Turkey's economic crisis in the 1970s and 1990s

Turkey:

Economy in the 1970s and 1990s

Turkey is a unique country that lies partially in Asia and partly in Europe. The Asian and the European part of the country are separated by the Bosporus, which is the water link between the Black Sea and the Mediterranean. Although the areas constituting Turkey have a very ancient history, the modern day Turkey became a Republic in 1923 under the leadership of Mustafa Kemal (Ataturk) after the collapse of the Ottoman Empire. Turkey's economy is a mixture of modern industry and ancient agriculture that has undergone many ups and down throughout its history. In this paper we will focus on the economy of Turkey in the 1970s & 1990s, and discuss the major economy-related events that occurred during this period.

The 1970s

The decade of 1970s was a period of serious economic crisis in Turkey, which was accompanied by political and social turmoil.

Overview of Major Events

Suleiman Demirel had won the general elections in 1969 to become the Prime Minister, soon confronted by civil unrest and violent clashes between the extreme leftist and rightist factions. There was an ongoing separatist struggle by the country's Kurdish minority that exacerbated the situation. A severe earthquake hit Western Turkey in 1970-71 that resulted in widespread damage. Demirel was followed by a succession of Prime Ministers in the early seventies amidst continuing civil strife and unrest. Under U.S. pressure, the Turkish government banned the cultivation of opium poppy (used in manufacture of heroin) in 1972. Turkish troops invaded the island of Cyprus in mid-1974 and occupied 30% of the island. This was purportedly done to protect the island's Turkish inhabitants following a Greek-inspired coup in Cyprus. Turkey and Greece were on the verge of all out war, which was prevented only by the intervention of the United Nations and the U.S. During most of the decade, Demirel and Ecevit alternated as heads of unstable, minority governments presiding over a worsening economy. The decade ended with a military coup in 1980 following major civil unrest claiming over 2000 lives.

1977: The Crisis Year

Apart from the political instability and civil strife in the country, the Turkish economy had to face an unprecedented increase in oil prices after the 1973 Arab-Israeli war. The economic conditions continued to worsen over the next several years, reaching crisis level by 1977. Inflation reached a rate of over 50% in that year while unemployment exceeded 30% of the total workforce. Domestic industries were hit hard by the increase in cost of raw materials and energy and could not compete in the foreign markets. The country's trade deficit approached $4 billion in 1977, which resulted in a balance of payment deficit nearly five times the 1974 level. With foreign creditors refusing to give further credit due to doubts over the country's ability to repay loans, Turkey was faced with bankruptcy, which was barely prevented by intervention from the Central Bank by suspending payments for imports. By the end of 1977, the country's external debt had ballooned to over $11 billion.

Overview of Major Events

Turgut Ozal, an economist by profession, was re-elected as the Prime Minister of Turkey in 1989, whose government allowed U.S. To launch air strikes on Iraq from its territories during the Persian Gulf War of 1991. Despite massive dislocation of the Kurds, Turkey kept its border closed as it was already facing increasing Kurdish nationalism. Demirel gain became the Prime Minister after defeating Ozal's motherland party in the elections of 1991.Tansu Ciller of the True Path Party became the first woman Prime Minister of the country in 1993. By now the economic boom of the late 80s was an old story. High inflation, increasing foreign debt and deficit financing led to another economic crisis in 1994. Increasing social instability led to the popularity of Islamic fundamentalists. In the parliamentary elections of 1995, the Islamic Welfare Party became the single largest party and formed a coalition government -- the first 'Islamic' government since the Kemalist revolution. However, the secular military, increasingly alarmed by the Welfare Party's support for Islamic education and culture, forced the resignation of the government in 1997 -- banning the Welfare Party in 1998. During this period, high rates of inflation continued to plague the economy. On the foreign front tensions with Greece persisted over the partition of Cyprus and territorial disputes, and the country was accused of human rights abuses over its handling of the Kurdish nationalist movement. Two major earthquakes hit Northwest Turkey in 1999, killing thousands. Relations with Greece improved somewhat with both countries offering aid to quake victims in each other's countries. In late 1999 Turkey was invited to apply for membership of the European Union, reversing a 1997 rejection of such a move.

The 1990s Economy:

The Turkish economy had benefited greatly from the stabilization programs carried out by the Ozal government in 1980s. The Iran-Iraq War (1980-88) proved to be a boon for Turkey as well, since both the warring countries became its major trading partners and Iraq relied on it for the export route of its crude oil. Turkey benefited not only by getting its oil supplies from the pipelines passing through its territory, it also got substantial export fee from the Iraqi oil pipelines. The boom period ended with the Gulf war in 1991, as the UN embargo on Iraq stopped the export of its oil through Turkey. According to estimates the Turkish economy lost over U.S. $3 billion by stoppage of its trade with Iraq. However, after compensation for the loss by Saudi Arabia, Kuwait and the UAE, Turkey's economy began to show signs of improvement in 1992.

The economy again plunged into crisis in 1994. This was the accumulated result of large government spending and heavy public-sector borrowings that reached a record 17% of the GDP in 1993. This high government spending resulted in hyperinflation that touched 73% in mid-1993. The resulting rise in real exchange rates meant increased imports and slow exports, and a spiraling trade and current account deficit. Increased foreign borrowing by the government as well as commercial banks overheated the economy that led to a cycle of 'dollarization' as people converted their domestic assets in foreign currency. These alternating cycles of hyperinflation, over-spending by the government and austerity measures enforced by the international financial institutions continued through the 1990s.