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The Global Localization: Turkey

One of the key economic themes that will likely dominate the post COVID-19 world would be that of a decline in globalization. Rise in protectionism in global trade will likely become a worldwide trend, initial trailers of which we had been witnessing even prior to the COVID-19 outbreak with the US-China trade wars. The last time the world got disenchanted with globalization and trade was during the Great Depression that began around 1929.

In this series called The Global Localization we take you back to the Middle Eastern economies of 1929 and relook at their response to the Great Depression. How did the state respond to the challenges of a collapse in commodity prices and that of scarcity of essentials? Which Middle Eastern economies emerged stronger and why? The idea is to learn from our past mistakes and successes, because history repeats itself. With this series we try to revisit some of the important lessons learnt.

Today we will be discussing the Turkish state that formed with the War of Independence in 1922 under the leadership of Mustafa Kemal Ataturk.

Young Turks: The journey through the Great Depression

The Great Depression was marked by a decline in global trade. The slowdown hit Turkey via the crash in agricultural commodity prices, Turkey’s main export to the world. The foreign exchange crisis that followed the commodity price crash, led the Turkish government prioritizing localization and import substitution over global trade as an engine of economic growth. Consequently, Turkish GDP in the 1930s was driven by a) incentives and subsidies that spurred private sector manufacturing growth; b) redistribution of agricultural surplus in the urban centers to drive industrialization and c) extensive development of railways that enabled the redistribution of agricultural surplus in the urban centers.

Turkish economy Pre-1929

The creation of the national economy was heralded by political negotiations on one hand, like The Lausanne Peace Treaty (1924) and economic policies favoring the creation of domestic industry on the other. Lausanne Treaty played an important role in de-globalisation of the Turkish economy as free trade treaties were abolished, high tariffs (13%) were introduced on imports and the Ottoman external debt was renegotiated. The creation of domestic economy through modernization and industrialization began with the development of extensive railway network, connecting the rural Turkey to urban centers thus integrating the domestic market. In 1927, Law for Encouragement of Industry was introduced which saw govt subsidy flowing into sectors like food processing, textile, cement and construction. The most important development pre 1929 was however the abolition of the agricultural tethe which used to place an unfair amount of burden on the small producers. With this the large landowners, money lenders etc lost a mechanism to extract agricultural surplus, incentivizing and consequently raising agricultural output.

Source: Turkey, State Institute of Statistics, Statistical Indicators, 1923-1992; Tuncer Bulutay, Yahya S. Tezel and Nuri Yildirim, Turkiye Milli Geliri (1923-48).

The Great Depression: Protectionism & Localisation

The Great Depression saw the prices for agricultural commodities tumble making Turkey’s exports less valuable. Loss of income for the large agricultural sector and the forex crisis convinced the government to take an even more protectionist approach to policy making. Ration on food imports were introduced and import duties were raised. Consequently, the decline in imports to GDP (14.4% of GDP in 1929 to 8.7% in 1932/33 and 6.8% by 1938/39) outweighed the fall in exports to GDP, bringing in a period of foreign trade surplus up until World War II.

Thus there was de-globalization in the Turkish economy post 1929. Due to the forex crisis in 1929, the govt introduced 1) barter agreements in bilateral trade; and 2) cessation of payment of external debt and demand for resettlement of debt.

Severe import restrictions created attractive conditions for domestic manufacturers post 1929 and led to their growth in the 1930s. However, the expansion of the industrial sector was aided by growth in agricultural output. Two reforms in the primary sector helped the expansion in agricultural output: a) abolition of tethe; and b) introduction of price support programs in 1932. This helped farmers sell at a preset price to the state even as global agri prices crashed. This also helped states take the agricultural surplus to catalyze the industrialization process in the urban centers. Thus agriculture played an important role in the growth of the economy.

Turkey's response to counter the impact of shrinking global trade (while clocking domestic revival) is ever more relevant today. Decreasing trade, crash in commodity prices along with the COVID induced slowdown has been met with protectionist policy making. This could be the beginning of "go local". Whether this is prudent policy making or knee-jerk over-reaction, only time will tell. After all, hindsight is 2020 (no pun intended, or maybe just a little bit).

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