INTL 410/ECON 481

Caner BAKIR
FALL-2016

1
 Boratav, K. 2007. Türkiye İktisat Tarihi 1908-2005, Ankara: İmge Kitabevi, chs.
9.

 Yeldan, E. 2004. Küreselleşme Sürecinde Türkiye Ekonomisi: Bölüşüm, Birikim ve

Büyüme, İstanbul: İletisim Yayınları, Part 5.

 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.

2
1. Political Instability and the Age of Coalitions
2. The 1994 Shock: The First Crisis of the Neoliberal Era
3. The Politics of Redistribution in the 1990s
4. Review questions

3
 The late 1980s was a critical juncture for Turkey’s neoliberal experiment, with two
equally important developments:

• 1987: Redemocratization and the resumption of party competition; Turgut Özal’s ANAP
managed to win the 1987 elections, but continued to lose ground to successors of the
two main centre-right and centre-left parties of the 1960s and the 1970s (DYP, following
the AP line; and SHP, following the CHP line). Its response was to slow down reforms
and eventually backpedal from orthodox fiscal austerity: populist side-payments
resume!

• 1989: Capital account liberalization. Extremely important factor to understand Turkish

economy in the neoliberal era. Opened the Turkish financial system to foreign capital
inflows, i.e. “hot money”. Its implications were tremendous.

4
• ANAP’s efforts to broaden its support base by recourse to old style economic
populism was fiscally damaging but politically insufficient. The pent up social
grievances of the top-down neoliberalism proved too much for ANAP to
handle as exemplified in mounting labor activism in the late 1980s. Party
competition intensified further in the aftermath of capital account
liberalization, leading to greater political instability

 ANAP lost the general elections of 1991; the following years were marked by
a string of weak coalition governments.

• The following table demonstrates the short-life of coalition governments during

1990s.

5
6
 Turkey had to battle other political problems in the 1990s:
a. The Kurdish problem and the PKK, causing a prolonged low-intensity civil conflict in the East and
South-East = rising military expenditures + more emphasis on the fiscally straining South-East
Anatolian Project (GAP)

b. The rise of political Islam.

 Given these problems, for much of the 1990s, the economy took a back seat in
Turkey’s political agenda.
 Party fragmentation in the centre-right and centre-left brought about fierce
everyday competition, stifling the emergence of a longer term vision of
economic development and forcing weak governments to try to hold on to
power by addressing distributive pressures via everyday populism.

7
• High inflation (but no hyperinflation)
• Large and expanding fiscal deficits (due to increased current and transfer
payments)
• Large current account deficits
• Currency overvaluation
• Unruly integration with international financial markets (“open positions”
of the banking system) Low investment and savings
• Boom-and-bust cycles of growth
• Overall, poor economic governance and macro instability!

8
 A combination of structural weaknesses (deep causes) and economic mismanagement (triggering
factors).
STRUCTURAL WEAKNESSES:

 Among the structural weaknesses of the Turkish economy were large current account deficits and fiscal
deficits (i.e. twin deficits). Thus, foreign capital-dependent growth as usual, but this time in a more
liberalized economy and most importantly under a lax banking regulatory regime.

 By the mid-1990s, a certain pattern had emerged in the Turkish economy: In a context of financial
integration and fiscal expansion, large twin deficits (current account and fiscal) were being financed via
foreign capital inflows channeled through domestic banks. The number of banks had flourished rapidly,
and yet they were only loosely regulated.

 The key to profitability for most banks was the financing of the fiscal debt in the form of lending via
government securities (i.e. state bonds and Treasury bills). In this way, the Treasury and the domestic
banking system had grown mutually dependent in a symbiotic relationship.

9
ECONOMIC MISMANAGEMENT / POLICY FAILURES:

 The downside of this symbiosis was the high cost of domestic borrowing. PM Tansu Çiller decided to break this
cycle by recourse to an old form of deficit financing: low-interest rate cash advances through the Central Bank. For
doing so, she cancelled previously announced Treasury auctions. This attempt on the part of the Turkish government to
exit financial markets for managing its deficits backfired rapidly. In early 1994, the excess liquidity in the system,
coupled with the lowering of Turkey’s investment rating by international credit rating.

 Institutions (Moody’s; Standard and Poor’s) and rumors of a pending major devaluation caused a run on foreign
exchange. In the following months, a sharp capital outflow halved Turkey’s international reserves, and overnight rates
in interbank markets reached 1,000 percent.

 Yet only after the March 27 local elections did the government announces an economic package (“5 April decisions”),
which included a severe devaluation of the lira, and sharp rises in taxes and public sector prices. The crisis took its toll
on the real sector as well, forcing halts in production in several major manufacturing plants and a string of bankruptcies
in the commercial sector. The Turkish economy shrank by over 6 percent in 1994.

10
1. The financial/banking sector as the new source of vulnerability in the Turkish economy. A few small

banks were taken over by the Savings Deposit Insurance Fund (TMSF). Most critically, Çiller announced

100 % state guarantee on all deposit in Turkish banks. This would create a major “moral hazard” in the

rest of the decade.

2. Some bureaucratic reorganization: the Undersecretariat of the Treasury and the Undersecretariat of

Foreign Trade now separated in late 1994 (recall they were combined in 1983)---a sign that state finances

and export-orientation no longer needed to be governed single-handedly.

3. A largely symbolic IMF Stand-By Arrangement in 1994 (US$ 600 million) to help re-establish investor

confidence.

4. Yet no change in the dynamics of fiscal expansion; domestic borrowing via highly internationalized

banks as the preferred method of deficit financing.

5. Still, “labor populism” is no more; among popular collective interests only farmers are now targeted.

Continued large agricultural supports.

11
 In comparative terms, the main implication of this crisis was to demonstrate the perils of premature
integration with international financial markets for many “emerging market” countries. It was the type
of crisis Mexico (1994), Russia (1998), Asian countries (1997), and Brazil (1999) also encountered.
“Finance-led globalization” is dangerous business for liberalizing late developers, especially without
proper regulatory mechanisms in place and in contexts of macro instability.

 But quick recovery and continued political instability generated no incentive for Turkish policymakers to
undertake structural reforms to overcome this challenge. The latter part of the 1990s were characterized
by even more intense imbalances stemming from a virulent combination of uncontrolled exposure to
capital inflows, fiscal profligacy, and endemic institutional weaknesses.

12
13
14
• Like most other late developers in the 1990s, Turkey too found it hard to reconcile the requisites of
liberalization/internationalization with political governability in an open, competitive polity.

• The ISI regime had rested on a delicate coalition of societal interests and class compromises. The politically
insulated neoliberal reform push under ANAP in the 1980s lacked any such social support. Mass collective interests
such as organized labor and rural peasantry were radically excluded, and even big business had little say over policy
decisions even though they stood to benefit from market reforms.

• The coalition governments of the 1990s attempted to mend the growing rift between policymaking and societal
interests, often by relying on both old, pre-neoliberal mechanisms and institutions of populist redistribution and
novel, neoliberal mechanisms and institutions of fiscal-financial governance. This included:

(a) Higher wages in the public sector, but especially old agricultural support mechanisms such as higher support prices
and input subsidies.
(b) Mechanisms of debt financing that included both old-style cash advances from the Central Bank but increasingly
also new tools including Treasury auctions toward domestic commercial banks.
(c) A domestic banking system quite internationalized in its operations but regulated very loosely.

15
 Attempts at reducing subsidies in the context of the Uruguay Round Agreement
on Agriculture (AoA) in 1994-1995 failed. Also, financial reform efforts in 1997-
198 were thwarted.

 Workers and industrialists were excluded from this alliance: Wages fell sharply
in the second half of the 1990s---labor was excluded. Profits in manufacturing
also fell.

 High public sector borrowing requirement (PSBR) choked off credit markets;
the state absorbed all available funds in the system via very high interest rates.
Less than half of bank assets went to credits (and much less in the late 1990s). As
a result, no investment drives in the 1990s either.

16
 The balance sheets of public banks such as Ziraat and Halk deteriorated; a good
deal of cover-up and sweeping under the carpet through accounting tricks and
non-disclosure. Some “duty losses” were linked to their genuine activities;
however, some was the result of “orders from above” regarding Treasury auctions
(i.e. they were forced to place low bids when demand from private commercial
banks fell short of the financing needs of the Treasury). This was one factor why
policymakers were reluctant to reform bank regulation.
 Larger industrialists in the late 1990s accidentally benefited from this state of
affairs. Rather than using up their capital for investing in a risky macroeconomic
environment, they relied on financial rents (i.e. they too remained in government
securities). Almost 90 % of profits of the largest industrial firms in 1999 accrued
from “non-operating income”.
 The outcome: a downward spiral of large fiscal deficits, large current account
deficits, currency overvaluation, systemic risks in the banking system, high
inflation, low investment, and eventually policy and institutional paralysis.

17
1. What are the underlying dynamics of 1994 economic crisis?

2. How instable coalition governments contributed to the

deepening of economic fragilities in the 1990s?

3. What is the relationship between premature financial

liberalization and economic crisis in 1994?

4. Do you think that 1990s “refer to lost decades” in Turkish

political economy?

5. What were the major problems of banking sector during 1990s?

18