EC470-TURKISH ECONOMY
Sources of Growth and
Growth Financing
Amine Nur Soysal
Oya Aldağ
Gizem Konukseven
Mohammad Irfaan Nahoor
Ezgi Elmas
Burak Kaleli
PERIODIZATION:
Periods:
1914–1929
Post-WWI recovery ends and a new policy era begins
1930–1949
Early Republic including the Great Depression and WWII
1950–1979
Post-WWII era under import-substituting industrialization
1980–2002
Era of globalization since 1980
2002-2016
AKP Government period
ABOVE AVERAGE GROWTH PERIODS:
ABOVE AVERAGE GROWTH PERIODS
1) 1930-1949: (3.1 percent)
-Mixed economy framework (etatism)
-State-led industrialization
2) 1950-1979: (3.1 percent)
-Export-led policies
-Development plans (1963-1977)
BELOW AVERAGE GROWTH PERIODS
1) 1914-1929: (0.0 percent)
-The WWI & the War of Independence
-The emigration of Greek citizens
2) 1980-2005: (2.5 percent)
-Economic crises
-Decline in capital accumulation
GDP per capita in Turkey in comparison with the World
• There is an upward trend both for Turkey and the World.
• During the period between 1980 and 1990, GDP per capita in Turkey remained below
the level of the World.
• As of 1980, the GDP per capita of Turkey has become more volatile.
1914-1929:

WWI & the War of Independence: huge loss of human capital (18%)

Emigration of Greek population (1924): huge loss of human capital

The key of the New Republic for development:
◦ 1. Industrialization
◦ 2. The creation of Turkish bourgeoisie

Decrease in average GDP per capita growth rate (1880-1913: 0.8 % & 1914-1929: 0.0 %)

The abolition of agricultural tithe and animal tax in 1924 ⇒ The recovery of agricultural
sector
1914-1929:

The recovery of agricultural sector contributed to the urban economy as well.

Importance of industry increased, but its effects were limited.

Main source of growth were small and medium producers.

The role of capital accumulation is negligible.

The construction of new railways, ports, etc. and the nationalization of existing
companies (public investment increased)
1930-1949:

Great Depression:
- The sharp decline in prices of agricultural commodities

Protectionism and greater control over foreign trade and foreign exchange ⇒ tariffs
and quotas
Small scale producers benefited from the protectionist policies. (75% of employment in
manufacturing)


Etatism announced in 1930
etatism: a strategy which promotes the state as a leading producer and investor
in the urban sector

The first Five Year Development Plan in 1934
- State economic enterprises in key sectors
1930-1949:

Demographic recovery in the agricultural sector.
- Agricultural output increased by 50-70% during the 1930s.

1930’s ⇒ High growth rates in Turkey until WWII in both agricultural and non-agricultural
sectors.

Post-WWII ⇒ High growth rates around the world with autarkic policies.
Agriculture-led growth (1947-1962)
- The rapid increase in the accumulation of physical capital in agriculture is the primary
source of this high growth rate.


Labor productivity increased due to the increase in agricultural productivity.
1950-1979:

Agriculture-led growth in the 1950’s under Truman Doctrine, Marshall Plans.

The increase in arable lands together with the mechanization of agriculture that began in
the 1950s is one of the most important transformations that took place in the modern
Turkish era.

Turkey witnesses the highest rates of overall growth during the period 1950–79.

The non-agricultural sector also shows the greatest growth during the period 1950–79.

Rates of capital accumulation are highest during 1950-1979. For the overall economy, the
capital accumulation rate is 6.36 %, with the non-agricultural sector displaying a comparable
capital accumulation rate of 6.67 % for this period. Note that capital accumulation was the
most significant source of growth for this period of Turkish economy.

Average output growth is 6.15 %.
1950-1979:

The higher growth rates of inputs such as labor, land and human capital.

After 1950s, since there was a sectoral shift from agricultural sector into non-agricultural
sector, we observed an increase in labor productivity.

ISI was led by the private sector. Under the ISI regime, investment in heavy industries are
undertaken by state enterprises and the private sector produces the more profitable
consumer goods. But, we observed that for this period, level of private sector investment
overpassed the level of public sector investment.
1980-2002:

Stabilization and outward-oriented policies

Beginning early 1980’s,Turkey started to pursue an economic strategy of export-led growth.
(export boom)
- The share of manufacturing goods in total exports ⇒ 36% (1980) to 80% (1985)

A move from fixed exchange rate regime to floating exchange rate regime took place.

Fragile coalitions and weak governments.

Financial instability and crises in the world.

Banking system regulations were implemented. Short-term capital inflows were welcomed
for the first time of Turkish economic history.
1980-2002:

The land under cultivation starts to decline after 1980 as industrial uses, tourism and
residential housing begin to claim some of the agricultural land.

The growth rate of the capital–output ratio has fallen since 1980.

An apparent decline in the rate of capital accumulation was observed after 1980. This can
be partly attributed to the experience of macroeconomic instability of the 1990's in Turkey.

1994 and 2001 crises are among the major causes for the reduction in the rate of output
growth and capital accumulation for the Turkish economy in the post-1980’s period.
1980-2002:

In comparison to the developing countries as a whole, Turkey grew faster than the
developing country averages from the nineteenth century until the 1970s. However, it has
been lagging behind the developing country averages since the 1980s.

There has been a qualitative change in the pattern of total factor productivity growth after
1980, with TFP improvements originating from the non-agricultural sector including
manufacturing and services becoming more important.

The composition of investment in the post-1980's period has changed. Investment
expenditures shifted to residential uses after 1980.

During the crisis of 2000-2001, overall level of investment including FDI and capital inflows
decreased.
Gross Capital Formation (formerly gross domestic
investment) and Gross Savings(% of GDP)
30
25
20
15
investment
saving
10
5
0
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
Total Factor Productivity


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TFP:The difference between the rate of growth of output and the contribution of
input growth.
TFP growth has accounted for the main source of growth in the developed countries.
In Turkey:
1913-29: TFP growth declined.
1930-49: Steep TFP growth derived from the growth in agricultural sector, whereas the
contribution of TFP growth lacked in the state-led non agricultural sector.
1950-79: The role of TFP is very minor during ISI period.
1980-2000: The TFP growth became higher originating from the financial liberalization
measures.
Conclusion:The contribution of TFP in Turkey has become low in contrast to the developed
countries.
TFP at constant national prices (2005=1)
1.2
1
0.8
0.6
0.4
0.2
0
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
AKP Government Period, 2002-onwards:







Export-oriented policies. However, current account deficit problem couldn’t/cannot be
fixed.
High growth rates have been observed (average appr. 5%).
But after 2005, the growth pace started to fall due to tight monetary policy and
depreciation of Turkish lira because of the short-term capital inflows.
With the help of macroeconomic stability and increasing exports, Turkey has achieved a
growth trend closer to the developing countries’ averages.
The most private-sector-friendly policies in Turkey’s history.
Twin IMF and EU anchors for enhancing the economy and sustainability.
Savings rates has not changed relatively as compared to previous eras.
AKP Government Period, 2002-onwards:






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SEEs’ privatizations have occured. (Türk Telekom, etc.)
Large budget surpluses.
Relatively increasing unemployment rates. (jobless recovery)
Credit rating to investment grade(BBB-): attracting FDI and capital inflows.
FDI coming is very high due to macroeconomic stability, privatizations and meetings with
EU for the membership. Throughout the history of Turkish economy, FDI was limited(2-3
billion dollars per year.). After 2005, it has become 10-15 billion dollars per year.
More fluctuations in capital inflows and outflows have been observed.
Private invesment has increased more as compared to public investment.(see the graph,
later)
Annual GDP Growth Rate (AKP Period)
Capital stock at currentPPPs (in mil. 2005US$)
3000000
2500000
2000000
1500000
1000000
500000
0
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Foreign direct investment, net inflows (% of GDP)
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
Private investment exhibits the J-curve phenomenon, rising steeply after the large decline
during the crisis of 2000-2001. One important factor in the recent investment performance
is the increase in newer vintage capital in the total capital stock. This has occurred as firms
have taken advantage of favorable developments in global credit markets and an overvalued
exchange rate to upgrade the quality of their capital stocks.
Conclusion:



Output growth in Turkey is primarily due to capital accumulation, not TFP growth. However,
the rate of capital accumulation is typically lower for Turkey.We found that the rate of
capital accumulation slows after 1980.Also, it is to be noted that TFP growth has accounted
for the main source of growth in the developed countries.The contribution of TFP in Turkey
has become low in contrast to the developed countries. During the entire 1950–2005
period, TFP growth is only slightly above 1 per cent per annum.
In Turkish economic history, the rate of capital accumulation, human capital and channeling
resources out of agriculture into higher productivity sectors such as manufacturing have
been the major sources of economic growth. However, the process of structural
transformation has proceeded at a relatively slow pace in Turkey.
The relatively slow process of structural transformation and the inability of the Turkish
economy to achieve sustained increases in its growth rate may be inextricably linked to the
low rates of saving and capital accumulation.
Conclusion:



The main factor that distinguishes the pre- and post-1950 periods is the increased rate
of physical capital accumulation in both agricultural and non-agricultural sectors.
The political and economic instabilities combined with slow improvement in the
institutional environment emerge as a key reason why the rates of capital accumulation
and economic growth have not been higher in Turkey since World War II.
The low investment position including FDIs (compared to other developed and
developing countries) stems from:
1) Corruption cases
2) Inefficient regulatory and tax system
3) Macroeconomic instability
4) Negative expectations
5) The existence of the informal economy, etc.
Conclusion:

Turkey’s average GDP growth rate clearly is slower than the GDP growth rates of countries
such as South Korea, Thailand or Malaysia, which had comparable per capita levels of income
in 1960. A similar observation can be made for the ‘late starters’ in Europe.

The main factor behind East Asian growth or growth in late starters such as Portugal to be
high rates of saving and investment.

Growth experience of the East Asian countries combines a rapid re-allocation of resources
from agriculture to non-agricultural uses together with very high rates of capital
accumulation. By contrast, the process of structural transformation in Turkey remains
incomplete, with 34 per cent of the labor force still in agriculture as of 2005.
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TURKSTAT, CBRT, Turkey Data Monitor