INTL 410/ECON 481

Dr. Caner BAKIR

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 Akyüz, Y. 1990. “Financial System and Policies in Turkey in the 1980s” in Tosun
Arıcanlı and Dani Rodrik, The Political Economy of Turkey, New York: St. Martin’s
Press, pp. 98-131.
 Boratav, K. 2007. Türkiye İktisatTarihi 1908-2005, Ankara: İmge Kitabevi, chs. 8.
 Yeldan, E. 2004. Küreselleşme Sürecinde Türkiye Ekonomisi: Bölüşüm, Birikim ve
Büyüme, İstanbul: İletisimYayınları, Part 2.
 Ertugrul, A. and Selcuk, F. 2001. “A Brief Account of the Turkish Economy, 1980-
2000”, Russian and East European Finance and Trade, Vol. 37, No. 6, pp. 6-30.
 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.

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1. Introduction
2. Financial liberalization
3. External trade liberalization
4. Export-led growth strategy
5. General evaluation
6. Review questions

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 Import-substituted industrialization policies in the 1970s
paved the way for a major economic and political crisis in
1980.
 With 24 January 1980 decisions, Turkey abandoned ISI-led
policies.
 The new policy paradigm framed as ‘export-led growth’
strategy.
 Three main pillars of export-led growth model;
o Liberalization of financial markets
o Liberalization of external trade regime
o Active state support of export industries
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 The Turkish financial system before 1980s was highly repressed.
 The characteristics were;
o Ceilings on deposits and lending rates and negative real interest rates

o Credit rationing and subsidized credits to priority sectors

o Excessive taxation of financial incomes and transactions

o Excessive reliance of firms on credits rather than equity finance and direct security issues

o Low quality bank portfolios.

 An analysis of who-gets-what from financial repression:

o Privileged firms in manufacturing industry benefitted because they got the opportunity to access
to credit with very low interest repayments.
o Negative interest rates discouraged the households to use banks and financial instruments for
saving purposes.
o Financial/Banking industry losses because excessive taxation is imposed on foreign transactions.
Moreover, the main motivation (interest gains) are generally absent in repressed systems.
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 The policies pursued in the post-1980 period, which were closely followed
by IMF and World Bank, aimed at reducing the degree of financial
repression. The aim was financial liberalization.
 The first step in this regard was to lift the ceilings on personal time deposit
interest rates.
o The resistance of major banks to increase the interest rates paved the way for

the expansion of informal market and brokers

o Banker Kastelli and the ‘bankers crisis’ (refer to next slide)

o The cost of the crisis was about 2,5 percent of GNP

o The importance of regulation was recognized!

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 With January 24th decisions, following July 1st, 1980 all credit and
deposit interests were released. Liberalization of interest with some
exceptions led to a great increase in deposit and credit interests.
 Many companies had loans much higher than their shareholder's
equity. Holding banks dominating the system tried to finance group
companies, and were not willing to credit others. In this situation,
companies in distress tried funds of the banker institutions. In this
period with the release of the rates, banking institutions grew in
number unchallenged by regulatory laws.
 Bankers developed immensely both in the field of capital market and
external money market. In this period two new financial devices were
introduced. First of these were "anonymous account" in which the
identity of account owner was kept secret, the other was a sort of
short term debentures; anonymous certificate of deposit.

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 In a short period big funds had gathered into anonymous accounts. By some banks,
anonymous certificate of deposits was made a means of exceeding interest rates
which are decided by banks through negotiations.
 These banks transferred their certificates of deposits to capital market bankers and
made these bankers sell them so they could give more interest than it was written
on certificates.
 Economic measures applied since January 24th, 1980 led to bankruptcies of many
enterprises which could not keep up with new conditions. Large portion of these
were credit receivers from the bankers. When these enterprises could not pay back
to the bankers, bankers also delayed payment of interest and capital to the savers.
 One of the biggest of these bankers was ‘‘Banker Kastelli.’’ Since he could not pay
his obligations he escaped abroad and his accounts were confiscated. The crisis
spread into entire financial market.
 The cost of the crisis was about 2,5 percent of GNP!
 In August 11th, 1983 "Banker Casualties Law" was enacted.

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  Four notable developments in the banking sector in 1980;

1. Foreign banks (about 13) allowed to open branches in Turkey for the first time.

2. Interbank money market was created in 1986.

3. Central Bank started open market operations in 1987.

4. New banking law was enacted requiring banks to hold contingency reserves.

 For regulatory purposes, Capital Markets Board was established.

 Istanbul Stock Exchange was reopened in 1986.

 In 1989, Turkey applied IMF for the full convertibility of Turkish lira.

 All these measures aimed at increasing the financial depth in Turkey.

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 The policies pursed in the 1980s have resulted in an increased depth of finance.
Stock of financial assets over GNP increased from 25 percent in 1980 to 46 percent
in 1986!
 However, there occurred a tendency to move from long-term investment finance
to short term commercial loans.
 In this period, also, the private sector bond and equity markets performed in a very
poor manner.
 It served to the increasing dependence of corporate sector on bank credits.
 In a fluctuating financial system, this created a volatile investment environment
because of the frequent changes in cost and availability of credits.

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 Turkey pursued ‘export-led growth’ strategy during 1980s.
 The initial results were successful.
 The annual growth rate was impressive: 5.8 percent growth between 1981-1988.
 Industrial value added was above the GDP growth, 8.1 percent during the same
period.
 The openness of economy increased immediately: Export/GDP ratio increased
from 4.1 percent in 1980 to 13.3 percent in 1988 (Import/GDP ratio increased
from 11.3 percent to 16.4 percent during same period).
 The trade deficit in 1988 decreased significantly: from 7 percent of GDP in 1980 to
1 percent in 1988. Why and how?
▪ Real depreciation of the Turkish lira (about 40 percent)
▪ Extensive tax incentives to exporters
▪ Depreciation in real wages (Question: How is it related to growth in exports?)

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 There are significant achievements during initial phase of
liberalization policies in Turkey (1980-1989: export-led growth).
o Export-performance increased 15 percent per year.
o The financial markets liberalized and financial depth increased
(stock of financial assets over GNP increased from 25 percent in
1980 to 46 percent in 1986)
o The public sector borrowing requirement was kept at
manageable levels (see, slide 14).
 Turkish political economy significantly integrated with world
markets.
 Yet, there are failures as well.

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 The liberalization of finance and external trade system prior to reducing
inflation permanently, ensuring fiscal discipline, and continuous devaluations
created side-effects for the economy:
o Turkey could not develop ‘selective industrialization’ policies to underpin the
sustainability of Turkey’s export performance in the medium-term horizon.
o Boom in exports was not derived from the improvement in Turkey’s technology
base. Rather devaluations, extensive subsidies, and domestic-consumption
suppression
o Private savings as a proportion of GNP fell drastically (15.8 in 1978 to 11.7 in 1986)

o Currency fluctuations and devaluations of TL became an integral part of financial

system, especially during the end of ‘export-led growth’ policies.

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Note: Before addressing the questions below, please be sure that you review
the basic concepts and definitions.

1. Who gained and who lost from financial liberalization in Turkey (Please,
discuss the question from an IPE perspective!)
2. What are the reasons of a paradigm shift from financial repression
toward financial liberalization in Turkey in the 1980s?
3. How financial liberalization contributed to financial depth in Turkey?
4. Discuss the positive and negative aspects of financial liberalization in
the 1980s?

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