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Turkey in Economic Perspective

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Melinda McClimans

on 17 November 2014

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Transcript of Turkey in Economic Perspective

Turkey in Economic Perspective
Middle Eastern Capitalists?: Turkey in Economic Perspective
Economic Challenges
The Fight for Global Dominance
Recent changes,
their internal ramifications.
For many years Turkey was known for its inflation and the low value of it currency. There is a historical bias at work in many related analyses, however, as European commentators also called its predecessor, the Ottoman Empire "The Sick Man of Europe", although it actually remained a formidable economic player until the end.

Yet, the reality of its economic challenges over the 20th century is hard to deny. As recently as 1994, Turkey hit new economic lows with over 100% inflation (Pamuk,2013). And in 2001 there was an economic crash which required an IMF Bail-out.
Until recently Turkey was placed squarely in the category of 'developing', or 'pre-industrial' countries. It was among those countries which survived in the global economy through loans from the International Monetary Fund (IMF) and the World Bank (Stiglitz,2006).
Tough times
Again in 2001, when economic crisis hit, Turkey's economy was bailed out by the World Bank (Moghadam,2005;Gopinath,2002). This may have led to a major transformation in the political landscape with the Justice and Developmment Party
( ) candidate, Recep Tayyip Erdoğan, winning the election for prime minister. One explanation is that the nation was disillusioned with current, and apparently ineffective, economic policy and wanted a change (Pamuk,2013).
Political Landscape
Starting in 1980 there was an effort to realign the economy toward becoming an active participant in the global economy. This was orchestrated by Türgut Özal, but conformed with the general expectations of the World Bank and the IMF (Pamuk,2013).Despite the previous internal focus and isolation, a sufficient industrial foundation had been laid for that procedure, evidenced by steady increases in both imports and exports thereafter. (Pamuk,2013).

This was followed by (or perhaps it caused) a larger shift in society and government. Some call the ratification of the new constitution in 1982 the beginning of the "Third Turkish Republic" (Mango,1983;Pamuk,2013), and the influence of Özal is clear; in 1983 the military government installed him as the Deputy Prime Minister in Charge of the Economy (Nas,2008), and he became prime minister later in the same year.
Türgüt Özal, Turkey's first Economics Minister, implemented the economic strategy of “Import Substitution Industrialization” (ISI) demonstrated a clear understanding that the global dominance of European could not be competed against until they had enough capacity to produce at substantially higher levels. Thus, the economy focused inward, and industry was initially created to meet national need, rather than to export.

This strategy was part of a somewhat command style economy (Ericson,2007), aligned with the statist government implemented by Atatürk (Findley,1980,2010). These policies were a logical culmination of the Europeanizing and centralizing reforms the late Ottoman rulers had been implementing, but the new nation-state with its smaller borders, no longer had the luxury to pursue full-fledged economic liberalism.

Şevket Pamuk, emphasizes that he was not original in his ISI strategy, Turkey being one of many developing countries attempting to this at the time (2013).
Özal's Influence
In order to be truly economically competitive with Europe, and to gain all the capabilities associated with modernity, Turkey underwent radical cultural and political transformations as well. Ataturk endeavored to gel Turkish national identity by reforming the Turkish language by substituting Arabic and Persian terminology with words from the Turkic motherlands in Central Asia.

The Europeanizing reforms which characterized Kemal's policies continued from what Ottoman government had begun implementing.
Another example of policy begun by the Ottoman government which was continued by the nascent state of modern Turkey had begun in 1914. This was a negation or reversal of trade agreements with Europe which were unfavorable to Turkey (Findley,2010). Capitulations were done away with, and protective tariffs enforced.
A new constitution was ratified in 1921 with the founding of the modern Turkish state - Goldschmidt calls this time in Turkish history "The Phoenix Rising from the Ashes" (2010). Profound social and economic reforms were pursued. Daily life - from ways of dress, to the Turkish language itself - changed in nearly every way. Further, the state also intervened in commerce, in accordance with the new statist governmental framework, establishing centralized control (Findley,1980,2010).

The radical nature of the reforms came at a time when daily life was transformed, per force, due to war. The level of devastation that had resulted from World War One is hard to imagine. Of the 2.85 million men who were mobilized 800,000 were killed or died of disease, and civilian casualties in Anatolia equaled approximately 20% of the population (Findley,2010).
Rising from the Ashes
Ottoman Power
From the peak of the Ottoman global political power of the 16th century, until the end of the Empire in World War I (this could be counted somewhere between the Battle of Gallipoli in 1915, and the point at which the Sultan-Caliph was dethroned and the new Turkish Republic was formed in 1922), throughout the history of the modern state, the region and its peoples have seen a lot of economic extremes. Economic historian of the London School of Economics, Sevket Pamuk calls the downturn of 1873-1896, for example, the Ottoman 'Great Depression' (1987). Yet, the Ottomans for many years enjoyed economic dominance. Recently, Giancarlo Casale of the University of Minnesota, has shown that knowledge of 16th and 17th century European economic history is incomplete without the Ottoman Empire and that their competition was the primary reason Portuguese traders were not able to dominate trade (2010). The competition between countries for global markets was not only between the Christian countries of Europe but included the Muslim Ottoman Empire. Often European history excludes this important player, perhaps due to the Christiandom/Islamdom paradigm entrenched in dominant scholarship (Willinsky,1998). Immense economic strength was established by Süleyman the Magnificent, or the "Law Giver", who secured East-West trade, and conquered the territory that would comprise the Empire at close to its most expansive point (Allen,1999).
The ups and downs of global political and economic power are reflected in their capitulation policies, which were favorable to them during their times of power (Inalcik & Quataert,1994; Findley,2010;Eldem,2006).

During its time of peak strength, the Ottoman Empire influenced the economies of European countries, not vice versa. Those countries included provinces, allies, and enemies alike, but they remained trade partners to varying degrees of mutual benefit.

“imperative economic interdependency compelled both sides to maintain close trade relations, even during war time.” Quataert & Inalcik,1994

Especially in the 19th century, however, they grew increasingly less favorable as European competitors increased their power.

Ups & Downs
A milestone in the long turning of the Ottoman economic tide occurred with the Tanzimat reforms of the early 19th century. These gave trade advantages in Ottoman territories and created a new unfavorable balance of economic power:
"The Anglo-Ottoman Commercial Convention of Balta-Liman [1838]. . .this marked the point at which the traditional system of capitulations, the repeated revisions of which had for a long time been becoming less and less favorable to Ottoman interests, gave way to bilaterally negotiated commercial treaties. [It] had the effect of confirming all preexisting capitulatory privileges, setting export and import duties at low rates abolishing monopolies, and assuring British merchants the same rights as the most favored of local traders." - Findley,1980 p. 162

Thus, Ottoman manufactures received a blow they would not recover from (Findley,1980) and the economy became focused on providing materials the European countries needed for producing their goods. This is one reason why local production remains a key target in Turkish economic strategy.
Tipping the Scale
Ottoman Economic

Ottoman economic policy can be characterized by the following priorities (Findley,2010;Eldem,2006):
Managing budgets; i.e., ensuring minimal deficit by maximizing revenue and cutting spending. Maintaining stability and continuity of fiscal practice a major priority. This traditionalist approach characterized much of their economic policy.
Applying free market policies in specific geographic areas and market sectors. According to Casale (2006):
"The Ottoman conquest of Egypt and the Levant did bring an end to the Mamluk system for controlling spice trade, and by the turn of the seventeenth century free-market principles were more or less established throughout the region. " (p. 172)
**Also** intervening in markets for necessary goods to ensure sufficient supply (Inalcik & Quataert, 1994;Findley,2010) food supply chains and markets. According to Inalcik and Quataert,
"Istanbul's daily grain consumption of the early 18th century has been estimated at about 200 tons. . .Thus, the provisions of Istanbul and the army could not be left to traders and to the free interplay of market forces, since famine and the ensuing suffering often brought the populace and the military to the brink of revolt."

Edhem clarifies that Ottoman policies were not against mercantilism (2006). It was a an indifference to mercantilism, more than a specific disagreement with it, that caused Ottoman policy to not reflect its principles. Mercantilism was being pursued with zeal in Europe, on the other hand, and was one of the cornerstones of the initial economic global dominance that led to colonialism. The East India Tea company is a case in point. As the company gained power in the Indian subcontinent the British government needed to step in on different occasions to mediate disputes with the locals. Eventually, the British government took over the country completely and claimed it as a part of British territory (Lal,2008).
According to the World Bank's "World Development Indicators Database", Turkey was the 15th largest economy in 2011, and, according to the International Monetary Fund's "World Economic Outlook Database" it was 16th largest in 2011, 2012 and 2103 (both are basing their ranking on Purchasing Power Parity, or PPP - 2013 figures are projections).
Turkey is considered an 'emerging market' by Merrill Lynch and the World Bank, while economist Tevfik Nas calls it a 'maturing market' (2008). Some are implying parity with China, particiularly due to the phenomenal GDP growth of 2010 (9.2% increase)and 2011 (8.5% increase) (CIA World Factbook, 2013;Ellyatt,2013). But other analysts remain skeptical (Pamuk,2013). Indeed, in 2012 the growth went down to a more modest 2.6% increase. Şevket Pamuk states its overall performance remains far behind the incredible GDP increases of China, India, and South Korea (2013).
Turkey's Economic
Role Today
The “free market” vs. “command economy” binary remains a powerful paradigm. Yet this understanding of global economies falls short, particularly in regard to Turkey and its predecessor. The predominant approach the Ottoman government took was a "provisionalist" one, responding to the needs of particular situations. Further, it pursued free market policy, especially in relation to Indian Ocean trade routes (Casale,2006&2010).
Or. . . not so new Paradigm
Thus, Turkey's phenomenal improvement may simply be part of the global trend of growth rather than something unique. Indeed, what used to be the G7 are now the G20. The G20 consists of emerging market economies like Turkey, plus Canada, France, Germany, Italy, Japan, the U.K., and the U.S (the G7).

Where there had been a clear disparity between, what Ferguson calls, "The West" and "The Rest" since the inception of European world power (2010), there is now an overall blurring of this line, a global reorganization.
"Free" vs. "Command"
Turkey plays an important role now in the global economy, particularly in Turkic republics of Central Asia and the Caucuses, as well as in the Middle East, North and East Africa (Dombey,2013). In other words, Turkey's, linguistic, religious, and historic ties with those countries give it a cultural advantage in regard to economic influence ("Investment Climate in Turkey",2013).

Turkey is now repositioning itself in the international political and economic schemata. The government is negotiating a new constitution to replace the one which was implemented after the 1980 military coup (Jones,2012). Government and major industrial players have identified key economic and political goals which have removed barriers for foreign investors and increased production to create an export-powered economy (Bozzo,2012;Dombey,2013;Ellyatt,2013). This is tied to its bid for accession into the European Union, but that is not the only cause. Turkey is seeking to diversify its trade partners, and spread its economic influence beyond Europe (Dombey,2013).
The Case of Turkey
Turkey is now repositioning itself in the international political and economic schemata. the government is negotiating a new constitution to replace the one which was implemented after the 1980 military coup (Jones,2012). Government and major industrial players have identified key economic and political goals which have removed barriers for foreign investors and increased production to create an export-powered economy. This is not a modern version of the Tanzimat, but a strategy which seeks to diversify its trade partners, and thus spread its economic relationships beyond Europe (Bozzo,2012;Dombey,2013;Ellyatt,2013).

Average incomes have grown by 30 to 40% since 2001(Pamuk,2013). This is an incredible accomplishment. Yet, employment rates have not shown a corresponding increase (Pamuk,2013). While there are nouveau riche, they are only a small percentage. In Turkey, as in the world as a whole, there remains a large differential between "Haves" and "Have-nots" which is not reflected in the per capita income measure that is standard amongst economists (Stiglitz,2006).
Empowerment, Despite
Continuing Disparity
Kerri Finlayson, Professor of Sociology and Anthropology at North Central Michigan College, and journalist, Kenneth Winter, thank you for making this presentation possible and for gathering together so many from "the bus" as part of the audience.

I thank Barbara Petzen, for her feedback on an earlier version of this presentation and for sharing her historical knowledge, and insights on Turkey.

I would also like to thank the Global Business Learning Community at the Fisher College of Business who invited me to speak to their students about my experiences of the economic situation in Turkey and share information on global economics. That presentation inspired me to dig deeper into the history, and address commonly held misconceptions regarding “East” vs. “West.”

I would like to thank the "Investment Support and Promotion Agency" of the Turkish Ministry of Economics for taking time each year with the scholars and educators we bring to Turkey, and their work in preparing a great presentation.

I would like to thank Carter Findley for his tireless work to bring the latest scholarship on Turkey to OSU campus. I personally, and many students I have known, have benefited directly.
Challenges Today
Industrializing new provinces.
New centers of manufacturing have emerged (Pamuk,2013). Their low wage cost is one of the factors for this shift. Konya is one of the provinces which has recently undergone dramatic change. We visited during our trip this year and learned from locals first-hand how much their lives had changed with new wealth, as well as the surrounding landscape. There were many new apartment buildings there. Recently, the Prime Ministry has developed an incentive program to develop provincial economies across the country (“Investment Climate in Turkey”, 2013). One can see on the map to the right the distribution of industry, from former centers to newer centers – the red provinces are the most established, while the blue are recently industrialized.
Red/Magenta (1 on the key) stands for the areas which have established industrial economies, and the colors range until 6, indicating the least industrial.
The unemployment rate has not decreased significantly (Pamuk, 2013).

The rate of female participation in the workplace has not increased with the economic growth (Pamuk,2013;The Economist,2013).

It remains "heavily dependent on capital inflows" (Economist,2013), inflows which have traditionally been, and remain for the most part, from Europe. The attempt to diversify foreign investment supported through the same Prime Ministry Office, "Investment Support and Promotion Agency", which also maintains the internal incentives scheme illustrated in the map to the right. They boast a 6-day turn around time for incorporating in Turkey ("Investment Climate in Turkey,2013).
Turkey’s history, and the Ottoman Empire’s history before it, challenge the conceptual binary of capitalist economy vs. command economy. With phenomenal GDP growth rates, such as 9.2% in 2010, Turkey is one example of what is happening in the world to change dominant ideas related to "development", and even democracy. The Ottoman economy before it (or, as Findley notes, economies - 2010) played an important role in the economic competition which spurred phenomenal growth and innovation in Europe that made most of its countries, at one point or another, world powers. Within the following information, you'll learn more about the roles that both Turkey and the Ottoman Empire have played in the world, as well as their internal economic situations.

Please refer to this presentation's bibliography here: https://osu.box.com/econ-bib

This is intended for a general audience, but contains some economic terms. I try to include brief descriptions or explanations after using such words, but space is limited. Thus, I highly recommend the Economist’s reference: Economics, A-Z http://www.economist.com/economics-a-to-z
The Great Divide
Marshall Hodgson, emphasizes modernity's impact on global economic systems, and the role it played in "The Great Divide":
"It was not merely, or perhaps even primarily, that the Europeans and their overseas settlers found themselves in a position to defeat militarily any powers they came into contact with. Their merchants were able to out-produce, out-travel, and out-sell anyone, their physicians were able to heal better than others, their scientists were able to put all others to shame. Only a limited part of the world's surface was actually occupied by European troops, at least at first. European hegemony did not mean direct European world rule. What mattered was that both the occupied ('colonial' 'settled') and unoccupied ('independent') areas were fairly rapidly caught up in a world-wide political and commercial system, the rules of which were made by, and for the advantage of, the Europeans and their overseas settlers." p. 177
. . .and the related topic of divergence:
"Henceforth the gap in development between one part of the world and all the rest becomes decisive, and we must understand its character in order to understand anything else." p. 176

Colonial powers, in general, didn't start with political control, but with economic power. In many territories around the world economic dominance could be felt from a myriad of European countries, even if they weren't in direct control over them (Ferguson,2003). In the case of the Ottoman Empire and Turkey:
"the Ottoman Empire never overcame the fiasco of the reforms enacted at the beginning of the Tanzimat; indeed, the incorporation of the Empire into a European-dominated economic system was far advanced before the era of reform began and simply continued thereafter." (Findley,1980)
Building the Nation-State
The "Third Republic"
Modern Turkey
New Paradigm
Turkey, now one of the world's largest economies (World Bank, 2011), has been categorized as an emerging economy for many years by sources such as The Economist, Merill Lynch, and The World Bank, though, more recently, economists have begun to call it a maturing economy (Nas,2008). It is now the country with the most car manufacturing in Europe, "Honda, Hyundai, Renault, Toyota and Ford Motor are increasing vehicle production in Turkey" (Bozzo,2012).
USAID Data since 1950 reveals a new global reality. Once there was a clear dividing line between developed and developing economies, also referred to as "First World" and "Third World." Since then the gap has been closing, economically, but also in regard to the institutions and cultural norms related to modernity. "Stop Calling Them 'Developing Countries'" www.bit.ly/b3JZNB on Gapminder.org shows a global economic convergence with visual illustrations, and the author, Hans Rosling, has a TED Talk which explains the methodology:
"Let My Dataset Change Your Mindset" http://www.ted.com/talks/hans_rosling_at_state.html Niall Ferguson's TED talk on"The 6 Killer Apps of Economic Prosperity" also points to the paradigm shift that had already become a new global reality: http://on.ted.com/Ferguson
Closing of the Gap
What does it mean?
Conservative organizations, such as the Heritage Foundation, interpret this convergence as an overall increase in wealth and reduction of global poverty (Sala-i-Martin,2007), and it does correspond to increasing health and other positive outcomes (Rosling,2009). However, as some economists point out (Stiglitz,2006), due to the focus on mean average income, the ways in which the wealth is distributed within countries can easily be overlooked. This can skew outsiders' perception of the actual economic circumstances many Turkish citizens are experiencing under the current situation.
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