The Turkish Neoliberal Unshared Growth Regime of the Post-2001 Period
Please cite the paper as:
“Zeynep M. Sonat Hansjörg Herr, (2013), The Turkish Neoliberal Unshared Growth Regime of the Post-2001 Period, World Economics Association (WEA) Conferences, No. 4 2013, Neoliberalism in Turkey: A Balance Sheet of Three Decades, 28th October to 16th December 2013”
Abstract
This paper questions the sustainability of Turkey’s growth performance in the post-2001 period. After the 2001 crisis, Turkey continued to pursue a radical market reform strategy following the philosophy of the Washington Consensus. A “jobless” growth due to
high productivity increases which were to a large extent caused by intensifying the work process and not always by technological advancement, financial sector fragilities and very high inequality have characterized the Turkish economy in this period. This paper asserts that Turkey’s macroeconomic regime in the post-2001 period has been a handicapped one, which might not sustain a stable growth performance in the long-term and at least is risky because of its inherent social and economic fragility. Recommendable is a new development regime with selective capital controls, a balanced current account, an active government policy to support certain industries, a strengthening of unions and employer associations, a coordinated wage bargaining on the sectoral level, and last but not least policies to achieve a more equal income distribution.
In this paper, authors review the development regime of Turkey in the 2000s (the AKP period). Authors collected their review under 7 headings. Under “demand, GDP growth and employment” authors argue that GDP growth in the post-2001 period has been strong. Authors underlined that private consumption share in aggregate demand was slightly higher in the 2000s than in the 1990s and that the rapid increase of consumer loans and credit cards in the 2000s played an important role in this development. Authors also underlined the further deterioration of Turkey’s external balance with the rest of the world. The important contribution of this section is the identification of this period as “jobless growth” by authors. While the average growth rate in the period of 2002-2007 was 6.8 per cent, the official unemployment rates in the post-2001 period remained at a level of around 10 percent, signaling that the actual rate must be much higher. Authors however did not offer any conclusive explanation on their jobless growth argument, though they presented several views on the possible explanation of this issue put forward by others. In the rest of the paper, authors discussed the 2000s of Turkish economy under different headings ranging from “Integration into the world market”, “Credit expansion and bubbles in Turkey”, “Wage development and inflation”, “Monetary policy”, “Fiscal policy” to “Inequality in Turkey” by emphasizing the low performance of Turkish economy in most of these topics.
I fully agree with almost all comments of authors on the performance of Turkish economy in 2000s. In contrast, I fully disagree with almost all suggestions made by the authors in the last two pages of their essay. First, authors argue that “another more sustainable and successful development regime in Turkey is possible” (p.21). Authors state that “the Turkish economy has to be protected from foreign instability and instabilities” by changing the way it is integrated with international financial markets. In particular, they suggest controlling capital imports (and especially indebtedness in foreign currency of all domestic sectors) to reduce external vulnerability. Second, authors also advise for Turkey “to come to a constellation of a medium-term balanced current account”. Third, rather implicitly, they criticize the financialization of Turkish economy. Fourth, authors suggest Turkey to stimulate productivity and innovation in industry. Fifth, authors suggest a more equal income distribution to guarantee social cohesion in society and sustainable economic prosperity. Many critiques can be raised on applicability of these suggestions, e.g., how can Turkey improve current account balance while she is energy-dependent and energy prices are rising. Above all, perhaps the most important point to raise here is that firstly an economist must hold the view that “economics is not a normative but a positive social science”.
“Unshared growth regime!” What a great summary of the last three decades of Turkey… The paper skillfully provides data to illustrate the speculative, finance-led, jobless, unequal, unstable, and import dependent character of the growth regime in Turkey.
The paper highlights an important and under-researched problem regarding the link between household debt and stagnation of the real income of the working people. An excellent piece of research providing elaborate evidence illustrating that this has intensified since the crisis of 2001 in particular for the low wage working class is presented by Karacimen (2012).
I would add another dimension of inequality to the discussion in the paper regarding functional income inequality: the secular fall in the share of wages in national income since 1980 by some 20%-point of GDP. Both currency crises in 1994 and 2001 left deep distributional scars in the functional income distribution with persistent effects lasting years after the recovery. Despite some increase since 2008, the wage share has still not recovered back to its pre-2001 crisis level in 2000; it is still 1.4% lower in 2011 compared to 2000, and dramatically lower than the wage share in its peak in 1991 by a rate of 9.6% (Onaran, 2013). Furthermore, between 2006 and 2011 the share of the bottom 40% as well as the top 20% within the total wage income has increased, whereas the share of the middle 40% decreased (Onaran, 2013). Research by Onaran and Galanis (2013), Onaran and Stockhammer (2005) and Onaran and Yenturk (2001) shows that this pro-capital redistribution of income has strong negative effects on growth in Turkey; i.e. the growth regime in turkey is wage-led; thus a fall in the wage share is detrimental for growth. In our recent research for the International Labour Office we have simulated the effects of global race to the bottom in the wage share in Turky as well as other major developing countries and the developed countries (Onaran and Galanis, 2013). Our results indicate that the global race to the bottom in wages have led to 5%-point less growth in Turkey in the last three decades.
Another issue I would like to raise is the poverty and social policies of the AKP (the ruling party) regime. AKP has initiated a redistribution towards the poorest of the society via both crony in kind transfers of food and fuel, in particular in the eve of the elections, as well as some institutional pro-poor changes, e.g. in the health services increasing access for the poor and the informal sector workers. Share of social transfers, in particular transfers other than pensions and survivors’ benefits, have doubled as a ratio to GDP from 0.9% in 2006 to 1.8% in 2010 (Onaran, 2013). Relative poverty rate (the ratio of individuals below %50 of the median value of the consumption expenditures per equivalent individual) declined from a level of 18.5% in 2002 to 16.0% in 2011 (Onaran, 2013). Minimum wages have also received a significant boost in real terms, and increased from 0.61 as a ratio to the median wage of full-time workers in 2002 to 0.71 in 2011, and minimum wages as a ratio to average wages increased from 0.32 to 0.38 in the same period (Onaran, 2013). However, the source of this redistribution was income scrapped from the organized blue collar and white-collar/professional working people rather than taxes on corporate profits and the rich. This redistribution helps to increase the profits of the employers without hurting the poorest further. This may also partly explain the diverse class composition of the mass, albeit shaky, electoral support for the party.
I disagree with the authours on one point regarding the link between inflation and depreciation-wage-price spiral. During both 1994 and 2001 crises real wages fell dramatically, indeed much more than the fall in productivity. One important reason of this is that nominal wages have significantly failed to adjust to the inflationary effects of the depreciation during the currency crises in an environment of increasing unemployment and weakening bargaining power of the workers. This lack of adjustment has been one of the strongest reasons behind the distributional scars left by the crisis, and long after the crisis wage stagnation continued. Onaran (2009) illustrates further evidence on this. Inflation has been dominated by the pass-through from devaluation and other cost shocks such as energy or food prices.
Finally, I would like to express my full support for the policy alternatives at the end of the paper. However, I fail to understand why thee authours shy away from the use of “import substitutionist” policies, although at another part of the paper strongly advocate industrial policy. A mix of import substitution and export orientation and industrial policy should be seen as complementary policies.
References
Karacimen, E. 2012 Financialisation of Developing Countries through Debt and the Credit Systems, AHE Conference, July 2012.
Onaran, Ö. 2013, The political economy of inequality, redistribution, and the protests in Turkey, http://researchturkey.org/wp/wordpress/?p=3717
Onaran, Ö., “Wage share, globalization, and crisis: The case of manufacturing industry in Korea, Mexico, and Turkey,” International Review of Applied Economics, 23(2): 113-134, 2009
Onaran, Ö. and Galanis, G. “Is aggregate demand wage-led or profit-led? National and global effects,” Conditions of Work and employment Series No. 40 , International Labour Office, 2012
Onaran, Ö., Stockhammer, E., “Two different export-oriented growth strategies: accumulation and distribution in Turkey and South Korea”, Emerging Markets Finance and Trade, 41(1), 65-89, 2005.
Onaran, Ö., Yenturk, N., “Do low wages stimulate investments? An analysis of the relationship between distribution and investments in Turkish private manufacturing industry”, International Review of Applied Economics, 15(4), 359-374, 2001
Dear Prof. Dr. Yetkiner,
Thank you very much for your comments on our paper which we appreciate. First of all, we agree that Turkey may not introduce a set of alternative policies immediately. However, we think that economic policy recommendations do not have to be feasible each time. Based on our analysis in the paper, we aim at opening up a new perspective towards the future policy options of Turkey. We believe that if sufficient amount of people start believing in these policy options, they could as well be introduced. The New Deal after the Great Depression shows that fundamental changes are possible. Thus, we follow Keynes’ hope in his General Theory: “Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories […], so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But soon or late, it is ideas, not vested interests, which are dangerous for good or evil.” (Keynes 1936, p. 383)
A second point we would like to stress is about the normative side of economics. We disagree with the view that economics is a positive science without any normative aspect. Economics, as social science in general, is indeed normative in many respects. Adopting a theory to explain an economic phenomenon or choosing the type of data to explain it often depend on one’s judgement. The policy recommendations also depend on what type of world one would like to see. Additionally, economics is different to natural sciences, because it is about society, and therefore the conditions in a society are ever-changing. For this reason, many schools of thought in economics compete with each other at a certain period of time. With our proposals we would like to stimulate such a debate.
Reference
Keynes, J. M. (1936 [1997]). The General Theory of Employment, Interest, and Money. Prometheus Books. New York.
Dear Prof. Dr. Onaran,
Thank you very much for your comments on our paper. We appreciate that we agree in almost all points.
We support your argument that the change in the functional income distribution had very negative effects in Turkey and is detrimental for growth. We also support the idea of a wage-led growth or better income-of the masses led development. To achieve a wage led growth we recommend a reform of the financial system which should serve the real economy, policies against rent-seeking all dimensions, radical change in wage dispersion towards more equality including minimum wage policy and government redistribution policies.
We also agree that import substitution should not be excluded from the set of policies. Our statement in the paper rather means that an industrial policy for generating domestic industries to replace imports is not enough. We consider industrial policy as a set of policies “that stimulate specific economic activities and promote structural change” (Rodrik, 2008, p. 3) or “a policy that attempts to affect the evolution of specific industries (and even specific firms when they are large enough) through state intervention in order to affect “national” efficiency and growth” (Chang, 1998, p. 107). Following such a strategy of export promotion and import substitutions has its place in a national strategy of development. We recommend that Turkey should adopt a set of policies which enable new industries to grow and the existing ones to advance. In this sense, both import substitution and export promotion should be the parts of the policy agenda in Turkey.
Nominal depreciations which should lead to real depreciations are in most cases difficult for countries. Real depreciations may be needed to restore international competitiveness in the short-term as other policies, for example increasing productivity, may take time. A real depreciation reduces real wages especially if a large part of the consumption basket is imported. To increase international competitiveness via the exchange rate implies reductions of real income and real wages in the short-term. However, these losses can be compensated by higher aggregate demand and income in the medium-term. We believe that the best policy is to combine nominal depreciations with domestic nominal wage increases according to medium-term productivity development plus the target inflation rate of the central bank. Of course, in the ideal case unions and workers should get a compensation for such a wage policy – for example changes in the tax or public transfer system.
References
Rodrik, D. (2008). “Industrial Policy: Don’t Ask Why, Ask How”. Middle East Development Journal, Demo Issue 2008 (1-29).
Chang, H. J. (1998). “Globalization, Transnational Corporations, and Economic Development: Can the Developing Countries Pursue Strategic Industrial Policy in Globalizing World Economy?” In: Baker, D. Epstein, G., Pollin R. (eds.) Globalization and Progressive Economic Policy. Cambridge University Pres.