Econ 481

Turkish Economy
Spring 2024

} The period between 1940-1945 was an ’interlude’ in which

economic regression and sharp changes in economic polices
took place.
} Turkey did not participate in the War, but it was in a state of
full-scale mobilization
} Active labor force declined substantially due to obligatory
military drafts.
} Agricultural production dropped sharply (wheat by 50%)
} Investment projects postponed; resources used to finance
military expenditures

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} Successful economic policy making left its place for
serious blunders in the policy making
} Heavy taxes to finance war spending led to excessive
pressure on agricultural and industrial producers
} Measures such as the 1942 wealth levy (varlık vergisi)
made things worse.
} Military expenditures ’crowded-out’ public investment.
} Volume of imports shrank by half in two years. This led
to input and capacity constraints in the main state-led
industrial activities

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} The steady domination of Germany both in terms of political
influence and in international trade was a peculiar process.
} Turkish exports to Germany was approximately 50% of total
Turkish exports
} The German-Turkish Treaty of Friendship of June 18, 1941,
was instrumental.
} Turkey agreed to allow exports to Germany of 45,000 tons of
chromite ore in 1941-1942, and 90,000 tons of chromite in
both 1943 and 1944.
} Turkey ranked fourth among producers of chromite, after
Africa, the Philippines, and Cuba.
} Germany exchanged looted gold for foreign currency;
financed its diplomatic, espionage, and propaganda activities
in Turkey; and gained influence over the Turkish operations
of certain Axis and neutral countries.

} The decline in agricultural production led to scarcities and an

increase in inflation.
} In response to declining agricultural production, starting in
1940 the government unsuccessfully tried to fix agricultural
prices and force farmers to sell their products at those prices.
} It introduced price controls throughout the economy.
} Yet at the same time went ahead with printing money
(monetary expansion) to finance defense spending.

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} Two governments, two different political directions, and substantial
differences in economic policy
} A more politically liberal and reformist government (Refik Saydam),
followed by a government (Şükrü Saraçoğlu) implementing more
regressive policies
} All the policies were geared towards the consequences of the economic
decline. There was no real attempt to reverse the decline in production.
} Saydam’s Milli Korunma Kanunu supplied an overwhelming umbrella for
the government to control industrial relations, appropriate private
enterprises, if necessary, impose price ceilings in domestic trade and set
quotas for the sale of basic goods.
} Ticaret Ofisi and İaşe MüsteşarlığI, on the other hand, were used to
control international trade.
} Similar to the case of İttihad ve Terakki during WWI, the main concern
was the provision of the cities.

} In 1942, the Saraçoğlu government lifted some of the price

controls that were introduced by the Saydam government in 1940
and let the big farmers sell up to 25% of their production surplus
in the domestic markets, and İaşe Müsteşarlığı was abolished.
} These policies led to a worsening in the budget deficit.
} Inflation increased substantially in 1942 and 1943 (90% and 75%
according to Boratav).
} In order to control additional incomes generated by excessive
price increases, the government introduced the wealth levy
(1942) and the agricultural crop levy (1944, at a rate of 10%)

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} The response was a radical turn in terms of ’taxation’.
} Wealth levy (Varlık Vergisi), imposed in 1942 was a dramatic
attack on the bourgeoisie;
} It was an extraordinary amount paid at once and could lead to
forced labor and mostly applied in the case of minorities.
} Till 1944, 114 thousand taxpayers paid this wealth tax which
amounted to almost 40% of all state expenses and 3.5% of the
GDP in 1943. Total funds collected reached to 315 million TL.
} Toprak Mahsulleri Vergisi (agricultural crop tax), on the other
hand, was an all-encompassing tax on agricultural producers.
} A 10% tax on output was a blowout for the small and middle
scale farmers who had lost their fortunes in 1930s. From 1944 to
1946, 167 million TL was collected via the new agricultural tax.

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Source: Pamuk (2008)

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} GDP declined by as much as 35% throughout the period, 6% per annum.
} Agricultural production declined by 7.1% and industrial production by
5.5% per annum. More importantly, fixed capital formation declined to
8.2% of GDP.
} International trade contracted; $ 250 m. cumulative trade surplus for the
whole period.
} Income distribution worsened; real wages declined by 50%.
} Wealth levy pushed the urban entrepreneurial classes into bankruptcies
and involved huge income redistribution.
} As a result, by the end of the War large segments of the urban and rural
population turned against the Republican People’s Party.
} Faced with internal and external pressure, RPP had no alternative but to
allow other political parties to be established and compete on equal
grounds.

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} Commercial capitalist class, mainly trading agricultural

goods, were the winners.
} The bureaucracy could sustain their living standards in
an inflationary period.
} Since the real wages declined, the industrial capitalists
could increase their profits.
} The worker and the small farmers were once again the
losers.

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