Download ECON 401 November 12, 2012 Export-led growth and the 1980s

ECON 401
November 12, 2012
Export-led growth and the 1980s
Late 1970s
 The rate of growth and the degree of industrialization
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depended on the availability of foreign exchange
Foreign exchange shortage emerged as one the most
important barriers to the industrialization process during
the last years of the 1970s.
The shortage of foreign exchange also led to the
shortages of key intermediate goods such as oil and
electricity (because oil was the main energy used in the
production of electricity)
Given the high prices of major intermediate goods and high
wages, profits of the major industrialists had to be cut.
As a result of falling profit share, both production and
investment in industrial sectors started to decline in the
late 1970s.
High inflation and low growth rates became the major
characteristics of the last period of the 1970s
Transformation of Economic Policies in the 1980s
 How to solve the following problems:
 Declining share of profits
 Lack of foreign exchange or chronic external deficit
problem
 High inflation
 Transition from an inward-oriented to an export-led
growth model
 New treaties signed with the IMF and the World Bank
in return for renewed access to external sources
 Stabilization policies along with structural changes in
economy
 Reduction in government involvement in productive
activities and increased emphasis on market forces
 Liberalization of external trade (and later external
finance, as well)
 Deregulation of domestic markets (including labor and
financial markets)
 The change started with the declaration of these
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policies as a “shock therapy” program in January 1980
The policies became real effective only after the
military intervention in September 1980
On September 12, 1980, the military dissolved the
parliament and suspended all civilian institutions
A team of high-level technocrats became responsible
for preparing and implementing this new policy
Turgut Özal was appointed as the deputy prime
minister in charge of economic policy
His party also won the first elections in 1983
Stabilization policies (1981-1983)
 How to curb the demand at home?
 Repress trade unions
 Abolish the right to strike
 Determination of wages by public institutions rather than through
collective bargaining (compulsory incomes policy)
 Cutting back the support prices in agriculture led to reversal of terms
of trade against farmers
 How to balance the budget deficit?
 Improvement of the balance sheet of State Economic Enterprises
(SEEs)
 Elimination of price controls and huge price increases by SEEs
 Reduction in public expenditures and tax increases
 How to promote exports?
 New exchange rate policy
 Overvalued currency led to a fall in exports and generated an excess
demand in f/x markets
 Starting in 1980 after a 100 % devaluation, nominal exchange rate
had been kept low
 Turkish currency depreciated by 50 percent in real terms between
1979 and 1987
Indicators of Distribution of Income
Real wage index in
industry
Average 1978/79
1988
100
71
Share of wages in total 37.2
in value added
15.4
Agricultural terms of
trade
61
100
Structural Changes
 Domestic financial liberalization
 Elimination of limits on interest rates (credits and
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deposits)
How to get positive real interest rates for higher savings
Crisis in 1982 (pyramid type of investments by money
brokers), then some controls in financial markets were
reintroduced
Istanbul Stock exchange was established
State and treasury bonds became the major financial
asset in the 1980s. Financing of public expenditures
started to shift towards domestic borrowing
 Liberalization of international trade
 Reducing quotas and tariffs
 Elimination of any regulation regarding the use of foreign
exchange associated with external trade
 Change in the tax system
 Lower tax burden on business and high income groups
 Tax exemptions for interest gains as a result of owning
bonds or for capital gains real estate and financial assets
 Implementation of the value added tax in 1985
 The role of Government in economic activities
 Financial difficulties for the SEEs paved the way for
future privatization
 SEEs mostly depended on public sources for their
finances
 Starting in the 1980, SEEs were forced to finance their
expenditures and investments from domestic and
international markets
 These new loans and their interest payments increased
SEEs’ vulnerability to market fluctuations