Download Economics 401 Week 3

Economics 401
Week 3
Announcements
 Do not forget to send me ([email protected]) the
name list of your group (3 or 4 people) for the term project
by OCTOBER 23. After the deadline, points will be
deducted!
 There will be no class on Monday October 29; make-up class
will be held on Tuesday October 30 at 6.30 pm.
Classroom: C 201.
 Midterm exam will be held on November 6 at 6.30 pm
Early period of the New Republic (1923-29)
 Turkey inherited an economy without any
industrial basis
 Most important sectors: production of wool and
cotton yarn, cloth, raw silk and tobacco processing
 These activities represented about 80% of industrial
production and 70 % of overall employment in Turkey.
 “If you want to hang yourself do it with English rope”
 Turkish economy was disarticulated
 Transportation, especially railroads were oriented
towards the requirements of exports, connecting
mostly export goods with ports.
Early period of the New Republic (1923-29)
 The demographic consequences of the war
years were devastating
 Before the WW 1, population was about 15 million (about 10
% Greeks, 7% Armenians and 1 % Jews)
 After the WW 1 and Independence War, population shrank
to 13.5 million whereas the non-Muslims accounted for only
2.6 %.
 How to deal with the resulting economic loss?
 Turkish republic inherited an economy with
chronic external deficits and debt which was
supposed to be paid in the coming years
Early period of the New Republic (1923-29)
 The prime motivation of economic policies in this
period was how to replace traditional non-Muslim
bourgeoisie (mostly merchants) with a national one.
 The most painless method of generating this group
was through a process of active state support for
private accumulation
 Additionally, international capital was promoted to
help the same private accumulation process.
 Where Turkish merchants and industrialists were
leaking, it was necessary to create them through
the enrichment of particular individuals and the
natural candidates were the leading actors in
political circles and people close to them.
Early period of the New Republic (1923-29)
 İzmir İktisat Kongresi (İzmir Economic Congress) was
organized in February 1923 (before Lausanne Treaty).
 The congress rather had a symbolic importance in
terms of declaring the economic policy of the new
Republic to an international audience.
 Another important signal was that the new Republic
would not embrace a socialist economy and welcome
foreign capital
 Different segments of the economy were represented
by 4 main groups.
 Merchants were the most organized ones and consisted of
influential figures who did not develop strong ties with the
nationalist movement during the war-years and came
particularly from İzmir and İstanbul.
 On the other hand, farmers were represented only by big
landlords and workers’ and industrialists’ representatives
were mainly party figures.
Early period of the New Republic (1923-29)
 Lausanne peace treaty in 1923
 The treaty included some constraints on the
economic policies of the Republic
 Two-thirds of the Ottoman debt was to be paid
back (starting in 1929)
 Turkey had to accept tariffs from 1914 until
1929
 Very low tariffs incompatible with protectionist policies
 Autonomy over tariffs only in case of state
monopolies (to raise government revenue)
 No quantitative restrictions (e.g. Quotas)
Early period of the New Republic (1923-29)
 The official approach towards foreign capital was
pragmatic
 FDI was encouraged as long as investors were not
seeking political concessions as they did during the
previous era.
 About one-third of the corporations established between
1920 and 1930 were partnerships of Turks with foreign
capital
 This was the period
not of liberalism, but of wide-scale
state support for private enterprise.
 The law for the encouragement of industry (Teşvik-i Sanayi
kanunu) provided the domestic sector with a variety of
subsidies and incentives
 The monopoly rights established by the state (sugar,
tobacco, oil imports, alcohol etc.) were usually given to
local or foreign firms.
 The transfer of monopoly rights was not compatible with the
original aim of the existence of monopoly rights
Early period of the New Republic (1923-29)
 At the beginning of the period, the Turkish
banking system was predominantly under
foreign control.
 In 1924, with the direct initiative of political
leaders, a private national bank (İş Bankası) was
founded.
 Prominent political figures were appointed to the
board of director, and the bank acted as an
influential lobby, through its holdings in various
economic activities and as a mediator between
business and government circles.
Early period of the New Republic (1923-29)
 Some notes on agriculture
 Huge loss of skilled manpower in war-years,
especially deportation of 1.2 millions of Greeks.
 The emigrants from Balkans more or less compensated for
this loss
 There was a quick recovery of production to pre-war levels
 Although there was no problem regarding tobacco and
cotton, the skills and networks necessary for grape and fig
production were never available at the pre-war levels.
 However, we need more than skills and inputs to
reorganize agricultural exports
 The renewed importance of foreign capital in credit
allocation through foreign banks
 Almost 65-75 % of all credits were allocated by foreign
banks
Early period of the New Republic (1923-29)
 Aşar (tax on farmers paid in kind) was abolished.
 Significant loss for the government (almost one-fifth of
the revenue in 1924
 Was it a redistribution of income from the state to the
farmers?
 Government started to impose new indirect taxes (on sugar
and kerosene)
 Government recovered its loss from aşar, but nonagrıcultural sector now had to face increasing tax burden
 Now the farmers were able to use their surplus for
markets. (e.g. Production of wheat doubled in 5 years)
 Domestic terms of trade (i.e. P Ag/Pind) increased by
44 % in favor of farmers between 1923 and 1929.
 Overall, one can argue that the farmers were better
off in this period, however, it is impossible to
conclude that each farmer benefitted at the same
rate.
Early period of the New Republic (1923-29)
 1929 was the start of a worldwide depression.
 United States faced severe financial crisis which
resulted in a huge disruption in credit flows, and
then in bankruptcies of banks, industrial
corporations and farmers
 Throughout the 1920s, United States was the
major creditor in the world and the engine of
global economic growth
 As a result of the Great Depression, most of the
countries faced low demand for their exports and
lost their access to external debt.
 The question was how to stimulate Turkish
economy without any external support (i.e.in the
absence of international trade and foreign
financial flows)?
Etatism (Devletçilik) throughout the 1930s
 In the 1920s, most of the rise in agricultural
exports came from expanding trade credits (to a
large extent through foreign banks) and improving
terms of trade (rising relative price of agricultural
goods in the world markets)
 Starting in 1929, there was a huge decline in
external credits necessary for sustaining
agricultural trade.
 No access to credit and decreasing terms of trade
led to bankruptcy of farmers and trade companies
(especially in İzmir and İstanbul)
 The volume of trading activity quickly diminished.
Bilateral trade agreements became more important.
And, being close to the government was crucial in
order to get access to trade privileges.
 Profitability in trade companies fell from 10 % in the
1920s to very low levels in the 1930s.
Etatism (Devletçilik) throughout the 1930s
 Most of the farmers switched back to subsistence
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agriculture.
Some of them, who could not pay back their debts
had to sell their land and animals, and start
working as sharecroppers.
Destruction of animals as a survival strategy made
them deprive of their production equipment.
In order to buy the same amount of consumption
goods, now the farmers had to sell larger amount
of wheat.
While the Great Depression resulted in significant
lossses for farmers and traders, the same event
provided the industrialists with new opportunities.
Etatism (Devletçilik) throughout the 1930s
 New economic policy was how to close the economy
and reduce its dependence on foreign capital.
 The first response was how to control foreign
trade and foreign exchange transaction.
 Tariffs were raised to 46% from 13 % on average in
June 1929.
 Central bank was established in 1930 to control
foreign exchange transactions.
 The new industrialists started to sell goods of
inferior quality at prices much higher than the
world prices in protected markets
 There was industrial growth in a statistical sense.
 You can import “intermediate goods” at reduced
prices, such as iron wires, and then transform them
into nails ready to be sold at ten times higher than
world prices.
Etatism (Devletçilik) throughout the 1930s
 The idea was how to replace imported goods with
domestically produced goods in order to save
foreign exchange
 Early application of Import Substitution
Industrialization (ISI) Strategy which would be
the dominant strategy in Turkey and many other
developing countries after the 2nd WW.
 Etatism became the official policy in 1933, after it
became clear the the private sector could not
undertake the necessary investment for
industrialization on its own.
 However, the policy was still oriented towards the
development of a capitalist economy along with a
private sector.
Etatism (Devletçilik) throughout the 1930s
 The first 5-year plan in 1933 indicated the sectors
where private companies could not afford investments
on their own (heavy industry such as steel or chemicals;
transportation, mining etc.)
 State directly intervened in these sectors by
undertaking investments through state economic
enterprises (the core of etatism)
 The idea was how to provide the newly emerging private
sector with further incentives so that they could
overtake the industrial process in the future
 Dexpending on the scale and technology, industrialists
would be exempt from tax on imported goods and subject
to preferred position in state auctions and given free land.
 There were few but big firms which could benefit from
these policies throughout the period.
 Explicit agreements on price determination were allowed
by the state.
Etatism (Devletçilik) throughout the 1930s
 İş Bankası played a key role by allocating
credits and becoming a major shareholder.
 All members of board of directors were
members of the parliament.
 Another evidence of state-private sector
cooperation for the sake of industrializaton
 There were strict controls on credit allocation
and interest rate
 The state and the new industrialists were the
main actors in the 1930s, but what about the
other social groups?
Etatism (Devletçilik) throughout the 1930s
 Farmers and workers contributed to the accumulation
process by transferring a part of their surplus
 Wheat was the most strategic commodity.
 The wheat determined the income of the majority of
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farmers.
Wheat/industry price index was 134 in 1928 and only 68 in
1938.
The surplus was transferred from farmers towards
industrialists as a result of the difference between the
price paid by the consumers of industrial goods and the
price paid to the farmers.
Another idea is that wheat is a crucial food item, and the
wages can be kept as low as possible in the presence of
declining wheat price.
On the other hand, through official institutions, state also
prevented the wheat prices from falling too low.
There was also downward pressure on wages following the
migration of landless peasants to big cities.
Comparison of two periods
 Both the 1920s and 1930s were considered high-growth periods
(annual average was around 10%)
 However, there were key differences between two periods:
 1920s
 Growth in the earlier period was a result of expansion in agriculture
and trade sectors.
 The economy used the idle capacity in post-war years
 Foreign dependence in terms of chronic external deficits was a
crucial characteristic of the earlier period.
 Farmers and merchants were the main beneficiaries
 1930s
 On the other hand, growth in the 1930s came mostly from
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industrialization and state investments.
Turkey reached its historically highest yearly industrial growth rate
(10%)in this period.
Turkey became a self-sufficient country in terms of basic consumer
goods at the end of the period (three whites)
This stage of industrialization was also achieved without any
external support (Turkey ran trade surplus for the whole period with
a single exception in 1928).
Bureaucrats and industrialists were the main beneficiaries.