Turkish Economy from an Institutionalist Perspective Beyza Karadeniz Cem Deniz Colak Cuneyt Guler Selin Irmak Bogazici University EC 470 - Turkish Economy March 27, 2018
Outline A General Overview of Institutions 1923-1929: Early Republic Era 1930-1950: Protection and Etatist Industrialization 1951-1960: Return to Liberal Policies 1961-1980: Planned Industrialization 1981-2000: Liberalization 2001-2007: Early 2000s 2 of 23
A General Overview of Institutions What is an institution? Institutions are the rules of the game in a society or, more formally, are the humanly devised constraints that shape human interaction. (North, 1981) Distinction between de jure and de facto rules Relationship between political and economic institutions one should not try to understand or manipulate economic institutions without thinking about the political forces that created or sustain them. (Acemoglu and Robinson, 2008) 3 of 23
A General Overview of Institutions Economic institutions matter for economic growth because they shape: Incentives of key economic actors in society Distribution of resources in society Reasons behind the difference between the success of countries: Extractive institutions: lack of law and order, interests of elites Inclusive institutions: broad participation and pluralism, encouraging investments 4 of 23
1923-1929 Early Republic Era No clear concept or necessary experience for the economic development of the country Capital accumulation forced by the state Economic responsibility taken by state Promotion of private investment through the establishment of several investment banks and creation of tax concessions and direct subsidies 5 of 23
1923-1929 Early Republic Era 1923 Izmir Iktisat Congress protectionist development strategy was adopted but still there were cautious promotion of private sector main sector for economic development was selected as agriculture 1925 ASAR, the heavy taxes on peasant was abolished 6 of 23
1923-1929 Early Republic Era Establishment of several institutions to promote private investment after Izmir Iktisat Congress (1923) - protectionist development strategy with promotion of private sector Turkiye Is Bankasi (1924) Tesvik-i Sanayi Kanunu (1927) - the growth of sugar, cotton, flour milling (three whites), coal, iron, gasoline Turkiye Ekonomi Kurumu (1929) Central Bank (1931) 7 of 23
1930-1950 Protection and Etatist Industrialization Shortage of entrepreneurs and managers in the private sector Little share of private sector both in the domestic and foreign sector Key industries were selected: manufactured goods, textiles, railways, telecommunications and energy sector Under this new state-led development strategy lots of SEE were established (Sumerbank) Excessive protectionist measures were put in force to protect the infant industries from international competition 8 of 23
1930-1950 Protection and Etatist Industrialization 1930 Sumerbank and Etibank were established to meet the credit demands of the private sector. 1945 the law on land reform led the opening of new areas to cultivation made land available to farmers without holdings (in accordance with Izmir Iktisat congress) 1947 the Trade Union Law labor unions emerged. In 1963, another law legalized strikes lockouts and collective bargaining. After 1980 coup, all labor unions were banned except Turk-is since they had remained outside political domain. DISK started its activities again in 1991. 9 of 23
1951-1960 Return to Liberal Policies Menderes government opened up Turkish economy into world markets The New Economic Program removed restrictions on foreign trade to large extent, reduced import tariffs, promoted exports(mainly agriculture) and FDI Aim was privatize and regulate SEE 10 of 23
1951-1960 Return to Liberal Policies 1952 TOBB, TISK, TUSIAD started to grow merchants and industrialist association. Only TUSIAD has been concerned with the widening economic inequalities between regions and social classes 1960 TUBITAK the only organization responsible for formulating and coordinating national science and technology policies. 1960 State Planning Organization responsible for preparing national economic targets and allocating funds for projects 11 of 23
1951-1960 Return to Liberal Policies Reasons why policy reforms in this period were not successful The fundamental conditions for import substitution were maintained and the government did not totally disengage itself from control of the economy Economic liberalization program was not accompanied by the full liberalization of foreign trade and FX regulations Export revenues could not be as rapidly increased as industrialization required 1958-59 measures succeeded in stabilizing the economy but not the political system. Therefore, military took power in May 1960 12 of 23
1961-1980 Planned Industrialization Newly formed SPO was responsible for designing development policy SPOs encouraged industrialization through import substitution By the mid-1960s, Turkish economy had completed the first stage of its import substitution in replacing imports with non-durable consumer goods Second stage of import substitutions tried to be implemented which was the imports of intermediate goods and consumer durable Contrast to first stage, capital intensive technologies and qualified labor force was needed 13 of 23
1981-2000 Liberalization Turkey implemented some IMF policies in which the economic role of the state was restricted and markets became the only determinants of prices. Turkey changed from a closed and controlled economy to one where markets played the major role. State intervention was reduced through liberalization, decision making within the government became more centralized 1990 the Undersecretariat of Treasury and Foreign Traderesponsible for public debt and cash management, leaving the Ministry of Finance with the basic task of revenue collection and procedural management of the public budget 14 of 23
1981-2000 Liberalization The establishment of Extra Budgetary Funds allowed the executive to circumvent parliamentary oversight and allocate public funds for preferred projects Ozals half-baked laws for privatization allowed government to pursue privatization in unaccountable and non-transparent ways. 1994 the Law on the Protection of Competition 1994 Turkish Patent Institute was established under the Ministry of Industry and Commerce. And intellectual and industrial property rights system started to be built 15 of 23
1981-2000 Liberalization Capital Markets Boards (1982) Contributes to prevention of a financial crisis and economic mistrust Continuous and sustainable growth Delegation of significant rule-making authority away from the government and ministries, it represented a counter-example to the centralization of policy making authority that characterized most of the 1980s and 1990s Rapid growth of non-bank financial institutions - Banker crisis in 1982 Bankacilik Duzenleme ve Denetleme Kurumu (1999) - Strongest RA to ensure stability of banking system but less concerned with consumer production and competition 16 of 23
Privitazation purpose = reduce inefficiencies (government ownership, political influence, lack of competition) It depends on the legal and inst environment regulatory tasks should be transferred to independent agencies to reduce political influence Deregulation and privatization of industries (2001) - Revenue driven THY Turk Telekom - increasing productivity 17 of 23
2001-2007 Growth-enhancing reforms following Turkeys financial crisis Radical structural reform imposed by IMF and World Bank after 2001 End of tutelage of Turkish military over politics Warming of Turkey - EU relations 18 of 23
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Major Institutional Changes 2001-2007 Greater Independence to Central Bank, implemented in 2001 Sole objective: inflation-targeting, prohibition of direct lending to government Public Finance and Debt Management Law (2002) and Control Law (2003) Governmental control over public expenditures enhanced out-of-control budget expenditures restricted 20 of 23
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References Acemoglu, Daron. Robinson, James. The Role of Institutions in Growth and Development. Acemoglu, Daron. Ucer, Murat. The Ups and Downs of Turkish Growth, 2002-2015: Political Dynamics, The European Union and Institutional Slide.(2015, October) Atiyas, zak. Economic Institutions and Institutional Change in Turkey during the Neoliberal Era.(2012, September). Temel, Tugrul. The Institutional Framework of Turkey and Turkish Agriculture. Ylmaz, Bahri. Why Has Turkey Failed? Does it fit to Acemoglu and Robinsons Thesis in Why Nations Fail?. 23 of 23