Etatist Era and Industrialisation: 1930s and 1940s CL A SS 5

1. Etatist Era and Industrialisation: 1930s and 1940sCLASS 5 DokuzEylülUniversity FacultyofBusiness

2. Etatism in the Turkish Economy 1933 1938 1945 Etatism Period War Economy

3. Statist Industrialisation Policy in the Turkish economy • Although the role of the state was vital in society as indicated before in connection with the concept of a mother state , the unique conditions of the early 1930’s necessitated the etatist industrial drive. • Industrialization was the dictum of the economic policy of that period because it was commonly accepted that the lack of industrialization was utmost reason for the fall of the Empire. • Etatism in Turkey can be defined as the first stage of import substituting industrialisation (ISI) (basic consumer goods) as well as a drive which is carried out by public enterprises.

4. Reasons of the Etatism Policy • The significant characteristics of economic development for the period between 1929 and 1938 resulted from two events; • Internal Factors • External Factors

5. Reasons of the Etatism Policy • Internal Factors: • The Great Depression of 1929 brought a decline in outside demand for agricultural raw materials. • Serious falls in exports caused a fall in production and national income which in turn created foreign exchange bottlenecks. • The lack of foreign currency became an important issue because it was needed for importing basic manufactured consumer goods, raw materials, machinery and paying the foreign debts that were inherited from the Empire.

6. The lack of foreign exchange resulted in a further decline in production and increase in unemployment. • The only way to get rid of this vicious cycle was industrialisation. • In other words, the only sector that could be stimulated by the public initiative was manufacturing. This sector would be able to process domestically produced agricultural raw materials, the export of which was facing difficulties. Therefore, the processing of raw materials became essential.

7. Since private enterprises were unable/unwilling to invest in manufacturing, because they did not have enough accumulated capital a state initiative was necessary. • Another rationale behind state initiation there were negative effects of the Great Depression and return on private investments could only be realised in the long run.

8. Reasons of the Etatism Policy • External Factors: • Great Depression of 1929, was characterized by decreasing output, falling prices and rising unemployment. To overcome this problems, as Keynes suggested, the state had to increase spending to stimulate economic activities.Regulated economy and direct public investments were common policy practices of the period. • There was rapid industrialization in the USSR with a planned economic policy.

9. The USSR did not face a Great Depression-type of economic slump and at that time had close relations with Turkey. • The rulers of Turkey had established some institutions like the High Economic Council and planning commissions. • The Soviet Union provided both financial and technical aid to the Turkish etatistindustrialisationprocess.

10. Etatism in Turkey • Etatistindustrialisation started in the early 1930s.In1932,The Soviet Committee headed by Prof. Orlof prepared the first reportand in 1934, this report was accepted as the “First Five Year Industrialisation Plan”. • The plan provided for the establishment of a number of state-ownedeconomic enterprises (SEEs) in iron and steel, textiles, paper, ceramics, glass, andchemical products. • Most notably, Sümerbankand Etibankwere established, where the first would be an umbrella organisationof all public enterprises while the second would be engaged in infrastructures, like mining and electricity.

11. First Five Year Industrial Plan: • The first Five-Year Development Plan was implemented between 1934 and 1938 (İsmet İnönü). • To substitute imports of consumption goods by domestic production. • Industrial establishments were designed to be able to utilise the agricultural products and natural resources of the country as their inputs for industrial output. • The location of industry would be close to the natural and labor resources . • It was obviously intended that regional development would be well balanced. • Priority was given to textile, mining, paper, chemistry, glass and glassware, cement.

12. The main source of finance was the central government budget (basically taxes). • Soviet credits were taken in favourable terms which was completely allocated to the textile industry. • T. Business Bank (İş Bankası) provided credits to support paper production and some light chemicals.

13. Second Five Year Industrial Plan: • 1939- period • The aim was to produce intermediate and investment goods. • The second Five-Year Development Plan which was issued by a committeeappointed by Celal Bayar could not be implementedbecause of the Second World War.

14. İvedili Plan (1946): • Towards the end of the war, a new Five Year Plan, İvedili Plan, was prepared in 1946. • It was prepared by a group which included two former publishers (Şevket Süreyya Aydemir and İsmail HusrevTokin) of the Kadro. • The Plan recommended the continuation of the etatist industrialization together with investments in agriculture and transportation; that is to say a process of full scale and total development was independently recommended. • The Plan was not implemented.

15. After the Second World War the whole world was tripartite; the capitalist, the socialist and the underdeveloped. • The two first were rivals as they were creating their own camps. • Existing international and domestic conditions as well as its geographical location forced Turkey to join the first camp.

16. In addition to the general international developments, the US government included Turkey in its Marshal Plan (1948) which was designed for the reconstruction of Europe. • Furthermore, the US had an additional economic aid package only for Turkey and Greece that was called the Truman Doctrine (1947), which was aimed primarily at the prevention of communism in these countries.

17. Although Turkey did not participate in the Second World War and had accumulated gold and exchange reserves, the US reports stated that the country definitely needed foreign aid and capital for its development. • Furthermore, it was emphasized that Turkey must not continue with industrialization, especially in establishing what was called at that time «heavy industries» such as producing iron and steel, chemicals and fertilizers, and paper products.

18. Instead the country was supposed to specialize in agriculture which was needed for the reconstruction of Europe, in supplying food and raw materials. • With the implementation of a free international trade policy, Turkey would be able to grow faster economically through specialization in agriculture. • Although the Turkish railroad system was functioning well and could have been improved, US commission strongly recommended construction of the roads and highways. • The result was a complete shift in the transportation policy from rail to land routes.

19. Consistent with these developments, the primary issue of the economic policy discussions centered around the role and the place of the state in economic affairs, which was defined under the title of «New Etatism». • 1947 Development Plan (Vaner Plan) • This Plan gaveemphasistoagricultureandinfrastructure. • Itwaspreparedunderthecontrol of foreigners.

20. According to the 1947 Development Plan , • The state should create competitive conditions in both domestic and foreign trade. • Monopolies would be eliminated (The PEEs, especially big ones, were going to be sold to private entrepreneurs). • Economic conditions in rural areas would be facilitated. • Invest only in infrastructures and energy and provide all types of support, including foreign capital and other incentives to the private sector.

21. Measures • Because of the extraordinary conditions the government had to take some exceptional measures for raising revenues. • National Protection Law (1940) gave extraordinary authority to the government in interfering with the markets, in terms of price and quantity. • Wealth Tax (1942) which was a greatly disputed application was introduced. • The dispute over this tax was because the tax base and the rate were left to the estimation commissions. • It is argued that the revenues of the Wealth Tax, which was implemented for about two years, were collected essentially from the minorities. The ones (around 1.200 people) who did not pay the tax was exiled to Erzurum (Aşkale). • Soil Products Tax (reinitiating Aşar), that is paying 10 % of the gross agricultural output to the Treasury. This was practiced for about two years for raising government revenues.

22. Agriculture • Land reform was attempted. • The Law of Distributing Land to Farmers aimed to give farm land to those that were either totally landless or had only a limited amount of land. • Areaplantedincreased • 1938: TurkishGrainBoard (Toprak Mahsülleri Ofisi) wasfounded

23. MiningandEnergy • MTA (General Directorate of Mineral Research and Exploration (MadenTetkikveAramaKurumu) and Etibank were established in 1935. • MTA was responsible for mechanical issues such as searching, mining and extracting the ores and/or training the miners or other personnel whereas Etibank was fulfilling certain financial tasks such as buying and selling of the mines. • Besides, Etibank was given other crucial duties such as producing and distributing electricity which was then an irreplaceable source of energy. • Though a considerable progress has been experienced in mining and energy sectors, some unfavorable factors such as low yield per worker due to lack of advanced technology and capital investments, deficiencies in processing the mines or raw materials, and high costs of producing electricity have deteriorated the positive picture.

24. Industry • Domestic demand was satisfied by domestic production • Most successful industry: • Textile (80% of domestic demand) • Sugar (No need for imports) • Cement production has increased (exported) • Iron-steel (Karabük) • Average number of workers: • 1933: 47; 1939:84 • Problems: • Increased import demand • Agriculture-industry competition

25. International Trade • The main purpose was to prevent trade deficits. • While doing so, 1. Imports of the goods produced domestically have been restricted. 2. “Imports in return for exports policy” was adopted. Restrictions on imports have been relaxed this way. 3. Turkey’s sole trade deficit within the 1933-1945 period was seen in 1938.

26. International Trade (million TL)

27. National income • National income increased by 9% on average • Pre-war period: Agriculture, Industry • Post-war period: Services • Income distribution problems

28. Money Supply • Increase in the money supply is less than the increase in national income between 1930 and 1939. • Since the upward move of the money supply is slower than that of the national income, a contractionary effect has taken place. • As a result , the wholesale price index (TEFE in Turkish) has not increased until the years of the war. • Increases in required reserves were used to control the money supply and inflation rates accordingly. • During the war, increase in the money supply has surpassed the increase in the national income (which is opposite to the prewar period). • Increases in inflation rate were observed as well. • Excess supply of money was given as credits.

29. First Devaluation After the war, Turkey had devalued TL on the 7th September 1946. The Reason for this devaluation was twofold. • To increase exports and decrease imports. 2)After becoming a member of IMF Turkey would follow a fixed exchange rate policy, that is she would be unable to devalue TL more than ten per cent without the permission of the IMF.

30. Public Finance/Budget • Pre-war period: • Between 1933 and 1938 greatest part of the revenues was provided by indirect taxation and invested in industrial projects (70% indirect taxes) • In this epoch, balanced budget has been adopted in principle which has led to a surplus in the budget. • Post-war period: • The share of indirect taxation in budget expenditures has decreased. • The share of direct taxation increased by imposing taxes on wealth and land.(Wealth Tax and Soil Products Tax) • Government revenues are spent as transfer expenditures rather than industrial investments.

31. Other Institutional Establishments In addition to Sümerbank and Etibank some other institutions were established. Halk Bank (for providing credits to the small and medium sized non agricultural enterprises) Emlak Kredi Bank ( for supplying credits to housing and construction) EIE-General Directorate of Electrical Power Resources Survey and Developments (Elektrik İşleri Etüt İdaresi) The SIS- State Institute of Statistics (Devlet İstatistik Enstitüsü) The Turkish Language and Turkish History Institutions were among the institutions that were established in that period.

32. Social Developments • A great deal of progress has been shown in literacy rate. • Village Institutes have been developed to improve the literacy rate and educate qualified labor.(During the war years, 21 Village institutes were opened in remote areas of the country). • People Homes were created to be centers of creativity in music, painting, theatre and other cultural and artistic activities. • A “labor law” has been enacted to regulate the labor hours in a week, thus women and small children 16 or under have been protected.

33. Memberships • Just after the war there was a process of establishing new political and economic institutions that would shape the world. • Turkey tried to be one of the founders of these organizations, starting with the UN (United Nations) and related institutions like IMF (International Monetary Fund) and the IBRD (International Bank for Reconstruction and Development) (now called the World Bank). • Turkey also joined the Council of Europe and later the OECD.