1 Introduction
There is no successful development story without the state (Chang 2002). A well-functioning bureaucracy, strong public finance, smart industrial policies , and welfare state institutions have been seen as key state-related factors that promote economic growth and development (Musgrave 1959; Amsten 1989; Wade 1990; Evans 1995; Weiss and Hobson 1995; Chang 2002; Rodrik 2008; Mazzucato 2013). The state should also secure property rights , protect patents, enforce contracts, control corruption , and ease red tape to further spur development and prosperity (North 1990; Acemoglu and Robinson 2012). Considering the crucial role of the state in economic growth and development, it is important to analyse the effect of the state on the Turkish economy.
Before the 1980s in Turkey , except for a few years of quasi-liberal policies, the state played a significant role in the economy by implementing development planning and import substitution industrialization . Because of military coups , the limited competence of entrepreneurs, and low bureaucratic capacity, state-led development strategy did not work well. In the 1980s, Turkey, along with most of the major developing countries, began to implement neo-liberal economic policies. The so-called Washington Consensus reduced the state’s economic interventions to a certain extent in the 1980s. These policies initially gave the Turkish economy some momentum, but the rapid and unplanned liberalization process paved the way for the economic crisis of 1994. The coalition governments of the 1990s led to an increase in the desire for state intervention in the economy, but these interventions were typically not smart, but corrupt and populist (Öniş 2003). Short-lived coalition governments, a high level of corruption , and the duty losses of the state-owned banks ruined public finances. A crisis was inevitable. The 2000/2001 crisis was one of the most catastrophic economic events that Turkey has ever experienced. High inflation and a current account deficit , an excessive public sector borrowing requirement (PSBR), and a fragile banking system were the main economic culprits of this devastating crisis (Akin et al. 2009).
According to old Turkish proverb, one misfortune is better than a thousand pieces of advice. This underlines the notion that one learns better from one’s own misfortunes than from the advice of others. Following this proverb, it could be said that there was at least one good side to the 2000/2001 crisis : the intense governance reform process that followed. In addition to the restructuring of the banking system, public sector reforms ensured macroeconomic stability in Turkey. Although this was a standard IMF-led stabilization policy, Turkey increased its health and education expenditures, invested in mega infrastructure projects, and encouraged firms to produce and export more. Thanks to this reform process, gross domestic product (GDP) per capita increased from USD 3,058 in 2001 to USD 10,382 in 2008.1
Turkey was one of the countries least affected by the global financial crisis (GFC).2 While many European countries such as United Kingdom, Greece, Italy, Spain, and Portugal have imposed austerity measures since 2008, Turkey’s low public deficit and debt enabled it to use expansionary fiscal policies during the GFC. Turkey has also engaged in research and development (R&D) and export incentives to boost economic growth and has used social welfare programmes to relieve the economic and social conditions of low-income individuals.
Squeezed global liquidity , economic slowdowns affecting trading partners (especially European Union countries), escalating geopolitical risks in the Middle East, terrorist attacks, and a failed coup attempt have caused the Turkish economy to grow below its potential since 2012, and GDP per capita has been stuck at around $10,000. To overcome this trend and reach developed-country status, Turkey needs to do more. In this sense, the state must do its own part to support economic growth and development; from enforcing contracts to easing red tape , the state should improve the quality of institutions, and to reduce income inequality , the tax system—which is very reliant on indirect taxes —should be reformed. The state should review its industrial and technology policies, and instead of giving incentives to all firms and industries , the state should pick the winners and support promising firms and industries.
This chapter aims to analyse the role of the state in the Turkish economy over the last 15 years. After evaluating the effectiveness of the state in the Turkish economy, the chapter puts forth policy proposals to make the state mechanisms more growth- and development-friendly.
2 Public Finance and Fiscal Policies
One of the most important actions involved in the restructuring of the Turkish economy after the 2000/2001 crisis was establishing sound macroeconomic governance; without a doubt, reforming the public finance system was necessary for sound macroeconomic governance. Turkey targeted the maintenance of high primary surplus and to reduce Turkey’s public debt burden to well below the Maastricht criterion of 60 per cent. To achieve this, Turkey privatized some public companies and reduced the level of corruption and redundant expenditures in pu...