Turkish Economy

Turkish Economy - Structure and Grwoth

At the time of the collapse of the Ottoman Empire during World War I, the Turkish economy was underdeveloped: agriculture depended on outmoded techniques and poor-quality livestock, and the few factories producing basic products such as sugar and flour were under foreign control. Between 1923 and 1985, the economy grew at an average annual rate of 6 percent. In large part as a result of government policies, a backward economy developed into a complex economic system producing a wide range of agricultural, industrial, and service products for both domestic and export markets.

Economic Development

At the birth of the republic, Turkey's industrial base was weak because Ottoman industries had been undermined by the capitulations. World War I and the War of Independence (1919-22) also had extensively disrupted the Turkish economy. The loss of Ottoman territories, for example, cut off Anatolia from traditional markets. Agricultural output--the source of income for most of the population--had dropped sharply as peasants went to war. Even the production of wheat, Turkey's main crop, was insufficient to meet domestic demand. In addition, massacres and the emigration of Greeks, Armenians, and Jews, who had dominated urban economic life, caused a shortage of skilled laborers and entrepreneurs.

Turkey's economy recovered remarkably once hostilities ceased. From 1923 to 1926, agricultural output rose by 87 percent, as agricultural production returned to prewar levels. Industry and services grew at more than 9 percent per year from 1923 to 1929; however, their share of the economy remained quite low at the end of the decade. By 1930, as a result of the world depression, external markets for Turkish agricultural exports had collapsed, causing a sharp decline in national income. The government stepped in during the early 1930s to promote economic recovery, following a doctrine known as etatism (see Glossary). Growth slowed during the worst years of the depression but between 1935 and 1939 reached 6 percent per year. During the 1940s, the economy stagnated, in large part because maintaining armed neutrality during World War II increased the country's military expenditures while almost entirely curtailing foreign trade.

After 1950 the country suffered economic disruptions about once a decade; the most serious crisis occurred in the late 1970s. In each case, an industry-led period of rapid expansion, marked by a sharp increase in exports, resulted in a balance of payments crisis. Devaluations of the Turkish lira and austerity programs designed to dampen domestic demand for foreign goods were implemented in accordance with International Monetary Fund (IMF--see Glossary) guidelines. These measures usually led to sufficient improvement in the country's external accounts to make possible the resumption of loans to Turkey by foreign creditors. Although the military interventions of 1960 and 1971 were prompted in part by economic difficulties, after each intervention Turkish politicians boosted government spending, causing the economy to overheat. In the absence of serious structural reforms, Turkey ran chronic current account deficits usually financed by external borrowing that made the country's external debt rise from decade to decade, reaching by 1980 about US$16.2 billion, or more than one-quarter of annual gross domestic product (GDP--see Glossary). Debt-servicing costs in that year equaled 33 percent of exports of goods and services.

By the late 1970s, Turkey's economy had perhaps reached its worst crisis since the fall of the Ottoman Empire. Turkish authorities had failed to take sufficient measures to adjust to the effects of the sharp increase in world oil prices in 1973-74 and had financed the resulting deficits with short-term loans from foreign lenders. By 1979 inflation had reached triple-digit levels, unemployment had risen to about 15 percent, industry was using only half its capacity, and the government was unable to pay even the interest on foreign loans. It seemed that Turkey would be able to sustain crisis-free development only if major changes were made in the government's import-substitution approach to development. Many observers doubted the ability of Turkish politicians to carry out the needed reforms.

Reforms under Ð"-zal

In January 1980, the government of Prime Minister SÐ"јleyman Demirel (who had served as prime minister 1965-71, 1975-78, and 1979-80) began implementing a far-reaching reform program designed by then Deputy Prime Minister Turgut Ð"-zal to shift Turkey's economy toward export-led growth.

The Ð"-zal strategy called for import-substitution policies to be replaced with policies designed to encourage exports that could finance imports, giving Turkey a chance to break out of the postwar pattern of alternating periods of rapid growth and deflation. With this strategy, planners hoped Turkey could experience export-led growth over the long run. The government pursued these goals by means of a comprehensive package: devaluation of the Turkish lira and institution of flexible exchange rates, maintenance of positive real interest rates and tight control of the money supply and credit, elimination of most subsidies and the freeing of prices charged by state enterprises, reform of the tax system, and encouragement of foreign investment. In July 1982, when Ð"-zal left office, many of his reforms were placed on hold. Starting in November 1983, however, when he again became prime minister, he was able to extend the liberalization program.

The liberalization program overcame the balance of payments crisis, reestablished Turkey's ability to borrow in international capital markets, and led to renewed economic growth. Merchandise exports grew from US$2.3 billion in 1979 to US$8.3 billion in 1985. Merchandise import growth in the same period--from US$4.8 billion to US$11.2 billion--did not keep pace with export growth and proportionately narrowed the trade deficit, although the deficit level stabilized at around US$2.5 billion. Ð"-zal's policies had a particularly positive impact on the services account of the current account. Despite a jump in interest payments, from US$200 million in 1979 to US$1.4 billion in 1985, the services account accumulated a growing surplus during this period. Expanding tourist receipts and pipeline fees from Iraq were the main reasons for this improvement. Stabilizing the current account helped restore creditworthiness on international capital markets. Foreign investment, which had been negligible in the 1970s, now started to grow, although it remained modest in the mid-1980s. Also, Turkey was able to borrow on the international market, whereas in