Transcript Economic Liberalization File

PSIR 426/W 10
Economic Liberalization
Turgut Özal and his economic legacy
 Turgut Ozal was a critical figure in Turkey’s transition to a
neo-liberal development model in the 1980s. As the chief
economic advisor to Prime Minister Demirel in 1980, he was
the principal architect of the stabilization programme (24 Jan
1980) and was later entrusted with formulating economic
policy by the junta.
 Following the transition to democracy, he carried out the
implementation of the 24 January decisions under the ANAP
Government.
Turgut Özal and his economic legacy
 Ozal, as the leader of ANAP, became the Prime Minister and
reached the peak of his influence in that position for the next six
years, with the ANAP repeating its electoral success during the
elections of November 1987.
 Ozal became the president of the Republic in November 1989, a
position that he occupied until his unexpected death in April
1993.
 Thus, for a period of a decade, from January 1980 to November
1989, albeit with the interruption of a brief period, Turkey
experienced extraordinary continuity in economic leadership.
Turgut Özal and his economic legacy
 The (24 January)1980 programme which was one of the earliest
of its kind involved close co-operation between the IMF and the
World Bank as the providers of massive financial support for
Turkey.
 The scale of financial support was, in part, due to Turkey’s geostrategic importance.
 Ozal’s leadership also injected a considerable sense of optimism
into the domestic business community which had been
accustomed to operate within closed walls and high protective
barriers. Clearly, the changing nature of incentives made the
environment much more attractive in the early 1980s.
Nevertheless, Ozal’s influence was important in creating a mood
of optimism whereby Turkish businessmen felt confident in their
ability to penetrate distant markets.
Turgut Özal and his economic legacy
 This element of optimism was not only injected into the
business community but into theTurkish public at large.
 Ozal’s project of popular capitalism through such measures as
mass housing projects and high interests for the savings of
small investors managed to incorporate with considerable
success middle strata of the Turkish public as key stakeholders in a Thatcher-style project of popular capitalism.
 This was part of a broader project implemented with
missionary zeal to transform the Turkish economy and
Turkish society at large in the mould of what he believed to
be a genuinely capitalistic economy and society, overcoming
its strong etatiste reflexes in the process.
Turgut Özal and his economic legacy
 The parliamentary elections were held in November
1983. The NSC took a number of restrictive measures
prior to the elections: it banned two parties that were
clearly recognized as the potential successors to the CHP
(Sosyal Demokrasi Partisi SODEP) and the AP (DYP);
and it permitted only three newly established parties to
compete in the elections.
 Within these circumstances, Özal’s ANAP captured
nearly a majority of the votes (45 per cent) and 52 per
cent of the parliamentary seats
Turgut Özal and his economic legacy
 The
dynamics behind ANAP’s unexpected
electoral success was partly linked to the fact that
the party did not appear to be closely associated
with the military. The party aimed to present
itself as a broad-based political party that was to
catch voters with literally all types of political
tendencies.
 ANAP was based on a hybrid ideology combining
elements of liberalism, conservatism with strong
Islamist connotations, nationalism and welfarism.
Turgut Özal and his Economic Legacy
 The 1983-87 period witnessed the ascendancy of Ozal and
his ANAP.
 Within a few days of its formation, (Dec 1983) the
government issued a decree designed to carry out a major
reform of a number of ministries. Ozal appointed an
undersecretary for carrying out special tasks which had been
undertaken thus far by the minister.
 This procedure had political implications as it undermined
the principle of cabinet responsibility by placing virtually all
power in the hands of the Prime Minister and his entourage
of under secretaries.
Turgut Özal and his economic legacy
 Hence soon after the ANAP government was formed, a
‘successful modus operandi’ was achieved between the
President and the Prime Minister with President Kenan
Evren engaging himself with matters related to internal and
external security, as well as foreign affairs and higher
education. On the other hand, the Prime Minister took over
the responsibility of all matters relating to the economy.
 The ANAP leadership seemed to be happy with the 1982
Constitution and refrained from openly challenging the
military guardianship of the post-1982 constitutional regime.
Turgut Özal and his economic legacy
 Initially the ANAP government demonstrated a strong
commitment to liberalization. Ozal’s economic programme,
though described by his supporters as a ‘revolution in the
economy’, was in fact a continuation of economic policy
introduced in January 1980.
 The government hoped to bring down inflation and raised
interest rates in the hope of reducing the money supply.
Import and export regulations were liberalised and within
few months, it was possible to buy a large variety of
imported consumer goods.
Turgut Özal and his economic legacy
 Ozal’s
policies aimed to accelerate the
concentration of economic power in the major
holdings or corporations.
 Ozal argued that the restoration of competition
would force industry to become efficient and lead
to the survival of the fittest.
 There was a need for the reorganisation of
industry from top to bottom and small units had
to make way for large, competitive ones.
Turgut Özal and his economic legacy
 The government initially demonstrated a strong commitment
to economic liberalization. It reduced the degree of tariff
protection on imports and reduced similar restrictions on the
capital account and foreign exchange transactions by a
considerable margin.
 Foreign and domestic investors became subject to equal
treatment before Turkish law. The incentives provided to
domestic investors were also given to foreign investors and
the level of foreign investment in Turkey continued to
increase.
Turgut Özal and his Economic Legacy
 In this period, the ANAP government showed little interest
in advancing the democratic process. Ozal’s philosophy was
summed up in the words: ‘first the economy, then
democracy’.
 Ozal concerned himself with the economy and left the
martial law regime to maintain law and order. There was no
attempt to amend the undemocratic laws inherited from the
military government.
 The trade unions law, the higher education law, the laws on
elections and political parties, the press law, the penal code,
and the law governing the running of Turkey’s radio and
television all remained unaltered.
Turgut Özal and his Economic Legacy
 A central idea in this respect was to limit the powers of
representative institutions such that the natural workings of the
free market could be protected and insulated from the detrimental
effects of powerful interest group pressures that can be exercised
through representative institutions.
 Hence, the notion of limiting the domain of representative
democracy for the benefit of the market was an idea that Ozal
clearly favoured.
 Ultimately, what Ozal desired foremost was the speedy
implementation of market-oriented reforms. It was important in
this respect that decisions be taken quickly and not be obstructed
by key interest groups that had a stake in opposing reform.
Turgut Özal and his Economic Legacy
 Indeed, this was the secret of the so-called economic
success of ANAP until the second half of the 1980s. In
this sense, the continued moderation or suppression of
wage demands was a critical factor in keeping domestic
inflation below the rate of exchange depreciation in the
mid-1980s.
 ‘From 1982 to 1988, industrial wages rose less than
domestic inflation and exchange depreciation in every
year but 1987, leading to declining real wages’.
Turgut Özal and his Economic Legacy
 The year 1987 marks the beginning of a new phase in
Turkey’s transition from authoritarian rule to democratic
politics. Turkey applied for full membership of the EEC.
The ANAP government tried to improve legislations in
line with International Labour Organization (ILO)
Conventions to prepare for forthcoming full
membership of the EEC.
Turgut Özal and his economic legacy
 Turkey’s application was rejected, but Ozal’s initiatives paved the
way for the Customs Union (in 95) that became a crucial element
in the full-scale liberalization of the Turkish economy in the
context of the 1990s.
 In retrospect, the trade liberalization process in Turkey could have
been a much more gradual process in Ozal’s absence.
 Important segments of the Turkish business community, notably
those that were primarily oriented towards the lucrative internal
market, resisted trade liberalization. Were it not for Ozal’s bold
initiatives in this respect, which he often tied in with the goal of
EC membership, the exposure of domestic industry to genuine
external competition would have been a far more protracted
process.
Turgut Özal and his Economic Legacy
 Even though Turkey’s application was not accepted due to its
‘lack of democracy and economic development’, Turkey
started taking steps towards democratization in line with the
expectations of the EEC.
 More importantly, a referendum was held in 1987 on the
issue of lifting the ban on the political activities of pre-1980
political leaders such as Suleyman Demirel and Bulent
Ecevit.
 The ban was lifted with a 50.3 per cent ‘yes’ vote whereas
49.7 per cent voted ‘no’.
Turgut Özal and his Economic Legacy
 The referendum had a significant impact on
ANAP’s decline. It had already started to lose
support due to growing public disenchantment
with its management of the economy, particularly
regarding the problem of inflation.
 The second half of the 1980s witnessed a rise in
the inflation rate and rising unemployment
figures that led many voters to desert ANAP.
Turgut Özal and his Economic Legacy
 The year 1989 is important as it signifies the
limits of an accumulation model based on wage
suppression. Politicized by the intransigence of
governments, the working class started organising
a wide array of workers’ actions that were
referred to as ‘Spring Actions’.
 In 1989, hundreds of thousands of workers,
disregarding their union leaderships, descended
onto the streets and protested against their
multifarious problems.
Turgut Özal and his Economic Legacy
 When the cabinet postponed the strikes, in an
arbitrary move that it inherited from the military
regime, the workers actions turned into different
forms of struggle such as boycotts, visits to the
doctor, organized demonstrations, meetings,
lunch boycotts, the growing of beards, shaved
heads and working barefoot.
Turgut Özal and his Economic Legacy
 The ‘Spring Actions’ of 1989 spilled over into
1990 and the following years. The number of days
lost in strikes far exceeded those lost in 1980.
 The government’s reply to the strikes was to
increase wages and salaries of public-sector
employees. Real wages in manufacturing
increased by 90 per cent from 1988 to 1991.
Turgut Özal and his Economic Legacy
 The dissatisfaction on the part of the two principal losers
in the structural adjustment process, agriculture and
labour, determined the outcome of the 1991 election
which marked the end of eight years of ANAP rule.
 The centre-right Doğru Yol Partisi (DYP), which drew
its support primarily from rural areas and small business,
formed a coalition government with the center-left
Sosyaldemokrat Halkcı Parti (SHP) that drew its support
primarily from urban wage earners and lower and
middle level public sector employees.
Turgut Özal and his Economic Legacy
 Turkey has been exposed to successive economic crises in the
second phase, in 1994, 2000 and 2001 respectively.
 The author believes that these are the products of Ozal’s
legacy.
 Ozal himself played an instrumental role in the radical
decision to liberalize the capital account fully in August 1989.
 Ozal hoped that an open capital account regime would help
to attract large amounts of external capital. This, in turn,
would be instrumental in accelerating the pace of economic
growth.
Turgut Özal and his economic legacy
 Yet, this proved to be a serious miscalculation. The decision
to liberalize the capital account in an environment of high
degree of macroeconomic instability and the absence of an
adequate institutional framework to regulate the financial
sector rendered the Turkish economy highly dependent on
short-term and highly speculative capital flows.
 Short-term capital inflows magnified the degree of instability
in the Turkish economy as political actors used these funds to
finance rising budget deficits thereby postponing costly
adjustment decisions to the future. It was not surprising in
this context that Turkish economy experienced successive
financial crises with serious real economy consequences.
Turgut Özal and his economic legacy
 There is no doubt that Turkey have made significant
strides in transforming its economy, having experienced
deep crises in their import substitution phase of
development.
 However, the kind of neo-liberal reform experiment that
essentially bypasses and undermines democratic
institutions and norms can generate devastatingly
unfavourable consequences from a longer-term
perspective.
Turgut Özal and his economic legacy
 Turkish society is characterized by a high degree of income
inequality. Ozal hoped to deal with the problem of pervasive
inequality through sustained economic growth. He tended to
reject the notion of extensive direct re-distribution as being
inherently inconsistent with the neo-liberal logic.
 Yet, the kind of growth path that he helped to instigate was a
highly fragile pattern of debt-led growth which was highly
vulnerable to speculative attacks and financial crises.
Turgut Özal and his economic legacy
 Turgut Ozal’s leadership had a decisive impact on the neo-
liberal transformation of the Turkish economy. The early
1980s constituted the heyday of the ‘Washington Consensus’.
 Turkey, having lived through a major crisis in the late 1970s,
was one of the first countries to encounter the new
liberalization message fromWashington.
Turgut Özal and his economic legacy
 It shall be underlined that the negative aspects of Ozal’s
legacy were synonymous with the weak spots in the
Washington Consensus.
 For example, Turkey was not alone in being exposed to the
vagaries of financial globalization through premature capital
account liberalization.