Role of Government in the Economy

Role of Government in the Economy

The Ottoman Empire established a strong tradition of government direction of the economy. Ottoman economic doctrine ascribed to the state both the right and the duty to control the economy for the common good. The state controlled a large proportion of the land and suppressed power centers, blocking the development of a landed aristocracy. One's position in the imperial hierarchy was the primary determinant of income. Because the sultan confiscated his functionaries' wealth when they died, status could be passed on only by means of education. For example, candidates for positions in the bureaucracy were required to have command of the Ottoman language. Peasants and artisans also claimed and received protection from the state, often at the expense of economic modernization. The bureaucracy had little interest in economic growth, which might lead to the rise of a new class that would challenge its dominance. To ensure control of certain urban-based production and service functions, they were reserved for minority groups.

Republican Turkey inherited attitudes and memories from the Ottomans that continue to play a key role in the country's political economy in the late twentieth century. Republican leaders believe that the state has a duty to intervene in the economy, not only to strengthen the nation against foreign intervention but ultimately to further the well-being of the people.

Liberal Interlude

Scholars traditionally have stressed the significance of state intervention in the economy during the early years of the republic, but more recent research indicates that Turkish economic policy was relatively liberal until the 1930s. The government made significant investments in railroad and other infrastructure projects, but the Law for the Encouragement of Industry of 1927 and other measures encouraged private enterprise. Moreover, Turkey's economy was relatively open to international markets during the 1920s. Under the provisions of the Treaty of Lausanne of 1923, the capitulations were abolished, but Turkey could not introduce protective tariffs until August 1929. As a result, tariffs remained low, and the Turkish lira was convertible and floating. Foreign interests invested in both public and private enterprises, helping to initiate industrial development. During these early years, economic growth was satisfactory, but the country ran chronic foreign trade deficits despite the continued fall in the value of the lira.

Turkish economic development reached a turning point with the Great Depression. By 1930 foreign markets for Turkish agricultural products had collapsed, causing sharp declines in the prices of agricultural goods and a corresponding decline in national income. Dissatisfied with the slow development of industry, Turkey's leaders began to look for alternative policies. During the late 1920s and the early 1930s, economic and political thinkers discussed alternative approaches to national economic development. The interventionist trend in Western economic thinking, represented by works such as John Maynard Keynes's The End of Laissez-Faire (1926), influenced the theoretical debate. The apparent successes of the Soviet Union's drive to develop heavy industry under its First Five-Year Plan (1928-33) also impressed Turkish thinkers, although in the end Turkish policy borrowed primarily from the West.

Etatism

At its 1931 congress, the Republican People's Party (Cumhuriyet Halk Partisi--CHP) adopted etatism, one of Atatürk's Six Arrows, as its official economic strategy. According to this program, individual enterprise was to retain a fundamental role in the economy, but active government intervention was necessary to boost the nation's welfare and the state's prosperity. The CHP also declared that etatism was an intermediate road between capitalism and socialism. In practice, etatism entailed the promotion of industrialization by means of five-year plans and the creation of public enterprises. Comprehensive protective tariffs also were introduced during the 1930s, establishing a pattern of import-substitution industrialization that would continue for many years.

After World War II, all major parties claimed to support etatism. The sharp reorientation of Turkey's economic policies after 1980 included a repudiation of much etatist doctrine, which, however, still influenced Turkish economic thinking. Inasmuch as Atatürk had declared that once Turkey had reached a satisfactory level of development certain state enterprises could be returned to private control, the post-1980s economic reforms perhaps could be considered a continuation of one aspect of the original etatist program. Moreover, the government continued to use policy tools such as SEEs and development planning that had originated during the etatist period. Nonetheless, by the mid-1990s deepening government indebtedness dictated a faster reduction of the state's economic commitments. Given Turkey's high inflation, job insecurity, and unemployment, etatism could be in vogue again, but in the mid-1990s no major opposition party was calling for the wholesale renationalization of the economy. .

State Economic Enterprises and Privatization

An important tool of etatism to further government economic policies, State Economic Enterprises (SEEs) are variously organized, but the government owns at least a 50 percent share in each of them. SEEs are set up by the government, and each has a board that reflects the ownership of the particular SEE, combining government representatives, who direct the enterprise, with private interests. During the etatist industrialization campaign of the 1930s, the government set up many industrial SEEs. In the mid-1990s, SEEs continue to dominate sectors considered to be of national importance or sectors where private investors have hesitated to invest because capital requirements are too great in light of expected returns. SEEs include national transportation, communications, and energy enterprises; banks that own companies, in particular branches such as textiles or refining; and conglomerates with holdings in many fields. Some SEEs control companies in which ownership is shared with private and foreign investors. In 1964 the State Investment Bank was established to provide long-term investment credits to SEEs. Credits from the Central Bank of Turkey, transfers from the Treasury, and capital markets also finance SEEs.

In the mid-1990s, SEEs accounted for more than 40 percent of value added in manufacturing and employed about 550,000 workers, or about 20 percent of the industrial work force. Until 1980 SEEs set their prices in accordance with government directives, but after the introduction of that year's reform package, they were expected to set prices independently. Nevertheless, prices of some major commodities, such as fertilizers, continue to be determined by the government. SEEs also influence markets, especially those for agricultural goods, by establishing guaranteed minimum prices for commodities.

Aside from their role in industrial development, SEEs are charged with social goals. The farm-support program stabilizes farmers' incomes, while low consumer prices for food, energy, and transportation help the urban poor. SEEs also provide training and employ surplus university graduates and constituents of influential politicians, contributing to overstaffing. Some SEEs are placed in underdeveloped regions to spur industrial development, a practice that increases transportation and infrastructure costs.

One objective of the Özal reforms was to improve SEEs' efficiency and reduce their need for subsidies. By 1982 the government had freed most SEE prices and had given SEE managers greater autonomy and responsibility. The administration favored opening state monopolies to outside competition and decided in 1983 to limit SEE investments in manufacturing. Nevertheless, in the mid-1980s the state sector had to take over several failed banks that had significant industrial holdings, and the low rate of private investment meant that the public share in industrial investment actually rose. By the mid-1990s, SEEs remained a major burden on the public exchequer. Of the fifty SEEs, only fifteen were expected to report profits in 1994. Funding the operating losses of the SEEs--TL90 trillion in 1994 alone--annually cost the Treasury around TL20 trillion (about US$70 billion) in 1993 and 1994; the remainder was borrowed from banks. The total debt stock of the public enterprises by late 1994 was estimated at TL250 trillion, the bulk of which was owed to the Treasury and Central Bank. This debt generated an interest charge of around TL60 trillion in 1994 alone on collective sales of TL550 trillion. Deepening economic problems in the 1990s were part of the reason for the losses. This situation was exacerbated by a requirement that took effect after 1989 stipulating that SEEs borrow at high market rates.

Major plans for privatization of SEEs were supposed to go into effect as early as 1987 but as of early 1995 had not yet occurred. Prime candidates for sale include the state airline, the cement industry, and the textile industry. Almost all SEEs are considered potentially suitable for privatization except for certain infrastructure facilities such as power plants and railroads.

Some SEE managers and unions oppose privatization, fearing that, once under private management, the enterprises will eliminate unprofitable subsidiaries or aggressively reduce overstaffing. Some opposition parties also fear that public assets will be allocated among "friends" of government officials, with the result being the creation of private monopolies. Observers anticipate that certain "strategic" industries, including much mining and defense production, will remain in the public sector and that the best the administration can hope for would be to force them to approximate private- sector practices. Moreover, certain privatization moves, particularly the sale of cement mills belonging to the public enterprise Citosan, and a controlling stake in the airport management company Havas, were reversed by the Constitutional Court on administrative grounds.

After becoming prime minister, Çiller accepted the existing legislation on privatization and even sought wider powers to hasten the process. Law 3291, passed in 1986, had established the Public Participation Administration, which would control SEEs designated for privatization and prepare them for the process. In late 1994, the National Assembly passed a bill introduced by Çiller to revamp the administrative procedures dealing with privatization.

The bill established the Privatization Administration to carry out technical work and a Privatization High Board to make final decisions. The latter would control the Privatization Fund into which revenues were to be channeled. The Privatization High Board would consist of the prime minister, the minister of state "responsible for privatization," and the ministers of finance and industry and trade. The board was also to be responsible for deciding which public enterprises are of special strategic importance and in which the state should retain preference shares. Turkish Petroleum, Ziraat Bank, Halk Bank, Turkish Airlines, and the Soil Products Office Alkaloid Plant were placed in the latter category. Railroads, airports, and the General Management for Trade in Tobacco, Tobacco Products, and Alcoholic Spirits (Tütün, Tütün Mamülleri, Tuz ve Alkol Isletmeleri Genel Müdürlügü--TEKEL) were not designated to be privatized in the mid-1990s. Privatization of telecommunications and the electricity production and distribution board were to be dealt with in separate legislation. All other types of SEEs were again targeted for privatization in various ways, including the sale of all or parts of a company through share offers, block sales, auctions, and the transfer of plants to private domestic and foreign entities and to companies formed by workers and local townspeople. Some of the early candidates were the Eregli Iron and Steelworks, the Turkish Petroleum Refineries Corporation (Türkiye Petrol Refinerileri As--TÜPRAS), the state oil products distributor (Petrol Ofisi), the petrochemicals company (Petkim), the industrial interests of the state holding company, Sumerbank, the national airline (Turkish Airlines), and the airport company (Havas). The bill also set guidelines to prevent the formation of private monopolies and methods for dealing with workers who lose their jobs. Workers made redundant would continue to receive their wages for up to eight months and, depending on length of service, would get pensions or severance pay.

Development Planning

Turkey first introduced five-year plans in the 1930s as part of the etatist industrialization drive. The first five-year plan began in 1934. A second plan was drafted but only partially implemented because of World War II. These early plans were largely lists of desirable projects, but they provided guidance for the development of infrastructure, mining, and manufacturing. During the 1950s, the Democrat Party (DP) eliminated central economic planning, but the 1961 constitution made social and economic planning a state duty. In 1961 the government established the State Planning Organization (SPO), which was given responsibility for preparing long-term and annual plans, following up on plan implementation, and advising on current economic policy. The SPO comes under the prime minister's office and receives policy direction from the High Planning Council (also seen as the Supreme Planning Council), which is chaired by the prime minister and includes cabinet ministers. The Central Planning Organization, the secretariat of the High Planning Council, formulates the strategy and broad targets on which the SPO bases detailed plans. Plan targets are binding for the public sector but only indicative for private enterprises.

SPO plans include--in addition to investment levels--macroeconomic targets, social goals, and policy recommendations for individual subsectors of the economy. Turkey was one of the first countries to develop regional planning, a major challenge given the limited development of eastern and southeastern Anatolia. The SPO has approached planning from a long-term perspective and drew up the First Five-Year Plan (1963-67) and the Second Five-Year Plan (1968-72) in the context of what should be accomplished by the mid-1970s. Similarly, development goals for 1995, including a customs union with the EC, were set in the Third Five-Year Plan (1973-77) and the Fourth Five-Year Plan (1979-83). Successive plans took stock of problems and previous accomplishments, but many policy suggestions were never effectively implemented.

Early plans were heavily weighted toward manufacturing, import substitution, and the intermediate goods sector. The economic and political disorder of the late 1970s, however, made it impossible to achieve plan targets. After the 1980 coup, the Fourth Five-Year Plan was modified to favor the private sector, labor-intensive and export-oriented projects, and investments that would pay for themselves relatively quickly. The Özal administration delayed the Fifth Five-Year Plan (1984-89) for one year to take account of the structural reform program introduced in 1983. Unlike earlier plans, the Fifth Five-Year Plan called for a smaller state sector. According to the plan, the state would take more of a general supervisory role than it had in the past, concentrating on encouraging private economic actors. Nevertheless, the state was to continue an aggressive program of infrastructure investments to clear bottlenecks in energy, transport, and other sectors.

In May 1989, the government published the 1990-95 Development Plan. The plan called for overall economic growth of 7 percent per year. The growth of private-sector investment was targeted at an average of 11 percent per year, whereas the aim was to increase exports 15 percent per year. The inflation rate was targeted at 10 percent per year. As it developed, although high growth rates were maintained during the 1990-95 period, they came at the cost of increased foreign and domestic borrowing, which funded an inflationary government budgetary and monetary policy. Rapid rates of growth also were boosted by foreign direct investment. Excessive borrowing and domestic political problems led to a balance of payments crisis that sharply reduced domestic investment rates and ultimately led to a decline in incomes. Whereas the development plan had called for high growth rates and macroeconomic stability, Turkey actually has experienced high growth rates and macroeconomic instability.

Budget

Public-sector spending is the most important means of state intervention in the Turkish economy. The consolidated government budget comprises central government spending and a number of annexed budgets of such partially autonomous entities as the State Highway Administration, state monopolies, and some universities and academies. Local budgets and most SEE budgets generally are not included in the consolidated budget, nor are special and extrabudgetary funds. The most important of the latter are the Mass Housing Fund, financed from luxury-import duties; the Defense Industry Support Fund, financed from levies on sales of gasoline, cigarettes, and alcoholic beverages; and the Public Revenue Sharing Schemes Fund. The partially autonomous organizations are included in the calculations for the public-sector borrowing requirement (PSBR).

Since 1983 the Treasury, under the direct control of the prime minister's office, has had sole responsibility to raise domestic tax revenues. The Ministry of Finance and the SPO are mainly responsible for planning spending policies, but the minister of finance presents the annual budget to parliament, which approves the annual government budget and legislates supplementary appropriations as required during the fiscal year, at times making significant modifications.

Turkish governments have persistently run large budget deficits, which have fueled inflation, capital flight, and heavy foreign and domestic borrowing. At the heart of this problem is the political system, which tends to be largely unrepresentative even when democracy is formally operating. Prior to major elections, governments have been prone to boost spending, particularly salaries for government workers. Despite recent modest changes to this system, Turkish governments have been averse to increasing taxes to pay for their high spending. Taxes, excluding social security contributions, are still around 20 percent of GNP--the lowest figure among the member countries of the Organisation for Economic Co-operation and Development.

Prior to 1980, local administrations had limited revenue-earning power and depended heavily on funds transferred from the central government. Even with such transfers, local governments were often short of funds needed to provide services required during a period of rapid urbanization when many city dwellers lacked even the most basic services. After 1980 reforms significantly strengthened the revenue base of municipalities, in part by providing that 5 percent of government tax revenues would be withheld at the local level. In 1994 Çiller also attempted to increase the revenues that local governments might raise.

During the early and mid-1980s, the government made serious attempts to reduce Turkey's inflationary budget deficits, implementing policies to streamline government, improve public resources allocation, and modernize the tax system. The government, for example, designed tax reforms to increase revenues and to reduce inequities. In addition, the introduction of a lump sum tax on small businesses and a new system of income tax payments for self-employed people reduced tax evasion. The government also started to tax farmers' incomes systematically for the first time since the 1920s. Other reforms strengthened tax administration, established new tax courts, and instituted heavier penalties for tax evasion.

Overall, the consolidated budget deficit declined during the 1980s as a result of the reform measures. During the decade, the deficit averaged 3 percent of GNP. However, the deficit went up in the 1990s, reaching 7.4 percent in 1991, 6.1 percent in 1992, 9.8 percent in 1993, and 8 percent in 1994 (see table 6, Appendix A). The 1994 figure includes a first-quarter budget deficit of 17 percent, which was sharply offset in subsequent quarters after the promulgation of the April 5 measures and tight supervision by the IMF. These measures more than reversed some of the increases in wages and other spending made in 1992 and 1993. Public-sector borrowing requirements have been much higher as a percentage of GNP. After averaging around 6 percent during the 1980s, they ranged from about 10 to 17 percent in the 1990s.

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