Country Study: Turkey
Overview
Strategically located at the intersection of the Middle East and
Central Asia, Turkey serves as a regional model for the many nations there
undergoing transitions from state-run economies and authoritarianism to
economic liberalism and democracy. Once the center of the Ottoman Empire
and now a vanguard for secular democracy and the free market, Turkey in
less than a century has experienced an economic revolution within the
context of a greater political-cultural revolution. During its remarkable
economic transformation, one of the persistent stumbling blocks Turkey has
encountered on the road from the East to the West, has been its legacy of
chronic fiscal deficits and dependence of foreign aid. In an effort to
deal with the case of these persistent deficits, 1980s hero of economic
reform, Turgut Özal initiated a liberalization program focusing on
privatizing state-run industries and expanding Turkish exports. However,
despite this new economic strategy, political customs and systemic flaws
such as "electoral politics" continue to prevent the state from controlling
its budget deficits. Yet, despite lingering deficits, one can see
tremendous growth potential within Turkey's economic sectors. Moving from
an examination of the economic sectors to the flow and control of financial
capital, one sees how the price of money is set by a small oligopoly of
government and private banks. As is the case with other parts of the
Turkish economy, this "German model" banking system demonstrates modest
although increasing signs of openness and decentralization.
Parallel Socio-Political and Economic Revolutions
Over the years since its birth in 1923 Turkey has undergone a
remarkable economic revolution within the context of a larger
political-cultural revolution. In the aftermath of WWI, the Western Allies
moved according to pre-arranged treaties to carve up amongst themselves the
remnants of the Ottoman Empire. However, when they attempted to partition
what is now Turkey, war hero and champion of nationalism Mustafa Kemal
(Atatürk), rallied his countrymen and pushed the allies back. From
Atatürk's victory in a brief War of Independence, Turkey emerged as the
only defeated remnant of the Central Powers to negotiate with the Allies as
an equal and shape its borders to establish the nation of Turkey in 1923.
leader of the newly founded Republic of Turkey. Inaugurated as the first
president of a one-party, unicameral democracy, Atatürk led Turkey toward
his personal vision of secular democracy and launched a dramatic program of
reforms to sever Turkish society from its theocratic past. An entire
society was rearranged as numerous ties between religion and state were
systematically cut. Atatürk's reforms included abolishing the Islamic
Caliphate, outlawing certain religious clothing, granting woman suffrage,
and adopting the Latin alphabet to form a new Turkish language. Such a
drastic departure from the past came as a shock to most Turks and created
lasting social cleavages that continue to cause recurrent upheaval in
modern Turkish society. Such cleavages have led to waves of violence and
chaos such that the Turkish military, which took up the mantel of
protecting Atatürkism, have launched periodic coups to "rescue" Turkey's
democracy when it allegedly strayed too far from Atatürk's secular vision.
Under the watchful eyes of its military guardians, Turkey's now multi-party
parliamentary democracy has made great progress; however, it still fights
to achieve legitimacy in light of recurrent military intervention.
Similar to its long journey from the authoritarianism of leader and
icon Atatürk to a more pluralistic democracy, Turkey has also made an
extraordinary transition across the economic spectrum. After a brief
interlude with liberalism in the 1920s, the Great Depression drove Turkey
to reorient its economic policy toward a state interventionist model.
Frustrated by stagnate growth during the Depression, Turkey's leaders were
inspired by the popular ideas of John Maynard Keyes as he penned them in
his famous work The End of Lassez-Faire (1926). Likewise, they were deeply
impressed by the rapid and extensive industrial growth the Soviets had
achieved using government-directed 5-year plans. As a result of these
ideological inspirations, from the 1930s until 1980, the Turkish economy
was largely state-directed. Turkey focused its economic strategy around a
policy of import-substitution, whereby the state attempted to manufacture a
variety of goods to replace those they had to import. Furthermore,
adopting Soviet-style five-year plans and spending heavily on state-run
enterprises, Turkey achieved rapid industrial development leading up to the
end of WWII. Thereafter however, the drawbacks of heavy state intervention
in the economy became apparent to policymakers. By 1980, 40% of
manufacturing was accounted for by state enterprises which were too often
inefficient, overstaffed, and increasingly expensive to sustain. A debt
crisis in late 1970s aggravated by the 1973 oil crisis ultimately brought
Turkey to a major turning point in its economic strategy. Facing triple
digit inflation, 15% unemployment, and unable to pay the interest on
external loans, the Turkey sought an economic savior to implement both an
economic stabilization plan and champion a new economic vision. That
savior turned out to be Turgut Özal, an economist who after a military coup
in 1980, succeeded in winning the first election and launching an economic
reform movement that continues today. Moving Turkey away from its past of
heavy state intervention and import-substitution, Özal advocated free trade
and privatization. He began decreasing subsidies to state-run industries
and lifted price controls on state produced goods. This liberalization
effort initiated by Özal in 1980 marked the turning point in Turkey's long
transition from a state-planned economy to one emphasizing economic
liberalism.
Foreign Intervention and Chronic Debt
In its 200-year struggle to reshape itself into a European industrial
nation, Turkey has repeatedly become indebted to Western nations and as a
result forfeited some portion of its economic autonomy. Beginning in the
eighteenth century, a series of unequal treaties that affected trade and
taxation were imposed by the West upon a weakening Ottoman Empire. These
agreements or "capitulations" handicapped the Ottoman economy and began a
relationship of both dependence and distrust with the West. Still later,
as a part of the Tanzimat or "restructuring" reforms of 1839-1878, the
Ottomans attempted to build an indigenous industrial base as part of its
effort to catch up to the West. However, the effort required loans from
the very nations they were trying to emulate and again, only led to a
deepening indebtedness to Western imperial powers. After a period of rapid
growth and relative economic autonomy during the early republic, modern
Turkey has returned to a dependence on loans from international banks and
has had to deal with the external interference such loans require. Since
the 1950s, Turkey as suffered an economic disruption about once a decade;
the most serious case occurred in the late 1970s. These cyclical economic
difficulties seem to follow a predictable pattern. Usually a period of
rapid industrial growth takes place requiring a sharp increase in imports,
which in turn leads to a balance of payments crisis. The International
Monetary Fund (IMF) intervenes to provide emergency aid, but also demands
Turkey agree to the guidelines of some austerity program. These IMF
restrictions usually lead to some improvements in the country's external
accounts, whereby more loans are granted and the cycle begins all over
again. Varying slightly from the normal cycle, the latest disruption in
Turkey's economy occurred in 1994 and involved excessive government
spending on public sector industries and for higher salaries for civil
servants. These expenditures resulted in more external borrowing from both
public and later the private sector. Once external accounts reached a
critical point, the IMF again arrived to provide a $740 million aid package
provided certain economic restrictions were endorsed. Although this cycle
of foreign aid and imposed IMF restrictions seems intrusive, the root
causes of deficit spending lie with Turkeys still flawed political system.
The root of the Turkish economy's debt problem today is excessive
government expenditures. Uncontrolled state spending has fueled inflation,
capital flight, and heavy foreign and domestic borrowing. This apparently
simple dilemma of overspending was emphasized in a discussion I had in June
of 1997 with Dr. Haluk Kasnakoğlu and Dr. A. Halıs Akder, both Professors
of Economics at Middle East Technical University in Ankara. Both
Professors concurred that if their government could simply rein in the
growth of annual budgets--high inflation and external debts would gradually
diminish. Yet why has shrinking state budgets proven so politically
difficult? The answer to this lies within a political system that
tends to be more representative of certain special interest groups within
Turkish society. For example, the wealthy elites have successfully
prevented tax reforms to make tax collection for efficient and progressive.
In fact, 1995 tax revenues in Turkey are only 14.3% of GNP—the lowest
figure among the member countries of the Organization of Economic
Co-operation and Development (OECD). Likewise, the political clout of a
burgeoning sector of civil servants has blocked government attempts to pare
down the staffs of government agencies and reduce salaries. Instead,
Turkey suffers from "electoral politics", in which politicians "goose" the
economy with increased spending and raise government employee salaries to
increase their party's reelection chances. This lack of discipline and
unwillingness to raise taxes to pay for deficit spending has doomed the
government to permanent reliance on both internal and external borrowing to
keep state budgets afloat (see figure 1 above).
A View of Key Economic Sectors
Examining the three major sectors of the Turkish economy, Industry,
Agriculture and Services, provides a picture of both the effect of current
economic liberalization efforts and reveals Turkey's still untapped
economic potential. In 1995, as a portion of GNP, industry represented
30.6%, agriculture 15.9%, and services the remainder at 53.5%. Abandoning
its long-held import-substitution strategy during the 1980s, industry has
rebounded and has become increasingly efficient and able to produce
competitive export goods. A former mainstay of the Turkish economy,
agriculture took a back seat during Turkey's twentieth century focus on
industrial growth and as a result of neglect, this sector represents
enormous untapped
potential. Lastly, the large and nebulous services sector serves as a
weathervane of both positive and negative results from Turkey's continuing
economic liberalization.
Since the 1980s, industry has improved productivity and efficiency by
abandoning its import-substitution strategy and replacing it with a
strategy encouraging private ownership, privatizing state firms and the
shifting of resources to exploit Turkish products already competitive on
the global market. In the pre-Özal era, from 1950-1970, industry had
averaged 8.6% growth annually. However, too much dependence on outside
energy and unresponsiveness to market forces caused Turkey's industrial
growth to stagnate in the late 70s. To address this problem, Özal began a
program in 1980 to inject the influence of market forces in
decision-making, to increase exports, and to either privatize government
enterprises or reform them to increase efficiency. This retrenchment of
industrial strategy did cause industry's contribution to economy to drop
initially, however, it quickly recovered and expanded such that in 1995 in
represented a record 30.6% of GNP. Still, even with the successes of a
continuing liberalization movement and an ongoing privatization effort, the
industrial sector today remains hindered by the state's still considerable
economic presence in the 1990s. As late as 1995, the public-sector still
contributed 40% of the value added within manufacturing and as a result
many private-sector companies today have no alternative but to depend on
crucial inputs from unreliable state industries. Such friction from
unresponsive state enterprises prevents Turkish industry from reaching its
full potential.
Even given the problems resulting from the state's still pervasive
participation in industry, there are many positive signs for the future of
this sector. In particular, textiles stand out among Turkey's leading
industrial contributors, which also include food processing, petroleum, and
iron/steel production. Accounting for 35% of total exports in 1992,
textiles have arisen today as one Turkey's strongest exports and serve as
the state's most important foreign exchange earner. Between 1987-1992,
textile exports grew at an astonishing average annual rate of 19%. In
fact, Turkish textiles have become so competitive on the world market that
many industrial nations have resorted to protectionism to prevent their
importation. Turkish Textile manufacturing is but one of several areas
within Turkey's economic sectors that highlight its increasing industrial
might in the global market place.
If Turkish industry exhibits great potential, however slowly it may be
ridding itself of government intrusion, even more so can be said of its
agricultural sector. Since the 1923 birth of the republic, Turkey has put
so much emphasis on building a Western-style industrial base that its once
dominate agricultural sector has been neglected. Agriculture's share of
the state economy and as a percentage of total exports has fallen
dramatically. Farm production declined from 50% of GNP in 1950 to around
15% of GNP by 1993 and agriculture's share of exports dropped from a recent
high of 60% in 1980 to only 15% in the mid-1990s. As a result of the
state's neglect of agriculture, farmers have been given little incentive to
adopt modern techniques or absorb vast improvements in mechanization and
fertilizers. As a result, a dormant capacity within Turkish agriculture
exists, which if exploited, could make Turkey a regional export giant.
What are the missing elements to developing this hidden capacity?
Included among many needs, Turkish farmers lack training in modern farming
methods—too many farmers over cultivate their land and lose valuable
topsoil for not knowing modern methods of soil regeneration. Furthermore,
there is widespread need for better hybrid seeds, upgraded livestock herds,
standardized farm products, and reorganized and modernized food processing
facilities and distribution. The government has however made some recent
efforts to reform the agricultural sector. For example, it has switched
from its former policy of promoting Turkey's self-sufficiency in food
production to a strategy of maximizing agriculture's contribution to the
balance of trade. Also, in an attempt to lessen expenditures and increase
market forces, heavy government price supports have been gradually reduced
and tighter policies for farming loans imposed. In addition, a wider range
of food imports has been permitted in an effort to force indigenous farmers
to respond to competition. However, as is the case in industry, despite
these reforms, much governmental heavy-handedness from the past still
hinders productivity. For example, many confusing and overlapping
government agricultural agencies established between 1930-1980 continue to
play a role in the daily lives of farmers. Old attitudes and practices
remain. Yet, offering some hope, the government today is moving to
streamline state agencies and is gradually reducing past redundancies and
inefficiencies. If as a result such effort Turkey succeeds in freeing the
pent-up production capacity within its agriculture sector; it could join
the ranks of the world's powerhouses of food production.
The consistent growth of the all-encompassing services sector,
representing 53.5% of GNP in 1995, reveals both the positive and negatives
as a result of Turkey's economic liberalization process. Incorporating
everything outside of industry and agriculture, the services sector
contains everything from the rising influence of technology in
telecommunication and banking to the legions of menial laborers driving
taxis and sweeping the halls of numerous state buildings. On the one hand,
economic liberalism has benefited the fortunate middle and upper classes in
Turkey who have been able to spread their disposable income on an
increasing array of technological goods and services. From electronics and
cellular phones to the increasing number of professional services offered,
many Turks have ravenously absorbed all their more market-oriented economy
has provided. On the other hand, the services sector has ballooned from
state spending to employ legions of tea-servers, chauffeurs, and janitors
who cannot afford the luxuries provided by this more open market. Services
represent the expansive numbers of Turks who are underemployed, performing
a vast array of low-paid jobs, and who are yet to enjoy much benefit from
any economic liberalization. While some have succeeded in the rising
technological portion of the vacuum-like sector, many more are still
waiting with little hope of getting off lowest rungs of the economic
ladder.
Finance and The Strings of Power
The banking system in the Republic of Turkey was from the beginning
designed to support the state's goal to develop a modern industry. In 1923
Turkey's first National Economic Congress decided that banks would be
established to finance main sectors of the Economy. This concept of
connecting banks to industry remains today in that the state and various
industries form a complex system through which legislation and government
polices direct credit flows. Added to the influence of state-owned banks,
private banks emerged in the 1960s and likewise established intimate
connections with industrial conglomerates. Together, both government and
private banks form an oligopoly in which a small number of banks control
the majority of assets and thereby dictate the cost of borrowing money.
These banks funnel credit to the industries or groups they serve. As a
general rule, the amount of credit available to a particular economic
sector depends largely on the resources available to the institutions for
that sector, rather than on market assessments.
In early 1995, the Turkish banking system consisted of the Central
Bank and 58 banks, including 21 foreign banks. Before 1980, there were
only 4 foreign banks in Turkey, but their numbers grew during the 80s as
the Government liberalized banking laws. In the middle of this system the
Central bank, founded in 1930, is responsible for issuing bank notes,
protecting the value of Turkish currency, and regulating the banking and
credit system. The Central bank also finances the government deficits and
makes loans to both public and private banks. As part of the 80s reform
effort, in 1983 the Central Bank began to withdraw from making loans to
other banks and stepped up it supervisory functions. Additionally, of
Turkey's commercial banks, 6 are state owned and 21 are partly or wholly
foreign owned. Depicting the consolidated nature of the commercial banking
sector, 46% of all assets are concentrated in just four banks. Those four
banks are (1) the oldest and largest public bank, Ziraat Bankası (The
Agricultural Bank of Turkey) (2) The Real Estate Bank (state-owned) (3)
Işbank (private) (4) Akbank (private).
The concentrations of assets within Turkish banking system align it
with the characteristics of John Zysman's German financial system model
(see figure 3 above). Describing this model in his book
The Mediterranean Debt Crescent, Dr. Clement Henry, Professor of Government
at the University of Texas writes,
A powerful central bank shares a bargaining relationship with a highly
concentrated system of privately owned universal banks. State authorities
bargain with a banking sector in which a small number of privately owned
universal banks wield significant influence over credit allocation and
other
major credit issues. The banks are usually responsive to the government,
but they have independent bargaining power and wield a collective veto to
protect their common interests.
Like the above description of the German model, deposits in Turkey are
concentrated among an oligopoly of a few state and private banks.
According to the Turkish Association of Bankers, the five largest banks
control 46% of total bank assets (see figure). As high as this
concentration is, we can see it is down 4 percentage points from 1994.
This decline indicates perhaps the Turkish banking oligopoly may be slowly
losing market share due to competition from other areas such as the stock
market or alternative lending sources such as the still few, yet emerging
Islamic Banks.
Modern Turkey does vary however in one key aspect from Zysman's German
financial model—in the manner the Turkish State also plays a role in the
oligopoly. Again, Dr. Henry aptly describes this unique derivation,
The Turkish Treasury owns eight banks controlling roughly 40% of the assets
of
the Turkish commercial banking system. In 1990 they held almost as many
deposits
as the 25 privately owned national commercial banks. Turkey's commercial
banks
collectively disposed of over 85% of the commercial bank deposits in 1990;
four of
them, Ziraat, Vakiflar, Halk and Konutbank were state-owned, and two of
them
were among Turkey's top five deposit-takers.
As is different from the scenario in German, the Turkish government "is not
only a regulator of the banking system, but is itself a major player in the
financial oligopoly." Furthermore, the Turkish oligopoly is distinctive in
that it is not a strong one. None of the major banks aggressively set
prices or shape the market. Rather, most banks lack the will or financial
strength to force the cost of money one way or another. Instead they are
satisfied to support the tacit agreements of the financial oligopoly to
sustain interest rates so that all banks remain profitable or at least
solvent as they continue to support corporate conglomerates.
Even with the reform measures passed in the 1980s, introducing
transparency and competition into Turkey's banking system has been a slow
process. When the government and huge business holding companies have a
vested interest in the status quo, the likelihood of major change is
minimal. However, Özal efforts in the 80s did manage to reduce the Central
Bank's direct financing and lending in the economy and curtail its role to
more of a regulatory function. The Banking Reform Law passed in 1985
pressed for "more rigorous monitoring by the government, the Central Bank,
and various public auditors, banks were expected to improve their capital
statements and diversify their ownership and loan portfolios, so as to be
more independent from the various family holdings." Yet, despite such
laws, the symbiotic relationships between the government, large banks and
family-owned holding companies continues. Correspondingly, political
pressures remain to prop up weak companies. The openness in financial
markets Özal sought in the 80s may still take some years if not decades to
achieve. Still, the slow decline in market share of the oligopoly's major
banks offers some small sign that some market pressures may be gradually
working to bring about more competition and diversity in Turkish banking.
Likewise, there is also hope that Istanbul Stock Exchange may in the future
offer small and medium sized companies an alternative means to raise
capital.
Capital Markets
Although government enterprises and private companies have increased
their use of stocks and bonds since the 1970s, Turkish capital markets
today remain underdeveloped. Reopening the Istanbul Stock Market (ISE)
after its closure in 1979, the Özal administration worked to bring their
stock market in alignment with world standards. In an effort to expand the
number of companies traded publicly, The Capital Markets Law was passed in
1982 and Capital Markets Board was established to issue regulations for
institutions marketing bonds and other financial instruments. Although it
was anointed a "rising market" by international finance gurus and
recognized as the best performing market in 1993, the Turkish stock market
remains undercapitalized by world standards. From 1990 to 1995
capitalization of the ISE averaged only about 12.5%, well below the levels
of even such state-dominated countries as Sweden and Greece (see figure).
Also damaging progress, the ISE suffered a severe setback in 1994 when it
crashed due to that year's currency and balance of payments crisis.
Nevertheless, the ISE hopes to gain from both the government's continued
push to privatize its many State Economic Enterprises (SEEs) and from the
confidence of international investors who remain bullish on the Turkish
economy's future potential.
Cited Works
Author Unknown, Banks in Turkey 1996. The Banks Association of Turkey.
Ankara: The Banks
Association of Turkey, 1996.
Author unknown. The Republic of Turkey's Ministry of Foreign Affairs.
"Development of National
Banking and Implementation of Etatism (1909-1944)." Banking in Turkey.
Online. Internet. 25 Sept.
Available: http//www.mfa.gov.tr/grupc/c5.htm.
Henry, Clement C. The Mediterranean Debt Crescent: Money and Power in
Algeria, Egypt, Morocco,
Tunisia, and Turkey. Cairo: American University Press, 1996.
Metz, Helen C., ed. Turkey: a country study. Washington D.C.: Library of
Congress, 1996.