Econ 481

Turkish Economy
Spring 2024

} There were failed attempts during Ataturk’s time to switch to a

multi-party democracy
◦ Terakkiperver Cumhuriyet Fırkası – 1924
◦ Serbest Cumhuriyet Fırkası – 1930
} As RPP lost popularity after the War, it was forced to call for
democratic elections.
} RPP lost control of the economic policy during the war years.
} Those businesses, mostly active in commerce, that were close to
the RPP strived during the War years
} However, even those groups that benefitted from the policies of
the War era forced the RPP government towards the transition to
a multi-party democracy
} These groups would continue benefitting even if the opposition
parties came to power

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} Businesses had accumulated sufficient power to challenge the
RPP's one-party system after the WWII. According to Istanbul
Chamber of Commerce, 1041 new firms joined the Chamber
in 1941 and 956 new firms joined in 1942.
} The growing capitalist bloc cracked the social basis of RPP:
the social basis consisted of 'corporatist' but fragile amalgam
of bureaucracy, landlords, merchants, military and the
intellectuals.
} Capitalists wanted an unconstrained market economy. Second
Economics Congress (İktisat Kongresi, Istanbul, 1948) was
instrumental to voice their demands.
} Ironically, democracy also meant 'populism' would be an
essential part of politics.
} 'September 7' decisions taken by CHP in 1946 was an attempt
towards economic liberalization.

} İsmet İnonu played a very critical role in forcing the transition

towards multi-party democracy
} First elections with direct suffrage took place in July 1946
} Democratic Party that was founded in January 1946 came
second after the RPP
} There were allegations that this first try was not completely
free
} The second one took place in May 1950 and the opposition
Democratic Party won the elections with a landslide victory

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} The end of the war also signified an important turning point
in economic policy
} The government decided to end the protectionist policies of
the previous decade and a half and adopted a policy toward
more integration with the world economy
} However, this time was different from the experience of
1923-1929, as the government was encouraged by the
winners of the war to pursue these policies
} Policy focus shifted
◦ From protectionism toward liberalization
◦ From etatism towards free enterprise
◦ From industry to agriculture, construction, and mining
} Distribution of state-owned land by the RPP government

} The policies were consistent with the “New World Order,” US

dominance, and Marshall Aid to Europe
} The long-term close relationship with the US started in 1946 when
the US declared that an old debt of $100 m. was forgiven.
} In the following year, 1947, Turkey, along with Greece, was included
under the ‘Truman Doctrine,’ the immediate consequence of which
was becoming a member of the OECD, IMF, and the World Bank.
} Within the period of 1946-1950, Turkey obtained substantial foreign
aid and long-term credit, amounting to $391 m. This amount was
greater than the cumulative total credit and aid of the previous 23
years.
} In return, the USA made sure that public funds would be reallocated
from industry to agriculture and construction.
} An advisor to the then US Secretary of State, Max Thornburg,
explicitly reported that the credit and support would only be provided
if Turkey left ‘etatism' and let 'private enterprises' flourish.

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} Despite the indications in 1945 and 1946 for the continuation
of the etatist and protectionist economic policies, RPP
decided to stop the preparation for the 3rd Industrialization
Plan
} The new policy framework became institutional in the 1947
Congress of the RPP
} Despite a trade surplus of $100 m, 1946 witnessed a major
devaluation of the Lira, with the TL per USD exchange rate
increasing from 1.28 to 2.80 on September 7.
} Along with policies to integrate the Turkish economy with the
global economy, such as the removal of quotas, removal of
barriers to foreign direct investment, etc.
} The liberal policies were put into action three years before the
Democratic Party started to govern the country.

} At the end of the WWII, Central Bank had FX reserves

worth $250 mn.

} In 1946 alone, trade surplus reached $100 mn

} Benefits of FDI were exaggerated and there was no

interest from outside to undertake FDI in Turkey

} Why did the elite choose to liberalize?

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} DP's commitment to 'free enterprise' was pragmatic.
} In 1950 when Menderes gained power and hence
etatism theoretically ended, 63 per cent of value-added
in Turkish industry originated from private enterprises
and 37 per cent from SEEs.
} By 1960 when Menderes' government fell, 52 per cent
of industrial value-added originated in the private
sector and 48 per cent in the public.
} Rent redistribution was more important.

} Main line of support to agriculture was mechanization

} Number of tractors increased from 1,756 in 1948 to 37,743
in 1954.
} Cheap credit and technical support was also essential.
} The area of actively used agricultural fields increased 9
million hectares in 1949 to 13.2 million hectares in 1954.
} Total production of wheat increased from 2,265 tones in
1949 to 6,210 tones in 1955.

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Source: Pamuk (2014)
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Source: Pamuk (2014)

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} Economic growth picked up along with a switch to ever-
increasing trade deficits
} Average growth rate in 1946-48 jumped to 17.2%.
} Growth was mostly driven by the agricultural sector
} GDP and agricultural production (in constant prices) reached
their pre-war (1939) levels by 1948; industry reached that
level by 1952.
} Agriculture grew by 13.2% on average in 1946-53 whereas
industry grew by 9.2%
} The share of agriculture increased from 42% in 1946-47 to
45.2%in 1952-53, while that of industry declined from 15.2%
to 13.5%

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} Unlike the 1923-29 period, liberal trade policies led to

substantial current account deficits
} Last Seen in 1946: 1946 was the last year that Turkey had
trade surplus
} Cumulative Trade deficit from 1946 to 1953 was $500 million
} Investment reached to 10.5% of GDP, approximately one-fifth
of it was financed by external borrowing
} While average incomes of all social groups increased during
the period,
} Income distribution moved in favor of merchant capitalists
and farmers and against the fixed income earners.

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b
15

Source: Pamuk (2014)

16
 Source: Pamuk (2018)
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} The number of workers covered by Labor Law (1947) went up from

329.5 thousand in 1948 to 556.5 thousand in 1953.
} Unionization rate followed a trend of growth; from 15.8% in 1948 to
25.2% in 1953.
} However, still the unions were denied the right to strike.
} Bureaucracy lost. Their share of salaries went down from 8.3 to 6.6%
at the end of the period.
} Urban workers' wage share also declined relatively; share of
compensation in value added decreased from 38.9 to 32%.
} In eight years, an average farmer could increase her household
income by 46.5 % according to the calculations of Nur Keyder.
} Despite the relative price movements, thanks to mechanization and
public investment in agriculture the rural families had benefited
from the policies of the period.

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Source: Pamuk (2008)
19

Source: Pamuk (2014)

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