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1. Background
For many decades since its independence in 1923, Turkey was a largely agrarian economy, with the majority of its people living in rural areas. Yüksel Görmez and
Serkan Yiğit note in The Economic and Financial Stability in Turkey: A Historical Perspective that “77% of the population, about 13 million people, were living in rural areas and largely dependent on agriculture” (3). Agriculture itself depended on good weather conditions. This paper seeks to assess the reasons for the 2001 crisis, performance of post-2001 mass privatization and reforms, including a critical comparison with Argentina and Mexico.
2. Pre-2001 era
In the initial years, which we shall refer to as the pre-2001 era, the country followed a “mixed” economic system, in which state institutions and private enterprise co-existed. The 1950s saw an increase in private ownership and infusion of private capital due to incentives given by the government. In the 1960s, the import substitution growth strategy yielded good results. However the oil crisis in the 1970s led to a huge balance of payments problem in Turkey. The late 1980s and 1990s saw the re-emergence of private banks and it moved from an import substitution strategy to a growth-oriented strategy. This helped reduce the role and importance of State Economic Enterprises (SEEs) in economic activity, but it still resulted in the 2001 financial crisis, triggered by the Asian and Russian financial crisis of 1998. The crisis resulted in hyper inflation (69%), depreciation of the Lira, low GDP rates (4%), increase in domestic debt stock and massive current account balance. During 1995-2000, private manufacturing real wages have kept their momentum in general, although they could not recover their pre-1994 crisis levels. However, “after the 2000/2001 wave of crises, real wages in private manufacturing faced a second cycle of contraction” (Yeldan 10). This was the social impact of the weak macroeconomic policies and lack of regulation in the pre-2001 period and the 1990s, which is often termed as the lost decade. According to Mihai Macovei in Growth and economic crises in Turkey: leaving behind a turbulent past, “from the Second World War until the 2001 economic crisis, Turkey’s economic catching-up with the developed economies was weak and volatile. The low productivity growth and relative stagnation through the 1970s was primarily the result of policies of import substitution, subsidization of agriculture and economic dirigisme which resulted in a sub-optimal allocation of resources. And in spite of some steps towards reform and liberalization in the 1980s, economic growth was plagued by recurrent crises, as a result of inadequate macro-economic policies and financial opening in a weak institutional and regulatory environment. The volatile growth pattern culminated in the 2000/2001 crisis which led to the breakdown of the currency peg to the US dollar, a sharp depreciation of the Turkish lira, and a contraction of GDP by 5.7% in real terms in 2001”.
3. Post-2001 reforms
Over the past decades, the restructuring and reforms undertaken by Turkey have yielded results and the EU now recognizes it as a functioning marker economy. According to Ziya Öniş in Power, Interests and Coalitions: The Political Economy of Mass Privatization in Turkey,
“the momentum of the privatization program gathered significant pace in the aftermath of 2001. A number of large-scale privatizations have been accomplished with significant implications for public revenues” (10). The post-2001 reforms and stabilization plan had two main elements. One was to target inflation and the second was a move towards a floating exchange rate. Systemic reforms and regulation like more independence to the Central Bank of Turkey, privatization of state enterprises and more fiscal discipline resulted in fall in inflation rate and also reduction in the exchange rate volatility and appreciation of the currency.
As a result of the privatization and stabilization reforms, credit and deposit rates improved and banks showed efficient performance. In 2002-03 real GDP grew by 6.2% and 5.3% respectively.
According to Yeldan in, Assessing the Privatization Experience in Turkey: Implementation, Politics and Performance Results, “privatization helped to transfer the allocation of capital and resources from public to private sector, which resulted in improved efficiency and productivity” (12).
Between 1985 and 2010, Turkey generated a total of $41.98 billion in privatization revenues, compared to $8.4 billion in the period 1985-2000. Therefore Turkey’s privatization boom is clearly a post-2001 phenomenon. Indeed, the major boom in privatization revenues occurred in the post-2004 era which corresponds with the start of formal negotiations with the European Union for full-membership (Mihai Macovei). Block sales have been the dominant form of transfer. Many of these are as a result of domestic and foreign partnerships.
Tüpraş sold 81.6% of shares to Enerji Yatırımları A.Ş, Petkim PetroKimya Holding A.Ş. - block and asset sale of 85% to Socar-Turcas-Injaz Ortak Girişim Grubunun, Türk Telekom A.Ş - block sale of 70% to Oger Telecom O.G.G, Erdemir - block sale of 46.12% shares to Ataer Holding A.Ş. and Turkish Airlines - sale of 51.75% shares to various owners. But the question still remains on the long term impact of privatization on the social and economic structure in Turkey.
4. Comparison with Argentina and Mexico
There are many differences on the actions taken by Turkey, Argentina and Mexico after their respective crises. Although the economic realities in the three countries differed, it is interesting to note that Turkey undertook quick reforms and avoided the default on its public debt, while Argentina defaulted and went under, while Mexico had the huge bailout by the United States.
If we look at the causes in Latam, the Argentinean crisis was fueled by political and class struggles and also a faulty resource allocation mechanism. Turkey on the other hand, managed the resource allocation well. Turkey moved towards industrialization whereas the Latam countries were implementing a distributional policy, without a focus on long term development.
Resource allocation is a key part of any economy. Typically in mixed economies, the state plays the role in allocating resources based on its economic and social goals. In case of countries with weak regulation, privatization brings about a vacuum in terms of the responsibility of managing resource allocation. In the case of Turkey, the banking system took over but did not show great success due to corruption. Argentina also was not able to consolidate its long term fiscal position. Turkey faced a liquidity crisis due to the weak Lira but Argentina was more of a closed economy and it maintained a stable current account deficit as compared to Turkey.
5. Conclusion
In conclusion, we can see that there are various factors which impact any economy and fuel a crisis. In the new globalized world we operate in, there is always a cascading effect and a crisis in one country creates repercussions in others. This is more strongly felt in emerging economies, where there are pressures between social, economic and political goals. Privatization as exemplified by Turkey has seen some success, but the long term impact is still questionable.
References
Buyukuslu, Ali Riza. “The Evolution of Privatization in Turkey and Its Impact on Turkish Trade Unions.” Questia. IBAR, 1 January 1995. Web. 1 January 2016.
Görmez , Yüksel and Yiğit, Serkan. “The Economic and Financial Stability in Turkey: A Historical Perspective.” NBS. Central Bank of Turkey, n.d. Web. 1 January 2016.
Kumcuoglu, Umit. “Turkey vs. Argentina: A Comparative Analysis With A Long Term Perspective.”Turkish policy. TPQ, 5 June 2002. Web. 1 January 2016.
Macovei, Mihai. “Growth and economic crises in Turkey: leaving behind a turbulent past.” Europa. European Commission, October 2009. Web. 1 January 2016.
Musacchio, Aldo. “Mexico's Financial Crisis of 1994-1995.” Harvard. Harvard Business School, No. 12–101, May 2012. Web. 1 January 2016.
Önis, Ziya. “Power, Interests and Coalitions: the political economy of mass privatization in Turkey.” Third World Quarterly 32.4, 2011.Web. 1 January 2016.
Yeldan, Erinc A. “Assessing the Privatization Experience in Turkey: Implementation, Politics and Performance Results.” Bilkent. EPI, June 2005. Web. 1 January 2016.
