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«Volume Title: Reform, Recovery, and Growth: Latin America and the Middle East Volume Author/Editor: Rudiger Dornbusch and Sebastian Edwards, eds. ...»

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This PDF is a selection from an out-of-print volume from the National Bureau

of Economic Research

Volume Title: Reform, Recovery, and Growth: Latin America and the Middle


Volume Author/Editor: Rudiger Dornbusch and Sebastian Edwards, eds.

Volume Publisher: University of Chicago Press

Volume ISBN: 0-226-15745-4

Volume URL: http://www.nber.org/books/dorn95-1

Conference Date: December 17-18, 1992

Publication Date: January 1995

Chapter Title: Partial Adjustment and Growth in the 1980s in Turkey Chapter Author: Anne O. Krueger Chapter URL: http://www.nber.org/chapters/c7662 Chapter pages in book: (p. 343 - 368) Partial Adjustment and Growth in the 1980s in Turkey Anne 0. Krueger

11.1 Introduction Until 1980, Turkish economic policies were broadly typical of those of most developing countries. A policy of import substitution had been consistently followed at least since the 1950s, with prohibition of imports of commodities for which domestic production was deemed adequate. In part to foster import substitution, but more importantly because foreign exchange was always scarce, those policies were buttressed by quantitative restrictions on imports and tight exchange control, which increased the inner orientation of the economy even beyond that which would have resulted from those policies undertaken to encourage import substitution. State economic enterprises (SEES)had been established and expanded to process and market agricultural commodities, to extract and export minerals, and to produce a wide variety of manufactured goods. Negative real interest rates enabled the government to direct resources through allocation of rationed credit, as well as through import licensing.

In the course of economic growth in the postwar period, the Turkish authorities had already twice been confronted with mounting balance of payments difficulties and rising inflation. In both instances, there had been fairly typical stabilization programs, which succeeded in improving the foreign exchange situation and, in the earlier crisis in 1958, drastically reducing inflation.

By the late 1970s, Turkey was confronting yet another crisis. Inflation had accelerated throughout the 1970s, and reached an annual rate of over 100%by Anne 0. Krueger is Arts and Sciences Professor of Economics at Duke University and a research associate of the National Bureau of Economic Research.

The author is indebted to Omer Gokcekus and Ahmet Kipici for valuable research assistance in gathering recent data and analyzing time series behavior of inflation, and to Tercan Baysan for valuable comments on the penultimate draft of this paper.

344 Anne 0.Krueger late 1979 in a country with relatively few indexation mechanisms and strong sensitivity to it on the part of influential groups (including the civil service and the military).

While the political reaction to inflation would probably in itself have forced policy changes, foreign exchange shortages at an increasingly overvalued exchange rate were also resulting in major difficulties and dislocations. Some economists even estimated that there were negative gross foreign exchange reserves by late 1979! Whether true or not, there were certainly long delays in obtaining import licenses and foreign exchange, embassy employees overseas went months without being paid, there was no coffee, and the short supplies of petroleum and other imports resulted in severe dislocations and hardships during the severe Anatolian winter. According to the official statistics, real GNP fell only 5% over the 1977-79 period, but contemporary accounts and observations of those who lived through it suggest a far steeper drop, especially starting in the second half of 1979.

Throughout the latter part of the 1970s, successive coalition governments had attempted unsuccessfully to grapple with economic difficulties. Several IMF-supported programs had been started, only to be abandoned when it proved infeasible to implement them. Governments had changed frequently, in large part in response to dissatisfaction with economic performance. By the beginning of the 1980s, it seemed clear that Turkey was in for yet another round of stabilization following the pattern of 1958 and 1970.

Instead, when policy changes came in early 1980, they were far different both in announcement and in action from the two earlier episodes. Instead of addressing primarily the macroeconomic issues driving inflation and the immediate balance-of-payments difficulties, the authorities announced a program that had two fundamental objectives: to alter underlying economic policies aimed toward growth and to reduce the rate of inflation. While this second objective had been included in both earlier programs (although the Turks were singularly unsuccessful in achieving it in the second), the enunciation and pursuit of the first objective constituted a major departure from past economic policies.

From its initiation, the sectoral reform program was articulated and designed to shift Turkey’s entire growth strategy away from import substitution and toward greater integration with the international market. Moreover, it was explicitly stated that the role of the government in the economy was to be greatly diminished and that private enterprise would be relied upon to generate economic growth. From a historical perspective, this was revolutionary indeed!

For purposes of this analysis, I shall refer to the entire set of policies designed to achieve this result as being “sectoral” reforms, contrasted with the policies entailed in stabilization that will be termed “macro” reforms.’

1. There is, however, at least one important and visible link between macro and sectoral reforms, as defined here. That is, the SEES were incurring large deficits, financed by Central Bank credits.

Growth in the 1980s in Turkey 345 Partial Adjustment and After 1980, policy reforms continued. Although macro reforms were initially successful, with the rate of inflation falling from over 100%to a low of about 35% in 1982, the rate of inflation thereafter rose again, and inflation continued as a problem throughout the 1980s. By contrast, the sectoral reforms geared to shifting reliance toward the private sector and integrating the Turkish economy with that of the rest of the world gathered momentum as the decade proceeded. By the early 1990s, it could fairly be said that Turkey’s sectoral reforms had been-at least to 1991-successful, while Turkey’s macro reforms had largely failed. Important questions focused on the sustainability of the sectoral reforms in light of continuing inflation and macroeconomic difficulties.

It is the purpose of this paper to analyze the Turkish reforms of the 1980s and their relationship to growth. A natural starting point is a brief review of the earlier stabilization programs, the topic of section 11.2. Section I I.3 then covers the economic difficulties and policies immediately preceding the January 1980 reforms. Section 11.4 reviews the initial reform program and the response to it. Section 11.5 covers the second phase of reforms, starting in the fall of 1983. Section 11.6 analyzes the real growth of the economy starting in 1983, while section 11.7 covers the macro reforms and their consequences.

Section 11.8 addresses the reasons why the macro reforms were so unsuccessful while the sectoral reforms appear to have delivered such satisfactory growth. Section 11.9 concludes by providing a tentative assessment of the sustainability of the altered policies toward the various sectors of the Turkish economy in light of the overall macroeconomic difficulties.

11.2 Two Preceding Cycles Turkey became an independent state after the First World War, as the Ottoman Empire disintegrated. With Ataturk as a national charismatic leader, economic policy for raising living standards was already an important national issue in the 1920s and 1930s. After a brief effort to develop through laissezfaire in the 1920s, Ataturk switched to etatism2 as a philosophy in the 193Os, and the first large SEEs were founded, producing textiles, footwear, and a variety of other manufactured goods.

Ataturk died in 1938 but remained the revered founding father of the nation.

In the post war period, economic growth resumed, with SEEs expanding rapThose deficits alone exceeded 5% of GNP by the late 1970s. Reforms restructuring the SEEs in ways that prevented the expansion of Central Bank credit were both sectoral insofar as they increased the efficiency of SEEs (or reduced the resources allocated to inefficient activities) and macro insofar as they reduced inflationary pressures.

2. See Okyar (1965) for an analysis. For present purposes, it suffices to say that etatism was articulated as a rationale for state economic activities through SEEs. These activities were supposed to coexist, however, with private economic activity. Etatism clearly grew out of the distrust of markets that was worldwide in the 1930s.

Anne 0. Krueger idly into new import substitution activities.

The underlying policy of etatism remained the guiding principle of development efforts until 1980. Starting in the late 1940s, Turkey’s economy grew rapidly, as the opportunities afforded by postwar recovery, receipt of Point IV and Marshall Plan aid, and a buoyant world economy all conduced to economic growth. Simultaneously, there was a rapid increase in government expenditures, especially on investment projects designed to accelerate economic growth.

Starting in 1953, however, export growth ceased,’ both because of the end of the Korean War commodity boom and because of the shift of resources to the buoyant domestic market. Simultaneously the rate of inflation accelerated.

As in many other countries at that time, the Turkish authorities were committed to maintaining a fixed nominal exchange rate. By 1954, the government introduced import licensing in an effort to restrain the demand for imports in line with the availability of foreign exchange. Over the next several years, inflationary pressures intensified4 while foreign exchange earnings continued to drop.

By 1957, the situation was by any measure serious. Surcharges had been imposed on imports; even those who received import licenses waited eight to twelve months for foreign exchange permits. Export earnings were dropping rapidly, and the black market premium was more than 100%above the nominal exchange rate. At that time, as in many other countries, the top political leadership (Adnan Menderes) was adamantly opposed to any change in the nominal exchange rate. By then, Turks were financing imports with suppliers’ credits and other short-term, high-interest-bearing notes. As the harvest approached in 1958, however, even that source of financing was disappearing, and it became evident that little if any gasoline would be available to enable the trucks to move the harvest to ports, without a change in policies.

Reluctantly, the government of Turkey agreed with the International Monetary Fund (IMF) to a stabilization program, the key elements of which were a major devaluation (from TL2.8 to TL9 per U S. dollar); immediate import liberalization and rationalization of import licensing schemes;5 ceilings on

3. Turkey had expanded the area under cultivation for wheat through introduction of tractors and mechanization in the late 1940s and was even the world’s largest wheat exporter in the early 1950s. The evidence suggests that this large effort was in fact uneconomic in the long run, and wheat exports peaked in 1953. See Krueger (1974) for a discussion.

4. It is difficult to provide a good estimate of the rate of inflation. The Turkish authorities imposed price controls on most basic consumer goods in an effort to restrain inflation, and it was the official prices of those goods that entered into the official price statistics. According to those statistics, the rate of inflation reached an annual rate of almost 25% by 1958, having exceeded 10% annually since 1954.

5. Until 1958, import licenses had been dealt with on an ad hoc basis. The 1958 program included provisions so that there would be some imports (on a “liberalized list”) for which the granting of foreign exchange was more or less automatic, some imports (the “quota list”) for which quantitative limits were set and whose allocation was subject to detailed bureaucratic negotiation, and some imports whose origin could only be Turkey’s bilateral trading partners. Any commodity not listed was ineligible for importation. This basic system lasted until the early 1980%with new lists published every six months. See Krueger (1974, chap. 6) for a detailed description of how the system worked.

347 Partial Adjustment and Growth in the 1980s in Turkey government expenditures, credit, and the money supply; and an increase in prices of commodities produced by SEEs, with the removal of price controls over most items for the private economy.6 Import liberalization was financed by IMF and other official credits; official creditors also sponsored and supported debt rescheduling for Turkey’s outstanding debt.7 Most of the components of this package are fairly standard in IMFsupported programs, and require little comment. A possible exception is the increases in prices of SEEs, which featured prominently in the 1970 and 1980 reforms as well. As already mentioned, efforts to control inflation in the years prior to 1958 consisted largely of the imposition of price controls. Private sector firms responded either by shutting down or by selling in the black market.

SEEs, however, sold at official prices and incurred losses. As inflation accelerated, these losses mounted. The losses, in turn, were covered by credits automatically extended by the Central Bank to the various loss-making SEEs. The result was growth in the money supply fueled in significant measure by SEE deficits. Raising the prices of goods produced by SEEs in 1958 naturally resulted in an immediate once-and-for-all increase in the various price indices;

after that, however, the reduced rate of expansion of Central Bank credits resulted in a reduced rate of inflation. Indeed, the 1958 Turkish stabilization program was unusual in that real GDP, which had been declining, started growing immediately in response to greater availability of imports, while the rate of inflation dropped dramatically: from 25% (at the understated official measure) in 1958 to less than 5% in 1959.

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