THE POLmCAL ECONOMY OF TURKEY The Political Economy of Turkey Debt, Adjustment and Sustainability TOSUN ARICANLI Assistant Professor of Economics and DANIRODRIK Assistant Professor of Public Policy both at John F. Kennedy School of Government Harvard University Palgrave Macmillan ISBN 978-1-349-11276-0 ISBN 978-1-349-11274-6 (eBook) DOI 10.1007/978-1-349-11274-6 Tosun Aricanli and Dani Rodrik 1990 Softcover reprint of the hardcover 1st edition 1990 978-0-333-51545-7 All rights reserved. For information, write: Scholarly and Reference Division, SL Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y. 10010 First published in the United States of America in 1990 ISBN 978-0-312-03596-9 Library of Congress Cataloging-in-Publication Data The Political Economy of Turkey: debt, adjustment and sustainability [edited by] Tosun Aricanli and Dani Rodrik. p. em. ISBN 978-0-312-03596-9 1. Turkey-Economic policy. 2. Debts, External-Turkey. I. Aricanli, Ali Tosun, 1947-. U. Rodrik, Dani. HC482.P68 1990 338.9561---dc20 89-34980 CIP Contents List of Figures vii List of Tables VIU Acknowledgements xi Notes on the Contributors xii Introduction and Overview Tosun Arzcanlz and Dani Rodrik 1 1 Turkey's Trade Liberalization in the 1980s and Prospects for its Sustainability Tercan Baysan and Charles Blitzer 9 2 Fiscal Aspects of Adjustment in the 1980s Merih Celdsun 37 3 An Assessment of the Pattern of Turkish Manufactured Export Growth in the 1980s and its Prospects Fikret Senses 60 4 The Record on Private Investment in Turkey Patrick Conway 78 5 Financial System and Policies in Turkey in the 1980s Yzlmaz Akyuz 98 6 The Private Sector's Response to Financial Liberalization in Turkey: 1980-82 Izak Atiyas 132 7 External Balance and Growth in Turkey: Can They Be Reconciled? Ritu Anand, Ajay Chhibber and Sweder van Wijnbergen 157 8 Some Policy Dilemmas in Turkish Macroeconomic Management Dani Rodrik 183 v vi Contents 9 Inter-Class and Intra-Class Relations of Distribution Under 'Structural Adjustment': Turkey During the 1980s Korkut Boratav 199 10 The Political Economy of Turkey's External Debt: The Bearing of Exogenous Factors Tosun Ancanlz 230 11 Turkish Debt and Conditionality in Historical Perspective: A Comparison of the 1980s with the 1860s Emine Kzray 254 12 Turkish Experience: Summary and Comparative Notes Lance Taylor 269 Index 276 List of Figures 4.1 Real Private Investment Growth 83 4.2 Real Public Investment Growth 83 4.3 Turkey: Housing as a Share of Private Investment 84 5.1 The Lorenz Curve of the Distribution of Household Time Deposits, 1985 124 7.1 Fiscal Deficits, Real Output Growth and Real Interest Rates for Given Current Account Targets 161 7.2 Public Savings Rate, 1967-87 166 7.3 The Effect of Changes in Fiscal Deficit on Interest Rates and Output Growth (A and B) 170 10.1 Migration and Change in Insured Employment 233 10.2 Growth of National Labor Force, Unemployment and Migration 236 10.3 Growth in Insured and Uninsured Employment in the 1970s 238 10.4 US Military and Economic Aid to Turkey (Grants and Loans) 235 10.5 Destination of Exports 248 vii List of Tables 1.1 Real Exchange Rate, 1979-87 12 1.2 Export Incentives, 1980--86 14 1.3 Turkey's Import Regime in the 1980s 16 1.4 1984 Changes in Protection 18 1.5 Changes in Nominal Tariff Protection, 1983--84 20 1.6 Export Performance, 1979-86 26 1.7 Imports, 1979-86 28 1.8 Balance of Payments and External Debt Burden Indicators, 1980--86 30 2.1 Macroeconomic Balances and Public Sector, 1976--87 44 2.2 Fiscal Aggregates, 1978-87 46 2.3 Public Sector Borrowing Requirement (PSBR), 1980--87 48 2.4 Money, Domestic Credit and Public Sector 49 2.5 Structural Change in Public Revenue, Savings and Investment, 1979-87 51 2.6 Selected SEE Prices and Indicators 54 2.7 EBF Levies and Import Protection, 1985 55 2.8 Indicators of Public Debt, 1981-87 56 3.1 Manufactured Exports, 1963--87 63 3.2 Share of Three Most Important Product Categories in Total Manufactured Exports, 1974-87 64 3.3 Share of Middle Eastern Countries in Manufactured Exports by Major Category, 1978-87 66 3.4 Factor Content of Manufactured Exports by Destination, 1984 and 1987 67 Al Value Added per Employee and Factor Content Distribution of Exports by Manufacturing Activity 76 4.1 Growth in Turkish Real Private Investment and Related Indicators 85 4.2 Impulse Response Functions from V AR Regressions 90 4.3 Average Growth Rates of Components of Private Investment 91 4.4 Impulse Response Functions: Real Private Investment 92 Al Contemporaneous Correlation Coefficients: Aggregate Private Investment V AR 97 A2 Vector Autoregression in lpt 97 5.1 Commercial Bank Interest Rates, 1980--86 100 5.2 Real After-Tax Rates of Return, 1979-86 101 5.3 Percentage Distribution of Time Deposits, 1979-86 101 5.4 Indicators of Financial Deepening, 1979-86 105 viii List of Tables ix 5.5 Financial Assets - New'lssues, 1979-86 106 5.6 Composition of the Stock of Financial Assets, 1979-86 107 5.7 Household Portfolios, 1978-85 107 5.8 Distribution of Bank Credits, 1979-86 108 5.9 Net New Issues by Sectors, 1979-86 109 5.10 Credit Costs and Interest Spreads 112 5.11 Sectoral Allocation of Credits by the Banking System, 1979-86 115 5.12 Corporate Sector: Distribution of Sale Revenues, 1978-86 116 5.13 Financial Indicators for Non-Financial Corporations, 1978-86 117 5.14 Savings Ratios 125 6.1 Ex-Post Real Deposit Interest Rates 138 6.2 Annual Rates of Inflation 138 6.3 Statistics on Private Commercial Banks 139 6.4 Indicators of Financial Deepening 140 6.5 Assets of the Banking System 141 6.6 Private Sector's Share in Total Credit 142 6.7 Annual Non-Weighted Averages of Financial Ratios 148 6.8 ANOVA Results 149 7.1 Measures of the Overall Debt Burden 158 7.2 Key Macroeconomic Indicators 165 7.3 Allowable Foreign Borrowing: Sustainable Current Account Deficits 173 7.4 Fiscal Implications of Output Growth 177 8.1 Macroeconomic Performance in Comparative Perspective 185 8.2 Principal Debt Indicators 187 8.3 Composition of the Stock of Financial Assets 193 9.1 The 'Social Matrix' for Analysing Relations of Distribution in Turkey 203 9.2 Marketing Channels, Agents and Pricing Behavior in the Turkish Economy 205 9.3 Wage Indicators, 1976-86 207 9.4 Mark-up Rates and Real Wages in Manufacturing Industry 208 9.5 Hourly Wages in Dollar Terms and Labor Productivity Comparisons in Manufacturing Industries 209 9.6 Terms of Trade and Commercial Margins for Agriculture 213 9.7 Price and Output Effects on Per Capita Farmer Incomes 214 9.8A Relative Magnitude of Support Purchases and Relative Support Prices (Wholesale) 216 X List of Tables 9.8B Relative Support Prices {Agricultural) 216 9.9 Indicators on Internal Division of the Surplus 220 10.1 Exogenous Factors of Major Significance for the Performance of the Turkish Economy 231