The Multinational Monitor



The Costs of Privatization

Turkey in the 1980s

by Stuart Gold

From Argentina to Zaire, free market principles have been extolled as the primary means of achieving sustainable economic development. The free market development model has been enshrined in the 1980s by the multilateral lending agencies and the industrialized nations, the United States in particular. On January 24, 1980, Turkey reversed a longstanding policy of extensive state intervention in the economy and launched a concerted effort to open its economy more fully to the dictates of the marketplace. In the nine years since, Turkey's economy has undergone dramatic changes.

Prior to 1980, Turkey's economy was characterized by a heavy reliance on state intervention. The fundamental transformation of Turkey's economy has moved the country from an inward- focused, import substitution-based development model toward export led growth and industrialization. In the 1930s Mustafa Kemal Ataturk, founder of the Turkish republic, institutionalized a policy called etatism: government intervention in the economy to achieve rapid industrialization. As in most developing countries, the state intervened because Turkey lacked a well-established, indigenous business class capable of leading the development process. Import substitution, adhered to from the early 1960s until 1977, was intended to eliminate undue reliance on foreign credit by domestically producing goods which previously had been imported. In true Kemalist form, the government was responsible for the direction of specific programs. This system was inherently insular in that it sought to protect domestic markets from imported goods in order to curtail the outflow of the precious capital so necessary for economic development.

The "January 24" plan, penned by then finance minister and current prime minister Turgut Ozal, reversed this inward looking perspective and switched to a more open, outward looking approach, thereby shifting the whole focus of the Turkish economy. Ozal's policies include liberalizing foreign trade, streamlining and privatizing state run industries, devaluing the currency, removing price controls and reducing the budget deficit by eliminating government largesse in state run businesses. Turkey's free market policies have been greeted in the West with great enthusiasm. The optimism of the United States and the International Monetary Fund (IMF), however, overlooks the problems Turkey is encountering as a result of its structural adjustment program. Turkey is representative of much of what is wrong with an over-reliance on free market principles.

Certain elements of this program have been fully implemented while others have either been delayed or only partially implemented. For example, Ozal has succeeded in opening Turkey's financial system so that the economy is responsive to the international marketplace as well as liberalizing the foreign investment policies. He has not made as much headway in reducing inflation or eliminating the large public sector, however. The tensions between Ataturk's legacy of paternalism and Ozal's free market ideology have limited the speed and extent to which Turkey's economy can be altered. And the competition between these two economic ideologies largely defines Turkey's economic structure.

The debt and economic policy

When Turgut Ozal became prime minister in November 1983, he moved rapidly to restructure the economy in the hope of attracting capital. In the six years of his rule, the economy has grown an average of 5.6 percent annually. This impressive growth rate has enabled Ozal and the multilateral lending agencies to hail Turkey's economic turnaround, and hence structural adjustment, as a grand success. There are flaws in this analysis, however. Turkey's export-led industrialization has, as intended, further integrated the country into the international capitalist economy. But Turkey has paid a price in the loss of its economic sovereignty and domestic harmony.

Altan Yalpat, a Turkish social scientist, writes in Merip Reports, a magazine devoted to covering the Near East, that "Massive human rights violations, repression, a precipitous decline in working class living standards and rising levels of unemployment [have been] dismissed as the 'incidental costs of stabilization."' Massive indebtedness to the international lending agencies should be added to that list.

With very little fanfare Turkey has achieved the dubious distinction of becoming a super debtor nation. Turkey's pursuit of free market development has resulted in the quadrupling of its debt in the last 10 years, from $11 billion in 1979 to almost $45 billion in 1989. Though not quite on the scale of her Latin American counterparts, Turkey's nearly $45 billion debt has forced the country to relinquish an inordinate amount of economic control to multilateral and international lending agencies. Like other debtor countries, Turkey has traded the possibility of sustainable growth in the future for immediate access to capital. According to E.A. Tonak, professor of economics at Simon's Rock College and coeditor of Turkey in Transition: New Perspectives, the "huge external debt limits the government tremendously. [The debt] puts a lot of constraints on the flexibility of economic policy." As a result, Turkey is caught in a vicious cycle, needing short term, high interest loans to pay the more than $7 billion annual debt payments. Fikret Ceyhun, professor of economics at the University of North Dakota, says that 25 percent of Turkey's debt is for short-term loans with interest rates of 14 to 15 percent. Ceyhun argues that this situation enslaves Turkey to its creditors. "When a country like Turkey becomes heavily indebted as a result of her industrialization strategy, then a rise in the Eurodollar or the U.S. interest rate by 1 or 2 percent ... could increase Turkey's interest payments by as much as $500 million annually for a $40 billion debt." In the final analysis, Ceyhun says, Turkey "can't depend on outsiders as the engine of economic growth."

Yet, one look at Ozal's policies shows that that is exactly what the prime minister is trying to do. Despite the Ozalist onslaught, Turkey's economy remains an amalgam of its etatist past and its free market present. The mixed acceptance of Ozal's policies shows the tenacity of the Kemalist legacy and the limitations on further privatization of the economy. Turkey presents a particularly interesting and complex case because of its level of development and the path it has chosen. For Turkey the dilemma is, how to establish sustainable growth without repression and what role should the state play in achieving that goal.

Turkey's State Economic Enterprises (SEEs) are a major target of Ozal's privatization campaign. According to Ozalist precepts, they stand out as remnants of a bygone era, inefficient sponges soaking up far too much capital. Despite this view Ozal has moved cautiously. For example, SEEs still comprise about half of the country's economic activity and employ about 30 percent of all non-agricultural workers. The SEEs are prominent in manufacturing and other industrial areas. Some of the largest SEEs are: Petkim, which deals with petroleum and other energy products; Sumerbank, which is Turkey's largest textiles company; Turkish airlines; Teletas, the telephone system; and the cement industry.

Ozal has streamlined the SEEs in an effort to make them more efficient. He has allowed the SEEs to set prices more in keeping with market forces. Ozal has also decentralized control. All of this is a prelude to the eventual privatization of many of the SEEs. Streamlining might look good on paper, but in a country with 15 to 20 percent unemployment, much of it structural, the SEEs are a major source of employment. As the SEEs are made more efficient and thus employ less people, fewer Turks will have access to the management training ground that the SEEs have traditionally provided. In addition, Tonak writes of the ripple effect that will occur if the SEEs are subjected to the whims of the marketplace.

Controlling government deficits ... is a goal with which few would disagree; yet, forcing state economic enterprises to be fiscally self-sufficient would necessarily cause a decline in the standard of living of the working class, since they provide it with many standard consumer items (textiles, leather, sugar etc.) at low cost. Moreover, in a country where unemployment and underemployment are chronically extremely high, [SEEs] provide many thousands of jobs that can hardly be sacrificed on the altar of productivity and profitability. Finally, since the level of social welfare expenditures and services is already far below that of industrialized countries, curbing them further would give rise to cruel consequences which are not hard to imagine.
Although none of the SEEs have actually been sold off, the government's privatization plans have already met with resistance from many who fear that privatization will result in extensive denationalization. Dr. Galip Yalman, a political economist at ESDA, a private independent research organization based in Ankara, says that "Certain private sector representatives were reported as being rather critical of associating privatization with denationalization." The political competition to the left of Ozal's Motherland party is the Social Democratic Party (SHP). The SHP differs with Ozal on this critical issue of economic policy. "They are not supporting denationalization or privatization. They would probably reverse Ozal's policies," says Ceyhun.

Foreign investment in Turkey

Ozal's liberalization of the foreign trade regime has not resulted in a large influx of foreign investment. "Despite the number of changes in the [foreign investment] code, actual direct investment has not been at the level hoped for," says Yalman. Foreign investment peaked at $234 million in 1985. In 1988, it was $193 million, according to the U.S. Commerce Department. The reasons for the lukewarm response are an international lack of confidence in Turkey's economic stability and the country's persistent, rampant inflation. The recent decline in foreign investment has not completely dampened U.S. business community interest, however. "The bloom is off the rose but the rose is still capable of blooming," says William Rau, director of the Turkish-U.S. Business Council. "The private side looks to Turkey as a source of cheap, good labor, some of it well-trained," he added.

In 1988, about 53 percent of foreign investment went to the manufacturing industry. More than 40 percent of foreign capital went to the service industries. Hotels (and other tourist related industries) and banking were far and away the largest recipients of foreign venture capital. At almost $50 million each, both of those sectors received more than double that received by any other investment area, except retail and wholesale trade and the food industry.

Unfortunately, neither tourism nor the financial services industries are going to significantly diversify the Turkish economy and help it achieve sustainable growth. "Turkey's industrialization is a dependent industrialization," says Ceyhun, referring to the type of investment entering the country. "Turkey has not yet established heavy infrastructure industry. The country still depends upon European and U.S. multinational corporations to provide know-how and necessary parts," he elaborates. For example, much of Turkey's automobile industry is comprised of joint ventures with European and U.S. companies. Mercedes Benz has production facilities in Turkey, but the technology transfer is minimal. As for the advantages of locating in Turkey, Ceyhun dismisses the usual rhetoric about Turkey being an ideal conduit to both the European Economic Community (EEC) and the Middle East. "It's not in the EEC or the Middle East. [Turkey's] not really a very low wage country. I don't see why any multinational corporation should locate in Turkey. They could locate in Spain or Portugal and have the real benefits of the EEC." Turkey, he continues, is "trapped between East and West" without being completely in either.

In order to lure foreign investment for large-scale infrastructure projects, Turgut Ozal formulated a novel approach called Build-Operate-Transfer or "BOT." The BOT model allows a foreign company to build a project, for example a dam, run it for a number of years, turn a profit and then transfer it to the government or a private Turkish entity. The rationale for BOT was to attract foreign capital without requiring a large capital outlay by the government. But, as with most of Ozal's policies, initial enthusiasm for the model has given way to skepticism. To date there are no examples of a completed agreement. Yalman says that the "actual results are rather dismal." He adds, "The government doesn't boast about it anymore. To what extent Turkey is still counting on it in the government I don't know."

Export dependency

Turkey's export boom of the mid-1980s, hailed as the "Turkish miracle" by the multilateral lending agencies and the U.S. government, did not last. Yalman asserts that "export led growth has come to an end. Turkish industry is not in a position to make a new leap forward in export markets." Turkey's export boom coincided with and has been offset by an import boom. While Turkey's exports grew from $2.9 billion in 1980 to $10.1 billion in 1987, imports increased from $7.9 billion to $14.2 billion in the same period. Ironically, George Kopits, of the IMF's European Department, notes "external assistance enabled Turkey to finance the imports required to achieve export-led growth." (The external assistance referred to is the more than $2 billion the IMF and other multilateral agencies infused into the Turkish economy in the five years following the introduction of the "January 24" program.) In essence, Turkey indebted itself to import equipment that has made the country more susceptible to the vagaries of the global marketplace.


Organized labor has borne the brunt of the Ozalist realignment. The "January 24" plan was followed nine months later by a military coup on September 12, 1980. The junta which took power ostensibly sought to restore calm and order after three years of near anarchy. The military's agenda was more comprehensive than the mere restoration of order, however. "Since the 1980 coup the military has become a business organization," says Ceyhun. "The military has a vested interest in the economic policy of Ozal," he adds. In order to advance this interest the military proceeded to route the union movement in Turkey. One of the junta's first acts was to outlaw the Confederation of Progressive Trade Unions (DISK) and arrest all of its top leaders. In addition, the military rulers, led by General Kenan Evren, ordered all striking workers back to work.

The connection between labor repression and the IMF-inspired austerity program is inescapable. "When the IMF devises [its] policies one item is of foremost importance, that being the control of the high increase of wages," says Professor Tonak.

The military junta, which ruled until November 1983, was instrumental in removing any organized opposition to the structural adjustment program. "The Turkish military targeted any opposition to its rule which prompted them to move against DISK, correctly identifying it as the most serious threat to the structural adjustment program," according to Berch Berberoglu, a political economist and the author of Turkey in Crisis. "The purpose [of the coup] was to eliminate the left," Berberoglu added.

Boosters of Turkey argue that worker rights were restored with the advent of the 1982 constitution and the return to civilian government in November 1983. According to a report on the trade union movement in Turkey by the European Trade Union Institute (ETUI), the research arm of the European Trade Union Confederation (ETUC), however, the gap between rhetoric and reality is significant. "Though the Turkish Constitution presents a satisfactory catalogue of rights and freedoms, it then proceeds to empty them of all content by means of a series of prohibitions, exceptions and restrictions." For example, the Constitution stipulates that "Trade unions may no longer pursue political goals, may not entertain relations with political parties or collaborate in their activities, may not support or receive support from any political party, may not grant assistance or give donations to, or receive such assistance or donations from, such political parties." These prohibitions on political activity "constitute direct and restrictive interference in the internal affairs, congress resolutions and sovereignty of trade union members," according to the ETUI report.

The government uses the legal system as a tool of repression to curtail union activism. For example, even though the prohibition on strikes was lifted in 1984, there are severe limitations on this right. Professor Tonak says that as a result of the restrictions there is "no right to strike officially and formally.a Striking over collective bargaining agreements is unlawful; protests in the form of production slowdowns are also unlawful. The ETUI report details the near total control the government, and in turn management, retains over labor's destiny: "The purpose, the deadlines, the economic effects, the demands, the details of implementation, in short, everything affecting the strike, is at the mercy of arbitrary action by the employer or the government and can turn the strike into catastrophe for the workers and the trade union."

Despite all of the restrictions, labor activism is on the rise in Turkey. The new militancy is spurred by the decline in real wages over the last 10 years as price supports and other government subsidies have been removed. Between 1983 and 1988 real wages fell by 56 percent. The surviving trade union confederation, Turk-Is, though much more conservative than DISK, has begun to take a more active role in pushing for worker rights. The number of strikes increased dramatically in 1987 and 1988. From 1984 to 1986 there were only 46 strikes resulting in the loss of about 434,000 work days. In 1987 and 1988 there were 462 strikes and almost 3.5 million work days lost. The unions have resorted to subtle tactics to avoid a government crack down. According to Tonak, the strikes are "very active and creative" with the workers doing such things as feigning illness and going to the infirmary en masse.

The challenge to labor at this juncture is to establish a beach head from which to press for worker rights and to encourage a critical examination of the structural adjustment program.

Presently about 2.3 million workers are unionized out of a total workforce of 18.5 million. (Turk-Is is by far the largest confederation with almost 1.5 million members.) Discounting the agricultural sector and the unemployed, for whom unionisation is prohibited, the rate of unionization is approximately 25 percent, according to the ETUI report. How aggressive the unions will be is open to question. The banning of DISK was a blow to the more militant workers. The options for the political future of DISK are constricted for the moment. There are no statistics but many of DISK's members are now in Turk-Is. Ceyhun doesn't "think they will have much influence in Turk-Is' direction. Turk-Is is a very conservative organization," he added.

International pressure from such sources as the International Labor Office and the ETUC, both of which Turkey belongs to, has had only a nominal impact on the treatment of labor. Turkey has signed numerous conventions on human rights. Still Turkey is "far from being in conformity with the ILO conventions," according to A. Pouyat of the Freedom of Association Branch of the ILO in Geneva. In accordance with current ILO standards, the Organization has pressed the government of Turkey to cease compulsory arbitration and to allow collective bargaining for trade unions that do not comprise 50 percent of the workers in a single enterprise or 10 percent of the workers in a given sector--the current requirements. But Yalman says that despite the pressure, "Every year the Turkish government has cosmetic changes but the actual system remains."

The future

After six years of Ozal's rule and with a general election on the horizon, Turkey's economic future is anything but secure. The real question defining and dividing the political scene is what role the state should play in the economy.

Contrary to appearances, there is no consensus for Ozal's policies. The prime minister has been forced to backtrack on his austerity program because of popular discontent. Rampant inflation, running at 75.5 percent from September 1988 to September 1989, continues to wreak havoc on economic stability and has decimated purchasing power. Turkey has not received an IMF loan since 1985. An IMF source told Multinational Monitor that Ozal has been following an expansionary policy for the last 18 months and that there has been "quite a bit of critical evaluation" of such straying from the IMF line. The source said that Turkey has all the elements to achieve export-led growth "except dedicated policy implementation." He cited inflation as the most vexing obstacle to continuing the structural adjustment program.

This analysis underestimates the domestic political problems Ozal faces. The March 1989 local elections are portentous for Oal's political future. In that election Ozal's Motherland Party (ANAP) finished third. The challenges were from both the left and right. The main party of the left, the Social Democratic Party (SHP), came in first in March although the right parties were slightly stronger overall. The True Path Party (DYP), Ozal's main challenge from the right, came in second, still ahead of ANAP.

The Social Democrats "don't have a clear-cut economic policy but are in favor of state intervention" in the economy, according to Tonak. The SHP is "not supporting denationalization or privatization. They probably would reverse Ozal's policies," argues Ceyhun. Because of this, the SHP "doesn't have support of big business, especially the industrialists," says Ceyhun. The views of the big industrialists are not, however, uniformly or unreservedly supportive of Ozal's policies. Yalman says that "industrialists are [becoming] more and more vocal ... demanding from the government some industrial strategy for the 1990s." It's "hard to say the government has provided a satisfactory answer," he added.

Turkey and the EEC

One issue that divides both the business community and the politicians is Turkey's accession to full membership in the EEC.

Turkey is currently an associate member of the EEC, as it has been since 1964. In 1987, Turkey applied for full membership, thereby opening up a pandora's box. Questions about Turkey's ability to compete internationally, the impact foreign penetration will have on Turkey's nascent industries, the impact of Turkish labor on Western Europe, whether the EEC can absorb what would be its poorest member as it approaches full integration in 1992, and whether democracy in Turkey is at the level of its Western European counterparts are all unanswered.

The consensus among all concerned parties is that Turkey will not become a full EEC member within the next 10 to 15 years. Critics of Turkish entry into the EEC cite both economic and human rights issues as grounds for delaying a decision. A source at the West German embassy, a crucial country in the decision about Turkey's membership, says that the Turkish economy has not reached the state of competitiveness necessary to comply with obligations of membership. The German official says that the "real question is whether the existing obligations [under the associate membership agreement] are implemented or not." He concludes that Turkey has not met those obligations. "Turkish rhetoric is far, far away from reality" in terms of a time frame for being admitted.

Turkish officials realize that their country will not become a full member in the immediate future, however. Turkey's minister in charge of EEC affairs, Ali Bozer, recently stated that, "We are not insisting upon becoming a member immediately, but want the EC, before 1992, to express its commitment for Turkey's acceptance as a full member." Turkey wants a European commitment to sanction its new economic path.

Turkey today is at a crossroads in its economic development. Eight years after the country decided to align itself fully with the IMF proscriptions, the prognosis for the fundamental improvement of Turkey's economy is mixed. The contradictions of adhering to an unfettered free market approach have been exposed; now the question is what steps will internalize and solidify the prosperity. In his book, New Perspectives, Tonak notes that structural adjustment's "underlying principle is the restructuring of capital, that is the process of adaptation of capital to changing societal conditions in order to reproduce itself; this process inheres contradictions between capital and labor, as well as among the ruling classes themselves, both domestically and internationally. The wide-ranging and rapid political, institutional and juridical restructuring in effect in Turkey since 12 September 1980 bears the imprint of this process.... Paradoxically, these developments at the same time presage their own obsolescence...." Tonak continues, "It appears that the 1980 regime simply did not appreciate one basic fact: that the political currents present in Turkey before the army takeover existed in response to certain socio-economic forces, and that as long as those forces are not addressed, no amount of political engineering can prevent them from resurfacing on the political scene wherever they can." Tonak's description of shortsightedness can be applied equally to Ozal's regime.

Turkey's economic planners must focus on improving the well- being of its citizens. The obstacles to this goal are daunting given the developing world's capital needs and the industrialized world's monopoly of capital. Ozal thoroughly ensnared Turkey in the IMF capital trap. Extricating the country will be much more difficult. "No country can go it alone against the IMF and the United States," says Ceyhun. At a time when free-market principles form a new secular religion, with privatization and liberalization as the liturgy, Turkey's options are limited. Acknowledging that there are alternatives would be a first step in a long and arduous process.

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