Sources of Industrial Growth and Structural Change of Industrial Growth and Structural Change ......

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Sources of Industrial Growthand Structural Change

The Case of Turkey

Merih Celasun

WORLD BANK STAFF WORKING PAPERSNumbgei 614-__

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w4/s-WORLD BANK STAFF WMRKING PAPERS 0<5 7

Number 614 7

Sources of- Industrial Growthand Structural Change

The Case of Turkey

Merih Celasun

INTERNAnONAL MONETARY FUNDJOINT LIBPARY

MAR 2 {l 1984

INTERNATIONAL BANK FOR1EMONSTRUCTION AND DEVLOPENT

WASHINGTOX, D.C. 20431

The World BankWashington, D.C., U.S.A.

Copyright © 1983The Intemational Bank for Reconstructionand Development / THE WWORLD BANK1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

First printing September 1983All rights reservedManufactured in the United States of America

This is a working document published informally by the World Bank. Topresent the results of research with the least possible delay, the typescript hasnot been prepared in accordance with the procedures appropriate to formalprinted texts, and the World Bank accepts no responsibility for errors. Thepublication is supplied at a token charge to defray part of the cost ofmanufacture and distribution.

The views and interpretations in this document are those of the author(s) andshould not be attributed to the World Bank, to its affiliated organizations, or toany individual acting on their behalf. Any maps used have been preparedsolely for the convenience of the readers; the denominations used and theboundaries shown do not imply, on the part of the World Bank and its affiliates,any judgment on the legal status of any territory or any endorsement oracceptance of such boundaries.

The full range of World Bank publications is described in the Catalog of WorldBank Publications; the continuing research program of the Bank is outlined inWorld Bank Research Program: Abstracts of Current Studies. Both booklets areupdated annually; the most recent edition of each is available without chargefrom the Publications Distribution Unit of the Bank in Washington or from theEuropean Office of the Bank, 66, avenue d'Iena, 75116 Paris, France.

Merih Celasun is a professor at the Middle East Technical University inAnkara and a consultant to the Development Research Department of the WorldBank.

Library of Congress Cataloging in Publication Data

Celasun, Merih.Sources of Industrial growth and structural change.

(World Bank staff working paper ; no. 614)Bibliography: p.1. Turkey--Industries. 2. Turkey--Economic policy.

I. Title. II. Series.HC492.C44 1983 338.09561 83-16981ISBN 0-8213-0283-2

Abstract

This study provides an empirical analysis of the sources of Turkey'sgrowth and structural change since the 1950's, and considers the prospects forits transition from and inward-looking development strategy to trade-orientedgrowth in the 1980s. The paper discusses the major planning issues forimproved adjustment to current domestic and international economic problems,with special attention to the role of Turkey's public and private sectors inthe industrialization process. As part of a project on industrialization inselected semi-industrial countries, the study also compares Turkey'sexperience with those of other countries.

Acknowledgements

The author wishes to thank Hollis B. Chenery, Larry Westphal, BelaBalassa and Sherman Robinson for their encouragement and constant interest.The development of the present work in successive stages owes much to thegenerous data provided by Yusuf Hamurdan, Erdogan Ozotun and Cetin Akbay andcomments on the methodology given by Yuji Kubo, Moises Syrquin and KemalDervis are gratefully acknowledged. The author is indebted to KathleenJordan, Tevfik Yaprak nd Selcuk Caner for very competent computerprogramming. Ayse Tan and Kim Tran deserve special thanks for typingsuccessive drafts. The author is also grateful to Anne Vorce, who edited thefinal text for publication, and improved the presentation.

iii

Summary

This paper analyzes the sources of Turkey's growth and structural

change since the 1950s, with an emphasis on the limits of an inward-looking

development strategy for Turkey's industrialization and its adjustment to

current economic conditions. The analysis suggests that Turkey needs to alter

its trade orientation and the paper describes the major issues that must be

faced for a successful transition to a trade-oriented development strategy in

the 1980s.

For economic, historic, institutional and policy reasons, Turkey's

postwar growth strategy has generally been inward-looking. In comparison to

other semi-industrial countries of a similar size, Turkey has had a very low

share of trade in GDP until recently. As this study emphasizes, internal

factors and domestic demand have been the main sources of Turkish growth and

structural change. The limited role of trade in Turkey's industrialization

has been due primarily to the relatively large size of its domestic markets,

its natural resotlrce diversity, political conditions, and the structure of

incentives. Unlike other semi-industrial countries that had successfully

switched from an import substitution to an export-oriented strategy, Turkey

thus prolonged the inward-oriented phase of its manufacturing growth. As a

result, a highly protected industrial structure that relied heavily on the

import of intermediate goods became a costly feature of Turkish

industrialization. However, with the external economic shocks of the 1970s,

it became clear that Turkey's narrow trade focus could not be sustained.

These new developments in the world economic scene added to already serious

iv

adjustment problems resulting from increased import intensity and stagnant

export growth.

This paper also analyzes the sources of changes in factor uses and

relative prices and the implications of these results for policy planners.

Despite the growth of the manufacturing sector, Turkey's structural transition

has not been accompanied by sufficient increases in employment, and employment

problems will continue to be a major item on the policy agenda. Increased

trade-oriented growth, with a gradual decline in the levels of protection for

domestic market-oriented industries, will generate important shifts in

sectoral prices, real wages and profits.

Finally, for planners, the study indicates several problems that

could be remedied through policy measures. The lack of integrative mechanisms

and common rules of market behavior in Turkey's dualistic mixed economy system

has led to pervasive distortions in the structure of savings, costs and

prices. In addition, the reliance on non-price measures and selective

policies rather than general policy instruments to achieve economy-wide

objectives has created difficulties for the consistency and efficiency of

savings generation and resource allocation, and has led to recurrent balance

of payments problems. The concluding part of the paper reviews the major

directions of policy changes required for a more viable growth process in the

l980s.

v

TABLE OF CONTENTS

Page

INTRODUCTION ..................... 1

1. HISTORICAL BACKGROUND: 1923-80............... 4

A. Economic Development Before 19509... 0......-......... 4B. Economic Development in 195O-73..oo......... ........ 7C. Economic Development After 1973 ............... *.....o11

2. PATTERNS OF DEVELOPMENT, 1953-78: An Overview.....o....14

3. SOURCES OF INDUSTRIALIZATION, 1953-73 .................... 21

A. Scope of the Analysis. ........ 21B. Basic Data ........ 24C. Policy Characteristics and Trade

Orientation of the Subperiods .............. o...o.28D. Sources of Growth and Structural Change:

An Economy-Wide Analysis ............. . ... .31

E. Sources of Growth and Structural Changein Gross Output: An Analysis byMajor Sectors ............. 38

F. Sources of Growth Patterns inManufacturing Industries..oo..o..oo.. o ............ 48

G. Sources of Import Growth by Commodity.....#* ....... 52H. Decomposition of Value Added ....................... oo56I. Sources of Turkish Industrialization in

the Light of Experience Elsewhere:An Overview.oooo.~.oo.o* .. o.o.- 58

4. SOURCES OF CHANGES IN FACTOR USESAND RELATIVE PRICES .............. ...... ..... . .... . ... o 64

A. Historical Patterns of Employment andProductivity Growth.*....,...*** .. . . ... .. .o.64

B. Sources of Changes in Employment..o..o.....oo.e..o 70C. Sources of Changes in Investment

Requirementsoooo -oo.. .. s...0.. 76D. Sources of Changes in Relative

Sectoral Prices..ooo .. e .. 80E. Domestic Price Distortions, Labor Reallocation

and Value Added Growth Rates 87

vi

Page

5. STRUCTURAL CHANGE IN THE MANUFACTURING SECTOR ............... 96

A. Actual and Predicted Patterns inManufacturing Output....................................... 96

B. Patterns of Public and PrivateShares in Turkish Manufacturingo.......... ... ........ .101

6. TOWARD TRADE-ORIENTED GROWTH AND STRUCTURAL CHANGEIN THE 188...........................,1

A. Trade Effects on Turkish Industrialization.............,llB. Prospects for Transition....... . . ...... .. .. ..... .. . ... .,,117C. Future Research. .. . .. e e. .. . . .. . .. *.. . ,,125

REFERENCES 122

APPENDIX 1. MODELS FOR SOIURCES OF GROWTH DECOMPOSITION ....... ..... 132

A. Methodology in Brief. . . . . .. .. o .o oo.o . o.,,132Be Notationo ooooooooooesossooooooo..138C. Sources of Growth Decomposition of

Production (Gross Output)ooooo..o...ooo......o..... .139D. Sources of Growth Decomposition of

Value Added oosoooooooo..o.o.o .o..145E. Sources of Growth Decomposition

of Importso.ooo.o..ooooo..ooo..oo..oo.oo..o.oo... a,146

F. Sources of Growth Decompositionof Primary Factors. ... . oo.o. oo o..o oo .. o...,147

G. Sources of Changes in Relative SectorPriceso osooooooooooooooesooo...149

APPENDIX 2. DEFLATION OF THE TURKISH I-0 TABLES ..... ,.oo.........151

Ao Generalosoo oooosooooooosoooooo...151B. Deflation Procedure. . . . . .. ooo.o. oo oe. oo.o o151C. Construction of Trade Price Indiceso...ooo. 1.o... o.ol54

D. Construction of Price Indices forProduction and Supply..o... .. . . . o o. oo o..ooo.157

vii

LIST OF TABLESPage

Chapter 1

1.1 Major Economic Indicators, 1923-73... .................. .... 99.9..5

Chapter 2

2.1 Resource Accumulation and Allocational Processes, 1953-78 ...... 16

2.2 Demographic and Income Distributional Processes, 1953-78 ....... 17

Chapter 3

3.1 Value Added Estimates in the Deflated Input-Output (I-O) andNational Accounts (NY) Data Systems, 1963 and 1973 ............. 26

3.2 Variation in Aggregate Trade Ratios Over Time, 1953-78.........30

3.3 Growth in Sector Output, 1953-73...............................32

3.4 Trade by Major Sectors, 1953-73................................33

3.5 Sources of Growth and Structural Change in Gross Output,1953-73: A Summary of Aggregate Results (Alternate Measures)...35

3.6 Sources of Growth in Value Added, 1963-73: A Summary ofAggregate Results (Total Measures) ............................ 39

3.7 Sources of Gross Output Growth in Major Sectors, 1953-73:Share Method, First Difference * o ** * o ..............................o..............40

3.8 Sources of Gross Output Deviations from BalancedGrowth, 1953-73: Major Sectors............ ....................... 45

3.9 Sources of Gross Output Growth in Manufacturing, 1953-73:Share Total Method, First Difference...........................50

3.10 Sources of Import Growth by Commodity, 1953-73: A Summaryof Aggregate Results (Share Method, First Difference) ...... 53

3.11 Sources of Import Growth by Commodity, 1953-73: Disag-gregated Results (Share Total Method, First Difference)........ 54

3.12 Sources of Value Added Growth in Major Sectors, 1963-73:Share Total Method..........................

3.13 A Summary of Measures for Sources of Growth in Manufacturing,1953-73: Share Total Method, First Difference................. 60

3.14 Sources of Manufacturing Gross Output Deviation fromBalanced Growth: An Inter-Country Comparison (Based onShare Total Method, Deviation). e .9.61

viii

Page

3.15 Sources of Manufacturing Gross Output Increase Over Time:An Inter-Country Comparison (Based on Share TotalMethod, First Difference). .... ... . .. . . ... . . . . . . . . . . .* . ** * ** * 62

Chapter 4

4.1 Sectoral Structure of the Economically Active Population,1950-71o ... o...so... o e....so... o......................... 6

4.2 The Employment Status of the Economically Active Population,1950-70o ... o..*.... o....so... *e.o... oooo........................68

4.3 Index of Increase in Output, Employment and LaborProductivity, 1953-73 .... .................. ...... .69

4.4 Sources of Growth and Structural Change in Employment,1963-73: A Summary of Aggregate Results (Based on ShareTotal Method) ............

4.5 Sources of Employment Growth, 1963-73: Disaggregated Results(Share Total Method, First Difference)........................75

4.6 Sources of Changes in Capital Requirements, 1963-73............78

4.7 Incremental Capital-Output and Capital-Labor Ratios,

4.8 Sources of Changes in the Price Structure, 1963-73.. .ooos.o.83

4.9 Sectoral Wage Rates (Current), 1963-73...84

4.10 Index of Intersectoral Wage Differentials, 1963-73. ..... o. .85

4.11 Index of the Increase in Gross Domestic Product (GDP)Under Variant Cases, 1953-78 . 92

4.12 Effects of Labor Reallocation and Domestic PriceDistortions on Observed GDP Growth Rates, 1953-78 ...... ooo...93

Chapter 5

5.1 Actual and Predicted Shares in Manufacturing ValueAdded, 1953-78 .......

5.2 Public and Private Sector Shares in ManufacturingValue Added, 1953-72.........e................... . ..... 102

5.3 Structure of Manufacturing Fixed Investments, 1963-83 .... ... 103

5.4 Nominal and Effective Protection Rates, 1968(R. Olgun Study) ........................ 107

ix

Page

5.5 Share of Firms with Foreign Partnership in ManufacturingIndustry (1973)...............................................109

APPENDIX 2

2.1 Sector Classification (25 Sector Level)........................160

2.2 Major Sectors (9 Sector Level) ................................161

2.3 Trade Prices: 1953, 1958....* ...................... ..... 162

2.4 Trade Prices: 1963, 1973 ....... *so . .oo. 163

2.5 Price Indices For Sectoral Gross Production and Supply:1963, 1973oo. ... .o.o..oo... o ... oo................................... 164

2.6 Relative Weights of Commodities in the Constructionof the Import Price Index ... ................................. 165

2.7 Relative Weights of Commodities in the Construction ofthe Export Price Index. .o....................................... .168

SOURCES OF INDUSTRIAL GROWTHAND STRUCTURAL CHANGE:

The Case of Turkey

Merih Celasun

INTRODUCTION

Turkey's delayed adjustment to the external economic shocks of the

mid-1970s has resulted in costly growth losses, hyperinflation and political

instability. At the heart of the adjustment difficulties were certain

structural trends that minimized the role of trade in the development

process. Institutional features and policy also played important roles. This

study examines the various factors that have shaped Turkey's economy since

1950, with an emphasis on the implications of an inward-looking trade

strategy. A major objective of the historical analysis is to delineate the

scope of the major planning issues involved in the transition toward trade-

oriented growth in the 1980s.

This paper is part of a comparative study of industrialization in

selected semi-industrial countries 1/ The broad objectives of these

coordinated research efforts are to determine the common features of

industrialization, and to explain country differences in terms of specific

policies and resource endowments. Technical economic analysis is an important

part of the project. Varied input-output methods, which are used to analyze

the changing combinations of factors in growth under different conditions,

have been applied to each country.

The analysis of Turkey primarily concerns the estimation of the

1/ Chenery (1979, Chapter 3) presents an overview of the typical patterns andsources of industrialization at various stages of the development process.Kubo and Robinson (1979) give the initial results of the comparativeanalysis of the sources of industrial growth in eight countries (includingTurkey). The seven others are Japan, Norway, Korea, Taiwan, Mexico,Colombia and Israel.

- 2 -

sources of growth and structural change in production and imports in 1953-73

(Chapter 3). The sources of change in value added, factor use and relative

product prices from 1963-73 have also been studied because more detailed

information is available for that period (Chapter 4). The overall structural

assessment has been extended to 1978 based on the average country patterns

estimated by Chenery and Syrquin (1975) and Chenery and Taylor (1968).

Accordingly, Chapter 5 examines the transformation of the manufacturing sector

in more detail and discusses the roles of the public and private sectors in

the growth of individual manufacturing industries.

Development policy has played a significant role in Turkish growth

and structural change. During 1953-73, the style and framework of development

policy changed. The first decade was an era of uncoordinated development,

which was characterized by frequent shifts in the government's ad hoc economic

policies. In contrast, from 1963-73 formal economy-wide planning techniques

and institutions were adopted and a stronger emphasis on non-inflationary

growth and industrialization was apparent. The trade and balance of payments

regime had essentially a semi-closed character during 1953-70, but became more

open in the early 1970s. The relatively larger role of export expansion as a

source of growth from 1968-73 reflected both the effects of switching to a

semi-open trade regime and the impact of the world commodity boom in 1971-

73. The final section (Chapter 6) provides a brief review of the basic

institutional and policy factors that have been instrumental in Turkey's

inward-looking industrialization strategy. It also discusses Turkey's recent

(1980-81) policy changes and the prospects for a trade-oriented transition in

the 1980s. Suggestions for future planning and research are offered as well.

Extensive empirical work on the construction of price indices for

production, imports and exports that have shown considerable intersectoral and

intrasectoral variation has been an integral part of the project. The data

base largely consists of sectoral output and trade data for 1953 and 1958 and

official input output tables for 1963, 1968 and 1973. The sector information

has been adjusted for consistency and reclassified at the 25 sector level 1/

A useful by-product of this study is a set of deflated input-output tables,

which closely conform to the official national accounts published by Turkey's

State Institute of Statistics (SIS). The analytical methods of the sources of

growth analysis are reviewed in Appendix 1. The deflation procedures used,

sectoral price indices constructed and sector classification adopted in data

processing are presented in Appendix 2.

1/ For brevity in presentation, the computer printouts (for decompositionmeasures) at the 25 sector level of aggregation are summarized in the textin tables prepared at the 9 sector level of aggregation.

- 4 -

1. HISTORICAL BACKGROUND: 1923-1980

Although the sources of growth analysis covers 1953-73, further

historical background on Turkey's economic growth is needed to indicate trends

over a longer perspective. Chapter 1 presents a survey of the major phases of

development marked by important institutional and/or policy changes since the

early days of the Republic. The major economic indicators assembled in Tables

l.la and 1.lb describe the historical evolution of the economy according to

its principal structural features from 1923-73. 1/

A. Economic Development Before 1950

The Turkish Republic was established in 1923 upon the end of the War

of Independence that erupted after the Ottoman Empire was dissolved. As shown

in Table 1.lb, economic growth was very rapid between 1923 and 1938 before it

was interrupted by World War II. (The annual increase of per capita GNP was

5.3 percent.) The first fifteen years of the new republican period was

characterized by profound social reforms. However, these reforms were

accompanied by only moderate changes in economic organization and productive

structure.

1/ Some of the structural characteristics are recalculated in Chapter 2 forconsistent comparisons with the cross-country norms, which are expressedin terms of percentage shares in GDP at factor cost.

Table 1.la

Major Economic Indicators, 1923-1973

1923 1938 1953 1963±/ 1973

A. Computation of Per Capita Income 2/

GNP (billion TL, 1968 m.p.) 11.4 33.3 51.7 82.8 157.6Population (million)

Total 12.6 16.9 22.6 29.7 38.3Urban - 3.5 4.7 8.6 15.4

GNP per capita (1968 TL, m.p.) 911.0 1,971.0 2,292.0 2,794.0 4,115.0GNP per capita (1964 US $,f.c.) 75.0 161.0 186.0 228.0 335.0

B. Percentage Shares in GNP(1968 producer prices)

Value Added inPrimary Production 43.6 45.0 42.0 36.0 24.4Manufacturing 8.4 11.6 10.6 14.9 20.6Social Overhead 7.4 9.3 12.2 13.8 16.0

Constructi2l) 3.3 4.4 6.2 6.1 5.8Utilities __ 4.1 4.9 6.0 7.7 11.2

Services 41.5 35.0 35.5 35.5 35.8Factor Income from Abroad -0.9 -1.0 -0.3 -0.2 3.2

C. Percentage Shares in GNP(Current Prices)

Imports (goods and n.f.s.) 15.2 7.9 11.3 9.6 11.0 4/Exports (goods and n.f.s.) 8.9 7.6 8.0 6.0 8.0Resource Gap 6.3 0.3 3.3 3.6 3.0Current Deficit 7.5 0.4 3.5 3.9 -1.6Private Consumption 91.3 75.7 77.8 76.8 66.8Public Consumption 9.2 13.4 11.0 11.5 13.7Fixed Investment 7.0 11.3 14.0 14.8 17.0Stock Increases - - 0.8 5/ 0.8 0.8National Savings -0.5 10.9 11.2 11.7 19.4

(Cont'd)

-6-

Table 1.lb

Major Economic Indicators, 1923-1973 (Cont'd)

1923-38 1938-53 1953-63 1963-73

D. Compound Annual Growth Rates(Percent)

GNP (at 1968 prices) 7.4 3.0 4.8 6.7

GNP per capita 5.3 1.0 2.0 4.06/Agriculture Value Added 7.6 2.5 3.2 2.3-Manufacturing Value Added 9.7 2.4 8.5 10.1Population

Total 2.0 1.9 2.8 2.6Urban - 2.0 6.2 5.9

15-64 Age Group - - 2.2 2.6Employment

Total - 1.3 1.3Manufacturing - - 3.5 4.6

PricesGNP Deflator - 11.4 10.6 9.6

Agriculture Deflator - - 10.2 10.5Manufacturing Deflator - - 10.1 7.2Real Wages

Nonagriculture - 0.1 1.5 2.7Manufacturing - - - 3.5 -

1/ Data for 1953, 63 and 73 refer, respectively, to 1952-54, 1962-64 and1972-74 averages, unless indicated otherwise.

2/ TL = Turkish lira; m.p. - market prices; f,c, - factor cost

3/ Includes electricity, gas, water and transportation.

4/ This column refers to the 1973 I-0 (input-output) table.

5/ Unofficial estimate.

6/ This rate becomes 2.7 % per year in 1963-1975.

7/ For 1962-1972.

Sources: Bulutay, Yildirim, Tezel (1974) for 1923-1948 national accounts data;State Institute of Statistics (SIS) (1973, 1974) for 1948-1973 data;State Planning Organization (SPO), Five Year Plans, for populationand employment data; and Zaim (1974) for wage data.

A major shift in economic policy took place in the early 1930s

partly in response to the Depression. A renewed emphasis was placed on the

creation and expansion of government-owned enterprises in industrial

sectors. Because of the vigorous initiatives of public enterprises in

commodity-producing sectors, the share of the non-service sectors in GDP

increased from 60 percent in the mid-1920s to 67 percent in 1938. 1/ However,

growth and price stability were interrupted by World War II. As a result,

average annual GNP growth fell to -2.9 and 1.2 percent in 1938-43 and 1938-48,

respectively. Following a major exchange rate adjustment in 1946, government

policies gradually shifted back toward a free enterprise orientation.2/ A

more decisive shift in that direction occurred after the political changes

resulting from the 1950 election.3 / Because of shifting political attitudes

and priorities, a draft five-year plan was not formally adopted in 1947-52.4/

B. Economic Development in 1950-1973

Aided by a steep rise in agricultural output (due to favorable

weather conditions and extension of farmland) and primary exports, the economy

expanded rapidly at an average annual rate of 7.9 percent from 1948-53.

However, after the crop failure of 1954, Turkey entered a phase of severe

balance of payments problems and stagnant growth. As a result of continual

difficulties in increasing agricultural output, controlling domestic inflation

1/ For a full discussion of national accounts data for this period seeBulutay et al (1974). Non-service sectors include "A" and "M+" sectorsaccording to Kuznets' classifications (1969).

2/ The exchange rate was adjusted in August 1946 from 1.28 TL to 2.80 TL perUS dollar.

3/ The Democratic Party, winner of the 1950 election over the RepublicanParty, which governed the country in 1923-50, remained in power until themilitary intervention of May, 1960.

4/ See Tekeli and Ilkin (1974) for a discussion of the 1947 Vaner Plan.

- 8 -

and revitalizing the trade sector, annual growth averaged around 4.0 percent

during 1953-58. This led to the introduction of a devaluation and stabili-

zation policy package in August 1958.1/

From 1958-63, major factors accompanying Turkey's average growth of

5.0 percent annually were a military intervention (1960); the gradual

transition to price stability; the design of a more systematic incentive

structure; and the institutionalization of formal development planning. The

economic difficulties faced in the late 1950s were further aggravated by rapid

population growth (2.8 percent a year) and an upsurge in rural-urban migration

at nearly 6.5 percent a year (see Table l.lb). 2/

There were important differences in the instruments and style of

development policy between the two consecutive ten-year periods from 1953-

73. The 1963-73 period was characterized by the implementation of two five-

year plans, whereas the earlier period was a time of ad hoc shifts in the

government's policies, as well as frequent fluctuations in output and trade

conditions. Turkey's development planning in the 1960s, which emphasized

economy-wide as well as balanced growth, was part of the country's response to

the imbalances experienced and limited resource mobilization achieved in the

1950s.

Turkey's economic performance improved in the second ten-year

period. Despite sluggish growth in agricultural production, annual GNP growth

for 1963-73 averaged around 6.7 percent, as compared with 4.8 percent in

1/ The exchange rate was adjusted de facto from 2.8 to 9.0 TL per US dollarfor numerous transactions.

2/ For a review of the policy experience of 1953-63, see Okyar (1979).

- 9 -

1953-63S The average share of fixed investment in GNP (at market prices)

increased from about 14.0 percent in 1953-62 to 16.1 percent in 1963-72.

During the First and Second Plans (1963-67 and 1968-72), emphasis was placed

on improving domestic savings performance. This led to marginal savings

ratios of 32 and 26 percent, respectively. In turn, the observed ratios of

current account deficit to GNP (at market prices) were quite low, and they

averaged around 1.8 and 0.6 percent, respectively, under the two consecutive

five-year plans. Public savings were about 45-50 percent of total domestic

savings. The proportionally larger share of public fixed investment in the

total (around 52-53 percent) reflected the significant role assigned to the

public sector in major development programs.2/

However, the adoption of formal planning did not significantly

change the restrictive trade policies which discriminated against exports, and

relied heavily on import rationing measures.!/ To the contrary, annual import

programs featuring quantitative restrictions became an important policy device

under the successive five-year plans. The structure of protection resulting

from the trade regime allowed high-cost and import-dependent private

manufacturing plants to be established and maintained.

Turkeyos decision to join the European Economic Community (EEC) was

an important policy development in 1963-73. In September 1963, Turkey and the

EEC signed the Association Agreement, which stipulated that two stages

(preparatory and transitional) would occur before full membership. The

1/ The observed value added growth rates in 1953-73 are somewhat overstatedby domestic price distortions, as shown in Chapter 4.

2/ See Celasun (1980 a).

3/ A path-breaking research effort by Krueger (1974) provides a comprehensiveanalysis of the trade and payments policies of Turkey during the 1950-71period with a clear focus on trade-growth relationships.

- 10 -

preparatory stage was completed by the end of the 1960s, and the Additional

Protocol was signed in November 1970. The latter protocol, which became

effective in January 1973, specified the ground rules for the transitional

stage of establishing a customs union with the EEC before the full membership

stage.

At the beginning of the transitional stage, the EEC removed tariff

barriers for Turkish manufactured exports, except for certain products, such

as cotton yarns and numerous processed food items in which Turkey has a

considerable comparative advantage. For agricultural exports, the EEC

provided selective trade facilities, which were eroded shortly thereafter by

the EEC's subsequent agreements with other countries.l/ In turn, Turkey

agreed to remove gradually tariff and non-tariff barriers for EEC manufactured

imports according to two timetables (over 12 and 22 year periods, as

differentiated by products), and eventually to realign her tariff structure

with the EEC's external tariff structure. Until foreign exchange restrictions

appeared in 1978, tariff reductions were carried out as scheduled in the

Additional Protocol. Free movement for Turkish workers, one of the next

hurdles, is likely to be limited due to growing unemployment in the EEC.

The cyclical position of the economy in the early 1970s affects the

analysis because 1973 marks the end of the period studied. GNP growth in

1971-73 received a substantial boost from a huge increase in workers'

1/ FPI (1978) presents the proceedings of a symposium on Turkey-EECrelations, including discussion on the effects of the new EEC policiestowards other countries. See Hic (1972) for an informative review of theTurkey-EEC relations in the earlier stages.

- 11 -

remittances following the devaluation of August 1970.1/ The remittances, in

turn, reflected the rapid expansion of the Western European economies in 1970-

73. Net factor income from abroad reached an all-time high, 4.6 percent of

GNP, in 1973. This sharp rise in the export of factor services was also

accompanied by a significant increase in agriculture-based exports, largely as

the result of expanding world demand and favorable shifts in relative

prices. The improved foreign exchange position of the country also led to the

rapid growth of imports of basic intermediate goods, investment goods and

parts for consumer durables.

C. Economic Development After 1973

Despite the oil crisis and related external shocks, Turkey attempted

to preserve its growth momentum under the Third Plan (1973-77) through rapid

reserve decumulation and massive external borrowing. Instead of relying upon

internal adjustment to promote balance of payments improvement, the various

coalition governments pursued expansionary policies, while allowing a decline

in marginal savings ratios, and negative import substitution in the energy and

manufacturing sectors.!/ The average rate of GNP growth was about 6.5 percent

a year (despite a 4 percent growth in 1977), and the investment/GNP ratio

increased from 18 percent in 1973 to 23.5 percent in 1977. The marginal

1/ In August 1970, the exchange rate was adjusted from 9 TL to 15 TL per U.S.dollar for a wide range of transactions, excluding certain agriculturalexports.

2/ In Balassa (1979 and 1981), Turkey's adjustment policies (after 1973) arereviewed in the light of the experience of other industrializing eco-nomics. Celasun (1980 a) provides an appraisal of the real and monetaryaspects, while Dervis and Robinson (1978) analyze the erosion of the realforeign exchange rate in the 1973-77 period. In World Bank (1980), thesalient features of the 1978 and 1979 Stabilization Programs are dis-cussed.

- 12 -

savings ratio for the five-year period averaged around 12 percent, while the

current account deficit as a proportion of GNP rose sharply and reached

unsustainable proportions in 1976 and 1977 (around 5.7 and 8.0 percent,

respectively). The heavy borrowing soon led to a high external debt ($14

billion by the end of 1978, including $7.5 billion in short-term debt).

In addition to the adverse impact of the sharp rise in imported oil

prices, the implementation of the Third Plan involved major difficulties in

coping with the increasing import intensity of intermediate inputs in the

production structure. By the early 1970s, the Turkish economy had developed

to the intermediate stage of import substitution, which had the following

characteristics: (1) the exhaustion of easy import substitution possibilities

in the early industries; (2) the pronounced shifts in the structure of

intermediate inputs towards more technology-intensive and capital-intensive

materials; and (3) the need for increased selectivity in the choice of trade-

improving investment programs. 1/ Despite the large increase in levels of

fixed investment, net import substitution was negative and hurt the balance of

payments in 1973-77. Turkey's export market shares also decreased noticeably

in this period 2/

Because it could not sustain heavy external borrowing as the main

adjustment mechanism, the Turkish economy finally faced a severe crisis in

1978-80. The juncture of structural, cyclical and political difficulties of

unprecedented proportions worsened matters. The measures contained in two

stabilization programs in 1978 and 1979 proved to be inadequate in reducing

1/ For a more detailed analysis, see Chapters 3 and 5.

2/ See Balassa (1981, Tables LA and 1B).

- 13 -

distortions of resource allocation and curbing domestic inflation.1/ Annual

growth declined from 4.0 percent in 1977 to 0.4 percent in 1979, while

inflation rose from 49 percent in 1978 to 81 percent in 1979.2/

The government introduced a bold and comprehensive policy package in

January 1980 to correct the rapidly worsening economic situation, and to

redirect growth toward exports with a greater reliance on market forces. The

package included substantial increases in the prices of public enterprises;

elimination of price controls for a wide range of industrial products; a major

currency devaluation; improved incentives for exports; better conditions for

foreign private capital; and a flexible policy for further exchange rate

adjustments. The monetary side of the package was strengthened in July 1980

when most of the interest rates in the banking system were freed. Turkey's

military government, which assumed power in September 1980, supported the new

policy framework, and moved to consolidate its components under more stable

institutional arrangements. Following the massive cost-push and deflationary

impacts of these measures during 1980, the Turkish economy showed an

improvement in 1981, with particularly encouraging results in export

expansion, public finance and control over monetary expansion.

1/ See World Bank (1980, Chapter 1), and Chapter 6.

2/ As measured by the Wholesale Price Index.

- 14 -

2. PATTERNS OF DEVELOPMENT, 1953-78:

An Overview

This study of Turkish development is based on previous work

concerning patterns of development. The stages of structural transformation

generally experienced by a developing country have been investigated by

Chenery and Taylor (1968) and Chenery and Syrquin (1975). These

investigations attempt to determine average or normal patterns of development

for all countries, as opposed to factors in development for a specific

country. They provide a quantitative basis to examine how Turkish development

conforms to or diverges from the norms predicted for a country of its size (as

measured by population), income level and, in some comparisons, net resource

inflow.

Chenery and Syrquin suggested that there are ten development

processes in structural transformation. Six stages are related to resource

accumulation and allocation, and four to demographic and income distributional

aspects. For this study, their actual and predicted values have been

determined for the benchmark years 1953, 1963, 1973 and 1978. The results are

summarized in Tables 2.1 and 2.2 A/ Cyclical influences have not been

eliminated in 1978, during which severe shortages of intermediate goods

imports and disruptions in industrial production occurred. In the

determination of the predicted values from the basic regressions of Chenery-

1/ The author is thankful to Selcuk Caner and Tevfik Yaprak for their ablehelp in the computation of the cross-country norms in Chapters 2 and 5.An earlier version of the results of this analysis is discussed briefly inCelasun (1978).

- 15 -

Syrquin, the following data have been used for the explanatory variables "per

capita income" and 'population":"/

1953 1963 1973 1978

Per capita GNP (factor cost) 186 228 335 403(1964 U.S.$)

Population (millions) 22.6 29.7 38.3 43.2

Source: SIS national income series and population data.

According to the cross-country regressions, Turkey's overall

development transition should have been half-completed by 1973, when per

capita income was above $300. This is based on the findings that some

development processes occur in earlier stages of overall transition, while

others are delayed until later stages, with the stages measured by per capita

income ranging from $100 (least developed) to $1000 (most developed), in 1964

prices. 2/ For example, on the average, the transition is half-completed at

about $300 for all ten processes, whereas the midpoint for investment,

savings, school enrollment ratio, food consumption, primary production, total

exports and imports and urbanization is around $200, and at much higher levels

for others.

1/ In order to reduce the upward bias caused by overvalued exchange rates,per capita income levels for the benchmark years are estimated bydeflating national income series to constant 1964 prices, and using thenominal 1964 exchange rate of 9.00 TL per US dollar for conversions. Thelatter rate was a relatively realistic value at the time. The populationfigures used in the calculations exclude workers employed abroad.

2/ See Chenery and Syrquin (1975, Figures 1 to 6).

- 16 -

Table 2.1Resource Accumulation and Allocational Processes, 1953-1978 1,

Actual- Predicte;1953 1963 1973 1978 1953 1963 1973 1978

(Percent of GDP)

A. Accumulation1. Investment

a. Savings 11.5 12.0 14.8 17.8 16.3 18.0 19.6 20.5b. Gross Investment 14.8 15.6 18.3 21.6 18.0 19.6 21.0 21.8c. Capital Inflow 4/ 3.3 3.6 3.5 3.8 2.8 1.6 1.4 1.3

2. Government Revenuea. Gov't Rev. 5/ 16.0 16.6 21.1 24.4 15.6 16.8 18.7 19.7b. Tax Rev. 12.6 13.9 18.5 20.2 15.0 15.8 17.8 18.6

3. Educationa. Educational 1.7 2.6 3.4 3.3 1.9 3.0 3.1 3.2

Expendituresb. School Enrollment

Ratio (%)Primary 58.0 72.0 90.0 105.0 - - - -Primary & Secondary 33.3 45.9 56.1 71.0 46.4 57.0 65.4 69.2

B. Allocation1. Domestic Demand

a. Gross Investment 14.8 15.6 18.3 21.6 18.0 19.6 21.0 21.8b. Public Consumption 11.0 11.5 14.1 12.7 12.2 13.6 13.7 13.8c. Private Consumption 77.6 76.6 71.2 69.4 71.5 70.1 68.9 68.2d. Food Consumption 41.4 38.9 28.9 27.4 33.9 30.4 26.7 25.1

2. Production(value added at factor cost)a. Primary 45.9 40.1 29.7 26.9 34.4 30.2 24.5 22.0b. Industry 6/ 12.8 19.2 22.9 25.0 22.6 23.5 26.8 28.4c. Utilities 5.7 8.8 10.7 11.0 6.2 7.1 7.5 7.8d. Services 35.6 31.8 35.7 37.1 36.2 38.8 40.5 41.2

3. Tradea. Imports 11.3 9.6 11.4 9.9 17.0 16.2 15.6 15.3b. Exports 8.0 6.0 7.9 6.1 17.3 15.2 14.8 14.6c. Primary Exports 7.4 4.0 4.1 3.3 10.8 9.7 8.3 7.6d. Manuf. Exports 0.6 1.0 1.8 1.2 4.4 4.8 6.0 6.6e. Service Exports - 1.0 2.0 1.6 - - - -

1/ Definitions and units of measurement follow Chenery-Syrquin (1975), pp. 180-187.2/ Actual data for 1953, 1963, 1973 refer to, respectively, 1952-54, 1962-64 and

1972-73 averages, except that B.2 is based on 1972-74 averages, and A.2 refersto 1973 data (all in current prices).

3/ Predicted shares may not add up to appropriate totals; from "Basic" regressions,Chenery-Syrquin (1975).

4/ Capital inflow is net imports of goods and non-factor services.5/ Central plus local government revenue, excluding savings bonds and public factor

income; tax revenue includes SEE corporate taxes.6/ Includes manufacturing and construction.Sources: Turkish State Institute of Statistics, national accounts data;

World Bank (1974), government revenue and educational expenditures,(1953-63); Turkish State Planning Organization, Annual Programs; Governmentof Turkey, Ministry of Finance, Consolidated Budgets; and Celasun (1981)for 1978 actual allocational shares.

- 17 -

Table 2.2

Demographic and Income Distribution Processes, 1953-1978 1/

Actual- Predicted&1953 1963 1973 1978 1953 1963 1973 1978

(Percent of GDP)

A. Labor Allocation 4/

X Share ofa. Primary labor 79.2 77.6 64.8 60.9 56.9 53.8 47.2 44.9b. Industry labor 7.4 10.1 13.6 15.3 15.8 17.9 21.7 22.9c. Utilities and

Service Labor 13.4 12.3 21.6 23.8 17.4 28.2 30.8 31.9

B. Urbanization

Urban percent oftotal population 20.8 28.9 40.1 45.8 33.9 39.0 46.4 48.8

C. Demographic Transition5/

a. Birth Rate(per thousand) - 39.6 35.0 32.2 37.5 35.2 31.5 30.3

b. Death Rate(per thousand) - 14.6 10.8 10.0 14.9 13.8 12.1 11.6

D. Income Distribution

a. Share of Highest 20X - 57.0 56.5 - 56.1 56.1 55.7 55.3b. Share of Lowest 40% - 13.0 11.5 - 11.7 11.5 11.2 10.1

1/ See footnote 1 in Table 2.1.



4/ See Table 4.1 labor data for 1953, 1963 and 1973 actual figures. The 1978labor estimates are derived from the Third Plan (SPO) data base for employ-ment.

5/ For 1963 "Actual," 1966/67 estimates from 1966/67 Demographic Survey,Hacettepe University were used.

Sources: State Institute of Statistics, Yearbooks.State Planning Organization (1976), Income Distribution.

- 18 -

Based on the evaluation of structural transition in terms of the ten

development processes, Turkey had the following characteristics:

(1) In the 1950s and early 1960s, Turkey performed substantially below

the predicted levels for a country of its size and income in the accumulation

of capital and skills, the restructure of domestic demand and production, and,

particularly, the development of a "normal" export base. The actual

government revenues (excluding public factor income) were comparable to the

predicted values, but their composition and patterns of usage must be studied

separately.

(2) Unlike the preceding ten years, from 1963-73 there was considerable

structural transformation in capital accumulation and primary schooling as

well as in reduction of the share of primary production. In this period, the

change in the share of industrial labor was unexpectedly low in view of the

rapid pace of population growth and urbanization, and the continuing large

labor surplus in rural areas. (See Table 5.1) Despite favorable economic

conditions in the early 1970s, the shares of total and industrial exports

continued to remain drastically below cross-country norms.

(3) Income distribution, described in terms of the shares of the highest

20 percent and lowest 40 percent, is comparable with the typical country

standards. However, the 1963 and 1973 figures indicate a decline for the

poorest groups that benefited mainly upper-middle income classes from 1963-73,

as discussed by the Turkish State Planning Organization (SPO), (1976).

(4) The share of educational expenditure in GDP was comparatively low in

1953-63, but showed an increase after 1963. This was also reflected by the

improvement in school enrollment ratios during those years. From 1963-78, the

increase in primary and secondary school enrollment (taken as a whole) mainly

indicated the expansion of primary schooling. As a result, the need for

- 19 -

development of secondary school capacities, particularly in the field of

vocational training, is not apparent from these figures.

(5) Changes between 1973 and 1978 reflected the continuation of

structural trends in 1963-73, and led to the further restructuring of domestic

demand and production. However, because the actual trade ratios for 1978 were

still markedly below the cross-country norms, the urgency of shifting toward a

trade orientation is clear. The growth-limiting effects of the lower share of

imports in GDP were accentuated by the smaller share of non-petroleum products

in total imports in 1978 as compared to the share in 1973.

(6) The relatively high share of tax revenue in GDP in 1973 and,

particularly, 1978 largely reflects the distorting effects of inflation on

income tax, which was based on tax schedules that had not been changed since

1963. The progressive tax rates applied to the rapidly increasing gross

salaries of public employees resulted in misleading tax increments of

considerable proportions from 1973-80, until revised income tax legislation

was adopted in 1981.

(7) Finally, the capital inflow figures shown in Table 2.1 measure the

net imports of goods and non-factor services, and do not reflect the sizable

contribution of workers' remittances to the trade adjustment process in 1963-

78. In terms of current account deficits, external resource inflows were

quite moderate by inter-country standards, and normally less than 2 percent of

GDP in 1963-73.

The deviations of the Turkish economic structure from the average

country patterns are particularly significant in the following four main

areas, which are examined in more detailed below:

1. The actual export/GDP ratios have been far below the cross-country

norms throughout 1953-78. This indicates the inward orientation of the

- 20 -

development strategy.

2. The actual import/GDP ratios have been higher than those for exports,

but still markedly below the predicted values. This suggests the relatively

narrow scope for import substitution at the economy-wide level.

3. Although the Turkish industrialization process was considerably

delayed until 1963, the subsequent catching-up effort has been significant in

terms of the rising share of industry in total value added.

4. The share of industry in total employment has remained below cross-

country standards. This indicates the need for more labor-absorbing patterns

of industrial growth in the future.

- 21 -

3. SOURCES OF INDUSTRIALIZATION, 1953-73

A. Scope of the Analysis

As comparison of Turkey's development with the cross-country norms

discussed in Chapter 2 indicated, a considerable amount of restructuring in

domestic production occurred during 1953-73 despite the continued lag with

"normal" trade patterns. Chapter 3 examines the sources of different

expansion of sectors, which led to a rapid increase of the share of industry

in total production.

The changes in sectoral production (or gross output) have been

explained in terms of the following four factors:

1. Domestic final demand expansion

2. Export expansion

3. Import substitution

4. Technological change or changes in input-output coefficients.

The analysis has been conducted in empirically-based input-output

(I-0) frameworks incorporating these factors. The relative importance (or, in

mathematical terms, weights) of these sources of growth have been determined

for different sectoral aggregations at various times in order to compare

sectors and/or time periods as policy orientation shifts. The computational

process of distinguishing and estimating the relative weights of these factors

is known as decomposition analysis.

The estimates for the sources of gross output growth also provide a

basis to explain changes in sectoral value added and factor use in terms of

the same causal factors plus changes in value added and factor coefficients,

respectively. With minor modifications, the analytical framework is also used

to estimate the sources of import growth to shed additional light on the

- 22 -

process of import substitution experienced in the economy. In this section,

the estimates for the sources of gross output and import growth are derived

for the various subperiods of 1953-73. The sources of changes in value added

are examined for 1963-68 and 1968-73 only, because complete I-0 tables are

unavailable for the earlier periods, for which the interindustry data have

been compiled on a partial basis. The sources of change in factor use are

analyzed in Chapter 4.

The type of sources of growth analysis used here is different from

the production function approach, which relates output expansion to changes in

factor inputs and productivities-11 In this study, the process of sectoral

growth is primarily considered from the demand side based on the consistent

accounting identities of input-output relations. There are two methods that

can be used to analyze growth from this perspective. The first approach is

known as the constant composition method (referred to hereinafter as the

"composition method"). Following the tradition of the celebrated analysis of

Chenery, Shishido and Watanabe (CSW, 1962) for Japan, it attempts to explain

the nonproportional expansion of sectoral output in terms of the non-

proportional growth of causal factors observed in individual sectors.

Nonproportional growth is measured by deviations from the balanced (or norm)

growth path, in which all elements expand proportionally at the growth rate of

aggregate demand or aggregate value added.

The second approach is designated the constant share method

(referred to hereinafter as the "share method"). It differs from the

composition method in the treatment of import substitution as a cause of

expansion. The share method, which was elaborated by Syrquin (1976), defines

1/ In Chapter 4, the roles of labor reallocation and productivity changes inthe aggregate growth process are briefly considered.

- 23 -

the constant (initial year) share of imports in domestic demand as the norm in

individual sectors, and defines import substitution in terms of changes in the

import (or, symmetrically, domestic supply) shares rather than changes in the

commodity composition of imports. In contrast, the composition method

measures import substitution in terms of deviations of sectoral import

expansion from the expected growth path, or from the constant (initial year)

composition of sectoral imports. The share method also allows two sets of

decomposition measures which explain different phenomena under

consideration. Changes in the relevant factors are defined in terms of first

differences (or increments) and/or deviations from propositional growth.

While the deviation measures clarify the causes of structural change (seen in

compositional shifts), the first difference measures are used in examining

growth processes and policy effects in individual sectors.

For both methods, changes in intermediate input requirements have

been studied to differentiate the direct and indirect demand effects on

growth. The decomposition analysis has been divided into two variations,

known as the direct and total methods.1J The total measures combine the

direct and indirect (known as backward-linkage) effects of changes in domestic

final demand, exports and import substitution, and identify changes in I-0

coefficients (which represent technological change) as a separate source of

growth.l/ In turn, the direct measures include all intermediate uses of the

products of a particular sector under the domestic demand contribution to the

growth process.

1/ These terms also apply to variations of any approach in the sources ofgrowth literature.

2/ In the abeence of separate import matrices for all benchmark years, thepresent analysis quantifies the effects of changes in total (rather thandomestic) I-0 coefficients as a source of growth.

- 24 -

The choice of initial or terminal year coefficients (and

correspondingly terminal or initial year volume weights) in the decomposition

equations is important. This issue has been treated as an index number

problem by separately estimating the Laspeyres and Paasche indices on the

basis of structural coefficients being taken as the relevant weights. 1/ The

arithmetic means of these two indices are used here (unless otherwise

indicated) to reduce possible bias in the estimation process. For time

intervals consisting of at least two subperiods, the averages of the Laspeyres

and Paasche measures for successive subperiods are simply summed to obtain the

"chained" measures for sources of growth. Appendix 1 provides a method-

ological review of the sources of growth models of the types employed in the

present study, and gives the algebraic formulations of the decomposition

equations under the variant methods.

B. Basic Data

The data base consists of interindustry data analyzed for five

benchmark years spaced at five-year intervals from 1953-73. The three I-0

tables compiled by the official agencies for the years 1963, 1968 and 1973

have been adjusted for differences in sector coverage, reorganized in 25x25

sector matrices, and deflated to constant 1968 domestic prices.2/ Before the

1/ In the cases where the initial year I-0 matrix is not available (e.g., fortime periods starting with 1953 in the Turkish case), a modified form ofLaspeyres index is used, as noted in Appendix 1.

2/ The SPO made an earlier attempt to prepare a 15 sector table for 1959,which is not comparable with the later tables because of the differencesin sector classification and price conventions. See Korum (1963) for adetailed review of the 1959 table. Another unpublished table by the SP0for 1967 has not been used in the present study. The 1963 table wascompiled by the SP0, while the 1968 and 1973 tables were published by theState Institute of Statistics. See Appendix 2 for a detailed account ofthe deflation work needed to prepare a consistent set of data for thisstudy.

- 25 -

data was deflated, the 1963 I-0 table required substantial adjustments in the

imputed values of some of the component parts of agricultural and livestock

outputs (such as straw, pasture and animal services), and in the

classification of utilities, public services, crude oil and oil refining

sectors. The treatment of cotton ginning also had to be modified in the 1973

I-0 table to ensure compatability with the export commodity classification of

the earlier tables.

The data for the benchmark years 1953 and 1958 represent 1952-54 and

1957-59 averages to minimize the distorting effects of cyclical factors in the

analysis. In the absence of complete I-0 matrices for these two benchmark

years, the gross output, domestic final and intermediate demand, and trade

data were estimated at the 25 sector level of aggregation to establish the

minimum levels for estimating the sources of output and import growth for

periods starting with 1953 or 1958.21 In the latter stages of the research,

the year 1958 was dropped from the analysis. It appeared to be an

inappropriate benchmark year because of unusually severe import shortages and

economic disruptions.

The figures totalled from the deflated I-0 data of this study are

comparable to the estimates of the official national income (NY) accounts

published by the State Institute of Statistics (SIS) in current as well as in

constant 1968 prices. As shown in Table 3.1, the constant price value added

1/ For the years 1953 (1952-54 average) and 1958 (1957-59 average), thecommodity trade data from the United Nations Yearbook of InternationalTrade Statistics was processed according to the trade classifications ofthe 1963 and 1968 I-0 tables, and then deflated to constant prices bydeflators given in Annex II. The net output figures of Ecevit and Ozotun(1974) and various SIS sources were converted into gross output estimateson the basis of available production data. For estimation of the elementsof domestic demand, the data analysis drew upon partial official dataavailable on fixed investment and various estimates based on incomeelasticities for private consumption.

- 26 -

Table 3.1

Value Added Estimates in the Deflated Input-Output (I-O)and National Accounts (NY) Data Systems,

1963 and 1973

1963 1973I-0 NY I-0 NY----- (Million 1968 TL)-----

Value Added (producer prices)

Agriculture 28491 29139 32787 32922Mining 1101 1251 2415 2463Manufacturing 13746 12303 32646 32127Social Overhead 1/ 10757 11097 24748 24963Services 26284 26362 52782 52933GDP (p.p.) 2/ 80379 80150 145379 145406Import Taxes 4132 4142 8582 5023GDP (m.p.) 3/ 84511 84291 153961 150429

1/ Social overhead includes electricity, gas, water, construction, andtransportation.

2/ p.p. - producer prices

3/ m.p. - market prices

Sources: SIS national accounts; deflated I-0 data.

- 27 -

estimates for the major sectors in the I-0 and NY data systems are nearly

the same for the 1963 and 1973 benchmark years.l/

To ensure comparability with other country studies, all sources of

growth computations here were carried out at the 25 sector level 2 To

simplify the analysis, the results have been further combined into 9 major

sectors, except where discussions are presented in more detail.3/

The observed rates of real growth in aggregate value added (measured

by GDP (m.p.)) were used as the norm growth rates in the estimation of the

sources of nonproportional expansion in deviation terms. The norm growth

rates ("A -1" as defined in Appendix 1) based on the double-deflated I-0

aggregates are shown below for different time intervals covered in the

analysis:gl

Norm CorrespondingGrowth Rate (%) Annual Compound Rate (%)

1953-63 61.2 4.91963-68 34.5 6.11968-73 35.5 6.31963-73 82.2 6.21953-73 193.7 5.5

1/ The observed difference in the I-0 and NY figures for manufacturing valueadded in 1973 would have been greater if the new Wholesale Price Index(WPI) of the Ministry of Commerce were not adjusted, as described inAppendix 2.D.

2/ See Kubo and Robinson (1979).

3/ See Tables A.2.1 and A.2.2 in Appendix 2 for sector classifications.

4/ As shown in Table 3.1, the GDP figures obtained from the double-deflatedI-0 tables for 1963 and 1973 are nearly the same as the GDP estimates ofthe NY accounts in constant 1968 prices. For the year 1953 and 1968, theGDP figures in the I-0 and NY systems are definitionally the same.

- 28 -

C. Policy Characteristics and Trade Orientation of the Subperiods /

Formal development planning began in the early 1960s. Following a

brief favorable trade cycle in 1948-53, the Turkish economy experienced severe

external and internal imbalances in 1954-58. As a result, a drastic

stabilization program including a massive devaluation was adopted in 1958.

Aided by sizable foreign assistance, growth gradually resumed, and price

stability was restored in 1959-62..L/ The First (1963-67) and Second (1968-72)

Five-Year Plans, implemented the following decade, placed a greater emphasis

on resource mobilization and coordination of the growth process.

Nonetheless, the restrictive trade regime and related incentives did

not fundamentally change until more externally-oriented policy attitudes

appeared in the late 1960s and early 1970s. The sizable devaluation and

reduced quantitative restrictions in 1970 permitted Turkey to take more

advantage of the favorable international trade environment in 1970-73, and

stimulated the inflow of workers remittances, which came mainly from OECD-

Europe. However, following the first oil price shock in 1973-74, real

incentives and other corrective measures to improve the balance of payments

were not maintained. As a result, Turkey experienced huge losses in foreign

exchange reserves and a sharp rise in external indebtedness. These problems

finally led to another deep crisis in 1978-80.

The following policy characteristics for Turkey during 1953-73 are

described by Kubo and Robinson (1979), based on the scheme of classification

developed by Bhagwati (1978) and Krueger (1978) for trade and exchange rate

regimes in developing countries:

1/ 1953-63, 1963-68, 1968-73. 1958 is excluded as aberrant.

2/ See Krueger (1974) and Okyar (1979) for detailed accounts of Turkey'seconomic policy experience in 1953-63.

- 29 -

Trade and Exchange Level of ForeignDevelopment Rate Regime CapitalStrategy (Bhagwati-Krueger Scheme) Inflow

1953-63 Semi-closed I,II,III,IV Low (less than 51 of GDP)

1963-68 Semi-closed II Low (less than 51 of GDP)

1968-73 Semi-open II,III,IV Low (less than 51 of GDP)

Semi-closed implies encouraging import substitution anddiscriminating against exports.Semi-open indicates reduced quantity restriction (QR).

I - intense QRII - intense QR with corrective measuresIII - formal devaluation and/or reduced reliance on QRIV - further reduction of QR

These characterizations will be used to examine the interperiod differences in

growth patterns, with the qualifying remark that the semi-open period 1968-73

involved continued (albeit reduced) discrimination against exports under a

trade regime which still prohibited a wide range of consumer goods imports.L/

The trade ratios shown in Table 3.2 provide additional information

on the general trade orientation at various times from 1948-78 and point to

the general character of the sources of growth that will be analyzed in more

detail. Low export shares in GDP in 1953-63 and 1963-68 suggest the limited

role of exports in growth during the semi-closed phases of development. The

import shares in 1963 and 1968 were considerably lower than the 1953 ratio,

and indicate significant import substitution in the 1953-68 period. In turn,

the upward shift in the export/GDP ratio in 1968-73 (particularly in 1973) was

accompanied by a rise in the import/GDP ratio. These increases imply a

decline in the relative importance of import substitution to the overall

1/ See Baysan (1980) for the analysis of the scope of and possible effects oftrade liberalization in 1973.

- 30 -

Table 3.2

Variation in Aggregate Trade Ratios Over Time, 1953-78 l/

TradeImports/GDP Exports/GDP Deficit/GDP

(Percent)

A. Goods and Non-FactorService Trade Ratiosin 1968 Prices

1953 (1952-54 Av.) 9.3 5.8 3.51958 (1957-59 Av.) 4.9 3.9 1.01963 8.1 4.6 3.51968 6.9 4.7 2.21973 9.3 6.7 2.61977 10.1 5.0 5.11978 6.9 5.6 1.3

B. Goods Trade Ratios:Period Averages inCurrent Prices

1948-53 9.6 7.5 2.11953-58 5.4 3.9 1.51958-63 7.2 4.6 2.61963-68 6.6 4.8 1.81968-73 8.3 4.9 3.51973-77 12.7 4.3 8.41973-78 12.0 4.4 7.6

1/ The GDP figures are measured in market prices. The goods trade ratios arebased on the domestic c.i.f. and f.o.b. values of imports and exports,respectively.

Sources: The I-0 data base of the present study (for 1953-73 estimates in(A)).

State Institute of Statistics (for other estimates).

- 31 -

growth process. However, as the figures in Table 3.2 broadly suggest, the

trend in declining import substitution continued in 1973-77, but it was not

accompanied by export-oriented restructuring in domestic production.!I

Consequently, the sharp fall in the imports/GDP ratio in 1978 signalled the

emergence of a massive external imbalance in the economy.

Tables 3.3 and 3.4 present a set of complementary data. Output and

trade growth are broken down by major sectors in the two successive ten-year

periods of 1953-63 and 1963-73. As these tables show, economic growth was

more rapid in 1963-73. In addition, it was accompanied by a considerable

change in the sectoral mix of output. The share of the primary sectors in GDP

(m.p.) declined from 41.5 percent in 1963 to 22.7 percent in 1973, while the

share of manufacturing increased from 11.5 percent to 21.2 percent. Although

the high rates of protection in Turkey undoubtedly cause industrial shares to

be overestimated, shifts toward manufacturing and other non-agricultural

sectors clearly indicate a transitional process toward industrialization.._/

The sources of growth analysis represents an empirical attempt to measure the

relative importance of several factors which affected and shaped such a

process.

D. Sources of Growth and Structural Change: An Economy-Wide Analysis

Internal factors were prominent sources of industrialization in

Turkey's recent economic history. The decomposition measures for the sources

of growth and structural change in gross output (production) and value added

are first aggregated and examined at the national economy level. The

aggregate first difference measures are calculated from the algebraic sums of

1/ See Balassa (1979) and Celasun (1980 a) for appraisals of macroeconomicdevelopments in 1973-78.

2/ See Olgun (1975) for an analysis of the structure of protection in Turkishmanufacturing based on the 1968 data. The main results are summarized inTable 5.4.

Table 3.3

Growth in Sector Output, 1953-1973 1/

1953 1963 1973 Index (V)x V S X V S X V S 1963 1973 17

(million TL) (%) (million TL) (Z) (million TL) (%) 1953 1963 1953

I. Primary ProductionA. Agriculture 29,787 20,820 42,823 28,491 47,878 32,787B. Mining 1,223 912 1,502 1,101 3,324 2,415Total Primary 31,010 21,732 41.5 44,303 29,592 35.0 51,152 35,202 22.9 136 119 162

II. ManufacturingA. Food 7,641 2,365 13,742 4,266 23,825 7,215 180 169 305B. Textile Leather 4,029 1,483 6,937 2,792 16,180 6,028 188 216 406C. Light Inter-

mediates 1,307 414 2,835 953 8,828 3,246 230 341 784D. Basic Inter-

mediates 3,168 868 8,800 3,912 28,639 9,524 451 243 1097E. Machinery 4,484 914 6,038 1,823 18,714 6,633 199 364 726Total Manufacturing 20,629 6,044 11.5 38,353 13,746 16.3 96,186 32,646 21.2 227 237 540

III.Social OverheadA. Electricity,

Gas, Water 421 292 1,164 717 3,326 1,970B. Construction 5,766 3,229 8,863 4,854 15,873 8,788C. Transportation 5,087 2,809 9,746 5,186 22,952 13,990Total SocialOverhead 11,274 6,330 12.1 19,773 10,757 12.7 42,151 24,748 16.1 170 230 391

IV. Services 16,819 15,071 28.7 29,360 26,284 31.1 61,174 52,782 34.3 174 201 350

Import Taxes 3,235 6.2 4,132 4.9 8,582 5.5

TOTAL (GDP, m.p.) 52,412 100.0 84,511 100.0 153,961 100.0 161 182 294

1/ X, V and S denote, respectively, production (including import taxes), value added (producer prices, excluding importtaxes) and percent share of GDP. 1953 figures are 1952-54 averages. 1963 and 1973 values are derived from deflatedI-0 tables.

Sources: Deflated I-0 tables

Table 3.4

Trade by Major Sectors, 1953 - 1973 1/

Index (E) Index (M)1953 1963 1973 1963 1973 1963 1973E M E M E M 1953 1963 1953 1963------------ (Million 1968 TL) ------------------

I. PrimaryA. Agriculture 2,173 301 2,191 748 2,619 365B. Mining 181 10 96 430 168 1,350Total Primary 2,354 311 2,287 1,178 2,787 1,715 97 122 379 146

II. ManufacturingA. Food 73 18 213 226 2053 127B. Textile and Leather 17 211 106 142 758 188C. Light Intermediates - 210 2 377 30 203D. Basic Intermediates 133 980 149 1215 558 5264E. Machinery 4 2,938 - 3,029 134 5,918Total Manufacturing 227 4,357 470 4,989 3,533 11,700 207 752 115 235

III.Social Overhead 249 84 503 280 1,883 346 202 375 333 124IV. Services 186 - 668 372 2,158 547 359 323 -- 147

TOTAL 3,016 4,752 3,928 6,819 10,361 14,308 130 264 143 210

1/ E and M denote, respectively, exports (ex-factory) and imports (c.i.f.) measured in 1968 constant domestic price.1953 figures are 1952-54 averages. 1963 and 1973 values are derived from deflated I-0 tables. The transport andtrade margins on commodity exports are included in the social overhead and services exports, respectively.

Sources: Deflated I-O tables.

- 34 -

sectoral changes, whereas the economy-wide deviation measures are based on the

absolute totals of sectoral deviations, disregarding their algebraic signs.

The measures derived from the decomposition of gross output are shown in

percentage terms in Table 3.5 (a and b) for all the methods used in the

analysis.

Table 3.5 shows that the relative importance of the relevant factors

significantly varies according to which decomposition measure is used. This

indicates which factors contributed more to growth (as represented by the

first difference measures) or to structural change (as represented by the

deviation measures). Under the first difference measure, the increase in

domestic final demand accounted for 87.3 percent of the increase in total

gross output in 1953-73. Yet, according to the deviation measure,

nonproportional growth of this factor explained 49.4 percent of the structural

change in production. Technological change is also a significant factor in

nonproportional expansion (structural change), in addition to its minor role

in total growth.

Table 3.5 also indicates the significance of trade in growth and

structural change. From 1953-73 the combined trade effects (of export

expansion and import substitution) accounted for 9.5 percent of growth (first

difference total measure), and 15.5 percent of the structural change in the

overall economy (deviation total measure). Import substitution was more

important in structural change than aggregate growth (6.3 versus 2.4 percent).

Yet the differences in the growth and structural effects of export expansion

are less pronounced in nearly all subperiods. This reflects relative

stability in the commodity composition of exports during the period.

Furthermore, a comparison of the total measures with the direct

measures indicates the predominant role of domestic final demand expansion in

Table 3.5a

Sources of Growth and Sturctural Change in Gross Output, 1953-73:A Summary of Aggregate Results

(Alternative Measures) Yf

Domestic Demand Expansion Export Import Change in I-0Final Intermediate Total Expansion Substitution Coeffs.

…----------…----------------------------- (Percent) -----------------…

Share Method, First Difference(a) Direct Measure

1953-63 61.5 35.1 96.6 1.8 1.6 -1963-68 54.7 37.3 92.0 2.9 5.2 -1968-73 58.1 36.1 94.2 2.3 3.5 -1963-73(*) 55.0 37.8 92.8 5.4 1.8 -1953-73(*) 57.0 37.0 94.0 4.3 1.7 _1953-68 55.2 38.2 93.4 7.2 -0.6 -

(b) Total Measure1953-63 92.4 - 92.4 2.7 1.9 3.01963-68 83.6 - 83.6 4.8 8.2 3.41968-73 86.0 - 86.0 12.1 -1.3 3.21963-73(*) 85.0 - 85.0 9.0 2.7 3.31953-73(*) 87.3 - 87.3 7.1 2.4 3.21953-68 88.9 - 88.9 3.7 5.4 2.0

Share Method, Deviation(a) Direct Measure

1953-63 31.0 45.4 76.4 9.7 13.9 -1963-68 38.7 48.7 87.4 4.4 8.2 -1968-73 46.0 40.3 86.3 8.5 5.2 -1963-73(*) 41.8 45.6 87.4 7.7 4.9 -1953-73(*) 39.9 46.2 86.1 8.3 5.6 _1953-68 31.5 50.3 81.8 7.1 11.1 -

(b) Total Measure1953-63 32.4 - 32.4 9.5 14.7 43.41963-68 48.6 - 48.6 4.2 11.4 35.81968-73 50.6 - 50.6 10.3 5.5 33.61963-73(*) 52.2 - 52.2 8.9 5.8 33.11953-73(*) 49.4 - 49.4 9.2 6.3 35.11953-68 38.6 - 38.6 7.5 14.1 39.7

Table 3.5b (Cont'd)

Domestic Demand Expansion Export Import Change in I-0Final Intermediate Total Expansion Substitution Coeffs.

------------------------------------------ (Percent) --------------------------

Composition (CSW) Method, Deviation(a) Direct Measure

1953-63 29.2 47.1 76.3 8.7 15.0 -1963-68 38.7 49.4 88.1 4.2 7.7 -1968-73 44.6 39.4 84.0 7.6 8.4 -1963-73(*) 41.2 44.7 85.9 7.0 7.1 _1953-73(*) 38.9 46.3 85.2 7.5 7.2 _1953-68 30.7 51.5 82.2 6.7 11.1 -

(b) Total Measure1953-63 49.8 - 49.8 4.0 9.5 36.61963-68 48.4 - 48.4 8.9 11.2 31.51968-73 51.2 - 51.2 8.0 8.7 32.11963-73(*) 30.7 - 30.7 8.5 16.7 44.11953-73(*) 48.6 - 48.6 8.3 8.2 34.91953-68 38.3 - 38.3 7.0 13.9 40.8

1/ All measures represent arithmetic averages of the estimates obtained from the Layspeyres and Paasche indices. Theestimates for the periods marked by (*), 1963-73 and 1953-73, are the chained measures for the two (1963-68and 1968-73) and three (1953-63, 1963-68 and 1968-73) periods spanned, respectively. The deviation measuresare the relative weights calculated from absolute totals of sectoral deviations under each causal factor. Thecalculations are based on 25 sector 1-0 data in constant 1968 domestic prices.

Source: Numerical results of the decomposition analysis.

- 37 -

generating intermediate demand increases. This result, known as the backward

linkage effect, explains about 37 percent of the increase in total output from

1953-73. Under deviation analysis, nonproportional growth of intermediate

demand is largely attributed to the effects of technological change rather

than to the nonproportional growth of domestic final demand. Additionally,

the backward linkage effects of trade factors on the general economy appear to

be small, except in 1963-68 and 1968-73 when import substitution and export

expansion, respectively, became more important.

A general view of the economy also demonstrates the varying

proportions of trade effects over time. The relative contributions of import

substitution were higher than those of export expansion during 1953-63 and

1963-68, while a sharp reversal occurred in their relative roles in 1968-73.

These results are broadly in line with the shifts in trade policies previously

noted. According to the measures calculated separately for 1953-68, import

substitution had a significant impact on structural change in production under

the semi-closed development policies of the 1950s and 1960s, but it lost most

of its influence in the early 1970s.

The differences in the treatment of import substitution under these

various approaches is indicated by a comparison of the deviation measures

obtained under the composition and share methods. Under the composition

method, which treats import substitution in relation to total GDP rather than

to sector demand, the relative contribution of import substitution appears to

be affected by variations in the nonproportional growth rates of imports.

This point will be discussed below in regard to the major sectors.

The measures for the decomposition of value added are also combined

at the national economy level, as shown in Table 3.6. These measures support

the findings of the decomposition analysis for gross output discussed above.

- 38 -

Furthermore, the additional factor found in value added analysis (the change

in value added coefficients) made negative contributions to growth, but

strongly influenced structural change in value added during 1963-73. The

measures summarized in Table 3.6 reinforce the overall findings that internal

factors were prominent sources of industrialization in Turkey's recent

economic history.

E. Sources of Growth and Structural Change in Gross Output: An Analysis by

Major Sectors

The results of the decomposition of gross output are reported at the

9 sector level in Tables 3.7 (a and b) and 3.8 for growth and structural

change, respectively. Manufacturing industries have been classified into five

major groups (or sectors) which exhibited varying patterns of growth from

1953-73. In these tables, the decomposition measures are also given

separately for total manufacturing and for manufacturing excluding food and

textiles, mainly to crystallize the nature of trade effects in manufacturing.

Growth of Gross Output: First Difference Measures

For different intervals during 1953-73, Table 3.7 (a and b) gives

the direct and total first difference decomposition measures for major

sectors. The chained measures for 1963-73 are dominated by the estimates for

1968-73, which was characterized by larger increases in gross output in most

sectors. The analysis of the sources of agricultural output growth is

affected by the choice of benchmark years which do not have the same weather

conditions. For example, the excellent harvest of 1963 meant that a large

increase in agricultural output was recorded in 1953-63 but that a limited

increase was noted in 1963-68.

Table 3.6

Sources of Growth in Value Added, 1963-73: A Summary of Aggregate Results (Total Measures) -

Value Added Domestic Change ChangeIncrease Demand Export Import in I-0 in Value Added

(billion 1968 TL) Expansion Expansion Substitution Coeffs. Coeffs.(%) (%) (M) (%) (%)

Share Method,First Difference

1963-68 29.1 88.9 4.7 8.2 3.0 -4.8

1968-73 40.3 90.7 12.0 -1.0 0.6 -2.3

1963-73(*) 69.4 89.9 8.9 2.9 1.6 -3.3 v

Share Method, Deviation

1963-68 29.1 37.4 2.7 8.7 30.3 20.9

1968-73 40.3 40.6 8.3 4.4 27.7 19.0

1963-73(*) 69.4 41.6 6.8 4.5 27.6 19.6

1/ See footnote in Table 3.5. The estimates for 1963-73(*) are the chained measures.


Table 3.7b (Cont'd)

Inter-mediate Change

Domestic Export Import Demand in I-0Output Demand Expansion Expansion Substitution Expansion Coeffs.

Increase Direct Total Direct Total Direct Total Direct Total(million 1968 TL) ------------------------------ (Percent) ----------------- -

1968-73I A Agriculture 3,302 25.6 118.8 10.6 37.1 -4.2 -5.8 68.0 -50.1I B Mining 658 17.6 141.0 -0.3 14.4 -63.4 -70.3 146.1 14.9II A Food 6,678 43.0 54.8 16.4 20.1 -0.7 -1.0 41.3 26.1II B Textile & Leather 4,472 62.9 95.0 14.9 22.0 -0.6 -1.0 22.7 -16.1II C Light Intenmediates 3,063 33.6 77.8 0.9 5.9 5.9 7.5 59.6 8.8II D Basic Intermediates 13,119 23.1 64.2 3.0 7.3 -2.6 -4.3 76.4 32.8II E Machinery 7,486 81.3 104.3 1.7 3.4 -0.8 -0.9 17.8 -6.9III Social Overhead 12,473 70.5 89.4 8.9 11.6 1.0 0.4 19.6 -1.4IV Services 18,163 70.2 94.5 6.9 10.3 1.6 1.2 21.4 -6.0

TOTAL II A to II E 34,818 45.4 76.2 6.7 10.7 -0.8 -1.5 48.7 14.6TOTAL II C to II E 23,668 42.9 78.7 2.3 5.6 -0.9 -1.7 55.7 17.1TOTAL I A to IV 69,414 55.2 86.0 7.2 12.1 -0.6 -1.3 38.2 3.2

1963-73I A Agriculture 5,055 66.4 188.7 8.5 34.2 8.2 13.7 16.9 -136.6I B Mining 1,823 22.9 100.8 4.0 10.3 -4.0 -3.3 77.0 -7.8II A Food 10,083 44.6 57.9 18.3 21.4 1.5 1.6 35.7 19.1II B Textile & Leather 9,243 59.4 87.6 7.0 10.7 0.7 1.4 32.9 0.3II C Light Intermediates 5,992 37.3 74.6 0.5 3.5 8.8 10.9 53.4 11.0II D Basic Intermediates 19,832 26.8 69.5 2.1 5.5 -1.8 -0.9 72.9 25.9II E Machinery 12,671 70.9 91.8 1.1 2.3 7.7 9.1 20.4 -3.2III Social Overhead 22,361 66.4 82.5 6.2 8.1 0.9 1.1 26.5 8.2IV Services 31,770 63.6 86.0 4.7 7.1 0.7 1.2 31.0 5.6

TOTAL II A to II E 57,821 45.9 75.8 5.3 8.2 2.4 3.3 46.4 12.7TOTAL II C to II E 38,495 42.9 77.6 1.5 4.1 3.0 4.2 52.6 14.1TOTAL I A to IV 118,830 55.0 85.0 5.4 9.0 1.8 2.7 27.8 3.3

1/ See footnote 1 in Table 3.5. The estimates for 1963-73 are chained measures. The sources of growth contributionsfor each sector (or group) add up to + 100% except for rounding errors. Direct measures under domestic demandexpansion relate to direct effect of increase in domestic final demand.


Table 3.7a

Sources of Gross Output Growth in Major Sectors, 1953-73: Share Method, First Differencel/

Inter-mediate Change

Domestic Export Import Demand in I-0

Output Demand Expansion Expansion Substitution Expansion Coeffs.Increase Direct Total Direct Total Direct Total Direct Total

(million 1968 TL) ------- … ---------- (Percent) -----------…-----

1953-63I A Agriculture 13,009 51.4 104.9 0.1 1.9 -1.9 -3.0 50.4 -3.9I B Mining 278 4.2 166.0 -30.7 -28.2 6.5 24.7 120.0 -62.5II A Food 6,101 75.1 88.2 2.3 2.9 -2.5 -3.0 25.1 11.9II B Textile & Leather 2,908 64.9 93.0 3.1 4.1 5.6 7.8 26.4 -4.9II C Light Intermediates 1,529 34.7 76.9 0.1 1.4 3.8 3.5 61.4 18.2II D Basic Intermediates 5,639 15.2 56.6 0.3 1.2 15.1 16.6 69.4 25.6II E Machinery 1,559 75.0 122.1 -0.2 1.0 34.3 37.3 -9.0 -60.4III Social Overhead 8,516 81.6 93.3 3.0 3.3 -1.0 -0.6 16.5 3.9IV Services 12,585 74.8 93.3 3.8 4.5 -2.3 -2.0 23.7 4.2


1963-68I A Agriculture 1,753 143.1 320.3 4.5 28.9 31.7 50.3 -79.3 -299.5

I B Mining 1,165 25.9 78.2 6.4 7.9 29.6 34.6 38.1 -20.7II B Food 3,405 47.7 64.0 21.8 24.1 5.7 6.5 24.8 5.4II B Textile & Leather 4,771 56.1 80.7 -0.3 0.1 1.8 3.5 42.4 15.7II C Light Intermediates 2,929 41.2 71.3 0.1 1h1 11.8 14.4 46.9 13.3II D Basic Intermediates 6,714 34.0 79.8 0.2 1.9 -0.3 5.7 66.1 12.6II E Machinery 5,185 55.8 73.7 0.1 0.8 20.0 23.4 24.0 2.1III Social Overhead 9,889 61.3 73.9 2.7 3.6 0.8 2.0 35.2 20.5IV Services 13,607 54.9 74.8 1.8 2.8 -0.6 1.2 43.9 21.2


- 42 -

Despite the distortions caused by weather fluctuations, the

predominant role of domestic demand expansion in agricultural growth

throughout the entire period is obvious. The major difference between the

direct and total measures for domestic demand contribution is a result of the

indirect effects of domestic final demand expansion on the food processing

industries. The implied shifts in the relative shares of agriculture and food

processing in total private consumption reflect the effects of urbanization

and income increases on consumption patterns. The larger contribution of

export expansion to agricultural growth in the last part of the period is also

notable, particularly in the form of intermediate demand generated by food and

textile exports. As observed previously, the net contribution of changes in

input-output coefficients has been negative in agricultural growth, mainly due

to declining proportions of traditional (intra-sectoral) inputs in crop and

livestock production.

The mining industry is a small primary sector in Turkey's productive

structure. Its expansion has been constrained by numerous institutional and

technological factors. In the early 1950s, mineral exports were moderately

important, and their subsequent decline is reflected in the negative

contribution of export expansion to sectoral growth from 1953-63. The

positive effect of import substitution on growth in 1953-63 and 1963-68 ended

in 1968-73 mainly because of increasing imports of crude oil and phosphate

rock in the early 1970s. In the expansion of mining output, intermediate

demand resulting from final demand growth in other sectors (e.g.,

construction) was a dominant factor in all periods. The rise in the direct

contribution of domestic final demand expansion in 1963-73 mainly corresponds

to the increased share of coal in residential heating as non-commercial fuel

sources were gradually replaced.

- 43 -

The expanded role of technological change in the last subperiod

(1968-73) had a significant impact on the mining industry. This development

was the result of the increasing share of raw minerals in intermediate inputs

required by the agricultural and manufacturing sectors. These trends in

mineral use became more prominent in 1973-77, and caused a rapid growth of oil

and non-oil mineral imports when domestic supply adjustments did not occur.

In manufacturing, domestic final demand expansion (with its total

effects) accounted for 81 and 76 percent of the growth in gross output in

1953-63 and 1963-73, respectively. With technological change contributing

about 8 and 13 percent in these two periods, internal factors clearly played

an overwhelming role in the overall expansion of this sector. Export

expansion and import substitution together accounted for only 11 percent of

the manufacturing output growth in the entire 1953-73 period.

The relative contributions of export expansion and import substitu-

tion to manufacturing growth varied significantly over time and by major

sectors. During 1953-63 and 1963-68, total import substitution effects

accounted for 18 and 14 percent of the gross output increases in manufacturing

(excluding food and textiles), but their relative contribution turned negative

(for the same group) in 1968-73. Export expansion was an insignificant

contributor to manufacturing growth in 1953-63, but became important for food

processing in 1963-68. In the subsequent period of 1968-73, export expansion

explained 20 and 22 percent of the production increases in food and textiles,

respectively, while accounting for nearly 11 percent of the aggregate growth

in total manufacturing.

Domestic demand expansion was the predominant source of gross output

growth in the social overhead and services sectors. The positive export

contributions of these major sectors largely reflect changes in transport and

- 44 -

in trade margins on commodity exports, rather than increases in invisible

exports such as tourism and shipping. With import substitution playing

practically no role in their expansion, social overhead and services exhibited

the typical patterns of nontradable sectors in the growth process.-/

Structural Change in Gross Output: Deviation Measures

Table 3.8 indicates the decomposition of nonproportional output

expansions in major sectors for 1953-63 and 1963-73. The reported estimates

are the total measures obtained under the share and composition methods. The

measurement of import substitution in relation to changes in GDP results in

rather exaggerated estimates of its role under the composition method, which

implicitly treats imports as perfect substitutes for domestic goods. In

particular, according to the composition method, import substitution provided

a large negative contribution (-19 percent) to the nonproportional growth of

manufacturing gross output in 1963-73, during which manufactured imports

increased 135 percent, as compared to 82 percent growth in aggregate value

added (see Tables 3.3 and 3.4). In turn, by focusing on the changes in the

shares of imports in total demand in individual sectors, the share method

produces import substitution measures more consistent with the rigidities

actually faced in the substitution of imports by domestic goods. The

following observations at the sector level are, therefore, based on the

deviation measures derived under the total share method.

The sectoral estimates for the sources of nonproportional growth

support the general conclusions reached on the basis of the overall analysis

discussed above. The compositional shifts in domestic final demand accounted

1/ In the 1980s, the direct effects of export expansion are likely to belarger in the social overhead sector due to growing invisible foreignexchange earnings from interregional road transport activities.

Table 3.8

Sources of Gross Output Deviations From Balanced Growth, 1953-73: Major Sectors 1/

Domestic Export Import Changes in Output DeviationDemand Expansion Expansion Substitution I-0 Coeffs.

'53-63 '63-73 '53-63 '63-73 '53-63 63-73 '53-63 '63-73 '56-63 '63-73___ ___ _-------- - …(Percent) - - - ---------… -…(million 1968 TL)

Share Total MethodI A Agriculture -47.4 -69.8 -28.1 -1.7 -9.0 3.2 -15.5 -31.6 -5,237 -25,329

I B Mining -13.3 149.5 -43.8 16.0 16.6 -19.5 -59.5 -45.9 -470 366

II A Food 25.2 -700.6 8.5 245.2 -15.6 27.1 81.9 328.3 1,425 -677

II B Textile & Leather 66.0 62.0 22.9 32.0 63.2 5.2 -52.1 0.9 442 2,728

II C Light Intermediates 29.0 44.5 0.7 5.1 8.9 24.7 61.4 25.7 729 2,981

II D Basic Intermediates 10.5 43.4 -2.9 6.5 29.5 -1.8 62.9 51.9 3,700 11,328

II E Machinery -33.8 84.0 -0.1 3.6 62.8 19.7 -128.1 -7.2 -1,186 6,631

III Social Overhead 64.5 28.5 5.6 24.0 -3.6 5.8 33.5 41.5 1,617 5,097

IV Services 61.9 39.6 14.5 21.9 -13.2 6.9 36.8 31.6 2,292 6,504

TOTAL II A to II E 16.6 38.1 2.2 15.9 38.3 9.4 42.9 36.6 5,111 22,991 ;

TOTAL II C to II E 6.1 56.4 -3.4 5.4 58.6 8.8 38.7 29.4 3,244 20,940

Relative Weights 32.4 52.2 9.5 8.9 14.7 5.8 43.4 33.1

Composition (CSW) Total MethodI A Agriculture -48.0 70.4 -28.2 -1.7 -8.3 3.8 -15.5 -31.7

I B Mining -4.3 220.1 -42.6 27.8 -64.3 -226.4 11.2 78.5II A Food 25.9 -698.4 8.5 245.9 -17.7 13.8 83.4 338.7

II B Textile & Leather 70.0 63.8 23.1 32.2 62.6 2.8 -55.6 1.2

II C Light Intermediates 37.0 54.1 0.7 5.5 -9.2 10.5 71.5 29.8

II D Basic Intermediates 12.5 62.7 -3.2 7.2 16.2 -35.2 74.6 65.2

II E Machinery -55.7 120.5 -1.3 4.1 169.9 -13.3 -212.8 -11.3

III Social Overhead 66.5 34.8 5.5 24.3 -5.2 -3.8 33.3 44.6

IV Services 62.8 46.8 14.4 22.4 -13.8 -5.1 36.6 35.9

TOTAL II A to II E 14.7 59.7 1.8 16.5 50.3 -19.1 33.2 42.8

TOTAL II C to II E 2.2 79.8 -4.0 6.0 78.5 -21.7 23.3 35.9

Relative Weights 30.7 51.2 8.5 8.0 16.7 8.7 44.1 32.1

1/ See footnote 1 in Table 3.7. The relative weights are calculated from absolute totals of 25 sector gross output

deviations under each causal factor.


- 46 -

f or 47 and 70 percent of the negative deviations in agricultural gross output

.in 1953-63 and 1963-73, respectively. This factor alone explains 56 percent

of the large positive deviations observed in manufacturing (excluding food and

textiles) during 1963-73. These trends in nonproportional growth were further

strengthened by the effects from technological change, which caused negative

output deviations in agriculture, and generally positive deviations in

manufacturing subsectors. The combined deviation effects of domestic final

demand and technological change were also dominant in the differential growth

of social overhead and services. The latter two sectors experienced important

structural change contributions from export expansion in 1963-73. This mainly

reflected the effects of the export boom of the early 1970s.

The disaggregated estimates in Table 3.8 also indicate that import

substitution was a sizable source of nonproportional growth in manufacturing

in 1953-63. It accounted for 59 percent of the gross output deviations in

manufacturing (excluding food and textiles) in the early period. This trend

continued in 1963-68, but was reversed in 1968-73. The chained measures

attribute about 9 percent of the total manufacturing output deviation to the

import substitution process in 1963-73. In contrast, the nonproportional

growth of exports had a negligible impact on the compositional changes in

manufacturing output in 1953-63, but accounted for nearly 16 percent of the

gross output deviations in total manufacturing in 1963-73, with particularly

pronounced effects in the food and textile groups.

According to the analysis, the nonproportional expansion of domestic

final demand and the changes in input-output coefficients were the two major

sources of structural change in gross output. The changing composition of

domestic final demand with rising national income was not a straight-forward

process in 1953-73, but represented the combined effects of four main

- 47 -

factors: (1) differential growth of investment and consumption expenditures,

which resulted in a faster expansion of demand for investment goods; (2)

increasing proportions of machinery and equipment in fixed investment, which

were due to shifting patterns of investment by sector of destination

(particularly in 1963-73); (3) non-uniform income elasticities of consumer

demand, which produced the typical decline in the share of agriculture and

food, with a corresponding rise in the shares of manufactures and services (at

varying speeds in urban and rural areas); and (4) a faster rise in public

consumption than in private consumption, resulting in the disproportionate

increase of the share of public services in aggregate demand. To underline

the broad shifts in the structure of domestic final demand, the orders of

magnitude of the implied expenditure elasticities of demand for major

categories of goods and services have been compared as follows:_/

1953-63 1963-73 1953-73

Agriculture and Food 0.83 0.30 0.46Textiles and Clothing 1.07 1.04 1.06Other Manufactures 0.93 2.67 2.06Social Overhead 1.12 1.15 1.14Services 1.15 1.11 1.16

In addition, the nature of the effects of technological change

appear to be somewhat different from those observed in countries with limited

supplies of natural resources, like Japan and Korea. In the industrialization

of such countries, the major contribution of technological change has been to

substitute limited local primary inputs with manufactured goods and thus to

1/ These are not the Engel elasticities of private consumer demand, but theimplied expenditure elasticities of total domestic final demand. Theelasticities for agriculture and services would have been higher ifrelative price effects were to be considered (see Chapter 4.E). Thefluctuatingvvalues of stock changes in agriculture also had an effect onthe observed elasticities for agriculture and food.

- 48 -

reduce dependence on primary imports,./

In the Turkish case, changes in input-output coefficients do not

reflect primarily a similar major effort to replace imported primary products

by fabricated goods. Rather, three broad elements are represented:

(1) Changes in the intra-sectoral product flows of the agriculture-

livestock-food complex (e.g., less animal service, more processed feed for

livestock, and higher stages of food processing which require proportionally

less agricultural input);

(2) The introduction of new techniques and intermediate products

into various major sectors (e.g., petroleum products for transport and energy,

and chemicals for agriculture and new materials for construction); and

(3) The widening of the range within which electricity, transport,

trade and services are used as intermediate inputs.

In addition to these three factors, the effects of input

substitution that result in reduced demand for primary products (such as, for

example, increased use of synthetic fibers in the textile sector) have also

been noticeable in certain sectors. Although the sources of growth models

track down the effects of technological change in the process of non-

proportional expansion, they generate no quantitative information on the

relative influences of a variety of factors that cause changes in input-output

coefficients.

F. Sources of Growth Patterns in Manufacturing Industries

For a more detailed examination of the pattern of expansion in

manufacturing, Table 3.9 provides disaggregated estimates for the sources of

gross output growth at the level of individual industries. These estimates

1/ See Chenery and Watanabe (1975).

- 49 -

are in first difference terms, and derived under the share total method for

1953-63 and 1963-73.

As the estimates in Table 3.9 show, domestic final demand expansion

was a predominant source of growth in all individual industries during the

entire period. The growth contribution of this factor was relatively higher

in machinery and textiles, lower in basic intermediates, and close to average

in light intermediate industries. In contrast, technological effects

contributed strongly to basic intermediates, moderately to light Intermediates

and food processing, and negatively to textiles and machinery group during

their expansion.

The observed pattern of import substitution in 1953-63 indicates

that this factor was a significant source of growth. Relative contributions

exceeded 20 percent in the early stages of development of a number of

industries such as non-metallic products (cement, glass, etc.), petroleum

refining, basic metals and machinery products (mainly, non-electrical).

Import substitution also contributed positively (about 8 percent) to the

output growth in textiles and rubber products. From 1963-73, the role of

import substitution as a source of growth was reduced in machinery output (12

percent), and turned negative in basic intermediates taken as a group (-1

percent). Notwithstanding the generally declining trend in import

substitution for manufacturing as a whole, the growth effects of this factor

were moderately improved in paper (11 percent), rubber (18 percent), and

transport equipment (11 percent). In both ten-year period, chemicals had

negative growth contribution from import substitution.

In 1953-63, export expansion was an insignificant source of output

growth in all manufacturing branches (with the minor exception of leather

products). In the latter decade (especially in 1968-73), its substantially

Table 3.9

Sources of Gross Output Growth in Manufacturing, 1953-73: Share Total Method, First Difference 1/

Import Domestic Export Import Changes inIncrease Demand Expansion Expansion Substitution I-0 Coeffs.

'53-63 '63-73 '53-63 '63-73 '53-63 '63-73 '53-63 '63-73 '53-63 '63-73(million 1968 TL) -------------- (Perent)- - --

A. Food 6,101 10.083 88.2 57.9 2.9 21.4 -3.0 1.6 11.9 19.1

B. Textile and Leather7. Textiles & Apparel 2,482 7,720 98.1 89.5 1.6 13.0 8.3 2.0 -7.9 -4.610. Leather and

Products 426 1,523 63.4 77.8 19.0 -1.1 5.0 -1.9 12.6 25.2Total B 2,908 9,243 93.0 87.6 4.1 10.7 7.8 1.4 -4.9 0.3

C. Light Intenmediates8. Wood Products 597 1,750 76.4 86.3 1.0 2.4 2.5 3.0 20.2 8.39. Paper & Products 420 2,298 81.0 77.3 1.7 3.4 -1.2 11.0 18.5 8.311. Rubber & Plastics 512 1,944 74.2 60.9 1.5 4.7 8.7 17.9 15.6 16.5Total C 1,529 5,992 76.9 74.6 1.4 3.5 3.5 10.9 18.2 11.0 Q

D. Basic Intermediates12. Chemicals 753 5,005 99.8 69.9 -0.3 3.4 -25.0 -4.5 25.5 31.113. Petroleum and

Coal Products 2,858 6,876 44.6 61.8 3.5 7.8 21.1 1.7 30.7 28.814. Non-metallic

Min. Product 691 2,702 63.1 78.5 0.8 5.5 36.7 2.7 -0.6 13.315. Basic Metals 1,337 5,249 54.9 74.6 -2.9 4.4 19.8 -2.8 28.2 23.8Total D 5,639 19,832 56.6 69.5 1.2 5.5 16.6 -0.9 25.6 25.9

E. Machinery16. Metal Products 233 3,381 254.7 111.3 1.3 4.2 -17.6 1.3 -138.4 -16.817. Machinery 1,068 4,642 63.5 99.6 -0.02 1.4 67.7 12.4 -31.2 -13.418. Transport

Equipment 258 4,648 244.7 69.9 5.2 1.8 -38.9 11.4 -111.1 16.8Total E 1,559 12,671 122.1 91.8 1.0 2.3 37.3 9.1 -60.4 -3.2

TOTAL Manufacturing 17,736 57.821 81.0 75.8 2.3 8.2 9.1 3.3 7.6 12.7

1/ See Footnote 1 in Table 3.7. The number in the front of each manufacturing sector designates the sector number inthe 25 sector classification.


- 51 -

enhanced role was observed in the aggregate analysis. The small positive

contributions of export expansion noted in the growth of chemicals, petroleum

refining, basic metals, rubber and paper products during 1963-73 were mainly

due to intermediate demand effects of export growth in agriculture, food and

textiles. In turn, the positive export growth contributions observed in non-

metallics and metal products largely represented the direct effects of export

expansion in these individual subsectors. The industry breakdown of the

growth contributions of exports in the latter period reflects Turkey's

comparative advantage in food, textiles and apparels, non-metallic mineral

products, and selective items in basic metals and metal fabricating branches,

which use semi-skilled labor. 1/

Sectoral analysis of the sources of growth within manufacturing

indicates contrasting patterns of import substitution and technological change

in the basic intermediates and machinery groups. The substantial early

contribution of import substitution to output growth in basic intermediates

declined over time, whereas technological change continued to have a

relatively large role in their expansion, particularly in the case of

chemicals. In turn, machinery and related products had more favorable import

substitutinn effects in their growth process, while experiencing generally

negative contributions from changes in input-output coefficients (except

transport equipment in 1963-73). The sustained growth effects of

technological change in basic intermediates, especially in chemicals,

underscores the continuing process of technological innovations and/or input

substitution in the production structure. The latter process had important

1/ See Krueger (1974). The solutions of an optimizing multi-sectoral modelfor the 1972-80 perLod also provide a similar pattern of comparativeadvantage in Celasun (1974).

- 52 -

implications for the growth of intermediate goods imports throughout the

period, as shown in Table 3.10.

G. Sources of Import Growth by Commodity

Tables 3.10 and 3.11 present estimates for the sources of import

growth by commodity (i.e., by sector of origin) during 1953-73 in aggregated

and disaggregated first difference terms, respectively. These estimates,

which have been derived under the share method, provide a complementary

perspective to the sectoral growth patterns.

The aggregated direct measures listed in Table 3.10 indicate that

intermediate demand expansion alone accounted for 60 percent of the import

growth in 1953-63 and 1963-73. For the entire period 1953-73, 72 percent of

import growth induced by intermediate demand expansion was attributed to

domestic f-nal demand factor; 20 percent to technological change; and about 8

percent to export expansion and import substitution.

In aggregate terms, the relative contributions of export expansion

and import substitution to the growth of total imports were 2.8 and -26.4

percent, respectively, in 1953-73. These figures reveal the exceedingly low

import intensity of Turkey's export-oriented production, as well as the large

extent to which trade adjustment policies relied on import substitution to

achieve balance in the external sector, especially under the semi-closed

development strategy of the 1953-68 period.1 1 In the semi-open period of

1968-73, import substitution contributed positively (6 percent) to the growth

of imports.

The sectora-l breakdown of the total measures for the sources of

1/ In the case of Korea during 1955-73, the comparable measures estimated byKim (1978) for export expansion and import substitution as sources ofimport growth (by commodity) were 32.7 and -0.4 percent, respectively.

Table 3.10

Sources of Import Growth by Commodity 1953-73: A Summary ofAggregate Results (Share Method, First Difference) 1/

Changes in Domestic Demand Expansion Export Import Change inImports Final ITteria Total Expansion Substitution 1-0 Coeffs.

(million 1968 TL) -(Percent)----

Direcet Ieasures1953-63 2,067 68.2 61.9 130.1 - -30.1 -1963-68 1,046 162.4 180.7 343.1 - -243.1 -1968-73 6,445 53.2 40.2 93.4 - 6.6 -1963-73(*) 7,491 68.5 59.8 128.3 - -28.3 -1953-73(*) 9,558 68.4 60.3 128.7 - -28.7 -1953-68 3,113 103.2 95.0 198.2 - -98.2 -

Total Measures1953-63. 2,067 128.0 - 128.0 1.7 -26.1 -3.51963-68 1,046 274.7 - 274.7 4.0 -227.9 49.01968-73 6,445 80.3 - 80.3 3.0 6.1 10.61963-73(*) 7,491 107.4 - 107.4 3.2 -26.5 15.91953-73(*) 9,558 111.9 - 111.9 2.8 -26.4 11.71953-68 3,113 181.3 - 181.3 2.4 -88.2 4.5

1/ See footnote 1 in Table 3.5. (*) indicates chained measures for the periods 1953-73 and 1963-73.

Source: Numerical results of the decompisition analysis.

Table 3.11

Sources of Import Growth by Commodity 1953-73: Disaggregated Results(Share Total Method, First Difference) 1/

Import Domestic Export Import Changes inIncrease Demand Expansion Expansion Substitution I-0 Coeffs.

'53-63 '63-73 '53-63 '63-73 '53-63 '63-73 '53-63 '63-73 '53-63 '63-73(million 1968 TL) ----------------- (Percent)------------------ …

I A Agriculture 446 -383 44.5 24.2 0.8 2.8 55.4 -107.5 -0.7 -19.6

I B Mining 420 920 22.0 49.0 1.5 5.7 54.0 8.9 22.6 36.4

II A Food 208 -99 24.4 39.1 0.2 2.0 72.2 -151.0 3.3 9.8

II B Textiles & Leather -69 46 141.9 215.2 1.3 9.4 -233.9 -128.2 -9.2 3.

II C Light Intermediates8. Wood Products 6 -17 221.6 47.5 2.4 0.7 -182.6 -163.8 58.6 15.69. Paper & Products 48 5 85.8 3343.2 1.5 107.8 -7.1 -3692.9 19.8 342.0

11. Rubber & Plastics 113 -162 113.7 67.2 2.3 2.4 -39.9 -183.5 23.9 13.9 tn

II D Basic Intermediates12. Chemicals 493 2879 49.5 61.4 0.3 2.2 37.1 9.8 13.0 26.613. Petroleum and Coal

Products -177 146 143.6 87.6 5.3 7.8 -349.4 -36.2 100.5 40.814. Non-metallic

Min. Products -170 50 49.4 196.2 0.2 2.4 -149.2 -131.4 -0.4 32.715. Basic Metals 89 974 179.6 57.7 -0.8 -171.8 22.4 93.0 17.9

II E Machinery16. Metal Products 95 443 117.6 108.7 0.7 1.5 45.5 2.6 -63.8 -12.817. Machinery -263 1917 264.0 141.3 0.2 0.7 -234.3 -24.0 -129.8 -18.118. Transport Equip. 258 529 113.3 153.4 2.8 3.8 35.3 -86.8 -51.4 29.6

III Social Overhead 196 67 52.9 321.1 0.3 10.9 45.6 -297.2 1.1 65.1

IV Services 372 175 21.8 175.0 0.1 6.8 77.3 -120.7 0.8 38.9

TOTAL II A to II E 633 6,712 343.0 104.1 3.8 2.3 -220.0 -18.6 -26.9 12.3TOTAL I A to IV 2,067 7,491 128.0 107.4 1.7 3.2 -26.1 -26.5 -3.5 16.0

1/ See Footnote in Tables 3.7 and 3.9.

Sou-Lce; Nmari=cal reau-lts of the decornposition analysis.

- 55 -

import growth during 1953-63 and 1963-73 provides further insight into the

reduced role of import substitution in restraining the growth of manufactured

imports in the latter decade. The relative contribution of import substitu-

tion to the increment in total manufactured imports changed from -220 percent

in 1953-63 to -19 percent in 1963-73. In turn, technological change accounted

for -27 and +12 percent of the rise in total manufactured imports in these two

successive ten-year periods. In particular, the rapid increase in the

relative contributions of domestic demand and technological change to the

expansion of mining imports (including crude oil), chemicals imports

(including fertilizers), and basic metals imports (mainly semi-finished steel

products) in 1963-73 reflected the growing import intensity of the changing

product mix and input structures in the economy. In the aftermath of the 1973

oil crisis, these structural trends in mineral and basic intermediates imports

continued, and led to a foreign exchange bottleneck in the late 1970s in the

absence of internal adjustment measures.

The predominant role of domestic demand in import increases, and

general import-replacing nature of technological change is shown by the

decomposition of imports in the machinery and related industries. However, in

the case of the transport equipment industry, which experienced rapid growth

in output toward the end of the period, technological change contributed

positively to import increases from 1963-73, while import substitution effects

were negative, as expected. Expressed in another way, the decline in the

share of competitive imports in the total supply of this industry was

associated with a considerable increase in intra-industry flows, which, in

turn, led to the rapid expansion of semi-finished product imports in 1963-73,

- 56 -

particularly in road transport equipment and passenger car production. l/

H. Decomposition of Value Added

Table 3.12 presents the decomposition measures for value added by

major sectors for 1963-73. 3. These measures have been derived under the

share method in first difference and deviation terms by chaining the results

obtained for the 1963-68 and 1968-73 subperiods.

An additional cause of change in the productive structure, namely

the change in value added coefficients, is examined in the decomposition of

value added. This factor produced negative growth effects in all major

sectors except agriculture and social overhead. Compared to the results of

the decomposition of gross output, the relative contributions of domestic

final demand expansion, technological change and import substitution are

greater as sources of growth of value added, offsetting the growth-reducing

effects of changes in value added parameters.

The relative role of exports in the decomposition of gross output

and value added is essentially the same. The notable difference is only in

food processing. In its nonproportional expansion, export growth accounted

for 102 and 245 percent of the deviations in value added and gross output,

respectively, with corresponding differences in the negative contribution of

domestic final demand. This different pattern indicates the lower stages of

processing carried out for agricultural commodities such as tobacco and dried

fruits before they head for export markets.

The earlier conclusion that import substitution was a more

1/ The transport equipment industry's own input-output coefficient increasedfrom 0.056 in 1963 to 0.230 in 1973 in constant 1968 prices.

2/ The value added figures include indirect taxes on sectoral output andimports according to the definitions given in Appendix 2.B.

Table 3.12

Sources of Value Added Growth in Major Sectors, 1963-73:Share Total Method 1/

Domestic Tmport Change ChangeOutput demand Export substi- in I-0 in VAchange expansion expansion tution coeffs. Coeffs.

(million 1968 TL) (Percent - - - - - - - - - - -

First Difference (Increase)

I A Agriculture 4,349 150.8 29.1 11.2 -111.3 20.2I B Mining~ 1,353 97.3 10.7 -3.1 -3.7 -1.2II A Food 2,892 63.0 23.3 1.7 20.7 -8.7II B Textile & Leather 3,261 95.6 11.6 1.6 1.2 -10.0II C Light intermediates 2,122 85.4 4.2 14.8 13.5 -17.9II D Basic intermediates 9,511 81.3 6.9 -0.1 31.0 -19.1II E Machinery 5,466 104.0 2.5 11.6 -3.5 -14.5III Social overhead 13,991 76.3 7.6 1.0 7.4 7.7IV Services 26,497 89.6 6.7 1.4 4.9 -2.6

TOTAL II A to II E 23,252 86.7 8.3 4.5 15.8 -15.3TOTAL II C to II E 17,099 89.0 5.1 5.5 17.8 -17.5TOTAL I A to IV 69,441 89.9 8.9 2.9 1.6 -3.3

Deviation from BalancedGrowth (Deviation)

I A Agriculture -16,345 -73.7 -1.7 3.5 -34.4 6.3I B Mining 310 125.2 15.6 -16.7 -19.3 -4.9II A Food -509 -292.2 102.1 11.5 135.6 -57.0II B Textile & leather 674 90.7 49.7 8.4 6.2 -55.0II C Light intermediates 865 62.6 7.4 40.4 38.5 -49.1II D Basic intermediates 4,359 59.9 10.1 -0.0 76.9 -46.9II E Machinery 2,427 112.0 4.5 29.0 -9.3 -36.1III Social overhead 4,242 21.9 17.2 4.1 28.1 28.8IV Services 4,347 49.4 25.1 9.6 33.7 -17.7

TOTAL II A to II E 7,817 63.9 18.8 14.9 53.6 -51.2TOTAL II C to II E 7,651 76.7 8.1 13.7 45.2 -43.7Relative weight 41.6 6.7 4.5 27.6 19.6



- 58 -

significant source of structural change than growth in manufacturing is

supported by the results of the decomposition of value added. The sectoral

measures shown in Table 3.12 also illustrate the reverse roles of import

substitution and technological change in the development of machinery and

basic intermediates (especially chemicals), as discussed above in the context

of gross output changes.

I. Sources of Turkish Industrialization in the Light of Experience

Elsewhere: An Overview

The empirical analysis presented in the preceding parts of Chapter 3

provides extensive estimates for the sources of Turkish industrialization,

which was characterized by a significant nonproportional growth of

manufacturing production in 1953-73. The various components of the sources of

growth analysis clearly indicate the predominant effects of domestic final

demand and technological change in Turkey's past industrialization process.

These factors were complemented somewhat by import substitution in 1953-68,

and by export expansion in 1968-73. The increased role of exports in 1968-73

is attributed both to shifts in trade and exchange rate policies and to more

favorable external factors in the early 1970s. Table 3.13 gives a summary of

the first difference measures obtained from the decomposition of gross output,

imports (by commodity) and value added in total manufacturing. Estimates for

the sources of employment expansion for manufacturing are listed to show the

basic similarity of the factors that affected the various aspects of growth in

this sector 1/

To compare the Turkish experience in industrialization with the

seven other countries in this series, two additional tables have been compiled

1/ See Chapter 4 for a more detailed analysis.

- 59 -

(under the share method).1/ Table 3.14 provides estimates for the sources of

nonproportional growth of manufacturing as percentages of the increase in

total gross output in individual economies over comparable sample periods of

ten to twenty years. Turkey experienced the highest relative contributions of

domestic final demand (5.6 percent) and technological change (6.2 percent) to

the manufacturing gross output deviation from balanced growth among the eight

countries studied. The narrow role of export expansion was observed not only

in Turkey, but also in Colombia and Mexico, which experienced substantially

larger effects of import substitution as well. Export expansion as a source

of differential growth of manufacturing was most pronounced in Korea and

Taiwan, where the growth rates of manufacturing output were also the highest

among the eight countries.

In turn, Table 3.15 gives the measures for the sources of

manufacturing gross output increases in terms of percentages of the increment

in this sector's gross output at various times. These estimates support the

results listed in Table 3.14. Moreover, the pronounced shifts observed in the

sources of growth patterns over time in Japan, Korea, Taiwan and Israel

suggest that the switching from import substitution to export orientation in

the course of industrial development was successful. Compared to Korea,

Taiwan and Israel, the inward-oriented phase of manufacturing growth was too

prolonged in Turkey. One result was a highly protected industrial structure,

which relied heavily on the imports of intermediate goods.

Turkey's industrialization pattern in 1953-73 substantially supports

the theory of "balanced growth," which attempts to explain the structural

1/ See Kubo and Robinson (1979) for a more comprehensive comparative analysisof the sources of growth in these eight countries.

- 60 -

Table 3.13

A Summary of Measures for Sources of Growth in Manufacturing,1953-73: Share Total Method, First Difference 1/

Average DomesticAnnual Demand Export Import Change in Coeffs.

Growth Rate Expansion Expansion Substitution I-0 VA Labor(X per year)- ---- --- (Percent)

Gross Output

1953-63 6.4 81.0 2.3 9.1 7.6 - -

1963-68 9.9 75.2 4.4 10.5 9.9 - -

1968-73 9.4 76.2 10.7 -1.5 14.6 - -

1963-73(*) 9.6 75.8 8.2 3.3 12.7 - -

1953-73(*) 8.0 77.0 6.8 4.7 11.5 - -

Value Added

1963-68 8.2 96.9 4.3 13.5 11.6 -26.3 -

1968-73 9.2 80.6 10.7 -0.9 18.3 -8.8 -

1963-73(*) 8.7 86.7 8.3 4.5 15.8 -15.3 -

Imports

1953-63 1.4 343.0 3.8 -220.0 -26.9 - -

1963-68 4.8 181.7 2.3 -113.2 29.2 - -

1968-73 13.1 84.9 2.3 4.7 8.1 - -

1963-73(*) 8.9 104.1 2.3 -18.6 12.3 - -

1953-73(*) 5.1 124.6 2.4 -35.9 8.9 - -

Labor

1963-68 4.4 182.6 6.7 30.1 28.3 - -147.71968-73 4.8 159.8 19.2 -2.6 5.4 - -81.9

1963-73(*) 4.6 169.4 14.0 11.1 15.0 - -109.5

1/ All growth rates and measures pertain to total manufacturing. See footnotes inTables 3.5 and 3.6. Imports relate to manufactured imports (by commodity).(*) indicates chained measures.


- 61 -

Table 3.14

Sources of Manufacturing Gross Output Deviationfrom Balanced Growth: An Inter-Country Comparison

(Based on Share Total Method, Deviation)1/

Average Domestic ImportMan. Output Output Demand Export Substi- Change inGrowth Rate Deviation Expansion Expansion tution I-0 Coeffs.(X per year) ---------- -(Percent)----------

Colombia (1953-70) 8.1 16.1 1.4 1.4 7.8 5.6Israel (1958-68) 12.3 6.8 -2.7 7.5 -0.6 2.5Japan (1955-70) 13.3 12.6 5.0 2.8 -1.2 5.9Korea (1955-73) 15.8 27.4 4.7 21.1 1.4 0.2Mexico (1950-75) 7.7 10.1 3.5 -0.2 4.3 2.5Norway (1953-69) 5.2 7.8 -1.6 12.6 -9.2 6.0Taiwan (1956-71) 16.2 28.2 0.7 20.1 3.5 3.9Turkey (1953-73) 8.0 16.4 5.6 2.2 2.4 6.2

1/ Manufacturing gross output deviations and the sources measures areexpressed as percentages of the increment in aggregate gross output overall sectors in with columns 3-6 adding up to column 2.

Source (for countries other than Turkey): Kubo and Robinson (1979).

change in output mainly in terms of the compositional shifts in domestic

demand over time. The Turkish case closely corresponds to the "semi-closed"

large country prototype defined by Chenery in his empirical investigation of

the industrialization process in terms of typical patterns. 1/ However, the

limited export effects observed in the Turkish industrialization experience

cannot be explained solely in terms of low price and income elasticities of

demand for exports, as suggested by the proponents of the balanced growth

theory, but are caused mainly by the large size of the domestic markets,

diversity of natural resources, initial political conditions, and structure of

1/ See Chenery (1979, Chapter 3) for a recapitulation of the theory of"balanced growth," and an extensive analysis of typical patterns inindustrial growth and structural change.

- 62 -

Table 3.15

Sources of Manufacturing Gross Output IncreaseOver Time: An Inter-Country Comparison 1

(Based on Share Total Method, First Difference)_

Average DomesticMan. Output Demand Export Import Change in

Growth Rate Expansion Expansion Substitution 1-0 Coeffs.(% per year) ----------------------(Percent)---------------------

Colombia1953-66 8.3 60.3 6.8 - 22.1 10.81966-70 7.4 75.5 4.7 4.3 15.5

Israel1958-65 13.6 58.9 26.2 9.8 5.21965-68 9.4 68.7 54.8 -27.7 4.2

Japan1914-35 5.5 69.9 33.6 4.7 -8.21935-55 2.8 70.9 -7.1 15.5 20.71955-60 12.6 76.2 11.9 -3.4 15.21960-65 10.8 82.3 21.7 -0.3 -3.71965-70 16.5 74.2 17.6 -1.4 9.6

Korea1955-63 10.4 57.3 11.5 42.2 -11.01963-70 18.9 70.1 30.4 -0.6 0.11970-73 23.8 39.0 61.6 -2.5 1.8

Mexico1950-60 7.0 71.8 3.0 10.9 14.41960-70 8.6 86.1 4.0 11.0 -1.01970-75 7.2 81.5 7.7 2.6 8.2

Norway1953-61 5.1 64.3 37.3 -15.9 14.41961-69 5.3 50.6 58.8 -19.4 10.0

Taiwan1956-61 11.2 34.8 27.5 25.4 12.31961-66 16.6 49.2 44.5 1.7 4.61966-71 21.1 34.9 57.0 3.8 4.3

Turkey1953-63 6.4 81.0 2.2 9.1 7.71963-68 9.9 75.2 4.5 10.4 9.91968-73 9.4 76.2 10.7 -1.5 14.6

1/ The sources of growth contributions in columns 2-5 are measured as percentages of theincrement in manufacturing gross output during the indicated periods, and add up to100%.

Source (for countries other than Turkey): Kubo and Robinson (1979).

- 63 -

incentives, as discussed briefly in Chapter 6.

Finally, the comparatively moderate contribution of import

substitution to industrial growth was primarily due to the relatively small

proportions of imports in total domestic demand initially (as clearly

indicated in the analysis of the cross-country norms in Chapter 2). While the

effects of import substitution on the process of growth and structural change

in production were only moderate, its role as a trade adjustment mechanism was

substantial, according to the decomposition of import growth, particularly in

1953-63 and 1963-68. (For example, see the sources of growth of manufactured

imports in Table 3.13). The effects of export expansion and import

substitution on the patterns of factor allocation are examined in Chapter 4.

- 64 -

4. SOURCES OF CHANGES in FACTOR USES AND

RELATIVE PRICES

Despite the relatively rapid growth of the manufacturing sector,

Turkey's structural transition was not accompanied by sufficient increases in

employment. Employment opportunities in Western Europe for Turkish workers in

the 1960s and early 1970s eased Turkey's unemployment problems at the time,

but also encouraged complacency toward employment-related policy issues.

Furthermore, compositional shifts in domestic demand and output resulted in

larger investment in relatively capital-intensive sectors.

This section reappraises the patterns of primary factor use in view

of the sources of growth analysis discussed in Chapter 3.L' In addition to

the decomposition of factor use, Chapter 4 considers the sources of sectoral

price changes and the effect of domestic price distortions on value added

growth rates. The results of these complementary analyses suggest areas for

further multi-sectoral research on the role of relative prices in income

determination and resource allocation.

A. Historical Patterns of Employment and Productivity Growth

Tables 4.1 to 4.3 present data for a brief analysis of the

historical trends of labor supply and demand and productivity changes. The

labor and productivity figures assembled in these tables were derived from

various sources of data on the economically active population. The labor

supply and demand totals given in Table 4.1 are largely based on the official

1/ Because of the paucity of data for the earlier periods, the sources ofchanges in factor use (i.e., employment and investment requirements) havebeen estimated only for 1963-73.

- 65 -

Third Plan (1973-77) estimates for the earlier periods.1/

The patterns of population, labor supply and employment during 1950-

73 are shown in Table 4.1. The consequences of rapid population growth are

evident in the increasling values of dependency ratios, and in the growing

volumes of surplus labor, despite the massive migration of Turkish workers to

the labor-importing countries of Western Europe.2/ Rapid rates of

urbanization have added to these difficulties by creating increasingly serious

unemployment problems in the urban areas. The lack of employment

opportunities, increased education, and reduced female participation in the

rural areas have been instrumental in the steady decline of overall

participation ratios, which is indicated in Table 4.1-3/

The limited contribution made by the manufacturing sector to the

solution of unemployment problems in the urban areas is another notable

feature of the observed labor supply and demand patterns. This is

particularly striking in 1963-73, during which the service sectors contributed

56 per cent of the rise in total nonagricultural employment (excluding

unspecified categories), while the incremental contributions of the

manufacturing and social overhead sectors were around 25 and 18 per cent,

1/ The official Fourth Plan (1979-83) gives somewhat revised estimates forthe labor supply and demand totals in the earlier periods. In the revisedtime series, the total labor supply and agricultural employment figuresare adjusted upwards. The historical data on employment in major non-agricultural sectors are nearly the same in the Third and Fourth Plandocuments. See SPO (1973, Table 63) and SPO (1979, Table 20).

2/ For a detailed analysis of labor surplus in agriculture, see Hamurdan(1970). The author's estimate for the 1973 cumulative foreign demand forTurkish labor is within the range of the estimates of TUSIAD (1976) andTSKB (1977), which are 646,000 and 785,000, respectively.

3/ See Yalcintas (1970), World Bank (1974) and World Bank (1980) for criticalevaluations of the manpower and employment perspectives set out in theofficial development: plans. The determinants of the rates of urbanunemployment are examined by Celasun (1970).

Table 4.1

Sectoral Structure of the Economically Active Population, 1950-1973(Thousand persons)

1950 1953 1963 1968 1973

Population 20,947.0 22,571.0 29,655.0 33,585.0 38,287.0

15-64 Age Group 12,254.0 - 16,297.0 18,408.0 20,975.0Dependency Ratio (%) 74.8 - 82.0 82.4 82.5Labor Supply - - 13,045.0 14,025.0 15,175.0Participation Rate () - - 80.0 76.2 72.3Labor Demand - - 12,740.0 13,493.0 14,405.0a. Military - - 660.0 564.0 630.0b. Civilian 1/ 10,250.0 10,605.0 12,055.0 12,886.0 13,700.0

I A Agriculture 8,085.0 8,343.0 9,267.0 8,900.0 8,765.0I B Mining 53.0 59.0 85.0 105.0 115.0II Manufacturing 578.0 641.0 903.0 1,118.0 1,416.0III A Electricity, etc. 9.0 11.0 25.0 47.0 59.0III B Construction 114.0 144.0 317.0 387.0 450.0III C Transportation 125.0 149.0 268.0 350.0 475.0IV Services 1,286.0 1,262.0 1,190.0 1,979.0 2,420.0

(Unspecified) 2/ (485.0) (320.0) (81.0) (340.0) (135.0)c. Additional Foreign Demand - - 25.0 43.0 75.0

Labor Surplus - - 1,055.0 1,427.0 1,620.0Agricultural 3/ - - 750.0 895.0 850.0Nonagricultural - - 305.0 532.0 770.0

Cumulative Foreign Demand - - 36.0 220.0 690.0

1/ Economically active population.

2/ Unspecified labor demand in services for 1963, 1968 and 1973 refer, respectively,to SPO estimates for 1962, 1967 and 1972.

3/ Surplus labor in agriculture is included in agricultural labor estimates.

Sources: 1950 - Ecevit and Ozoton (1974), Population Census (1950) results.1953 - Estimated from 1950 and 1955 Population Censuses by interpolation.1963, 1968 - SPO (1973), Third Plan.1973 - Estimated on the basis of the Third Plan data.

- 67 -

respectively. In the same period, the share of agricultural labor in total

civilian labor demand declined from 77 per cent in 1963 to 64 per cent in

1973, with continually large volumes of labor surplus prevailing in the rural

areas.

The changing patterns of employment status for the economically

active population are shown in Table 4.2 for the selected population census

years.J/ The figures indicate only marginal changes in employment status in

1950-60, with significant changes beginning to take place after 1960. In

employment status patterns, the predominance of non-employees (or non-wage

earners) engaged in agriculture and trade is important. Large proportions of

the various non-employee categories are also observed in manufacturing,

transport and other services sectors.

Table 4.3 presents data on employment, net output (i.e., value

added) and productivity growth by major sectors in 1953-63 and 1963-73.

During both periods, total employment increased at an average rate of 1.3 per

cent per year (in contrast to 2.6 per cent annual increase in the 15-64 age

population). The overall productivity rise was somewhat faster in the 1963-73

period primarily due to notable productivity gains in the construction,

transportation and mining sectors. Considering the small base of

manufacturing employment in relation to agricultural labor, the employment

increases in this sector (41 percent in 1953-63 and 57 percent in 1963-73)

1/ In Turkish parlance, the term "economically active population" is usedloosely to denote either total labor supply or civilian labor demand. InTable 4.2, "economically active" population refers to civilian labordemand.

Table 4.2

The Employment Status of the Economically Active Population),1950-1970 J1

1950 1965 1970A B C A B C A B C

IA Agriculture 2.6 28.0 69.3 6.9 30.3 62.7 7.0 30.5 62.5

IB Mining 96.2 3.0 0.8 97.3 2.3 0.4 97.3 2.3 0.4

II Manufacturing 50.3 35.9 14.0 52.0 38.7 9.3 60.2 33.6 6.2

IIIA Electricity, etc. 94.2 4.5 1.3 97.3 2.2 0.5 97.3 2.2 0.5

IIIB Construction 89.3 9.3 1.4 93.5 6.1 0.4 93.5 6.1 0.4

IIIC Transportation 61.7 30.9 7.4 62.3 32.7 5.0 62.3 32.8 4.9

IVA Trade 31.1 61.9 7.0 17.3 76.3 6.4 17.3 76.4 6.3

IVB Finance - - - 95.1 4.5 0.4 95.3 4.5 0.4

IVC Other services 72.9 24.0 3.1 75.3 22.2 2.5 75.3 22.2 2.5

Unspecified 23.2 2.4 74.4 25.3 3.3 71.4 - - -

/1 A-employees; B-employers and self-employed workers; and C=unpaid family workers and unknownstatus.

Source: 1950, 1965 - Population census results as reported by Ecevit and Ozotun (1974).1970 - Estimates by Ecevit and Ozotun (1974)

- 69 -

Table 4.3

Index of Increase in Output, Employment and Labor Productivity,1953-1973 1/

1953-1963 1963-1973

Output

IA Agriculture 137 115IB Mining 121 219II Manufacturing 227 237IIIA Electricity, Gas, Water 246 275IIIB Construction 150 181IIIC Transportation 185 270IV Services 174 201

Total 161 182

Employment


Total 116 113

Labor Productivity


Total 145 161

1/ Indices are computed for each period by taking the earlier year as thebasis (-100). Out ut is real value added measured at constant 1968producer prices. Employment is the number of persons engaged. Employmentin services excludes unspecified labor.

Source (for output data): Deflated I-0 tables.Sources (for employment data): The 1963 and 1970 manufacturing censuses;

annual manufacturing sgurveys; ILO study by Ecevit and Ozotun (1974); andthe Third Plan data base.

- 70 -

have not been sufficiently high to play a central role in the absorption of

the rapidly growing urban labor force. The figures clearly point out the

stagnant nature of productivity changes in the service sector from 1963

onwards, which made labor absorption of such proportions possible.

The productivity indices estimated in Table 4.3 also show a slowdown

in the growth of labor productivity in manufacturing from 61 percent in 1953-

63 to 51 percent in 1963-73. The productivity growth rates for manufacturing

labor (in terms of value added per worker as defined in Table 4.3) were 27 and

19 percent during the 1963-68 and 1968-73 subperiods, respectively. These

figures indicate the workings of a downward trend in the efficiency of labor

use in manufacturing, despite the increased capital intensity of industrial

investments (as shown in Table 4.7), and gradually reduced import rationing in

the early 1970s, as discussed earlier in Chapter 3. The simultaneous

occurrence of increased capital-output ratios and decreased rates of labor

productivity growth in manufacturing points also to a deceleration in the rate

of total factor productivity growth (TFPG) in this sector from 1963-73.-'

B. Sources of Changes in Employment

The sources of changes in employment have been decomposed by the

share total method for 1963-68 and 1968-73 on the assumption that sectoral

labor demand is linked with sectoral gross output through a fixed coefficient

at a given time. As a result, the decomposition of employment has generated

another factor (the change in labor coefficients) in addition to the four

1/ In a recent empirical study based on firm-level data, Krueger and Tuncer(1980) also find a secular downward trend in TFPG in private sectormanufacturing in the 1963-76 period. For an earlier contribution on theappraisal of labor productivity in Turkish manufacturing in the mid-1960s,see Kazgan (1972).

- 71 -

sources of growth identified in the decomposition of gross output, as

discussed in the preceeding chapter. (See Appendix 1.F for the decomposition

1/formulas) 1

Total Employment

Table 4.4 gives the aggregate measures for the sources of growth and

structural change in employment at five-year intervals during 1963-73. As

expected, the change in labor coefficients produced a large negative effect on

employment growth throughout the entire period. Technological change also had

a contractionary effect on aggregate employment primarily as a result of the

negative contribution of input-output coefficient changes to agricultural

expansion. The combined negative effects of changes in structural

coefficients were mainly offset by the pronounced positive effect of domestic

final demand expansion on employment increases. The observed relative

contributions of import substitution and export expansion to employment

generation over time closely correspond to the relative proportions of their

contribution to output growth, as described in Chapter 3.

To determine the employment generation potential of outward-oriented

growth in Turkey, the relative sizes of domestic and export demand

contributions to value added and employment growth were compared for 1963-

73. While export and domestic demand expansion explained, respectively, 9 and

90 percent of the growth of value added, their contributions to increases in

1/ For the decomposition of employment,a detailed attempt was made by theauthor to derive estimates for sectoral total labor (including wageearners as well as workers in nonemployee status) at the 25 sector levelof aggregation for the benchmark years 1963, 1968 and 1973. The subtotalemployment figures for major sectors were reconciled with the laborbalances shown in Table 4.1. The main statistical sources were (1) the1963 and 1970 manufacturing censuses; (2) annual manufacturing surveys;(3) an ILO study by Ecevit and Ozotun (1974); and (4) the Third Plan database. Unspecified labor demand in services was not included in theservice sector employment data.

Table 4.4

Sources of Growth and Structural Change in Employment, 1963-73:

A Summary of Aggregate Results (Based on Share Total Method>&/

Domestic Change in

Employment Demand Export Import Coefficients

Increase Expansion Expansion Substitution 1-0 Labor

(Thous. persons) - - - - - - - - - - - - (Percent) - - - - - - - - - - - -

First difference1963-68 572 373.6 34.6 50.7 -156.0 -202.9

1968-73 1,019 223.5 43.3 -4.9 -41.5 -120.4

1963-73(*) 1,591 277.4 40.1 15.1 -82.6 -150.0

Deviation frombalanced growth1963-68 - 31.9 1.9 5.7 25.9 34.6

1968-73 45.3 3.4 2.3 19.5 29.6

1963-73(*) 40.2 2.6 2.9 22.9 31.4

1/ See footnote 1 in Table 3.5. (*) indicates that the estimates for 1963-73 are chained measures.


- 73 -

overall employment were 40 and 277 percent. These figures clearly show that

export effects (as opposed to domestic demand effects) had a greater impact on

increasing employment than the expansion of value added in 1963-73. This

reflects the significant differences in the relative factor intensities of

export and domestic market-oriented production in the Turkish economy.

In contrast, the decomposition of structural change in employment

shows a different pattern. The deviation measures indicate that the changes in

labor and input-output coefficients account for 54 percent of the

compositional shifts in employment from 1963-73, whereas the relative

contribution of domestic demand effects was about 40 percent. However, export

effects on the structural change of labor demand remained unimportant during

1963-68 and 1968-73.

Sectoral Employment

Table 4.5 presents sectoral estimates for the sources of employment

growth, which were calculated as the chained first difference measures for

1963-73. Employment change figures in this table show that total employment

increased by about 1.6 million in 1963-73, despite the large decrease (of 0.5

million) in agricultural employment. The changes in labor and input-output

coefficients were the primary reasons for the decline of agricultural

employment. They were not balanced by the positive effects of demand

expansion. Approximately 56 percent of the growth in nonagricultural

employment occurred In services. This sector experienced stagnant labor

productivity growth, as reflected in the small negative employment effect of

changes in labor coefficients. Employment expansion in social overhead was

also substantial, in spite of the large negative effect caused by changes in

labor coefficients (mainly reflecting productivity gains in transportation).

In the latter sector, the employment contribution of domestic demand expansion

- 74 -

was dominant. Among the nonagricultural sectors, mining played a minor role

in employment expansion, partly due to the relatively rapid pace of growth in

its labor productivity.

The manufacturing sector as a whole provided 25 percent of increased

employment (about 2.1 million people) in nonagricultural sectors, despite the

negative employment effects of changes in labor coefficients in all its

branches (except basic metals). Domestic and export demand expansion explain,

respectively, 169 and 14 percent of the increase in manufacturing employment,

during 1963-73. However, these positive effects on manufacturing employment

were largely offset by the negative employment impact (-110 percent) of

changes in labor coefficients.1/

The relative contribution of export expansion to employment growth

was less than 9 percent in all industries, except in food (32 percent),

textiles (25 percent), metal products (10 percent) and non-metallics (9

percent). In contrast, the relative contribution of import substitution to

employment growth varied widely among the manufacturing industries. The

asymmetrical effects of import substitution and technological change on

employment growth in the machinery and basic intermediate groups reflect the

same pattern discussed in the decomposition of production in Chapter 3.

The basic metals industry is the only example in which the change in

labor coefficients resulted in increased employment. This reflects the rapid

expansion of the labor force for this industry in the early 1970s for training

1/ During 1963-73,, nonagricultural employment in the Republic of Korea (witha population smaller than Turkey) increased by about 2.8 million people,and the incremental share of manufacturing was about 32 percent. In theKorean case, the relative contributions of domestic demand, exportexpansion and changes in labor coefficients to the growth of manufacturingemployment were 131, 113 and -137 percent, respectively. See Kim (1978).

Table 4.5

Sources of Employment Growth, 1963-73: Disaggregated Results(Share Total Method, First Difference)

Domestic Import Change inBase year Employment Demand Export Substi- CoefficientsEmployment Change Expansion Expansion tution I-0 Labor

(Thousand persons) - - - - - - - - - - - (Percent) - - - - - - - - - -

I A Agriculture 9,267.0 -502.0 394.0 82.9 32.0 -314.2 -294.7

I B Mining 85.0 30.0 259.2 26.0 -0.9 -67.7 -116.6

TI A Food 186.0 84.6 86.3 32.0 2.5 28.1 -48.9

II B Textiles and Leather 271.8 100.4 234.9 25.4 4.8 5.2 -170.3

II C Light Intermediates8. Wood Products 86.3 39.5 213.3 5.8 9.3 27.3 -155.79. Paper and Products 25.3 19.5 182.7 6.9 21.7 19.1 -130.4

11. Rubber and Plastics 9.2 8.8 97.6 6.7 36.0 25.2 -65.5Total II C 120.8 67.8 128.5 4.2 11.1 16.7 -92.7

II D Basic Intermediates12. Chemicals 18.6 35.8 95.3 4.6 -6.3 44.1 -37.713. Petroleum & Coal Prod. 1.8 3.0 63.4 7.8 1.7 28.1 -1.014. Non-Metallic Min. Prod. 41.7 37.7 139.2 9.0 4.5 23.5 -76.215. Basic Metals 12.9 34.1 71.5 4.2 -3.4 23.3 4.4

Total II D 75.0 110.6 102.0 6.1 -1.5 30.7 -36.8

II E Machinery16. Metal Products 114.3 48.5 293.9 9.7 17.3 -30.5 -190.417. Machinery 59.2 33.8 228.4 3.2 31.9 -28.0 -135.518. Transport Equipment 75.8 67.7 147.4 3.7 31.7 32.7 -115.5

Total II E 249.3 150.0 213.0 5.5 27.1 -1.4 -144.2

III Social Overhead 610.0 374.0 128.8 11.0 1.6 12.8 -54.2

IV Services 1,109.0 1,176.0 85.7 8.7 1.4 13.4 -9.2

TOTAL II A to II E 902.9 513.4 169.4 14.0 11.1 15.0 -109.5

TOTAL I A to IV 11,973.0 1,591.0 277.4 40.1 15.1 -82.6 -150.0

1/ Same as in Table 4.4.


- 76 -

prior to the completion of two large public sector projects (the integrated

steel works at Iskenderun, and the aluminum complex at Seydisehir).

The disaggregated estimates for the sources of employment growth

support the conclusions reached on the basis of aggregate measures. The

results point to the potential role of exports in generating additional

employment mainly in agriculture, food processing and textiles, but also, to a

lesser extent, in non-metallics, metal products and social overhead.l/

C. Sources of Changes in Investment Requirements

The lack of coefficient data on capital stocks has precluded an

analysis of the sources of capital expansion along the lines of the

decomposition of employment, as discussed above.2/ Instead, a method

developed by Watanabe (1975) in a sources of growth study on the Japanese

economy was adapted.3/ By using the available data on sectoral fixed

investments (by sector of destination), a sources of growth analysis has been

carried out for investments (i.e., the first differences in capital stocks)

rather than capital stocks in 1963-68 and 1968-73. As a result, the analysis

focuses on the differences between the second period and first period

investments. The following two causes of the differences were considered: (1)

the differences in the final demand expansions in the two consecutive periods;

and (2) the changes in production technologies (i.e., changes in incremental

1/ Turkey's comparative advantage in these sectors has been furtherstrengthened by the rapidly expanding import requirements of the oil-surplus countries in the Middle East.

2/ For public and private large-scale manufacturing (exluding small firms),Ebiri et al (1977) provide annual capital stock estimates for 15subsectors over 1965-75.

3/ See Appendix 1.F for the algebra of the decomposition scheme.

- 77 -

input-output and capital-output coefficients).l/

The numerical results of the investment growth analysis are

summarized at the 9 sector level of aggregation, as shown in Table 4.6.

According to the taible, the part of the investment increase attributed to

changes in production technologies was larger than the part attributed to the

expansion of final demand in all major sectors, except in food, textiles and

social overhead. These results support the earlier conclusions that export-

oriented manufacturing subsectors (such as food and textiles) have adopted

relatively more labor-intensive production technologies, and contributed more

effectively to employment generation (and capital savings) in their expansion

process.

The negative signs of the investment increments resulting from

differences in final demand expansion during the two consecutive periods

reflect the following factors:

(1) The long gestation lags and indivisibilities in fixed

investments (e.g., in mining and basic intermediates);

(2) The sharp increases in machinery and intermediate goods imports

in 1968-73, which restricted the growth of final demand on a net basis;

(3) The compositional shifts in consumer demand, which resulted in a

smaller increase in the final demand for unprocesssed agricultural products;

and

(4) The variations in cyclical conditions causing changes in the

rates of capacity utilization (e.g., adverse weather conditions for

agriculture in 1973).

These results also indicate the tenuous nature of medium-term input-output

projections which ignore gestation processes in capital formation and varying

1/ In this analysis, final demand is equal to domestic final demand plus ex-ports minus imports (by sector of origin).

Table 4.6

Sources of Changes in Capital Requirements, 1963-1973 X

(Million 1968 TL)

Total Due to

Fixed investment Expansion in Changes in

1962-67 1967-72 Increment Final Demand Production Tech.

IA Agriculture 11,159 14,217 3,058 -13,230 16,288

IB Mining 3,152 4,219 1,067 -8,452 9,519

IIA Food 1,820 2,741 921 699 222

IIB Textile and Leather 2,262 2,762 500 1,006 -506

IIC Light Intermediates 1,468 3,432 1,964 -2,749 4,713

IID Basic Intermediates 7,749 17,605 9,856 -5,675 15,531

IIE Machinery 1,979 4,442 2,463 -7,860 10,323

III Social Overhead 15,897 30,041 14,144 13,854 290

IV Services 27,706 41,268 13,562 4,220 9,342

1/ The decomposition analysis is based on the fixed investment differences in the two

successive five-year periods (1962-67 and 1967-72), assuming a one year gestation lag in

investment.

Source: Numerical results of the decomposition analysis,

- 79 -

rates of capacity utilization in different sectors.

Table 4.7 presents complementary evidence on the variation of

relative factor intensities over time and by major sectors. Estimates for the

incremental capital-output and capital-labor ratios in 1963-68 and 1968-73

have been derived from the data base of this study, except for agriculture

(see footnote 2 on Table 4.7). The incremental coefficients shown in Table 4.7

indicate a trend in the increased capital intensity of fixed investments in

mining, manufacturing and social overhead during 1963-73. This trend was

particularly apparent in the basic intermediates group, which includes highly

capital-intensive industries such as chemicals, basic metals and petroleum

refining. Incremental capital-output and capital-labor ratios for basic

intermediates were about twice as large in 1968-73 as in 1963-68; and they

were substantially higher than the overall averages calculated for the

manufacturing sector. Nevertheless, this group's share in total manufacturing

investments increased from 51 percent in 1963-68 to 57 percent in 1968-73.

The upward trend in the capital intensity of manufacturing from

1963-73 continued under the implementation of the Third Plan (1973-77) and was

assumed in the projections of the Fourth Plan (1979-83). However, these plans

did not adopt a selective investment strategy to optimize the choices on the

timing, size and combination of capacity expansions in this sector. Instead,

available investment resources were thinly spread over numerous industrial

projects in the mid- and late 1970s. As a result, structural adjustment was

more difficult in the early 1980si/

1/ See Balassa (1979) for a review of the allocation of investment fundsplanned under the Fourth Plan. An analysis of the optimal mix of importsubstitution and export promotion investments in 1972-80 is provided in amulti-sectoral modeling study by Celasun (1974).

- 80 -

Table 4.7

Incremental Capital-Output and Capital-Labor Ratios,1963-73 1/

ICOR ICLR1963-68 1968 73 1963-68 1968 73

I A Agriculture 2/ 3.45 3.44 - -I B Mining 4.09 7.77 157.6 421.9II A Food 1.70 1.46 51.7 55.5II B Textile and Leather 1.36 1.75 49.4 50.6II C Light Intermediates 1.29 2.97 45.4 96.7II D Basic Intermediates 2.90 5.98 172.2 268.4II E Machinery 1.38 1.32 34.8 47.7III Social Overhead 2.48 3.96 91.4 150.2IV Services 3/ 2.53 2.65 52.3 63.9TOTAL II A to II E 1.92 2.83 71.0 103.9TOTAL I B to IV 2.45 3.29 66.1 92.3

1/ All monetary values are measured at constant 1968 domestic prices. ICORand ICLR denote incremental capital-output and capital-labor ratios,respectively. Output is real value added in producer prices. The unit ofICLR is thousand TL per worker.

2/ 1962-64, 1967-69 and 1972-74 averages have been used for 1963, 1968 and1973 output figures in the estimation of agricultural ICOR to smooth outthe effects of fluctuating weather conditions.

3/ Unspecified labor has been excluded in the estimation of ICLR forservices.

Sources: Data base of the sources of growth models, and investment data ofthe SPO Annual Programs

D. Sources of Changes in Relative Sectoral Prices

Relative price movements have not received sufficient attention in

the available empirical research on the Turkish economy.l/ The prolonged

protection of domestic industries discouraged active interest in the movements

of real incentives, product price differentials and relative factor prices

until the economic crisis emerged in the late 1970s. This analysis attempts

1/ The two notable exceptions are the empirical contributions of Krueger(1974) and Dervis and Robinson (1978). While Krueger (1974) provides fullydocumented estimates for the movements of effective exchange rates for awide range of commodities in 1950-70, Dervis and Robinson (1978) decomposethe factors that contributed to the drift in equilibrium exchange rates in1973-78.

- 81 -

to distinguish the causes of differential change in domestic product prices at

the 25 sector level during 1963-73.

The framework of analysis is an input-output price model adapted

from more general methodology developed by Watanabe (1975) for the analysis of

price changes in Japan. In the tradition of the CSW models, the price analysis

takes a norm growth rate for the price increases, calculates deviations of the

observed sectoral prices from the norm price path, and finally attributes

these deviations to changes in: (1) the input-output structure; (2) labor

productivity; (3) real wages; and (4) residual factors, such as rents, profits

and indirect taxes (see Appendix 1.G). If capital stock and profit data were

available, a more disaggregated analysis of the residual factors would be

possible.

For Turkey's price model, the rate of increase in the GDP deflator

has been adopted as the norm growth rate for sectoral producer prices in 1963-

68 and 1968-73. Table 4.8 presents the combined results for 1963-73. In

order to circumvent the complex problem of imputing wages to workers having

non-employee status, the price model was solved by using data on sectoral

employment and wages for those having employee status. Consequently, the

residual factors incorporated the earnings of self-employed workers, which

were particularly important in the agriculture, livestock, trade and other

services sectors.

Movements in product prices during 1963-73 were dominated by the

more pronounced price changes in 1968-73, which somewhat shifted the domestic

terms of trade in favor of the agriculture and livestock sectors. The price

rises in agriculture partly reflected the effect of the general rise in the

world prices of primary commodities in 1972-73. They were also due to

agricultural price policies which were less restrictive after 1968. The

- 82 -

upward trend in real agricultural prices decelerated in 1973-78, and was

eventually reversed in 1978-80 by the sharper rise of nonagricultural product

prices (especially in the energy and chemicals sectors), according to the new

Wholesale Price Index (of the Ministry of Commerce).

Table 4.8 shows that prices in wood products (including furniture),

basic metals, machinery, transport equipment and services (except trade and

dwellings) had also increased at a faster rate than the general price level,

while prices in mining and most manufacturing industries showed a relative

decline. In sectors with positive price deviations (except basic metals and

machinery), positive signs for deviations for residual value added components

(including profits) resulted. The most pronounced were in livestock, wood

products, transport equipment and other service sectors (which include

commercial banks and other financial institutions).

Moreover, the decomposition of price changes indicates two

additional factors in price formation. First, the positive price deviations

caused by wage increases were offset in varying proportions by labor

productivity gains in all sectors (except public services). The principal

sectors in which labor productivity gains could not adequately compensate for

wage increases were electricity, coal mining and basic metals, in which the

shares of state enterprises in total production were predominant. Second,

changes in input-output coefficients produced positive deviations in sectoral

prices, with few exceptions. This means that technological change, which was

shown to be a significant source of structural change in output (see Chapter

3), tended to exert upward pressure on the real cost of production in most

manufacturing subsectors, with pronounced effects in machinery and related

branches.

- 83 -

Table 4.8

Sources of Changes in the Price Structure, 1963-1973 1/

Due to Changes in:Total Due to

Deviation I-0 Labor Deviationsin Price Structure Productivity in Wage Residuals

Primary

1. Agriculture 0.062 0.002 -0.035 0.050 0.0452. Livestock 0.480 -0.295 -0.014 0.028 0.7603. Crude Oil -0.205 0.057 -0.200 0.081 -0.1424. Coal -0.239 -0.238 -0.525 0.741 -0.2175. Other Mining -0.270 0.380 -0.404 0.163 -0.409

Manufacturing

6. Food -0.032 -0.033 -0.056 0.087 -0.0317. Textiles -0.328 0.187 -0.202 0.217 -0.5308. Wood Prod. 0.453 0.124 -0.253 0.071 0.5109. Paper, Publishing -0.653 -0.042 -0.504 0.206 -0.31310. Leather -0.263 -0.298 -0.037 0.066 0.00611. Rubber, Plastics -0.612 0.196 -0.056 0.148 -0.90112. Chemicals -0.500 -0.058 -0.172 0.148 -0.41713. Petrol.Prod. -0.365 0.181 -0.038 0.021 -0.52914. Non-Met.Min. -0.343 0.232 -0.299 0.303 -0.57915. Basic Metals 0.135 0.552 -0.065 0.220 -0.57116. Met.Prod. -0.296 0.316 -0.168 -0.010 -0.43417. Machinery 0.248 0.449 -0.180 0.164 -0.18418. Transport Eq. 0.268 0.218 -0.242 0.107 0.185

Social Overhead

19. Electricity 0.055 0.075 -0.399 0.526 -0.14720. Construction -0.001 0.136 -0.089 0.098 -0.14521. Transport -0.411 -0.093 -0.241 0.193 -0.270

Services

22. Trade -0.101 -0.023 -0.052 0.007 -0.03223. Other Serv. 0.088 0.144 -0.414 0.213 0.14524. Public Serv. 0.613 - 0.339 0.144 0.13025. Dwellings -0.113 0.058 -0.020 0.014 -0.165

1/ The ratio of the general price level (GDP deflator) in the two periods is2.43.

Source: Numerical solution of the input-output price model discussed in thetext.

- 84 -

Table 4.9

Sectoral Wage Rates (Current), 1963-73 1/

1963 1968 1973--- --- (1,000 TL/Yea r) -

Primary1. Agriculture 1.79 2.82 5.752. Livestock 3.26 4.09 7.863. Crude Oil 10.22 18.80 32.384. Coal 8.17 15.03 31.985. Other Mining 6.29 9.92 17.62

Manufacturing6. Food 5.68 9.92 17.837. Textiles 5.71 9.04 21.028. Wood Prod. 5.66 6.52 14.649. Paper Publishing 8.88 13.16 25.9410. Leather 7.22 9.97 18.9011. Rubber, Plastics 4.84 11.47 22.8012. Chemicals 8.31 13.11 26.2613. Petrol. Prod. 17.70 20.43 47.0814. Non-Met.Min. 5.76 9.87 21.9015. Basic Metals 9.70 16.22 39.9416. Net.Prod. 7.08 10.74 18.4817. Machinery 7.41 11.19 25.1518. Transport Equip. 7.24 12.09 18.62

Social Overhead19. Electricity, Gas,etc. 5.51 9.18 29.0020. Construction 4.15 6.56 10.9021. Transportation 7.22 12.26 25.40

Services22. Trade 8.35 10.86 18.3823. Other Serv. 6.21 9.32 19.6424. Public Serv. 17.40 20.39 45.7025. Dwellings - - -

1/ Compensation per "employee" (see footnote 1, Table 4.2), including socialsecurity premia paid by the employers if covered by the Social SecurityOrganization.

Sources: Ecevit and Ozotun (1974) employment and wage data for 1968-72adjusted for sector reclassification and extended to 1963 and 1973 on thebasis of the 1963 and 1970 Manufacturing Censuses and Annual ManufacturingSurvey Data of SIS.1973 estimates draw upon 1973 I-0 table figures for compensation ofemployees.For wage increases in major sectors in 1960-70, see Zaim (1974), Table 39.

- 85 -

Table 4.10

Index of Intersectoral Wage Differentials, 1963-73 1/

1963 1968 1973

Primary1. Agriculture 28 27 282. Livestock, Fishing 50 39 383. Crude Oil 158 180 1554. Coal 126 144 1535. Other Mining 97 95 84

Manufacturing6. Food 88 95 867. Textile 88 86 1018. Wood Prod. 88 62 709. Paper,Publishing 137 126 12410. Leather 112 95 9111. Rubber, Plastics 75 110 10912. Chemicals 129 125 12613. Petrol Prod. 274 195 22614. Non-Met. Min. 89 94 10515. Basic Metals 150 155 1-9216. Met. Prod. 110 103 8917. Machinery 115 107 12118. Transport Equip. 112 115 89

Social Overhead19. Electricity,, Gas, etc. 85 88 13920. Constructioni 64 63 5221. Transport 112 117 122

Services22. Trade 129 104 8823. Other Serv. 96 89 9424. Public Serv. 269 195 21925. Dwellings -- -

1/ The average wage rate (weighted by number of sectoral employees) inmanufacturing is taken as 100 at each benchmark year. The estimates for(current) average wage rates in manufacturing are as follows:

1963: 6,460 TL/year (per "employee"; see footnote 1, Table 4.2)1968: 10,470 TL/year1973: 20,840 TL/year

Source: Table 4.9

- 86 -

Furthermore, the price changes due to deviations in wages largely

reflect the shifts in intersectoral wage differentials over time. As

reflected in Tables 4.9 and 4.10, manufacturing wages have increased

significantly in 1963-73 relative to wages in construction, other mining,

public services, trade and other services. This is partly the result of the

growing influence of labor unions in wage determination under the umbrella of

restrictive trade policies pursued in the 1960s. Within the manufacturing

sector proper, wage differentials among the subsectors remained large

throughout the period. The overall pattern was that the wages in labor-

intensive branches (e.g., food, textiles, wood products, plastics, leather and

non-metallics) generally lagged behind the wages in capital-intensive ones

(e.g., petroleum products, basic metals, chemicals). The wage differentials

within manufacturing were in varying degrees due to differences in relative

factor intensities, labor skills, levels of protection, unionization and

degree of monopoly power in the domestic markets.1/ In addition, the

manufacturing subsectors which lagged behind the others in relative wage

levels were also the ones which experienced significant effects of export

expansion on their growth. (See Table 3.9.)

In the transition towards more trade-oriented growth in Turkey, the

gradually reduced levels of protection and incentives for domestic market-

oriented industries will generate important shifts in sectoral prices,

relative wages and profits. Thus, the type of price analysis presented here

merits continuing research in the future with an extended data base covering

sectoral capital stocks and profit ratios.

1/ A regression study by Aksoy (1980) finds statistically significant effectsof unionization on relative wages in Turkish manufacturing during 1963-71.

- 87 -

E. Domestic Price Distortions, Labor Reallocation and Value Added Growth Rates

An appraisal of employment changes in Turkey would be incomplete

without considering the impact of labor reallocation on the overall growth

process. Viewed from the supply side, the movement of labor from low

productivity agriculture to high productivity nonagricultural sectors has been

an important source of value added growth in the country. The sectoral

reallocation of labor itl Turkey has been particularly significant because of

the unusually large differences between the productivity levels of the

agricultural and nonagricultural sectors. The cross-country average for the

ratio of value added per labor unit in nonagricultural sectors to that in

agriculture is estimated as 2.37 in Kuznets (1969), while the actual Turkish

data shows the ratio to be 4 to 5 in 1953-78.

The deviations of Turkey's sectoral productivity differentials from

Kuznets' cross-country norms are substantial, and are usually attributed to

domestic price distortions arising from the protection-cum-subsidy system.

Although the low crop yields observed in cereal farming may partly account for

the depressed levels of labor productivity in Turkish agriculture, overvalued

factor returns and incomes in nonagricultural sectors have been indicated by

unusually large sectoral productivity differentials in the past.

Some of the broad policy issues connected with overvalued non-

agricultural incomes in Turkey were first addressed by Hatiboglu (1978) in an

an attempt to estimate the proportion of the "rent element' in non-

agricultural value added. Hatiboglu deducts the following from the actual

value added created by newly employed workers in non agricultural sectors: (1)

the hypothetical (or normal) payments to capital and (2) the amount of value

added if these workers were employed in agriculture. This approach entails

numerous measurement difficulties, but it can be used to calculate reasonable

- 88 -

estimates for the overstated part of intersectoral productivity differences

over time.

In a more recent analysis of the Turkish economy by Balassa (1979),

estimates are also derived for the effects of labor reallocation and relative

price distortions on overall labor productivity growth (referred to as overall

productivity growth or OPG) during 1967-77. Balassa calculates the

hypothetical rate (2.7 percent a year) of OPG based on the assumption of the

constant sectoral composition of the labor force between 1967 and 1977, and

compares it to the actual rate (4.9 percent a year) of OPG. He attributes the

difference (2.2 percent a year) to the impact of labor reallocation (among

agriculture, industry and services) under the unadjusted relative prices of

this period. The effect of relative price distortions on OPG is estimated by

recalculating the sectoral composition of Turkish aggregate value added in

1967 in terms of price-corrected productivity differentials, and by applying

actual rates of sectoral labor productivity growth to the adjusted base-year

figures in 1967-77. With the base-year productivity figures adjusted

according to Kuznets' cross-country standards, the results indicate a 4.1

percent increase in OPG annually as compared to the actual rate of 4.9

percent.i'

In the context of this study, which has focused on demand-related

determinants of growth and structural change, the effects of domestic price

distortions and labor reallocation on value added growth rates are of further

interest for the following three reasons; (1) to determine whether the effects

1/ The estimated rates of increase in total employment in 1967-77 are 21.8and 11.2 percent in Balassa (1979) and the official Fourth Plan (SPO1979), respectively. The data base of the present study indicates a 10.7percent rise in total employment between our benchmark years 1968 and1978.

- 89 -

of price distortions on aggregate growth closely match the time pattern of

import substitution effects estimated in the decomposition of output changes;

(2) to determine the relative sizes of labor reallocation and price distortion

effects in the growth process in order to develop a realistic perspective on

the potential sources of future trade-oriented income growth as rates of

protection for nonagricultural activities decline; and (3) to reassess the

effects of price distortions on value added growth in reference to the cross-

country norms estimatedl for Turkey in Chapter 2. Based on the regressions of

Chenery and Syrquin (1975), these norms allow for shifts in population and

income level over time., Furthermore, they reflect the more recent experience

of a larger number of countries, as compared to the average patterns estimated

in Kuznets (1969) on the basis of less information.

The relative effects of labor reallocation and price distortions on

the growth of overall labor productivity and gross domestic product (GDP) in

19 53-78 have been estimated by employing the general approach used in Balassa

(1979). Because separate sectoral estimates for agriculture are not available

in the Chenery-Syrquin regressions, the economy has been broken down into

primary (i.e., agriculture and mining) and non-primary sectors, with all

relevant figures arranged accordingly .1 As a point of departure in the

analysis, the following estimates have been derived for the labor productivity

ratios in non-primary and primary comparisons at given points in time during

1953-78:

1/ The share of mining in primary value added was on the average less than 5percent in 1953-73. Hence, the conclusions drawn for the primary sectorpertain essentially to agriculture in the Turkish context.

- 90 -

1953 1963 1968 1973 1978

Predicted 1/ 2.52 2.69 2.73 2.76 2.77

Actual 2/ 4.31 5.32 4.73 4.86 4.53

Value added growth is expressed as a product of employment growth

and labor productivity growth under three different sets of assumptions

(referred to as Cases I,II and III). In each case, the growth of total

employment and the sectoral growth of labor productivity are the actual rates

for a given period. In Cases I and II, the base year GDP is given, but its

sectoral breakdown is adjusted in order to produce the norm productivity

differential estimated from the Chenery-Syrquin cross-country patterns. In

Case I, the sectoral composition of employment is assumed to remain constant

between the endpoints of each subperiod, while in Case II the sectoral

employment growth rates are the same as the actual rates. Because Case III

represents the actual situation, there is no adjustment in the observed

figures.

The results of the calculations for each subperiod are presented in

index form in Table 4.11. The estimates derived for the growth rates of

overall labor productivity and GDP provide a basis to separate the relative

effects of labor reallocation and price distortions in the observed growth

process. In terms of compound annual growth rates (in annual percentage),

overall labor productivity growth (OPG) can be expressed (in rounded figures)

as follows:

1/ The predicted productivity ratios have been estimated from the cross-country norms for the shares of the primary and non-primary sectors intotal employment and value added, as reported in Chapter 2 (Tables 2.1 and2).

2/ See footnote 1 on Table 4.11 for employment and value added figures.

- 91 -

1953-63 p63-68 p68-73 p73-78

Case I : Price-adjusted OPG 2.9 2.1 3.3 4.8(without labor reallocation)

Case II : Price-adjusted OPG 3.1 3.8 4.5 5.7(with labor reallocation)

Case III: Actual OPG 3.6 4.7 5.1 5.9Effect of labor reallocation(Case I-Case II) 0.2 1.7 1.2 0.9Effect of price distortion(Case III-Case II) 0.5 0.9 0.6 0.2

The above estimates show that the impact of labor reallocation on

price-adjusted OPG was very low in 1953-63, but increased sharply in 1963-68.

This reflects the most rapid expansion of non-primary employment in this

subperiod, due to slow, labor productivity growth in the non-primary sector.

In 1968-73 and 1973-78, the relative proportion of the reallocation effect in

OPG steadily declined. This was due to a less pronounced rise in non-primary

employment, as well as to strong labor productivity growth in the primary

sector during the last subperiod. The effects of price distortions over time

roughly follow the pattern of labor reallocation effects, although they show a

sharp decline in 1973-78.

GDP (total value added) has been decomposed according to the effects

of the following four factors: (1) total employment; (2) price-adjusted OPG

(excluding the impact of labor reallocation); (3) improvement in price-

adjusted OPG due to labor reallocation; and (4) price distortions. The

relative shares of these four effects in GDP growth have been calculated by

the logarithmic decomposition scheme. Table 4.12 shows the percentages for

the subperiods and the chained results for 1953-78.

Because the employment series is statistically unreliable, the

estimated sizes of the relative contributions of labor reallocation and price

distortions to the growth of GDP are subject to certain margins of error.

Table 4.11

Index of the Increase in Gross Domestic Product (GDP) Under Variant Cases, 1953-78 i

Labor Input Labor Productivity Value AddedNon- Non- Non-

Primary primary Total Primary primary Total Primary primary Total

1953-63Case I 113.7 113.7 113.7 121.6 150.1 132.9 138.2 170.6 151.1Case II 111.3 122.7 113.7 121.6 150.1 136.2 135.!4 184.2 154.8Case III 111.3 122.7 113.7 121.6 150.1 141.9 135.4 184.2 161.3

1963-68Case I 106.9 106.9 106.9 116.9 103.9 111.2 125.0 111.1 118.9Case II 96.3 143.6 106.9 116.9 103.9 120.3 112.6 149.2 128.6Case III 96.3 143.6 106.9 116.9 103.9 126.1 112.6 149.2 134.8



1/ Indices are computed for each period by taking the earlier year as the basis (- 100). Actual valueadded data for the benchmark years 1953, 1963, 1968, 1973 and 1978 refer respectively, to the1952-54, 1962-64, 1967-69, 1972-74 and 1977-79 annual averages calculated from the SIS nationalincome series. Value added figures are measured in constant 1968 prices (at factor cost). Thesectoral labor figures come from the data base of the present study, and cover all persons engaged(including unspecified labor in services). The variant cases are designated as follows:

Case I: Norm productivity differential in the base year; unchanged sectoral composition of laborduring the period.

Case II: Norm productivity differential in the base year; and observed labor reallocation during theperiod.

Case III: Actual data.

- 93 -

Table 4.12

Effects of Labor Reallocation and Domestic Price Distortionson Observed GDP Growth Rates, 1953-78 1_

ChainedResults

1953-63 1963-68 1968-73 1973-78 1953-78

Percentage of Observed GDP Growth Attributed to:

A. Total Employment 26.8 22.3 19.6 12.2 20.9B. Price-adjusted Overall 59.5 35.7 51.4 71.8 55.4

Productivity Growth(excluding ReallocationEffect)

C. Improvement in Price- 5.1 26.3 18.5 12.3 13.7adjusted Overallproductivity Growth(due to LaborReallocation)

Subtotal (- A+B+C) (91.4) (84.3) (89.5) (96.3) (90.0)

D. Domestic Price 8.6 15.7 10.5 3.7 10.0Distortions

TOTAL 100.0 100.0 100.0 100.0 100.0

1/ The percentage contributions have been calculated by the logarithmicdecomposition scheme.

Source: Growth indices in Table 4.11.

However, the interperiod variations in the effects of these two factors are

significant, and are unlikely to change if employment figures are modified.

As expected, the overstatement of the observed GDP growth rate due to

distortions in relative prices was most pronounced in 1963-68. The relative

contribution of import substitution to the growth of output was also highest

during this time, as noted in Chapter 3±'

1/ See the first difference measures in Tables 3.5a and 3.6. In Krueger(1974), the annual rate of growth of manufacturing value added during1967-72 was estimated as 11.1 and 10.3 in domestic and world prices,respectively.

- 94 -

The relative size of the price distortion effect somewhat declined

in 1968-73, when a semi-open trade strategy was pursued and agricultural

prices were allowed to increase faster than the general price level. The

latter trend continued in 1973-78. Because of the government's subsidy

policies, the terms of trade for agriculture did not deteriorate despite the

sharp rise in world fertilizer prices. Rapid reserve decumulation and heavy

borrowing led to the continued real increase of imports in 1973-77, and caused

a further decline in the premium of industrial imports until the emergence of

payments difficulties in mid-1977.

The relative impact of labor reallocation on observed GDP growth was

also substantial in 1963-68. It shows a time pattern that approximates

(although at different orders of magnitude) the interperiod differences in the

effect of price distortions in 1963-78. However, the trends indicated by

calculation of the Chenery-Syrquin cross-country norms for labor use suggest

that a further restructuring of the labor force is very likely in the future

transitional process. (See Table 2.2.) Consequently, the reallocation of

labor should be expected to continue having an impact (albeit more moderate)

on the future growth of GDP, even after relative price distortions disappear.

The chained results for the entire period, when Turkey's real GDP

increased over four-fold, suggest that approximately 10 percent of the growth

is overstated because of the effect of domestic price distortions, which are

measured in terms of deviations from the intersectoral productivity

differentials inferred from the cross-country structural norms of Chenery and

Syrquin (1975).l/ The estimated price distortion effect on observed GDP

growth is very significant, and suggests that overvalued factor returns and

1/ The chained estimates for the cumulative effects of price distortions onGDP growth are 11.8 and 14.3 percent in 1953-73 and 1963-73, respectively.

- 95 -

incomes exist in the non-primary part of the economy. As a result, the

gradual removal of domestic price distortions and the transition toward trade-

oriented growth imply a slowdown in the rise of average real incomes of non-

primary producers and workers in the adjustment period."1 Given the low

savings propensities of income groups in the primary sector, the changes in

the structure of real incomes could have serious consequences not only for

income distribution, but also for the processes of resources mobilization.

Finally, the downward trend in the relative contribution of

employment to overall value added growth in 1953-78 (as shown in Table 4.12)

indicates the scope and need for larger employment effects in the growth

process of the 1980s. Because of the growing labor surplus in the country,

the generation of productive employment in an increasingly less protected and

more outward-oriented economy will clearly require more attention in policy

planning and project studies.

1/ The length of the adjustment period may be shortened by a vigorous driveto accelerate total factor productivity growth In the economy.

- 96 -

5. STRUCTURAL CHANGE IN THE MANUFACTURING SECTOR

This section provides a closer look at the structural transformation

of Turkish manufacturing compared with the cross-country average patterns in

1953-78, and public and private shares in 1953-73. In addition, the

interindustry pattern of protection that prevailed in the late 1960s is

briefly discussed. Chapter 5 complements the sources of growth analysis, and

serves as a background for the discussion of the basic causes of limited trade

effects in Turkish industrialization in Chapter 6.

A. Actual and Predicted Patterns in Manufacturing Output

As discussed in Chapter 2, the comparison of Turkey's observed

structural characteristics with those predicted for a country of its size and

income level reveals that the actual shares of industrial output, exports and

employment in their respective totals generally lag behind the cross-country

norms, although a substantial catching-up effort took place in 1963-78.

Table 5.1 contrasts Turkey's manufacturing structure with the large

country (L) patterns predicted by the cross-country regressions of Chenery and

Taylor (1968). The latter study shows that the manufacturing development

pattern for large countries (with populations above 15 million) is primarily

determined by the changing composition of domestic demand with rising income,

and that the effects of trade differences are relatively unimportant. The

individual industries are then described as "early," "middle" or 'late" on the

basis of the timing of their essential growth in the process of

industrialization. In the Chenery-Taylor cross-section patterns for large

countries, "early" industries (such as food and textiles) contribute the most

to growth when an economy's per capita income level is below $ 200; while

"middle" industries (such as chemicals, petroleum refining, non-metallic

- 97 -

minerals, rubber and wood products) contribute about 40 percent of the

increase in industrial share at levels between $ 100 and $ 400 (in constant

1960 U.S. dollars). "Late" industries (such as basic metals, machinery, paper

and printing) mainly have an impact above the $ 300 level, which Chenery-

Taylor consider the mid-point in the industrialization process. In the

calculation of the predicted shares for Turkey, per capita income levels for

the benchmark years 1953, 1963, 1973 and 1978 have been estimated as $ 176, $

216, $ 318 and $ 382, respectively, in 1960 U.S. dollars.L/

The non-uniform deviation of domestic prices from world prices in

various Turkish manufacturing industries may effect the comparison of actual

and predicted shares. The comparatively larger domestic world price

differentials in metal fabricating and intermediate goods production probably

lead to an overstatement of the transition from light to heavy industries in

Turkey. (See, e.g., the nominal and effective rates of protection estimated

for 1968 in Table 4.4.) Consequently, the changes observed in actual shares

(based on value added figures measured in current producer prices) should be

interpreted broadly in qualitative terms.2/

1/ The Chenery and Taylor regression equations for subsector shares have thefollowing form:Xi - a + B1 ln Y + 02(ln y) + ylnN + celn ep + e2ln cmwhere Xi - value added per capita in sector;

y - per capita GNP (in 1960 dollars) at factor costN - population in millionsep- share of primary exports in GNPem share of manufactured exports in GNP

Remarks: (i) e and em are predicted values from the large countryregressions; and a, Pl, 02* Y, el and e2 are estimated coefficients.

(ii) The vaLues of y are initially estimated in 1964 dollars(see footnote 2, Chapter 2; and Table 1.1), and subsequently switched to 1960dollars using the US Wholesale Price Index.

2/ The actual value added shares expressed in terms of current douesticfactor cost result in somewhat smaller shares for basic and lightintermediates, and larger shares for machinery and related industries.

- 98 -

According to Table 5.1, in 1953 Turkey lagged substantially behind

the cross-country norms in all intermediate goods industries, while exceeding

the norms in food, textile, and machinery and allied industries. In 1963, the

actual shares of textiles, basic intermediates and machinery sectors were

comparable to the typical large country averages, with food processing

surpassing the norms and light intermediates (particularly wood and paper

products) falling markedly below the predicted proportions. The observed

transition from 1963 to 1973 is more striking, with a pronounced fall in the

share of food processing; a significant rise in the share of machinery and

transport equipment industries; and gradual improvements in the shares of the

light and basic intermediate goods industries.

The establishment of new branches specializing in consumer durables

production (including passenger cars) is the main factor behind the

particularly large share of industries grouped under the heading of machinery

production in 1973 and 1978. The latter were basically in the form of assembly

operations heavily dependent on the imports of parts and components at

concessional tariffs. However, their final products were strongly protected

by high tariff walls and quantitative restrictions. The actual shares in 1978

were strongly affected by the cyclical position of the economy, which was

weakened by severe shortages of oil and non-oil imports and output disruptions

in the chemicals and petroleum refining subsectors.

Using the cross-country framework developed by Chenery and Taylor

(1968) as a basis, the characteristics of the transformation of Turkish

manufacturing in 1953-78 may be summarized as follows:

(1) The transition within Turkish manufacturing closely follows the

structural pattern predicted for a country of Turkey's size and income level

in 1953-73. Primarily in response to the changing composition of domestic

- 99 -

demand as income levels rose, the structure of manufacturing output shifted to

'middle" and "late" industries as predicted by the relevant cross-country

regressions. Changes in input-output relations tended to reinforce the

effects of domestic final demand on Turkish industrialization according to the

typical large country pattern.

(2) Despite the rapid decline in the relative share of food

processing after 1963, the actual share of this industry has been somewhat

higher than its predicted share in 1963-78. This situation partly reflects

the export expansion effects on the growth of food processing, as described

for later periods in the previous section. In turn, a comparison of the

actual and predicted shares of the textiles and leather industry shows that

export effects have not been sufficient to change its relative position in the

manufacturing structure of a large country such as Turkey.

(3) Although the rapid increases in the actual shares of "late"

industries such as basic metals, machinery and transport equipment are partly

due to the effects of domestic price distortions, they also indicate very high

income elasticities in these industries (more than 2, as shown in Section 3.E,

compared to the cross-section pool elasticity of 1.75 in Chenery and Taylor

(1968, footnote 37)). As a result, the moderation of domestic final demand

growth in the 1980s plusi the gradual removal of price distortions may reduce

the shares of these industries in the immediate future. Whether such

reductions can be offset by export expansion cannot be determined on the basis

of our interindustry data, and needs to be analyzed in a more disaggregated

framework.

(4) Finally, the comparison of the actual and predicted shares of

certain "middle" industries, such as petroleum refining and non-metallic

products, shows a considerable catching-up effort with the cross-country norms

Table 5.1

Actual and Predicted Shares in Manufacturing Value Added,1953-78

Actual -7 Predicted

1953 1963 1973 1978 1953 1963 1973 1978

- - - - - - - - - - - - - -(Percent)…- - - - - - - - - - - - -

A. Food 34.0 30.1 21.6 20.0 32.1 25.8 18.4 16.0

B. Textiles & Leather 31.1 23.9 20.0 15.5 21.7 22.1 22.2 20.8

C. Light IntermediatesWood Products 3.3 2.5 3.7 - 5.9 5.9 6.0 6.0

Paper and Printing 3.1 2.8 3.7 -- 6.5 7.1 8.0 8.3

Rubber and PlasticProducts 2.0 2.2 2.4 - 3.1 3.1 3.0 2.8

Total (C) 8.4 7.5 9.8 12.5 15.5 16.1 17.0 17.1

D. Basic IntermediatesChemicals 5.9 4.3 5.6 -

Petroleum Prod. 0.3 9.6 7.6 __ 11.0 11.7 12.1 12.2

Non-Metallic Prod. 3.8 5.4 5.3 - 5.5 6.1 6.6 6.7

Basic Metals 4.8 6.6 8.6 -- 4.5 6.1 8.4 9.4

Total (D) 14.8 25.9 27.1 22.0 21.0 23.9 27.1 28.3

E. MachineryMetal Products 6.1 5.9 5.0 -- -- -- -- -

Machinery 1.4 4.9 7.9 -- -- -- -- --

Transport Equip. 4.2 1.8 8.6 - -- -- -- -

Total (E) 11.7 12.6 21.5 30.0 9.7 12d1 15.2 16.9

TOTAL Manufacturing 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

1/ Current producer prices.

2/ Predicted values from "A" regressions (Large), Chenery-Taylor (1953-68).

Sources: Ecevit and Ozotun (1974) for 1953 data (adjusted for reclassification of ISIC

sector 39).1963 and 1973 I-0 Tables for 1963 and 1973 data.

Celasun (1981) for 1978 data.

- 101 -

in 1953-63, but relatively more moderate expansion after 1963. However, the

comparative figures in Table 5.1 also indicate that significant time lags

occurred in the introduction and/or expansion of other "middle' industries,

such as paper, printing and rubber products. The relatively small proportions

of output in total manufacturing for a number of "middle" industries poses a

resource allocation problem, as a result of the highly capital-intensive

nature of their fixed investments (illustrated by Table 4.7). Yet, despite

their rapidly expanded shares in manufacturing fixed investment, basic

intermediate industries have contributed inadequately to import substitution

and employment creation, as shown in Chapters 3 and 4. These two related

problems are briefly considered below in terms of public and private sector

shares.

B. Patterns of Public and Private Sector Shares in Turkish Manufacturing

In Turkey's recent economic history, public enterprises have played

a significant role in the growth and structural change of the manufacturing

sector. Established in the 1930s as a temporary institutional vehicle for

industrial growth, the public enterprise sector has, nevertheless, become

firmly entrenched in the national economy, and it serves a variety of economic

and non-economic objectives pursued by the government. As analyzed in detail

elsewhere (Walstedt, 1980), because public and private enterprises in Turkish

manufacturing have never been sufficiently integrated under common rules of

pricing and allocation in the factor and product markets, there is a deeply

rooted dualism in the country's industrial development.

Tables 5.2 and 5.3 present the estimated relative shares of the

public and private sectors in manufacturing value added and investments,

respectively, at approximately the same level of disaggregation discussed in

Table 5.2

Public and Private Sector Shares in Manufacturing Value Added,

1953-72AL/

1953 1963 1972

Public Private Public Private Public Private

Large Small Large Small Large Small

- - - - - - - - - - - - - - - - - (Percent) - - - - - - - - - - - - - - - - -

A. Food 58.0 24.1 17.9 56.3 26.4 17.3 59.3 26.5 14.2

B. Textiles & Leather 41.4 38.1 20.5 19.5 51.0 29.5 15.5 57.6 26.9

C. Light IntermediatesWood Products 10.0 16.7 73.3 16.8 15.0 68.2 11.2 18.5 70.3

Paper 85.4 4.5 10.1 87.2 5.3 7.5 80.8 14.9 4.3

Printing 9.4 55.1 35.5 8.6 62.6 28.8 10.4 66.1 23.5

Rubber - 94.4 5.6 - 86.7 13.3 -- 89.5 10.5

Total (C) 22.0 37.4 40.6 31.9 29.2 38.9 29.0 37.3 33.7

D. Basic IntermediatesChemicals 8.8 64.5 26.7 30.2 61.3 8.5 29.6 66.6 3.8

Petroleum Prod. 100.0 -- -- 35.7 64.3 -- 49.1 50.9 --

Non-Metallic Prod. 13.3 60.5 26.2 26.9 55.5 17.6 21.3 63.9 14.8

Basic Metals 95.0 5.0 -- 87.2 12.8 -- 82.2 17.8 --

Total (D) 40.3 42.5 17.2 43.9 49.9 6.2 50.9 46.0 3.1

E. MachineryMetal Products 30.8 19.6 49.6 12.8 40.2 47.0 8.6 47.5 43.9

Machinery 12.6 23.3 64.1 11.2 67.2 21.6 9.7 72.4 17.9

Transport Equipment 76.1 3.3 20.6 42.9 19.6 37.5 34.4 42.2 23.4

Total (E) 44.8 14.2 41.0 19.5 42.7 37.8 18.7 53.5 27.8

TOTAL Manufacturing 45.4 31.1 23.5 34.8 40.7 24.5 36.6 44.9 18.5

1/ Shares computed in current producer prices; "small private" includes rural and/or private small

firms with less than 10 workers.

Source: Ecevit and Ozotun (1974), adjusted for modifications in sector classification.

Table 5.3

Structure of Manufacturing Fixed Investments, 1963-83

Relative Share of PublicInvestments in Individual

Manufacturing Fixed Investments/' Subsectors (Actual)

1963-67 1968-72 1973-77 1979-83 1963-67 1968-72(First Plan) (Second Plan) (Third Plan) (Fourth Plan) (First Plan) (Second Plan)- - - - - - - - - - - - - - - - - - - - (Percent) - - - - - - - - - - - - - - - - - -

A. Food 11.5 8.8 12.4 7.0 46.1 36.0

B. Textiles & Leather 14.3 8=9 15.2 7.0 16.8 14.8

C. Light IntermediatesWood Products 1.3 1.8 1.7 1.6 30.8 31.7Paper and Printing 3.9 7.7 4.5 6.7 53.8 67.4Rubber & Plastic Prod. 4.2 1.6 2.5 1.2 -- --Total (C) 9.4 11.1 18.7 9.5 26.6 52.0

D. Basic IntermediatesChemicals 11.7 15.8 14.1 17.3 38.65Petroleum Prod. 9.1 8.6 9.0 3.8 97.81 6 I62Non-Metallic Prod. 10.2 8.7 7.5 7.3 52.9 J19.8Basic Metals 21.1 23.7 19.9 32.3 77.7/2 64.6/2Total (D) 52.1 56.8 50.5 60.7 67.6 56.7

E. MachineryMetal Products 4.7 2.8 2.3 3.5 14.9 9.3Machinery 4.3 6.4 6.5 8.9 23.2 8.3Transport Equipment 3.5 5.1 4.4 3.4 14.2 14.7Total (E) 12.5 14.3 13.2 15.8 17.6 10.8

TOTAL Manufacturing 100.00 100.0 100.0 100.0of which Public .4 48.0 44.0 46.4 46.1of which Private 52.0 46.0 53.6 53.9

1/ The figures for the first three plans are based on estimated actual data, while the Fourth Plan figuresrepresent official projections. The share of manufacturing in (economy-wide) total fixed investmentswas 20.4, 26.7 and 28.2 percent in the First, Second and Third Plans, respectively. Investmentdistribution is computed at constant prices.2/ Includes Erdemir (steel complex) investments.

Source: SPO Five-Year Plans and Annual Programs, adjusted for modifications in sector classification.

- 104 -

Chapter 3_1/

The most significant trends in the evolving patterns of public and

private ownership in manufacturing are the following:2/

(1) From 1953-63, the private share in total manufacturing value

added increased sharply due to the rapid expansion of private output in

textiles, machinery (particularly metal products, agricultural equipment and

vehicle assembly), petroleum products (mainly due to foreign private capital)

and, to a minor extent, in the basic metals industry. Within the machinery

group, the expansion of the relative share of large companies was very

significant. In chemicals (e.g., pharmaceuticals) and non-metallics, a shift

from small to larger firms was also apparent, while the private shares

declined. Public shares increased in chemicals, non-metallics (e.g., cement),

sugar (in food processing), and wood products, but decreased substantially in

textiles and machinery.

Both the disaggregated estimates of the sources of growth (shown in

Table 3.9) and the share figures indicate that the growth of the private

manufacturing industry in 1953-63 was very rapid, and that it benefited from

the contributions of import substitution in the machinery, textiles and rubber

products branches. During this time, an urban entrepreneurial class emerged,

and it played an increasing active political as well as economic role in the

1/ Because of the numerous organizational forms for public enterprises, andtheir extensive participation in the private sector, there are no fixedrules to partition industrial output between private and public shares.While Table 5.2 adheres to the practice of the SIS in reporting sectoralshares, Table 5.3 uses the SPO data sources, adjusted for consistency withTable 5.2 in the treatment of the basic metals subsector. (The Erdemirsteel complex is included in the public sector, although it is nominally aprivate enterprise, because it was established primarily with governmentcapital).

2/ See Korum (1975) for a comparative analysis of public and privateindustrial structures within the framework of Turkish I-0 tables.

- 105 -

subsequent periods. The private sector initiatives in the 1950s received

substantial support from the newly established institutions, such as the

Turkish Industrial Development Bank (funded by the World Bank), and benefited

from the government's ad hoc protection and subsidy measures.

(2) From 1963-73, policy interest in public enterprises as a vehicle

of industrial growth resumed, particularly in capital-intensive intermediate

goods industries. The relative scope of the private sector was increased

mainly in textiles, food processing, rubber products, chemicals (the less

capital-intensive categories), and machinery and related industries. In most

subsectors, the sustained rapid growth of private manufacturing value added

and investments was associated with shifts in the size of private

establishments.l/

(3) The sources of growth estimates discussed in Chapter 3 (Table

3.9), together with the value added shares shown in Table 4.2 suggest a

significant pattern. The growth of private manufacturing was more rapid for

subsectors in which domestic final demand expansion played an above average

role. Public shares typically increased in subsectors in which technological

change had a more than average effect on the growth process. The public

sector mainly attempted to address the problem of catching-up with the cross-

country norms in the "middle" industries, which met the rising intermediate

demand in all major sectors of the economy. In turn, export expansion effects

on the growth of food processing (involving lower stages of processing of

tobacco and dried fruits) largely occurred in public and semi-public units,

1/ Tekeli et al (1980) provide an extensive set of concentration measures forTurkish manufacturing In 1971-77. In about 65 percent of 115 four-digitprivate industries, the four-plant concentration ratio was above 50percent (in terms of the sales value). Also, the concentration ratios andintensity of electricity consumption together explain about 20 percent ofthe variation In the price-cost margins at the four-digit industry level.

- 106 -

while the export-oriented side of production growth in textiles was achieved

almost entirely by private firms toward the end of the 1963-73 period.

(4) The structure of fixed investments in manufacturing underwent

sequential shifts in the two consecutive five-year periods from 1963-73. The

shares of both light and basic intermediates in total manufacturing

investments increased during the period. The public sector took the lead in

paper, petroleum products, basic chemicals and metals. The investment shares

listed in Table 5.3 show the expanding scope of private fixed investments in

food processing (of non-monopoly goods), textiles, non-metallics, and

machinery and related industries (primarily consumer durables and vehicle

assembly plants). The subsector shares of manufacturing fixed investments

achieved under the Third Plan (1973-77) and projected in the Fourth Plan

(1979-83) suggest that these trends continued after 1973. The basic inter-

mediates group is absorbing more than 50 percent of the total investable

resources in the manufacturing sector through the implementation of public

enterprise projects.

Table 5.4 provides 1968 data on the structure of protection

estimated by Olgun (1975). In 1968 the economy was in a severely import-

constrained cyclical position, and comparisons of domestic and world prices

may be unreliable in some sectors (e.g., in agriculture and non-electrical

machinery, as noted by Olgun).

Nevertheless, the estimates indicate four salient characteristics of

the system of protection that prevailed in the 19609 and, to a considerable

extent, in the 1970s. First, the system of protection involved significant

discrimination between the primary and manufacturing sectors, which had

effective protection averaging 197 and 314 percent, respectively. The effects

of relative price distortions resulting from such discrimination have been

- 107 -

Table 5.4

Nominal and Effective Protection Rates, 1968

(H.Olgun Study)

(Unit: Percent)

Nominal Effective AgainstIndustry Protection Protection Export Bias

(Balassa) (Balassa)

Agriculture 45 41 138Forestry 63 102 206Animal Husbandry and Fishery 130 295 403Coal Mining 90 90 204Iron-Ore Mining 0 -31 76Other Mining 0 -8 95Sugar 304 -433 -666Tobacco n.a. n.a. n.a.Alcoholic Beverages n.a. n.a. n.a.Food Processing 100 377 530Textiles and Apparel 120 222 295Wood Products (including Furniture) 131 741 737Paper, Printing and Stationery 90 137 132Leather and Products

(including Shoes) 0 -33 83Rubber, Plastics and Products 40 18 262Chemicals 88 721 2,280Fertilizers 34 45 155Petroleum Refineries 259 715 6,269Ceramics, Glass 96 200 291Cement 68 80 268Iron-Steel 116 255 449Non-Ferrous Metals 118 235 113Metal Products 124 762 1,165Agr. and Non-Electrical Machinery 312 -255 -193Electrical Appliances & Machinery 141 1,637 2,306Transportation Equipment: 87 202 392

Source: Olgun (1975).

- 108 -

analyzed in Chapter 4.E in the context of overstated value added growth rates.

Second, the escalation in protection for the subsectors from lower to higher

stages of fabrication was substantial, as noted in the cases of agriculture

and food processing, and basic metals and metal products. Third, the wide

differences between nominal protection rates (based on price comparisons) and

nominal tariff rates (based on actual import taxes, not separately shown in

the table) reflected the presence of large import premia in all industries due

to quantitative import restrictions. Fourth, various export promotion schemes

did not remove the bias against exports, which is measured in Table 4.4 as the

percentage of excess value added realized in production for the domestic

market over value added generated in production for exports. ThIus, the

protectionist system reinforced the effects of domestic demand expansion as a

source of growth in manufacturing in general, and in private-led machinery and

related industries in particular.

The ownership patterns in Turkish manufacturing concerning the

relative shares of firms with foreign partnership are shown in Table 5.5 for

1973Ž11 The gross revenue and employment shares of firms with foreign

partnership were relatively high in those subsectors which had grown rapidly

in domestic market-oriented, but import-dependent ways, as in the case of

vehicle assembly, electrical appliances, chemical and pharmaceuticals. Minor

exceptions were certain non-metallic (e.g., earthware) projects. Foreign

private capital has also responded to the structure of incentives, which

favored inward-looking patterns of development, characterized by an increasing

dependence on imported current inputs.

1/ Foreign partnership in petroleum refining is not reported in Table 5.5.

- 109 -

C. Recapitulation

The comparison of the actual shares of subsectors in total

manufacturing output with those predicted for a country of Turkey's

population, size and income level shows that the structural transition within

Turkish manufacturing has generally followed the pattern predicted for a

typical large country with a narrow trade orientation. However, in the

Turkish transitional effort, there were delays in catching up with the cross-

Table 5.5

Share of Firms with Foreign Partnership in ManufacturingIndustry (1973)

MANUFACTURING INDUSTRY Gross Revenue Employment(Percent)

Food Industry 5.16 2.39Beverage Industry 8.71 17.21Textile Industry 1.05 0.51Non-leather Goods and Clothing Industry 1.25 2.48Paper and Paper Products Industry 3.52 0.96Chemical Industry 46.05 24.43Pharmaceuticals Industry 29.67 10.06Rubber and Tire Industry 58.53 26.55Plastic Goods Industry 13.42 4.71Glass Industry 13.67 4.94Stone and Earthware Industry 36.97 18.88Metal Goods Industry 13.04 5.89Non-electrical Machinery and Equipment Ind. 17.86 7.39Electrical Machinery and Equipment 40.21 31.14Motor Vehicles 44.21 18.34

Source: TUSIAD (1976)

country norms for "middle" industries producing capital-intensive intermediate

products. Analysis of the evolving patterns of public and private shares in

manufacturing reveals that the public sector has been essentially involved in

expanding domestic production of basic intermediates goods by undertaking

- 110 -

highly capital-intensive investment projects, while private firms have been

mainly attracted to the development of industries in which domestic final

demand effects have been the principal source of growth.

Although the overall strategy of structural change in Turkish

manufacturing resembles the typical large country pattern predicted by cross-

country regressions, this analysis indicates two sets of problems at the

implementation and policy levels. The first is related to the steadily rising

capital intensity of public investments in basic intermediate goods

industries, which have absorbed a large proportion of available funds for

manufacturing development in the country.1/ To a considerable extent, the

unduly high capital-output ratios of public manufacturing investments reflect

inadequate planning at the project level, resulting in investable resources

thinly spread over a numerous ongoing projects. The long gestation lags in

public manufacturing investments have sharply reduced their potential

contribution to the trade adjustment process in the mid- and late 1970s.

The second set of problems is connected with the protectionist

system, which featured an anti-export bias in the past, and provided greater

effective protection at higher stages of fabrication. The consequence has

been the emergence of high-cost private firms that produce equivalent products

for the domestic market under different technological agreements, and that

exhibit no particular tendencies for the horizontal and/or vertical

specialization needed for trade-oriented sustainable growth in the 1980s.

These broad conclusions indicate the need for more detailed research on new

guidelines for future rationalization and restructuring of the Turkish

manufacturing sector.

1/ See Walstedt (1980, section 3) for additional relevant data.

6. TOWARD TRADE-ORIENTED GROWTH

AND STRUCTURAL CHANGE IN THE 1980s

The previous chapters have analyzed the sources of growth and

structural change in Turkey's recent economic history, and evaluated them in

the context of the average country patterns. Internal factors (domestic final

demand and technological change) have been shown to account for about 85

percent of the shifts in the productive structure during 1953-73. Export

expansion and import substitution in varying proportions were the remaining

factors. While export effects on growth and structural change became somewhat

more pronounced in 1968-73, import substitution effects were more important in

1953-68, but showed a sharp decline in the early 1970s.

After the 'easier" stage of import substitution was completed by the

end of the 1960s, the import intensity of intermediate inputs steadily

increased in the 1970s (notwithstanding the shift in fixed investments toward

heavy industry). Along with stagnant export growth, it contributed to the

massive external imbalance in the economy.l/ As a result, the narrow trade

orientation in Turkey"s transitional effort could no longer be sustained in

the aftermath of the external shocks of the mid-1970s. This paper finally

discusses the major causes of limited trade effects observed in Turkish

industrialization, and considers the prospects for transition toward more

outward orientation in the 1980s.

A. Trade Effects on Turkish Industrialization

The principal factors that limited the trade orientation of Turkish

industrialization after 1950 are broadly reviewed in terms of the country's

1/ See Balassa (1981),

- 112 -

size and natural endowments, institutional conditions, and economic policies.

(1) Large Country Characteristics and Natural Endowments

Chenery's empirically based cross-country comparisons show that the

sources of growth In large countries (i.e., a population over 15 million in

1960) differ from the average pattern in that the effects of domestic final

demand and technological change are more pronounced in aln major sectors. l/

In a typical large country, greater internal demand, relatively more diverse

natural resources, and higher internal transport costs induce an essentially

domestic market-or-iented growth process, with exports accounting for only 15

percent of the (gross) output change in manufacturing at the Turkish income

levels observed in 1953-73.

The Turkish situation nearly represents the extreme case of a semi-

closed (rather than a typical) large country identified in Chenery's cross-

section analysis. This study has shown that export expansion as a source of

growth contributed about 2.3 and 8.2 percent to the manufacturing output

increases in 1953-63 and 1963-73, respectively. In addition, import

substitution lost its relative importance after contributing significantly in

the earlier periods of industrialization. The timing of allocational

adjustments toward export expansion in general, and promotion of industrial

exports in particular has lagged far behind the normal transition expected for

a country of Turkey's size and income level during the past two decades.

The delayed shift toward normal export orientation may be partly

explained by the natural resource endowment of the country. In certain

countries which experienced export-led industrialization (such as Japan and

Korea), natural resource limitations restricted output expansion in the

1/ See Chanery (1979, Chapter 3).

- 113 -

primary sectors, necessitated substantial primary imports, and thereby

fostered the attitude that exports were essential for survival and sustained

economic growth. Industrial policies were framed in this atmosphere to

exploit the country's comparative advantage vigorously by emphasizing the

accumulation of skills and diffusion of new technologies.

In the Turkish case, the apparent availability and untapped

potential of the natural resources have been generally seen as promising

factors in Turkey's :Long-term development. Consequently, the prevalent

attitudes toward the natural resource potential of Turkey led to a policy

outlook in which outward-looking industrialization did not appear as

necessary. However, after experiencing domestic hardships in adjusting to

higher prices of imported oil in the late 1970s, more realistic public

attitudes have started to emerge regarding the need to complement primary

exports with export-oriented non-primary activities (including service as well

as manufactured exports).

Furthermore, the unprecedented growth of the population and the

rural influx to the urban areas after 1950 also created an environment in

which the internal market expanded rapidly for a wide range of manufactured

products, which could be produced domestically behind high tariff walls."/

The continual changes in the rural-urban mix of the population produced

compositional shifts in consumer demand, generated additional domestic

requirements for processed consumer goods, and thus contributed to the

expansion of home market-oriented manufacturing output. The large

1/ At this point, we merely point out the demand effects of demographicphenomena, and do not mention other direct and indirect effects on savingsrates, labor marketsl, public services, and pressures on rural and urbanland. Tuncer (1976) provides a thorough review of demographic aspects insocio-economic development, and examines the determinants of the Turkishfertility rates in a cross-sectional and time-series study.

- 114 -

inequalities in income distribution (with a Gini coefficient of around 0.55)

also created a bias in the structure of private consumption demand for

consumer durables. This led to considerable opportunities for high-cost

import substitution in metal fabricating industries.l/

(2)Institutional Conditions

The political conditions in the earlier periods of the Republic

produced deep-seated non-economic motivation for long-term development

policies. The unforgotten experiences of the Ottoman capitulations (involving

the loss of tax and tariff autonomy in some instances), and the difficult

negotiations for the settlement of old debts contributed to the growth of

economic nationalism. Preserving national sovereignty and achieving economic

independence (often interpreted as "self-sufficiency") became the priorities

of the national governments. These long-term tendencies were apparent in

certain attitudes toward development, such as the reluctance to allow large-

scale foreign private investment, the inclination to use a restrictive trade

regime, and the preference for protected and inward-oriented industriali-

zation.

The central concern with "self-sufficiency' also led to state

ownership in those sectors of the economy which were perceived as strategic by

the government. Lacking the preconditions of middle-class based capitalist

growth in the industrial and social overhead sectors, public authorities

introduced the etatist approach to development in the 1930s, which led to the

formation of a large state economic enterprise system (SEEs) to complement

1/ Import substitution for consumer durables appears to have been less in theexport-led industrialization of Korea, where there is a more equitabledistribution of income (with a Gini coefficient of around 0.36 in 1971).See Westphal and Kim (1974) and Kim (1978).

- 115 -

private activity in the! economy..Y

Pioneers in the development of key industries in the earlier

periods, the public enterprises increasingly became institutional instruments

for regional development, employment expansion and extra-market interventions

on social-political grounds. However, because their operational and financial

performances were generally inadequate, steadily rising budgetary transfers

and deficit financing from the Central Bank were required. Without a

reasonably well-functioning price mechanism and/or efficient public planning,

Turkey's mixed economy eventually became dualistic, and featured non-

integrated public and private enterprise subsystems with different types of

resource mobilization and allocation. The failure to build integrative

mechanisms in Turkey's mixed economy (i.e., establishing common rules for

finance, pricing and employment in state and private industrial enterprises)

has caused pervasive (listortions in the structure of savings, costs and

prices, and has thereby created numerous stumbling blocks for the adoption of

a flexible and outward-looking strategy in industrial development.

(3) Economic Policies and The Structure of Protection

The slow pace of the institutional development in Turkey's mixed

economy system (particularly in the area of tax and financial subsystems, SEE

organization, economy-wLde marketing arrangements, and suitably structured

agricultural co-operatives and small ancillary industries) produced a setting

in which governments often formulated and pursued their economic policies in

an ad hoc manner. Until recently, governments relied almost exclusively on

1/ See,e.g., Johnson (1967) and Solis (1971) for discussions of stateownership under economic nationalism in general, and in Mexico,respectively. The genesis and rational of etatism are examined by Okyar(1965). For a more recent analysis of Turkey's state manufacturingenterprises, see Walestedt (1980).

- 116 -

nou-price measures and selective policy means (such as concessional taxes,

import licences, preferential credits and administered prices) rather than

general policy instruments (fiscal, monetary and trade policy, including an

equilibrium rate of exchange) to achieve economy-wide objectives.

While producing some results in specific sectors, the tendency to

use selective measures and direct interventions as a predominant policy

approach created serious problems in the consistency and efficiency of savings

generation and resource allocation in the country. The adverse consequences

of avoiding general policy instruments have been particularly apparent in the

balance of payments. Control of the external accounts through ad hoc measures

proved to be cumbersome as well as counter-productive because the value of a

key policy tool, the foreign exchange rate, was unadjusted. After major

devaluations, the unchecked erosion in the real exchange rate often resulted

in the significant decline of the relative value of incentives for activities

that augmented foreign exchange (i.e., earnings and/or savings), as examined

in detail by Krueger (1974) and Dervis and Robinson (1978) for 1950-70 and

1973-77, respectively .V

The long-term institutional tendencies for inward-looking

industrialization were reinforced by the prolonged use of a semi-closed trade

and exchange rate regime, which discriminated against exports, and accorded

increased rates of effective protection at higher stages of fabrication (as

discussed In the final part of Chapter 5). The real effective exchange rates

provided insufficient incentives for export promotion, while the system of

protection contributed to the development of highly import-dependent private

manufacturing industries, which could be maintained only by massive capital

1/ See also Balassa (1981, Table 4) for the movement of real exchange ratesin 1967-81.

- 117 -

inflows after 1973../

3. Prospects for Transition 2/

Recent Policy Changes

As pointed out in Chapter 1, Turkey's delayed policy response to the

*xternal shocks of the mid-1970s were very costly in term of aggregate growth

losses, hyperinflation and political instability in 1977-80. External trade

disequilibrium was clearly the principal factor behind the economic

dislocations of the late 1970s. Foreign exchange stringency had restricted

the inflow of imports that were required (almost in fixed proportions) for

current production as well as capacity expansions needed for future growth.

Interruptions in growth occurred despite the existence of a sizable parallel

market and illegal imports that were largely financed by workers' remittances

outside official channels.

As shown in this study, the trade imbalances that emerged in the

1970s were mainly of a structural nature. Their gradual elimination required

an effective combination of anticyclical and structural policies in the

medium-run. However, the removal of the trade limit to income growth was

particularly difficult because of, on the one hand, the long-term character of

the supply measures taken to increase primary energy production and reduce oil

imports and, on the other, the increasing technological complexity and capital

intensity of import substitution in intermediate manufactured goods. In an

industrializing economy such as Turkey's, the budgetary, technological and

skill constraints require an increasingly selective approach to import

1/ Krueger (1974, pp.208) shows that Turkey's non-traditional exports werehighly responsive to real exchange rate changes in 1950-69.

2/ The present discussion partly draws on the author's earlier assessments(Celasun, 1980 b).

- 118 -

substitution in its later stages, which results in an alternating sequence of

capacity expansions in the industrial subsectors. Thus, the aggregate import-

output ratio tends to stabilize, if not gradually rise, over time. Accord-

ingly, the possibility of removing the trade bottleneck and resuming self-

sustained growth by further contraction of real aggregate imports was limited

in the late 1970s and will remain limited in the intermediate future. On the

eve of the 1980s, the resumption of growth required, therefore, a decisive

change in development strategy toward higher export orientation and more

efficient import substitution.i/

The policy package that was implemented in early 1980 signified a

determined political effort to set in motion government actions and market

forces to curb hyperinflation, and to initiate a more open development

process.2/ In addition to emphasizing the usual price measures in an IMF-

style stabilization-cum-devaluation program, the policy package introduced a

new set of policies for Turkey's mixed economy system. While lifting the

formal price controls in the private manufacturing industry, and granting a

considerable autonomy to public enterprises in their future pricing decisions,

the new approach assigned a larger role to domestic and foreign private

capital in export promotion and investment (such as in oil and non-oil

mining).

In June 1980, the policy mix was extended by an official decree

which allowed the commercial banks to set their borrowing and lending rates

1/ The evidence for the urgent need to adopt a trade-oriented strategy wasrapidly accumulating by the end of 1979, as discussed in length in Balassa(1979), Wolf (1980) and World Bank (1980).

2/ For detailed reviews of Turkey's stabilization policy experience in 1978-79, and of the 1980 policy package, see Balassa (1981) and Celasun (1980b).

- 119 -

freely, subject to certain constraints on preferential credits and obligations

to contribute to an initerest subsidy fund. The fiscal component of the new

policy framework was strengthened in 1981 by new tax legislation and

restrained public spending. The adoption of a flexible exchange rate policy

(which became more evident in early 1981) has been another cornerstone of the

new policy package.

As expected, the immediate economic effects of the 1980 policy

measures were very mixed, and took the form of the following: (1) a heavy

deflationary impact of monetary restraint and nominal price adjustments; (2)

intensified cost-push pressures on the general price level; (3) a sharp fall

in real wages and labor inrest, as a result; (4) increased capital inflows and

imports; and (5) a slor response from exports initially. The attempts to

implement a restrained wage policy led to numerous strikes, produced

considerable unrest, and resulted in the loss of 7.7 million work days in the

first eight months of 1980, comparing poorly with the 1.15 million work days

lost during 1979. After the military takeover in September 1980, public

sector workers with unsettled wage agreements were granted a tentative raise

of about 70 percent in gross nominal wages, pending formal settlements in 1981

and 1982. The deflationary impact and cost-push effects of the stabilization

measures resulted in a -2.2 percent growth in real GNP, and about a 94.7

percent rise in the Wholesale Price Index 1/

Once industriaL production resumed after the military intervention

and the new policies were strictly implemented (buttressed in 1981 by a tax

reform package), real GNP increased by about 4.4 percent in 1981, while the

1/ The year-on-year rate of inflation was 132 percent in March 1980, but fellto 94.7 percent in December 1980, 38 percent in June 1981, and 27.3percent in November 1981.

- 120 -

year-on-year inflation decelerated sharply to 27.3 percent in November 1981.

The balance of paymnts rapidly improved, with merchandise exports amd

workers' remittances rising to about $4.7 and $2.5 billion in 1981 from $2.8

and $2.1 billion levels, respectively, in 1980. In the external sector, the

particularly encouraging new trends have been the increased product

diversification in exports; the expansion of trading opportunities in the

Middle East; and the growing involvement of the Turkish contractors in the

infrastructure development projects of various oil-surplus countries in the

region.

Apart from the remaining problems (such as SEE reorganization,

rising unemployment and poor distribution of income), the improved

macroeconomic performance in 1981 bolstered general confidence at home and

abroad in the country's ability to halt the deepening crisis, and to switch to

a more viable growth path in the 1980s.

Policy-Making and Planning in the 1980s

When domestic inflation is under control, the formal policy

objectives need to be shifted in a balanced way from price stabilization to

the removal of external disequilibrium and long-term restructuring of the

economy in order to prosote sore employment and better income distribution.

The current account deficits ned to be reduced to historically normal and/or

financially manageable proportions of GNP, while sufficient capacity for

Import growthi to sustain a steady expansion of employment and GNP close to

potential output levels should be developed. This task requires a concerted

social effort to restructure factor allocation and domestic production in

order to maximize the capacity for foreign exchange generation after a

reasonable period of adaptation. The development process needs reorientation

towards trade-improving activities, and requires a more effective integration

- 121 -

of export promotion and import substitution under reduced protection. As

shown in Chapter 4, increased export promotion and employment objectives are

conplesentary because more favorable labor-output ratios characterize the

potentially export-oriented subsectors (including capital goods and consumer

durables).

The transition toward greater trade orientation has significant

implications for Turkey's political economy as well as for economic management

methods in the 1980s, which are discussed in the following paragraphs.

(1) Relative Prices and Incomes

The basic issue in the political realm concerns the design of

socially responsible arrangements for the equitable sharing of sacrifices

required in the adjusltment process. Above all, this process calls for

allocational and distributional changes to affect the transfer of real income

because of the sharply deteriorated terms of trade since the did-1970s. Until

the adoption of the 1980 policy package, the policyakers and organized socio-

economic groups avoided this adjustment through large-scale borrowing abroad,

and excessive monetary (expansion at home.

The assignment of higher priorities to trade-improving and resource

mobilization efforts will lead to the restrained growth of domestic

consumption and higher real prices for tradables and savings, with

corresponding income transfers from the users to the suppliers of scarce

foreign exchange and domestic capital. Both the private firms and the SESs

will be involved in the process of interrelated price and income adjustments,

and will be confronted with changes in the pattern of real profits and

wages. An indicated in Chapter 4.E, the gradual adaptation to world prices in

non-primary product markets is likely to result in the slackening growth of

the previously overvalued factor incomes in the urban areas. Clearly, the

- 122 -

distributional implications of relative price changes are very mixed, and they

require quantitative assessments in the future. A realistic and carefully

phased program is needed to reconcile the equity and growth objectives in the

new economic framework, with an emphasis on employment expansion in labor-

intensive sectors that increase foreign exchange.

(2) Resource Mobilization and Redirection of Investment

To support the 1980-81 policy measures, new financial resources need

to be significantly tapped and quickly directed to trade-improving activities.

Private savings (as reported in the national accounts) have recently exceeded

private investments, and have been partly drafted by the public sector through

the money creation processX The new stabilization measures are designed to

reduce the size of forced savings (or deficit financing) by enlargening the

share of public revenue in GNP, with a corresponding decline in the growth of

private disposable income. With public investments having a larger share in

total investments (as projected in the official programs) and concentrated

mainly in capital-intensive energy and infrastructure projects, the

mobilization and allocation of "rivate savings gain strategic importance in

expanding the production of tradable goods in the economy. As self-financing

in the private manufacturing industry decreases, more energetic efforts will

be required to attract foreign direct investment, and to mobilize workers'

remittances for the financing of export-oriented projects-2

(3) Reforming the Institutional Structure and Policy System

The modified aisa of the new development orientation will require

1/ Gross private savings (including deficit financing) are projected to reach10 to 11 percent of GNP from 1981 onwards.

2/ See Wolf (1980) for an elucidation of the differential effects of varioustypes of capital Inflows in development.

- 123 -

major reforms in policy instruments and in the way they are implemented. In

the policy reform process, a central task concerns the improvement of the

institutional effectiveness of Turkey's mixed economy, which has a large state

enterprise subsystem (SEEs) that complements private business activity. As

noted earlier, the basic problem is not the large share of the SEEs, but

rather the dualism of the mixed economic system, which is characterized by

different types of economic behavior in its subsystems (public and private).

Instead of focusing solely on the legal and administrative aspects

of the SEEs, a series of steps may be taken to rationalize the economic basis

of the SEE decision-making procedures by insisting on the calculation of

economic returns and real subsidies (or the subsidy equivalent of effective

protection). The subsidies may be specified annually and be subject to ex

post evaluations by public representatives. / To further strengthen the

institutional base of Tlurkey's mixed economy, more efficient arrangements are

required for the operation of financial and labor markets. The range of

financial instruments available to the public needs to be extended, while

measures should be taken to reduce the large spread that exists between the

relevant interest rates for borrowers of funds and suppliers of small savings.

In the difficult field of industrial relations, an early return to the system

of collective bargaining would help mobilize broad labor support for the new

development strategy.

If the functioning of the price mechanism improves, a more balanced

combination of general and selective instruments may be arranged in the

government's policy package. For example, a crucial move would be the

preparation of a timetable for the gradual restructuring of the trade regime

1/ See Walstedt (1980, pp.196) for the outline of a reform program for theSEEs.

- 124 -

in order to provide appropriate guidelines for micro-level planning of export

promotion and import substitution. The modified protectionist system may

formally aim to remove the inherent bias against exports (by narrowing the

product range of probibited imports); reduce discrimination among industries

to normal proportions; and increase the effectiveness of the exchange rate

instrument as an equilibriating mechanism for the balance of payments. The

redesign of the trade policy framework may be complemented by sector-specific

studies to identify promising lines of vertical and/or horizontal

specialization for selective support by the government.

The suggested policy changes involve a variety of political and

technical issues, and they should be viewed as a continual reform process that

can only be implemented in stages. Turkey's planning machinery also needs to

be tailored to the new circumstances with a sharper focus on the optimal mix

of policy aims and means in a dynamic setting. The reorientation of the

planning work would require the development of indigenous research capacity,

and less involvement in operational matters, which can be delegated to the

relevant agencies.

(4) Accelerating Total Factor Productivity Growth

There is the need and scope for an economy-wide drive to increase

total factor productivity growth in the 19809. This is apparent from the

domestic and foreign capital constraints on aggregate growth, low levels of

capacity utilization and productivity in most sectors (including agriculture),

and unused potential of applied research in the country. The applied research

efforts should be directed towards the diffusion and adaptation of technical

innovations that have capital-saving and energy-conserving biases in

production. An improved and wider use of the semi-skilled labor potential of

the country would also buttress the sustained expansion of exports of goods

- 125 -

and packaged services to the oil-surplus areas in the Middle East.

Finally, the domestic economic performance in the medium-run will

also depend on the changes that are taking place in the world economy. Newly

evolving external conditions require highly innovative policies and

arrangements to develop more productive and supportive forms of co-operation

at the international and regional levels.

C. Future Research

The findings of this study can be complemented and extended by

research in several promising directions. A simple, but useful follow-up

would be to express the study's input-output data in deflated world prices,

and to reestimate the sources of growth with the same methodology. To

compensate partly for the use of domestic prices in our analytical

assessments, the effects of domestic price distortions on value added growth

rates in 1953-78 have been estimated. (See Chapter 4) Another practical

extension relates to the estimation of the sources of multi-sectoral growth

from 1973-77, when negative import substitution became more pronounced, and

export expansion effects declined sharply, as shown in an economy-wide

analysis by Balassa (1981).L/

One of the more challenging research tasks would be to integrate the

production function approach and the input-output methods used in this

project. However, a major problem here would be the lack of reliable

estimates for capital stocks and functional distribution of income at the

sectoral level. Nonetheless, with judiciously assembled and "guesstimated"

production-function data, a useful attempt may be made to construct a

historical price-endogenous multi-sectoral model, which should be able to

1/ The year 1978 can not be used as a suitable benchmark year because of itsunusual cyclical characteristics and import shortages.

- 126 -

track structural changes occurring under given policies and exogenous

conditions,I' With the aid of such a model, deeper issues may be examined,

such as the distributional consequences of semi-closed trade policies and the

distorting effects of dual economic behavior in public and private

enterprises.

For the immediate policy concerns in the early 1980s, empirical

research connected with the estimation of incentive and cost-benefit

indicators at the disaggregated level is particularly relevant for the

redesign of the system of protection. The commodity-level cost surveys which

have already been initiated should be complemented by sectoral studies

covering demand and supply aspects, including the possible restructuring of

the existing operations under the newly adopted trade-oriented strategy.

1/ See Dervis and Robinson (1978) for an earlier use of a price-endogenousmulti-sectoral model in analyzing trade-growth relationships in 1973-83.

- 127 -

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APPENDIX 1

MODELS FOR SOURCES OF GROWTH DECOMPOSITION

A. Methodology in Brief

A.1 Major Characteristics of the Models Used in the Present Study

Appendix I gives the algebra of the models used to analyze the

sources of growth and structural change in Turkish economic development during

the sample period 1953-73. Although the thrust of the study is to decompose

factors which jointly caused differences in the rates of production growth in

the various sectors of the economy, the analysis is also extended to the

determination of the sources of changes in the sectoral patterns of value

added, imports, factor use and relative prices.

The fundamental logic of the models is based on the earlier

contributions of (1) Chenery (1960); (2) Chenery, Shishido and Watanabe's

investigation of the Japanese industrialization experience (CSW, 1962); and

(3) their subsequent modifications, which are reviewed elsewhere by Fane

(1973) and Syrquin (1976).

These models differ from the sources of growth models in the

tradition of the celebrated work of Denison (1967). The Denison-type models

employ the production-function approach, and attempt to measure the relative

contributions of primary factor accumulation and reallocation in the aggregate

growth process. Hatiboglu (1978) adopts the Denison approach in his general

appraisal of Turkish economic growth in 1950-75 with imputed factor returns in

the nonagricultural sectors.

The type of models used in the present analysis have the following

significant characteristics:

- 133 -

(i) The principal Eeature of the line of research originally established

by Chenery (1960) and CSW (1962) is that, with the material balance (supply-

demand) equations in an input-output (I-0) framework as a basis, the shifts in

the sectoral structure of production (or of a related vector such as value-

added, factor use, etc..) are attributed to a number of supply and demand

factors, which are treated as autonomous elements in the analysis. These

autonomous elements, which are also referred to as causal factors, are usually

the following: (1) domestic final demand; (2) technological change (or, more

specifically, changes in I-0 coefficients); (3) exports; and (4) import-

substitution. In some versions of the models, the elements (1) and (2) are

combined under the catelgory of domestic demand effect, and (3) and (4) are

considered the trade effect on the growth and structural change of the

variable under examination.

(ii) In empirical iLmplementation, there are two types of measures that

can be used to quantify the changes observed in the sectoral variables over a

given time frame: (1) first differences (increments) and (2) deviations from a

proportional (or balanceel) growth path. The deviation measures are calculated

with respect to a reference growth pattern in which all relevant variables of

the input-output system grow at a specified "norm" rate, called the

proportionality factor. In the sources of growth analysis of production,

value-added and imports, the proportionality factor is considered the ratio of

gross domestic product (G]DP) in the terminal year to that of the base year. In

the analysis of price changes, this factor becomes the ratio of the general

price level in the terminal and base years.

(iii) The use of an input-output (I-0) framework in the sources analysis

also permits the distinction between the direct and total effects of the

autonomous elements in the! process of growth and structural change. The total

- 134 -

effects reflect the indirect linkage effects of a change in the production

level of a particular sector in the economy. In this study, the direct and

total effects are calculated separately, but the results are presented

selectively in the text for cases that are relevant to the discussion.

(iv) The empirical work along the lines of the pioneering CSW models

requires comparable interindustry data for the benchmark periods at the same

level of sector aggregation. Among the problems were the typical statistical

difficulties in processing available sectoral data in a format permitting

comparisons over time. This was particularly hard for the earlier periods in

which there are no I-0 tables, such as the benchmark periods 1952-54 (average)

and 1957-59 (average). In addition, deflating all data to a common price

basis was cumbersome. The deflation of current price I-0 data to constant

prices is essential under two sets of circumstances: (1) if there were

intersectoral differences in price movements, and/or (2) if there were

intrasectoral differences in the changes of production, import and export

prices over time.

In the Turkish context, these two types of price variations were

significant enough to warrant complementary research on the construction of

appropriate price indices, and the deflation of all current price data into

the constant prices of a suitable reference period, which was selected as the

year 1968. The latter serves as the base year for deflated official national

income data. An integral part of the study was time-consuming empirical

research to deflate the current price sectoral production and trade data for

the benckmark periods (1952-54 (average), 1957-59 (average), 1963, 1968 and

1973), as described in Appendix 2. The mathematical formulas presented below

have been applied to Turkish intersectoral data measured in real terms by 1968

- 135 -

constant domestic priced!.

(v) Another common difficulty in the sources of growth decomposition

calculations over a specified period is an index number problem. The

resolution of this problem requires a choice of using either (1) the base

period volume weights, while using the structural coefficients of the terminal

period, or (2) the terminal period volume weights, while using the structural

coefficients of the base period. In a way, the problem is conceptually

similar to decomposing a change in value terms into price and quantity

indices. An attempt is made to circumvent this problem by computing both the

Laspeyres and Paasche types of decomposition measures, as indicated in the

mathematical formulations below.

A.2 Treatment of Import Substitution

The treatment of import substitution (IS) is a source of dispute in

empirical research for the field. The evolution of the treatment in the

literature is broadly summarized as follows:

(i) An early contribution by Chenery (1960), which used deviation

measures, treated the IS factor in terms of changes in the share of imports in

the total supply of a given sector. Lewis and Soligo (1965) adopted the

approach of Chenery (1960) in their assessment of the Pakistan growth

experience, but preferred to work with first differences as measures of

changes in the sectoral output and trade variables. These two studies were

both conducted in terms of direct effects, and had not explicitly incorporated

the effects of I-0 linkages and coefficient changes over time.

1/ In future investigations of the Turkish economic transformation, asignificant contribution would be to deflate the available I-0 data intoconstant world market prices to remove the distorting effects of economicrents in national income formation, as aptly pointed out by Hatiboglu(1978).

- 136 -

(ii) CSW (1962), in their study of Japanese growth, which considered the

domestic linkage effects of causal factors, measured the IS factor in terms of

deviation of import growth from the proportional path of expansion. Although

such an IS measure somewhat reflects the actual replacement of imports by

domestic production, it does not adequately measure changes in the sectoral

ratios of output (or imports) to total supply.

(iii) Criticizing the IS measure of CSW (1962), Morley and Smith (1970)

proposed a variant approach to IS. They introduced a new concept of gross

(redefined) imports, which was to be obtained by premultiplying the import

vector by the Leontief inverse, and measuring IS as the change in the share of

gross (redefined) imports in total (redefined) supply incorporating gross

output and gross imports. In Morley and Smith (1970), the IS factor

represents the domestic production recessary to substitute completely for

imports, which is an extreme view of the actual IS process. Similarly, Fane

(1973) suggested an alternative measure of IS involving two components:

namely, IS in sector (j), and indirect IS contributions of production increase

in sector (j). As in Chenery (1960), Lewis and Soligo (1965), and Morley and

Smith (1970), Pane also employed the share method in defining IS by focusing

on the changing share of imports in total supply over time.

(iv) More recent contributions to the analysis of IS came from Syrquin

(1976) and Balassa (1976). Again adopting the share approach, Syrquin seeks

to quantify the effects of changes in the ratio of imports to total domestic

demand, and proposes a series of refinements in the treatment of imports and

IS for situations where detailed data of import use are available. In turn,

Balassa extends the two-commodity trade model of Johnson (1962) to a

multisectoral context, and seeks to explain changes in imports over time in

terms of pro-trade and anti-trade biases in production and consumption. In

- 137 -

the Balassa framework, import-substitution is defined in terms of deviations

of the growth rates of the sector's production and consumption from the

Oneutral growth," i.e., the growth rate of national product.

In the present Turkey study, the IS factor is treated along the

lines of the CSW (1962) and Syrquin (1976) formulations, which are also

referred to as constant composition and constant share (or, for short,

composition and share) methods. To provide additional evidence on the

changing pattern of imsports, the decomposition measures for the sources of

growth of imports (by commodity, i.e., by sector of origin) are also

calculated and presented for selected periods in 1953-73.

In recent research on observed IS in Turkish economic growth, Korum

(1976) adopts the Lewis and Soligo (1965) measurement of the IS contribution

to growth, and provides sectoral estimates of this measure (at a 37 sector

level of aggregation) by using the current price sectoral production and trade

data available in the 1963, 1968 and 1973 I-0 tables. Despite the calculation

of only direct effects, and the use of undeflated sectoral data, the overall

conclusions of Korum's study are similar to those here in that the role of

trade effects in TurkishL industrial growth has been very narrow in 1963-73.

This review of the sources of growth models suggests that their

analytical frameworks need to be extended in a number of new directions. A

possible extension wouLd be the integration of the aggregate production-

function approach of Denison (1967) with the I-0 methods used here. The

accumulation of primary factor inputs (i.e., capital and labor) and their

continual reallocation over time interact with the causal factors identified

in the I-0 models of sources of growth. Within a broader framework of

analysis, the growth contributions of a variety of autonomous factors

(including factor inputs as well as exports, IS and technical progress) may be

- 138 -

quantified more systematically. Another direction of extension would be the

explicit introduction of policy variables into the sources of growth

investigations. In future research, the historically validated price-

endogenous I-0 models, which allow direct substitution in production and

consumption, are likely to serve as more comprehensive frameworks to establish

causal chains between past policies and observed growth and structural change

in individual economies.

B. Notation

The analytical frameworks used in this study are briefly sketched

here to facilitate the interpretation of the empirical findings presented in

the text.-

All frameworks are structured around the Leontief I-0 system, in

which the sectors are denoted by the subscripts i and/or J. In this research

i,j - 1,2,... 25. With each application, the frameworks are implemented over

a time period with specified base and end years, which are typically

designated in the literature as period 1 and period 2, respectively. For the

sake of simplicity, equations are given in matrix form. All I-0 data is

expressed in constant prices, unless otherwise indicated. The notations

adopted are the following:

Xt : production (or output) vector in period t (t-1,2),

Dt : domestic final demand vector in period t (t-1,2),

Wt : intermediate demand vector in period t (t-l,2).

Et : export vector in period t (t-1,2),

Mt : import vector in period t (t-1,2),

At : matrix of (total) input-output coefficients in period t (t-1,2)

1/ See Syrquin (1976) and Kubo (1977 and 1978) for comprehensive reviews ofthe alternative formulas for decomposition measures.

- 139 -

Rt (I-At)-l

A: ratio of gross domestic product (GDP in market prices) in period 2

to that of period 1.

y A - 1

For any variable, vector or matrix a:

6a - a2 - AaX (the deviation from the proportional path)

Aa - a2 - a (the first difference or absolute change-L')

Additional notation will be introduced at appropriate points below.

C. Sources of Growth Decomposition of Production (Gross Output)

C.1 Basic Conventions

In this part of Appendix 1, the modified forms of measures

originally proposed by CSW (1962) and Syrquin (1976) are presented for the

decomposition of sources of growth in sectoral production (or gross output).

Three important points should be noted.

First, these measures may be calculated for three cases: where (A)

the sectoral import data are not separately available for final and

intermediate uses; (B) the import matrix is available; and (C) the breakdown

of imports into final and intermediate uses is known without the availability

of a full import matrix. In the Turkish application, we proceed with Case A

due to the lack of import data by sector of use in earlier benchmark

periods ./

Second, the decomposition measures may be defined under the direct

(D) and total (T) methods, depending on whether or not the intersectoral

1/ The term "absolute change" is widely used in the literature, but its usageis not strictly proper in the mathematical sense since the firstdifferences may also have a negative sign.

2/ See Chakraverty et al (1973) and the recently completed study by SIS(1979) for estimated import matrices for 1968 and 1973.

- 140 -

linkages are taken into account in the computations. Under the total method,

the intersectoral impact of direct effects (of causal factors) is explicitly

introduced in the analysis.

Third, the measures are calculated under two versions of treatment

of the index number problem. The Laspeyres and Paasche indices are defined on

the basis of the I-0 coefficients used as weights. Thus, the Laspeyres version

(L) employs the I-0 coefficients of the first period, while the Paasche

version (P) adopts the second period I-0 coefficients as the relevant

weights. In the text, the arithmetic averages of Laspeyres and Paasche

measures are presented, unless otherwise indicated.1! In the context of these

conventions, the following labels are used to designate the decomposition

formulations under either the constant composition or share method:

-DAL: Direct measures; no breakdown of imports by use; Laspeyres version

-DAP: Direct measures; no breakdown of imports by use; Paasche version

-TAL: Total measures; no breakdown of imports by use; Laspeyres version

-TAP: Total measures; no breakdown of imports by use; Paasche version

In principle, unless stated otherwise, the sources of growth and

structural change are decomposed into the following causal factors:

-Domestic demand expansion (DDE)

-Export expansion (EE)

-Import substitution (IS)

-Change in I-0 coefficients or technological change (TC)

To ensure comparability with the notation of other country studies

1/ In the cases where an I-0 matrix is not available for the first period(e.g., for the benchmark years 1953 and 1958), the Laspeyres version ofthe decomposition equations is used in a modified form, by substitutingthe second period 1-0 matrix for the first period (unobserved) matrix, andthen determinine the effect of changes in I-0 coefficients as a residual.

- 141 -

of sources of growth, the causal factor DDE refers to domestic final demand

expansion under the total method, whereas it consists of final and

intermediate parts under the direct method. (See the equations for direct

measures below. j/

C.2 Constant Composition (CSW) Method

Under the constant composition method, only deviation measures are

calculated.

Total Method: Deviation

Total Effect of:

(CSW-TAL)6X - R1 6D DDE

+ R1 6E EE

- R1 6M IS

+ R1 (AA)X2 TC

and

(CSW-TAP)6X - R2 6D DDE

+ R2 6E EE

- R2 8M IS

+ R2(AA)AXl TC

Direct Method: Deviation

The Laspeyres and Paasche versions are the same when only direct

effects are measured under the CSW method.

1/ See Kubo and Robinson (1979), and Kim (1978).

- 142 -

Direct Effect of:

(CSW-DAL and DAP)6X - SD DDE-final

+ SW DDE-intermediate

+ 6E EE

+ (6X - 6E) IS-production

- (6D + 6W) IS-consumption

C.3 Constant Share Method

With the constant share method, the first difference as well as the

deviation measures are calculated. The additional definitions needed for this

method are:

u it (Xit Eit /(Dit +Wt and

Rt ' (I - utAt)

where ut is the diagonal matrix of uit.

Total Method, Deviation

Total Effect of:A

(Share-TAL) 6X - !1u1 6 DDE

+ 716E EE

+ K1Au(D2 + W2) Is

+ T uAAX2 TC

(Share-TAP) - R2u2 6D DDE

- 143 -

+ 7 26E EE

+ R2AuA(D1 + Wi) IS

+ R2u2(AA)XX, TC

Direct Method: Deviation

Direct Effect of:

(Share-DAL) 6X - u 6D DDE-final

+ u1 SW DDE-intermediate

+ SE EE

+ Au(D 2 + W2) IS

(Share-DAP) 6X l u2 6D DDE-final

+ u2 W DDE-intermediate

+ KE EE

+ AuA(D1 + W1) IS

- 144 -

Total Method, First Difference

Total Effect of:

(Share-TAL) AX - VIuIAD DDE

+ R1 AE EE

-A

+ RAu(D2 + I 2) IS

+ RlulAX2 TC

(Share-TAP) AX - R2u2 AD DDE

+ R2AE ER

2

+ R2Au(DI + W1) IS

+ R u2AAX, TC

Direct Method. First Difference Direct Effect of:

(Share-DAL) AX - u1 AD DDE-final

+ u1AW DDE-intermediate

+ AE EE

+ Au(D2 + W2) Is

- 145 -

(Share-DAP) AX - u2 AD DDE-final

+ u2 AW DDE-intermediate

+ AE EE

+ Au(D1 + W1 ) IS

D. Sources of Growth Decomposition of Value Added

In view of the changes that occur in value added coefficients over

time, the sources of growth analysis may be expressed in net output or value

added terms, rather than in gross output. This procedure is particularly

suited to the analysis of trade effects on industrialization when structural

shifts in exports reflect only minor improvements in the stages of primary

commodities before they are shipped to export markets (as in the cases of

fruit, tobacco and cotton processing in Turkey's export trade).

Let Vit : value added in sector i in period t (t-1,2)

vit : value added coefficient I in period t (t-1,2)

In matrix form,

vt ' vtXt

where vt is a diagotnal matrix of coefficients.

Then, the contributions to change in value added over time may

broadly be decomposed into two parts as follows:

Change inProduction Change Value Added Coefficient

Deviation:

Laspeyres SV- v ax + (Av) X2

- 146 -

Paasche +V v2 6x (Av) XX

First Difference:

Laspeyres AV - v1 AX + (Av) X2

Paasche AV A v2 AX + (Av) X1

By further decomposing the vector of production change into its

component vectors (by either the composition or share measures above), it is

possible to differentiate the effects of five causal factors in value added

growth and structural change: (1) DDE, (2) EE, (3) IS, (4) changes in 1-0

coefficients, and (5) changes in value added coefficients.

E. Sources of Growth Decomposition of Imports

The sources of import growth are decomposed by first difference

measures by adapting Syrquin's (1976) methodology to the case where

disaggregated data of import use are not available. The following definitions

are introduced:

it Mit / (Dit + Wt), and

mt - diagonal matrix of mits.

Total Method, First Difference

Total Effect of:

(M-TAL) AM - (in1 + m1 A1 R1 u1)AD DDE

+ m Al R AE EE

+ (I-m A1 R) Am (D2 + W2) IS

+ (m1 + ml A1l i ul) AA A 2 TC

- 147 -

(M-TAP) AM - (i 2 + m2 A2 AD DDE

+i A2 R2 E EE

+ (I-2 A2 R2 ) aim (D1 + W1 ) IS

+ (m2 + m2 A2 R2 u2) A A2 TC

Direct Method, First Difference

Direct Effect of:

(M DAL) AM - m AD DDE-final

+ ml AW DDE-intermediate

+ Am (D 2 + 2) IS

(M-DAP) AM - m2 AD DDE-final

+ m2 AW DDE-intermediate

Am (D 1 + W1) IS

F. Sources of Growth Decomposition of Primary Factors

The sources of growth of primary factors can be analyzed with the

approach outlined for the decomposition of value added changes.

Let Qit: pr:lmary factor use in sector i in period t (t-1,2)

qit: primary factor coefficient i in period t (t-1,2)

In matrix form

Qt q t xt

where qt is a. diagonal matrix of coefficients.

Then, the firet stage of the decomposition process proceeds as

follows:

- 148 -

Change in

Production Change Factor Coefficient

Deviation

Laspeyres Q -q 6 + (Aq)X2

Paasche 6Q q2 6X + (Aq)X 1

First Difference

Laspeyres AQ - qAX + (Aq)X2

Paasche AQ -q2 AX + (Aq)X1

In the second stage of analysis, the vector of production change can

be decomposed into its component parts with any one of either the total or

direct decomposition equations outlined in Appendix 1.C. In this study, the

changes in value added and employment are decomposed by the constant share

method.

An alternative approach suggested by Watanabe (1975) attempts to

separate the total effects of two main phenomena (net final demand expansion

and changes in production technologies) as follows:

Let Ft : net final demand vector in period t

Then, AQ q2 R2 F2 - q1 1 1

Total Effect ofA

or, AQ q2 R2 AF Net final demand expansion

+ A(qR)F1 Changes in production

technologies

Changes in production technologies involve changes in both I-0 and

factor coefficients. Because it is more suitable to aggregate analysis, the

latter approach is employed in analyzing the changes in fixed investments in

the two successive five-year periods during 1963-73.

- 149 -

G. Sources of Changes in Relative Sector Prices

The sources of differential changes in sectoral gross output prices

are decomposed under a miodified form of a price model originally designed by

Watanabe (1975) .2 For the analysis of price changes, the following

additional variables are introduced:

Pit : price (index) of output of sector i (t-1,2)

Vit : current price value added of sector i (t-1,2)

Yit : current price wage rate of sector I (t-1,2)

Also, let Nit - number of employees in sector I (t-1,2)

8 : ratio of general price level in period 2 to that of

period 1.

Nitnit Xit

z Xi ' yi ni + residuali it it t

6i1 Pi2 ail

i 1i2 11

In matrix notation, price formation In the I-0 system is given as:

t t t

1/ Watanabe (1975) analyzes price changes in a larger framework incorporatingcapltal and labor inputs and prices. In the absence of capital stockdata, the present pric:e analysis treats the effects of changes in capital-output and profit ratios on a residual basis.

- 150 -

where the sign (') denotes a transposed matrix.

Then,

(2) pP' - Z2 (AR) + (AZ') R1

(3) Sz' - y; (An) + ni (dY) + Residual

Hence, the sources of deviations in prices may be decomposed as follows:

Total Effect of:

(4) 8P' - Z2 (AR) Changes in I-0 structuresA

+ Y2 (An) R. Changes in labor productivityA

+ ni (Sy) R1 Deviations in wages

+ Residual Changes in residual value added

Remark: The changes in "residual" comprise changes in the non-wage components

of the value added (such as rents, depreciation, profits, indirect

taxes and subsidies). When the capital stock data become available,

the equation (4) may be adjusted accordingly.

- 151 -

APPENDIX 2

DEFLATION OF THE TURKISH 1-0 TABLES:

A Summary Note on the Methodology and Related Empirical Research

A. General

This sources of growth study for Turkey is largely made possible by

three I-0 tables available for the benchmark years 1963, 1968 and 1973. These

tables have been adjusted and re-organized around 25X25 sectors, as defined in

Tables A2.1 and A2.2. The 1963 and 1973 tables were then deflated to constant

1968 prices. For the earlier benchmark years 1953 and 1958 (for which I-0

tables are not available), the data on sectoral output, trade and final demand

are also processed at the 25 sector level of aggregation, and estimated in

1968 prices.

The deflation oE the 1963 and 1973 tables to constant 1968 prices by

the double deflation method is briefly described in the following paragraphs.

(The deflation effort wasg somewhat simplified because imports are classified

by sector of origin (i.e., on a competitive basis) in the official Turkish I-0

tables.)

B. Deflation Procedure

Notation

Xi : sectoral production (or output) in current prices

(including indirect taxes on domestic output and

import taxes on imports (Mi))

Di : sectoral domestic final demand in current prices

Ei : sectoral exports (ex-factory) in current prices

- 152 -

ML : sectoral Imports (c.l.f.) In current prices

S .: sectoral supply for domestic use in current prices (- Xi + Ml -Bi)

aii : technical coefficient in current prices

* * * * * *Xi Mi , Di * Bi * Si , and a., are the values measured In constant

1968 prices.

P , eand Pi are the prices indices for X1, Mis E., and Siv

respectively (1968 - 1.0).

Note: (i) The flows in the I-0 tables exclude trade and transport margins;

(11) Pz is essentially a composite price index which measures the

price of output Xi including import taxes on Mi;

(iii) P is derived from Equation (4); and

(iv) i,J denote sectors, i, -

Definitional Relations

(1) ;X 'i/Pi

(2) mN -N/P m

(3) E; E iP e

(4) P, X + M E

(5) D; - D Pi

(6) ai aij p (- )

I i /p

- 153 -

Material Balances (In current prices)

(7) X 1J Zai Xi + DI +E BI M-

Material Balances (In constant 1968 domestic prices)

In matrix notation,,

(8) g - (I-A ) 1(D + E -HM)* *

where A - (aij)

Remarks (i) X provided by Equation (8) is in principle equal to

obtained by Equation (1). Due to rounding errors in the estimation

* * * *of aij D E and M and In the computation of the inverse

matrix (I-A ) , these two sets of estimates for X will be only

approximately equal. In the Turkey exercise, the estimates (X )

obtained by Equations (1) and (8) turned out to be very close for

both benchmarlc years (1963 and 1973). In the analysis of sources of

growth, the estimates obtained by equation (8) are adopted in the

calculation of production growth and deviations from proportional

expansion.

(ii) The value added coefficients (including indirect taxes on

sectoral output and imports) are the following:

v~ ljaij

* ~~xv a 1- iav;j iii

- 154 -

Similarly, gross domestic product measured in current and

constant prices becomes,respectively:

GDP - E v X

and* * *

GDP - 5 viXi

For the comparison of national income estimates and deflated I-0

aggregates, sectoral value added figures are recomputed in producer

prices which are net of import taxes, as shown in Table 3.1 in

Chapter 3.

(iii) For decomposition of value added, it is sufficient to use the

estimates for (v) without recomputing them in terms of producer

prices in the strict sense (i.e., net of import tax on Mj).

C. Construction of Trade Price Indices

There are no sectorally arranged trade (i.e., import and export)

price indices available in Turkey which could be used in the present study.

Consequently, a special effort was required to construct sectoral trade price

indices (at a 25 sector level of aggregation, as defined in Table A.2.1) to

deflate current price sectoral trade data to constant domestic prices. The

empirical work undertaken in this context is outlined as follows:

(i) The year 1963 was taken as the base period in the original

calculation of sectoral average trade price indices, but subsequently the

base was switched to 1968. In view of the continually shifting

composition of trade (imports, in particular) during 1953-73, the year

1963 represents a more reasonable mid-point than the other benchmark

periods. The selection of 1963, which had a relatively strong balance of

payments, also makes it possible to contrast the characteristics of the

- 155 -

unplanned and planned eras of 1953-63 and 1963-73, respectively.

(ii) After the establishment of the base 1963, the next step was to

select two separate samples of commodities for the imports and exports of

each international sector in the I-0 system. The commodities included in

the samples were determined on two practical grounds: (1) the availability

of the quantity and value statistics at the commodity level in all

benchmark years; and (2) their relative importance in sectoral trade in

the larger segment of the period 1953-73. The commodity breakdown of

sectoral imports and exports of the 1963 I-0 table (in Chakraverti et al

(1970)), and the Ul!l Yearbooks of International Trade Statistics provided

helpful information at this point (see Tables A.2.6 and A.2.7).

(iii) The price indices for specific commodity imports (c.i.f.) and

exports (f.o.b.) incorporated in the sectoral samples were calculated in

terms of their unit: values with the base 1963, using Turkey's tables in

the UN Yearbooks of International Trade Statistics, for the benchmark

years 1953, 1958, 19168 and 1973. The years 1953 and 1958 represent three-

year averages for 1952-54 and 1957-59, respectively, in order to smooth

out the conjunctural variations in these subperiods. The US dollar values

of the international trade data were converted to local currency values

(i.e., Turkish lira) at the prevailing official exchange rates. For 1973,

the existence of multiple exchange rates was taken into account in view of

the State Institute of Statistics, (SIS) foreign trade data 1/

(iv) The average import and export price indices were calculated for

sectoral samples using the 1963 relative weights (with the Laspeyres

method), but were sritched to the base year 1968, which is the constant-

See, for example, (SIS) Statistical Yearbook of Turkey, 1975.

- 156 -

price reference year in the main study.

(v) In sectors where information on commodlty trade was limited and/or

inconsistent, World Bank price indices for world exports of minerals and

manufactured goods were used. l The Bank international price indices are

based on current US dollar values, and, therefore, had to be adjusted for

changes in Turkish foreign exchange rates during 1953-73. Because the

World Bank manufactured trade prices are adjusted for freight charges from

developed to developing countries, they could be directly used in the

calculation of Turkey's import price indices in manufacturing sectors

lacking adequate price data.

(vi) While the use of c.i.f. prices for imports is consistent with the

Turkish I-0 conventions, the f.o.b. price indices for sectoral commodity

exports needed to be adjusted for differences in f.o.b. and ex-factory

prices. As a result of the lack of readily available data on export

subsidies, and to avoid additional cumbersome work, it was assumed that

the long-term movements of the domestic f.o.b. and ex-factory prices were

approximately the same at the sector level during the time period of this

analysis. Thus, the domestic f.o.b. price indices were used to deflate

commodity export vectors in the current-price 1-0 tables.

(vii) The current values of invisible imports were deflated to constant

prices by the World Bank price index for manufactured goods trade.

However, the deflation of the invisible service exports in the 1-0 tables

required two types of treatment for: (1) distributional (mainly, trade and

transport) margins on commodity exports; and (2) direct service exports.

For the first part, the economy-wide average (commodity) f.o.b. price

See World Bank (1975), "Price Forecasts for Major Primary Commodities,"Tables 11 and 17.

- 157 -

index was used. Second, the direct service exports were deflated by the

Bank price index used for Invisible imports.

(viii) To fill various small gaps in trade price statistics, available

expert judgment was used (e.g., the minor account of electricity trade in

1973). Tables A..2.3 and A.2.4 list the results of empirical work on the

construction of trade price indices, while Tables A.2.6 and A.2.7 present

the base period weights of 1963 for commodity imports and exports in

individual sectors,

D. Construction of Price Indices for Production and Supply

The price indices for production (or output) and supply at the 25

sector level were constructed for the deflation of the 1963 and 1973 I-0

tables into 1968 constant prices. The sectoral production estimates for the

benchmark years 1953 and 1958 were derived primarily from the data expressed

in 1968 prices, and thLus required no special work on production prices.

For the years 1963 and 1973, the main sources of production price

data were (1) the new Wholesale Price Index (new WPI) of the Ministry of

Commerce and SIS,1/ and (2) the sectoral value added deflators used in the

national accounts worked out by the SIS. While the first source was used in

estimating the prices of agricultural and industrial production (with some

adjustments for the year 1973), the second source was used to estimate the

service sectors' prices. As Indicated above, the gross production price (Pi)

is essentially a comlposite price Index which defines the price of production

Xi including import taxes on M1 . Consequently, the construction of this index

involved several steps as follows:

(i) Determination of the sectoral production figures net of import taxes

See Gocmencelebi (1974).

- 158 -

in current price I-0 tables that were rearranged at the 25 sector level of

aggregation;

(ii) Estimation of price indices for sectoral production net of Import

taxes (from the new WPI and GDP deflator series);

(iil) Deflation of sectoral production data, net of import taxes, by price

indices estimated in step (ii) into 1968 constant prices;

(iv) Estimation of sectoral import taxes in 1968 prices, using 1968 tax

rates on deflated sectoral imports;

(v) Calculation of the 1968 constant price value of Xi by adding the

reestimated import taxes (in 1968 prices) to the deflated net production

figures determined in step (iii); and

(vi) Estimation of the gross production price (Pi) on the basis of the

current price and constant price value of Xi After the estimation of

the price index (pt) , the sectoral supply price (Pt) was determined in a

manner shown in subsection B in this annex, using Equation (4). The

results are listed in Table A.2.5.

Although the use of the United Nations ISIC sectoral classification

in the new WPI, unlike the other WPIs available in Turkey, facilitates the

construction of production price deflators for I-0 studies, the new WPI

estimates are not realistic in some periods during which substantial price

changes took place in the economy. In particular, for the period 1972-73, the

new WPI data does not adequately reflect the increases that actually occurred

in industrial prices. As a result, it underestimates the rise in the general

price level. The alternative price estimates for this period are the

following:

- 159 -

Annual Rate of Increase (x) 1963-100

General Index 1972 1973 1972 1973

The New WPI (Ministry of 14.1 17.5 184.3 216.6

Commerce)

The Old WPI (Ministry of

Commerce) 18.0 17.5 199.3 240.1

The WPI of the Istanbul Chamber 15.5 21.0 195.6 236.7

of Commerce

The 1973 estimates of the new WPI for manufacturing subsectors have

been adjusted upwards on the basis of various price data in order to

approximate the 1968 sectoral value added estimates of the SIS by the double

deflation of the 1973 I-0 table. The deflated aggregates of this table are

compared with the estimates of official national accounts in the main text in

Chapter 3.B.

- 160 -

Table A.2.1

Sector Classification (25 Sector Level)

KSt tojSectors in Official -O TablesSector 19 6 1-11 196 - 19731

1. Agriculture, Forestry 1,2 1,2 1,3,221/2. Livestock, Fishing 3 3 2,43. Crude Oil 6 6 64. Coal Mining 4 4 55. Other Mining 5,6 5,7 7,8,9,106. Food Processing 7,8,9,10 8 to 13 11 to 197. Textiles, Apparels 11 14,16 20,218. Wood Products 12 17,18 25,269. Paper and Products 13 19,20 27,2810. Leather and Products 14 15,21 23,2411. Rubber and Plastic Products 15 22,36 34,3512. Chemicals 16,17 23,24 29,30,3113. Petroleum and Coal Products 18 25,26 32,3314. Non-metallic Mineral Products 19,20 27,28 36,37,3815. Basic Metals 21,22 29,30 39,4016. Metal Products 23 31,37 41,4917. Machinery 24,25 32,33 42,43,4418. Transport Equipment 26 34,35 45 to 4819. Electricity, Gas, Water 27 38,39 50,5120. Construction 34,35 47,48 52,5321. Transportation, Communication 28,29,31 40,41,43 56 to 6022. Trade 30 42 5423. Other Services 32,33 44,45,46 55,61,6224. Public Services 36 49 6325. Ownership of Dwellings 37 50 64

1/ See the remarks on the adjustment of the 1963 table in the text in Chapter3.B.

2/ For consistency with the 1968 1-0 Table, cotton ginning exports areIncluded in agriculture. In turn, cotton ginning for domestic use isincorporated Into the textiles sector.

Source for 1963 I-0 table: Chakraverty et al (1970).Source for 1968 and 1973 I-0 tables: State Institute of Statistics.

- 161 -

Table A.2.2

Major Sectors (9 Sector Level)

Aggregated Corresponding Code No.Classification Ž1 in Table A.2.1

IA Agriculturie 1,2

IB Mining 3,4,5

IlA Food 6

IIB Textiles and Leather 7,10

IIC Light Intermediates 8,9,11

IID Basic Intermediates 12,13,14,15

III Machinery 16,17,18

III Social Overhead 19,20,21

IV Services 22-25

1/ The Roman numerals I and II in the aggregated classification refer toprimary and manufacturing sectors, respectively.

- 162 -

Table A.2.3

Trade Prices: 1953, 1958 1,

1953 1958Imports Exports Imports Exports

Sector (c.i.f.) (f.o.b.) (c.i.f.) (f.o.b.)(1968-100)

1 53.1 34.1 34.9 34.32 53.8 32.1 38.6 31.934 26.2 26.1 39.8 39.85 26.2 37.2 39.8 35.46 53.2 38.7 42.5 37.07 80.1 17.8 48.1 18.58 27.2 27.2 28.4 28.49 46.5 27.2 49.3 28.410 27.2 23.6 28.4 23.211 33.4 27.2 33.8 32.212 49.5 33.0 43.6 34.413 42.3 35.6 47.5 37.114 23.5 27.2 32.9 28.415 46.5 25.8 45.7 20.016 29.8 27.2 32.4 28.417 19.2 27.2 25.3 28.418 24.5 27.2 27.6 28.4

1/ 1953 and 1958 figures are, respectively, 1952-54 and 1957-59 averages;price data refers to commodity trade measured in domestic prices; for theanalysis of sources of growth, f.o.b. exports values are transformed toex-factory exports using estimates for distributive margins on commodityexports.

Source: Estimates derived by the author.

- 163 -

Table A.2.4

Trade Prices: 1963, 1973 1,

1963 _ 1973 ^Imports Exports Imports Exports-(c.i.f.) (c.i.f.)

Sector (1968-100)

1 98.3 107.0 277.2 207.42 141.8 76.5 304.2 299.53 118.5 118.5 279.6 279.64 75.0 75.0 233.3 228.85 75.0 74.3 233.3 171.06 103.1 149.3 278.5 280.77 141.0 62.1 252.5 257.68 95.1 95.1 241.2 236.59 106.7 95.1 385.1 236.510 95.1 75.5 241.2 251.011 98.4 95.1 183.3 236.512 96.1 115.5 172.9 287.113 125.6 124.5 194.6 380.814 125.0 95.1 289.8 236.515 118.3 67.0 282.8 199.216 95.4 95.1 201.9 236.517 93.8 95.1 272.6 236.518 88.3 95.1 240.6 236.519 - - 250.0 250.020 - - - -21 97.7 95.2 239.0 231.022 97.7 98.0 - 222.623 97.7 95.2 239.0 236.524 97.7 94.3 - -25 - - _ _

1/ Domestic price indices for sectoral trade flows included in the I-0tables.

2/ Export prices denote! producer (or ex-factory) prices of sectoral goodsdestined for export markets; for sectors 21 and 22 (transport and trade,respectively), export: prices are composite prices incorporating both theprices of invisible exports and of distributive margins on commodityexports in sectors 1 to 18.


- 164 -

Table A.2.5

Price Indices for Sectoral Gross Production andSupply: 1963, 1973 1/

1963 1973Gross Gross

Sector Production Supply Production Supply(1968-100)

1 85.6 84.5 214.2 215.12 72.9 73.7 225.1 224.73 96.2 117.1 213.3 257.14 73.2 73.3 154.0 154.15 72.2 70.8 148.4 152.96 79.4 78.7 189.7 181.87 91.4 92.8 180.0 176.78 76.6 77.0 231.4 231.59 95.6 96.8 167.0 173.910 89.0 90.5 190.0 190.111 84.3 87.6 143.6 144.512 87.9 90.3 163.6 166.113 73.2 74.0 141.4 138.314 81.8 83.8 164.5 165.815 79.2 85.0 206.0 213.216 79.8 82.4 164.3 168.417 74.0 82.3 204.6 228.818 67.9 74.3 191.8 200.419 69.7 69.7 174.9 175.120 74.1 74.1 180.0 180.221 87.9 87.9 172.5 168.122 82.0 82.0 189.2 187.323 78.7 78.7 200.0 196.124 71.5 71.5 234.7 234.725 76.3 76.3 174.1 174.2

1/ See Appendix 21B for definitions.


- 165 -

Table A.2.6a

Relative Weights of Commodities in theConstruction of the Import Price Index

SITCSector Code 1/ 1963 Weights

1 041 Wheat 92071 Coffee Spices, etc. 6242 Wood 2

100

2 211.1 Hides of Cattle 20262.1 Sheep's Wool, Greasy 80

100

3 331 Crude Oil 100

4 32 Coal, Coke 100

5 28 Metal ores 100

6 411 Animal Oils, Fats 22421 Fixed Vegetable Oils 78

100

7 651 Textile Yarn, Thread 68653 Textile Fabrics 32

100

8 63 Wood, Cork, Prod. 6682 Furniture 34

100

9 641 Paper and Paperboard 100

(Cont'd)

- 166 -

Table A.2.6b

Relative Weights of Commodities in the Constructionof the Import Price Index (Cont'd)

SITCSector Code 1963 Weights

10 61 Leather Products 100or 211.4 (As proxies for 61) 26

211.6 74

100

11 629 Articles of Rubber 80231 Crude Rubber 20

100

12 561 Fertilizers 1051,53,54,58,59, Other Chemicals 90

100

13 332 Petroleum Products 100

14 662 Bricks and Tiles 46664 Glass 54

100

15 67 (Excluding 678) Iron and Steel 8668 Non-Ferrous Metals 14

100

16 678 Tubes, Pipes, Fittings 1569 Manufactured Metals 5786 Scientific Instruments 28

100

17 71 Non-electrical Machinery 7772 Electrical Machinery 23

100

(Cont'd)

- 167 -

Table A.2.6cRelative Weights of Commodities in the Construction of

the Import Price Index (Cont'd)

SITCSector Code - 1963 Weights

Breakdown of 71

711 13

712 5

714 2

715 8

717 13

718 11

719 48

100

18 731 Railway Vehicles 10

732 Road Mot. Vehicles 90

100

I/ Standard International Trade Classification Code of the United Nations.


- 168 -

Table A.2.7aRelative Weights of Commodities in the Construction

of the Export Price Index

1/ SITC 2/Sector - Code - 1963 Weights

1 051 Fruit, fresh, and Nuts 27052 Dried Fruit 10121 Tobacco 29263.1 Raw Cotton 34

100

2 002.1 Bovine Animals 47002.2 Sheep and Goats031 Fish 7262 Wool 46

100

5 276 Other Crude Minerals 35283 Non-ferrous Ores 65

100

6 061 Sugar and Honey 30421.5 Olive Oil 33081 Fodder, n.e.c. 37

100

7 65 Textile Yarns and Fabrics 100

8 63 Wood and Cork Prod. 100

9 64 Paper and Paperboard 100

10 211.4 As proxies for Leather Prod. 26211.6 74

100

(Cont'd)

- 169 -

Table A.2.7bRelative Weights of Commodities in the Construction

of the Esport Price Index (Cont'd)

SITCSector 1/ Code 2/ 1963 Weights

12 51 Chemicals 47532.4 Tanning Extracts 53

13 332.1 Motor Spirit 9332.4 Residual Fuel Oil 91

15 671 Iron and Steel 5682.1 Copper and Alloys 95

1/ The export prices of commodity sectors 3,4,11,14,17 and 18 are estimatedon the basis of World Bank world price indices for minerals and/ormanufactured exports.

2/ See footnote 1 in Table A.2.6.


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