Turkish Economy: Bogazici University

Turkish Economy
Lecture 3:
Bogazici University
Ceyhun Elgin (Bogazici) EC 470 1 / 42

Integration with the World Economy: 1946-1953
Capitalist class had accumulated sufficient power to challenge the
CHP’s one-party system after the WWII. According to Istanbul
Chamber of Commerce, 1041 new firms joined the Chamber in 1941
and 956 new firms joined in 1942.
That capitalist bloc cracked the social basis of CHP: the social basis
consisted of ’corporatist’ but fragile amalgam of bureaucracy,
landlords, merchants, military and the intellectuals.
The capitalists wanted an unconstrained market economy. 2nd
Congress of Economics held in Istanbul in 1948 was instrumental to
voice their demands.
Ironically the game of democracy also meant ’populism’ would be an
essential part of politics.
Democrat Party (1946)

’September 7’ decisions taken by CHP in 1946 was an attempt for
economic liberalization
The leftist wing of CHP was eliminated; S. Aydemir and I. Husrev
helped to prepare a Five-Year Plan for Industrialization
Devaluation of TL, removal of restrictions on imports and price
controls were welcomed by the capitalist bloc as well as the western
countries, especially by USA
The Turkish lira was devalued in August 1946, from TL 1.28 per U.S.
dollar to IL 2.80 per dollar
The long-term close relationship with USA started in 1946, when US
declared that an old debt of 100 million USD was forgiven.
In the following year, 1947 Turkey along with Greece were included
under the ’Truman Doctrine’.

The immediate consequence of Truman Doctrine was accession to

OECD (1948 as OEEC with Turkey as a founding member)
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.
An adviser to the then State Secretary of US, Max Thornburg,
explicitly reported that the credit and support would only be provided
if Turkey left ’statism’ and let private enterprizes’ flourish.

At the end of the WWII, Central Bank had FX reserves worth 250
million USD
in 1946 alone, trade surplus reached 100 million USD
The benefits of FDI were overrated.
Why did the elite choose to liberalize?

However, DP’s commitment to ’free enterprize’ was pragmatic. n

1950 when Menderes gained power and hence Etatism theoretically
ended, 63 per cent of value-added in Turkish industry originated from
private firms and 37 per cent from SEEs.
By 1960 when Menderes’ government fell, 52 per cent of industrial
value-added originated in the private sector and 48 per cent in the
public.
Rent redistibution was more important.

The main line of support to agriculture was mechanization

The number of tractors increased from 1756 in 1948 to 37,743 in
1954.
Cheap credit and technical support was also essential.
The area of actively used agricultural fields increased 9 million
hectares in 1949 to 13.2 million hectares in 1954.
The total production of wheat increased from 2,265 tones in 1949 to
6,210 tones in 1955.

The agricultural exports went up by 50% from 1950 to 1953.

The GDP growth rates were phenomenal; 12.8% in 1951, 11.9% in
1952 and 11.2% in 1953.
Nevertheless, fixed capital formation could not be raised significantly.
In 1953, as a ratio of GDP it merely reached 12%. The growth was
due to agricultural expansion.

The cumulative trade deficit was as big as 500 million USD within
1946-1953 period.
Import dependency became a structural feature of the Turkish
economy.
Almost one-fifth of all fixed investments was financed by ’foreign
sources’.

The number of workers covered by Labour Law (1947) went up from

329.5 thousand in 1948 to 556.5 thousand in 1953.
Unionization rate followed a trend of growth; from 15.8% in 1948 to
25.2% in 1953.
However, still the unions were denied the right of strikes.

The bureaucracy lost. Their share of salaries went down from 8.3 to
6.6 percent at the end of the period.
Urban workers’ wage share also declined relatively; share of
compensation in value added decreased from 38.9 to 32 percent.
In eight years an average farmer could increase her household income
by 46.5% according to the calculations of Nur Keyder.
Despite the relative price movements, thanks to mechanization and
public investment in agriculture the rural families had benefited from
this period.

Unsustainable Integration and Re-Integration: 1954-1961
Once again, liberalization ended in terms of frustration in

international accounts.
The interventionist measures were employed in order to decrease the
finance gap.
The twin-deficit problem
The end result was a slower growth period (4.4% annual during the
period) in which state had to play a bigger role than envisaged

In dollar terms, the imports had declined by 40% between 1953-1958.

WhY did the loans decline?
National Defence Act was reenacted. However, it was not successful
Despite the great incentives for FDI, there was little FDI coming.
The lion’s share of foreign resources were in terms of credit and
partnerships with local firms.
The share of foreign resources in the fixed capital formation declined
to 10%.

Import dependency of industry and other sectors became a bottleneck.

The industrial growth rate could only be 4.3% annually.
Due to the control of the international trade regime, the share of
consumption goods in imports declined from 23% to 11%
A disguised form of import substitution was pursued by the DP
government.
Industrial share of nondurable consumption goods (textiles, foods,
etc.) reached 75% of total industrial output.

More importantly, despite the great momentum gained in earlier

period the agricultural growth rate was merely 1.8%.
Given the population share in agriculture, that growth rate was a
push factor for internal migration.
The lack of infrastructure in urban areas opened up new informal
sectors: dolmusculuk, gecekonduculuk.

The first IMF agreement of 1958 brought a full package of

conditionalities, with a huge devaluation of TL
The internal price controls were removed and the interventionist
measures on international trade was upheld.
In return, the unpaid debt was restructured and new credit lines were
opened.

The internal terms of trade between industry and agriculture had two
countervailing periods. Till 1958, industrial prices were kept lower but
then agricultural prices were hit hard.
The share of wages seemed to be constant in terms of value added.
The ’informal/shadow’ sector had emerged as an important venue.
The landlords who could make use of mechanization and
commercialization had gained substantially

The money supply had increased dramatically from 1954 onwards.

Inflation began to be a major problem.
The credit expansion was mostly channeled to service sectors.
Rapid urbanization meant a larger internal market with two different
basis, formal and informal.

There existed two radical breaks in terms of taxation after WWII.

The general law on taxes in 1950 and Value Added Tax (VAT) reform
in 1985
The businessmen demanded 10% as the corporate tax. DP enforced
20% just as it is currently.
The farmers asked for total exemption from the income taxes.
In 1955 the small shopkeepers received exemption as well.

During DP governments, the share of direct taxes declined from

35-40% to 25-30%.
The ills of the economy was not dealt with, only postponed.
Black markets emerged.

The rate of capital accumulation, ratio of fixed capital formation to

GDP, averaged 14.5% from 1954 to 1960.
However, the composition of the investment was socially suboptimal
and inefficient
32% of the investment was on hardware, machinery and equipment
wheras 68% went in construction.

Et ve Balik Kurumu was established in 1952.

TSKB and MKE were founded in 1950
SEKA and TPAO were established in 1954 and in 1955 respectively.
The foreign exchange bottlenecks led a forced expansion of the SEE
sector.
6-7 September 1955 Incidents against Greeks in Turkey

DP lost its momentum and lost some of voters in 1957

The response was authoritarian. i.e Vatan Cephesi and Tahkikat
Komisyonlari
”Ispat Hakki, Ismail Hakki” and Ankara Hilton
”Those with black cassocks”, ”How can one cook stuffed aubergines”
”hayir, tenkit zamani gecti. simdi tenkil zamanidir.”
An early election in 1960 could have saved the democracy and
Menderes life.
The liberal and the international support was already gone.


Turkish Economy: Bogazici University

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Turkish Economy

Ceyhun Elgin (Bogazici) EC 470 1 / 42

Ceyhun Elgin (Bogazici) EC 470 2 / 42

Ceyhun Elgin (Bogazici) EC 470 4 / 42

The immediate consequence of Truman Doctrine was accession to

Ceyhun Elgin (Bogazici) EC 470 5 / 42

Ceyhun Elgin (Bogazici) EC 470 6 / 42

However, DP’s commitment to ’free enterprize’ was pragmatic. n

Ceyhun Elgin (Bogazici) EC 470 7 / 42

The main line of support to agriculture was mechanization

Ceyhun Elgin (Bogazici) EC 470 8 / 42

The agricultural exports went up by 50% from 1950 to 1953.

Ceyhun Elgin (Bogazici) EC 470 9 / 42

Ceyhun Elgin (Bogazici) EC 470 10 / 42

The number of workers covered by Labour Law (1947) went up from

Ceyhun Elgin (Bogazici) EC 470 11 / 42

Ceyhun Elgin (Bogazici) EC 470 12 / 42

Once again, liberalization ended in terms of frustration in

Ceyhun Elgin (Bogazici) EC 470 18 / 42

In dollar terms, the imports had declined by 40% between 1953-1958.

Ceyhun Elgin (Bogazici) EC 470 19 / 42

Import dependency of industry and other sectors became a bottleneck.

Ceyhun Elgin (Bogazici) EC 470 20 / 42

More importantly, despite the great momentum gained in earlier

Ceyhun Elgin (Bogazici) EC 470 21 / 42

The first IMF agreement of 1958 brought a full package of

Ceyhun Elgin (Bogazici) EC 470 22 / 42

Ceyhun Elgin (Bogazici) EC 470 23 / 42

The money supply had increased dramatically from 1954 onwards.

Ceyhun Elgin (Bogazici) EC 470 24 / 42

There existed two radical breaks in terms of taxation after WWII.

Ceyhun Elgin (Bogazici) EC 470 25 / 42

During DP governments, the share of direct taxes declined from

Ceyhun Elgin (Bogazici) EC 470 26 / 42

The rate of capital accumulation, ratio of fixed capital formation to

Ceyhun Elgin (Bogazici) EC 470 27 / 42

Et ve Balik Kurumu was established in 1952.

Ceyhun Elgin (Bogazici) EC 470 28 / 42

DP lost its momentum and lost some of voters in 1957

Ceyhun Elgin (Bogazici) EC 470 35 / 42

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