EU438- Notes L1 Introduction: Economy and Population Part I : Long Term Economic Growth Economic Growth In recent years,

s, however, Turkeys GDP per capita has been increasing more rapidly than that of western Europe and the EU. This trend is likely to continue in the years ahead. Causes of Economic Growth : a) Proximate / Immediate Causes: inputs and productivity Physical capital, human capital productivity b) Ultimate Causes : Economic and Social Environment Instititutions and Policies Economic and Political Institutions (definition): written and unwritten rules and their enforcement:

Need to support and encourage investment in physical and human capital, new technology, research and productivity increases Rule of Law, stability, openness, equality importance of EU

Part II: Long Term Trends and Issues in Population Outline Population Growth, rates and causes for each period Demographic Transition and Declining Fertility after WW II Window of Opportunity Rising Life Expectancy Urbanization after WW II Population Growth, rates and causes for each period Total Population in millions 20.9 44,4 67.4 72,5 (est.) 80 (est.) 95 Annual Growth Rate percent 2,0 2,3 1,8 1,3 0,8 0

1950 1980 2000 2010 2020 2050

Large Differences in the Fertility Rate -Urban vs. Rural -West vs. East -Determinants of the Fertility Rate -High Infant Mortality Rates until recently -Recent Declines in Infant Mortality Rates -Also large differences Urban vs. Rural, East vs. West Demographic Window of Opportunity: Demographic Window of Opportunity: The shift in balance of the broad age groups particularly the increase in working age group.

Share of Age Groups in Total Population (percent) 0 - 14 65 + Median Age (years) 1980 39 4,7 20 2010 27 6,1 28 2040 20 16,5 37 L2.1: Different Economic Models and Policies in 20th century Turkey Periodisation in Economic Policy in Turkey 12341929 to 1950 : Etatism : State led ISI 1950 to 1960 : Agriculture led growth 1963-1979 : ISI led by the private sector 1980 - Shift to market oriented Neoliberal Policies

1929 to 1950 : Etatism : State led ISI From Ottoman Empire to New Nation State Single party regime until 1950 Mostly agricultural economy Great Depression, collapse in the prices of agricultural commodities Strong Protectionism and Industrialization led by the state

Politics and Economics since WWII: Multi party electoral regime; Democrat Party comes to power in 1950. 1950 to 1960 : Agriculture led growth Agriculture led growth ends up in economic and political crisis - Beginning of Urbanization 1963 to 1979 : ISI (import substituting industrialisation) led by the private sector Development Planning, 5 year plans for the urban sector Logic of ISI : -A package of government interventionism for industrialisation -Selective use of Protectionism -Tariffs, quotas, tax breaks -Foreign Exchange Controls to favor industry; K controls, overvalued exchange rate - Consistent with Keynesian interventionism in developed countries and around the world

Achievements: -High rates of economic growth -Close to 6 percent per year overall, more than 3 percent per year in GDP per capita -Rapid industrialization 9 to 10 pa -Rapid Urbanization, Employment growth

Problems: - Lack of exports inward looking industrialization; fear of EU integration -Soft State ... Political instability, coalition governments, rent seeking -Inflation, stagnation, foreign exchange shortages -Govt Policy Slow to React : Reactive (not Proactive) State nis-enses - Major Economic Crisis at the end of the 1970s

However, it was not only the Crisis in Turkey that led to the shift in 1980 1970s: Changes in Developed Countries End of the Breton Woods Era Neoliberal Policy stance by the IMF, World Bank: Washington Consensus

1980 - Shift to market oriented Neoliberal Policies New Era in Economic Policy beginning in January 1980, led by zal Greater emphasis on markets Liberalization of foreign trade, especially of imports and early support of exports by subsidies

Accomplishments of the 1980s: - Trade liberalization, -Growth of Exports

But lagging in other areas ... Public sector reform, privatisation was slow to get off the ground Lack of fiscal discipline despite the suppression of wages, agricultural prices Capital Account Liberalization in 1989 ; paving the way for the accumulation of external debt

Turkeys Relations with the EU since 1980 Inward-looking, hesitant partner in the 1970s Application for candidacy rejected in 1987 Customs Union begins in 1995 Accepted as candidate after political reforms 1999-2001 Accession negotiations begin in 2005

L2.2- Opening of the Economy to Market Oriented Policies and Globalization since 1980 Accomplishments of the 1980s Trade liberalization Growth of Exports However : Lagging in other areas ... Public sector reform, privatisation Lack of fiscal discipline despite the suppression of wages, agricultural prices K Account Liberalization in 1989 ; paving the way for the accumulation of external debt

Turkeys Relations with the EU since 1980

Inward-looking, hesitant partner in the 1970s Application for candidacy rejected in 1987 Customs Union begins in 1995 Accepted as candidate after political reforms 1999-2001 Accession negotiations begin in 2005

After the recovery of the 1980s, two problems were feeding on each other during the 1990s. Problem 1: Premature Financial Globalization Financing large budget deficits with short term K inflows; FDI low until after 2004 Rising Debt / GDP ratio Stop-go cycles ; Recessions in 1990, 1994, 1998 Another dimension of K account liberalization: Turkish FDI abroad began to increase

Problem 2: Political Instability and Populism in the 1990s Political instability, short lived governments Promises exceed revenues Agricultural producers, urban businesses Large Budget deficits: growing debt and high inflation Increasing vulnerability of the Banking System

Resulting in : The Financial and Banking Crisis of 2001 Large and Unsustainable Public Debt due to large budget deficits and public borrowing in the 1990s plus: Crisis in the private sector banks Collapse of the IMF designed stabilisation program, large depreciation of the currency 8 percent drop in GDP, incomes, employment

The IMF backed Dervi Recovery Program of 2001 Bringing the budget deficit under control: fiscal discipline Insulation of the Public Sector from Politics Institutional Reforms Greater independence for the Central Bank, autonomous regulatory agencies, etc. Post-Washington Consensus Reforms

Frequent Economic Crises since WWII 1958 : end of agriculture based growth 1978-79 : end of ISI 1994 2001 : end of early phase of neoliberal model

More on Economic Crises (ni, 2010) Policy Mistakes or Crises of Economic Governance Governments often trying to postpone difficult decisions or choices and late to respond

Economic crises and military interventions until 1980 Did single party governments provide more economic stability ?

AKP in Power 2002 Elections of 2002: collapse of earlier parties helps AKP to power ... Origins of AKP Economic Recovery from the lows of 2001 AKP continues with the 2001 Program Moderation in political and economic positions Fiscal discipline : Large Primary Surpluses until 2007 Continues with open economy-export oriented policies with the support of winners from globalisation

Overview of Economic Recovery, 2001 to 2007 Rates of growth of GDP exceeding 6 percent per year or 5 percent per person per year Declines in : Inflation from above 60 percent to 10 per cent per year Interest rates from 80-90 percent to 16-18 percent Debt / GDP ratio from 90 percent to 60 percent Export growth despite stronger Lira Large inflows of FDI especially from EU countries after 2005 Employment growth slow .... Rapid decline in rural jobs, slow rise in urban jobs; low rates of womens labor force participation The 2001 program is exhausted; Economic Growth begins to slow down in 20072008 before the onset of the global crisis Economic success leads to electoral success in 2007 Moderation, moving to the center of the political spectrum; winners from globalisation AKP has been different from earlier Islamist parties

Importance of the double anchors, IMF and EU (ni and Bakir) IMF and EU conditionality EU perspective; Customs Union in 1995; political reforms in 1999-2001; membership perspective in 1999: accession talks begin in 2005 Commitment and Credibility necessary from both sides Creates constituencies for reform

Fading of the Double Anchors The EU anchor began to weaken in 2005 as French and German governments began to oppose Turkeys membership AKPs commitment to EU reforms and policies weakened as well During the global crisis since 2007, the government chose not to enter a stand-by agreement with IMF, deciding to deal with the crisis without IMF support.

Impact of the Global Financial and Economic Crisis since 2007 Banking sector remained strong (thanks to the reforms after the crisis of 2001) Sharp drop in exports and industrial production Expansionary monetary and fiscal policy made possible by many years of budget surpluses GDP declined by more than 6 percent in 2009

GDP Rebounds by 8 percent in 2010

Impact of the Global Financial and Economic Crisis since 2007 Banking sector remained strong (thanks to the reforms after the crisis of 2001) Sharp drop in exports and industrial production Expansionary monetary and fiscal policy made possible by many years of budget surpluses GDP declined by more than 6 percent in 2009 GDP Rebounds by 8 percent in 2010

L3- Politics of Neoliberal Economic Policy Changes Overview of Policy Changes 1970s-1980s: Paradigm Change in Developed Countries End of the Breton Woods Era From Keynesian Interventionism to Greater Emphasis on Markets: Liberalisation, De-Regulation, Dismantling of the Welfare State Towards Developing Economies: Neoliberal Policy stance by the IMF, World Bank: Washington Consensus Opening in Turkey in January 1980, led by zal Greater emphasis on Markets Trade and Financial Liberalization

Agenda Today Understanding Economic Policy Changes: Both the BIG PICTURE as well the individual CASE STUDIES which we will examine later in the course ... Why some changes did happen while others did not etc. ? What was the politics of these changes ? How did these changes proceed ? Was there a logic ? But first, an overall perspective on long term performance ...

Summary of Econ Performance since 1980 I- Rates of Growth are slower since 1980 around the world and in Turkey but also exceptions (in south and east Asia) II- Fluctuations are more frequent macroeconomic instability; Stop and Go cycles

Understanding Economic Policy Changes Why and when are economic policy changes attempted ? Why some policy changes did happen while others did not etc. ? What was the politics of these changes ? How did these changes proceed ? Was there a logic ?

Understanding (Politics of) Economic Policy Changes (cont.) Importance of crises which often provide opportunities for change

International support or pressure Last but not least : Domestic politics, obtaining domestic support

Importance of the double anchors, IMF and EU (ni and Bakir) IMF and EU conditionality Frequent agreements with the IMF EU candidacy, accession process Creates constituencies for reform Commitment and Credibility necessary from both sides A new era now after the fading of both anchors ?

Key to Reforms is Obtaining Support from Society or Overcoming Opposition (where will support come from in the early stages of policy changes when emerging interests are not yet strong?) Collective Action Problems Asymmetry between Winners (often and mostly in the future) and Losers (today); example trade liberalization and European integration since the 1970s

L4- Changing Agendas / Emphases of Economic Policy since 1980 Outline Washington Consensus Agenda in the 1980s and 1990s The Second Generation Agenda in the last decade: PWC A Second Generation Case Study from Turkey for : Banking Sector Reform

Washington Consensus Agenda in 80s and 90s Wiki: The term was initially coined in 1989 by John Williamson to describe a set of ten specific economic policy prescriptions that he considered should constitute the "standard" reform package promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the IMF, World Bank, and the US Treasury Department.[1] The Washington Consensus was most influential during the 1990s. WC replaced Keynesian interventionism and the ISI strategy in the 1970s and 1980s The Slogan of the New Era: Stabilise, Privatise and Liberalise WC was supported by the IMF and World Bank and adopted by the developing countries especially when the latter were in difficulty and in need of financial support The Washington Consensus was strongest in the 1990s However, WC was criticised from the start and shortcomings emerged soon. Market fundamentalism Examples of China and India which did not fully embrace WC but did well vs. Latin America which did, but did not do very well

The Post-Washington Consensus General direction of policy did not change but there were important differences between First Generation and Second Generation Most importantly : A new position in the Markets vs. States debate .... (Stiglitz, Krugman, others)

which is ultimately the most basic and enduring debate in political economy New Roles for the State: (different from the roles during the Keynesian / ISI era) Governance Creating effective institutions, improving regulatory structures Rules and their Enforcement Reminder: Economic and Political Institutions : written and unwritten rules and their enforcement Need to support and encourage investment in physical and human capital, new technology, research and productivity increases Rule of Law, enforcement of law, equality before the law Importance of stable political and economic institutions Institutions are persistent and path dependent, it is often easier to change policies than institutions Also new emphasis on : Infrasturucture, health care and education, Inequality, income distribution and poverty reduction Dealing with market failures (where, for various reasons, markets by themselves will not lead to the best outcome, hence the need for government intervention)

Two other important problem areas for many developing economies including Turkey: 1.Financial Globalization : what to do towards capital mobility in the new era and the instabilities it may create ?

Tobin Tax ? or other measures as in Turkey today

2. Employment Creation: criticism of jobless growth or economic stability without growth ; weak performance in Turkey since 2001 Banking Sector Reform in Turkey in 2001: typical example of second generation policy change Banking sector before the crisis of 2001 Poor macroeconomic environment; large budget deficits, large government borrowing; banks lending to government at high rates, crowding out private investment Problems with Public Sector Banks : ordered to lend by the government Problems with Private Banks : high risk behaviour , open positions Weak regulation and supervision of banks; mostly hands off ; supervisors looking the other way : Seen as important deficiency of Washington Consensus

After 2001: Severe crisis brings Reforms after 2001 Legal, institutional changes under IMF and EU anchors, stronger regulation / supervision

A stronger and more effective Banking Regulation and Supervision Board Also legal changes for greater Central Bank independence Improving performance of the banking sector after 2001 Rising international investor interest in Turkeys banks; 35 to 40 percent of the banking sector were purchased by international banks in the last decade Different Behavior by Banks after 2001 Due to more effective supervision but also due to more cautious behavior by banks because of hard learned lessons from the recent past and No exposure to toxic assets Turkeys Banking Sector during the Global Crisis Banks in good shape in 2007-08 Global financial crisis did not affect the banking sector in Turkey; no public support or bail out of any bank since 2007.

L5 - Policy Changes in Agriculture and in Urban Labor Markets Agriculture since WWII Small, medium sized family enterprises in Agriculture Lower productivity, underemployment, especially of labor; but production continued to rise at high rates after WWII and until the 1980s due to the availability of land, the Green Revolution etc. Large differences in per capita income between Agl and the Urban sector Large, powerful voter group but numbers declining in recent decades; recipient of large government subsidies, price support programs for individual crops until recently Structural Change Long term trends in agricultural and urban employment Migration accelerates after WWII but not very rapid until the last decade Who is likely to migrate ? Poor, less educated older people in the countryside today

Agricultural Reform Implementation Project (ARIP, 2002) Few policy changes towards agriculture in the 1980s and 1990s. Earlier policy instruments continued. Low prices and few subsidies in the 1980s under military rule and Ozal ... Higher prices and more subsidies during the populist 1990s. Major changes since the crisis of 2001 Liberalisation accepted during economic and fiscal crises, under external pressure However, little domestic support for the policy changes from producers, politicians and government (Akder) Opening agriculture to a globalizing world; supported by the IMF and WB ; plus long view towards EU CAP; some EU funds; also WTO also opening agriculture to large corporations, international and domestic Liberalisation ... Getting the prices right ... Removing subsidies in inputs and price support programs in favor Direct Payments per capita However, more recently, return to limited amount of crop specific subsidies (in 17 crops but total payments less than 1 percent of GDP in 2011) No alternative policy promoting training, higher productivity ... or institutional changes for investment, innovation

Today, Rural Areas continue to be where the Poor, Less Educated and Older people are located.

Migration and Patterns of Urban Employment High population growth and high rates of rural to urban migration and urbanization until the 1980s ... Lower population growth but higher inflows from Agriculture in recent years to new urban centers; but slower rates of job creation in the urban sector... Recent migrant facing hierarchy of urban employment White collar, blue collar, informal sector, unemployed Security and stability as well as wages/income varies Low Labor Participation Rate (for women and youth) How to explain the low participation rate for women ? Culture /values ? Low rates of economic growth, job creation ? Absence of government policy ? U shaped womens participation rate ?

Direction of World Bank supported Policy Changes: More Flexible Urban Labor Markets Focuses on, proposes changes in High Income Taxes; Severance Payments; Unemployment Insurance Premiums Policy Direction: advocates more flexibility; shift of focus from protecting jobs to protecting workers Critics: Power of labor unions declined sharply, labor markets already more flexible; wages did not rise since the 1980s despite the increases in GDP per capita, share of wages or labor in GDP much lower today than in the era before 1980 Still very little job creation; jobless growth in manufacturing and elsewhere

Towards more Flexible Urban Labor Markets? Encouraging job creation Existing restrictions on temporary employment High income taxes High severance payments High Unemployment Insurance premiums Encouraging high working hours and informality Policy Direction: more flexibility; shift of focus from protecting jobs to protecting workers

Reminder: Age Structure of the Population: A Window of Opportunity ? Declining fertility rates, birth rates since the 1970s (Fertility Rate today: 2.1; less than 2 in western Turkey) As a result, the Ratio : (Adult Population (15-64) / Total Pop) has been rising from the 1980s until 2020s An opportunity to be taken advantage of ONLY IF the economy is able to create more jobs However, Labor Participation Rates are not rising at the moment .... due to slow job creation in the urban sector

L6- Globalisation, Neoliberal Economic Policies and the Rise of New Economic Elites since 1980 Overview Decembers employment report (released today) Unemployment rate declining. Important development since 1980 with economic, social and political consequences Brief History of Economic Elites in Turkey New Economic Elites after 1980 and the Reasons for their Rise Conclusion

Turkish Economy before 1980 Inward oriented industrialisation after WWII ... development planning, state intervention, protectionism, tariffs, subsidies, tax breaks Industrialisation, especially larger scale enterprises, were confined mostly to the Istanbul-Marmara region International trade and investment remained limited

Economic Elites before 1980 Etatism (state led industrialisation) in the 1930s Mixed economy after WWII, but increasingly led by the private sector; especially by holding companies in Istanbul and the Marmara region State intervention was always important Economic elites were created by the state and by state intervention (Bugra, 1994)

Globalization and New Economic Policies since 1980 Opening the economy to exports, imports and international investment; export led growth; search for markets and investment opportunties abroad Greater reliance on the market mechanism, less government intervention but it continues Organisation of the firm changes from large scale towards small scale, more flexible

Similar trends were experienced in other Developing Countries since 1980 Rapid Economic Growth Export oriented Industrialisation Rising Share of Manufactures in Export In fact, Turkeys growth rates have not been as high as those in East and South Asia

Annual Rates of Growth for Turkey Total GDP 1980-2010 2002-2008 3,9 5,5 Per Capita GDP 2,3 4,4 Manufacturing Industry 5,3 6,5

These rates are lower than those in South and East Asia; moreover, rate of growth of manufacturing employment has been much slower. New Industrial Centers or Anatolian Tigers? Small and medium sized family firms Began with labor intensive goods Low productivity, low wages, low technology Moving up the ladder in recent years

Are they real and how important are they ? Some Evidence : - Three Groups of Provinces and some long term trends since 1980 -19 out of 81 provinces accounting for apprx. 90 percent of output and employment -Group I: ISI era leaders , Group II : Their Neighbors, Group III : New Centers across Anatolia Provincial Groups in Manufacturing Group I

Group II:

Group III:

S h a r e s o f P r o v in c ia l G r o u p s in M a n u fa c tu r in g V a lu e A d d e d , 1 9 8 1 -2 0 0 1
90 80 70 60 50 40 30 20 10 0 1981 1988 1992 1997 2001
I II+ III II III

Forms of Government Intervention in Favor of Individual Businesses in the New Era since 1980 Local government business; however Central government actions more important : Privatisation Central Government procurement: Large Scale Infrastructure, Housing, other Energy Production and Distribution licenses Credits by Public Sector Banks still important

Business Associations at the National Level TOBB TUSAD MUSAD ASKON TURKONFED TUSKON Rivalry or alliance ? 1950 1971 1990 1999 2004 2005 (mandatory) all others are voluntary

Conclusion 1 New economic elites and a new middle class in both the old and the new industrial centers since the 1980s, late comers, winners from globalisation The new elites are still small in relation to the established elites but they are politically influential and rising State interventionism was important in the rise of many Business elites have always been dependent on the state in modern Turkey

Conclusion 2: Elites Old and New Common Values: Democracy Market Economy, Property Rights, Economic Stability, Openness, Competition Moderation of AKP, fiscal discipline, EU orientation in contrast to earlier Islamist parties Also Differences : Use of religious networks in business Conservative on Social Issues: Women in the labor force? Looking ahead: New Emphasis in Economics and Social Sciences: Importance of economic and political institutions for long term economic development The role of the new and old elites in shaping these institutions Attitudes towards Governance, Corruption, Level Playing Field Continuation of patronage politics or stronger institutions and better governance ? Answers will come in the Long Term

L8- Globalisation, EU Integration and Changes in Turkish Foreign Policy The Impact of the Opening of the Economy (or Globalisation) on Turkish Foreign Policy since 1980 Growth in Trade: Search for markets, need to make contacts etc. .... contrasts between inward oriented ISI and Export Growth strategies Recent Increase in FDI in Turkey Also FDI from Turkey: in Russia, Black Sea region, Iraq both north and south, more generally the Middle East, and EU Not limited to the old business elites but also new business groups

The Impact of Globalisation on Foreign Policy (cont.) Tourism Construction Companies abroad International Migration

More on the Same : Cold War priorities in Foreign Policy : security, military issues vs. economic motives in FP more recently New groups, new interests

More recently: Zero problem policy with the neighbors Some Scepticism : How much influence does the private sector really have on Foreign Policy ? Some .... changed since 1980 and since the end of the Cold War Differences between AKP and others

EU: Another Major Influence on Turkish Foreign Policy (Aydin-Akmee, Onis, Kirisci) Europeanisation: Convergence of norms, rules and practices ... Acquis ... but also elsewhere Creates constituencies for reform Commitment and Credibility necessary from both sides

Another Source of Change in Turkish Foreign Policy during the Last Decade: Europeanisation Peaceful settlement of disputes Shift towards civilian priorities Examples : Greece, Cyprus, Middle East, Citizenship; Policies towards international immmigration, asylum However: fading of EU conditionality and EU soft power since 2005 Changes in Foreign Policy as well ?

Foreign Policy Developments since 2007 Zero problem ... Emphasis on the neighborhood National interests... with a strong economic component Armenia, Syria, Iran, Energy Policy, Israel, growing visibility in the Middle East Not all have been successful Can be beneficial to the EU as well... but ... Outcomes still contingent ... Can go either way