INTL 410/ECIR 410

Dr. Caner BAKIR

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 Boratav, K. 2007. Türkiye İktisat Tarihi 1908-2005, Ankara:
İmge Kitabevi, chapter 7.

 Pamuk, Ş. 2008. ‘‘Economic Change in Twentieth-century

Turkey: Is the Glass More Than Half Full?’’ in Turkey in the
Modern World, Reşat Kasaba (ed.), Cambridge: Cambridge
University Press.
 Yeldan Erinc, Küreselleşme Sürecinde Türkiye Ekonomisi
Bölüşüm, Birikim ve Büyüme Ankara: Iletisim

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 Turkey followed state-led inward oriented growth policies between 1960-1980.
 The “planning era” started with a military coup (27 Mayıs Darbesi) and totally collapsed with another
military coup (12 Eylül Darbesi)
 State Planning Organization (SPO), established with 1961 Constitution, became the leading authority in
designing and implementing economy-wide planning policies.
 During this era, three “five year development plans” were prepared.
 Along with trade restrictions and financial repression policies, the state made use of heavy public
investments, especially in the manufacturing sector, to promote industrialization and economic
development.
 The deteriorating political environment during 1970s, the negative external developments (Cyprus
intervention in 1974, first oil shock in 1973, and second oil shock in 1979) accompanied with the
inappropriate economic policy decisions paved the way for economic crisis at the end of 1970 and
marked the end of planning era in Turkey.

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 The Turkish Labour
Force Agreement is
signed between
Germany and Turkey.
Start of the first official
wave of guest-workers
to Germany. The Turkish
population of Germany
has reached three
million in 50 years.
 This is especially
important for
remittances!
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 In 1963, The Ankara
Agreement is signed
establishing a Customs
Union between Turkey and
the European Economic
Community.
 It aimed at securing Turkey's
full membership in the EEC
through the establishment
in three phases of a customs
union
 the EEC's share in Turkish
imports rose from 29% in
1963 to 42% in 1972.

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 In 1964, Turkey
attempted to intervene
in Cyprus, yet Johnson
sent a hars letter to the
Prime Minister, İsmet
İnönü, which entailed a
diplomatic frustration.
 It played an important
role for the shift in
public opinion towards
USA.

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 In 1967, students
protested against 6th
fleet of USA in Istanbul.
 In 1969, the car of
Robert Kommer,
ambassador of USA for
Turkey, was set to fire
during his visit to
METU.

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 On March 12, 1971, The
Army forces the
Demirel government’s
resignation after ssuing
a memorandum.
 In 1972, three leaders of
student protesters,
Deniz Gezmiş, Hüseyin
İnan & Yusuf Aslan were
executed.

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 From 1960 to 1980, Turkey enjoyed a high rate of growth (real GDP grew at an
annual average rate of 4.7%), a very rapid rate of capital accumulation (real capital
stock grew at an annual average rate of 7%).

 Turkey's growth performance was more impressive during the 1960s (real GDP grew
at an average annual rate of 5.4% during this period).

 Capital accumulation was modest (real capital stock grew at an annual average rate
of 5%) but the macroeconomic environment was stable during the 1960s.

 The overall economic performance is stronger during 1960s in comparison to 1970s

(see the next two slides for relevant figures).

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 MAJOR POLICY GOALS
To accelerate economic
development by import
substitution and central planning.
To reduce Turkey’s dependence to
import products especially in
durable consumption goods and
intermediate goods!
MAJOR POLICY INSTRUMENTS
• Five year development plans
• State-led enterprises
• Fixed exchange rate system
• Strict control over capital
in/outflows
• Subsidies to private sector
• Price controls
• Import quotas
• State-led market making
policies in the agricultural sector
manufacturing industry.
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 This era resembles the statist 1929-1939 period.
• However, there are certain differences.

• ISI-led era differs from the 1929-1939 period in terms of the

composition of industrialization, and sector-specific priorities.
• The ISI-led era is characterized with comprehensive development
plans, rather than ad hoc industrialization attempts.
• The main actors in the ISI-led era are appointed bureaucrats
(“technocrats”), rather than major political figures.
• Investments were mainly directed to durable consumption goods
(“specific sectors” were targeted).

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 Import-substituted-industrialization (ISI) determined the basic framework
 All economic investments and decisions were implemented according to the
plans prepared by SPO experts.
 Worker remittances significantly contributed to national accounts (in 1970s,
remittances sent by Turkish workers in Europe passed 1 billion dollars
threshold).
 Populist distributional policies pursued.
• The real wages of labour class was two times higher than South Korea at
that time.
• A relatively developed welfare system and generous subsidies was
implemented.
 During 1960s, the economy was stable, the growth rates were high and
inflation was under control.
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 The picture has dramatically changed in the 1970s.
• Dependence on intermediate goods could not be reduced. Export/import ratio deteriorated
constantly. The foreign trade deficit increased to 8 percent of GDP in 1975.

*** The share of import in GDP increased from 7 percent in 1960 up to 12.6 in
1976. The export/import ratio decreased from 68.5 percent to almost 40 percent
in the same period!

• The main source of growth in Turkey was generous foreign credits provided by the IMF, World
Bank, and the US (increased to 1 billion dollar in 1975, which was about 400-500 million dollar
during 1960s.) Why?

• As oil prices increased sharply, not only once but twice, the economy failed to adapt to high-
energy prices and the economic policy makers lost sight of the medium and long run but rather
concentrated on short-term solutions. Foreign exchange rate guarantees increased;
contingent liabilities of the public sector and advances to the Treasury from the Central Bank
printing machines created a persistently high and volatile inflation.
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 During the 1973 Arab-Israeli War, Arab members of the Organization of
Petroleum Exporting Countries (OPEC) imposed an embargo against the
United States in retaliation for the U.S. decision to re-supply the Israeli
military and to gain leverage in the post-war peace negotiations. Arab
OPEC members also extended the embargo to other countries that
supported Israel including the Netherlands, Portugal, and South Africa.
 The onset of the embargo contributed to an upward spiral in oil prices
with global implications. The price of oil per barrel first doubled, then
quadrupled, imposing skyrocketing costs on consumers and structural
challenges to the stability of whole national economies. Since the
embargo coincided with a devaluation of the dollar, a global recession
seemed imminent.

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 A coup d'état in Cyprus on 15 July 1974 by
Greek Cypriot and Greek elements favouring
union with Greece was followed by military
intervention by Turkey, whose troops
established Turkish Cypriot control over the
northern part of the island.
 US embargo on aid to Turkey went into effect
on 5 February 1975.

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 The “planned economy years” came to an abrupt end in late 1970s. There are
various reasons for this failure:
1. Lack of effective coordination and collaboration among public sector
agencies/private sector actors
2. Lack of institutionalized conflict resolution mechanisms
3. Fragmented bureaucratic apparatus
4. Weaknesses in state’s industrial vision
5. Weaknesses in implementation

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 The “planned economy years” came to an abrupt end in late 1970s. There are
various reasons for this failure:
1. The coordination and synchronization among different state organs were
not sophisticated enough to properly put the plans into implementation.
2. The subsidies were not tied to reciprocal performance criteria. The “infant
industry” policies were not properly implemented.
3. Potential export sectors were not encouraged to compete at the global level.
Rather, they plunged into complacency problems due to the poorly designed
surveillance schemas.
4. The over domination of the state killed the entrepreneurial spirit in the
market.
5. The patron-client relations in political and bureaucratic realm as well as the
increasing political instability in mid-1970s jeopardized all kind of long-term
developmentalist plans.
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 Achievements

• Turkey succeeded producing durable consumption goods domestically

• Industrialization was carried into a new phase
• Relatively comprehensive social security system was introduced
• Interest group politics and organized interest representation was introduced into Turkish political economy

Failures

• Overdependence to intermediate products continued.

• Turkey’s export performance remained very weak.
• The extensive dominance of the SPO discouraged private entrepreneurs to develop a competitive outlook.
• The subsidies and generous infant industry protection policies could not be matched with robust performance
monitoring and evaluation schemes.

Overall assessment

Despite Turkey achieved producing durable consumption products, a robust industrialization based on high-value
added production could not be achieved. In a comparative perspective with East Asian countries, Turkey refers to a
moderately performing country.
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 ISI-based Post-Crisis
Industrialization Economic Crisis Adjustment Export-Led
(1972-76) (1977-80) (81-82) Growth (83-87)
Real Annual Change in (%)
GDP 6.8 0.5 4.2 6.5
Agriculture 1.8 0.5 0.6 0.8
Manufacturing 9.7 -0.2 7.9 8.6
Private Sector Fixed Investment 11.5 -7.3 -1 14.1
Public Sector Fixed Investment 15.4 -1.7 4.8 12
Savings (as % GDP) 20.9 17.3 17.7 19.5
Investment (as % GDP) 21.3 22.3 18.3 20.9
Public Sector Borrowing Requirement (as % of GDP) 5.7 6.9 3.7 4.7

Inflation 18.4 59.5 35.1 40.7

Exchange Rate Annual Depreciation 3.9 48 45 39.7
Public Equity Real Interest Rate *** *** *** ***
Manufacturing Real Wages 3.1 -1.1 -1.1 -3.9
Manufacturing Exports 39.4 14.3 19.7 12.5
Imports (as % of GDP) 11.7 11.2 14 15.9
Exports (as % of GDP) 5.3 4.2 8.5 10.8
Current Account (as % of GDP) -1.4 -3.4 -2.7 -1.9
External Debt (as % of GDP) 1.4 14.5 27.1 37.8
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1. What is your overall assessment about ISI-led
industrialization policies during 1960s and 1970s? (Hint:
Answer the questions in terms of achievements and failures).

2. Compare and contrast Turkey’s success with those of East

Asian developmental states. What are the similarities and
differences in terms of policy choices and instruments?

3. Why ISI-led development policies collapsed in late-1970s?

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