Growth and Structure of the Economy

Growth and Structure of the Economy

At the time of the collapse of the Ottoman Empire during the First World War, the Turkish economy was underdeveloped: agriculture on outdated techniques and poor quality of the animals depended on, and the few factories producing basic products such as sugar and flour were under foreign control. Between 1923 and 1985 the economy grew at an average annual rate of 6 percent. developed in large part as a result of government policy, a backward economy in a complex economic system produces a wide range of agricultural, industrial and service products for domestic and export markets.

Economic Development

On the birth of the republic, Turkey’s industrial base is weak because Ottoman industry was undermined by the capitulations. The First World War and the War of Independence (1919-22) had also extensively disrupted the Turkish economy. The loss of Ottoman territories, for example, cut off from the traditional markets of Anatolia. Agricultural production – the source of income for the majority of the population – was sharply as farmers moved fallen in the war. The production of wheat, Turkey, the main crop, was not sufficient to meet domestic demand. In addition, massacres and the exodus of Greeks, Armenians and Jews, had dominated the urban economy, causing a shortage of skilled workers and entrepreneurs.

Turkey’s economy recovered remarkably set once hostilities. From 1923 to 1926, agricultural production increased by 87 percent, as agricultural production returned to prewar levels. Industry and services grew by more than 9 percent per year from 1923 to 1929, but their share of the economy remained quite low at the end of the decade. Until 1930, had collapsed as a result of global economic crisis, external markets for Turkish agricultural exports, resulting in a significant decline in national income at. The government came during the early 1930s to promote economic recovery, following a doctrine known as statism (see Glossary). The growth slowed down during the worst years of the Depression, but achieved 1935-1939 6 percent per year. During the 1940s, stagnated the economy, in large part because maintaining armed neutrality during the Second World War increased the military expenditure of the country, while almost all of the restriction of foreign trade.

After 1950 the country suffered economic disruptions about once per decade, the most serious crisis occurred in the late 1970s. In each case, an industry-led period of rapid expansion, marked by a sharp rise in exports, resulted in balance of payments crisis. dampen devaluations of the lira and savings programs for the domestic demand for foreign goods, were in line with the International Monetary Fund (IMF implemented – see Glossary) guidelines. These measures usually a sufficient improvement of the balance of payments led the country to enable the resumption of loans to Turkey by foreign creditors. Although the military interventions were prompted in part by the economic difficulties to the 1960 and 1971, increased after each intervention Turkish politicians spending, thereby overheating the economy. In the absence of serious structural reforms, ran Turkey chronic current account deficits of the rule by external borrowing, the foreign debt rise from decade made to decade financed and reached in 1980 approximately U.S. $ 16,200,000,000, or more than one quarter of the annual gross domestic product (GDP – see Glossary). Debt-servicing costs in that year was equal to 33 percent of exports of goods and services.

In the late 1970s, the Turkish economy had reached perhaps its worst crisis since the fall of the Ottoman Empire. Turkish authorities had failed to adapt adequate measures on the impact of the surge in world oil prices take 1973/74 and had financed the resulting deficits with short-term loans from foreign lenders. Until 1979, inflation had reached triple-digit levels, the number of unemployed rose by about 15 percent, the industry was only half its capacity, and the government had to pay even the interest on foreign loans. It seemed that Turkey is in a position, crisis-free development only if major changes were made in the government import-substitution approach to development be maintained. Many observers doubted the ability of Turkish politicians to carry out the necessary reforms.

Reforms under Özal

In January 1980, the government of Prime Minister Suleyman Demirel (who had as prime minister from 1965 to 1971, served from 1975 to 1978, and relocate 1979-80) to carry out a far-reaching reform program to Deputy Prime Minister Turgut Özal interpreted as Turkey’s economytowards export-led growth.

The Özal strategy of import-substitution policy calls with strategies developed to exports, imports could be financed, Turkey a chance to break from the postwar pattern of alternating periods of rapid growth and deflation promotion be replaced. With this strategy, planners hoped Turkey could experience export-led growth in the long term. The government pursues these objectives through a comprehensive package: devaluation of the Turkish lira and institution of flexible exchange rates, maintenance of positive real interest rates and tight control of the money supply and credit, the elimination of most subsidies and freeing of prices from state enterprises, reform of the tax system and encourage foreign investment. In July 1982, when Özal left office, many of his reforms put on ice. Starting in November 1983, however, when he became prime minister again, he was able to extend the liberalization program.

The liberalization program overcame restored the balance of payments crisis, Turkey’s capacity to borrow in international capital markets, and led to renewed economic growth. Goods exports increased from U.S. $ 2300000000 in 1979 to U.S. $ 8,300,000,000 in 1985. Merchandise import growth over the same period – from U.S. $ U.S. $ 11200000000 4800000000 not – keep pace with export growth and reduced proportionally, the trade deficit, although the deficit level stabilized at around U.S. $ 2,500,000,000th Özal’s policy had a particularly positive influence on the performance because of the current account. Despite a jump in interest payments account for U.S. $ 200,000,000 in 1979 to U.S. $ 1,400,000,000 in 1985 to the services of a growing surplus accumulated over the period. The development of tourism revenue and fees pipeline from Iraq were the main reasons for this improvement. Stabilize the current account helped restore creditworthiness in international capital markets. Foreign investment, which had insignificant in the 1970s, now began to grow, although it remained modest in the mid-1980s. Turkey also has to borrow in a position in the international market, and could in the late 1970s, only to support the IMF and other official creditors.

The reduction in public expenditure, which was in the center of the stabilization program slowed, the economy strong in the late 1970s and early 1980s. Real gross national product (GNP – see Glossary) declined by 1.5 percent in 1979 and 1.3 percent in 1980. The manufacturing and service sectors felt much of the impact of this decline in income, with the manufacturing sector operating at close to 50 percent of total capacity. Since the external payments constraint eased, the economy bounced back strongly. Between 1981 and 1985, real GDP grew by 3 percent per year, led by growth in manufacturing. With strict controls on workers’ earnings and activities, the industrial sector began drawing on unused industrial capacity and output increases by an average rate of 9.1 percent per year between 1981 and 1985. The devaluation of the lira also helped make Turkey more economically competitive. As a result, produces, exports rose from an average of 45 percent per annum over the period.

The rapid revival of growth and the improvement of the balance of payments were not sufficient to unemployment and inflation, to overcome the serious problems remained. The official unemployment rate fell from 15 percent in 1979 to 11 percent in 1980, but, partly because of the rapid growth of the labor force, unemployment rose to 13 percent in 1985. Inflation fell by around 25 percent in the period 1981-1982, but rose again to more than 30 percent in 1983 and more than 40 percent in 1984. Although inflation eased somewhat in 1985 and 1986, it remained one of the priority problems of economic policy makers.

Economic Performance in the early 1990s

Turkey benefited economically from the Iran-Iraq war (1980-88). Both Iran and Iraq were major trading partners and Turkish business supplied both combatants, encouraged by government export credits. With limited access to the Persian Gulf, Iraq was also heavily dependent on Turkey for export routes for its crude oil production. Iraq had two pipelines side by side of its northern oil fields of Kirkuk to the Turkish Mediterranean port of Ceyhan, easily financed northwest of Iskenderun. The capacity of the pipelines of about 1.1 million barrels per day (bpd).Not only that Turkey is to receive part of its domestic supplies from the pipeline, but there was a considerable pay entrepôt. Some sources have estimated the fee at U.S. $ 300,000,000 U.S. $ 500,000,000.

Turkish economy was ailing the 1991 Persian Gulf War. The UN embargo against Iraq calls for the elimination of oil exports through Ceyhan pipeline, which is the loss of the pipeline fees. In addition, the economy can have as much as U.S. $ 3000000000 lost trade with Iraq. Saudi Arabia, Kuwait and the United Arab Emirates (UAE) was to compensate Turkey for these losses, however, and grow to 1992 the economy began quickly.

The Turkish economy plunged into crisis again in 1994. The central government is moving in 1992 and 1993 to grant large wage increases in public services and transfers to public enterprises expanded public borrowing to a record level of 17 percent of GDP increase in 1993.This high level of government spending increased dramatically Domestic demand is the growth rate to 6.4 percent in 1992 and 7.6 percent in 1993. In return, went on the inflation rate, with a peak annual rate of 73 percent of mid-1993. The resulting increase in the real exchange rate by an increase in imports slowed and the expansion of exports. The trade deficit rose in 1993 to U.S. $ 14,000,000,000, while the current account deficit reached U.S. $ 6,300,000,000, or 5.3 percent of GDP.

Turkey’s impressive economic performance in the 1980s have good marks from Wall Street credit-rating agencies. In 1992 and 1993 the government used these ratings to attract capital to cover its budget deficits. International bonds in this period amounted to U.S. $ 7500000000thThese capital flows to the maintenance of overvalued exchange rate. In a market economy should provide a high level of government borrowing in domestic interest rates higher and potentially even translate to “crowd out” private borrowers and ultimately slow economic growth.But the government foreign borrowing, the pressure from domestic interest rates and actually spurred more private borrowing increased in an already overheated economy. Sensing an easy profit opportunity in this period, commercial banks borrowed at world interest rates in Turkey and gave a higher domestic prices without fear of a falling currency. As a result of increased short-term foreign debt of Turkey sharp. External and internal confidence in the ability of government to manage the impending crisis of balance of payments slowed, compounding economic difficulties.

Prime Minister Tansu Ciller disputes between (1993 -) and the central bank governor to undermine confidence in the government. The Prime Minister stressed on the monetization of the fiscal deficit (selling government debt instruments of the central bank) to accede to the proposal of the Central Bank for more public debt in the form of government securities issue.The central bank governor was in August 1993 on this subject. In January 1994, international rating agencies downgraded Turkey’s debt below investment grade. At the time, was a second Central Bank governor.

Mounting concern over the chaos in economic policy was reflected in an accelerated “dollarization” of the economy as residents switched domestic assets into foreign currency deposits to protect their investments. Until late 1994, about 50 percent of the total deposit base in the form of deposits held in foreign currency, up from 1 percent in 1993. The downgrading by rating agencies and a lack of confidence in the government’s budget deficit raised the target of 14 per cent of GDP for 1994 large-scale capital flight and the collapse of the exchange rate. The government had to by selling its foreign exchange reserves to intervene to calm the decline of the Turkish lira. As a result, reserves fell from U.S. $ 6300000000 at the end of 1993 to U.S. $ 3,000,000,000 by the end of March 1994. Before the end of April, when the government was forced to announce a long-overdue austerity program following the March 1994 local elections, the lira fell by 76 percent by the end of 1993 to TL41, 000 against the U.S. dollar.

The package of measures by the Government on 5 April 1994 announced that the IMF was presented in the context of its request for a U.S. $ 740,000,000 standby facility beginning in July 1994. Measures included a sharp increase in prices the companies charge the public sector of the public would fall in the budgetary spending, a commitment to raise taxes, and to accelerate the promise of the privatization of state economic enterprises (SEEs). Some observers doubt the credibility of these measures as the tax measures equivalent to an increase in sales 4 percent of GDP and the expenditure cuts were translated equivalent to 6 percent of GDP.

The government actually succeeded in generating a small surplus in the budget in the second quarter of 1994, primarily as a result of higher taxes, after running a deficit of 17 percent of GDP in the first quarter. The slowdown in government spending, a sharp loss in business confidence and the resulting decline in economic activity reduces the tax revenue, however. The financial crisis led to a decline in real GDP of 5 percent in 1994 after the economy had grown lively in 1992 and 1993. Real wages also fell in 1994: average nominal wage increases of 65 percent was about 20 percent below the rate of consumer price inflation.

Analysts pointed out that despite the continued fragility of the macroeconomic adjustment process and the vulnerability of fiscal policy to political pressure to subject the government market checks and balances. Combined with a stronger private sector, particularly in the export sector was the economy expected to bounce back to a pattern of faster growth.

Structure of the economy

can deliver was in the years after World War II the economy a much wider range of goods and services. Until 1994, the industrial sector accounted for nearly 40 percent of GDP, having surpassed agriculture (including forestry and fisheries), which contributed about 16 percent of production. The rapid change in the industry, the relative importance of the result of government policy in force since the 1930s in favor of industrialization (see Figure 8). In the early 1990s, the government to further increases in industry’s share of the economy, particularly through the promotion of export.

Services increased by a small fraction of the economy in the 1920s by nearly half of GDP 1994th Several factors explain the growth of the service sector. Government – already considerable under the Ottomans expanded – increasing over defense spending, health were education, welfare and programs implemented, and the government workers has been increased to the many new public organizations staff. Trade, tourism, transport and financial services was also more important as the economy developed and diversified.