This document summarizes Turkey's economic development strategies from 1923 to 2014, moving from an inward-looking, state-led strategy to a more outward, market-oriented approach. From the 1930s to 1980, Turkey pursued import substitution industrialization behind high trade barriers. This led to economic crises and dependence on foreign loans. In 1980, under pressure from the IMF and World Bank, Turkey embarked on structural adjustment, liberalizing trade, privatizing state firms, and adopting an export-led growth model focused on market forces over state intervention.

1. Moving from Inward-Looking and State-led Development
Strategy to World market - Oriented Strategy
1923-2014
A Case Study for Turkey
Bahri Yilmaz
EU Jean Monnet Professor and Professor in Economics,
Sabanci University, Istanbul
Paper prepared 9.Economic Freedom of the Arab World
Conference, Amman, November 18-19, 2014

2. ECONOMIC DEVELOPMENT OF TURKEY
Reconstruction of the economy and inward- looking strategy (import-substitution
policy) between 1923- 1980.
Outward- looking (export-oriented) development strategy starting 1980- 2014.

3. The young Turkish Republic inherited from the Ottoman Empire:
After the establishment of the Turkish Republic, there was no foundation
on which to build an ambitious economic policy.
The decline of the Ottoman Empire had left the Turkish economy in very
bad conditions.
From the breakdown of the Ottoman Empire the economic life of Turkey
was based on agriculture. The country had approximately 13 million
inhibitions. Per capita income was 30 US Dollars (in current $ prices).
The share of industrial sector in total GDP was only 12% and the limited
amount of labour was employed in the industrial sector. 50 percent of
GDP and 80 percent of population are estimated to have been in
agriculture in the early 1920s.
So the country was exporting agricultural products. (Tobacco, Cotton,
Hazelnuts, olive oil and wheat).

4. The only part of the infrastructure, which had received attention, was
the railways, and they were foreign-owned, as were most banks and
manufacturing enterprises.
What made matters worse was that a large portion of the non- Muslim
ethnic minorities had left the country during the war of liberation,
greatly diminishing Turkey’s already small contingent of technicians
and entrepreneurs.
Because, educated Muslim Turks had tended to regard commerce and
industry as beneath them, preferring a more prestigious career in the
civil service or armed forces.

5. Although the republic was exempted from payment of war reparations
and most of its war debt was written off, it was nonetheless held
responsible for the large commercial debt the Ottoman Empire had
accumulated in the .
19th and early 20th centuries.
Turkey was also obligated by terms of the treaty to continue to allow
concessions granted to foreign companies before 1914, which included
rights to impose taxes and collect tariffs.
Perhaps most important of all, Turkey was forced to maintain the
Ottoman tariff schedule until 1929.

6. 1923-1930: Construction and Searching for its Development Strategy
Turkey’s development strategy built upon three broad objectives:
Rapid economic growth;
Self-reliance (or self sufficiency) and job creation;
Equitable income distribution and social justice.
The government was no in position to pursue that objective in the
1920s. Because the leadership had neither the clear concept nor the
necessary experience for the economic development of the country.
Given the liberal economic way the industrialization should have been
carried out by “the Turkish businessmen and national industry”.

7. At the same time, it is assumed that the capital accumulation had to
be forced by the state.
Additionally, the state should have taken the economic responsibility
and should have attended to the production process actively in a
way, in which the private sector was not in a position to do its own
resources.
The government’s policy initiatives were mainly directed at
promoting private investment through the establishment of several
investment banks and the creation of certain tax concessions and
direct subsidies (for example, in the sugar industry).

8. Two main reasons, which hindered the success of this attempt at
liberal policies:
One of them was again the burden of foreign debts taken over
from the Ottoman Empire, which made it difficult to finance the
planned productive investments.
The second complication came from the lack of entrepreneur
and capitalist spirit of individuals.

9. 1930- 1950: The Etatist Period (State-led economic Development)
Beginning in about 1930, the government’s approach to the economy
began to change.
The “First Industrial Plan”, which was prepared with the help of the
planning experts of the Soviet Union, was introduced.
There are three mains for changing economic policies from market-oriented
to state-oriented:
 After an initial period of relatively free trade policies in 1920s and very low
overall growth, the government decided to introduce a policy of "Etatism"
in the 1930s.
 Within the framework of the new development philosophy and policy, the
government then in power started heavily to intervene into the economy.
 It helped launch and sustain an inward-looking strategy, taking into
consideration the initial conditions in structure and industrial organization.

10. Import substitution l
is a policy replacing imports by domestic
production under the protection of high tariffs and quotas.
This approach ignores the benefits of specialization and
comparative advantage.
The reasons why import substitution or inward-looking
development strategy rather than export-oriented development
strategy has usually been chosen as an industrialization strategy
are:
1. Until, 1970s many developing countries were sceptical about
the possibility of exporting manufactured goods.
They believed that industrialization was necessarily based on a
substitution of a domestic industry for imports rather than on a
growth of manufactured exports.

11. 2. The infant industry argument: According to the infant industry
argument, potentially developing countries have a comparative
advantage in manufacturing.
But manufacturing industries in developing countries cannot initially
compete with well-established manufacturing sector in developed
countries.
In order to make manufacturing more competitive government should
temporarily support new industries until they have grown strong
enough to meet international competition.
Therefore, it makes sense, according this argument, to use trade
restrictions and to protect domestic young industries from outside
competition.

12. Indeed, in the 1930s, Turkey had to cope with huge amount of
structural and institutional problems.
There was a shortage of entrepreneurs and managers to undertake
activities in private sectors.
The private sector had little of both domestic and foreign markets.
As a matter of this fact, it assigned a leading and dominant role for the
state in economic development with key industries such as
manufactured goods, textiles, railways, and telecommunications and
energy sector.

13. Under the new state-led and inward-looking development strategy, a
number of State Economic Enterprises (SEEs) were established in
Turkey.
They mainly produced and marketed a variety of agricultural, mineral
and manufactured commodities.
Many of these SEEs produced manufactured goods that had
previously been imported.
Excessive protectionist measures were put in force to protect the
infant industries from international competition.
Throughout the years the importance of the SEEs and its share, either
in total production or in total employment, grew steadily.
At the same time, the state owned enterprises were the main school of
up-and coming industrialist and top managers in the private sector.

14. The Inward looking development strategy led to
• Heavy involvement of the state
•State owned enterprises in industry, mining (critical sectors)
•Large public banks directing credit to targeted sectors and groups
•Some sort of planning, setting of national targets
•Widespread price controls (eg on critical inputs to industry)
•Smaller reliance on “market forces”, greater reliance on government action
•Most sectors oligopolistic; very little domestic competition
•Because industry was inefficient, it could not compete internationally,
countries could not earn foreign exchange that they needed to import
the necessary industrial inputs, or pay back foreign debt

15. III. 1950-1960: The Return back to Private Sector Friendly Liberal
Economic Policies.
The unexpected defeat in 1950 of the Republican People’s party, which had
ruled since the founding of the republic in 1923, raised hope that the failures of
etatism would be put right.
Then new government wanted to give large role for private enterprise. Also
promised was greater attention to the problems of agriculture, which had
largely ignored.
In a short time, the newly elected government headed by Menderes, whose new
economic program to take gradual steps towards the integration of the Turkish
economy into world markets, initiated the economic policy reform.

16. The New Economic Program included the following measures:
 Quantitative restrictions on foreign trade were removed to large
extent, the distortions of import tariffs was reduced, export was
promoted, mainly agriculture, rules on foreign direct investment
became quite liberal.
 The government had intended to privatise and to regulate state
economic enterprises.

17. The success of policy reforms, on which Turkey embarked during the
1950s, remained very limited. Here three main reasons could be
mentioned:
First of all, the fundamental conditions for import-substitution were
maintained and the government did not totally disengage itself from
control of the economy.
Secondly, the economic liberalisation program during 1950s was not
accompanied by the full liberalization of the foreign trade and foreign
exchange regulations.
Thirdly, export revenues could not be so rapidly increased, as
industrialisation required

18. Consequently, the economic of the Menderes government reached
a deadlock at the beginning of August 1958, when a new
stabilization plan of the IMF was enforced.
This stabilisation package covered not only the standard
measures, but also the establishment of restricted import regime
based on annual import programs fixing quotes by users and
producers.
The 1958 and 1959 measures succeeded in stabilising the
economy but not the political system. So military leaders took
power in May 1960.

19. 1960-1973: Planned Industrialisation
At the beginning of 1960, the inward looking strategy was greatly
reinforced with a new image.
Turkey turned towards indicative development planning, which
had first been instituted in the 1930s in a very simple way:
In the early 1960s a newly formed State Planning Organisation
(SPO) was given responsibility for designing development policy.
The SPO articulated the policy of encouraging industrialisation
through import substitution.
By the mid- 1960s the Turkish economy had already completed
the first stage of its import substitution in replacing imports non-durable
consumer goods (food processing, textiles etc).

20. Now the government and planning authorities had to come to a final
decision and make up its mind between:
Either switching of the development strategy partly from inward-looking
to outward-looking ones and embarking on exportation of
homemade manufactured goods or moving on the second stage of
import substitution
They decided to go over the second stage of import substitution.
This meant that the imports of intermediate goods (steel) and
consumer durables were to be replaced by domestic production.
In contrast to the first stage, the economy needed the transfer
higher capital-intensive technologies and the qualified labour force
was in evitable to achieve the planning targets.

21. By 1970 the government once again entered a stabilisation program
with the IMF, devaluing the currency against US Dollar and
attempting to stabilise the economy.
As in the 1958-1960 devaluation episode, the intention was to
rationalise the trade and payments regime, but the fundamental
philosophy of import-substitution underlying the regime was not
questioned.
Political antagonism, on the other hand, remained very close to the
surface and hampered the government’s ability with the growing
economic problem. As a consequence, the military again intervened,
this time 1971.

22. 1973-1980: Boom and Bust:
The outlook for the Turkish economy in the early 1970s was optimistic.
The foreign exchange constraint seemed to have been overcome, and
foreign capital was available thanks to the expansion in world liquidity
generated by OPEC surpluses after 1973.
The period from 1973 to 1977, the third five-year plan, was one of remarkable
achievement, particularly in the industrial sector, which experienced real
growth of 14.2 percent per annum.
The main stimulus to growth was a rapid rise in the level of investment,
especially in the public sector.
Foreign rather than domestic savings financed the rise in investment from
about 19 percent of GDP in 1973 to 24 percent of GDP in 1977, therefore.
This approach was not sustainable.

23. The growth boom began to decrease in 1977 as foreign lenders became
worried about the size and structure of Turkey’s rapidly growing external
debt.
During the mid-1970s’ boom, inflation averaged about 20 percent per
annum or four times the average rate in the preceding decade. But
inflation accelerated, hitting an all-time high of just over 100 percent in
1980.

24. Two developments led rising budget deficits in the early 1970s: One large
salary increases to civil servants.
The second was a dramatic rise in SEE financial deficits, owing both to
increased wage cost and a rise in the rate of investment by SEEs.
Toward the end of the decade, however, foreign exchange difficulties
intensified.

25. Consequences and final results of state-led development strategy
From 1930s until 1980, the inward looking development strategy played a
major role and was pursued rigorously by all Turkish governments for almost
more than a half of a century.
Nevertheless, Turkey has succeeded in building a well-diversified industrial
structure.
It has been producing a far greater variety of industrial goods, including
intermediate and capital goods, than most developing countries.
The country has also succeeded in eliminating poverty; improved education,
health conditions of its population

26. In the late 1970s and the early 1980s Turkey's policy makers
recognized that inward orientation led the economy to the economic
and social crises, which regularly repeated itself within every ten-year
time period ended in a " Stand by Agreement" with the IMF.
It was immediately followed by a military coup d'etat three times,
namely in 1960, 1971 and 1980. The last huge external financing
difficulties, which arose from "the first and second oil shocks" in
the 1970s, provided an opportunity for reformers to advance their
plans for economic liberalization.

27. Rapidly accumulating foreign debt, inability to repay
Large drops in GDP
IMF, the World Bank said:
The reason for the crisis were “distortions” created by the ISI model
Protection from imports created inefficient industries, there was no
competition
It also created a lot of “rent seeking”.
It was very important to have access to cheap inputs, cheap credit or
foreign exchange
=> political influence rather than productivity and efficiency was the
main determinant of success

29. Hence IMF aadd tthhee WWoorrlldd BBaannkk ssaaiidd
 PPuutt aann eenndd ttoo IISSII
 lliibbeerraalliizzee ttrraaddee ((aanndd iinntteerrnnaattiioonnaall ffiinnaannccee))
 eenndd pprriiccee ccoonnttrroollss
 eelliimmiinnaattee ssttaattee oowwnneedd eenntteerrpprriisseess
 pprriivvaattiizzee
 lleett mmaarrkkeett ffoorrcceess,, nnoott ggoovveerrnnmmeennttss,, ddeetteerrmmiinnee hhooww rreessoouurrcceess ((eegg ffoorreeiiggnn
eexxcchhaannggee aanndd ddoommeessttiicc ccrreeddiitt)) wwiillll bbee aallllooccaatteedd
 AAllll ooff tthhiiss wwaass ccaalllleedd ““ssttrruuccttuurraall aaddjjuussttmmeenntt””.. TThhee WWoorrlldd BBaannkk aanndd tthhee
IIMMFF ssaaiidd tthheeyy wwoouulldd hheellpp oonnllyy iiff ccoouunnttrriieess eemmbbaarrkk oonn ssttrruuccttuurraall
aaddjjuussttmmeenntt pprrooggrraammss ((SSAAPP))..
 TThhiiss mmeeaanntt tthhee eenndd ooff aa mmooddeell ooff ddeevveellooppmmeenntt ((aanndd ppoolliittiiccaall
aalliiggnnmmeennttss tthhaatt ssuuppppoorrtteedd iitt??))

30. 1980-2014. Outward – Looking Development Strategy:
In January 1980, the government announced, under pressure of the
IMF and the World Bank, a series of far-reaching reforms starting with
massive devaluation and an announcement that henceforth there
would be frequent adjustments in the exchange rate to keep pace with
differentials between domestic and foreign inflation.
Additionally, prices of outputs in public sector enterprises were
increased sufficiently to reduce their deficits and thus sharply cut the
size of the public sector deficit.
Also, foreign trade reforms were coordinated with radical shifts of
policies away from market intervention, import reliance on market
forces and trade liberalisation.

31. It was also expected that the outward orientation could bring some benefits for
the Turkish economy such as:
 Improved resource allocation in line with social marginal costs and
benefits; access to better technologies, inputs and intermediate goods;
 an economy better able to take advantage of economies of scale and
scope; better education and training; greater domestic competition; and
the increase in employment of highly skilled labour in the production
process.

32. The main objectives of the 1980 reforms were:
 to improve the balance of payments and raise international
competitiveness;
 to contain inflation;
 to raise the efficiency of SEEs;
 to shift the economy’s center gravity from the public to the private
sector,
The economic reform policies, which were initiated on 24 January 1980
included the following measures:
 The most important steps taken towards reliance on market forces
concerned exchange rate management and trade policy.
 Further more, the export promotion measures were intensified and
import quotes

33. Unfortunately, on grounds of populist and inconsistent policies pursued the "
two steps forward and one step backward" sequence, the outward-looking
development strategy put in force in 1980 has been interrupted by significant
mistakes made by Turkish policy makers in the 1990s.
Today, inflation, current account deficit and unemployment remain a major
concern of the Turkish economy once again.