Download Economics 401 Week 5

Economics 401
Week 5
Prelude to Democracy (1946-50)
 Economic policies in this new period were to be
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shaped by the way Turkey integrated into the
world economy
A new economic structure was established
under the leadership of the United States
In 1944, economists and politicians from the
U.S. and the U.K laid out the framework of new
economic policies in Bretton Woods
The main idea was how to sustain high growth
rates and full employment without disruptions
in world trade and financial markets.
Countries had to be specialized according to
their comparative advantage and fully embrace
free trade
 They would be allowed devaluation to some extent and
provided external support in the presence of payment
difficulties
Prelude to Democracy (1946-50)
 There were limits on short-term financial flows
in order to support fixed exchange rate
system and promote stability in world economy
 Official international loans would be promoted
as long as they were used in accordance with
the expected position in the new division of
labor
 Accordingly, developed countries would
produce capital intensive goods (machinery and
equipment) and develoing countries would
specialize in agricultural goods and raw
materials)
Economic Policies (1946-1953)
 In 1946 Turkey still had a surplus in trade and more than
sufficient amount of foreign exchange reserves
 Turkey carried out a major devaluation in 1946.
 The value of 1 US dollar jumped from 1.28 to 2.8 TL overnight
 Gradual liberalization of trade policies started in the same
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year
Barriers to international capital were also modified in 1947
First with Truman Doctrine and then with the Marshall plan
Turkey received huge economic aid from the U.S. after the
war.
Within the period of 1946-1950, Turkey obtained substantial
foreign aid and long-term credit, amounting to 391 million $.
This amount was greater than the cumulative total credit and
aid of last 23 years.
In return, USA made sure that public funds would be
reallocated from industry into agriculture and construction.
Economic Policies (1946-1953)
 In the period 1946 and 1953, the annual growth rate of
the economy was about 10 %, mostly due to economic
recovery after war years.
 Again, the crucial source of growth came from
agricultural sector, exceeding the industrial growth in
the same period
 This time it was the change in productivity rather than
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favorable prices that led to agricultural growth
Availability of new technology (tractors) contributed
positively to agricultural expansion.
The number of tractors in 1946 barely exceeded 1000,
however, the number of tractors reached 43000 by 1955.
On the other hand, the cultivated land increased by 50 %
whereas the population increased only by 20 percent.
Access to cheap credit (mostly through state banks)
helped farmers buy new tractors and benefit from
agricultural expnasion
Economic Policies (1946-1953)
 Other important import items were construction
machinery, road-building equipment and motor vehicles.
 These resources were mostly financed by U.S. aid
 According to the reports prepared by famous
economists, Turkey was advised to use its resources in
infrastructure (mostly highways) required by
agricultural exports.
 The relative share of agriculture rose, while the same
share of industry fell.
 This observation was indicating the new position of
Turkey in international division of labor.
 After running trade surplus since 1930, Turkey started to
run deficits from 1947 on.
 Although the share of investment stayed stable
throughout the period, more and more of new
investments were financed through external sources.
Economic Policies (1946-1953)
 1953 was the last year of an another expansionary
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period in Turkish economic history
Most of the people observed absolute improvements in
their economic situation, although agricultural sector
did relatively better.
Although this liberal integration of Turkey with the
world economy resulted in high growth rates and
material prosperity for most of the people, the same
process also led to a return of external deficit problem
The growth process depended mostly on imported
intermediate and capital goods
Export revenue and foreign aid/credits were important
to finance the flow of imports
The “dependence” on international sources would
continue in the following periods despite the reversal of
liberal trade policies
Economic Policies (1954-61)
 There was a sharp decline in agricultural output and
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exports in 1954 due to international prices and weather
conditions.
The dollar value of 1953 exports and imports was never
attained in this period.
As a response to external deficit and falling export
revenues, government tried to put new restrictions on
trade policies
At the same time, high and steady growth rates were
important in keeping voters content with the ruling
party
Democratic party under the leadership of Menderes
used all available official means to keep popular support
as high as possible.
 Credit to the agrciultural sector, price support programs
and public investment were financed by printing money
 Inflation rose (almost 100 % between 1955 and 1959)
Economic Policies (1954-61)
 Liberal trade regime was abandoned in 1954 and some
restrictions were reinforced.
 After 1955, when restrictions were imposed on imports, the
share of consumer goods dropped to only 10 percent.
 Government-induced domestic demand and protected
markets provided the manufacturers with sufficient
incentive to produce for the domestic market.
 After 1954, all domestic manufacturing output could find
markets and high profits.
 Non-durable good (textile, food etc.) production constituted
75 % of total industrial output.
 Once more, there was an increase in the share of industry in
total output.
 This was another period of disguised ISI
 Overall average economic growth in this period was 4.4 %
 However, the external deficit still remained a problem and
Turkey was continuously in need for foreign aid
Economic Policies (1954-61)
 Inflationary growth became a liability because of its
distributional effects and uncertainty
 IMF pushed its own agenda and made Turkey to switch
back to more liberal policies in return for access to
international credit markets and foreign aid in 1958.
 Another devaluation from 2.8 TL to 9 TL took place
 Control over public spending
 In return Turkey would have its foreign debt payment
postponed and gain access to new international loans.
 Even the industrialists were discontent and demanded
for concrete strategies about the future path of
Turkish economy
 World Bank and OECD experts urged Menderes
government to form a planning board in order to impose
some control over public spending and the allocation of
foreign exchange.
Election Results in the 1950s
Election
Year
1950
1954
1957
Democratic
Party (DP)
52.7 (408)
57.5 (502)
47.9 (424)
35.2 (32)
41.1 (178)
Republican 39.4 (69)
People’s
Party (CHP)
Economic Policies (1954-61)
 The commitment of DP to free enterprise was
pragmatic.
 In 1950 when Menderes gained power and hence etatism
theoretically ended, 63 % of value-added in Turkish
industry originated from private firms and 37 % from
SEEs.
 By 1960 when Menderes government fell, 52 % of
industrial value-added originated in the private sector and
48 % in the public.
 Internal migration started to speed up in this period
 Mechanization of agriculture and the rise of
underempolyment in rural areas
 First construction sector then industry attracted more
people from rural areas
 Between 1950 and 1960, the population of 4 major cities
increased by 75 %.