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PSIR 426/W 10 Economic Liberalization

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Turgut zal and his economic legacy Turgut Ozal was a critical figure in Turkeys 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.

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Turgut zal 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.

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Turgut zal 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 Turkeys geo- strategic importance. Ozals 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, Ozals influence was important in creating a mood of optimism whereby Turkish businessmen felt confident in their ability to penetrate distant markets.

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Turgut zal and his economic legacy This element of optimism was not only injected into the business community but into the Turkish public at large. Ozals 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 stake- holders 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.

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Turgut zal 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, zals ANAP captured nearly a majority of the votes (45 per cent) and 52 per cent of the parliamentary seats

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Turgut zal and his economic legacy The dynamics behind ANAPs 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.

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Turgut zal 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.

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Turgut zal 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.

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Turgut zal and his economic legacy Initially the ANAP government demonstrated a strong commitment to liberalization. Ozals 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.

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Turgut zal and his economic legacy Ozals 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.

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Turgut zal 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.

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Turgut zal and his Economic Legacy In this period, the ANAP government showed little interest in advancing the democratic process. Ozals 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 Turkeys radio and television all remained unaltered.

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Turgut zal 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.

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Turgut zal 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.

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Turgut zal and his Economic Legacy The year 1987 marks the beginning of a new phase in Turkeys 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.

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Turgut zal and his economic legacy Turkeys application was rejected, but Ozals 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 Ozals 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 Ozals 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.

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Turgut zal and his Economic Legacy Even though Turkeys 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.

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Turgut zal and his Economic Legacy The referendum had a significant impact on ANAPs 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.

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Turgut zal 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.

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Turgut zal 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.

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Turgut zal 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 governments 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.

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Turgut zal 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 Do ru Yol Partisi (DYP), which drew its support primarily from rural areas and small business, formed a coalition government with the center-left Sosyaldemokrat Halkc Parti (SHP) that drew its support primarily from urban wage earners and lower and middle level public sector employees.

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Turgut zal 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 Ozals 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.

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Turgut zal 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.

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Turgut zal 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.

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Turgut zal 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.

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Turgut zal and his economic legacy Turgut Ozals 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 from Washington.

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Turgut zal and his economic legacy It shall be underlined that the negative aspects of Ozals 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.