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Appraisal Of Developmental Planning And Industrialization In Turkey

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Appraisal Of Developmental Planning And Industrialization In Turkey

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Content APPRAISAL OF DEVELOPMENTAL PLANNING AND INDUSTRIALIZATION IN TURKEY by Jalal Mohammed Ali Bayati A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (Economics) June 1973 INFORMATION TO USERS This material was produced from a microfilm copy of the original document. While the most advanced technological means to photograph and reproduce this document have been used, the quality is heavily dependent upon the quality of the original submitted. The following explanation of techniques is provided to help you understand markings or patterns which may appear on this reproduction. 1. The sign or "target" for pages apparently lacking from the document photographed is "Missing Page(s)". If it was possible to obtain the mining page(s) or section, they are spliced into the film along with adjacent pages. This may have necessitated cutting thru an image and duplicating adjacent pages to insure you complete continuity. 2. When an image on the film is obliterated with a large round black mark, it is an indication that the photographer suspected that the copy may have moved during exposure and thus cause a blurred image. You will find a good image of the page in the adjacent frame. 3. When a map, drawing or chart, etc., was part of the material being photographed the photographer followed a definite method in "sectioning" the material. It is customary to begin photoing at the upper left hand corner of a large sheet and to continue photoing from left to right in equal sections with a small overlap. If necessary, sectioning is continued again — beginning below the first row and continuing on until complete. 4. The majority of users indicate that the textual content is of greatest value, however, a somewhat higher quality reproduction could be made from "photographs" if essential to the understanding of the dissertation. Silver prints of "photographs" may ba ordered at additional charge by writing the Order Department, giving the catalog number, title, author and specific peges you wish reproduced. 5. PLEASE NOTE: Some peges may have indistinct print. Filmed as received. Xerox University Microfilms 300 North Z N t Road Ann Arbor, Michigan 4S106 73-31,322 BAYATI, Jalal Mohanmed Ali, 1933- APPRAISAL OF DEVELOPMENTAL PLANNING AND INDUSTRIALIZATION IN TURKEY. University of Southern California, Ph.D., 1973 Economics, theory University Microfilms, A X E R O X Company , Ann Arbor, M ichigan THIS DISSERTATION HAS BEEN MICROFILMED EXACTLY AS RECEIVED. UNIVERSITY O F S O U T H E R N CALIFORNIA T H E ORADUATE SCH OOL UNIVERSITY PARK LOS ANOELE*. C ALIFO RNIA B 0 0 0 7 This dissertation, written by J a l a l , Mohansned A ll B a y a ti under the direction of h..l.§... Dissertation C om - mittee, and approved by all its members, has been presented to and accepted by The Graduate School, in partial fulfillm ent of requirements of the degree of D O C T O R O F P H I L O S O P H Y DISSERTATION CO M M ITTEE To the memory of my father ii ACKNOWLEDGEMENTS I would like to extend my sincere gratitude to the members of my guidance committee;Professor John E. Elliott (committee chairman),for his valuable guidance and advice not only in writing this dissertation,but throughout my entire study at U.S.C. Special thanks are due to Distinguished professor Gerhard Tintner for taking the time to see that the major portion of the dissertation was completed before his depart <re to Europe. I am grateful to Dr.John Reed for his criticisms and help. I would like to thank the Ministry of Education (Office of the Missions),for granting me a three years scholarship,which enabled me to complete the major portion of the work towards the degree. TABLE OF CONTENTS Chapter Page X. INTRODUCTION................................ 1 Purpose, Scope and Organization Statement of Research and Methodological Problems II. Turkey's Planning Within the Context of 9 Developmental Theories, Strategies and Policies Theory of Balanced vs. Unbalanced Growth Priorities: Agriculture vs. Industry and Services Free Trade vs. Protection Dualism Planning: Some Theoretical Considerations The Tools of Policy Implementation ill. Historical and Institutional Setting . . . 46 A Review of Developmental Planning in Turkey Prior to the Sixties The Role of Private Enterprise in Turkish Economy IV. The First Five-year Development Plan (1963-1967)..............................58 The Structure and Functions of SPO Principles, Objectives and Strategies Methodology of the Plan A Review and Appraisal of the Plan Attitudes towards Planning in Turkey V. Financial Aspects of the Plan................. 78 Domestic Capital Tax Policy in Turkey Investment tax credit Financial Policy Fiscal Policy Conclusions iv Chapter Page VI- Monetary Aspects of the Plan.............. 96 Monetary Implications of the Plan Appraisal of the Monetary Aspects of the Plan VII. Industrialization: Efforts and Potentialities 110 Basic Industries First: Energy Sector Second: Iron and Steel Third : Other Industries Conclusions and Evaluations VIII. The Second Five-Year Development Plan (1968-1972)..................................... 151 Main Economic objectives and Projections Financial and Monetary Aspects and Projections Industrialization during Second Five-Year Plan Conclusions and Evaluations IX. CONCLUSIONS and EVALUATIONS..................... 174 Appendix An Econometric Model of Turkey 191 BIBLIOGRAPHY 207 Statistical Appendix 215 v LIST OF TABLES Table Page 1. Breakdown of investments between public and Private Sectors: 1963-1966. . . . 68 2. Private Investment in the Manufactur ing Industry: 1963-1964.................. 69 3. Investments, Plan Targets and Realization: 1963-1966......................... 77 4. Investments, Internal Savings, External Savings: 1957-1967. ........ 84 5. Government Budgets: 1960-1966.......... 95 6. Index of Wholesale Prices: 1963-1967......... 98 7. Money, Deposits and Credit in Turkey: 1963-1967........................ 101 8. Results of the Monetary Policy in the First Three Years of the Plan: 1963-1965. . 103 9, Total Estimated Expenditures on zonguldak Coal Mining in Turkey: 1950. . . . 119 10. Estimated Average dollar cost of coal Production and Estimated Average dollar Savings ( zonguldak Coal Mines ): 1948-1952...................................... 122 11. Labor Productivity of Coal for Selected Countries i 1960................................. 127 12. Composition of the Development in the Industrial Sector in Turkey: 1967, 197 2. . . 161 13. Per Capita Income in Turkey: 1938-1965. . . 216 14. Gross National Product in Turkey: 1962-1966 217 uL Table Page 15. Basic Industrial Production in Turkey: 1963-1967............................. 218 16. Indices of Industrial Production in Turkey: 1963-1967............................. 219 17. Production of Mineral Ores in Turkey: 1963-1967......................................... 220 18. Production and Imports of Steel: 1945-1960......................................... 221 19. Sales of Basic Industrial Products in Turkey: 1963-1967 ........................... 222 20. Summary Table for the Balance of Payments: 1963-1967............................. 223 21. Foreign Trade Sector of Turkey: 1963-1967 224 22. Import Estimates; 1963-1967.................... 225 23. Price Indices and Cost of Living in Turkey: 1966-1971............................. 226 24. Relative Shares of the Sectors in GNP in Turkey: 1962> 1967. 1972...................227 25. Distribution of Gross National Product in Turkey: 1963-1967............................. 228 vii CHAPTER I INTRODUCTION Purpose, Scope, and Organization The purpose of this study is to examine and appraise developmental policies and planning of the Turkish economy, with primary focus on the non-agricult- ural/industrial sectors. The organization of the dissertation shall be as follows. Chapter I provides an overall statement of purpose, scope, and methodology, as well as a brief description of some salient features of the Turkish economy, chapter II gives theoretical perspective to the discussion of Turkey's planning experience as a case study by reviewing some of the key issues of development al theory, strategy, and policy. The literature of deve lopment theory and policy is not examined in any great depth. But it is hoped that this review of the literature places succeeding discussion of economic planning in Turkey in broader perspective. Chapter III presents a brief historical review of development policy and exper ience prior to the 1960s and a discussion of the public- 1 2 private mix in the Turkish economy. With these first two chapters serving as background, Chapter IV gives an overview of the First Five-Year Development Plan, its objectives, strategies, and methodologies, and desc ribes some basic dimensions of the planning process in Turkish economic life. Financial and monetary aspects of the First Five-Year plan are examined in some depth in Chapters V and VI. The efforts, potentialities, and accomplishments of the industrialization process are described in Chapter VII. This chapter in particular, as well as the dissertation as a whole, review, analyzes, and evaluates the economic development potential of Turkey, examines resource utilization in relation to development policies and planning, considers the question of the adequacy of resources used to attain desired objectives and efficiency of means to attain planning goals, and attempts to assess the possible repercussions on overall economic performance of the particular alloc ative approaches embodied in the Five-Year Plan. Because of the lack of sufficient information, especially quantitative data, at this time, the Second Five-Year Plan (1968-1972) is not described herein in any depth. Furthermore, it would appear to be too early to make a meaningful appraisal of the Second Five-Year Plan, since many of the policy measures taken will have 3 the major thrust of their effects only over a longer period of time. However, sufficient information is now available on the Second Five-Year Plan to give a broad description of its character and thus provide perspective in an assessment of the First Five-Year Plan. This is done in Chapter VIII. Finally, Chapter IX provides Summary and Conclusions. The dissertation also includes, as a brief Appendix, discussion of "An Econometric Model of Turkey, 1 1 based primarily upon the work of Gerhard Tintner and von Balder Hohenbalken(1962). Turkey as a Less Developed Country (LDC) Economically, Turkey is classified as a less developed or "underdeveloped" economy (LDC), with a low per-capita income and is predominantly an agricul tural economy. Still, to use Professor Rostow's phrase, it achieved the "take-off" stage in 1937, during the Ataturk's period,1and is in the process of developing a modern industrial sector. Today, countries of the third world increasingly realize that economic development, as well as political 1 W. W. Rostow, "The Stages of Economic Growtlv” Leading Issues in Development Economics, ed. G. M. Meier, (New York: Oxford University Press, 1964), P. 18. 4 freedom ie crucial to increasing living standards, creat ing a modern society, and accomplishing a respectable status in the world community. The problem these developing countries confront has two main dimensions: first, to convert, as rapidly as possible, the primitive mode of their economies to modern structure; and secondly, to be capable of compet ing with other countries economically. The main method ology emphasized in seeking solutions to this two-fold problem in these countries has been "economic planning". Hence, our focus upon the developmental plans. Any sound analysis of any economy's development potentialities has to consider the resource base (both natural and human), in order to conceive appropriate policies and overcome the obstacles confronting the path of attaining desired economic goals. Turkey's principal minerals are: iron ore, coal, chrome, copper, manganese, zinc, and lead. However, only few of these resources occur in more than moderate abund ance. Also, bounded by seas on the north, west and south, Turkey has the means for extensive and cheap water tran sportation. The principal problem of water transportation is the lack of navigable rivers into the interior, and relatively few natural harbors, such as Istanbul and Izm ir. Therefore, one of the key areas for development is improvement of harbors, besides building more railroads, highways, airports, all of which are still in backward condition. This is important for both agricultural and industrial development. Furthermore, like most other developing countries, Turkey lacks the investment capital necessary for a rapid expansion of productive capacity, to make possible the rise in the standard of living measured by future rise of per-capita income and consump tion. However, an increase in savings is particularly difficult to attain in an economy like Turkey, where per- capita income is very low. In addition, Turkey is among the highest in population growth in the world. Conseq uently, if the current rate of population growth remains unchanged, and if the industrial, agricultural and social overhead capital, though increasing, will not keep ahead of the population increase, then unemployment and under employment could become increasingly more serious problems in the near future. Other problems which would, if unresolved, seri ously retard economic growth, are: the uncertainty of foreign markets for major exports, inadequate transport ation and marketing systems, and lack of both managerial skills and a progressive civil service system. These problems have contributed to lower product ivity and raise production costs, promote inefficiencies. 6 and thus seriously retard economic growth. Therefore, to attain and maintain a higher standard of living requires further and more efficient utilization of economic resou rces, a greater diversification of production, involving, at this stage of Turkey's development, a steady shift of resource utilization from agriculture to industry. Turkey's industrial development depends to a large extent upon the development of basic industries, such as iron and steel, mining, electricity, etc. Although these industries and the exploration of new natural reso urces are highly ranked among the priorities of economic policy, the low productivity, resulting from lack of skilled labor, managerial and organizational elements, are responsible for backward conditions of the utiliz ation of economic resources. Therefore, the particular importance of these resources for the country's indust rial development is the focus of this study. The devel opment of these basic industries are mostly studied where data is available in terms of measuring the relative efficiency of total investment in each case, or the returns attributable to the total investment in each industry. These industries are: coal, hydroelectric power, iron ore, steel, copper, chromium and import substitute industries. 7 Statement of Research and Methodological Problems Numerous difficulties have been encountered in undertaking this study, some of which were: 1. Inadequacy of essential data related to this study. Most of the material was descriptive and histor ical rather than quantitative and analytical. 2. Out of all the major studies made on Turkey, only a small portion has related to its economic aspects. 3. Time required to receive some data from Turkey. From the point of view of empirical data, the availability and quality of the quantitative data is the main determining factor of the method used and the degree of the accuracy of the results. Excluding the totally planned economies, the economic data of the developing countries is short of being comprehensive and adequate. The economic researcher encounters unsurmount- able difficulties of both conceptual and statistical varieties, particularly with respect to goods produced and consumed within the household. A great majority of householders are illiterate and are accustomed to carry ing most of their payments in kind for goods and services. These economic activities defy identification and quant itative measurement. Therefore, a good portion of the quantitative data on national product (income) are 8 aggregates which are essentially estimates. Therefore, absolute accuracy would be an unattainable goal. The degree of practical usefulness of this data would depend very much upon the objectivity of the rese archer, in preparation, compilation, and interpretation. Furthermore, most of the national income data is charac terized by exaggeration and maybe motivated by political deliberation and nationalistic sentiments. Some basic data is referred to in the bibliography of some published reports? other data is circulated confidentially. CHAPTER II TURKEY'S PLANNING WITHIN THE CONTEXT OF DEVELOPMENTAL THEORIES AND STRATEGIES Apart from the ambiguities and limitations involved in the measurement of economic development, the question of whether economic development is good or bad is still a controversial matter. However, we proceed our analysis with a presupposition that econ omic development is superior to no development. Further more, the theoretical insights stated here are not only relevant to the Turkish economic development, but to the many other economies as well. A study of economic history reveals the fact that since early times in history, up to the Industrial Revolution, the standard of living of preindustrial societies did not experience a remarkable and a progress ive change (aside from ups and downs brought about by wars, famine, plagues, etc.). Factors behind this slow progress or lack of it were mainly two: first absence of important technological improve ments ; second the failure of capital to accumulate. 9 10 As to the industrialized capitalist countries, an outstanding features of their economic development is that it does not proceed smoothly or continously, but intermittently or in jerks. This is due to the occurren ces of so-called business cycles or economic fluctuations. Since these economies are "unplanned" systems, motivated by individual profit-making, growth under predominantly private enterprise economies has been both irregular and uneven. Furthermore, recent economic history indicated that, in general, the growth rate of capitalist countries has been generally less than what the socialist economies, based on social ownership of the means of production and on economic planning, have achieved. Today, "most countries fall in the underdevel oped category: About one-fifth of the world's population live in the highly developed group {A), with more than $1,500 per capita; just over one-eight live in the inter mediate group (B); about two-thirds live in the under developed group (C). The economically underdeveloped areas of the world have been, for the most part, the traditional or semi-colonial regions, the agricultural plantation and 1 Paul A. Samuelson. Economics, (New York: McGraw-Hill Cotopany, 1970), P. 743. 11 raw materials hinterlands of the big industrial powers, which have exploited these areas as sources of cheap raw materials and foodstuffs. Marxist economists maintain that monopoly capitalism and imperialism made it impossible for the underdeveloped countries to follow the traditional path of capitalist development. The large capitalist monop olies, they argue, which emerged in the capitalist coun tries, have seized to undertake developmental investments in these underdeveloped areas, because such investments might threaten to create competition with their establish ed monopolistic positions at home. consequently, invest ments were largely directed to the exploitation of nation al resources and food supplies. The net result was that the economies of these underdeveloped countries became one-sided? that is; they became raw material and food exporting economies for the developed nations. The profits which were made by foreign capital in these countries were not used in these countries for industrial investment, which we know from historical experience is the real dynamic factor in the process of economic development. This, they maintain, is the essential reason why the underdeveloped countries were unable to follow the class ical capitalist path of economic development. 12 The continued economic backwardness of these countries, even after their political independence, has been partly due to carry-overs from the period of imper ialist rule and the persistence of feudalistic social structures and ways of life. In Turkey, for example, the vestages of feudalism have asserted continuing influences. Also, the very low income levels in these countries can support no more than narrow and restricted home markets to encourage the private capitalists to bear the risks of investing in industry. Furthermore, in the absence of a realistic and comprehensive development plan, the haphazard fashion in which the state has initiated invest ment in industry often has created too many uncertainties to be attractive to capitalist entrepreneurs. Thus,private capital finds it more profitable to go into trade, land purchases, or luxury buildings and speculative activities. In regard to foreign trade, a characteristic weakness of most of the underdeveloped economies is that their export trade is heavily dependent upon one or too few products, which renders them vulnerable to market flactuations in regard to the main export product. It may also constitute an obstacle to any attempts to provide the means for industrial development, through imports of machinery, by expanding foreign trade. 13 Another fairly common feature of many under developed economies is the existence of a high population density in relation to the area of cultivated land, a large surplus of manpower, and an agriculture character ized by primitive means of production. Some Theoretical Aspects of Developmental Strategies The Theories of Balanced versus Unbalanced Growth It is convenient to commence a discussion of theoretical aspects of developmental strategies with a comparison of the theories of balanced versus unbalanced growth. The balanced growth strategy has been especially 2 associated with the writings of Ragnar Nurkse. professor Nurkse holds that the inducement to invest is limited by the size of the market, while investment, that is, demand for capital, is a function of national income. However, he thinks that the small size of the market can be over- comed by the implementation of a balanced growth approach, which may also be utilized to expand the volume of exter nal trade. In brief, "balanced growth" implies that 2 Ragnar Nurkse, Problems of Capital Form ation in Underdeveloped Countries, (New York; Oxford Univ ersity Press, 1961) 14 because of interdependencies of the different sectors, a general expansion must occur throughout the economy. According to this essentially traditional Neo-Classical view, output will be maximized when resources are alloc ated so as to achieve equalization of (social) marginal products in all lines of production. Furthermore, because of rural underemployment, the marginal productivity of labor in agriculture is low, perhaps zero. In short, in less developed countries (LDCs) there are potential unused resources, that is, disguised unemployment in the agricultural sector. Remov ing them from that sector and employing them in another will not decrease output in the first sector, and would increase output in the second. On this basis, the efforts to utilize these potential resources, as in Turkey, has an economic justification. However, if training is required, there would be an added cost. The social overhead projects will also have positive costs, due to the fact that other factors are not free. Further, as to how large are external economies, and whether market prices tend to reflect true costs, is still an area of controversy. An opposing strategy for development is that of unbalanced growth, associated with the writings of 15 Albert Hirschman. Professor Hirschman maintains that "economic development would proceed best through creation of pressures, tensions and disequilibrium.'^ This theory of economic development stresses the dynamic processes of development, whereby a large rate of initial savings is necessary to be invested in certain developmental projects. Professor Hirschman believes that the theory of balanced growth fails to conceive of growth as a dynamic process. He argues that:"Development presumably means the process of change of one type of economy into some other more advanced type. But such a process is given up as hopeless by the balanced growth theory, which finds it difficult to visualize how the (underdevelopment equilib- 4 rium) can be broken into at any one point." This theoret ical approach, similar to Schumpeter's analysis of economic development of capitalism (which occurred in a cyclical fashion or in jerks) has much merit. However, while economic plans and policies have their overall theoretical roots, it would not seem advisable for LDCs to lean totally upon a single economic growth theory. Priorities; Agriculture vs. Industry and Services Related to the controversy of balanced versus unbalanced growth theories is the question of priority ^Albert 0. Hirschman, The Strategy of Economic Development,(New Haven: Yale University Press, 1958), PP. 6, 9, 88, 158, 207. 4 Ibid.. P. 52. 16 of emphasis*^ Which comes first — agriculture or industry? Those economists who maintain that agriculture is more important for growth than industry base their arguments upon the following grounds* On the supply side* a. Economic history has tended to show that the agricultural base must be developed in order to support industrialization in the economy. b. Capital requirements: when investment capital is scarce in the economy, each dollar would proceed farther in agriculture than industry,since capital/output in agriculture is Bmaller than industry, and the skill requirements in the agricultural sector tend to be gener ally less than that in the industrial sector. Also, by adding capital in the agricultural sector, a continuing surplus of labor is created, which could be utilized elsewhere, such as industry. Lastly, because in most LDCs, the agricultural sector tends to be dominant, it thus gravely affects the level of the GNP and the rate of economic growth. c. If we assume an open economy, the industrial sector may not be able to compete in international market. 5 G. M. Meier, Leading Issues in Develop ment Economics,(London: Oxford University Press, 1964). 17 perhaps not even in the domestic market. On the demand side: 1. At low levels of income, particularly in LDCs, the demand for food may have a high income elasticity? that is a rise in income levels in the agricultural sector would lead to a large rise in demand for non- agricultural goods. And because a large portion of the population is in agriculture, this results in large market demands for all types of goods in the economy. Also, it is argued that the price elasticity of demand for agricultural goods is fairly high, which means that if the price of these agricultural commodities falls, demand will increase substantially. 2. An increase in agricultural exports, and revenue from the land tax could be used both to finance the imp orts of capital goods and to develop other sectors of the economy. 3. Industry may require inputs from the agricultural sector, particularly industries such as textiles and food processing. Finally, it is maintained that a stable and growing agricultural sector would contribute to a stable political environment. Contrary to the above position are those economists 18 who believe that industry is more important for develop mental purposes than agriculture.6 Such economists base their arguments mainly upon the following points: 1. Because the marginal product of labor in agric ulture is very much lower than that in industry, output should rise substantially merely by moving laborers from the agricultural sector to the industrial sector. 2. Because income elasticity in industry is larger than that in agriculture, inter-industry demand rises as income levels increase. 3. It is argued that the long-run solution for balance of payments difficulties is through building import substitute industries, especially when the secular drift in terms of trade is against the primary producing economies. (Because of inelasticity of world demand for agricultural products, total revenue would fall when price decreases.) 4. The industrial sector would provide the agri culture with needed technology and the development of agricultural potential. As the industrial sector's share expands in the economy, the demand for agricultural 6 As will be discussed more fully in later chapters, the emphasis of Turkish planners and policy makers has often been on industrialization. 19 goods will rise. 5. Industrialization is not guaranteed with priority to agricultural development, but it is more likely with the "industrialization first" policy. Further more, the surplus land may not be used, and agricultural development might not be satisfactory, due to unsuitable weather conditions. 6. External economies are more important in industry than in agriculture(e.g. the effects of labor training and skills which accrue to the whole society, and urbanization, which tend to break up the traditional influences that retard economic growth). Still other economists argue that the services sector is the most important for the LDCs. First, because of the disguised agricultural unem ployment in these economies, the MPL is very low; so the potential for increased output through reallocation to the services sector is high. Second, there are external economies, due to diffu sion of training effects. These involve commerce and small businesses, which eventually generate entrepreneurs. Third, the services sector is characterized by a high degree of mobility. Free Trade versus Protection 20 Since the time of Adam Smith, economists have argued in favor of expanding trade, because it leads to expansion of markets, economies of scale, an inducement to invest, and because it encourages the division of labor and increases technological progress. Classical and neo-classical economists supported the idea of free trade on the basis of the theory of comparative advantage, which was static in terms of time and uncertainty. They also assumed mobility of resources within country, but immobility between countries. More over, they assumed full employment of resources and perfect competition, as well as constant returns to scale and no transportation costs. In recent years, a number of economists have argued against free trade, especially for the LDCs. The case for protection includes the infant industry argument, 7 the terms of trade argument (example: Raul Prebisch),and some dynamic aspects of growth theories. The term infant industry generally applies to newly established industries or relatively underdeveloped 7 Raul H. Prebisch,“Commercial Policy in the Underdeveloped Countries," Readings in International Economic Relations, Finn B. Jensen ana I. Walter (eds.) (New York: The Ronald Press Co., 1966), PP.435-465. 21 manufacturing enterprises. The infancy of an industry at home is relative to the same industry abroad. The argument maintains that such industries should be protect ed from foreign competition by protective tariffs and subsidies until such a time as they become able to compete with the foreign industries on equal grounds. As to the terms of trade argument: A good number of economists, notably Prebisch, contend that the terms of trade are turning against the LDCs. The reason: the LDCs typically export primary products, which face in elastic demands. Thus, the efforts of the LDCs to promote their exports is not too promising t and, in the long run, foreign trade may not function as a viable engine to promote economic development. It should be noted, howeven that this argument may not apply in cases of countries endowed with skilled cheap labor force, since they can specialize in the export of light-manufactured goods, rather than being completely dependent upon the export of primary goods. Actually, Prebisch and other economists of a similar persuasion, while criticizing the classical theory of free trade, still regard the foreign sector, under conditions of appropriate planning and guidance, as a potentially strategic contributor to economic devel- opment. The true opposing position to completely free 22 trade is that of autarky, as practiced, for example, in Soviet Russia, in the Stalinist years. The Soviet type of developmental planning strat egy is an Autarkic approach, in which in the early stages of development process, priority is given to domestic heavy industries in their investment policy, and the foreign trade sector is not emphasized. Since the Autar kic central planning committee desires to isolate the economy from the fluctuations of world market prices, foreign trade is carried out, when needed, by trading at world prices, which are not necessarily related to the domestic costs and prices. This is inconsistent with the principles of comparative advantages. However, because of its wide endowment of resources, the Soviet Union was able to gain macroeconomic benefits from their Autarkic approach, possibly more than enough to compensate for the microeconomic inefficiencies and welfare costs involved. However, when we take account of many other Communist-bloc countries, it seems that the same approach did not work. The possible explanation of this failure is that the microeconomic inefficiences and welfare costs of the centrally planned approach more than outweighed the benefits in these instances. Dualiam Dualism occurs when a modern portion of an economy exists next to a primitive portion. There may even be two types of manufacturing processes in the same industry. Almost all countries have these dualisms, at least in some sectors, but they are especially prominent in the LDCs. In advanced economies, the most modern firms win out, and the less modern fall by the wayside . However, in LDCs, such is not the case. Perhaps this is one of the reasons why they are underdeveloped. On the micro-economic level, it may be much harder to perceive the persistence of the dual character; but at a macro-economic level, they are more obvious. Boeke presents a sociological explanation of dual- Q ism. He maintains that dualism is caused by social and cultural differences between traditional and foreign influences, and it requires a long time, maybe generations, to change cultural modes. This sheds some light as to why dualisms are so persistent. Resource immobility is another explanation of the existence of dualism, notably people*s ties and attach ments to certain areas. 8 Julius H. Boeke, Economics and Economic Policy of Dual Societies , (New YorlTi Institute of Pacific Relations, 1953). 24 Technological Dualism may be another type of dualism. In some modern sectors, input coefficients are fixed; thus, with a given amount of one input, you automatically determine the amount to be used of the other. The remaining surplus from the modern sector proceeds to the other sector, i.e. the backward one, which is a variable-coefficient sector, so it can absorb extra resources (primarily labor). Therefore, the margin al Product of labor in the backward sector is, usually, less than that in the modern sector. Moreover, due to scarcity of capital in less developed countries, only a small amount of labor could be absorbed in the modern sector. Another possible reason for dualism is that the labor unions may have taken place in less developed countries at an earlier stage of development than in developed countries. Labor unions may have forced up wages above the equilibrium level in these LDCs, and may, also, resulted in less motivation to innovate. Also, with the presence of monopoly, the tendency is to get less employment of resources (at a point where MC=MR). Governments, particularly in LDCs, are usually interested in projects that demonstrate progress. Such industries may be capital-intensive. Thus, the "demon stration effect" is manifested in the emphasis upon new 25 products, which are produced in industrial countries, i.e., which require high skills and managerial know-how. In general, there is a persistent lack of inter course (economic and otherwise) between sectors, i.e., a lack of dependence. This may be due to: 1. Production processes may be independent, i.e., require no inputs across sector lines. 2. Investment in one sector does not affect other sectors. 3. However, as profit increases in the modern sector, the independence of that sector is reduced, since more and more of the other sector's factors are required to increase the output. The modern sector is often in close participa tion with foreign or international banks in financing their activities. Although entrepreneurs may be very small, they create a buffering unit from international influences. A test for dualism is to establish an input/out put table. If there are many sizable transactions bet ween section I and section II (backward vs. forward), then there is at most a small degree of dualism. If the table is pretty empty, then you most probably have dual- istic society. 26 Planning! Some Theoretical considerations Planning may be defined as a scheme of action, a proposed way to carry out a schematic program for some proposed or intended objectives. Generally, central plan ning, as opposed to the free market system, provides an alternative for allocation of resources. Why Central Planning ? The main points in favor of central planning in the LDCs are: 1. When external economies exist, the free market will not give appropriate information for efficient resource allocation. 2. When internal economies exist, and competition breaks down, the need emerges to set up agencies to regulate or control private monopolies. 3. In war-time, depression, famines, etc. central planning typically emerges as a means to make needed large-scale and rapid change. 4. When resources are unemployed for a considerable period of time (i.e. unemployed labor and excess capacity), then social opportunity costa and private market costs diverge to a point that requires discretionary policies 27 to put workers back into productive employment. 5. Moreover, whenever market distribution is thought not to be the optimal, certain programs are required such as medical care, pension..etc. 6. Discretionary actions are needed when foreign exchange rates are out of line. When the balance of payments is in chronic disequilibrium or deficit, then central planning may prove to be a useful instrument. 7. The very existence of planning may reduce the risk factor. Likewise, it may create some cooperation among different segments in the economy (e.g. between business, government and labor), and coordination of policies, such as is claimed by France's indicative plan ning and Dutch planners. Besides, there are political benefits to letting plans out in the open, and making people well aware of the trade-offs between options. It is worthwhile to note that even if planning results were unfavorable in a certain economy, we may not discard it, since results may be caused by bad planning; therefore, we may endeavor to improve the planning. Some argue that the more backward an economy is, the more centralized the planning that country needs, and the more difficult the task becomes, especially because of the lack of adequate quantitative national 28 account data. Therefore, the econometric models used in LDCs are most deficient, typically short-term models, used for stabilization purposes, and do not focus on growth. On the other hand, the fact that society has chosen central planning does not in itself imply that planning is desirable. The main problems associated with planning are: 1. Value judgements involved in terms of choosing the means and the plan's objectives, 2. Whether we should include in our evaluation the bureaucratic and political costs, the cost of possible lost freedom, if central planning entails dictatorship. Consequently, in setting up criteria of efficiency, equity, freedom, and progress, for evaluating various economic systems, it becomes doubtful, if one system would come out better on all criteria. At best, we have to make quantitative guesses in regard to various costs and benefits in different systems. In regard to the methodology, models, and techniques that are used in planning, it would seem that we still lack a real dynamic planning to be satisfactory answer to the defects in the static market system. Most planning techniques used are still crude. 29 The need is to develop end implement various techniques to bring secondary benefits into the evaluation. This q requires defining the social welfare function. Also, the time element should be included because multiplier effects take time to fully work out. The deficiency of using the input-output technique is that it is static, although it is useful because it includes the effects of backward and forward linkages. Also, most linear programming problems are static too. Therefore, so far it seems that there is no formal method of precisely evaluating projects ahead of time; usually the benefits are overestimated or the costs are underestimated. Some Theoretical Aspects of Economic Policy The necessary and required conditions to attain the optimum utilization of economic resources under perfect competition is an ideal but unattainable goal. This is even more true as far as the underdeveloped economies are concerned. The concept of " economic mechanism H pertains only to a small segment of the economies of most underdeveloped countries. This has 9 The problematic question arises: Who defines the social welfare function ? 30 serious implications regarding the applications of modern economic theory and planning techniques. Between the two alternatives of market system versus central economic planning, most of the LDCs lean toward socialism and central planning. The main contrib uting factors are: their desire for rapid economic devel opment, which they feel the market system would be too slow to achieve; the view that the profit criterion makes capitalism harsh and based on greed; and capitalism's failure to provide for full employment and an equitable distribution of income and wealth. Thus, today, most of the LDCs have some form of developmental planning. In analyzing the pertinent elements of economic policy and its implementation, we have to distinguish between economic theory and policy, and to specify the economic structure with which one is dealing. Policy recommendations lean heavily upon the type of one's theoretical orientation, although quantitative analysis tends to affect preference functions, the type of models, and the boundary conditions. In dynamic models, there is also the possibility of shifts in instruments as well as targets. The models used in developmental planning, usually are an integration of economic growth and policy models, using national accounts data. Among the numerous 31 workers in this area is Professor Tinbergen.^His theory of economic policy has two aspects; the logic of an operational approach and the technical problems of its implementation. The quantitative elements are considered to be the welfare function of the policy maker (including targets and instrument variables), an empirical model of structural relationships, and boundary conditions. The structural relations would include behavioral, technical, and definitional relationships. In a fixed target policy model (i.e. taking income and employment aggregates and then seeing the effects of the policy instruments, in the attainment of the plan's targets), requires that the number of instrument variables equal the number of targets. In other words, it requires a unique solution. The prob lem is that there may be many solutions, where this approach does not fit. Also, this model's approach is criticized as dealing only with the "characterization" of policy, and not the selection or application; for 10 Professor Tinbergen was appointed as the Chief Advisor for State Planning Organization, in Turkey's First Five-Years Plan. His major works pertinent to planning includes: Jan Tinbergen, Central Planning,(New Haven: Yale University Press, 1964). -~ — ______ , Economic Policy: Princi ples and Design, (Amesterdam: North Holland publishing Co* 1^56). 32 example, the classical justifications of government's interference, namely economies of scale and the failure of markets to mediate for the externalities, are not considered. Also, the model deals in structural equations and not the reduced forms. In development planning, one of the economic policy problems is to determine the proportion of invest ment to be devoted to the production of capital goods. The welfare objective is the maximization of income at the end of a given planning period* By contrast, the main functional role of national planning in developed mixed economies (e.g., French indicative planning, etc.), could be summed up in providing the informational basis on which public and private decisions are made, and coordinated, by estimating the possibilities, of growth for a given period and aiming to reduce the uncertainty about investment. The plan, also, offers a framework for long-term decisions. Capital Formation In most of the underdeveloped economies, capital formation is the most crucial aspect of their economic development, particularly, where the population is grow ing rapidly such as in Turkey. The most important part of capital formation is private sources. 33 The classical theory regarded saving as a positive function of interest rate, and investment as its negative function. Generally, the Keynesian theory treat ed saving as a function of income. Thus, the objective factor that affects saving is the consumption(unconsumed part of income). This implies that if the MPC is not constant, a redistribution of income in LDCs in favor of the poorer classes will increase consumption, or decrease savings, and, in turn, might reduce investment. Other factors affecting savings in LDCs is the high tendency for hoarding in different forms i.e., jewelry, gold, etc. This is partly due to the inadequacy of their credit and banking systems. Also, some religious institu tions such as Islam condemned charging interest on borrow ed money; interest was called "usury" and criticized main ly on ethical grounds. Furthermore, the demonstration effect in these countries works to lower savings; e.g., people with high incomes tend to be more luxury buying and import oriented. Thus, on this basis, the sales taxes that discriminates against this type of conspicuous consumption is justified. Although Friedman's permanent income hypothesis^ ^Briefly, the permanent income hypothesis states that people base their "permanent" consumption expenditures upon their "Permanent" income (which is an average actual and anticipated income over long periods), rather than solely to income of the current period. 34 was based on the United States case, it has some policy implications for LDCs. It suggests that although most aid programs may increase the income of LDCs, and may reduce their foreign exchange bottlenecks, over time it may also induce people to look at the larger portion of that income as permanent income, thus consuming more and saving less. Therefore, external savings (AID) may substitute for some of their domestic savings. However, this might be avoided by keeping AID very short term, so it stays as transitory income, without reducing their inducement to save. In regard to public savings, it is difficult to raise taxes in LDCs, because of low income levels and administrative problems, and because part of the transac tions in the economy are still carried out on barter, rather than monetary, terms. Therefore, among the direct taxes, the income tax is hard to collect, but land taxes are easier to levy. Indirect taxes, such as import duties and sales taxes, are generally easier to administer. However, both direct and indirect taxes could be made to be more regres sive or progressive. As far as investment is concerned, if capital is the limiting factor for development, then it requires a criterion for optimal allocation of the available capital. 35 One is the ICOR. When using the incremental capital- output ratio (ICOR), it is sometimes argued that we have to allocate to those industries with the lowest K/0 ratio, i.e., the highest o/K ratio, assuming that the measure (ratio) remains constant. The ICOR approach typically ignores depreciation, and the fact that other factors are required. Furthermore, ICOR does not measure social benefits, only profits. Also, it ignores changes in factor prices and the time element, thus, not consider ing income flows over time. Further, it is not necessarily true that minimizing the k/0 ratio maximizes growth, for some (though not all) high capital-intensive projects may be especially productive. Another investment criterion used is benefit-cost analysis, which, also tends to ignore the time element (after some cut-off date), as well as external economies. Furthermore, linear programming techniques share the defect of previous criteria with its static nature. How ever, now some more dynamic linear programming techniques are being attempted. This very brief sketch of some of the theoretical dimensions of economic policy in the LDCs merely highlights the key issues involved. Any one of these issues could be a topic for a further chapter. But for our purposes, it will suffice to identify and 36 discuss briefly the types of problems involved. Monetary Factors and the Theory of Economic Development Considerable vagueness still exists whenever the matter of monetary factors and their effects on economic development are analyzed. In general, the classical approach was that money affects the monetary side, not the real side of the economy. However, Keynesian theory argued that money has effects on the real sphere as well as monetary, owing to what he so-called "liquidity preference," and its effects caused by the interest rate. Today, almost all agree, within various degrees, that money does matter, and there are those, who recommend the use of a mild inflation as a policy instrument for economic development. They maintain that inflation results in higher profits for businessmen, because of a lag be tween price rises and wage hikes. These increased profits induce more investment. On the other side of this controversial matter is the monetarists, who maintain that inflation and development do not proceed together, because, they argue, that inflation encourages consumption now rather than later. Thus, savings, and therefore investment, will be reduced. Also, it may have some unfavorable effects on the allocation of the available 37 investment resources* If the past inflationary trend indicates the likelihood of more inflation, more invest ments would be directed to unproductive areas, such as land or luxury buildings, etc. On the other hand, the "structuralists" have somewhat diversified views. Some argue, along with the monetarists, that development is more difficult with inflation; others maintain that development is impossible without inflation. It is important to point out that a high rate of inflation is often associated with countries that have high military expenditures, and Turkey is an example in this case. Moreover, defence expenditures do not contribute directly to capital formation. The Tools of Policy Implementation Monetary ToqIb In general, the objectives of monetary policy is to promote economic stability and to maintain the balance of the foreign sector, while allowing for a high and rapid growth of per capita income. However, in LDCs1 monetary institutions are still backward. The effects of money on real factors have not been closely considered, as its effects upon the general price level. Nevertheless, in the field of economic development, no clear cut rela- 38 tionship or direct correlation between the amount of inflation and the percentage rate of growth in GNP has yet been found. Some maintain that unbalanced development creates inflationary pressures, and the development of the agri cultural sector must precede or accompany industrializa tion, if inflation is to be avoided. Furthermore, dif ferent levels of economic development require different structures of financial institutions. Financial interme diaries need to develop, if internal and external savings are to be encouraged efficiently into productive invest ments. Fiscal Policy The classical theory maintained that expansionary fiscal policy, with the economy assumed to be at full employment, would only lead to rising prices. On the other hand, the Keynesian school maintained that fiscal policy could result in real change, up to the full employ ment equilibrium, beyond which the effect would be only on the price level. Thus, to them, fiscal policy is an effective policy instrument, in the short run to maintain a stable full employment economy. However, some maintain that the use of Keynesian policies to obtain full employ 39 ment are not applicable to LDCs, Where disguised unem ployment is the problem, the Keynesian multiplier canhot be used to predict the impact of investment expenditures on both income and employment. In those economies, where the employment is predominantly agricultural, a large portion of production is for household consumption rather than for market exchange. Briefly, it could be said that the role and the goals of fiscal policy are derived from the type of society and economic system in which it operates. In most of the LDCs, the main tasks of fiscal policy are to tackle the problem of poverty by inducing and creating the required savings, to finance economic development, and to provide the most conducive environment for more private investments. In regard to the role of taxation in economic development. Professor Kaldor has discussed the matter cogently from two aspects: incentives and resource creation. In predominantly agricultural economies of LDCs, the customary way is to produce only the minimum, and to prefer idleness. Tax policy might very well result in an incentive for more work and less leisure. In regard to the resource creation aspect of taxation, the country's 40 taxation potential depends upon: a). Real per capita income. b). Degree of inequality in income distribution. c). The sectoral distribution of income. d). The administrative competence. Professor Kaldor states that the expansion of the industrial sector in LDCs implies that the agricultural sector would sell a steadily larger part of its output. He further maintains that it is the imposition of compul sory taxes on the agricultural sector which enlarges the supply of savings, in the required sense, for economic development. However, one of the main political objec tions is that it would most probably be socially unjust. Also, commodity taxes are not an adequate method for taxing the agricultural sector. It is worthwhile to point out that the essence of fiscal planning, is to determine the most efficient ways of absorbing each sector's tax paying capacity, in order to release the resources required for the develop ment plan. Foreign Trade and Exchange Rates Policies’ Countries that pursue a policy of industrialization often practice import substitution(Turkey is an example). 41 as the growth in traditional exports is too slow to accommodate rapid economic growth. However, if the ability to substitute domestic products for imports diminishes, this will cause a slowdown in the industrial growth. To solve this problem, some countries resort to a policy of export promotion, through devaluation. The domestic firms with a great portion of its debts in foreign currency faces great risks of losses in the case of the devaluation. As a practical way to determine the area of comparative advantage, the country should select the commodity which it produces with the lowest degree of protection. As to the question of the best way to find out whether devaluation would eliminate a given trade deficit, or what size of a deficit would be eliminated by a given 1 3 percentage of devaluation, Professor Machlup points out two dimensions of the question: first: the elasticities or the relative prices approach, and second; the income absorption or aggregate spending approach. The deficiencies of the relative price approach are: (a) After devaluation, cost curves for different 12 See Charles P. Kindieberger. Interna tional Economics,(Illinois: Richard D. Irwin,Inc.,1968), PP. 295-300. 42 industries do not remain constant. Industries, which had a relative advantage in international trade, before devaluation, may not have it any more. (b) Total income may change, due to the changes in relative prices. This has implications concerning the total amount of imports that will be brought into the country. (c) Income distribution will be likely to change. If different sectors of the economy have different propen sities to import, this will alter the amount of imports into the country. Professor Machlup's analysis proceeds as follows: Y = C + I + G + X - M A = C + I + G Y = A + B and B = X - M or B = Y - A Where A is absorption, B is the trade balance, which is negative when the nation absorbs more than its income (Turkey's trade situation). If the combined marginal propensity to consume, invest, and government expenditures are greater than unity, it would imply that if Y increases with devalua tion, the likely event is that the trade balance will 43 deteriorate. In regard to the following questions: How does devaluation effect Y ? How does a change in Y affect A ? How does devaluation directly affect A, not via income 7 Professor Machlup maintains that with devaluation, exports (X) increase , which will lead to an increase in (C) and (I). If idle resources exist in the economy, then employment and income will rise, through the foreign trade multiplier. Since the combined marginal propensities of C + I + G is greater than one, then B will deteriorate. Also, the country's terms of trade will deteriorate, because a country's exports are usually more specialized than its imports. The cash balance effect would be that devaluation raises the domestic prices of imports and of eaiports, and it will, also, raise the prices of import substitutes, of potential exports, and of intermediate goods. A reduction in the real value of total cash bal ances, and thus in A follows. As far as devaluation's effect on income distribu tion: if high income groups gain, then A will go down. Finally, if B is to be improved, the community as a whole must reduce its absorption of goods relative to its income. 44 As to whether a devaluation of the currency will lead to a favorable balance of payments, professor Lerner 13 maintains that the so-called “Lerner condition, “ must hold. The Lerner condition states that if the sum of elasticities of import and export demand is greater than one, the reaction will be favorable. This assumes two conditions: (a) Exports and imports are supplied at constant costs, i.e. supplies are infinitely elastic. (b) Exports and imports at the beginning of the change are equal. Foreign Aid. Loans, and Grants Foreign aid is an area where emotions and politics have played a larger role than economic analysis aiming at growth and more equitable income distribution. The purpose of foreign aid for LDCs is to assist them to attain a self-sustained and a rapid rate of growth. However, the purpose is not the commonly held belief of directly raising the standard of living. According to UN studies, the amount of foreign aid is very inadequate in relation to LDCs needs. Also, the increases in aid are less than able to keep up with the 13 Ibid., PP.259-262, 569-577. 45 population growth and inflation in most LDCs, besides their balance of payments difficulties. As noted earlier. Professor Friedman, on the basis of his permanent income hypothesis, concludes against aid, in that it may, by adding to income, over time allow for more consumption, because it will eventual ly viewed as permanent income, and by replacing domestic saving, may reduce saving. Therefore, he concludes, if necessary, aid should be only for short-term. There are risks associated with international loans, which, of course, differ from purely domestic loans in the following conditions; (a) The risks of world depression and the problems posed by short-term variations in the real value of exports (b) Risks that arise in the long-run context of economic growth, and with the relationship between debt service capacity, and overall economic (long-term) perfor mance. Finally, unless many LDCs show a better ability to adjust to short-term variations in available resources by the proper use of monetary and fiscal policies and rational development planning, foreign investors will tend to discount heavily the unexploited resource poten tialities and vital investment projects in those countries. CHAPTER III HISTORICAL AND INSTITUTIONAL SETTING The Modern Turkish republic was established in 1923, by the war of independence led by Ataturk immed iately after World War I. The new republic inherited from the Ottoman Empire many formidable difficulties: stagnant economic institutions, large debts, deficits, and an economy exhausted with the burdens of the war. The need for reform was great. Furthermore, the spirit of nationalism urged the Turks, under the leadership of Ataturk, to tackle these problems and pursue a policy directed towards rapid economic development. One of the first measures undertaken was to abolish all concessions giving preferential treatment to foreign interests ( capitulations ) and to buy out all foreign owned railroads, mines and public utilities. The purpose was to establish an unqualified control by the new republic over the country's revenues and finances. For the first decade, Ataturk hoped that domestic private enterprise would bring desired economic and industrial 46 47 development to the country. This was one of the main objectives of his economic policy. To enhance economic growth and provide needed capital investment, Ataturk established the first Turkish Bank of the new republic. Is Bankasi ( or Bank of Commerce. ),in 1924. This bank had a semi-public character, since it was privately owned; nevertheless, its Board of Directors were composed of the Deputies in the National Assembly. In order to encourage domestic industries, and provide them with the necessary credit facilities, Atat urk established the industrial and Mining Bank in 1925. The most important policy measure was the Indust rial Encouragement Act of 1927. This Act provided business with tax credits, lower transportation rates, technical training, and protective trade duties. How ever, the results were unsatisfactory to Ataturk* s impatient expectations. The main reasons were: lack of sufficient capital and organizational, managerial, and technical skills. Foreign investors were unwilling to invest in Turkey. Furthermore, exports and the domestic economy generally were hit hard by the world wide Great Depression of the 1930s. Under these cir cumstances, private enterprise failed to provide rapid 48 industrialization. Most of the Turkish leaders were former military officers, accustomed to authoritative policies and direct actions. Thus, Ataturk, the former officer , turned to a new approach to attain the goals of rapid industrial development, strong national defense, and economic progress. A Review of Developmental Planning in Turkey Prior to the Sixties As mentioned before, the idea of some sort of planning was not allien to the top leaders of the new republic. Kemal Ataturk, who laid the foundation of Etatism, pointed out that state encouragement and guid ance of economic development was not an emulation of socialist systems. Rather it is a system which is based upon the particular needs of Turkey. It considers private initiative and ownership coordinated with social needs as the basic principle. But government undertakes an active role in economic life. Thus, the urge for rapid economic development led Turkey to adopt (the first among the developing countries) a Five-Year development plan in 1934. In 1935, Ataturk established the Eti Bank to assume the responsibility of financing the exploration and utilization of mineral resources, to build power plants, and to distribute 49 electric power in Turkey. The First Five-Year Industrialization Plan, for mulated in 193 2, was approved and implemented by the government in 1934. Its objective was to increase the production of consumer goods, mainly by utilizing domes tic resources. The primary responsibility for its exe cution was given to the "Sumer Bank", which was establ ished in 1933, to replace the Industrial Credit and the State. Industrialization Office. However, no economic analysis was included in this plan. Thus, it was a partial program of loosely related technical projects. The Second Five-Year Industrialization Plan of 1938 gave priority primarily to the development of heavy industries, particularly the capital goods ind ustry, raising agricultural production and exports, improvement of highways, mining, electric power and housing, etc. In other words, it aimed mainly at ind ustrialization. Some general analysis of economic policy was included within the text of the plan. However, both the analysis and the statistical data were far from being satisfactory. In any case, the plan was abandoned with the outbreak of the Second World War. In the Economic Recovery Plan of 1947, for the first time, national income estimates were incorporated 50 into the plan. Agriculture, Industry, Services and Rents were the four items for which estimates for prod uction figures were prepared for the period 1927-195 2, both at current and 1947 prices. This plan also included the relationships between the government and the national income. However, the implementation of this plan was completely abandoned, due to the fact that the expected foreign capital funds did not materialize. Both the First and Second Five-Year Flans and the 1947 Development Plan were basically no more than sect oral industrialization programs, in comparison to the present day concept of economic planning. These early efforts made Turkey among the first countries to make an effort toward developmental planning in a mixed econ omy. However, the lack of comprehensiveness in those plans, and the overemphasis on industry at the expense of agricultural sector, resulted in some inefficiencies, retarded the overall economic growth, and did very little to improve the backward living conditions of farmers, although the politicians had given them a great deal of promises to that end. In 1950, political power shifted to the Democratic Party through election. This party advocated a liberal economic policy and was able to attain a short-lived economic prosperity, which was mainly attributed to the 51 substantial foreign aid and technical assistance. In the agricultural sector, a series of land reforms were adopt ed; credit facilities, tractors, and fertilizer and irri gation projects were subsidized. In the industrial sect or, credit facilities were expanded through the Indust rial Development Bank, established in 1950, and trade restrictions were greatly reduced. The above policy measures, plus good harvests, increased export prices associated with the Korean War, and an investment boom financed through foreign aid, made the years between 1950- 1953 a prosperous period. In general, economic policy in these years was formulated in piecemeal fashion, rather than as parts of a macroeconomic design. In 1954, a downward trend began in export prices, after the Korean boom; and the government, to maintain an ambitious investment plan, and the level of agricult ural income, resorted extensively to deficit financing. This led to the most severe inflation in Turkey since the end of World War II. The unofficial exchange rate of Turkish lira continued to depreciate, exports decr eased and foreign debts accumulated. The economic diff iculties of inflation and the balance of payments deficit gave credence to the criticisms of the opposition party that the economic policy of the government lacked any kind of plan or program. Furthermore, the aid-giving countries were recommending the necessity of implemen ting certain planned allocation of financial resources and a policy to ensure the stability of the economy of the borrowing country. In 1958, the government implemented a stabiliz ation program, which included a ceiling on central Bank and commercial bank lending, a partial devaluation of the lira, and increasing the prices of goods and services produced by the State Economic Enterprises in order to remedy their continued deficits. The government negot iated and obtained about $700 million from the U.S., I.M.F., and the O.E.E.C., to be invested within the framework of a development program. The planning efforts of the late fifties were no more than an attempt to en sure a proper use of foreign aid and a better coordin ation of investment expenditures among different projects. However, the stabilization program did not adequately attain its objectives. Thus, economic conditions and political pressures led to the I960 Coup d'etat. The new revolutionary government inherited an economy with a foreign debt which amounted to $850 million, foreign exchange and gold reserves were depleted, exports were stagnant, and the economy was experiencing strong inf lation. Thus, due to the failure of the stabilization 53 program, the new government, to maintain a firm control over the economy, gave priority to the policy of economic planning. In 1962, the "State Planning Organization" was established, followed by the approval of the First Five- Year Development Plan (1963-1967), which the following chapter attempts to review, analyze, and evaluate. The Role of Private Enterprise in the Turkish Economy Private business in Turkey had been for centuries in the hands of minority groups: primarily Greeks,Armen ians, and jews. The War of independence, with growing nationalistic feelings, has curtailed the role of these groups, has resulted in the loss of most skilled and experienced businessmen and has retarded the role of the private sector in the Turkish economy. The economic policy of the new republic emerged from past experience, and emphasized rapid economic dev elopment. The government pledged to encourage and stim ulate private enterprises. Ataturk realized that it was necessary for the state to provide required capital and initiative in many areas of the economy. Therefore, in 1924, as noted, he established the "Bank of Commerce" to provide investment capital for business, and, in 1925, a purely state bank (Industrial and Mining Bank) to finance 54 state owned industrial enterprises. The development which Ataturk had desired did not materialize as rapidly as he hoped, due to the inadequacy of investment capital, the lack of know-how in the country, and the unfavorable terms imposed by the "Treaty of Lau sanne" upon tariff revenues. Furthermore, the Great Depression of the thirties hurt the Turkish economy which depends heavily upon the export of primary goods, agric ultural goods and raw materials. Thus, the revenues obtained from these exports to finance industry were cut down enormously. The failure to attain rapid industrialization was attributed by many to the inability of the private sector to achieve that end. Therefore, a trend emerged toward a system of state owned enterprises, and an economic policy which was termed "Etatism". It was neither soci alistic nor capitalistic in character; but it was nation alistic, because it was not promoted by any special group. The purpose was to achieve economic progress for the country. The urge for development led the Turks to emb ark a series of five-year plana patterned after the Sov iet's state planning with German influences; these plans began, as indicated before, in 1934. The agency to which the execution of the plan was delegated was the "Indust rial and Mining Bank", which was now reorganized under 55 the name of "Sumer Bank". After World War II, the Turks turned towards the U.S. to obtain the technical, managerial and economic assistance necessary for its future course of develop ment, and a liberal economic policy was pursued by the Democratic party in the fifties until the 1960 revolu tion, which restated the idea of planning in Turkey, as we mentioned previously. As to the relations between the private and public sectors in Turkish economy, it is almost impossible, in many cases, to determine the exact proportion of busin esses owned privately versus what is owned publicly. The industrial sector consists primarily of light industries such as food processing, textiles, tobacco, paper, leather, etc. The few heavy industries consist of iron and steel, mining, chemicals, cements and const ruction materials. Most of the manufacturing concerns are state- owned enterprises. Thus, the state enterprises are and continue to be an important segment in the industrial structure of the Turkish economy. Due to the scarcity of capital, technical and managerial know-how, and the fear by private investors of government competition, the businesses are carried out on a small scale operation. Large scale private operations i.e. corporations and 56 joint stock, almost do not exist. This of course,deprives these enterprises from enjoying economies of scale. During World War II, increased demand resulted in high profits, and thus stimulated the growth of existing private enterprises and brought into being some new bus inesses. Despite all the planning efforts and policies, the new republic, up to recent years, did not yet achieve the desired objective of a rapid economic development. However, it stimulated somewhat the emergence and streng thening of the "private sector" in the Turkish economy. In most Turkish industries, government competes, in varying degrees, with private enterprise. Government ownership extends over almost all mining, such as coal, iron and steel, chrome, lignite and sulphur production. The same holds true for most of the non-manufacturing industrial activities, such as electric power, transpor tation (railroads, shipping and port facilities), commun ication (telephone, telegraph and radio) services. In regard to pricing and marketing organization, Turkey, like other developing countries, is beset by inadequacy of transportation and storage facilities, and lack of price and marketing information. This results in price and supply variations among different regions, and leads to inefficiency of commodity distribution in its domestic, as well as its export markets. Furthermore, 57 the role of competition, in various cases, is displaced by government's monopoly on marketing the total output of both private and public enterprises through its "state wholesale chains". However, in other cases, the goods produced by the private sector do find the opportunity to compete in the free market with goods produced by state enterprises. For the products of state economic enterprises, wholesale and retail prices are set by the government. The prices of imported as well as domestic inputs are fixed by adding a fixing mark-up to the cost of these inputs. In cases where government pricing policy is aimed at subsidizing the consumer, the goods are sold at prices lower than cost of production. Consequently, the private sector finds it difficult to compete in these areas except where it has a cost advantage or where the state enterp rises are operating very inefficiently. It is very difficult to determine what are the real costs and profits of output produced by state as well as private enterprises. The problem with the former involves finding out what parts of the overhead charges, employees benefits, and different types of taxes are included in their costs. In regard to the latter, the difficulty is presented in being unable to ascertain the actual costs and profits, since this information is kept concealed for fear of additional tax charges. CHAPTER IV THE FIRST FIVE-YEAR DEVELOPMENT PLAN ( 1963-1967 ) Introduction The new constitution of 1961 stated the national objectives and gave responsibility to the state to ensure that: "economic and social life is based on the objectives of justice, full employment, and living standards compa tible with human dignity, for all,"*and indicated that this would be attained through development planning of a democratic nature. The main accomplishment of this brief period was the establishment of the "State Planning Organization, in 1962, to undertake responsibility for the preparation of short and long term plans, to advise the government on a coordinated economic policy of various ministries and administrative offices, to stimulate and regulate activities of the private sector, and finally, to follow up and revise, if necessary, the implementation of the ^ Turkish Constitution, 1961, Art. 41. 2 Professor Jan Tinbergen was appointed as the Chief Advisor to the State Planning organization (S.P.O.). 58 59 plan. The Structure and Functions of State Planning Organization The Law which established the State Planning Org anization as an advisory body under the authority of the Prime Minister also required that Annual programs be pre pared, within the framework of the general plan, before approval of the annual government budget. The formulation and implementation of the plan was delegated to (1) The High Planning council and (2) The State Planning Organization. 1. The High Planning Council is under the chairmanship of the Prime Minister or his deputy. It includes three ministers, appointed by the Cabinet, the Undersecretary for planning, and the heads of the three main divisions of the State Planning Organization, namely; a. The Economic Planning Department. b. The Social Planning Department. c. The Coordination Department, which is mainly res ponsible for controlling the implementation of the plan. The Council decides the general principles and the strategy of the plan. After its approval by the Cabinet, the plan is turned over to the State Planning Organization for its proposals and elaborations. It would then be re-examined by the Council and, if approved, transmitted for final approval to the Cabinet and the Grand National Assembly. 2. The (Central)State planning Organization has the responsibility to formulate and implement the plan thro ugh its three divisional departments. In addition to the five year plans and the long term plans of 15 years, the S.P.O. is required to formulate the details of the Annual Programs. It is worthwhile to point out that Articles 41 and 129 have made the principle of planning an integral part of the new Turkish Constitution. Principles, Objectives and Strategies Mainly, the planners subscribed to the principle of "equal treatment" of the private and public sectors. Also, the advocated a redirection of private capital from less productive activities, such as real estate purchases, to productive investments. Furthermore, the principle of social justice was envisaged in the plan. The High Planning Council set a target growth rate for the First Five-Year Plan at an annual rate of 7 per cent, through an annua] investment of 18.9 per cent of GNP, (on the assumption of a capital-output ratio of 2.7), 1496 of which was assumed to come from the dome stic savings and the rest from external sources. "The estimated investment of the private outlay for the period 61 of 1963-1967 waa 6.7 to 8 per cent of GNP. The envisaged public outlay would require an increase in tax returns (but not necessarily in tax rates) of 45 per cent. Tax elasticity, in relation to income, has been estimated at 1.3, thus ruling out— according to official sources- the need for frequent adjustments in taxation during the planned period, while automatic increases would provide 3 for development expenditures." An important matter in planning is coordination. Z.Y. Hershlag summarizes the problem well: Apart from all economic considerations, the institutional difficulties in harmonising the development efforts and rendering the central plan applicable cannot be disregarded. As a matter of fact, at least five major elements have a say in the process of pre-determined development: 1. the government: 2. the S.P.O.: 3. the public sector, with interests often conflicting with each other, with the two first elements mentioned, and with the following ones too; 4. the atomised private enterprise, differing from the first three mainly by its profit incentive overruling all other issues; and finally, 5.the foreign element which, although also split into private and various international and national agencies, nevertheless retain its own, nearly identical, views on Turkey's growth, scale of priorities, and fiscal and monetary policies. In spite of unsparing and often successful attempts to harmonise the views and actions of the five elements mentioned, all of them are, if not constantly at least intermittently, at odds, including, in practice though less in theory, the Government and the S.P.O., the latter being occasionally reminded of its being basically . 3 Z.Y. Hershlag, Turkey: The Challenge of Growth (Leiden, Netherlands: E. J. Brill, 1968), P.189. 62 an advisory body. All this is a serious thorn in the flesh of the economic set-up and the development machinery. The call for application of "equal rules" to all sectors is one thing, but the grim reality of scarce resources, on the one hand, and differing concepts of priorities in targets and policies, on the other, render difficult the hammering Qut of conditions of viable co-existence. ^ Methodology of the Plan Planning is a method and a recognition that a discretionary designed program and policies could be carried out to attain the intended objectives. Professor J. Tinbergin, in an article on the "Methodological Background of the First Five-Year Plan," points out: "It should be clear from the outset that practical planning work can hardly ever be based on one single method, but that information and insight from all avaialable sources have to be used. This is partly due to the great lacunae in our knowledge of the development process, and partly to the gaps in statistical and other factual information. In the final analysis, the use of all available information is a question of common sense; it is part of an endeavor to keep the scope of uncertainty in the outcome as restricted as possible. In fact, everybody who has had 4 Ibid., P. 273. 63 some contact with the problem of planning the develop ment of a society knows that the art is still in its first stages and that despite all possibilities of error remain K large indeed." Furthermore, the formulation of a plan is more complicated the larger the number of variables and relationships involved. The First Five-Year Plan was prepared in accordance with the method "planning in stages," developed by Prof essor Jan Tinbergen, who was then the Chief Advisor to State Planning Organization in Turkey. In this method, the economy is analyzed in three interrelated stages: 1. The first "Macro-stage": the strategic decisions are made here. Decisions in the second and third stages should clarify and support the decision of the first stage, in which magnitudes such as aggregate income, con sumption, investment, exports and imports, which cover the whole economy and the relationships among them, are studied. The object is to draw appropriate development policies and targets and to diagnose factors limiting development. Simplicity was sought in the application of these techniques. A simple Harrod-Domar type macro model was used with i Jan Tinbergen, "Methodological Background of the Plan" Ilkin and Inane (eds.). Planning in Turkey {Ankara; M.E.T.U. Press, 1967), P. 71. 64 one sector. 2. The second stage determines sectoral growth rates and required investments. Inter-sectoral consistency and balance was sought. To solve bottlenecks in sectors such as cement, iron and steel, and textile, etc. A sectoral program was used, based on a Leontief static input-output model for 1959, with 15 activities (Inter-industries flows), assuming some input coefficients to be zero. The information and data was gathered by State Planning Organization's 40 ad-hoc committees. The partial sector programmers were to make the expenditure-output projections, according to the model's sectors, for the period 1963-1967. Thus, in the first two stages, the problem of consistency and balance is important. 3. in the third stage, Project evaluation, the search for efficiency comes into the picture, when the selection is made among various projects. The objective is to allocate the scarce resources among the most prod uctive projects. The project evaluation technique used in the plan was based on social profitability, considering the fact that a good number of the projects were infra structure. The First Five-Year Plan was prepared using data for the period 1950-1962, and with the application of a 65 simple Harrod-Domar growth model which, with a given target rate of growth at 7 percent, and an estimated capital-output ratio of 2.1 f* gave the amount of gross investment of 18.9 percent of the national income needed for the attainment of the planned growth target. This meant that the economy's savings should be raised from the initial level of 11 percent to the required 14 per cent, assuming that the foreign aid would be at least 4.9 percent of the national income. However, these figures were revised during the plan period. An estimate of the expected volume of private investment was made, for the plan period. The estimated volume of required public investment was arrived at by subtracting the estimates of the expected private invest ment from the total investment.7 6 The estimated figure of the capital-output ratio of 2.7, was over the period since 1950. The rate of population growth was estimated to be between 2.6-2.8 percent per annum. The estimates of capital-output ratio varies depending upon the choice of method, the level and intensity of employment of labor and other factors in the economy, and the size of the shares of socio-economic ca pital required in capital formation. An increase in the value of capital-output ratio would lead to a higher volume of investment needed to attain the set target rate of development plan. Some economists think that the use of sectoral values of cap ital coefficients gives a more adequate measure, measure between the increment of investment and rate of increase in 6NP. 7 In order to attain the average development rate of 7 percent, it will require 7 x 2.7- 18.9% of the GNP to be devoted for investment in capital. 66 The Five-Year Plan stated that, "It is neither necessary nor possible to draw a definite line between O the activities of the public and private sectors." How ever, "total investments as well as the investments to be made in each sector by the state and private enterpr ises will be indicated in the Annual Programs. As for public sector, the plan provided neither for a sectoral nor an institutional breakdown, i.e.,in terms of central administration, local authorities and state economic g enterprises." The most important aspect to be considered in the evaluation of a plan is to contrast the planned targets with the actual performance figures. In a mixed economy, the plan instruments provide assistance, incent ives, and guidance to the private sector, such as tax and credit availability, tariffs, etc. These measures show their impact only with a time lag, and it is diff icult to predict accurately the response of the private sector to various policy measures, such as fiscal, mon etary, and trade policies. This limits the usefulness State Planning Organization, First Five- Year Development Plan (1963-1967, ) (Ankara: 1963, )PP. 54-!>6. g I. Ongut, "The Private Sector in the Five-Year Plan," Planning in Turkey, op. cit.. PP. 153- 67 of data to forecast specific future trends. "What is more, the statistical data regarding the activities of the private sector is not adequate for such an evalua tion. Certain basic information, such as the breakdown of investments by sectors of the economy, is not availar ble, except for the manufacturing industry.However, in contrasting the target investments with the actual performance of both public and private sectors for the years 1963-1966, as indicated in Table I, we find that the private sector has exceeded the plan targets in those years, while the public sector has fallen short of attaining the plan target during the same period. As indicated in Table 2, private investment in manufacturing industry has surpassed the plan target by 7 percent in the first two years. However, in terms of its distribution, we find that in already established industries, such as consumption goods industries (mainly food and textiles), and in construction of private dwel lings, private investments well exceeded the plan target. But, in the area of new industries, particularly capital goods, the actual private investments did fall below the plan targets, which implies that the private investors are still unwilling to bear the risks in new industries. 10 Ibid.. P. 159. 00 \ £ > Table (1) Breakdown of Investments between Public and Private Sectors During 1963-1966(Billion TL) (At 1965 Prices) Private Sector Public Sector Plan Target Realization Plan Tarqet Realization (1) (2) (3) (4) 1963 4.3 5.3 6.6 5.5 1964 4.8 5.0 7.6 5.8 1965 5.4 5.5 8.4 6.5 1966 6.0 6.4 8.9 7.9 (Provisional) Relative Share of Private Sector Investment{%) Plan Target 15)_____ 39.4 38.7 39.1 40.0 Realization (6)_____ 49.1 46.3 45.8 42.9 Source: state Planning Organization,"Second Five-Year Development Plan";1968-1972, Ankara 1969, p.14. m vo Table (2) Private Investment in the Manufacturing Industry, (Total for 1963 and 1964) In million TL. Investment in Programmed (1963+1964) Actual (1963+1964) % Ratio of Actual/Programmed Consumption Goods Intermediary " Investment 299.2 1930.8 531.0 650.8 1989.4 302.4 217 103 57 Source: Turkiye Is Bankasi A.S.,1966 Annual Program, pp.174-177. 70 It is worthwhile to point out that "in the past, during the three years prior to the initial year of the plan, private investment had varied between 6-7 percent of the GNP, and planners expected a gradual rise in this ratio. Private investment was estimated to increase by 11 percent annually during the plan period, and to reach 8 percent of the GNP at the end of the five years. This was more or less a common-sense estimate, and it turned out to be a realistic one.Nevertheless, an important factor retarding the growth of the private sector, is the lack of well developed capital and money markets. Private savers tend to invest their savings in real estate and land rather than in the money and capital market. This tends to retard private investment, particularly in the industrial sector. An important objective of Turkish planners is to stimulate the private sector through aiming at stable economic conditions, through the implementation of the necessary measures to curb the inflationary trend and to attain the desired cost structure in the economy. Also, an allied objective is to accelerate the growth rate by the appropriate fiscal and monetary policies,and 11 Ibid.. P. 152 71 to stimulate certain sectors and industries. The plan ners also sought to improve the performance of the private sector through: (1) more technical and managerial training# (2) Protecting the economy in general, and certain indust ries in particular, from unfair foreign competition thro ugh appropriate foreign trade policies (since the economy as a whole is still in an infant stage of development,and (3) Providing equal opportunties and conditions for both private and public sectors in the products and financial markets. A Review and an Appraisal of the Plan The development achieved in the economy by var ious sectors during the First Five-Year Plan period can be briefly stated as follows: Although the Turkish economy is still predomi nantly agricultural, during the plan period (1963-1967) increases took place in the relative shares of the indu strial, as well as services, sectors, although at a lower rate than the rate envisaged in the plan. In the indus trial sector, some important development occurred in favor of intermediary products and some capital goods. This was achieved through a higher rate of production of iron and steel, cement, petroleum products and chemi cals. 72 Thus, an important objective foreseen in the plan was attained, that is the structural changes in the dir ection of decreasing the relative shares of the agricul tural sector in the economy and increasing the relative share of non-agricultural sectors. It is maintained that rapid industrialization, in the long run, will result in higher income and productivity in agriculture, by prov iding it with necessary technology, as well as increas ing the productivity in the economy as a whole. On the other hand, if the Second Five-Year Plan is to attain a 1% growth rate, provide an adequate livelihood for its rapidly growing population, and serve as a firm basis for development of local industry, which draws its raw materials from the agricultural sector, future plans will have to stress the development of the agricultural sector, for mutual interdependence between the two sectors requires balanced growth. The factors behind the failure of the public sector to attain the planned target rate of growth were mostly due to internal financial difficulties, in terms of secur ing plan's expected volume of revenues, and the inability to keep expenditures within the limits designated by the plan. Moreover, difficulties were involved in securing required external finances. Also, there were organiza tional, technical, and legislative deficiencies in the 73 preparation of a sufficient number of projects and the stimulation of investments. It is important to point out that the plan was based on too optimistic assumptions, regarding external resources, domestic savings, and the increases in the national income, as indicated by the following state ment: If the share of future investments in GNP is calculated at 18.3 percent for the period 1963-67, and the rate of domestic savings remains 12.8 per cent, an additional 5.5 percent of GNP, or about $2,183 million, averaging $436 million annually,must come from abroad. The planner's, however, were more optimistic, and they believed that following the rise in GNP and in National Income per capita, the propensity to save would increase too, and only 3,5 per cent of GNP, or $1,390 averaging $278 million annually, would have to come from abroad. Even this rate, of 3.5 per cent of GNP, exceeds significantly the past rate of 1.2 per cent. According to recent information, Turkey received from the OECD (including official Consortium aid of $705 m.) in 3 years (1963-1965) a total of $765 million, which amounts to about 3.3% of aggregate GNP during this period. Since, however, a significant proportion of this aid, 20-25%,constituted "roll-over" funds, the actual contribution to investment resources was much smaller. 12 Therefore, it would be a more realistic approach to base future developmental targets upon the assumption of available resources and an extrapolated rates of inv estment and growth rather than being forced, as it turned out, to change the planned target rates, in the short run. Furthermore, the government has been unable, so far, to 12 Z. Y. Hershlag, op. cit.. P. 194. 74 set up an effective system for controlling the implemen tation of the plan. Still there are positive aspects of developmental planning in Turkey. First is the relative success in moving both towards economic development and social equities. Second are the intangible effects of planning, notably changes in outlooks and attitudes. By making the pursuit of development a conscious task, the govern- knows that people want modernization, and that its popu larity will be based upon the success of its economic plans and policies. Also, the plan has had the effect of expanding the government's enterprises and its role in the economy. This is partly due to the weaknesses of the private sector, and the need of a backward economy such as Turkey's, for a huge amount of investment is needed in the development of infra-structure or social overhead capital. Regional Planning Aspects of the Plan With the establishment of the State Planning Organization, the basis for regional planning was set within the framework of the general plan. Two broad principles were considered in the plan: First- Principle of a balanced economic development. Second- the matter of consideration of the location of different projects. 75 Furthermore, a cross-sectoral study was made to determine the macro-economic policy objectives at the level of regional planning. However, neither the targets nor the tools of regional planning were clearly specified in the plan, which rendered it inadequate for the attain ment of the planned objectives. Therefore, despite all the early planning efforts in Turkey, and the urgent pressures to improve the standard of living, the economy failed to achieve the developmental objectives satisfact orily. In Turkey, as in other developing countries,neith er the regions nor the sectors are well integrated, acco unting systems are non-existent or deficient, and the country lacks the necessary technical and managerial know-how (quite apart from adequate capital investment) to plan effectively. All of which makes planning a very difficult task and realization fall short of aspirations. Attitudes towards Planning in Turkey Although wide-spread agreement exists on the idea of a qualified macro-planning in Turkey, considerable opposition exists to the concept of micro-economic plan ning. Opposition comes mostly from private entrepreneurs, who feel that economic enterprises should be guided solely by the criteria of efficiency and profit maximization. In their view, it is the government's task to provide mod ernization and automization, and to provide for employment 76 of the surplus labor, mainly in public works. Therefore, according to this view, the government should only deal with the results of the implementation of the concept of micro-economic efficiency of the plan. Also, this group criticizes the protectionist policies of the government as causing inefficiencies and being contradictory to the idea of Turkey's association in the Common Market. On the other side of the spectrum lies the views of a few, but well organized leftists, with old Marxist ideas of socialism and the vision of a regime patterned after the USSR or communist China. Nevertheless, the financial and intellectual weaknesses of private entrepreneurship in Turkey-beside a very small elite- compels the government to enter into different areas of economic life out of necessity rather than for ideological reasons. Table(3) Investments,Plan Targets and Realization (Billion TL.)(At 1965 Prices ) Year Plan Target Realization Rate of Realization (%) ( Index 1962=100 a) (2) (3) _ (41 1963 10.9 10.8 99.1 131.7 1964 12.4 10.8 87.1 131.7 1965 13.8 12.0 87.0 146.3 1966(Preliminary) 15.0 14.3 95.3 174.4 TOTAL(1963-1966) 52.1 47.9 91.9 — Source: S.P.C.,"Second Five-Year Development Plan",P.14, CHAPTER V FINANCIAL ASPECTS OF THE PLAN The attainment of the development targets of the plan depends largely upon the ability of the economy to secure adequate financial resources,*- which in turn de- 2 pends mainly upon the volume of public and private savings, and the extent to which they can be mobilized for the plan purposes. The development plan of Turkey was formulated through an evolutionary processes of successive approxima tions and revisions of assessement of the available means for the attainment of the desired plan targets. The lack of investment capital is among the most common problems to most of the developing countries. Con sequently, efforts are made to explore the possibilities of increasing the supply of capital resources, to reallo- 1 In economic development, factors other than investment, can effect the rate of development as well, such as education, health, etc. 2 Due to inadequacy and insufficiency of statistical data, it is a difficult task to make a sound assessement of the total savings in Turkish economy. How ever, some estimates are still avaialable. 78 79 cate them according to the priorities of different plan objectives, and to increase the efficiency of the utiliza tion of these resources. Planners of the First Five-Year Plan set the development target at a 7 percent annual increase in the GNP, as we mentioned previously. If we consider the rapid rate of growth in population3(which ranges between 2.6-2.8 per annum), then the target rate of increase in per capita income will drop to only 4 percent annually. This means that if Turkey maintains this rate of growth in its per capita, it will take her centuries in order to catch up with the advanced economies. As indicated previously, the required amount of total investment to attain the planned target is 18.9 of the GNP. Furthermore, the size of savings any economy is 3 H. W. Singer presented a formula for eco nomic growth based on the growth models of Harrod, Domar, and Hicks, in which the rate of growth is expressed as a function of net saving, productivity of capital, and rate of population growth: D = SP - R Where: D = Rate of growth of per capita income per annum, S * Rate of net savings as a percentage of national income, P - the increase of national product per unit of investment (ICOR), and R « rate of growth in population. H. W. Singer, The Mechanism of Economic Development,(Indian Economic Review, August 1952). 80 able to devote for investment in capital formation depends upon the level of per capita income, consumption, which in turn are effected, among other things, by the rate of population growth. In Turkey, the per capita income is very low. Thus, the ability of the economy to marshall the adequate amount of savings for the required investment in productive capacity of the economy is very low. Then the country has to turn to supplementary sources for capital investment. In the plan, the estimated amount of foreign 4 capital needed to attain the plan's target, was based upon the estimated imports of capital machinery and equipment, raw materials, and other needed imports, which are not produced in Turkey. In order to determine the import needs for the attainment of the plan target, the economy's output are studied quantitativeky and qualitatively; then the import of capital equipment necessary for development is encouraged, 4 Let the target rate of development be(t), the rate of domestic savings (s), the ICOR (the incremental capital-output ratio)(p), and the GNP (Y), the need in foreign capital (F) la given by the following formula: F - ( tP - s ) Y K. Bulutoglu,"Financing Turkey's Develop ment plan," Planning in Turkey, op. cit., p. 185. 81 and restrictions are imposed upon non-esstential consumer goods. However, "..during the period 1959-1961, consumer goods represented only 10 percent of the total imports, while the respective shares of capital goods and raw materials in total imports were 47 per cent and 43 per cent. Thus, restrictions in the imports of consumer goods could not significantly improve the balance of trade, whereas a sudden increase in the total amount of invest ments would clearly have an important repercussion on the deficit of the balance of payments, "■* Furthermore, " For an underdeveloped economy, it is nearly impossible to increase the volume of exports as fast as the increase in import requirements, due to the implementation of a development plan. Even if a mechanism of forced savings, e.g^increased taxation, releases enough funds to finance the investments, it does not at all follow that a part of the released resources can be transformed into foreign currency to pay for the imports of necessary equipment.The increased amount of imports then results in foreign debts, which 7 would in turn further increase the need for foreign capital 5 6 Ibid., PP. 185-86. Ibid., P. 186. 7 Foreign capital and exports depend large- ly, upon exogenous factors; therefore, the balance of pay ments problem worsens during the years when government is unable to secure enough foreign aid. 82 to service the debts and interest payments. Owing to the inadequacy of foreign exchange reserves and earnings, particularly at the beginning of the plan period, it became an imperative objective of plan policy to attempt to improve the balance of payments through promoting exports and restricting the importation of non-essential consumer goods. Furthermore, the increas ing demand for import of capital equipment has exerted more restrictions upon the import of consumer goods. How ever, as the production of import substitutes increase, the position of the consumer will be improved. Therefore, in formulating foreign trade policies, the deficit in the balance of payments and foreign exchange problems became the foremost matter in establishing priorities in the appraisal of different industrial projects. For these reasons, and to protect the economy from unfair competi*- tion with the advanced economies, certain fiscal measures g were implemented in the plan policies, such as a high ad valorem general tariff, supplemented with selective measures such as quotas, etc. However, many of these 8 It is worthwhile to point out that when the First Five-Year Plan was being formulated, Turkey was negotiating its relationship with the common Market, and the impact of its participation, to any extent, had not been taken into consideration in the plan. 83 policy instruments were applied selectively in order to curb inflation and the possible distortion of internal cost structure. In regard to costs and prices, the plan suggested: ..a certified accounting system will be set up, and the commercial code and tax system will be reviewed and revised. 9 Domestic Capital "It was envisaged that during the plan period domestic savings would increase by 15 percent, or 2 per centage points of GNP, as compared to the preceding five- year period.However, the plan did not specify the relative shares of private versus public savings in the total domestic savings in the economy. As we can observe from Table 4, the amount of total savings is not sufficient to attain the target rate of 7 percent. The saving gap amounts to the total savings needed minus the internal savings, which the economy was able to mobilize. As we can see in Table 4, the ratio of the State Planning Organization, First Five- Year Development Plan ,(1963-1967), op. cit., p. 446. 10 Bulutoglu, K., oj3. cit. , P. 188. Table(4) investments,Internal Savings, External Savings Year Investments as Percentage of GNP External Savings as Percentage of GNP Internal Savings as Percentage Of GNP 1957 13.1 0.7 12.4 1958 13.9 0.8 13.1 1959 15,7 3.1 12.6 196C 15.9 2.4 13.5 1961 15.2 2.8 12.4 1962 16.3 4.0 12.3 1963 17.0 4.1 12.9 1964 17.9 4.1 13.8 1965 18.3 3.4 14.9 1966 19.3 3.2 15.8 1967 19.4 2.8 16.6 Source: State Planning Organization,"First Five-Year Development Plan".1963-67, Ankara 1963, P.116, Tables 49-50, 85 external savings to the GNP is the highest in years 1963 and 1964 then decreasing to 2.8 per cent in the final year of the plan. In regard to the share of the private sector in total savings, we have to realize that: (1) The relative share of voluntary private savings was not expected to increase considerably (not at least in the short run), through facilitating the creation of money and capital markets, for the simple reason that the income of the great majority of Turkish population is too low to induce them to save through investing in financial assets. (2) Because of low per capita income, the gov ernment is unable to increase the share of forced savings in the economy, through higher income taxes. When ex post private savings do not equal the ex ante savings (ex ante investment), then the public sector has to fill the gap by increasing public investment beyond the level set for it in the plan, if plan target is to be realized. Fiscal and monetary policies are important instruments of economic policy in advanced economies. However, in a developing economy, monetary policy is even less effective in increasing the volume of private 86 investments to the desired level, for reasons which will be explained in the next chapter about the monetary policy aspects of the plan in Turkey. Therefore, in the short run, the most effective instrument for securing and allocating financial resources efficiently, in attaining plan objectives, is fiscal policy. Tax Policy in Turkey In general, the two functions of tax policy are,11 First: to accumulate, through tax revenue, capital funds necessary for the implementation of the plan. Second: to create, through tax credit measures, an incentive for households and businesses to increase their savings. These two aspects of taxation were taken into consideration in the efforts to reform the tax system in formulating the fiscal policy for the plan. As to the first aspect of tax policy, in Turkey, as in other economically developing countries, the incor poration of income tax on the agricultural sector confrorts a great deal of administrative difficulties. 11 N. Kaldor,"Taxation for Economic Devel opment, " The Journal of Modern African Studies, 1963, vol. 1, PP. 7-24. 87 The main source of government's tax revenue were indirect taxes, which tend to be generally regressive and thus contrary to another policy objective of the plan, 1 0 namely, a more equitable distribution of income. "Until 1957, the general exise tax was collected at the last stage of manufacturing. But with the reform of 1957, the collection was moved to the first stage of 1 production." This was aimed at reducing the number of tax-payers, and thus, the cost of collection. The other reason was political; because most of the first stage production enterprises were government owned, consequently, the tax burden was shifted to the public sector. Since the prices of these public enterprises are 12 In Turkey, only the tax on incomes subject to withholding at source is imposed satisfactorily. The income tax returns for other categories of incomes are largely fraudulent. The tax evasion rate has exhibit ed an increasing trend during the ten years of implementa tion, i.e., 1950-1960. However, in recent years the gov ernment has enacted a series of measures to combat tax dodgers; declaration of wealth to check the consistency of the tax payer's wealth with his declared income, wider application of lump-sum taxation to retailers, taxation on the base of expenses when the latter are incompatible with declared income, and the disclosures of tax returns. But these measures do not seem to have had a decisive impact on the degree of compliance with tax laws. K. Bulutoglu, op. cit., p. 197. 13 Ibid.. P. 197. 88 set arbitrarily by government bureaffovacy, the increased taxes rendered them unable to pay their tax liabilities without increasing their borrowings from the Central Bank. This further fueled the inflationary spiral, thus shifting the tax burden to fixed and low income groups. In order to increase tax revenue for the imple^- mentation of the plan, the tax could be levied on the basis of value added, and the administrative difficulties could be partially taken care of by extending this tax to those large-scale enterprises where the stages of production are well defined technologically. As to the tax evasion problem, an incentive reward of lower rates could be introduced to curb that problem. Investment tax credit In order to induce the community to invest more through increased savings, the government introduced measures to increase the rate of return on capital, thus stimulating investment expenditures. In an economy with an insufficient rate of savings and a substantial amount of hoarding, investment allowance^ accelerated depreciation, and tax refunds for exports would divert some of these savings into productive capital form ation, and some to the purchases of consumer goods, which 69 further stimulate consumer goods industries. Factors responsible for lack of an accelerated rate of capital formation in developing economies, besides low incomes and savings, are: lack of incentives for in vestment, a high rate of hoarding, and a great deal of uncertainty, particularly regarding long-run market condi tions. Tax relief cannot be expected to eliminate the conditions of uncertainties in the market, nor the other institutional impediments: however, it can increase the profitable rate of investment. This, coupled with policy measures to reduce market uncertainties, could exhila-rate investment expenditures effectively. Furthermore, some believe that tax allowances could be used to attract foreign capital to invest in import substitute industries, to meet the demands of the home market. Nevertheless, investment allowances, by attracting foreign capital,under unfavorable terms, could have negative effects more than offsetting the resulting benefits, whioh end mostly with the foreign investors rather than the national economy. Financial Policy and public Enterprises ~ Since more than 60 per cent of industrial invest ments in Turkey are carried out by public enterprises,their 90 importance to the economy as a whole, and to the success of the development plan is obvious. Therefore, the effi ciency with which these enterprises utilize their finan cial and other resources becomes a main concern for plan ners in Turkey. In formulating price policy, public enterprises are classified in three categories: Public Utilities,. T,heir primary objective is concerned with welfare distribution, rather than profit maximization. However, the over-emphasis on this function resulted, often, in large public deficits. Therefore,some suggest that these enterprises should consider the possible adjustments of their pricing policy to market conditions, in order to improve the efficiency of their operation, and to create the necessary investment funds. Revenue Monopolies. Theoretically, these enter prises operate under the principle of profit maximization in their pricing policies. However, in reality the gov ernment takes political factors into consideration in deciding the extent to which profit possibilities are to be utilized. Competitive Public Enterprises. These public enterprises operate under some competitive market condi tions, which largely determines their prices. However, 91 in Turkey, these enterprises often obtain government subsidies, and frequently for political reasons are compelled to buy their material inputs from certain sources at prices higher than competitive market prices, and have to sell their products at lower than equilibrium market prices, because of government's welfare policy. The final outcome of this policy was an increase in their budget deficits, which forces them to borrow more from the central Bank, and as a result an increase in the rate of inflation in the economy. Another field where political considerations override the principle of efficiency is in the area of area of manpower policy, where the government often offers employment in these public enterprises to those who are unemployed, thus, leading to a condition of "disguised unemployment", which means inefficiency, when diminishing returns lead to a condition of a zero or even negative marginal productivity of laborers under these conditions. Fiscal Measures in the Five-Year Plan To stimulate private investment in productive fields, the plan proposed higher taxes on buildings and land properties, coupled with accelerated depreciation and investment credit for desired industries and invest- 92 ments in less developed regions. Furthermore, the plan also proposed other measures to encourage investments, such as reducing import taxes (or paying it by install ments) on raw materials and capital equipment for certain industries. Moreover, to encourage certain exports, the plan provided for refunding of all indirect taxes which entered into the production costs of particular export goods. However, most of the plan's policy statements were more or less generalities, which made its operational aspects hard to be evaluated. Despite that, often, the specific details of each policy measures were left to the Annual Programs. Conclusions In order to realize an accelerated rate of economic development, the degree of emphasis upon either of Professor Kaldor's two basic alternative approaches to capital formation depends upon the stage of development of the economy. In a developing economy such as Turkey, where private investment is retarded by structural impedi ments, such as lack of adequate socio-economic capital, uncertainty and the small size of their market, etc., the tax incentive approach is not ample to achieve a high rate of growth in the capital stock. The incentive approach becomes more important, when those structural obstacles 93 are resolved. However, at this stage of economic develop ment, the compulsory approach (of resource creation)should be stressed. It is important to point out that during the preparation and the implementation of the First Five-year Plan of the sixties, the economic policy seems to have oscillated between these two approaches, due to marked political instability in the country. In a mixed economy, it is important for the planners to analyze and evaluate the schemes of incentives, guidance, and indirect controls, particularly to the private sector, in order to draw the most effective and efficient planning policies, designed for a rapid economic development. It has been argued by one of close student of Turkish planning "that the plan gave undue emphasis to the public sector by holding it responsible for 60 per cent of total investment and foresaw its expansion at the expense of the private sector. in the First Five-Year Plan, the private sector did not participate in the formulation of the plan; but beginning with the Second Five-Year Plan (1968-1972), the 14 I. Ongut, "The Private Sector in The Five- Year Plan," in Planning in Turkey, P. 159. 94 private sector has began to be represented on the relevant committees. Due to lack of sectoral breakdown of public in vestments, the plan has not been setting complementary targets for either the public or private sector, thus providing them with no assurances against the possibilities of inefficient competition between both sectors and in various industries. However, this most probably is due to Ihe government's attempt to gain the highest possible growth rate, by giving the public sector the responsibility of directing investment resources to those critical areas, whenever they fall short of attaining the planned targets. Table(5) Government Budgets(as implemented till 1963/64 and as Voted since 1964/65,1965/66(in million TL.) 1960/61 61/62 62/63 63/64 64/65 65/66 EXPENDITURE * Debt service 444.5 669.2 Education 768.9 1,204.7 Health & Welfare 283.2 376.2 Defence 1,145.3 2,088.2 Public Works 410.8 396.7 Others 3,165.2 3,845.7 TOTAL 6,217.9 8,616.7 Share of capital outlay 2,134.2 2,703.5 REVENUE Income & Corp.tax 1,776.9 2,495.2 Trans. & Prod.tax 1,741.3 1,700.0 Customs 575.5 612.5 Other Indirect taxes 888.7 1,139.6 Other Revenues 1,403.4 2,220.8 TOTAL 6,385.8 8. 168.1 778.3 1,162.3 ___ «... 1,331.2 1,712.7 1,988.3 2,182.2 389.7 467.2 550.7 590.9 2,322.5 2,571.1 2,907.8 3,004.7 510.9 691.9 691.9 676.3 3,886.2 5,064.5 7,345.4 7,967.3 9,038.7 11,488.7 13,484.3 14,421.4 2,779.7 3,744.7 6,844.7 7,151.8 2,271.5 2,655.9 3,310.0 3,419.5 2,067.3 2,539.2 3,085.0 3,280.0 737.3 796.1 1,060.0 1,230.0 1, 252.7 2,335.6 2,719.9 2,893.0 2,609.6 3,167.1 3,150.5 3,198.9 8,938.4 11,493.9 13,325.4 14,021.4 -100.3 +5.2 -158.9 -400.0 Surplus or Deficit +167.9 -448.6 ( ) _____________________________________________________________________ *Since 1964/65 included in capital outlay. Source: U.N.,Statistical Yearbooks; S.P.O.,1965 Annual Programme. CHAPTER VI MONETARY ASPECTS OF THE FIVE-YEAR PLAN The role and adequacy of the financial institutions in any economy are essential ingredients in developmental planning. Monetary institutions have a significant role in achieving an optimal allocation of the available financial resources, minimizing the gap between fund requirements and availabilities, avoiding balance of payments deficits, and in attaining price stability. Therefore, for a country like Turkey, pursuing a policy aimed at industrialization, expanding its foreign trade and national production, overall monetary stability has become an important element for such a policy. How ever, the Turkish record had shown that since the begin ning of World War II, both the money supply and prices have increased manyfold. This trend continued, at varying degrees, during the fifties and the sixties. During the plan period,(1963-1967), as is shown in Table 6, the Whole sale price index increased from 271 in 1963 (1953=100) to 96 97 322 in 1967.^ This constitutes an average annual rate of inflation of about 5 percent. The primary reasons for this inflation was the rapid growth of money supply and incomes without a parallel increase in the supply of goods and services. The credit expansion by the Central Bank financed the government's programs of capital investment in manufacturing, mining, and national security, besides the credit expansion by commercial banks. During the war, part of these expendi tures came out of the export surplus, which occurred as a result of great foreign demands for the Turkish exports. However, since the end of the world War II, a substantial import surplus developed, and was more than offset by the government's deficit policy, through the credit expansion by the Central Bank and the commercial banks. Monetary Implications of the First Five-Year Plan While the principle that money does matter has attained unanimity among most economists and policy makers, 1 Turkiye Is Bankasi (Bank of Commerce- Economic Repearch Dept.), Economic Indicators of Turkey. 1963-1967,Ankar a. p. 12. 2 The central Bank's only means of budget ary control is the ceiling of 10% of the budget, which the government may draw from the Bank as advances. T a b l e t s ) Index of Wholesale Prices(1953=100), Annual Averages,1963-67 1963 1964 1965 1966 1967 General Index Foodstuffs & Animal feeds Cereal Industrial raw Materials and semi-finished Products Textiles Minerals Construction Materials Ankara tost of Living index(1953=100) Istanbul Cost of Living Index(1953=100) 271 271 268 271 252 349 285 260 261 269 266 265 276 262 359 286 265 263 293 291 297 296 283 401 283 283 275 306 308 304 302 270 422 295 298 299 322 321 293 323 283 433 302 317 341 Source: Turkiye is Bankasi, Head Office,Economic Research Office."Economic Indicators of Turkey* * . 1963-1967, Ankara 1963, P. 12. 99 the planners of Turkey's First Five-Year Plan have formu lated the plan, for the most part, in physical terms, and except for very broad qualitative statements, they relin quished monetary and credit policies, either to the Central Bank and fiscal agencies, or to be considered within the Annual Program. Briefly, the broad statements in the plan regard ing money and credit pertained to the guidelines which the monetary and fiscal authorities should deliberate in formulating and in the implementation of their policies, namely: to maintain equilibrium between macro-economic magnitudes, so as to succeed in optimizing the allocation of financial resources, in achieving the plan objectives, of price stability, full employment, balance in their foreign accounts, etc. Furthermore, the plan stated that: Investments will be financed from real savings, and deficit financing will not be resorted to during the plan period. There will be equality between annual savings and annual investments.3 But,"although the plan dissuaded deficit financ ing, the Central Bank's total loans amounted to TL. 3,151 million in 1963, and TL. 8,760 million in 1967 (with 5,195 million going to the public sector and the rest to the 4 private sector." Under this credit expansion from the 3 L. Tanker,"Some Critical Comments on Monetary Aspects of the First Five-Year Plan" Planning in Turkey, p. 217. Turkive Is Bankasi. Economic Indicators o f Turkey, P. 11. --------------------- 100 Central Bank, the amount of banknotes in circulation increased from TL. 5,581 in 1963 to TL. 9,948 million in 1967 (see Table 7). The rest of the deficit financing supported either the increments in bank loans or the foreign exchange counterpart for imports over exports. Despite the large increase in the money stock in 1963, the wholesale price index increased by 4.2 per cent, indicating the economy's capacity to absorb some deficit financing. However, the Central Bank began to restrict the expansion of credit towards the end of 1963 as a measure against the pending inflation. The rate of economic growth realized in 1964 was 4.3 per cent, which fell much short of the plan target of 7 per cent. This deflationary tendency was attributed in part to the tight monetary policy and, more important, to the fall in agri cultural income in that year. The outcome of these eco nomic conditions were analyzed in the monetary policy section of the 1965 Annual Program. To attain the planned growth rate, an effective monetary policy takes all the relevant variables affecting money stock into consideration, such as demand for money, population growth, investment expenditures, debt monetiza tion, the efficiency with which the Central Bank allocates its credit between the private and public sectors, etc. - 1 Table (7) Money, Deposits and Credit in Turkey (Million TL.) 1963 1964 1965 1966 1967 Money Supply 12,167 13,999 16,434 19,780 22,682 Banknotes-Coins 4,926 5,835 6,326 7,164 8,714 Banknotes 4,772 5,664 6,174 6,990 8,513 Coins 154 171 152 174 201 Quasi money 1,999 2, 230 2,580 3,206 3,578 Commercial Demand Deposits 1,805 2, 207 2,555 3,181 3,562 Free Demand Deposits with the Central Bank 194 23 25 25 16 Demand saving deposits 5,242 5,934 7,528 9,410 10,390 f e s s s g H i i f i f i i a a i g s i s s n d a i a? 1 6,611 7, 345 8,351 9,948 Total Deposits 10,516 12,010 14,782 18,486 21,015 Demand Deposits 8,443 9,676 11,619 14,241 15,931 Time Deposits 2,073 2, 334 3,163 4,245 5,084 Savings Deposits 6,603 7,517 9,821 12,613 14, 344 Demand 5,242 5,934 7,528 9,410 10,390 Time 1,361 1,583 2, 293 3,203 3,954 Commercial Deposits 2,015 2,422 2,913 m Official Deposits Bank Loans(Consolidated) 1,898 2,071 2,048 Total loans 11,886 13,444 16,100 20,191 23,368 Composite loans 7,481 8,070 10,176 12,469 14,138 Agricultural loans 2,408 2,991 3,206 4,531 5,551 Loans against mortgages 1,410 1,651 1,813 1,947 2,051 Industrial loans(*) 385 485 593 817 1,043 Loans to small business 202 247 312 427 585 (*)Dating from March 1964, Industrial Development Bank loans and Industrial Investment and Credit Bank loans are included. Source:Turkiye Is Bankasi A.S.,"Economic Indicators of Turkey 1963-1967J 1 PP.10-11. 102 Therefore, Turkey's monetary policy has departed from the crude quantity theory of money approach. However, it omitted taking the matter of deficit financing,explicit ly, into account. Table 8 shows a positive correlation between the rates of increase in GNP, money supply, and prices in 1963 and 1965. However, the figures for 1964 show an increase of 16.4 in money supply and 4.3 per cent increase in the GNP in the same year. This occurred with a slight price decrease of a 0.7 per cent. However, a higher price increase occurred in 1965, with a time lag. Thus, it seems that in 1964, the Central Bank credit failed to meet properly the increasing liquidity demands in the economy, which led to a slow-down in economic activities, followed by a sharp increase of capital remit tances of the Turkish workers abroad, which amounted to over 70 million dollars in 1965. This enabled commercial banks to expand their credits to the private sector. How ever, the Central Bank remains responsible for the big gest portion of the increase in the money stock in the economy. As indicated in the plan, the details of the monetary and credit policies were assigned to the Annual Program. The Annual Progams indicate the policy guide lines, namely, allocation of credit among sectors,interest Table(8) Results of the Monetary Policy in the First Three Years of the Plan (In Percentages) Year Planned Growth Rate in GNP ill 1963 1964 1965 7 7 7 Actual Growth Rate in GNP (27 Rate of Increase in Money Supply (a) O) ' Rate of increase in Price 7.5 4.3 4.9 11.0 16.4 14.0 6.9 15.1 10.4 +4.2 - 0.2 +8.4 (a) Column(3) includes Demand Deposits; Column(4)excludes them. (b) Wholesale Price Index. Source: S.P.O., Annual Program , PP.7,613; Monthly Bulletin of the Central Bank, July 1966; Monthly Bulletin of Statistics, SIS, May 1966. 104 rates, the Central Bank relations with the Treasury, and the capital market, etc. In regard to the capital market, the problem which faces all economically underdeveloped countries is the lack of a well developed open market, which constitutes an important channel through which monetary authorities can effect the economy. Host of these countries confront the problem of scarcity of investment capital. Therefore, in order to channel domestic savings and reduce the heavy reliance upon the external sources, open operations could become an effective tool of monetary policy. The First Five-Year Plan states the following; A capital market that makes it possible for forward-looking entrepreneurs to use accumulated small savings, must be established as soon as possible. Both with this purpose and that of ensuring that pri vate enterprise operates and develops on more rational lines, the formulation of joint stock companies will be encouraged, a certified public accounting system will be set up, and the commercial code and tax system will be revised and reviewed so as to establish an operative and expanding capital market.5 Furthermore, in order to facilitate medium and long-terms credit to the private sector, the plan suggest ed creation of new and specialized financial institutions State Planning Organization, First Five Year Development Plan. 1963-1967, P. 446. 105 such as "People's Bank" to provide credit for small indus try, "Tourism Bank," and a bank to provide medium term credit for industry. Also, it is worthwhile to point out that the absence of open market operations in Turkey limits the Treasury's ability to borrow, which means a limitation in regard to an important means of deficit financing in the economy. Furthermore,"Law no.260 was passed on Feb. 24, 1961, which fixed the ceiling for the short-term advances to the Treasury as 5 percent of the General Budget expenditures, and required the Treasury to reimburse these advances by the end of the fiscal year. Later, by Law no. 583, dated April 21, 1965, this limit was raised from 5 per cent to 10 per cent of the General Budget ex penditures, and the condition for reimbursement by the end of the fiscal year was repealed.1,6 This leaves the Central Bank's credit to the state economic enterprises as the remaining avenue for deficit financing. However, this too, came under the control of the monetary author ities in June 1961. Also, the private sector did not receive the credit facilities required for planned targets in terms of industrialization, GNP, etc. 6 L. Tenker, op. cit., P. 226. 106 Appraisal of the Monetary Aspects of the Plan For any country, which is pursuing a policy of rapid economic development, the organization of the money capital markets, and the development of a modern system of banking, are essential matters. As indicated previously, the Turkish Five-Year Plan was deficient in the monetary aspects of planning. Furthermore, even the Annual Programs were inadequate in that regard. Briefly, the deficiencies were: Deficiency and Lack of Statistical Data and Research in the Monetary Field Turkey, like other underdeveloped economies, is only partially monetized. This makes impossible the task of working out a systematic and a complete flow-of-funds account (which records the monetary counterpart transac tions of goods and services in the economy). Such an account forms the basis for the construction of a monetary model for the whole economy. This problem could be miti- gated through statistical techniques of sampling, estima tions, and working out accounts for saving, private and public investments, government expenditures, revenues, and the foreign sector, etc. These accounts would be the basis for a monetary equilibrium model, which would be improved gradually by introducing to it various dynamic 107 variables, such as deficit financing, debt servicing, monetization, and creation of money and credit, etc. The absence of such accounts and monetary models resulted in arbitrary decisions regarding the private sector's credit requirements for investment to achieve planned targets. Furthermore, it made the impact of new taxes or price changes by enterprises unpredictable upon the economy. Therefore, a flow-of-funds account should be constructed by the central Bank, since most of the monetary statistics in the banking system are recorded with them. Dominance of the philosophy of Balanced Budget The widespread philosophy among both the govern ment officials and the public at large has been a balanced budget economy. This was evidenced by the plan's near exclusion of deficit financing as one of the means of attaining plan targets. However, Turkey, like most under developed economies, lacking adequate foreign exchange reserves, has felt compelled to resort to other means, namely, to expand the central Bank's credit to the Trea sury and to state economic enterprises. Therefore, the plan should have recognized an efficient implementation of deficit financing. Moreover, the development of open X08 market operations, used efficiently, would furnish the monetary authorities with an indirect method of deficit financing, utilized without arousing unjustifiable public apprehension. Institutional Deficiencies (a) Limited tools of monetary controls Like other developing economies, the absence of capital and money markets deprives the monetary author ities of an effective policy instrument, i.e.,open market operations. Further limitations exist due to inflexible reserve requirements and discount policy. Furthermore, the laws governing the banking system are outdated and inadequate. Therefore, modern monetary legislation is needed for the implementation of a policy aimed at a rapiftv ly growing economy. Also, to strengthen the public's con fidence and to reduce bank failures, a more up-to date supervision by the central Bank over other banks and a system of deposit insurance are needed. Finally, to limit the number of independent bank unit banks to the needs of the economy, a system of branch banking should be promoted, (b) Inefficiency of Debt Servicing Due to the lack of coordination between fis cal authorities (Ministry of Finance and the Treasury) and 109 the central Bank, the Treasury's operations in the monetiz ing and demonetizing the public debt have been inconsistent with the stated intentions of the plan regarding deficit financing, as noted earlier. (c) Deficiencies in the Management of Foreign Reserves and Foreign Exchange Operations The Central Bank policy applied to for eign exchange operations has not been conducive to plan targets, owing to its costly and static character. Since World War II, the letter of credit has been the principle means of financing imports. This method commits foreign credits ahead of actual imports. Tighter administrative procedures, which link import plans more closely with actual imports, might be in closer conformity with the needs of a developing economy, especially in terms of directing more imports toward investment goods. Further more, the free sale and circulation of gold in Turkey has accentuated and fostered the hoarding of gold, a leakage which is paid for by goods and hard foreign exchange earnings. Therefore, the need is urgent for reforms to bring Central Bank policies into harmony with fiscal policies, within the framework of the overall development plan. CHAPTER VII INDUSTRIALIZATION EFFORTS AND POTENTIALITIES Basic Industries Turkey's industrial development and growth depends largely on the development of basic industries, such as the energy sector, iron and steel, etc. The eco nomy is still predominantly agricultural. However, the net productivity per capita of labor is the lowest in agriculture. Raising the productivity of labor in agri culture is very important in the process of economic development. Basic industries are requisites, both in providing the required technology to raise the productivity of labor in agriculture, and in supplying employment for those laborers who are released by the increased product ivity in the agricultural sector. Furthermore, owing to the important role which industrialization holds in the process of economic development, almost all the economic plans and programs in Turkey were devoted to this end. The policy-makers in Turkey refused to accept 110 Ill the idea of an international comparative advantage if it meant a division of countries between industrial and agricultural. In 1933, the Sumer Bank was established to undertake the responsibility of establishing new industries and of managing some existing enterprises such as textiles, iron and steel, construction materials, etc. The policy-makers aimed at creating those industries which are based on the available local raw materials, such as the aforementioned industries. "Industrialization," declared Ataturk, "is one of our chief problems;we shall create every industry,great or small, for which there are in our land the economic conditions necessary to its work and development. The Great Depression hit the Turkish economy with unemployment, and lowered the prices of its agricultural output. The government responded to it, similar to other countries, by restictive trade policies and high tariff rates. The outcome was a severe drop in its both imports and exports. Thus, Turkey reverted to a policy aimed at self-sufficiency, through a drive for industrialization under the meticulous guidance of government's policy of "Etatism. " 1 H. W. Thornburg, G. Sprey and G. Soule, Turkeyi An Economical Appraisal.(New Yorks The Twentieth century Fund, 1949), P. 23. 112 In 1934, Turkey had adopted a Five-Year devel opment plan, for certain key industries* This makes Turkey the first among the developing countries to undertake an experiment in planned development. In 1935, the government formed "Eti Bank" to develop and control the mineral resources and sources of energy in Turkey. Furthermore, the state monopolies included some consumer industries such as cigarettes and alcoholic beverages etc. The industrial development was subdued by hardships during World War II, but was restored in the postwar period, during which the economy has witnessed a change in the structure of the industry in the form of a more rapid expansion of its private sector, which gained the recognition of the policy makers. This was in contrast to the "Etatism" era, where the state economic enterprises were the focus of concern in industrialization efforts and in development of economic resources. However, the mixed economic policy of the government and its oscil lation between socialism and a free enterprise system has aroused the criticism of both socialists and liberals in the country. Also, the economy, during the thirties and forties, was operating as a much more closed economy under etatist policy and later by the economic conditions brought 113 about by the war. However, in the fifties, despite the various restrictions, the economy became more subject to the influences of the international market in terms of costs, prices,and quality standards. Therefore, ineffi cient investment policies and production methods took more scrutiny, particularly in regard to the economy's long run objectives. Thus, more realization emerged as to the importance of efficiency and competitiveness in world's market. Hence, the lack of comprehensiveness and a sound basis of economic analysis in the industrial ization and developmental plans of the prewar period have resulted in inefficiency in the allocation of invest ment capital, such as the case in the Karabuk iron and steel mill. However, in the fifties, investments were generally made with the actual needs of the economy being taken into the account. Nevertheless, the condition of inefficiency continued in several areas. An important source of these inefficiencies is the price structure, which mostly ignored the real cost of production. Further more, among the main causes of high production costs or low productivity in the industrial sector in Turkey are: the lack of skilled labor force, lack of incentives due to the very low wage levels, deficiencies in managerial, technical know-how, and lack of necessary capital equip- 114 ment. Besides, the poor location of the industrial plants and the backward conditions and high transportation cost are among the factors contributing to the low productivity in both public as well as the private industrial sectors in Turkish economy. Nevertheless, apart from the deficient and unreliable data in a developing country like Turkey, according to Hershlag: The declared annual net profits in many industries such as rubber, steel or oil, have ranged recently between 12 and 15 percent of sales returns. This may be partially due to underpaid labour, but undoubtedly it is mainly the result of nearly full and efficient utilization of capacity of those enter prises. To a certain degree it should be attributed to the national price structure as well, upheld by Government price and imports policies, even though, for other reasons, these policies are often deplored by the entrepreneurs. Some of the public enterprises present particular problems in connection with product ivity, owing to the relatively smaller consideration given to profits than in the private sector. Recently, however, efficiency has been presented with requirements of much higher professional standards than in the past. 2 In respect to the investments in infrastructure, it is reasonable to consider that a longer period than five years is required for the direct and indirect effects of these investments to be felt in the economy. In regard to the postwar period, the large foreign aid advanced by the World Bank and United States' Marshall Plan aimed at raising the agricultural output, . food, and 2 Z. Y. Hershlag, op. cit.. PP.226-27. 115 raw materials exports of Turkey to OEEC countries. In 1950, the Industrial Development Bank was established, with the participation of both private and public capital, to help private enterprises. Meanwhile the government pursued a more liberal economic policy toward the private enterprise and to encourage foreign capital investments in Turkey. Thus, between the early fifties and the middle sixties, the industrial production, particularly the manufacturing, experienced relatively a rapid rate of growth. in this chapter, we also attempt to examine those industries where a great deal of industrialization effort has gone, some progress has been achieved, and where there are the necessary resource bases for growth. These industries are essential for Turkey's industrial ization and economic development. First: Energy Sector (A) Coal Mining Development and Potentialities As the economy of Turkey is expanding and its industries are growing, the demand for coal has been increasing at a faster rate than the increase in its pro*- duction. This has created shortages which hinder economic development. So far, the oil production in Turkey has not 1 16 been aufficient to its domestic needs, nor are the electric plants. Other kinds of fuel resources (lignite, firewood, charcoal..etc.) have been used to fill-in these shortages; however, the large reduction in coal exports, has in turn, deprived the country of much of its foreign exchange earn ings, which are badly needed for economic development, and to pay for Turkey's growing foreign debts. In order to increase the coal production and to reduce its cost, an important project, the "Zonguldak Coal Project," was developed in Turkey as early as 1948. Zonguldak basin extends along the coast of the Black Sea. "This potentially rich coal field was first discovered in 1829, and mining was began by the Turkish admiralty in 1848."3 "production by the outbreak of World War II had risen to 2,700 tons run of the mines annually.. War halted the modernization program, which was revived in 1946 with the arrival of American advisors. A 10-year Marshall plan supported modernization was completed in 1959 at the cost of 375 million TL. Further foreign aid funds were granted to the mines after 1959. In 1960, run of the mines production was 6.3 million tons..the country 3 Russell H. Dorr, Report on Zonguldak Coal Mines Project, Economic Cooperation Administration, (Washington D.C., ECA Project no. XIII, 1949), P.5. 117 no longer imported coal."4 "The proven bituminous coal reserves at Zonguldak province have been estimated at 1.3 billion tons. In 1957, the management and administration of coal mines were transferred from "Eti Bank" to TKI, a cor poration which nominally comesunder Ministry of Industry Supervision. Coal Mining and Economic Development of Turkey Coal is the main source of energy in Turkey and the main source of its expanding economy. It is the primary means of electricity in Turkey. "Sixty-five per cent of the nation's electric power in 1960 was thermal. Most of which is absorbed by its growing industries, i.e., steel, cement, sugar and fertilizer industries."^ It is badly needed in agriculture for operating the techniques of irrigating the land, instead of the primitive devices which are used now. Furthermore, almost all of the rail road and shipping still use coal power. Also, the house hold consumption, while rationed, has been keeping up with the growth of the industrial demand. 4 Malcolm D. Rivkin, Area Development for National Growth; The Turkish Precedent^ (New YorktFred. A. Praeger Publishers^ 1965), P. 151. 5 6 Ibid., P. 164. Ibid., P. 164. 118 Assessment of the Economic Potential of Coal Mining in Turkey The method used here to evaluate the potential ities of coal mining industry in Turkey, or to approximate its economic efficiency, is analogous to the method applied by business, the so called: "return on investment," The period under consideration is the postwar years. However, since no data are available on investment made prior to this period covered by our study, then we substitute it with the total expenditures in this industry to determine the economic efficiency as a ratio of total returns to the total costs or total expenditures. Total Expenditures on Zonguldak Coal Mines A complexity arises here, that is, in many case* the developmental expenditures at any one time depends upon what was spent on that project's earlier development.There-! fore, bearing this in mind, we precede with our analysis of the available data of the total expenditures. Therefore, the final ratio would be a return on expenditures, instead of a return on investment. As indicated by Table 9, the source of the total expenditures for the period 1944-1951 has been: the United States*s Aid (ECA), Foreign loans, which were purchases Tablet 9) Total Estimated Expenditures on Zonguldak Coal Mining in Turkey(by source) in dollars Source Dollar value American Aid(ECA) Foreign Loans Local currency Total $ 16,290,538 24,059,932 16,920,000 $57,270,470 Source* Bark,C.S., Estimates of Project Expenditures, (Eti Bank Project Application), October 13,1950. 120 from various European countries for which no foreign exchange is available, but there was unilateral agreement through the European Payment Union. Therefore, the devel opment of coal resources became even more important for pay off of the foreign debts resulting from this borrowing for the developmental projects. In this analysis, we attempt to determine a net annual return on the expenditures during the period under study. This "ratio" will be a rough quantitative measure on the expenditures on the Zonguldak coal project. Figures available were estimates of the expected expendi tures during that period and there is no way to find out whether those estimated expenditures materialized in full. According to the figures on Table 9, the total expenditures from all sources were $57,270,470 upon which the net annual returns on this coal project during those years is based, which hopefully gives an approximate measure of the economic efficiency on the expenditures in this line of economic activity in Turkey. Return on the Expenditures on Zonguldak*s Coal Project The rough "total returns" would be, as expected, based upon the increased production and cost reductions. 12 1 However, a further complexity presents itself because of the pricing method in the coal industry. The government deliberately keeps the selling price of coal below the actual cost of production in order to subsidize the consum ers as well as the industries. This makes it difficult to determine the actual efficiency of coal production in Turkey. However, the Ministry of the Economy of Turkey, has developed a series of cost estimates per ton of coal since 1948. Unfortunately, recent data are not available to me at this time, to keep these estimates up-to-date. Also, the government's report indicates that these estimatA are rather conservative, since they do not project all the benefits gained from the utilization of the modern tech nological devices in coal mining industry in Turkey. In the estimated average cost figures, the 7 "depreciation" and "interest" charges are both included. The estimated average cost of coal (per metric ton) from the zonguldak coal mines were: $10.44 for the year 1948, $9.00 for the year 1951 and $8.51 for the year 1952 as indicated in table 10. If we use the estimated cost reduction(estimated 7 Turkish Ministry of the Economy, Report on the Development of the Coalfield of zonguldak.(presented to the OEEC, at Paris and to ECA, Washington, D.C., Sept. 15, 1948), PP. 178-179. Tablet10) Estimated Average dollar Cost of Coal Production and Estimated Average dollar Savings (per Metric ton from Zonguldak Coal Mines) Year Estimated Average Cost (Metric ton) Estimated Average Cost Reduction(Per MT) Average Cost reduction (Average Savings) (per MT) 1948 $10.44 $10.44 1949 10.00 10.44 $0.44 1950 9.50 10.44 0.94 1951 9.00 10.44 1.44 1952 8.51 10.44 1.93 Source: Turkish Ministry of the Economy,"Report on the Development of the Coal field of ZonguldakJ1 Presented to the OEEC at Pans and to ECA,Washington, September 15,^948, P.185. 123 average savings) of $1.44 (per metric ton) for the year 1951, and multiply it by the actual amount of total coal g production of 2,987,846 tons in 1951, then we would obtain the total return on zonguldak coal mines for the same year, which would be $4,302,498. The Mutual Security Agency's report (Mission in Ankara) in 1952 states the world market price for coal in Mediterrnean ports, to be at that time approximately $20.00 per ton. Also, the average freight cost $4.00 per ton, and the estimated cost (per metric ton) in 1951 was $9.00 (as indicated in Table 10), therefore, the net profit amounts to $7.00 per ton. According to the MSA Mission's report Turkey's coal exports in 1951 amounted to 100,000 tons. Then the net profit gained amounted to $700,000. Therefore, the total return obtained from the coal mining project of Zonguldak in 1951, amounted to $4,302,498 in total savings (cost reduction), plus $700,000 of revenue from exports or a net total revenue of $5,002,498 in 1951, (this figure indicates total net annual return, since depreciation allowances and interest charges were excluded in obtaining 8 United States1 Department of Commerce, Business Information Service- World Trade Series, no. 214, "Turkey"; Economic Review , 195i. 124 this figure). As indicated earlier, the total expenditures on coal projects in 1951 was estimated at $57,270,470, and the net annual return for the same year was $5,002,498, a ratio which is approximately 9 per cent of the above total total expenditures. Therefore, the net annual return on expenditures in Zonguldak coal mines is approximately 9 per cent. This ratio does not sound very impressive. How ever, if we consider that a good portion of this total expenditure was spent on the construction of buildings, improvement of harbors, transportation, new mining equip ment, etc. or in fixed capital, which were discontinued after completion, then this ratio or the net annual return should have been risen substantially each year. On the other hand, if the aforementioned expenditures on construc tion, modern equipment, and transportation did not directly affect the increase in the production of coal, then exclud ing them would have resulted in much higher ratio of re turns to expenditures. However, when we consider that the estimates we used are replaced with the most recent cost figures, then the ratio of the net annual return might be quite different, since all the estimates and data on expenditures, production costs, selling prices, etc.,could well be revised. Furthermore, since we substituted the 125 business method of "return on investment" with the measure of "return on expenditures," then the outcoming ratio would not be the same in measuring the economic efficiency. How ever, this economic analysis would project, to some degree, that the cost saving in this industry, if it was maintain** ed, would have paid for itself within a short period of time; it further indicates the direction and, somewhat, the potentialities of coal mining industry in Turkey. Problems of Coal Mining Industry in Turkey The problems are, for the most part, either orga nizational or related to the geological characteristics of Zonguldak region. Therefore, "production difficulties arose despite infusion of over $20 million of foreign assistance to the mines since 1950. The organizational factors cited in the OCED-AIO study were the government's pricing policy and the structure of the company. Govern ment consistently priced coal below its actual cost;i.e. in 1960, the per ton cost of coal production was 132.06 9 TL., and the fixed selling price was 106.2 TL." The result was loss of economic efficiency and weakened mana gerial incentives, since they were not required to make g Malcolm D. Rivkin, op. cit.. P. 166. 126 a profit. Another problem, is the lack of managerial and technical coordination between two subsidiaries operating in that region; namely EKI at Zonguldak city and AKI at Kandilli-Eregli. This resulted in inefficiencies and waste. “According to AID advisors, the underground rail ways, loaders, pumping equipment, etc. were at a very high level of sophistication. Yet relatively little equipment was installed at the actual working faces were ancient pick and shovel techniques of extraction were standard procedure. Here, in the underground service activities, most of the unskilled, part-time peasant workers were employed. So long as these men and methods are maintained on the job, coal cannot be extracted faster, more efficient ly. ..Thus, Turkey's productivity per worker was, as a 10 reflection of this system, among the lowest in the world, as indicated in Table 11. (B) Electric Power For any country pursuing the objective of industrialization, electric power is of a vital importance. In Turkey most of the electric power plants were thermal units, dispersed throughout the country with 10 Ibid.. P. 167. 127 Table(11) Labor Productivity of Coal for Selected Countries,I960,(Average Output per Man Shift(Metric tons) Belgium 1.012 France 1. 203 West Germany 1.606 India 0.430 Netherlands 1.101 Poland 1.394 United Kingdom 1.400 U.S.A. 13.000 Source: Rivkin, M.D., Area Development for National Growth;The Turkish Precedent^ New York,Fred. A. Praeger,Publ.,1965,P.167, OECD-AID Mission's "Report on the coal Industry”,Vol.3,P.513. 128 different average cost and low productive capacity. The need was grave for an integrated system of power generation and transmission throughout the country. The most impor tant contribution of the United States' aid to Turkey was to develop the first national system of generating electric power, which is called "Sariyar hydroelectric Power Project!' This project's benefits to Turkish economy are numerous, mainly in lowering per unit cost of generating power. Ad<- ditional savings were in diverting the unconsumed coal to other uses including foreign trade. Furthermore, a side benefit of this type of project is in regulating irrigation and flood control. The Sariyar hydroelectric power project is located near and to the west of Ankara, not too far from Turkey's most populated cities and industrially developed regions. Here an attempt is made to present an economic appraisal of this project in addition to the other improve ments which Turkey has attained in the area of production of electric power. In determining the economic efficiency of investment or expenditures, we will use the same approach of finding the ratio of net returns to the total invest ment expenditures. 129 Economic Evaluation of the Sariyar Power Project To determine the relative efficiency of the total expenditures (total investments) in this project, the business approach is used as before; namely "return on investment." According to the project agreement of ECA, "the estimated investment for the Sariyar hydroelectric power project in Turkey, from 1949 through 1954, from foreign sources were as follows: United States' aid amount ed to $8,200,000 , and other European countries amounted to $19,000,000 (most of the loans were obtained from varie- ous European countries through the Organization of the European Payments Union According to the same source, the amount of investment contributed by the Turkish economy is estimated to be 55,800,000 TL, or the equivalent in dollars of $19,926,180. Therefore, the total investment to this project from all sources amounted to $47,126,180 which is the total cost of this project. In order to arrive at the total return on 11 Project Agreement, Economic Cooperation Agreement Between the United States of America and the Republic of Turkey.(Sept. TTt 1950), P.3. 130 investment, from this project, we have to find out the total cost savings. However, since this project was the first hydroelectric project in Turkey, we have to determine the cost difference between the thermal electric production and the hydroelectric power of Sariyar project. According to the Industrial Engineering Compa ny's report;"the estimated average cost for thermal elec tric power to be $.0147 per kwh., and estimated the annual production of the hydroelectric project to be 343,000,000 kwh. Furthermore, they estimated the total fixed and variable costs of production to be $970,900 per year. Therefore, by dividing the later figure ($970,900) by the former (343,000,000), the average total cost per kwh., would be $.00283."12 Since the average cost of thermal electric power is $.0147 and the cost of hydroelectric power to be $.00283, then the resulting cost saving will be $.01187 per kwh generated. Since the amount of the annual product ion was estimated to be 343,000,000 kwh, the total savings 13 amounted to $4,071,410 per year. The ratio of this annual 12 International Engineering Company,Report on the Economics of Sariyar Hydroelectric Project, Sekarya River, Turkey,(San FransTaco, California, M a y 1949). PP.15, 61. 13 By multiplying 343,000,000 kwh by the $.01187 unit saving per kwh. 131 savings to the total investment expenditures of $47,126,180 is almost 9 per cent. Since the depreciation was included in the cost figure, then, this ratio would be the Net Annu al Return on Investment. This annual savings would have paid for the total investment in this project in a little more than a decade. The main deficiency id this study is the reli- ability of the data used. The estimates forwarded were stated before the completion of this project. Furthermore, the side-benefits produced by building this project, in terms of flood control and regulating the irrigation of agricultural land were not included quantitatively into the analysis. Also, the gains obtained from saving on the consumption of coal were not included as well. How ever, the study gives at least a conservative estimate of the significance of investment in the hydroelectric power project to the Turkish economy. In regard to the pricing policy,"according to 1959 regulations, municipalities have acquired the right to a 30 per cent discount, and industry to a 20 per cent discount. While the sale price of privately generated power has recently been about 15 Kurus, the average sales price of "Public" electricity was, in 1964, 9.61 Kurus and with taxes; 9.94 Kurus. This average, even though 132 fluctuating throughout the years, has nearly always been below cost, particularly if financial charges were also included (as they should be) in cost."The average an nual losses have been estimated at 5 per cent of turnover, at least. Only for 1964, with a cost p/kwh of 7.7 2 kurus and price collection of 9.94 kurus, did profits of some TL. 50 million accumulate , but it proved difficult to discover whether financial charges were included in cost • 15 or not." This pricing policy encourages inefficiencies and other economic waste. "By 1965 total electricity supply was about 5,000 million kwh (equivalent to 157 kwh per capita), of which nearly 3,000 m. were supplied by the Central State sector, namely the Eti Bank (with annual sales returns estimated at TL. 210 million for 1965), and the balance by municipalities, the State Economic Enterprises and private enterprises (mainly for Istanbul, Karabuk, Eregli and the Seyhan area). "Although hydro-electric power has significantly increased, to about 50 per cent of the total by 1964, the 14 In 1965, the official rates of exchange ($1.00= 9.00 TL.), Cf. Z. Y. Hershlag, 0£. cit.. P. 332. 15 Ibid., P.223. 16 Ibid., P.223. 133 development programme for 1965/66 envisaged tow-thirds of the supply by thermal and one-third by hydroelectric installations, and in 1966, the government signed a con tract for the construction of a dam at a cost of TL.700 million, with a Franco-Italian consortium, the final cost of the dam is estimated at $327 million. However, in view of an average annual increase of 1296 in power consumption and growing shortages of supply, the main long-term plans are based on hydro-electric sources, including the Keban Dam, with an expected 3,000 m. kwh by 1970 and 6,000 kwh by the end of 1972.’ '17 Second; Iron and Steel (a) Iron ore In building heavy industries, iron, steel, and coal are of a great importance in Turkey, particularly as the country's industrial sector expands, so do the demand for iron and steel, in both domestic and foreign trade. The importance of the latter can not be overlooked, when we consider Turkey's foreign exchange position (when a country's deficit has been growing, partly due to a large volume of imports of these items)• In Turkey, the iron ore deposits are located 17 Ibid., P. 223. 134 near a town called Divrigi. Economic Analyeie of Iron Mining This study would proceed along the same method of analysis as in the previous cases; that is# we shall attempt to arrive at the relative efficiency in this industry, through attempting to find out a ratio, which measures the rate of return on expenditures in this line of economic activity in Turkey. Estimated Total Expenditures and Total Returns The data available at this time are data for the period of 1949-1952. However, this should not serious ly detract from the merits of this analysis, for it could be replaced with the most up-to-date, at any time. The data on expenditures are merely estimates of expected expenditures during the period of those three years. According to ECA Mission report on Turkey,"the total estimated expenditures for the Divrigi Iron Mines Project was $5,000,000 from 1949 through 1952. The above Mission's report indicates that the 18 Economic Cooperation Agreement.Special Mission to Turkey. Project no. XIII; Document 4A, (Ankara, January 12, 1949), p. 3. 135 "cost saving per ton from 1949 to 1952# amounted to $1.24. The total production of iron ore at Divrigi for 1952 was 300,000 tons. Therefore, the total net return on this project was $372,000 which is slightly over 7 per cent, a ratio of Net Annual Return on the estimated total expen ditures on this project, which means that, with the same cost savings per ton of output, this project will pay for itself in a little more than 12 years. However, the fore going economic analysis does not indicate the full impact of this development upon different sectors of the economy, particularly its industrial and foreign trade sectors. Furthermore, the reliability and the period covered by the various data used in this analysis leaves much to be desired. (b) Steel One of the projects sponsored by the Indus trialization Plan of 1934, was the first steel mill in Turkey, in 1937, at Karabuk. The initial technical assis tance was provided by Britain, and then by the United States after the World War II. Military consideration was important in placing this plant in that inland locatian 19 Ibid., (from a statistical table in Appendix III) . 136 where none of the necessary raw materials are in the near proximity. "Iron ore came by rail from Divrigi mines, 600 kilmeters to the east. Coal was sent from the Zonguldak mines, 100 kilometers to the north. Major markets were 200-300 kilometers away. The situation resulted in enor mous transportation costs at both ends of the process and forced forced the plant to operate at a constant subsidy through price fixing. Prices of Karabuk steel were pegged as high or higher than imports from Europe and America. Thus, the declared "Profit" of Karabuk on its 1960 sales was 85,000,000 TL., or a^ 1_6 per cent return on investment. Since steel imports were controlled and heavy tariffs levied, the mill was in a "can't lose" position. Its profits were as unreal as some of the coal mines losses. So long as market for both commodities existed, the price structure was able to cover, and indeed encourage, produce tion inefficiencies. Since the expansion of some industries in Ankara and other interior cities and improved transportation, Karabuk's location has become more favorable. "In an effort to double the production of the mill, the govern ment was able to obtain a $15,000,000 loan from Export- 20 Malcolm D. Rivkin, op. clt.. PP.170-71. 137 Import Bank, and another loan from Germany for a new coke plant. Production was varied, however. Over the 1950- 1960 decade, the plant accounted for more than half of Turkey's steel consumption. In 1960, overall production was 216,000 tons."21 The expansion of production in the future will depend partly upon whether the coal mined at zonguldak will keep pace with the increased demand and capacity of this steel mill. Other problems include the disguised unemployment at the steel plant. Yet the shortage is still evident at higher managerial and supervisory levels. Eregli Steel Turkey's second steel mill was under construc tion in 1962 with operations scheduled to begfriin 1964. "Fea sibility was determined in 1959 by an ICA- sponsored study prepared by Koppers Company of Pittsburgh. All the raw materials for major expansion of steel production were available in Turkey, the report continues; Ore at the Divrigi fields in the east as well as untouched deposits on the Aegean and near Iskenderun, coal over one billion tons of proven reserves at Zonguldak. Both the Turkish government and the American authorities accepted the 21 Ibid., PP. 170-171. 136 Koppers recommendations. A special mixed corporations was formed including the Turkish government, Turkish private investors, Koppers itself (to supervise, design and con struction) , and other foreign investors. The U.S. Devel opment Loan Fund advanced $139,000,000. The project would be constructed in three stages, with the first of 480,000- tons capacity. Full capacity would be attained by 1975."22 Hershlag points out that "Neither the Karabuk nor Eregli's prices were compared favorably with world prices. In 1965 prices of imported iron (in small quan tities), c.i.f., Istanbul were about $160 per ton, while Karabuk prices stood at $200 (special cost and price ac counting methods still prevailing here render these prices possible), and Eregli prices at $240. If for both import ed and local product customs and taxes are taken into account respectively, the differences largely level off, but still some discrepancy remains. In 1965, the Eregli plant was still working at a loss; however, the year 1966 was believed to be a break-even point. For 1968 profits are expected at an estimated rate of 12 per cent of total 23 revenues after taxes. 22 Ibid., PP. 174-176. 23 Z. Y. Hershlag, o p . cit., p. 220. 139 According to OECD's economic report of 1972: The third steel plant also is to be situated at Iskenderun with the financial assistance of the Soviet Union.1,24 25 Third: Other Industries (A) Chromium This mineral was discovered in Turkey, for the first time, by Professor Lawrence Smith in 1848. Then the exploitation of this mineral began, and during the 19th century the Ottoman Empire dominated the world chrom ium market. Turkey's share was then 6096 of the world's chromium. However, with the shrinking of Turkey's borders, there remained scattered throughout the country approximate* ly 150 chromium mines. Turkish chromium ore is among the world's best, thanks to its high metal concentration (44- 56%) . 26 Since this mineral is important in the production of high-grade steel, especially war equipment, the competi tion for its acquisition intensified, particularly during 24 OECD, Economic Surveys, Turkey, January 1972 P. 9. 25Having been unable to obtain the necesr- sary data for calculation of Net Annual Return on invest ment; therefore, I have presented a descriptive, qualita tive account, in regard to the following minings and indus tries: Chromium, copper, chemical and Import substitute industries. 26Z. Y. Hershlag, o£. cit., P. 99. 140 periods of crisis. The chief importers were the industrial countries, mainly Germany, and after the World War II the United States became the primary customer of Turkish chrom ium. In terms of output of chromium, "Turkey retained her place among the top four world producers of chromium, increasing her output from 3,000 tons in 1924 to 18,000 in 1929, 75,000 in 1933, 190,000 tons in 1939, and 208,000 in 1964."27 (b) Copper Primitive production of copper began as early as 1812 in Ergani, and by 1916, 92,350 tons of copper ore had been mined, from which were extracted 19,250 tons of copper. The percentage of copper content in the ore was ascertained at 20.6 per cent. However, the war brought copper mining to a halt. In 1918 the concession was given to the "Itibari Milli Bankasi" (The National Credit Bank), but a short time later it was transferred to the Deutsche Bank, with government participation in the bank's invest ment in the copper industry. In 1933, the government assigned its shares to the Sumer Bank, and on April 30, 1936, the Deutsche Bank agreed to sell its shares to the 27 Ibid., P. 100, and table 45(Appendix). 141 Eti Bank, which was chiefly responsible for the development and management of the mines. Thus, the nationalisation of the copper mines was accomplished and their exploitation commenced again. This time production was planned more efficiently. In order to improve the efficiency of the mines and transportation facilities to the point of ship ment on the Mediterranean,since copper was marked primari ly for export, a railway was constructed on the Fevzipasa- Erani line."28 This railway was constructed for the exploi tation and export from the rich copper mines of Ergani- Maden. "The contention of some circles that public owner ship has been a major reason for poor efficiency is not borne out by facts. While in copper 100 per cent of out put is in public hands and in coal some 95 per cent, the public share in iron ores has been reduced to 40-60 per cent, in boracite to 50 per cent, and manganese is com pletely privately produced. Productivity in privately owned mines is even lower than in those publicly owned. Despite many deficien cies of public enterprises, private mining lags behind for several reasons. Many private miners have no industrial and mining background. While private entrepreneurs work 28 Ibid., P. 99. 142 a great number of small mines, public mines are big, with higher mineral content, and are able to avail themselves of better capital. 1,29 As to the foreign exchange aspects of Turkish exports of minerals and other exports. "In 1958, a policy of differential rates were employed for purchase of foreign currency resulting from exports according to items: TL. 4.9 30 to the dollar for tobacco, opium, chromium and copper." The government in 1970 put a number of invest ment projects in the industrial sector were put for implej- mentation, one of which was the Black Sea Copper Project. (c) Chemical industry Since World War I, attempts have been made to stimulate the development of industries. However, the efforts for the encouragement of industrialization took a prominent position among priorities with the new Turkish Republic. Various central agencies were created such as Sumer Bank, and as early as 1933, when the First Five-Year Plan was drawn up in order to establish certain industries, among which was the chemical industry. The Second Plan, which was initiated in 1936, dealt with the development of nine major sectors, among which was the chemical indusb^ 29 Ibid., P. 222. 30 Ibid., P. 147. 143 "At the beginning of 1954# a new law for the encouragement of foreign capital investments was published. This law cancelled almost all various restrictions, permit ted the transfer of all profits and capital invested, upon liquidation of the enterprise, and also granted all the rights and facilities of local enterprises to foreign investors. After the enactment of the 1954 Law, the atti tude of foreign investors changed, though not yet decisive ly. By the end of 1959, about TL. 112 million or $35 mil lion (calculated at the then prevailing rates of exchange) were invested by foreign private capital during the whole period 1951-1959, excluding oil investments. The bulk of foreign investment went to the chemical and rubber indus- 31 tries. As Hershlag, indicates, "Turkey has started developing Petrochemical industries. Apart from the already existing modest industry, two major Petrochemical complexes are planned; the first, currently under construc tion and to be completed by 1969, carries a total invest ment of TL. 600 million; while the 8econd Five-Year Plan (1968-1972), requires an investment of TL. 800 million. British, Italian and Belgian firms are involved in these 32 projects, both in financing and excution." 31 Ibid., P. 154 32 Ibid.. P. 225. 144 (d) Import Substitute Industries Gold and foreign exchange reserves of Turkey are very limited, and the credits are insufficient. A substantial part of Turkish exports consists of agricul tural products and raw materials, similar to most of under developed economies. These facts give a depressing projec tion for the growth of income generated from exports. Most of the studies done by AID, U.N. and independent economic analysts on the balance of payments problems of Turkey reach the above conclusion. An AID report about Turkish economic conditions states the following; ''..the future of Turkish exports is all the more unpromising until she (the country) can gain experience in domestic import sub stitution and apply this experience to the export of manu factures and processed natural resource items.”33 While Williamson contends that Turkey would be able to overcome her balance of payments problems only through rapid development of import substitutes, he is not optimistic about Turkey's ability to do that in vital areas, such as machinery equipment and base metals. Most of the studies about world trade and 33 Jeffrey G. Williamson, Projected Aid Requirements for Turkey (1960-1975), (AID Discussion Paper no. 10, 1965), P. 33. 145 economic development support the conclusion that economic development depends in the long run on the diversification of production and exports as much as on enlarged productive capacity. This necessitates a change in the structure of production and exports. In other words, to industrialize and to increase the ratio of industrial goods in total exports seems to be the only promising strategy for Turkeyfe balance of payments. "It is interesting to note that while Turkish circles# notably the exports sector# give preference to the export drive# the OECD# AID# and foreign experts# like Professor Tinbergen# favor the development of import- substitute. One of their major reasons is that the 34 latter promise a higher value added than export goods." According to Tinbergen, "To develop import substituting industries is more attractive to developing countries than to develop export promoting industries. Besides the possibility of protecting the former ones# manufactured goods production may be preferred to the raw material production, because capital/output ratio in the production of manufactured goods is lower than the 35 capital/output ratio of primary goods production.” 34 United Nations# Towards a New Trade Policy for Development#(New Yorks 1964), 23. Jan Tinbergen# International# National# Regional and Social Industries# NEI, no. 26. 146 In order to maintain a steady process of indus trialization and economic growth, it is important for the import substitute industries to attain a comparative advan tage in world trade. Therefore, extensive research on planning is of a vital importance in the matter of the choice regarding the establishment of any of the import substituting industries. In its efforts for industrialization, "Turkey, for the period 1951-1965, import substitution has caused an increase in local industrial output. The annual value of import substitution in industry is approximately 2.5 per cent of total annual industrial output on the average, which means that by 1965, between 30 to 35 per cent of local output are substitutes as compared to 1952. "Perhaps the most significant contributions 37 of import substitution to development are the links it establishes or helps bring about, in the production sequence. These links are both vertical and horizontal. 36 A. H. Aker, Import Substitution and Comparative Advantage- A Case Study of Turkey', Cornell University, Ph.D. Dissertation, 1968, PI Ifel. 37 The most vigorous argument for the promo tion of import substitution in a specific industry is the infant industry argument. The extent of the infancy of an industry in a particular country is relative to a well established and in the same industry, in international market. 147 The vertical links are between the raw materials and intermediate goods industries and the intermediate and final goods. Intermediate goods are the more important items in the chain, since they have access to both ends. The establishment of an intermediate goods industry facil itates the establishment of some final goods industries or activities that produce raw materials for it on the other. There are at least two important cases of this happening in Turkey. The one is in the textile industry. Import substitution and accelerated growth of local output of yarn precedes the same process in textile manufacturing and raw cotton production. Thus, to a certain extent, one can say that the first push came from the intermediate goods industry. Though no statistics are available on this point, the textiles industry must have already estab- 38 lished links to the garment and decoration industries." The development of textile industry is among the distinguishing features of the take-off stage in indus trialization, due to various factors, among which are: the income-elasticity of demand for textiles; the existence of a large domestic market demand and a large labor absorp tion capacity, the large-scale production potentials of this industry, and the availability of raw material inputs 38 Ibid., P.183 148 from -the local agricultural sector of the economy. Also, the external economies were at work in that the private sector of the textile industry gained through emulating the state enterprise in the areas of technical advances and the improvement of working conditions. Another area within the textile industry is the rise in the production of not only of cotton# but of wool# silk and rayon# all of which was based on the raw material which was available in the agricultural sector# which# also provides the basis for another industry in Turkey, namely the sugar industry. The government encouraged this indus try through its tax policy, in order to meet the domestic needs. Thus, sugar imports were eliminated in 1935, but continued in the fifties# due to the rise of the per capita consumption. "The second case is the iron and steel industry. There can be no question that the local extraction of iron ore and coal have come about# because of and simultaneously with# the establishment of an iron and steel industry. Nei ther of the two extractive industries is internationally competitive and would find no buyers had it not been for the local iron and steel industry. The forward link of iron and steel has been to the manufacturing of light machinery and equipment. The growth of the steel industry 149 through import substitution immediately precedes that of the capital goods producing industries. " An example of a reasonably profitable joint venture of Turkish private capital and foreign investment is the "U.S.Royal Lastik Turk A.S.", the rubber factory at Adapazari, which started production in 1964, and reach ed full capacity by the first half of 1965, with gross sales of TL. 58 million in the first six months, and profits of TL. 13.6 million, a flat 10 per cent on invest- 40 ment, or somewhat more on gross sales." Another example of somewhat successful case in the industrial sector, is the cement industry, the produc tion of which continued to rise and the imports to de<- crease, despite the substantial increases of the local demand, "in this industry 18 plants existed by the middle of 1966, of which 6 belonged to the public enterprise (S.E. E.), and 12 to the private one. In spite of the substan tial increase in output, to 2.7 million tons in 1963 and to raise production to nearly 3 million tons in 1964 and to 3.5 million tons in 1965, to meet the growing demand. Although the location of the industry still leaves much to be desired and is currently under investigation, the 39 Ibid., P. 183. 40 Z. Y. Hershlag, op* cit.. P. 221. 150 development of thie sector is an additional proof of the local-market argument in setting-up industries, and the gestation period needed, particularly by modern and large- scale industries in developing countries, for adequate judgement of their performance and efficiency. 41 Ibid., PP. 221-222. CHAPTER VIII THE SECOND FIVE-YEAR DEVELOPMENT PLAN ( 1968 - 1972 ) Main Economic Objectives and Projections In 1967, the Second Five-Year Plan was drawn and approved by the Grand National Assembly and the Senate, for the period of 1968-1972, at the end of which the Republic commemorated its 50th anniversary. Although the previous plan fell short of attaining its target rate of growth, a 7 percent annual growth rate was set again for this plan. A rise of per capita income from TL. 2,600 to TL. 3,200 was projected. The implementation of the plan was to be within the existing system of a mixed eco nomy. Moreover, it aimed at reducing and gradually elim inating the economy's dependence on foreign capital re sources. During the plan period, the economy was to undergo some structural changes; the share of the indus trial sector in the economy would rise from 25.5 percent to 30.7 per cent. This is expected to decrease the ratio of labor force engaged in the agricultural sector, while 151 152 the output and productivity of this sector will rise through the utilization of modern technology. The result ing disguised unemployment will be tackled through indus trialization efforts, i.e., the lr.rge sums of capital investments in energy, communication, tourism, etc. The plan projected the possibility for 1.5 million jobs out side of agriculture, and a total of 2.3 million jobs in all sectors.1 Furthermore, among the main objectives of the plan was to attain and maintain overall stability of the general price level, by securing the economy from undue inflationary and deflationary tendencies. Methodology The Second Five-Year Plan followed the same methodology of "planning in stages;' of Professor Tinbergen, used in the previous plan. In the first stage "the maco-stage," macro- economic magnitudes were analyzed, within a macro-model, and total investment required for the attainment of plan targets, is determined, but revised and coordinated with the second stage or with the sectoral objectives, and as more dependable statistics are obtained, during the 1 State Planning Organization, Second Five-Year Development Plan (1968-1972),(Ankara: 1969), the forward section. 153 i final atage of plan formulation. Therefore, the macro- targets are put into their final form only after the detailed sectoral magnitudes, such as aggregate demand, output, value added, imports, and exports, are determined on the basis of coefficients used in the macro-model. "Sector studies and consistency between various sectors were carried out and realised within the framework of an input-output model, based on an input-output table 2 covering 37 sectors." The third, is the Project evaluation stage, where a choice between a number of projects were made. There may be also, a regional stage, either preceding the sectoral stage or following it, or even following the project stage, depending on the nature and priorities of the plan. Pricing and Income Analysis The maintenance of price stability has continued to be among the main policy objectives of the Second Five- Year Plan. Apart from seasonal and individual commodity price fluctuations, stability in the general price level was sought, through various necessary measures at hand. 2 Ibid., P. 73. 154 such as: (1) To preclude, or minimize, the destabilizing effects of deficit financing, the plan urged to secure investment demands from real savings. (2) The plan recommended appropriate tariff policies and price adjustments for goods produced by State Economic Enterprises, in order to eliminate bottle necks in the supply of capital and consumer goods. Besides, more technical training, and application of modern tech nology, was expected to provide more efficient production, i.e., keeping the cost of production at the lowest level. Furthermore, precautionary measures to curb the develop ment of black markets and speculative trends in the economy, which are usually created when the gap widens between publicly fixed and market prices. Finally, efforts were to be directed to raise the level of agricultural output, and to reduce its fluctuations, which has harmful effects on the economy. A.B in regard to investment policy: "In Turkey, national income is calculated on the basis of income and not of expenditure. Hence, tracing the development trend of investments, particularly those 3 made by the private sector, has proved to be difficult." 3 Ibid., P. 13. 155 During the period 1963 through 1966, total investments amounted to TL. 47.9 billion, at 1965 prices. An increase of TL. 17.7 billion was realised in national income during the same period. Hence, the capital-output ratio during the same period has been calculated to be 2.7 per cent. However, since an average rate of growth of 6.5 per cent was realised during the period 1962 through 1966, the actual capital-output coefficient must have been 4 higher than that foreseen in the plan." In order to attain the plan's growth target rate of 7 per cent per annum, the GNP has to increase by 40.3% or TL. 34,300 million, during the plan period, which means a rise from TL. 85,100 million in 1967 at 1965 prices, to TL. 119,400 million in 1972. However, transfer of external resources will be necessary, due to the balance of payments deficit and insufficiency of domestic saving, while the share of external savings in GNP will be decreasing, their volume will rise from TL. 1,700 million in 1967, to TL. 2,000 million in 1972. The level of investment necessary for a successful imple mentation are expected to rise to TL. 119,000 million, ^ according to capital-output coefficient calculated as 3.25. 4Ibid.. P. 13-14. ^Turkiye is Bankas1, Summary of Second Five-Year Development Plan of Turkey (1968-1972), (Ankara, 1967), pT 3. 156 The distribution of investments between private and public sectors depends, as before, upon the level of private (voluntary) savings-investments. If it increases faster than anticipated in the plan, the need for public investment will fall and vice versa. "During the plan period, the share of aggregate savings in GNP is expected to rise from 19.9% in 1967 to 24.3% by 1972. Thus, representing an average of 22.7% of GNP per annum.However, the total aggregate of volun tary plus public savings are not adequate for the realiza tion of the plan target, as indicated previously, consider ing the growing savings and balance of payments deficits in the economy. Thus, it is necessary to resort to external sources of finance. Among the main events during the Second Five- Year plan were: (1) the devaluation of the Turkish lira in 1970, and (2) the government's Stabilization Program, in August 1970. As to devaluation, the new exchange rate of the Turkish Lira was fixed at 1 United States dollar = 15 TL. "The chief reasons for this operation consisted on the one hand of the differences between the domestic prices and the world prices of Turkey's main export goods. 6 Ibid., PP. 5-6. 157 and the heavy burden imposed on the budget by the subsidies on such goods, and on the other hand of the sharp upward tendency in the demand for imports during the last few 7 years.M As to stabilization, the rate of inflation had been growing since 1965-and economic conditions in 1970 were increasingly deteriorating. Total expenditures, under heavy public deficit spending, outran productive capacity, and speculative activities developed in the private sector which adversely affected both consumption and investment in the economy. Although the authorities attempted to curb the rise in public expenditures, the Treasury was forced to proceed with heavy borrowing from the central Bank, because public revenues lagged behind expected revenues, and larger public expenditures were needed to compensate the inflationary impact in higher prices (cost of living) and production costs in the economy. The inflationary process was reinforced, also, by the deval uation of the Turkish lira and the rapid expansion of bank credit. The stabilization measures adopted by the Turkish authorities consisted mainly of the following: 7 Turkiye Is Bankasi, Annual Report 1970, (Ankara, 1970), P. 12. 158 The first set of measures was aimed at balancing the budget. A new tax law was introduced to broaden the tax base and reduce the heavy reliance upon import duties and some other indirect taxes. The new tax reform includ ed new indirect taxes and expanded the coverage of existing taxes. Also, the new taxes were intended to attain a more equitable distribution of the tax burden among social classes. However, the new taxes did not solve the problem of the heavy dependence of the Turkish fiscal system upon indirect taxes. The second set of measures consisted of continu ing efforts to reform the money and capital markets. A new law was introduced, which gave the Central Bank a better control over the banking system and more ability to limit bank credit for imports which did not conform with the real needs of the economy. The program also included a more flexible inter est rate structure to reflect the real rate of return on capital, and set higher interest rates in order to encour age more savings and reduce the rate of inflation in the economy. However, the stabilization program fell short of attaining the objective of curbing the inflationary trend in the economy. The contributing causes to this 159 inflationary process were mainly within the domestic economy, that is, the growing budgetary deficit, a higher level of guaranteed prices paid for some farm products, as a subsidy to the farmers, the rising remittances of earn ings by Turkish workers abroad, which in turn increased consumers' spending. Furthermore, the devaluation result ed in an increase in the prices and costs of imports, as mentioned previously. However, it failed to create the expected improvement in the balance of trade, due to the slow growth of agricultural exports, because of the struc tural rigidities on the supply side of a predominantly agricultural economy, and the implementation of more restrictive trade policy measures. Thus, during 1970, the growth of real GNP fell short of the plan target, followed by a notable recovery in 1971, chiefly as a result of favorable weather conditions and, in turn, high agricul tural output. By 1972, indications were that economic recovery was proceeding more or less as expected. "Activ ity in private industry is now picking up, and the budget for 1972, before parliament foresees a big push in public investment expenditures. The extent to which this latter aim can be met will depend upon the priorities assigned 8 to stopping inflation and to the balancing the budget." Q OECD, Economic Surveys, Turkey, Economic and Development Review Committee, January 1972, P. 5. 160 Sectoral Development Programs The sectoral programs were prepared and imple mented within the framework and objectives of the general plan, by analyzing all sectors and evaluating the projects involved, in determining the consistency in the inter sectoral relationships. The leading sector in the economy during the plan period was still the industrial sector, with an expected average growth rate of II.I9 6 per annum. The composition of this development in the industrial sector is shown in Table 12. This anticipated rapid growth would be due to the accelerated increase in the demand for finished goods, as well as raw materials, power, and manufactured goods, as a result of rapid industrialization and urbanization. "During the Second Plan period, an increase of TL. 34.3 billion in GNP is anticipated. Of this in crease, 38.6 per cent will be met by production increases in the manufacturing industry. Great weight is given to the subdivisions that produce intermediate or investment goods in the development of the manufacturing industry. The anticipated 4.2 per cent development target for agriculture will largely depend on the amount g of increase in productivity." 9SPO, Second Five-Year Development Plan.PP. Tablet 12 ) Composition of the Development in the Industrial Sector in Turkey(1967,1972) _______________ (Million TL.)__________________ (At 1965 Prices) Production(1) Value Added(2) 1967 1972 Annual 1967 1972 Annual Increase (96) v „ Increase (96) (1) (2) (3) <4> <5> (5) Manufacturing Industry Mining Energy: Electricity Coke-gas* 49,444 80,355 10.2 1,830 3,124 11.3 1,722 3,193 13.2 1,320 2,500 13.6 402 693 11.5 19,270 32,500 11.1 1,400 2,350 10.9 930 1,750 13.6 800 1,540 14.0 130 210 10.5 Total 52,996 86,672 10.3 21,600 36,600 11.1 {^At 1965 factor prices. (2)indirect taxes, depreciation allowances and amortisation included. (*)coke for metallurgy excluded. Source; S.P.O., Second Five-Year Development Plan ,1968-72, P.324. 162 In the agricultural sector, the plan stated the need for the application of more technological adv ances, fertilizers, and more and improved means of irri gation, to meet the food demands of a rapidly increasing population. Other sectors are expected to grow to provide balanced growth for the economy. Actual Performance As to the actual performance of the economy, the rate of growth of the GNP in 1969 was only 6.3 per cent, which was below the Second Five-Year Plan's annual target of 7 per cent. This was due to low agricultural output. "Turkey had to import 650,000 tons of wheat and the intention was to import 850,000 tons in 1970."*-° How ever, in 1969, industrial output increased more than 9 per cent and slightly less than the previous year's output. There were substantial increases in production of electric ity, cement, chemicals, tyres, textiles, and electrical appliances. However, severe bottlenecks developed for supplies of iron and steel, which domestic plants could not provide in sufficient quantities and emergency imports 11 had to be arranged which somewhat alleviated the situation? ^ oecd. Economic Survey, Turkey, December 1970, p. 6. 11 Ibid.. P. 7. 163 "As to 1970, the actual performance of the economy failed to attain the plan's target rate of growth. The GNP (at constant prices) was estimated to have in creased by 5.5 per cent. This was due to low agricultural output. The rate of industrial expansion fell to only 2.5 per cent, as compared with an average of 10 per cent in the preceding four years.The industrial sector was distressed by the shortages of raw materials and other essential imports, due to low foreign reserves and tight credit restrictions, which was introduced to check infla tion and speculative activities, which had developed in 1969. 1971 wittnessed a remarkable recovery, mainly due to high agricultural output, particularly a record wheat harvest, and indications are that economic activities will continue their upward trend in 1972. Although accomplishments fell short of targets, the following should be emphasized: First, the degree of departure from planning targets was not consistently dramatic. An achievement of a 6.3 per cent annual growth rate, for example, departs only 10 per cent from target. This represents 90 per cent achievement, which is fairly substantial, especially as compared to other experiences 12 Ibid., P. 6. 164 in central planning. Second, the rate of growth in GNP in excess of 6 per cent annually (much less a rate of industrial growth of over 10 per cent), compared with either pre-planning days or with the experiences of other LDCs,nB/be said to represent a reasonably high degree of success. Financial and Monetary Aspects and Projections of the Second Five-Year Plan Fiscal Policy The plan aimed at the implementation of a tax policy which conforms with the basic economic and social objectives of the plan, i.e., efficiency of resource allocation, equity in income distribution, and economic stability. As in the previous plan, the Second Five-Year plan urged financing the plan investment through real resources, in order to avoid economic instability. In order to realize the growth target of 7 per cent, the plan required an increase in tax revenues, an increase in the ratio of total savings to the GNP (without adversely effecting the income distribution), and some means to ensure that the increased flow of voluntary savings of the private sector be channelled into produc tive investment compatible with the priorities of the plan. 165 In addition to the fiscal measures included in the preceding plan, the Second Five-Year Plan urged the necessity of a reform in the current tax system, if the targets foreseen in the plan are to be achieved. The main weaknesses of the current tax system and tax administration, and the tax reforms proposed by the plan, may be briefly stated as follows: (1) Tax system should be reformed to acquire sufficient revenue flexibility and to avoid frequent amendments. (2) "The relative share of indirect taxes in 13 , . the tax system amounts to 70 per cent." This is contrary to the principle of justice in distribution of the tax burden. However, progressiveness in the tax system should not be detrimental to the incentives of the private sector to invest in productive areas. (3) "Out of the total indirect taxes to be collected, 42 per cent in 1967 and 36 per cent in 1972 are expected to be related to imports. Such close depend- 14 ence of the tax system on foreign trade is detrimental." (4) The tax administration and control systems 13 SPO, Second Five-Year Development Plan. op. cit., P. 116 14 Ibid., P. 116. 166 are inadequate. Necessary reforms should be introduced to protect the interests of the taxpayer, as well as tax administration. (5) The current production tax is to be replaced by a "value-added" tax. (6) A tax on highway transportation is proposed by the plan, in order to meet the cost of maintenance and improvement of the highway system. (7) Agricultural taxes should fluctuate together with changes in the agricultural income. (8) "New incentive measures in taxation will be introduced to direct investments into fields which will ensure interregional balance."15 (9) Tax incentives are to be introduced to stimulate investments in those export industries which have the potential of becoming competitive in world's market. Furthermore, measures are to be taken to reduce the demand for luxury goods, particularly those which are imported. 15 Ibid.. P. 120. 167 Monetary and credit Policy Aspects and Projections of the Second Fxve-Year Plan As in the previous plan, the Second Five- Year Plan stressed the role of the monetary policy in maintaining price stability, in keeping the balance of payments deficit within the foreseen limits, and in the pursuit of a policy aimed at full and efficient utiliza tion of resources, both human and capital, in the economy. To achieve these objectives, the plan urged the monetary authorities to provide the necessary expansion of money stock and credit availability commensusafce with the plan's target rate of economic growth. Briefly, the most outstanding measures regard ing the monetary aspects of the Second Five-Year Plan are the following: (1) To organize a "Council on Money and Credit", composed of the state Planning Organization, the Ministry of Finance, and the Central Bank, to ensure coordination, and to act in an advisory capacity to the council of Ministers in the implementation of the monetary policy. (2) To revise the central Bank Law (which was in effect since 1930), to make the Central Bank's relations with the Treasury and the banking system more effective and more compatible with the requirements of planned growth. 168 (3) To improve monetary policy through stimulat ing open market operations (to be utilized as a monetary tool), and to increase the money supply, the following measure is adopted; "The Treasury, instead of borrowing on short-term from the Central Bank, will itself issue short-term bonds and sell them to the banks, which in turn will be able to sell them to the Central Bank, when deemed necessary. (4) To ensure the conformity of the credit policy to the requirements of the plan, the central Bank's control and cooperation is deemed to be enhanced. (5) "Measures will be taken to utilize public 17 deposits as an instrument of monetary policy.” 7 (6) As in the previous plan, a flow-of-funds account will be established by the Central Bank and utilized in conjunction with the national income accounts. 16 Ibid., P. 125. 17 Ibid., P. 125. 169 Industrialization during Second Five-Year Pla~n The "preliminary national accounts data for 1969, suggests that industrial output rose by little more than 9 per cent, and thus, slightly less rapidly than the year before. There were substantial increases in produc tion of electricity, cement, chemicals, tyres, textiles, and electrical appliances. A severe bottleneck developed for supplies of iron and steel, which domestic plants could not provide in sufficient quantities and emergency imports had to be arranged. In general, it seems that the most rapid in creases in output last year were achieved by those branches of manufacturing industry, which are the most dependent 18 upon imported supplies." "During the first half of 1970, Turkish indus try suffered from shortages of raw materials and other industrial supplies, mainly because of deliberate slowing down of import procedures in view of the low level of convertible currency reserves. Among the branches which showed a slight decrease in production, were iron ore, 18 OECD, Turkey, Dec. 1970, op. cit., P. 7. 170 copper, coal, crude petroleum and woolen fabrics. Produc tion of paper, cotton fabrics and cigarettes and tobacco stagnated, whilst higher increases of output were recorded for steel, rolled products, cements, fertilisers, glass and alcoholic beverages. Available statistics for 1971 show that the expected stimulation of industrial activity has only 19 partially occurred," Conclusions and Evaluations The role of the State Planning Organization in Turkey is basically, as indicated before, an advisory body, of which it is occasionally reminded by the executive branch, whenever institutional problems of coordination between the plan and policy implementation were encounter ed. Therefore, some argue that just publishing the plan is not sufficient; and they think that this type of plan ning, particularly in a backward economy such as Turkey, aside from its demonstrative effect and political appeal, is not too promising. Also, they maintain that planning needs to be more ambitious; a more centralized type of planning, would be more effective, in terms of economic 19 OECD, Turkey. Jan. 197 2, op. cit., PP. s -t : 171 growth. However, the likely possibility of added bureau cracy, a trade-off between more rapid economic growth and some other objectives, such as economic and political democracy in the western sense, have to be seriously taken into the account. Furthermore, in order for the plan to succeed in attaining its growth targets in a predominantly an agricultural economy such as Turkey's, it has to stress the growth of its agricultural sector, so as to provide an adequate food requirements for its rapidly growing population. However, an overall review of Turkish plan ning and economic policies reveals that the development of the agricultural sector was not effectively pursued. Also, it seems that the attainment and maintenance of the balance of payments equilibrium, has not been among the main plan's objectives in Turkey, despite the chronic and deteriorating conditions of their balance of payments deficits.20 Moreover, Turkey is among the highest in popu lation increase in the world, and the country's demographic structure has been undergoing some far reaching transforma See Table 7 in Jan Tinbergen's Central Planning, (New Haveni Yale University Press, 1964K P.118, 172 tion, due to the rapid growth of population, urbanization, and the great number of Turkish workers in Western Europe, particularly in West Germany. Despite the various economic implications of this matter, and although most of the Turkish economic planners and policy makers are quite aware of the problem, nevertheless, the formulation and the implementation of the plan has not yet taken this matter seriously into account. It is hoped that the problems created,i.e., housing, education, food, health, and employ ment, are not left, in the long run, to Malthusian type market forces to resolve them. Furthermore, "the 15 year Plan, which attempts to take care of the estimated "one" million "disguised" unemployed in agriculture, forecasts a supply of 6.5 million additional jobs by the end of the period, as against the demand for 7.5 million, thus 21 not yet providing for about one million unemployed." Finally, in regard to the economic growth, it is worthwhile to point out that a sustained growth of both private and public sectors requires not only economic, managerial, and technological know-how, but a whole 21 Z. Y. Hershlag, op. clt., P. 303. According to official sources, the urban popula tion is growing more rapidly than in the rural areas, thus creating a serious problem, at least in the long run. 173 transformation from a medieval social structure and attitude to an industrious and modern outlook and atti tude. In this regard Hershlag points out that: "A shrewd Turkish observer, who himself had had the opportunity to study the problem from close quarters at the ministerial level, remarked that even though quite a number of economists and administrators had acquired some measure of learning and political education, these had remained superficial and the people concerned had not really become "occidentalised". In economic terms this means: extremely feeble knowledge of cost accounting and analysis; negligible market research; and poor technical and administrative capacities. While often heavy losses of many thousands of pounds are incurred almost as a matter of course, the managers of the economy are taken aback by expensive, though not 22 prohibitive, costs of mending the situation." 22 Ibid.. P. 271. CHAPTER IX CONCLUSIONS AND EVALUATIONS It has been indeed a significant step forward to formulate a reasonably comprehensive plan for the whole economy, in the face of difficulties that an underdeveloped economy such as Turkey encounters. Its contribution will be important in the long range economic development of the country. The first difficulty encountered is the lack of adequate expertise among government officials. There fore, for advice and technical and managerial knowledge, Turkey relied upon foreign experts, some of whom were not very familiar with the peculiar conditions of the country. Furthermore, statistical data, even in the main aspects of the economy, such as national income and product, price level indexes, savings and investment, and the level of employment were inadequate. Where statistics were lack ing or inadequate, the Board's response was to make some rough estimates. Furthermore, the consequences of politic- 174 175 al and administrative instability were reflected in the machinery and work of the Planning Board, in terms of various shortcomings and discrepancies, such as inconsis tencies of statistical data regarding the government's revenues, expenditures, etc. It seems that the nature of some of the state ments made in the plan were descriptive, arbitrary, insuf ficient, and even contrary to actual policy implementa tions, for example, in regard to deficit financing, as explained previously. The degree of the impact of gov ernment's financing on the national income, employment, and price level will not be known unless the method and the volume of financing is known. The type of deficit financing and the fields to which the expenditures have been channelled (except for some broad principles),indeed, the whole credit and monetary policy have been surrendered to the fiscal agencies and to the central Bank. The lack of overall coordination among different sectors of the plan is another problem. The causes are, attributed for the most part, to the nature of an under developed economy, such as Turkey's, and to the uncoordi nated work of different government agencies and experts in setting the plan. Furthermore, the statements which were made in the plan lacked adequate explanation or 176 justifications, with a great deal of abstraction. This was coupled with some unnecessary repetition of basic content, and the arbitrary nature of conclusions, in regard to the predicted outcomes of the plan policies. So, the plan could have been much improved if it had been put on a more precise and objective basis. For example, although the government has frequently paid lip service to the need to stimulate the private sector, limited facts have emerged to support those promises. Also, the plan stated a target rate of annual growth of 7 per cent in national income over the plan period. However, the actual rate of growth realized fell way below the plan objectives. This was not quite unexpected, because a close examination of the procedure or the method of arriving at such an estimate will reveal that the plan target was unrealistic. Why? Because the estimated rise in national income was based upon certain assumptions, which the attainment of the plan target has to be based upon, such as i useful estimates of the amount of public and private savings, in addition to a more reliable estimate as to the amount that the country will be able to obtain in foreign aid, loans, and foreign private investments. The public savings estimate depends, among other factors, upon the presupposition that the projected 177 rise in revenues will come about primarily as an outcome of the growth of national income. This basically implies that the rate of growth of all the sectors (agricultural, industrial, foreign sector, etc.) of the economy will occur according to the plan projections. This will come under considerable doubt, when we recognize the fact that the economy did not attain the plan targets during most of the plan period. The lack of sufficient capital invest ment aid an adequate number of skilled laborer and managerial know-how, contributed, among other factors, to this end. Also, the projected rate of private savings was primarily based, besides the projected rate of growth of national income, upon the assumption that so much of each year1s increased national income will be added to the private savings. There is no guarantee that projected propensities to consume and save will be realized in all cases. It is quite possible that with increased per capita income in a LDC, consumption will increase more than expected, indeed, at a limit, to the full extent of the increase in income, as it is a human tendency to raise the standard of living. Also, it is possible that with increased production, higher production costs will result, also leading to reduced private savings. As to the foreign sector, the foreign exchange 17* For a LDC, it is important to have a high rata of growth, which is also consistant orsr a considerable period of time. How does economic growth under the First Five-Year Plan compare with that of earlier periode? Because of inadequacy of data, we have to cor.- tend with very rough estimates to i:oopare the period of the thirties with the postwar era and the fifties with the sixties.* All of these periods had in eoseon coatinews developmental efforts, although various policy approaches were applied1 throughout. Hershlag suamerises the matter as follows: For the thirties the growth in 1939 as ocmpered with 1935, and found an average annual increase in heel National income of 6.4%, and a per capita increase of 4%. For the fifties we found an average annual growth of reel Gross Domestic Product (at factor cost) at 6.3%, and a per capita growth of 3.4%. Total annual growth for 1HO-45 was estimated at 5.3%, and per capita growth aver aged 2.1%. Thus the figures representing the average annual reel rate of growth per capita for the respective periode are 4%, 3.4% and 2.1%. This is not very encouraging, since it points to an average gradual fall in the rate of tyroslli. However, several qualifications should be esds with regard to these results: (1) According to censuses and estimates of population growth in non-Census years, the rate of * sees of the population appears to be higher for the fifties amd sixties; (2) Different lengths of periode aseemed for the See Table 13 for a synopsis of growth in per capita income in 1938 and 1948-1965. Also see Table 14 for growth rate in GNP(Planned vs. Actual rates) daring the period 1962-1966. 2A large amount of investments dering this period came not only from internal sources,as in the prewar period,but from external sources,i.e.,foreign aid w d in vestments. 178 earnings have not been too encouraging, considering the large deficits inUb country1s balance of payments. Foreign aid, loans and investments are not too reliable, due to their being subject to exogenous forces, mostly of non economic character. Therefore, it is more realistic not to take the projected volume of available capital resources on its face value. An important factor to be considered in the plan is that, even if all the financial estimates of the plan are realized, any change in the price level will retard an adequate and proper implementation of the plan. This consideration becomes more important when we recognize the fact that a rapid or an accelerated rate of develop mental expenditures is most likely to bring about some inflation in the economy. The necessary details and revisions of the general plan were left to the Annual Programs, in the light of the new factors that emerged in the process of implementation. Nevertheless, the latter have reflected a great deal of the shortcomings of the former. Thus, when considering the potentialities of the country, in terms of its natural resources and a stable labor market, etc., the rate of economic development has been very slow. 179 For a LDC, it is important to have a high rate of growth, which is also consistent over a considerable period of time. How does economic growth under the First Five-Year Plan compare with that of earlier periods? Because of inadequacy of data, we have to con tend with very rough estimates to compare the period of the thirties with the postwar era and the fifties with the sixties.1 All of these periods had in common continous developmental efforts, although various policy approaches were applied^ throughout. Hershlag summarizes the matter as follows: For the thirties the growth in 1939 as compared with 1935, and found an average annual increase in Real National income of 6.4%, and a per capita increase of 4%. For the fifties we found an average annual growth of real Gross Domestic Product (at factor cost) at 6.3%, and a per capita growth of 3.4%. Total annual growth for 1960-65 was estimated at 5.3%, and per capita growth averaged 2.1%. Thus the figures representing the average annual real rate of growth per capita for the respective periods are 4%, 3.4% and 2.1%. This is not very encouraging, since it points to an average gradual fall in the rate of growth. However, several qualifications should be made with regard to these results: (1) According to censuses and estimates of population growth in non-Census years, the rate of increase of the population appears to be higher for the fifties and sixties; (2) Different lengths of periods assumed for the See Table 13 for a synopsis of growth in per capita income in 1938 and 1948-1965. Also see Table 14 for growth rate in GNP(Planned vs. Actual rates) during the period 1962-1966* 2A large amount of investments during this period came not only from internal sources,as in the prewar period,but from external sources,i.e.,foreign aid and in vestments. 180 calculations, might have some Influence on the average rates; (3) The different basis years for constant prices in the first period (1938) and in the two later periods (1948) may also have repercussions on the results; (4) All this is subject to the reliability of the national product and price indices computations themselves; in this respect the 1960's data are more reliable technically and Less affected by propaganda reasons than those of the previous periods.3 Another possible explanation, (although it requires further research), is that some structural changes, from a more labor intensive to a more capital intensive economy, may have occurred. Besides, more investments in social overhead capital during the postwar period, manifested with a time-lag, may have caused a rise in the capital coefficient in the economy. The low income level, coupled with a high rate of population growth and inflation in the economy, have re-, suited in a low rate of capital formation. Furthermore, the climate has not been too favorable to attract private foreign capital, except mainly what has been obtained through the Turkish government from foreign governments, primarily through foreign aid programs. Financial institutions in Turkey are still too limited for rapid economic development. Some of the capi tal is provided for the private sector, through the banking 3 Z. Y. Hershlag, op. cit.. P. 280. 181 system. However, most of the transactions in the economy are carried out through cash payments, which further restricts the role of banking in the system. Also, there is a tendency by the commercial banks to limit credit facilities to the foreign trade sector, and to large scale industry, thus leaving only a meager amount for domestic transactions and small business concerns. This could be overcome by encouraging the development of branch banking, which undertakes the task of meeting the capital require ments of small domestic industries and business enter prises. Moreover, due to the lack of a security market in Turkey, most of the private savings have been invested in real estate purchases and in the construction of various types of buildings. Mainly, what keeps the security market in a retarded condition is the government's ownership of most of the industrial enterprises in the country. However, the main outlet for private savings to be channeled into the private investments is through the commercial banks and the Industrial Development Bank of Turkey. As to the industrialization efforts and the evaluation of industrial potentialities in Turkey; some basic industries were studied. The period for which data was available regarding costs, investments, etc., was the 182 post World War II period. Most of these data were gather ed during the United States' aid program, at that time. Among the projects which were studied were: coal, hydro electric power, iron and steel, in addition to brief descriptive surveys of some other industries, such as chromium, copper, import substitutes, etc. In regard to coal, the study has shown that the returns on the estimated total expenditures on coal in Turkey, during the period under study, have been around 9 per cent, which was sufficient in a little over a decade to pay for the total expenditures on this project. How ever, from recent production data, it seems that the production of coal has not kept a steady growth to earn sizeable foreign exchange earnings for the country. Never theless, it supplied a good deal of solid fuel that is badly needed for the economic development of Turkey. In the case of hydroelectric power, it has been one of the most important contributions of the United States aid program to Turkey. This project shows a 9 per cent annual return to investment, and is significant to the Turkish economy in terms of providing the major industrial region with a source of electric power and in releasing a large amount of coal to be utilized for other purposes. As to iron ore and steel, these projects, besides coal, have an important role in Turkish future industrial 183 development. Nevertheless, recent data shows that the policy makers have been tunable to pursue steady growth in these lines of economic development, since domestic production was unable to grow adequately to satisfy grow ing domestic needs, or to give relief to the growing trade deficit. One of the most serious obstacles confronting the path of a greater production of iron and steel is the lack of coordination between the iron mines and the steel mills. This is an example of an economic inefficien cy which the planners have not solved yet. Overall economic conditions in Turkey since world War II , were generally not too encouraging, despite all the developmental planning and industrial ization efforts. Per capita income is still very low. The external debts of the country amounted to TL. 12,904 million, as compared to about TL. 775 million in 1950. The total servicing charges for the debt, for the First Five-Year Plan, amounted roughly to $567 million, or more than 30 per cent of total export earnings. During the same period, exports were less than sufficient to pay for 70 per cent of imports. Inflation was severe; the general price index rose to 322 per cent of its 1953 level.4 The ^Figures are taken from the following source: Turkiye Is Bankasi, Economic Indicators of Turkey, (1963-1967), op. cit., P. 12. 1 8 4 crucial question is whether those unfavorable conditions could have been avoided, alleviated, or at least brought under control through better economic planning and more appropriate policies. It is evident that a complete answer would be almost impossible, and it is easy to look back and conclude that the course of events would have been changed through more appropriate policies. Furthermore, one of the method ological problems is to determine, a priori, which of the multitude of factors operating in the developmental pro cesses are, directly or indirectly, independent or exoge nous, and which are dependent or endogenous. For example, should we consider restrictive policies regarding foreign investment, or the preferential treatments of state eco nomic enterprises, to have been adopted mainly for politic cal purposes ? Are the historical forces and institutional frameworks independent or dependent variables ? Despite these methodological problems, the fact remains that the government has played an important role in both economic and political life of Turkey. This leads us to presume that the government was capable of affecting the course of events favorably through more appropriate policies. For example, in regard to the trade sector, Turkey, like most primary producing economies 185 has a low income elasticity of demand for most exports, while its needs are urgent for the manufactured goods not produced in the country, particularly capital goods. Little consideration was given to trends in demand abroad or to implication of economic policies, particularly in regard to exports. For example, the high demand for Turkish exports, particularly chromium, during the post- World War II and Korean war, were not realized to be asso ciated with the postwar recovery of Europe and then with stockpiling in the United States, during the Korean war. Also, for lack of investments, Turkey was unable to take the advantage of the world demand for copper in the late fifties and early sixties.5 Furthermore, because of bilat eral trade policies with centrally-planned economies, Turkey was unable to utilize the market opportunities in Western Europe. Moreover, the private sector was not encouraged into the field of foreign trade, mainly because the bulk of the trade is undertaken by state monopolies. Besides, the Turkish government lacked consistent import policies. Imports were allocated among industries and 5 It seems that the export problem of most of the primary producing and exporting economies is caused for the most part by fluctuations in volume, due to weather conditions, etc.,rather than by price fluctuations (espe cially, when a country's exports account for only a small portion of world's exports). 186 sectors on a haphazard basis. In regard to the imports of consumer goods, overly restrictive policies led to accentuation of the inflationary trend in the economy. Thus, owing to the difficulties that encounter the export, of primary products, policy makers put relatively more emphasis on import substitutes, the encouragement of which is based upon the infant industry argument. However, since industries seldom exist in isolation, and because of their linkages with other economic units and activities, the industry- by-industry approach of protection, does not apply, espe cially to underdeveloped economies such as Turkey. What they have am infant economies. It is the overall economy that has to be taken into consideration, if policies aim to have a long-range purpose. Therefore, well concieved economic planning and policies must consider the whole economy, with some emphasis on import substitutions in intermediate goods, which build forward and backward linkages to finished products and to available raw material industries. This would result in gains in terms of external and internal economies, through transmitting interdependent cost reductions in one industry to others, and possibly becoming competitive in the world*s market, with resulting comparative advantages. Consequently, the 187 whole process of an overall developmental plan for economic protection, would be to improve factor endowments and the technological basis of the economy. However, in order for an economy to gain impetus, a minimum of investment capital is needed. This shows that economic development, besides being primarily a responsibility of the developing nation, is an international problem. Thus, the desired end of rapid economic development requires cooperation among the international community. As to the development al economic protection policy, a temporary flat tariff rate on all final goods is less discriminatory, easy to manage, and could be revised downward as these industries establish themselves, that is when they show indications of becoming competitive abroad within a reasonable period of time. Thus, the most efficient industries could be transformed from import substituting industries into export industries, or continue to substitute for less efficient imports. So far in Turkey, in the industrial sector, no import substi tuting industry has been able to become competitive in the world market. However, indications are that the textile and leather industries have some tendency towards that end. Furthermore, the unavailability and inadequacy of statistics on the domestic production of machinery and equipment leaves a great deal of obscurity in this area. 188 A word of caution has to be stressed here, that is, if a policy of protection is made to be success ful, it has to be worked out free from political greed and with a sufficient degree of objectivity, the end of which is to lead to a free trade economy, through gradual elimination of all means of economic protection. Otherwise, protection has a way of becoming self-defeating and result ing in economic inefficiencies. In regard to the measures adopted by the Second Five-Year Plan and the economic stabilization program, it is worthwhile to point out that they did not attain their objectives satisfactorily. The devaluation of Turkish lira in 1970, similar to the 1960 devaluation, did not overcome the problem of widening the balance of payments deficits. Imports continued to outrun the growth of exports. The attempts to increase the inflow of direct foreign investments have not been fully realized. The government's policy to liberalize a large part of their imports was not implemented, due to shortages of foreign exchange reserves. These problems are evidently too basic and structural to be remedied by the type of policy aforementioned. Also, the fiscal measures adopted in the Stabili zation program of the 1970's,which aimed at broadening 189 the tax bfcae and attaining a more equitable distribution of tax burden, the new taxes have not mitigated the heavy reliance of economy's fiscal system upon the import duties and other indirect taxes. The growth of agricultural production often fell behind the plan targets, and substantial wheat had to be imported during some years. Therefore, more efforts should be directed toward increasing agricultural output and efficiency, through application of more technology and modern methods of cultivation, irrigation, marketing and adequate credit. However, the efficiency of large scale production is very difficult in an economy which is predominantly one of small-land holders. A.s to the non-agricultural and industrial sectors, a policy of long-term reforms must be of more serious consideration, if rapid economic growth and industrialization is to be achieved. Measures must be adopted to introduce overall structural and institutional reforms in order to improve the efficiency of the State Economic Enterprises and the management of the public utilities, thus relieving the public budget of the burden of some financial charges. Furthermore, it is essential to increase the competitiveness in the economy and to extend that competitiveness to the sphere of State Economic 190 Enterprises. However, mergers and other forms of economic integration have to be encouraged in order to gain the advantages of economies of scale. The government’s fre quently stated objective, to stimulate private industry through more credit facilities and by the creation of a capital market, should be more than half heartedly imple mented. It should also be noted that Turkey has not adequately made a systematic effort to utilize an important potential source of foreign exchange, namely, its Mediter ranean climate, beaches, and historical cites. Finally, it seems that despite the aforementioned problems, the results are still encouraging. All these efforts for industrialization and economic development combined have provided the country with a great deal of hope for a more rapidly expanding economy, and are expected to contribute significantly to a greater improvement of production and the standard of living of its valiant peopla* Appendix 1 1 AN ECONOMETRIC MODEL OF TURKEY" 191 Appendix AN ECONOMETRIC MODEL OF TURKEY A Macro-Model of Turkey The purpose of this Appendix is to construct a simple macro-economic model of Turkey,on the basis of available national account data.l In our model, the followings are the definitions of the variables used and the functional relationshipst 1.Variables and Equations In our model, the Endogenous variables are as follows: C = Nominal Personal Consumption. Y = Nominal Gross National Product. P = Price Index of Gross National Product. X = Real Gross National product. The Exogenous variables are the following : N = Population. G = Nominal Public Consumption. This Model is primarily based upon: Professor Tintner, Gerhard and Hohenbalken, Von Balder, Econometric Models of the OEEC Member Countries, the United States and Canada, and Their Application to Economic Policy* Weltwirtschaftliches Archiv, Vol.89, 1962, PP. 29-85. ig2 193 I = Nominal Gross Fixed-Capital formation. L = Nominal Increases in Stock. E = Nominal Exports. M = Nominal Imports. W = Nominal Yearly Wage per Worker, t = Time. All data are annual. The first one of our equations is a consumption function. Four kinds of consumption functions are stated in this model., as follows: Nt Pt ai+ blNt Pt *la* NtCpt = a2+ b2 + c2 — ------ (lb) Nt Pt Nt Pt Nt—1 Pt-1 1 Ct + a + b Yt + c . t <lc) Nt Pt J - * Nt Pt Reduced form equations for (Id) are derived from a static consumption function (la) and the definition (2). = k + 1 ( ----- ) Nt Pt 1 1 Nt Pt 1 Yt Nt Pt 2 2 Nt Pt Where : Kt = Gt + It + Lt + Et-Mt a4 = hi 12“ -j : J?. ? -- 1 2 L2 = a.+ b. __^ 4 4 Hf of (Id) Nt Pt * * Nt Pt The functions (la),{lb),(lc), and the reduced form equations are fitted by least squares regression method. 194 The Second one of our equations is the definition of Nominal Gross National Product: Yt = Ct + Gt + It + Lt + Et-Mt (2) The Third equation is the definition of the Real GroBB National Product: Xt = Xt (3) The Fourth equation is the Demand for Labor or the Marginal Productivity of Labor: dxt _ Wt (4) dDt Pt The Fifth equation is a Production Function. Three kinds of production functions are put forward as follows: log Xt = d^ + f^ logDt (5a) log Xt = d2 + f2 logDt + g2- t (5b) log Xt = d3 + f3 logDt (5c) Where! log f3 (log Wt - logXt, n t=l Pt Dt' d3 n *log xt“ f3 log Dt* Sources of Data: The annual data for Ct, Gt, It, Et, Mt, Yt, Xt, 2 Nt, Pt were obtained by regular routine. With re spect to the data for Dt and Wt, we need to explain 2 State Institute of Statistics, National Income: Total Expenditure and Investment of Turkey; 1938, mfi-196^, (Ankara: 1570) . ---- -------------------- 195 the way in which they were obtained* For employment* we have obtained the necessary figures from the "Second Five-Year Development Plan"*^ In regard to wages* we calculated an average for the average daily earning of production workers in public and private sectors for 1960-1965. But it was taken "a priori" to represent the general wage level. This decision is partly due to the unavailability of agricultural wage data* and by doing this*we ignored the disguised unemployment in Turkish economy,implicitly. The average daily earnings data of production workers in public and private sec tors*were then multiplied* to get the annual wage figures. The Statistical Method of the Model The model has 5 equations*which include two structural equations and three identities. The two groups of structural relationships whose parameters are to be estimated are the consumption function(l) and the production function(5). The a* b* d* and f are the symbols for the estimates of the true parameters. We do not state error terms for simplicity* and 3. State Planning Organization*"Second Five-Year Develop ment Plan," 196S-1972, Published by the Central Bank of Turkey, Ankara 1969, P.143* Table 59. 196 assume that errors are normally and independently distr ibuted. The static consumption function were fitted by simple least square regression. The order condition for identif- iability says that, to be identified, an equation in a model of H linear equations must exclude at least H-l of the variables that appear in the model. This requirement holds for our consumption function. From(la) and (2),we can derive the reduced form equ ations for the endogenous variables— j , . Nt Pt ana Nt Pt These reduced form equations are fitted by simple least squares regression, and the resulting coefficients are transformed back into the structural parameters of (Id). The least squares regression which are used for the estimates in our model yields maximum likelihood estima tors under stringent assumptions,i.e.,the errors satisfy the requirements of the Maroff theorem and are normally distributed. According to Markoff theorem, if we drop the normality assumption, the least squares method gives best linear unbiased estimates. All of the production functions in our model are Cobb-DouglaB type. For purposes of estimation, they can readily be made linear in the coefficients, as the Mark off theorem requires, by transforming the data into log arithms. The main reason for using this type of product ion function is that it promptly gives the elasticities 197 of the product with respect to the factors of production. Thus policy proposals may be derived. For example, we can get answers to the following type of question: By how many per cent will the output increase, on the average, if the given factor increases by 1 per cent ? Elasticities are dimensionless numbers and independent of the units of measurement. However, a production funct ion for real GNP with only labor as the single input is certainly incomplete. By applying Klein's method,in which we use simult aneously the information given by equation(4) we arrive at an estimate of the parameter f and then, with its value known, find the constant d. It goes as follows: f in the Cobb-Douglas function represents the elasticity of the output with respect to the labor input,i.e., dx f , X = DdX dD XdD D but,by definition(4)the Marginal Product of labor is equal to the real wage ^ - 3L. , dD P * • Therefore, by substituting in the above formula, f _ WD PX With observations for all of its four variables, f can be estimated. Klein chooses as estimator the logarithm of the geometric mean, which is equivalent to the arithmetic C D a\ The Data Million of Turkish Liras (at Current Market Prices) (1) (2) (3) (4) (5) (6) (7) 1 cal Ct Gt It Lt Et Mt Yt 1963 52,141 9,887 10,077 - 3,681.0 6,876.0 69,024 1964 54,504 10,616 10,567 - 4,108.0 5,372.0 74,198 1965 57,868 11,289 11,747 - 4,589.0 5,720.0 80,020 1966 67,896 12,160 15,153 - 4,905.0 7,183.0 93,578 1967 75,566 12, 329 17,262 _ 5,223.0 6,847.0 103,996 The Data ( continued ) Million (at Current of Turkish Liras Market Prices) Thousands of Persons (8) (9) (10) (11) (12) (13) Year Xt Nt Dt Wt Pt t 1963 61,527 29,880 12,829 7,238 107.7 1 1964 64,545 30,623 12,946 7,925 104.9 2 1965 67,466 31,391 13,047 8,173 104.5 3 1966 74,382 32,207 13,435 9,828 110.3 4 1967 78,888 33,044 13,739 10,015 106.1 5 200 mean of the logarithms log f = JL (logwtp£.) = -jf (log — - log—^ ) n PtXt t=l Pt Dt whose anti-log yields the elasticity f. To find the constant d , we start again with logXt « d + f log Dt d = logXt - f log Dt Since the estimate of f has already been obtained, the right-hand side of the equation is fully determined and we can find d, d = j^“i^ l°9xt " f logDt ) Estimated Parameters (la) Static Consumption function, simple regression N_S|_ = 0.00167 + 0.66520 Sb = 0.03710 f = 32.141* r2 = 0.9908 r = 0.9954 (* » significant at 1% level ) (5a) Static production function, simple regression of the logarithm log Xt « -9.82242 + 3.55831 log Dt af « 0.27364 F = 169.097 201 r2 - 0.9826 r = 0.9912 Evaluation of the estimated parameters 1) consumption functions The coefficientsb represent MPC, and the constants a^ are intercepts. The value of the estimated MPC seems to be low, mainly due to relating real per capita consumption with real per capita GNP and not with disposable income. While we are not so sure about dynamic functions, we could estimate meaningful and significant static functions. 2) Production functions The static cobb-Douglas function(5a), whose log arithmic transformation was fitted by ordinary least squares regression, has negative constant d and the large elasticity f. This comes from the absence of capital in the equation, and the ignorance of endogen eity of D. Derivation of simultaneous elasticities In the derivation of simultaneous elasticities, we will use the static model, since only the static form* of both equations(1) and (5) have statistically 202 significant and economically meaningful estimates for their parameters. The general structure is then as fol lows : = a* 4. b-i Yt Nt pt Nt Pt (la) Yt = Ct + Gt + It + Lt + Et-Mt (2) xt = 3£ (3) pt dXt = _Wt (4) dDt Pt Xt = 10d-Dtf (5) This five-equation system involves five endogenous variables: C, Y, X, P, D, and seven exogenous variables: N, W, I, G, L, E, M. For an analysis of possible economic policy measures, in this model, the endogenous variables are considered as the "targets". The exogenous variables, being not det ermined by the system, will be the (more or less) freely adjustable tools of the policy makers, are called "inst ruments". If all endogenous variables are expressed in terms of the exogenous variables, forecasts of the targets on the basis of changed instruments could be made!i.e., we are asking for the simultaneous elasticities of the target variables with respect to changes in the given instruments. We can set K for G + I + L + E -M, and this leaves us with only three exogenous variables, N, W, and K. The marginal product 3E- Qf a cobb-Douglas function equal*, 203 f x fTT * We express the above model in the more< manageable form as follows: C = aNP + bY (1) Y = C + K (2) XP = Y (3) fXP = WD (4) log X= d + f log D (5) To obtain the absolute changes of the endogenous variables with respect to a shift in one exogenous var iable , we replace each structural equation by the sum of the partial differentials of this equation with resp ect to all endogenous variables and the exogenous varia bles in question. We have, therefore, the following sys tem of three sets of differential equations: (1) N varies; W and K fixed dC = a[ PdN + NdP ] + bdY (6) dY = dC (7) PdX + XdP = dY (8) f [ PdX + XdP J = WdD (9) dX „ f dD (10) X d (2) W varies; N and K are fixed dC - aNdP + bdY (11) dY = dC (12) PdX + XdP - dY (13) 204 f [ PdX + XdP ] = WdD + DdW dX _f _dD X D (14) (15) (3) K varies; N, W fixed dc = aNdP + bdY dY = dC + dK PdX + XdP = dY f [ XdP + PdX ] = WdD dx _ c dp X D (16) (17) (18) (19) (20) The differentials in the above equations ( dY, dN, etc.) represent the absolute changes in the vari ables. We convert them into dimensionless, relative changes ( ~ , etc.) as follows: (1) N varies: dP » , a { i-f ) N i ,dN> dY Y dD x i ,dP . }“ (1-f)( p } dx , = (^ f (- D ' f X dC Y /dY\ "C dX f 1-f (-i* w d 4 (21) (22) (23) (24) (25) (2) W varies: rdW dP = r f (1-b) X 1,Un . P 1 X(l-b) -a(l-f)N '-W—' (26) (27) 205 (“ ) = “ - ( f^) (28) <^> “ -7- ( (29) ( dC ) = _Y ( dY ) (30) C C Y (3) K varies: | ( 1-*) (4E) = [------------------ ]-<-3r> <31) p X(l-b)- a(1-f) N K (f> = T (&rufh^r (ra,(f> ( 3 2 > (■¥’ “ (")-<"> (33) > (34) < $ > - - £ >--£(•#> (35) By setting dN dW ang _dK equal to 1 percent, we N W K can solve these recursive systems step by step to get the simultaneous relative responses of the endogenous variables; i.e., we are seeking for simultaneous elast icities of the target variables with respect to the given instrumental variable. The results obtained are shown in the following table, which shows the elastic ities (percentage change) of endogenous variables with respect to changes (1%) in each exogenous variable, ceteris paribus. 206 Exogenous variables Endogenous K------ variables N W ___________________________ G I I* E M p -0.006 3.538 -0.009 -0.013 - -0.000 -0.001 Y 0.002 0.008 0.313 0.460 - 0.016 0.023 X 0.008 -3.530 0.322 0.473 - 0.016 0.023 D 0.002 -0.992 0.091 0.133 - 0.005 0.007 C 0.003 0.009 -0.098 -0.114 - -0.007 -0.010 The changes of p with respect to N, G, I, E, and M have the reversed signs, and this could be cons idered wrong by "a priori" information. This is due to an unreasonably large figure for f which is greater than one. This comes from the fact that we ignored all the factors of production except labor. The negative respon ses of X and D to a wage increase could also have resul ted from the fact that the model operates under the mar ginal productivity theory and labor is the only input of the production function. The greater elasticities of X than those of V are also due to the fact that f is greater than one. b i b l i o g r a p h y ?07 208 Adelman, Adler, J Balassa, Balogh, ' Bator, F, Boeke, J, Bonne, A, Coppock, Domar, E, Friedman, Friach, 1 BIBLIOGRAPHY Note: This bibliography includes, besides the references quoted in this study,other relevant books and articles. I., and Morris, c. Society. Politics and Economic Development. Baltimore: John Hopkins Press, 1967. H. The Underdeveloped Areas: Their Industrializa tion. New Haven: Yale Institute of Int^l Studies, T5*S. B. Trade Prospects for Developing Countries, Illinois: Richard D. Irwin, Inc., 1964, Planning for Progress. London: Fabian Society, 196TI The Economics of Poverty, London: weidenfeld and Nicolson, 1966. 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"Problems of Industrialization of Eastern and Southeastern Europe," Economic Journal, Volume LIII (June-September, 1943), PP. 205-216. Scitovsky, T. "Two Concepts of External Economics," Journal of Political Economy, Volume LXII (April, 1954), PP. 143-51. _____________ . "Growth Balanced or Unbalanced," in M. Abram- ovitz, The Allocation of Economic Resources. Palo Alto: Stanford University Press, 1959, PP. 207-217. Singer, H. W. "The Mechanism of Economic Development, " Indian Economic Review.(August, 1952) PP. 12-33. Tintner, G., and Hohenbalken vonB. "Econometric Models for the OEEC Countries, the United States and Canada, and their Application to Economic Policy, Weltwirtschaftliches Archiv, Volume 89, 1962, PP. 29-85. Publications— United States— Barker, J. M., The Economy of Turkey, The International Bank for Reconstruction and Development, Washington, D.C., 1951. Chenery, H. B., Brandow, G. E., and Cohen, E. J. Turkish Investment and Economic Development. United States' Foreign Operations Administration Special Mission to Turkey- Ankara, (December, 1953). Dorr, R. H., Chief, Special Mission to Turkey, ECA Project no. XIII, Project Letter of Application.Ankara: (January 1T, 1949) . 214 Dorr, R. H. Report on Sarivar Hydroelectric Power Project, (August 7, 1950). . Report on Zonguldak Coal Mines Project, Eco nomic Cooperation Administration, Project no, XIII, Washington, D.C., (1949). Economic Cooperation Administration, Project Agreement Between the United States and the Republic of Turkey. (September 12, 1950). International Engineering Co.,(San Fransico, Calif.).Report on the Economics of Sarivar Hydroelectric Pro ject. Sakarva River-Turkey.(May, 1949). OECD, Economic Surveys, Turkey. (December, 1970)• . __________________. Turkey, (January, 1972). Ward, F. R. Report on Turkish Iron and Steel Industry. Prepared for the Iron and Steel Branch, Industry Division, ECA, Washington, D.C.,(December,1949). Williamson, J. G. Projected Aid Requirements for Turkeyt 1960-1975, AID, Discussion Papers, no. 10, Washington, D.C., (December, 1965). Publications-Turkey Bark, Cemal S. Estimates of Project Expenditures. Eti Bank Project Application^ Ankara* (October 13, 1950). State Institute of Statistics, National Income: Total Expen ditures and Investment of Turkey, 1938, 1948- 1969, Ankara, 1970. . Pocket Data Book of Turkey, Publication no. _____________ . PocKet Data book of Turjcev, £38^ (Ankara; SIS Press, 1969). State Planning Organization, First Five-Year Development Plan (1963-1967).(Ankara; 196^1. . Second Five-Year Development Plan (1968- 1972). (Ankara; 1968). Turkish Ministry of the Economy, Report on the Development of the Coalfield of Zonguldak. Presented to the OEEC at Paris and to theECA at Washington, D.C., (September 15, 1948). S TA TI STI CAL APPENDIX 215 Table(13) Per capita Income(NNP at factor costs) At constant(1948)Prices,1938-1965 ____________________________________________ (Turkish Lira) Year P/C Income Year P/C Income 1938 432 1956 532 1948 440 1957 549 1949 382 1958 597 1950 434 1959 604 1951 485 1960 600 1952 513 1961 585 1953 556 1962 605 1954 490 . 1963 633 1955 513 1964 645 1965 662 Source: Republic of Turkey's Prime Ministry, State Institute of Statistics, "National Income:Total Expenditure and Investment of Turkey;1938,1948- 1969; Ankara,1970, P.20. Table ( 3. 4) Gross National During the Product in Turkey Period(1962-1966) ( Million TL.) (At 1965 Prices) Year Plan Targets Annual Increase %) Realisation at 1965 Prices Annual Increase (%) Index 1962= 100 (1) <2$ (3) (4) (5) 1962 62,497 61,882 100.0 1963 66,871 7.0 66,648 7.7 107.7 1964 71,553 7.0 69,910 4.9 113.0 1965 76,562 7.0 73,127 4.6 118.2 1966 81,921 7.0 79,536 8.8 128.5 Source: State Planning Organization, "Second Five-Year Development Plan;1968-1972", Ankara 1969, P.9. Table (15 ) Basic Industrial Production in Turkey (1,000 tons) 1963 1964 1965 1966 1967 Pig-iron 301 400 681(1) 893(1) 997(1) Steel-ingot 332 405 585(1) 843(1) 996(1) Cement(2) Cotton fabrics 2,698 2,940 3,244 3,865 4, 249 (1,000 m.)(3) Woolen fabrics 164,495 169,011 180,747 187,415 188,706 (1,000 m.)(3) Commercial ferti 4,446 4,446 4,437 4,492 5,154 lizers(2) 327 Electric Power 312 376 380 361 (Million kwh. )(2)3,965 4,435 4,942 5,535 6,167 Thermic 1,857 2,783 2,775 3,218 3,797 Hydro-electric 2,108 1,652 2,167 2,317 2,370 (1) Turkish Iron and Steel Works+Ergli iron and Steel Works (2) Public+Private Sectors (3) Public Sector Source: Turkiye Is Bankasi, A.S.,"Economic Indicators of Turkey, 1963-1967", P.4, Table(i6) Indices of industrial Production in ______Turkey(1948-51=100)___________ 1963 1964 1965 1966 1967 General Index 300 393 432 510 567 Manufacturing 405 530 607 775 910 Foodstuffs 272 347 347 371 391 Mining Electric Power 215 241 264 288 296 566 655 710 805 864 Source; Turkiye Is Bankasi h.S., “Economic Indicators of Turkey. 1963-1967 P.4. o tM (N Tabled?) Production of Mineral Ores in Turkey (1,000 tons) 1963 1964 1965 1966 1967 Crude Petroleum(1) 745 921 1,534 2,041 2,728 Coal*(2) 4,152 4,449 4,390 4,480 5,031 Lignite*(1) 3,553 4,168 4,180 4,622 4,416(p) Iron ore (1) 733 951 1,510 1,618 l,546(p) Chrome ore*(l) 194 309 452 530 448(p) Copper(Blister)(2) 25 26 26 27 25 Manganese*(3) 21 24 26 22 28(p) (1) Public-Private Sectors (2) Public Sector (3) Private Sector (*) Salable (P) Provisional Source: Turkiye Is Bankasi A.S.,Econ.Research Dept.,"Economic Indicators of Turkey",1963-1967, P.5. Table (IB) Production and Imports of Steel by Year# 1945-1960 (In tons) Year Total Steel Consumed Imports Karabuk Production Karabuk Percent 1945 47,703 1956 271,000 120,000 150,500 57 1957 227,000 81,000 146,000 64 1958 202,000 65,500 136,000 67 1959 341.000 180,000 161,000 47 1960 216,000 Source; OECD-AID Mission,op.cit.."Report on the Steel Industry* 1# Vol.2, P.414. 222 Table(19) Sales of Basic Industrial Products ( 1,000 Tons ) 1963 1964 1965 1966 1967 Coal 4,070 Pig-iron 51 Petroleum Products 2,512 Electric Power(Million kwh.) Industrial (Million kwh.) 2,632 Other than Industrial (Million kwh.) 842 4,426 53 3,156 2,808 942 4, 232 75 3,539 3,145 1,057 4, 663 95 4,233 3,552 1,148 4,359 82 4,885 3,979 1,241 Source: Turkiye Is Bankasi, A.S." Economic Indicators of Turkey,1963-1967", P.5. 223 Table (20) Summary Table for the Balance of Payments (1963-1967) ______________ (In Million $) Year Deficit of Current Accts. Debt Payments Net Error & Omiss« ions Finance Require ments PL480 Private Foreign Capital Total Foreign Aid Require ments Foreigi Aid m (2) _ :3i. (4) (_5) . _ (7) 116) 1963 251 148 35 434 60 25 349 314 1964 273 99 35 407 60 25 322 287 1965 242 164 35 441 60 25 356 321 1966 246 80 35 361 60 25 276 241 1967 234 76 35 345 50 25 270 235 1963-67 1246 567 175 1968 290 125 1573 1398 Source; S.P.O., "First Five-Year Development ?lan‘ M 963-67, P.491, Table 374. 2 24 Table(21) Foreign Trade Sector of Turkey (Million Dollars) 1963 1964 1965 1966 1967 Exports (f.o.b.)($1 -=TL. 9.-) 368.1 410.8 463.7 490.5 522.7 Imports # (c.i.f.)($1.-=TL.-) 687.6 537.2 572.0 719.3 684.7 Trade Balance -319.5 -126.4 -108.3 -227.8 -162.0 (*)$l.-= (1963 TL.9.04, (1964,1965,1967 TL.9.08) Source: Turkiye Is Bankasi A.S., Economic Research Dept.,“Economic Indicators of Turkey 1963-1967", P.5. 225 Tablet 22) Import Estimates, 1963-1967(C.I.F.) __________ (In million dollars)___________________ 1963 1964 1965 1966 1967 Investment Goods Raw Materials Consumer goods 241.1 234.5 71.4 274.1 261.5 76.4 296.0 299.5 84.5 332.5 325.0 87.4 363.0 363.5 93.5 Total 547.0 612.0 680.0 744.9 820.0 Import Substitution -40.0 -45.0 -110.0 -130.0 -166.0 Total Import Requirements567.0 627.0 630.0 674.9 704.0 Source: S.P.0., "First Five-Year Development Plan1 1 , 1963-67, P. 468,Table 375. 226 Table(23) Price Indices and cost of Living in Turkey ( 1966-1971 ) Annual Average-Percentage Change December 1971/1970 1966 1967 1968 1969 1970 1971 Wholesale Prices General Index 4.8 7.6 4.6 6.0 5.6 17.0 23.0 Food 5.4 6.6 3.8 6.5 4.1 12.9 18.1 Industrial raw- materials 4.1 9.0 6.0 5.2 8.2 23.5 30.7 Cost of Livinq Ankara(total) 5.3 6.4 4.1 5.6 11.6 21.8 23.1 of which: Food Prices 4.3 7.5 4.9 4.5 10.5 17.0 16.0 Istanbul(total) 8.7 14.0 6.2 4.8 7.9 19.0 23.4 of which: Food Prices 9.0 15.3 5.1 5.6 7.2 16.0 18.9 Implicit Price deflator for GNP 6.1 4.8 3.4 5.3 9.4 17.0 Implicit Price deflator for Investment goods 5.9 7.7 3.7 4.9 9.4 Source: Monthly Economic Indicator-Published in OECD,“Turkey”,Economic Surveys, 1972, P.12. 227 Table(24) * Relative Shares of the Sectors in GNP in Turkey ____________________________________________(In Percentages) 1962 1967 1972 (1) 12) _ _ (3) Agriculture 36.4 30.4 26.6 Industry 22.8 25.5 30.7 Construction 5.0 5.3 5.4 Communication 7.1 7.4 7.5 Housing 4.2 4.5 4.3 Others 25.0 26.2 24.9 Income from Abroad -0.5 0.7 0.6 Total ioo.6 166.6 166.0 (1) Value-added shares at market prices. Source: SPO,“Second Five-Year Development Plan",1968-1972, P.325. Table(25) Distribution of Gross National Product in Turkey(at current Prices,Million TL.)________________ 1963 1964________ 1965 1966________ 1967 1.Agriculture 25,142 25,800 25,434 30,044 31,697 2.industry 9,462 10,475 11,743 13,727 15,937 3.construction 3,477 3,861 4, 250 5,061 5,741 4.Commerce 4, 550 5,041 5,671 6,465 7, 234 5. Transport & Communicat,. 4,367 4,664 5,139 5,674 6,519 6. Financial Institutions 7. Liberal Professions & 1,631 1,782 2,018 2,270 2,576 Services 2,976 3, 282 3,676 4,128 4,649 8. Rental Income 2, 713 3,066 3,325 3,691 4,115 9. Public Services 5,484 10. Total Internal Revenues 6,199 6,869 7,572 8,893 ( 1+9 ) 59,802 64,110 68,125 78,632 87,361 11.Income from Abroad 12.Net National Product (At factor Prices) -213 -236 +214 +511 +364 (10+11) 59,589 63,874 68,339 79,143 87,125 13.Indirect taxes 14.Net National Product (At Market Prices) 6,223 6,800 7,447 9,009 11,228 (12+13) 65,812 70,674 75,786 88,152 98,953 15.Depreciation Allowance 16.GNP(At Market Prices) 3, 212 3,524 3,900 4,329 4,827 (14+15) 17.GNP{At Factor Prices) 69,024 74,198 79,686 92,481 103,780 (12+15) 62,801 67,398 72,239 83,472 92,552 Source; Turkiye Is Bankasi,A.s.,"Economic Indicators of Turkey,1963-1967“, P.l. oo <N (N

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Creator Bayati, Jalal Mohammed Ali (author)

Core Title Appraisal Of Developmental Planning And Industrialization In Turkey

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, theory,OAI-PMH Harvest

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Advisor Elliott, John E. (committee chair), Reed, John J. (committee member), Tintner, Gerhard (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-880507

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