political economy in turkey -...

Political Economy In Turkey

State-led to State Partner

Wednesday, June 1, 2011

ETATISM AND STATE-LED DEVELOPMENT.

• Of the Arrows of Ataturk: Etatism requires the developmentalist state (devletçilik)

• As part of Kemalism, Etatism is not simply a strategy of state-led development, it is also part ideology.

• Although that was primarily devised as a response to local and international conditions of the 1930s

• Assets and trade rights either owned by minorities or bound into capitulations.


ETATISM

TURKEY'S FIRST FIVE-YEAR DEVELOPMENT PLAN: AN ASSESSMENT

I. INTRODUCTION

THE primary aim of this paper is to analyse the determinants of the rate of growth in G.N.P. over the period of the First Five-Year Plan, 1963-67. The background to this period is provided in the subsequent section which outlines the economic developments in the Turkish economy during the decade immediately preceding the planning era. The objectives of the Plan are then discussed together with some of the problems caused by the method of implementation employed. Section IV sets out the theoretical framework within which the assessment of the Plan is attempted. A brief description of the economic developments which took place during the planning period is

sketched in Section V. The analysis of these events is presented in Section VI. The main finding of this analysis is that the accelerated growth in G.N.P.

which occurred after 1962 was associated not so much with an upsurge in the proportion of investment in G.N.P. but rather, in the main, with a sharp fall in the incremental capital-output ratio (I.C.O.R.). This is contrary to the expectations of the planners who stated that the acceleration in the rate of growth would be achieved largely by increasing the proportion of investment in G.N.P. However, this pronouncement was quite inconsistent with their detailed figures for the planned increase in growth and the proportion of investment in G.N.P., as will be shown in Section VI.

In view of the importance of the I.C.O.R. in the subsequent analysis, it should be stressed at the outset that it is measured as a residual and so includes all influences on the growth rate, whether they are connected with new capital or not, other than the proportion of investment in G.N.P.

II. THE FIRST FIVE-YEAR DEVELOPMENT PLAN IN PERSPECTIVE

Although called the First Five-Year Development Plan, the Plan covering the period 1963-67 was not the first attempt at planned economic development in the history of the Turkish Republic. Two five-year plans had been drawn up in the 1930s, the second being abandoned at the beginning of the Second World War, and another was started in 1946.

The Democratic Party, which had strongly attacked 6tatism 1 in the

1 ttatism, followed fairly consistently in Turkey since the 1920s, might be described as " prag- matic socialism." It denotes " a situation in which the State takes an active and permanent part in economic affairs," but " is not in any way the same as . . . Collectivism or Communism " as it is not associated with attempts at nationalising existing private enterprise but with stepping in promptly where private enterprise has failed to take the initiative in vital segments of economic activity. See [14].

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Etatism is a form of economic nationalism•-Accumulation is state-led•-There is a corporatist model of the state organizing production•It is related to a number of economic, and political-economic theories.

•Modernization, Structuralism, Marxian theories (dependency, world systems)


ETATISM IS A MIX OF •Etatism "is a system peculiar to Turkey, which has evolved from the principle of the private activity of the individual, but places on the state responsibility for the national economy... to do quickly things, which have not been done throughout centuries in the Turkish Motherland by individual or private activity. It is also system different from liberalism.”

•By definition a heterodox practice, it is not orthodox free-market or liberal, economics. It is certainly not Marxism either.

•It is closer to Keynsian economics than socialism. Turkey’s early post-war period is very similar to conditions faced by other post-colonial societies.


ETATISM IS A MIX OF

•By definition a heterodox practice. •Neither orthodox liberal economics with sole reliance on markets and private contracts, or socialism with state control of productive resources.

•Modernization theory.•Stages of Growth

•5 stages: traditional, preconditions, take-off, drive to maturity, consumer society.•Keynsian liberalism with participation of the state.

•Structuralism•Economic observations focused on the problems of capital accumulation and investment facing less-developed countries.•Primary goods producers face declining terms of trade (their exports are less valuable than manufactured imports.)•Changes in terms of trade undermine currency stability and investment.


WHAT IS STATE-LED

• Modernization focuses on primary accumulation of capital.• Asserts that there are bottlenecks, or short-comings to laissez-faire

economics in a developing world context.• capital accumulation, • human capital, • and infrastructure.

• The state must create conditions for accumulation, investment and education.• Either the state provides these directly, or enables investment

through insurance or guarantees.


STRUCTURALISM

• Terms of trade result in the frequent disturbance of economy and increasing export of labour value.

• Terms of trade decline for primary goods prevents domestic accumulation of capital/savings.• Without investment, no improved productivity.• Reliance on single commodity or class of goods

undermines stable growth.• States must lead diversification of the economy.

• Periods of interruption of trade give indication of policy recommendation.


STRUCTURALISM

• Economic disruptions permit change weaken conservative forces.• Strong state policies,

• Tariffs against manufactured goods to reduce consumption and accumulate surplus domestically.

• Infant industry policies/ ISI• Agriculture reform,

• Change land tenure for efficient mid-size production, release peasants to be labor in efficient sectors.

• Education and Infrastructure.• Remove bottlenecks to production• invest in education.


STRUCTURALISM: POLICY RECOMMENDATIONS

• Create trade blocs of similar development level states

• Some (Prebisch) access to financial markets, and import of technology and capital goods as needed. Efficient ag, and tariffs help facilitate this

• Some- Permit import replacing FDI. Value added at home, learning by doing, technology gains.

• Some potential for transformation in position in system, and possible reconnection, or at least regionally efficient production.


KEYNESIAN / STATE LED

• Targets Unemployment first. Focus on full resource employment.

• State takes lead role in off-setting business cycle

• State invests (counter-cyclicly) in infrastructure and human capital


KEYNESIAN LIBERALISM

• Statist• Disregards notion of an “invisible hand” driven optimal

equilibrium• Finds multiple potential equilibria• High growth• Low growth/recession equilibrium.

• Counter-cyclical investment by state to stimulate or replace private savings.



• State intervention and regulation needed.• Depression capital was not experiencing profits, not

saving and not investing.• drop in interest rates to stimulate investment doesn’t

work alone.• depression equilibrium from insufficient demand,

absent savings.• Stopped money flow



• Keynsian policies

• Deficit spending to achieve resource utilization.

• Drop in interest rates to stimulate investment must concert with Gov’t spending to fire investment

• Transfer taxes to spending classes from saving classes.

• Gov’t demand can charge money circulation, increase velocity, w/o driving inflation until full-employment.

• Multiplier effect.


HETERODOX ECONOMICS

• Institutionalists

• Path dependency

• State-led

• Some elements of critical theory

• Strong dose of Keynes

• Sometimes called Post-Keynsian

• Veblen, Galbraith, Viner, and ECLA school


HETERODOX POLICIES

• Development of strong technocratic ability• Capital Controls• State-led investment (strategic trade)• Sometimes fixed exchange rate as inflation anchor

• two exchange rate policy• border taxes until VAT or similar system can be achieved.• State industrial participation.


ORTHODOX/NEOCLASSICAL VS. HETERODOX ECONOMIC POLICY

• No single heterodoxy • Heterodox Policies are a combination of orthodox and critical policies

• Often state-led policies, derived from one of Structural or Post-Keynesian traditions.

• Fixed exchange rates as inflation anchor• interest rate controls• export/import barriers• discriminatory, or selective capital policy (encourage cool long-term

investments, discourage hot money)• support and subsidy of important sectors, especially capital intensive

primary sectors• mining, energy, transportation.


ASSUMPTIONS BEHIND PURE THEORIES OF TRADE

• Costless Transactions• Full Resource Employment• Pareto distribution (side-payments to losers.)• Similar Technology• Constant Returns to Scale• Similar tastes• Costless Factor Movements (labor capital.)


RELAXING ASSUMPTIONS OF PURE THEORY OF TRADE

• Acquired Comparative Advantage: Means Comparative advantage is not just “Given” by Factor Endowments• Economies of Scale• Similar technologies• Regulatory, or enforcement advantage

• Institutional Advantage• Imperfect Competition


RELAXING ASSUMPTIONS: ACQUIRED COMPARATIVE ADVANTAGE

• Acquired Comparative Advantage• Economies of Scale

• more efficient production for larger scale (capital intensive operations)

• Explains trade between similarly endowed countries. Is a central idea of gains from trade.

• Thought to be complementary to H-O and gains from trade.• However, achievement of competitive scale for value-added sectors

leads to some policy prescriptions• Strategic Trade policies: Infant Industry Arguments

• subsidies• Tariffs• NTB


RELAXING ASSUMPTIONS: ACQUIRED COMPARATIVE ADVANTAGE AND INCREASING RETURNS

• Welfare loss to Tariffs or NTBs thought to be offset by public good of infant industry support

• ISI= Import substitution industrialization• Import substitution industrialization also argued to create local

economy of scale, and eventually knowledge to manufacture high value goods.

• Brazil and airplanes, automobiles• Quotas

• Increasing Returns to Scale can create monopoly firms in single nation markets.


DIFFERENT TECHNOLOGIES

• Different technologies can alter efficiency, or change factor intensity of production.

• Advances in technology provide monopoly-like profits to leading firms.

• Substitution of labor for capital and vis-versa

• Elasticity of substitution: How easily labor can substitute for capital

• The costs of production may vary based on worker productivity.

• Human capital- multiplies the relative endowment effect of labor. More productivity per unit input.


RELAXING ASSUMPTIONS: IMPERFECT COMPETITION

• Monopoly

• result of Economies of Scale, first mover advantages

• Distorts incentives for new investment and prevents start-ups

• Territorial Monopolies, and Intra-firm transfers

• Different reasons for firm structures.

• Intra-firm transfers account for 57% of OECD trade in 1987

• With differentiated products, or embedded with technology and proprietary information, or even movement within firms may not reflect real prices and costs.


INSTITUTIONAL ADVANTAGE/DISADVANTAGE

• Policy intention or failures create externalities that can provide false factor price advantage.

• Low regulatory ability• Low regulation• Labor repression• Capital subsidy.• Externalization of “public bads” separate the transmission of all factor

costs in the price of a good.• Public Bads are things like pollution, disease, anomie.• Differential enforcement or lack of enforcement causes market to displace costs to host (of

production) economy.• Trade may transmit pressures (factor price equalization) to likewise subsidize industrial

production.


PROBLEMS WITH STATE-LED DEVELOPMENT

• Trade barriers lead to rent-seeking behavior by domestic actors

• Industrialists want barriers to competition up despite effects to other sectors.

• State-owned Enterprises hide unemployment

• inefficient but keep workers off the streets.

• SOE can be used for patronage.

• SOE can be used to undercut political rivals.

• SOE privatization can be used to profit cronies.

• State-directed lending

• see above.

• domestic borrowing by state, plus guarantee on deposits= money making machine


PROBLEMS WITH STATE-LED DEVELOPMENT

★ State control of major economic actors and resources means there is more to fight over.

★ Parties and their proxies or clients have incentive.

★ winner take-all attitudes.

★ State must have balance of autonomy and embeddedness

★ Expertise is difficult to maintain independent of firms.


PERIODS OF STATE-LED DEVELOPMENT?

•The creation of State planning office to coordinate development•State Planning develops initial 5-year plans•1932 creation of the first state-commercial bank/ holding companies.

•Etibank (mining), Sumerbank (textiles and manufacturing)•Agriculture Bank was also created (Ziraat Bank)•creation of first share-holder private commercial bank İŞ Bank (shares held mostly by Ataturk and other CHP leaders, Celal Bayer was director.)

•First two five year plans 1934-1938, the second 1938-1942 (interrupted by WWII)


PERIODS OF STATE-LED DEVELOPMENT

•New five-year plans were suspended during DP reign.•They resumed in 1960s after the Coup and re-assertion of etatism.•Despite free-market rhetoric, and aspect of DP-- no privatizations occurred, and public investment increased substantially.

•Government investment drove inflation and overvaluation (from borrowing) at the same time, undermining international competitiveness.

•Tariff barriers and quotas protected domestic industry•TUSIAD, MUSIAD.•TUSIAD is the former official business association.•MUSIAD is the independent (read non-secularist) business association.



•Period of 1950-1958 Marked by•Growth in Agriculture•Growth in Manufacturing•Export boom due to Korea war•Export boom due to European recovery.

•Creation of Turkish Industrial and Development Bank•loans and insurance for private investment.

•S.O.Es established in•Machinery, Chemicals, Meat and Fish processing, Cement, Nitrogen (fertilizer and explosives), Petroleum Processing, Coal mining, Paper, and Iron.

•1958 Devaluation, weakened purchasing power for imports.



• 1961-1980:• The new Constitution stipulated the resumption of planned development.

Re-asserted Etatism.• Resumption of Five-year plans.

• 1963-1967 “1st” Five-year plan (of the Second Republic)• New directly controlled S.O.E.s• Increased wealth taxes• Increased import tariffs• Anticipated Aid of 3.5% of GNP. Only received 1.8%• Failure to assess industrial needs completely• private-sector investment diverged from intended areas• bad weather undermined agricultural targets.

• 1968-


PERIODS OF STATE-LED DEVELOPMENT1971] TURKEY'S FIRST FIVE-YEAR DEVELOPMENT PLAN 321

significant changes took place in the trends which occurred in these variables over the period 1950-68 between the pre-planning period and the planning period. Applying the Chow test provides some interesting results. First, no significant changes occurred in the trends in total, public and private investment as proportions of G.N.P. A priori, it might have been expected that change did occur in the trend in public investment between the pre- planning period and the planning period as there was undoubtedly a con-

TABLE V

Gross Investment

1950-68

(As proportions of G.N.P.)

(1) (2) (3)

Date. Total Public Private investment. investment. investment.

1950 9-6 2 9 6.7 1951 10-3 3 0 7-3 1952 12.8 3.7 941 1953 12-4 3.9 8-5 1954 14.7 3*9 10*8 1955 14*3 4-1 10.2 1956 13-4 4*4 9.4 1957 13.2 4.5 8.7 1958 14-0 4*3 9.7 1959 15-6 4*6 11.0 1960 15-9 4-8 11.1 1961 15*1 8*4 6.7 1962 13.6 7*3 6*3 1963 16-0 8.1 7 9 1964 15.4 8*4 7 0 1965 16-4 8*9 7.5 1966 17-6 9-6 8*0 1967 17.7 9.5 8-2 1968 19-3 10-3 9*0

Sources: Column 1, 1950-60 from State Planning Organisation, First Five-Year Development Plan, 1963-1967 (Ankara: State Planning Organisation, 1962), Table 9, p. 15; 1961-68 from United States Agency for International Development, Economic and Social Indicators-Turkey, 1967 and 1969 (Ankara: United States Agency for International Development, 1967 and 1969), Table 4-B, p. 12. Column 2, 1950-60 from State Planning Organisation, First Five-Year Development Plan, 1963-1967, op. cit., Table 13, p. 17; 1961-68 from United States Agency for International Development, Economic and Social Indicators-Turkey, 1967andl969, op. cit., Table 4-B, p. 12. Column 3 = (1) - (2).

siderable increase in the proportion of public investment in G.N.P. during the

planning period. However, closer inspection of the data reveals the fact

that public investment did increase sharply over the period 1950-61. By 1963 a level of public investment in G.N.P. of around 8% had already been

established. It exceeded 10% only by 1968.1

Although no significant change in the trend in total investment as a

proportion of G.N.P. occurred between the pre-planning and the planning

1 Although no change took place between 1962 and 1963 there was a significant change (at the 99% confidence level) in the trend between 1960 and 1961.

No. 322.-VOL. 81. y

Public and Private Investment 1950-1968



Second Five-Year Plan 1968-1972- The basic objective of the mixed economy system is to accelerate development by mobilizing all the resources and potential of the country through the framework of a better distribution of resources among economic and social activities. - The mixed economy system will be employed as a tool capable of ensuring an equitable and balanced development in the efforts towards improving the welfare of the Turkish nation. - Although the second plan is imperative for the public sector, it serves as a guide and support and it helps individuals explore and develop their enterprising potential. - The rules of the mixed economy system will be clearly defined and the drawbacks of the existing system will be quickly removed.



2nd 5-year PlanThe rules of the mixed economy

- The static and dynamic efficacy of the economy will be achieved mainly through the market mechanism. In other words, economic decisions will be made on the basis of free market prices. - In fields, where the public and private sectors carry out productive activities side-by-side, the government will ensure equality and treatment. - The government will ensure price stability and minimize the deficiencies of the price mechanism through indirect means such as tax, credit, money and foreign trade policies, and it will prevent the creation of monopolistic tendencies and the effective distribution of private sector resources in fields to help the development of the economy. - In particular, the state will undertake infrastructural investments, which accelerate the overall development of private sector industry and growth.



•Third Five Year Development Plan (1973-1977) also focused on the importance of government' s active role for economic development, •The Great Oil Shock of 1973-1974 • Crude oil prices went up sharply and this became the major source of inflation in many industrialized and developing countries. • •Following an Interim Plan for 1978.

•Fourth Five Year Development Plan 1979-1983 was introduced, • failed to prevent economic problems such as; •a very severe foreign exchange bootleneck, •a high inflation rate,•growing unemployment, •resulting new devaluation of the Turkish currency.•IMF Assistance sought. Ozal Plan initiated(Finance Minister)

•In this period, economic problems doubled with high political turmoil and deterioration, •Turkey underwent a major political and social crises. •Government failed to cope with growing labor strike and urban terrorism.



• 2001:• Still 37 S.O.E holding companies• 250 affiliated subsidiaries.• 70,000 employee or 25% of industrial employment.• privatization continued apace after 2001 crisis.

• Role in 1999 and 2001 crisis• duty-losses of S.O.E. 33% of Public Sector Borrowing

Requirement.• How


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