Int. J. Middle East Stud. 23 (1991), 163-176. Printed in the United States of America

Ziya Onis

THE EVOLUTION OF PRIVATIZATION IN TURKEY:THE INSTITUTIONAL CONTEXT OFPUBLIC-ENTERPRISE REFORM

In the 1980s public policy shifted sharply in favor of market-based solutions, incontrast to the previously dominant "Keynesian" approach to economic manage-ment. A number of countries, irrespective of their regimes or stages of develop-ment, are currently implementing programs designed to reduce the size and scopeof the public sector and strengthen the market. The privatization of publicenterprises constitutes a key element in such a strategy.1 Yet hitherto, the extent ofprivatization—the number of enterprises involved as well as the scale of divesti-ture—has been extremely limited, especially considering the amount of rhetoricthe idea has generated. In addition, the vigor with which privatization policieshave been pursued also shows considerable variation among countries. These"stylized facts" of privatization clearly merit an explanation.2 Here I will look forthat explanation by using the Turkish experience with privatization between1980 and 1989 as a case study.

Turkey embarked upon a major program of structural adjustment in 1980. Theprogram was designed to accomplish the transition to export-oriented growth andto overcome the limits on growth imposed by the import-substitution strategy. Inspite of the fact that the general thrust of the strategy has been in the direction ofplacing greater reliance on market forces and reducing the scope for state interven-tion, the degree of privatization has remained very restricted. The first major caseof divestiture occurred in 1988, eight years after the structural adjustment pro-gram began, and it was not until then that the process started to gain momentum.

In Turkey, the origins of the state economic enterprises can be traced back tothe early years of the Republic, the "etatist" period of the 1930s. State economicenterprises (SEEs) provided the initial impetus for industrialization in Turkey,which involved import substitution in basic consumer-goods industries, and theycompensated for the lack of an indigenous business elite at the time. While privatebusiness became increasingly important in the post-1950 period, the SEEs thatwere established in the 1930s continued to perform a central, if modified, role inindustrialization. Between 1963 and 1978, when the import-substitution strategywas implemented under successive five-year plans, the SEEs were still dominant inthe intermediate and capital-goods industries. Many were assigned the function ofproviding subsidized inputs to the private sector, a process facilitated by extensiveprice deregulation.

© 1991 Cambridge University Press0020-7438/91 $5.00+.00

164 Ziya

The importance of the SEEs in the Turkish economy is evident from theircontribution to total industrial production as well as to overall capital formation.The public sector accounted, on average, for more than 50 percent of total fixedcapital formation and around 40 percent of total value added in the manufactur-ing industry during the course of the 1980s.

The underlying problems of the SEEs intensified in the course of the 1970s.Their operating losses grew, and they had to turn to the central government'sbudget to finance them, which in turn fueled the accelerating inflation and theensuing crisis at the end of the decade. Mounting concern over the performance ofthe public-enterprise sector led to attempts to diagnose the origins of its problems.The diagnosis had several elements: the absence of autonomy and managerialincentives (identified as the central problem); frequent interference from politi-cians and bureaucrats; and failure of the state-enterprise sector to provide incen-tives to the managerial elite that would encourage increases in productivity andefficiency. The link which existed between the SEEs' deficits and the centralgovernment's budget implied that the enterprises concerned could operate with a"soft-budget constraint," which in turn constituted another source of relaxation inperformance, resulting in still greater inefficiency.

The lack of pressure to improve performance was exacerbated by the fact thatthe majority of the SEEs operated in either monopolistic or oligopolistic markets,shielded from competitive pressures by high rates of protection, as part of theoverall import-substitution strategy. Labor hoarding constituted another majorproblem of the public-enterprise sector. The SEEs had emerged as a source ofrapid employment expansion, motivated by the political concern with generatingsupport for the government in power.3

Attempts to reform the SEEs gained momentum in the second half of the 1970s.The fourth Five-Year Development Plan, which was prepared for 1979-83 but notimplemented, included proposals to reform the SEE sector, improving both itsorganizational structures and the pricing and investment decisions of the indi-vidual enterprises. SEE managers were given autonomy from politicians andbureaucrats, and incentives were established; both moves were meant to bolsterthe proposals directed toward organizational reform.

The pressures and proposals in favor of organizational changes within the SEEsector continued well into the 1980s, in spite of a major change in the overalldirection of economic policy. Neither privatization nor the "liberalization" of theSEEs, involving their opening up to greater external competition, elicited wide-spread acceptance. They had been established in Kemal Atatiirk's time, andconstituted an important historical legacy. They had also been part of a broaderproject of national reconstruction undertaken by a bureaucratic elite with a clearmission to act as the "guardian of the national interest." That the state economicenterprises were considered to be part of the heritage of the Kemalist era con-strained the possible transfer of ownership from the public to the private sector.

Proposals for organizational reform culminated in the Aysan Report of 1982;its basic thrust involved organizing the SEEs as sector-holding companies. Draw-ing their inspiration from the Italian IRI model, the proposals embodied in the

Privatization in Turkey 165

report had an important influence over public performance as long as the Ulusugovernment was in office, and some of its proposals were actually implemented.4

But in spite of the radical shift in economic policy in the 1980s in favor ofliberalization, the "neo-etatist" stance continued to dominate public-sector reformin the years 1980-83. In retrospect, the debates surrounding SEE reform and theorientation of policy reflected the strength of the traditional bureaucracy. Thishighly centralized bureaucracy and the associated state tradition undoubtedlyinfluenced the course of public-sector reform at that time.5

The World Bank had a crucial influence on the pattern of public-sector reformbetween 1980 and 1984. In these years, Turkey obtained five structural adjustmentloans (SALs), a record number, possibly because the bank regarded Turkey as atest case for a new type of adjustment program, which combined short-term stabili-zation with medium-term structural change, and involved close collaboration be-tween the World Bank and the IMF.6 The Turkish case involved long-termadjustment, so the World Bank was involved as the principal actor.

The available evidence indicates that the World Bank has adopted an essentiallycautious and pragmatic approach to privatization:

The popular stereotype which pictures the Bank as being engaged in a privatization crusadein the Third World is highly inaccurate. In its Structural Adjustment Loan policy condi-tions, the major instrument by which it has sought to reform policy towards publicenterprises, it has concentrated very much on the creation of competition and on efficiencyaudits for state monopolies rather than divestiture of these organizations.7

The Turkish case conformed rather closely to the general pattern. The structuraladjustment program is a pragmatic, stage-by-stage approach that has deliberatelyavoided drastic, wholesale liberalization. The SAL programs focused on threemajor aspects of public-enterprise reform: improving short-term financial struc-ture; redirecting investment programs and financing them from non-budgetsources; and changing the role of the SEEs to support the private sector. Privatiza-tion has not appeared on the agenda of policy reform.8

Subsequent evidence indicates that the SEEs complied with World Bank condi-tions. As a result of price deregulation, SEE profits rose after 1980 and theirclaims on the budget were reduced. The link between SEE financial requirementsand the central government budget was essentially broken. Profits and the elimi-nation of this link were the two key changes that distinguished the system before1980 from the system that followed.9 Yet it was widely recognized that increasedprofitability did not necessarily mean an improvement in productivity and effi-ciency. A significant component of the SEE sector operated under monopolistic orimperfectly competitive conditions; profitability was mainly the outcome of higherprices, not improvements in productivity.10

Following the reestablishment of multi-party democracy in November 1983, thenewly elected Ozal government pressed for reforms to accelerate the pace oftransition to a market-oriented economy. Trade and capital-account liberalizationannounced in December 1983 and January 1984 were among the very first mea-sures of the new government." Parallel to the movement toward a more liberal

166 Ziya Oni§

trading regime, privatization also appeared on the policy agenda for the first timein 1984. Initially, the State Planning Organization was made the principal institu-tion responsible for the organization and implementation of the privatizationprogram; it then commissioned the Morgan Guaranty Trust to draw up a masterplan for privatization. The Morgan Bank submitted its report in May 1986.12

The report prepared by the Morgan Guaranty Trust is illuminating in itsexposition of the general principles that have subsequently shaped the privatiza-tion process in Turkey. Its principal objective was to rank enterprises according totheir suitability for divestiture. "Saleability" was established as the primary cri-terion which, in turn, was closely linked to the economic viability of the enterprise.Current operating profitability and market potential were identified as the two keyindicators of economic viability.

Given priority were three major candidates identified as ideal for privatization,with the entire company considered to be suitable for divestiture. These wereTORBAN (a tourism chain), THY (the Turkish National Airlines), and USA§ (anairline catering company). These three enterprises were followed by two com-panies, YEMSAN and CITOSAN (the first, a manufacturer of animal feed, andthe second of cement); in both cases, the majority of the company was consideredto be suitable for divestiture. The report also argued that the government ought totake immediate steps toward privatizing the companies involved.

In retrospect, two elements of the report are significant in evaluating thesubsequent evolution of privatization in Turkey. The first is the familiar argumentthat because SEEs hold a monopoly position, their privatization will not bebeneficial unless it is accompanied by specific measures to enhance competition.Yet in the specific proposals involving the five companies to be privatized, noreference to monopoly regulation is made. The report largely ignores the subjectof a regulatory framework designed to create a competitive environment for thecompanies concerned once the transfer of ownership has been established.13

Second, foreign investors are identified as the principal candidates for takingover the companies selected for divestiture. In each of the priority cases, foreigninvestors figured among the preferred investor groups. The report often mentionsthat privatization involving investment from overseas represents an importantsource of capital and managerial and technical know-how, as well as being avehicle for enhancing the competitiveness of the companies divested, suggestingthat foreign rather than domestic investors will emerge as the principal partici-pants in the privatization process.

ORGANIZATION OF PRIVATIZATION IN TURKEY

The legal foundations for the privatization program were established in 1984,together with the Board of the Mass Housing and Public Participation Fund(PPF). The legislation empowered the cabinet to select the SEEs to be privatized.Once it had reached its decision, the SEE selected for divestiture would be placedunder the direction of the PPF, to which its assets would be transferred; the PPF

Privatization in Turkey 167

would then have the responsibility for the company's management, rehabilitation,and mode of transfer to private ownership.14

A centralized organization was set up to manage the privatization process. Itwas directly responsible to the prime minister and the cabinet, and independent ofother layers of the bureaucracy, such as the Treasury, the State Planning Organi-zation, and the Central Bank. The decision to empower the PPF to administer theprivatization program may have been made to allow the central government tobypass both the traditional bureaucracy and the Parliament, and to enhance itsown autonomy. The PPF was also conceived as an instrument for replacing thetraditional patrimonial bureaucracy with a managerial bureaucracy. The directtransfusion of a group of U.S. educated technocrats into the upper layers of thebureaucratic apparatus was part of the post-1983 phase, and the newly createdPPF was dominated by members of this technocratic elite.15

The PPF was also responsible for directing the largest of the extra-budgetaryfunds (EBFs) which constituted a major institutional innovation of the post-1983Ozal government. They provide considerable leverage to the central governmentfor directing public expenditure into specific uses: expenditures can be madewithout parliamentary approval, a privilege not granted to other forms of publicexpenditure financed directly from the budget. Consequently, EBFs represent amechanism that ensures greater autonomy of the central government vis-a-vis theparliament and the traditional bureaucracy.16

An important lesson to be drawn from the Turkish experiment is that privati-zation does not necessarily result in a retreat of the state. The dichotomy ofretreating states and expanding societies is, in fact, both superficial and mislead-ing. What follows liberalization and privatization experiments is not a retreat ofthe state, but rather its reorganization or reconstitution.

Three basic instruments were used to implement privatization: direct sales ofSEE assets; offers to sell management rights of an enterprise; and offers ofcertificates entitling the public to a share in the operating income of the enterprise.Clearly, only the first category could be classified as "privatization" in the usualsense of a transfer of ownership from the public to the private sector. For thoseSEEs involved in infrastructure—energy, transport, and communications—pri-vatization was confined to the third option, revenue-sharing certificates.

The first set of revenue-sharing certificates (RSCs) were issued in December1984 in conjunction with the first Bosphorus bridge. Rather unexpectedly, theywere sold out within hours. This was followed by the issue of RSCs for the Kebandam and hydroelectric power station in January 1985 and the joint-operatingrevenues of the Keban and the Oymapinar power stations (totalling 180 billionTurkish liras), which were again sold out in a single month. These experimentsconfirmed the buoyant demand for public assets, and provided a favorable signalto the authorities to press ahead with privatization in the normal sense of theterm.17

The privatization program incorporated a total of forty-five enterprises, classi-fied either as SEEs or mixed corporations with public participation.18 In spite ofthe scale of the program envisaged, little progress was made in 1986-87. The first

168 Ziya 6ni§

case of divestiture via the issue of share certificates occurred in February 1988, andinvolved the transfer of public participation in the telecommunications company,Teletas. The shares were sold through 4,822 branch banks. When the transfer wascompleted, the company had 41,695 shareholders, the largest number in thecountry.

Teletas. is a mixed corporation. Originally, the government controlled 40 per-cent of the company's shares, with the remainder belonging to a major foreignpartner, the Bell Telephone Company (39 percent), and to a number of miscel-laneous public administrations (21 percent). The privatization of Teletas. involvedthe sale of 22 percent of the company's shares under government control to thegeneral public. The British model, involving the examples of British Telecom andBritish Gas, appears to have had an influence on the selection of this company.19

Privatization programs typically have several objectives, but priorities can shiftonce the process builds up momentum.20 In Turkey, the policymakers thought ofprivatization as a mechanism for improving efficiency and promoting the develop-ment of the capital market by injecting vitality into it and placing it onto aself-sustained path of expansion. This development of the capital market would,in turn, help sustain a large-scale privatization drive.21 The emphasis on divesti-ture via the capital market was also consistent with the government's politicalobjective of incorporating a significant proportion of the middle-income popula-tion into the privatization process, thereby helping to extend property ownershipto wider segments of the society as part of its program of "popular capitalism."

The implementation of the privatization program and attempts to establishcapital-market institutions proceeded simultaneously. The leading capital marketinstitution in Turkey, the Istanbul Stock Exchange, was activated in February1986. Since privatization via the capital market is a risky undertaking, the policy-makers were forced to adopt a cautious approach. A major mistake in the choiceof a SEE would have hindered capital market development. This explains why theTeleta§ operation was delayed until February 1988.

In spite of a certain growth in activity since 1986, the size of Turkey's capitalmarket has remained restricted and it continues to be dominated by the publicsector. It is estimated that around 90 percent of the securities traded are govern-ment securities (Table 1). The limited size of the capital market, accentuated byhigh and volatile rates of inflation, has restricted both the pace and the scale of theprivatization program. A comparison with the experiment in the United Kingdomis illuminating. What made extensive privatization feasible there was the nature ofits capital market. Both the size and depth of the stock market as measured by therange of instruments available rendered successive divestitures of public assets ona massive scale a feasible option.22 The same conditions are not available in mostmiddle-income countries, and Turkey is no exception.

PRIVATIZATION AND POLITICAL ECONOMY

The political context is crucial for understanding the pattern of privatization inthe Turkish case. Although privatization had been on the agenda of policy reformfrom the mid-1980s onwards, the Ozal government relegated it to the background

Privatization in Turkey 169

TABLE 1 The capital market constraint on privatization: Themagnitude and composition of securities issued, 1983-88 (in percent)

Public-Sector Securities Total Securities Total Securities (excludingto Total Securities to GNP treasury bills) to GNP

198319841985198619871988

69.693.096.091.889.888.7

3.26.09.68.512.09.8

3.21.64.93.94.94.8

Source: State Planning Organization, Turkey: Main Economic Indictors, variousissues.

during its first administration (1983-87), and it did not become a serious concernuntil the government had obtained a mandate for its economic strategy in thegeneral elections of November 1987. Precisely at that point, however, the policiesthe government had implemented in its first term led to a shift in the macro-economic environment which undermined the conditions needed for successfulprivatization.

The elections of 1983 had marked a turning point in Turkey's recent economictrajectory. The Ozal government demonstrated a strong commitment to liberaliza-tion. A marked reduction in import tariffs and the opening up of the capitalaccount were, in fact, among its earliest measures. The reestablishment of a multi-party democracy brought a shift in incentives confronting the political elites after1983. Political rationality required the formation and subsequent consolidation ofan electoral coalition among groups with potentially conflicting interests. Thegovernment pressed increasingly for rapid economic growth. The expansion of thepublic sector was utilized as the principal mechanism for constructing and con-solidating the right-of-center coalition.23

Earlier, the conditions associated with IMF and World Bank lending had placeda brake on the government's ability to pursue ambitious growth targets between1980 and 1983, but these constraints were lifted by 1984. From 1983 onwards, thecountry's creditworthiness in international financial markets was restored, andmost medium- and long-term borrowing was directed to the public sector. Inaddition, the limits imposed on macroeconomic aggregates, as part of the condi-tions set by the international lending institutions, were no longer applicablebetween 1984 and 1987.

The growth rate of the GNP accelerated after 1983, reaching a peak of 8.0percent in 1986 and 7.4 percent in 1987. The favorable growth performance was,however, accompanied by high rates of inflation and the rapid buildup of domesticand external debts (Table 2). In spite of the changes in the sectoral distribution ofpublic investment away from manufacturing and into infrastructural activities,public expenditures continued to expand rapidly, and constituted the principalengine of growth during the period.24 Paradoxically, this was also a time when the

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198019811982198319841985198619871988

Ziya Onis

TABLE 2 Principal macroeconomic indicators,

GNPGrowth

-1.14.14.63.35.95.18.17.44.1

InflationRate"

108.636.727.030.550.343.229.632.068.4

MonetaryGrowth (M2)*

67.185.656.028.757.557.325.936.187.0

1980-88 (in percent)

External Debtto GNP

25.728.432.435.642.447.154.060.552.0

Budget Deficitto GNP

3.71.01.72.55.12.82.94.13.4

"Based on the State Institute of Statistics Wholesale Price Index (1981 = 100).^Annual.Sources: Ministry of Finance and Central Bank, Annual Reports, various years.

share of the SEEs registered an increase, just when privatization had been firmlyadded to the agenda. The contribution of the SEEs to GNP expanded from 11percent to 16 percent, at constant prices, in the period 1983-87."

The intensity of macroeconomic disequilibrium occurring by the end of 1987 ledto the imposition of stabilization measures on February 4, 1988, which weredesigned to curb the acceleration of inflation and to prevent the flight away fromthe Turkish lira.26 This stabilization program constituted one of the first measuresof the second Ozal administration. The timing of the Teleta§ operation wasunfortunate in the sense that it coincided with the establishment of an overallstabilization package designed to correct the macroeconomic imbalances in theeconomy.

The requirements of political rationality explain the policy incoherence whichappears to characterize the post-1983 phase. The policy was clearly unorthodox,involving the uneasy coexistence of tariff reform, the opening up of the capitalaccount, and favorable incentives to direct foreign investment, on the one hand;and growing macroeconomic disequilibrium resulting from a public-sector basedexpansionist strategy, on the other.27 Hence, political rationality came progres-sively into conflict with market rationality. The evolution of privatization inTurkey, therefore, cannot be understood solely in terms of government policytoward it and SEE reform. The macroeconomic environment is crucial for identify-ing the opportunities for, as well as the constraints on, privatization, and thesituation that had emerged by the beginning of 1988, involving high and volatilerates of inflation, was not conducive to launching a full-scale privatizationprogram.

PRIVATIZATION AND DIRECT FOREIGN INVESTMENT

The privatization program gained some momentum in the final months of 1987,culminating with the Teletas. operation in February 1988. The example of Teletas.

Privatization in Turkey 171

confirmed that the government was interested in privatization not only as a meansof improving enterprise efficiency but also as an effective instrument for promot-ing the development of the capital market. Privatization via the capital marketwould also be instrumental in enticing the participation of small investors, leadingto the spread of property ownership, which would in turn be consistent with thepolitical objective of strengthening the electoral coalition.

The initial response to the Teletas, experiment was favorable, generating a waveof optimism in the government. Judged in terms of both the number of share-holders involved and the immediate sale of the shares made available, the Teletasoperation was impressive. Yet during the subsequent months, the performance ofthe company in the Istanbul Stock Exchange failed to live up to the initialoptimism. The value of the company's shares steadily declined from an initial5,000 Turkish liras per unit in February to 3,000 Turkish liras by the end of theyear, leading many to call the Teletas. experiment a failure.

In retrospect, the policymakers drew lessons from the operation which led to aradical shift in privatization strategy. The performance of the Teletas. sharesshowed that the capital market was not sufficiently sophisticated to handle a majortransfer operation; hence, privatization in Turkey was confronted with a severeinstitutional constraint. The initial success of Teletas. was, in part, due to massiveexpenditures on commercials and advertisements involving the skillful use of themedia. The operation also had the unique advantage of being a pioneering casewith no basis for comparison. Considering its subsequent performance, to under-take another privatization operation via the capital market would have beenextremely risky. As a result, the authorities reluctantly shifted their attention toother mechanisms for reviving the privatization drive.

Domestic corporations were an obvious alternative to small investors. In areport published in 1986, the business community expressed its approval ofprivatization and put forward various practical proposals for its realization.28 Yetin retrospect, domestic business failed to emerge as a serious candidate for takingover publicly owned companies. The indications are that the business sector wasmore interested in obtaining the management rights to a highly profitable subsetof SEEs than in actually investing in the takeover of the companies themselves.

The absence of an adequate financial base constitutes the principal reason forthe failure of large corporations to emerge as active participants in the privatizationprocess. Large manufacturing firms in Turkey have high debt-equity ratios andare heavily dependent on short-term bank financing for their working capital. Thenumber of holding companies with close ties to commercial banks is extremelylimited. The vast majority of holding companies in Turkey are family concerns.Hence, the enterpreneurial elite has been reluctant to resort to the capital marketto raise equity, because it is afraid that the dispersion of shareholding involvedmight result in a loss of control over its enterprises. Consequently, a vicious cycleseems to have developed. The entrepreneurial response has restricted the pace ofcapital-market development. The weakness of the capital market has, in turn,contributed to the persistence of a weak financial base and excessive dependenceon short-term bank financing on the part of large manufacturing firms.29

In 1988, attention increasingly shifted to external investors as a means ofreviving the privatization drive in Turkey. By the end of the year, the route

172 Ziya 6ni§

TABLE 3 Privatization in Turkey, 1988-89

Company

Date of saleShare sold (%)Proceeds (million US$)Method of sale

Teletas

February 29, 198822.0

1.17share offers

Qitosan

December 198890.0

105.0direct sale to foreigninvestors

lisas

December 198870.014.0direct sale to foreigninvestors

Source: The Turkish Board of the Mass Housing and Public Participation Fund, OfficialPublications.

followed by privatization had converged with the path predicted by the MorganBank report. A number of privatizations took place in the final months of 1988and in early 1989, all of which involved the sale of a substantial part of anenterprise to foreign investors. This new wave was initiated by the sale of (Jitosanto the French Societe Ciment Francais. It was followed by the sale of 70 percent ofUSA§ shares to Scandinavian Airlines (Table 3). It will be recalled that, unlikeTeletas,, both companies concerned were among the priority group of enterprisesselected for immediate privatization by the Morgan Bank report. Finally, adecision was made in January 1989 to sell Bogazici Airlines to a consortium thatincluded Irish Airlines. The deal was subsequently called off, however, and Boga-zici Airlines was liquidated. More recently, a number of leading SEEs, includingSiimerbank and Petkim, have been short-listed for divestiture, with externalinvestors again emerging as the principal candidates for buying the enterprisesconcerned.30 Privatization, with its associated transfer of technology and know-how, is increasingly conceived as an instrument for accelerating the flow of foreigninvestment into the country in order to improve the performance of the enterprisesconcerned.

The shift to favoring foreign investors has generated popular opposition to theprivatization program. In 1989, the government's decision to sell Petkim, a petro-chemical complex, was subjected to intense debate and harsh criticisms. It wasresisted on the grounds that it was a government monopoly of major strategicsignificance. Both the left-of-center Social Democratic Populist Party (SDP) andthe business community interpreted the sale of the company as a threat to nationalsovereignty.

SDP, the leading opposition party, represents labor and the traditional bureau-cracy; it has adopted a consistent neo-etatist stance with respect to public enter-prise reform, and in 1989 privatization became the focal point of its opposition tothe government's economic program. The SDP is committed to renationalize theenterprises already privatized by the government. This vocal opposition of theSDP represented the rejuvenation of the neo-etatist perspective, which had alsobeen influential in the early 1980s. The SDP itself was the natural successor to theRepublican People's Party, which had originally instigated etatism in the 1930s

Privatization in Turkey 173

and had subsequently defended etatist principles until its eventual demise in 1980.The SDP's opposition to the privatization program became more pronouncedfollowing the electoral setback of Ozal's Motherland Party in the local govern-ment elections of March 1989. The right-of-center True Path Party, the othermajor opposition party, representing primarily rural interests, was also anti-privatization in 1989.

Leading organizations of corporate business, such as Tl)SIAD, have emergedas another source of opposition to any privatization program that is drivenexclusively by the participation of foreign investors. Possibly, domestic businesswas hoping to obtain a better deal in the absence of foreign competition. Theopposition of private business is significant in that it raises serious questionsconcerning the government's ability to sustain its privatization program after theend of 1989.

CONCLUSIONS AND FUTURE PROSPECTS

The Turkish privatization experiment has hitherto been distinguished by its prag-matic nature; it has not taken a shock-treatment approach. The objectives under-lying the privatization program have, however, shifted over the years. Initially,efficiency gains combined with capital market development, which would in turnhelp spread property ownership to small investors, were the goal; it was part of abroader project of instituting popular capitalism. More recently, following thefailure of the Teletas experiment, the focus has shifted decisively in favor ofattracting foreign investment. The mounting popular opposition to privatization,driven largely by this participation of foreign investors, has emerged as a seriousconstraint on the government's ability to maintain the momentum of its program.

As of the end of 1989, the pattern of privatization that has emerged displayscertain deficiencies. The absence of a regulatory framework constitutes a majorweakness. In spite of the rhetoric concerning the potential benefits of increasedcompetition, monopoly regulation has been effectively relegated to the back-ground. This is likely to constitute a serious problem when SEEs are sold toforeign companies; so far, monopoly regulation has been conspicuously absent.

Large-scale divestiture, via the capital market, will not be a feasible option inthe presence of chronic inflation, high interest rates, and mounting external debts.Macroeconomic imbalances may help to distort the privatization process anddivert it onto an unstable trajectory. The possibility of a shift of priorities in favorof raising public revenues, as a means of repaying the principal and interest onexternal debt, may lead to a situation in which companies may be sold at priceswhich fail to reflect their true value. Debt-equity swaps are currently a popularmeans of repaying external debts. Yet they may involve a novel form of externaldependence if the terms of transaction do not represent the correct valuation ofthe SEE assets. The elimination of macroeconomic imbalances is crucial if such anunstable path is to be avoided in the future.

DEPARTMENT OF ECONOMICS

BOGAZigi UNIVERSITY

174 Ziya Oni§

NOTES

Author's note: The present article is part of a larger project supported by the Middle East ResearchCommittee of the Ford Foundation. An early draft of the article was presented to the conference,"Dynamics of States and Societies in the Middle East," organized by the Center of Political Research,Cairo University, on June 18, 1989. Subsequently, I benefited from four anonymous referees of1JMES. I would also like to thank Colin Kirkpatrick, Ilkay Sunar, and John Waterbury for their helpand encouragement. The final version of the article was completed while I was a Fulbright fellow at theCenter of International Studies, Princeton University.

'For expositions of the theoretical and empirical arguments associated with the neo-classical schoolin general, and the "public choice" and "property rights" perspectives in particular, see John Kay,Colin Mayer, and David Thompson, eds., Privatisation and Regulation (Oxford, 1986); Paul Starr,"The Meaning of Privatization," Yale Law and Policy Review, 6 (1987), 11101-36; John Vickers andGeorge Yarrow, Privatization: An Economic Analysis (Cambridge, Mass., 1988).

2For empirical evidence concerning the limited number and scale of divestitures, see Elliot Berg,"Divestitures of State-Owned Enterprises in LDCs," report prepared for the World Bank (Washington,D.C., 1985); and Elliot Berg and Mary Shirley, "Divestitures in Developing Countries," World BankDiscussion Papers (Washington, D.C., 1987). John Vickers and Vincent Wright, eds., "The Politics ofIndustrial Privatization in Western Europe," West European Politics, 12, 3 (September, 1988), illumi-nates the variations in privatization experienced by the major European economies. Paul Sigmund,"Chile: Privatization, Reprivatization and Hyperprivatization," and John Waterbury, "The PoliticalContext of Public Sector Reform in Egypt, India, Mexico and Turkey," both of which were presentedto the Conference on Public Sector Reform and Privatization, Center of International Studies,Princeton University, April 1988, illustrate the contrasting patterns of privatization in the context ofdeveloping countries.

3 A comprehensive analysis of the origins, development, and subsequent problems confronted by thestate economic enterprises is provided by Bertil Walstadt, State Manufacturing Enterprise in a MixedEconomy: The Turkish Case (Baltimore, 1980). Mustafa Aysan and Selahattin Ozmen, Tiirkiye'de veDunyada Kamu Iktisadi Tesebbusleri (State Economic Enterprises in Turkey and the World Economy)(Istanbul, 1981), is a valuable source concerning the organization and performance in the pre-1980 era.

"For a useful discussion of the basic principles associated with Turkish etatism, see Osman Okyar,"The Concept of Etatism," Economic Journal, 95, 297, (1965), 98-111. The problems posed by theabsence of an indigenous business class and the role performed by the bureaucratic elite in undertakingeconomic transformation are analyzed by Caglar Keyder, State and Class in Turkey: A Study inCapitalist Development (London, 1987). Mustafa Aysan was an academic as well as a minister oftransport in the transitional government of Bulent Ulusu during the military interlude of 1980-83. Acomprehensive discussion of the reform proposals aimed toward organizational restructuring, includ-ing the Aysan report, is provided by Cevat Karatas, "Public Enterprises in Turkey: Reform Proposals,Pricing and Investment Policies," MEW Studies in Development, 13, 1 (1986), 135-69.

5For a comprehensive discussion of Turkey's "state tradition," as well as the nature and evolution ofTurkish bureaucracy, see Metin Heper, The State Tradition in Turkey (London, 1985).

'The contents of the SAL programs in Turkey, the nature of the World Bank conditions, and thenature and extent of collaboration between the IMF and the World Bank are examined by ColinKirkpatrick and Ziya Onis, "Structural Adjustment Lending and Policy Reform in Turkey, 1980-1986," paper presented to the U.K. Development Studies Association Conference, Birmingham,September 1988; and Peter Wolff, Stabilization Policy and Structural Adjustment in Turkey: 1980-1985: The Role of the IMF and the World Bank in an Externally Supported Adjustment Process(Berlin, 1987).

7The quotation is from Paul Mosley, "Privatisation, Policy Based Lending and World BankConditionality," in Paul Cook and Colin Kirkpatrick, eds., Privatisation in Developing Countries(Brighton, 1988), 125-40; see also Don Babai, "The World Bank and the IMF: Rolling Back the Stateor Backing Its Role?" in Raymond Vernon, ed., The Promise of Privatization: A Challenge for U.S.Policy (New York, 1988), pp. 254-85, with reference to the significance attached to privatization per sein the context of the World Bank's structural adjustment lending programs.

8See Kirkpatrick and Onis, "Structural Adjustment Lending and Policy Reform in Turkey."

Privatization in Turkey 175

'For empirical evidence underlying the propositions put forward in this section, see Ziya Onis andSiileyman Ozmucur, "The Role of the Financial System in the Creation and Resolution of Macro-economic Crises in Turkey," paper presented to the World Bank Conference on "MacroeconomicPolicies, Crisis and Growth in the Long Run," Madrid, May 1988. The important point emphasized inthe paper is that the elimination of the automatic link to the budget was replaced, in part, by thecreation of new avenues for satisfying the financial requirements of the SEEs. We demonstrate thatexternal borrowing became an increasingly significant source of finance for the state-enterprise sectorin the course of the 1980s. Furthermore, the ability to borrow on concessional terms from public banksalso represented a form of subsidy to the SEE sector.

'"Siileyman Ozmucur and Yilmaz Esmer, "Total Factor Productivity in Turkey: A Longitudinal andComparative Analysis of Total Factor Productivity Growth in Turkish Manufacturing Industries,1970-1985," mimeographed, Department of Economics, Bogazici University (July, 1988) demon-strates, on the basis of total factor productivity estimates, that the overall productivity performance ofthe public-manufacturing sector failed to register an improvement in the 1980s.

"For evidence concerning the liberalization of foreign trade and capital account, see Siibidey Togan,Hasan Olgun, and Halis Akder, External Economic Relations of Turkey (Istanbul, 1988); Tevfik Nasand Mehmet Odekon, eds., Liberalization and the Turkish Economy (New York, 1988).

l2State Planning Organization, Privatization Master Plan, prepared by the Morgan Guaranty Trust(Ankara, 1986).

"For investigations concerning the limitations of transfer of ownership unless accompanied bymeasures to increase competition, see John A. Kay and David Thompson, "Privatisation: A Policy inSearch of a Rationale," Economic Journal, 96, no. 1 (1986), 18-32; and George Yarrow, "Privatizationin Theory and Practice," Economic Policy: A European Forum, 1, no. 2 (1986), 324-77.

l4See Selahattin Ozmen, Tiirkiye'de ve Diinyada K/T'lerin Ozellestirilmesi (Privatization of PublicEnterprises: The Turkish Case and the International Context) (Istanbul, 1987), for a comprehensivediscussion of the legal framework underlying the privatization program in Turkey. Ozmen alsodocuments the pre-1980 debate on the privatization issue. Privatization had appeared on the agenda ofthe newly elected Menderes government in 1950 as part of its broader program of liberalization. Thatelection marked the transition to multi-party democracy. The new government displayed a clearcommitment to privatization, and indicated that it would contemplate the divestiture of certain typesof SEEs under appropriate conditions. Yet no actual divestitures occurred. In fact, the relative weightof the state-enterprise sector continued to expand during the Menderes era.

l5For an analysis of the changing nature of the bureaucracy in the 1980s, see Metin Heper, "TheMotherland Party Governments and Bureaucracy in Turkey, 1983-1988," Governance: An Inter-national Journal of Policy and Administration, 2(1989), 457-68. On the notion of state autonomy andstate capacity, see Peter Evans, Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the StateBack In (New York, 1985).

"For a comprehensive treatment of "extra-budgetary funds," see Oguz Oyan and Ali Riza Aydin,istikrar Programindan Fon Ekonomisine (From the Stabilization Program to Extra-Budgetary Funds)(Ankara, 1987).

"See Toplu Konut Fonu ve Kamu Ortakligi Idaresi Baskanligi (The Board of the Mass Housing andPublic Participation Fund), 1984-1988 Faaliyetleri (Activities in 1984-1988) (Ankara, 1988); andYeniden Yapilanma (Restructuring) (Ankara, 1988, 1989) for an official evaluation on the part of thepolicymakers involved in the preparation and implementation of the privatization program.

l8For a recent interpretation of the Turkish privatization experiment, see Roger Leeds, "Turkey:Rhetoric and Reality," in Raymond Vernon, ed., The Promise of Privatization: A Challenge for U.S.Policy (New York, 1988), 149-78.

"An interview with Cengiz Israfil, the vice-president of PPF, is highly illuminating regarding theTeleta§ experiment. See Cengiz Israfil, "Ozellestirmede Finans Reformu Yasandi" (Privatization andFinancial Reform), Istanbul Sanayi Odasi Dergisi, 269 (1988), 30-31. The U.K. experiment, whichhitherto has proved to be the most extensive program on a sustained basis, has generated a largeliterature. For a valuable investigation of the U.K. experience, see David Heald, "The United King-dom: Privatisation and Its Political Context," West European Politics, 12, 3 (1988), 31-48.

"Consider the U.K. experiment in this context. Initially, the principal concern was to improveefficiency. Subsequently, the focus shifted to the macroeconomic advantages of privatization as the

176 Ziya 6ni§

proceeds from the sale of the public assets made an important contribution to the reduction of thepublic-sector borrowing requirement. More recently, the emphasis has been on the spread of owner-ship. See Ezra Suleiman, "The Politics of Privatization in Britain and France," paper presented to theConference on "Public Sector Reform and Privatization," Center of International Studies, PrincetonUniversity.

21The interactions between privatization and capital markets are examined by Tony Killick andSimon Commander, "State Divestitures as a Policy Instrument in Developing Countries," WorldDevelopment, 16, no. 2 (1988), 1465-79. See Fatih Cosan and Hasan Ersel, "The Turkish FinancialSystem: Its Evolution and Performance, 1980-1986," Capital Market Board Publications, 7 (1986),27-88; Organisation of Economic Co-operation and Development, Turkey: Annual Country Survey(Paris, 1988); and Isik Inselbag and Biilent Giiltekin, "Financial Markets in Turkey," in Tevfik Nas andMehmet Odekon, eds., Liberalization and the Turkish Economy (New York, 1988), pp. 129-40,concerning the characteristics, performance, and shortcomings of the financial system in Turkey.

"The cautious approach and the limited privatization so far may be explained in part by the fact thatprivatization is confronted with severe technical problems regarding the proper evaluation of thecompany's assets and profitability. The problem of determining the appropriate sale price is accen-tuated by the fact that the accounting procedures of the SEEs had not previously complied withinternational norms. See Rifat Esen, "Privatization in Developing Countries: The Objectives, Prin-ciples and Techniques," Yapi Kredi Economic Review, 3, no. 3 (April, 1989), 37-71, for the technicalproblems involved in the divestiture of SEEs.

23For detailed considerations of the "logic of coalition building" in the Turkish case, see Ziya Onisand James Riedel, "The Political Economy of Macroeconomic Policies, Crises and Growth in Turkey,"paper presented to the World Bank Conference, "Macroeconomic Policies, Crisis and Growth in theLong-Run," Mexico City, April 1989; John Waterbury, "Coalition Building, Export-Led Growth andPublic Sector in Turkey," paper presented to the Middle East Studies Association Conference, LosAngeles, November 1988. Leeds, "Turkey: Rhetoric and Reality," also examines the constraintsimposed on the privatization program by the deficiencies of the macroeconomic environment. YetLeeds does not probe into the underlying political forces which account for the adoption of incoherentpolicies and the resultant macroeconomic disequilibrium.

24For empirical evidence concerning the role of the public sector in the growth process during the1983-87 phase, see TUSIAD, 1980 Sonrasi Ekonomide Kamu-Ozel Sektor Dengesi (Public-PrivateBalance in the Economy in the Post-1980 Era) (Istanbul, 1988). TOSIAD stands for Turk Sanayicilerive Isadamlari Dernegi or Turkish Industrialists and Businessmen's Association.

25The data on the contribution of the SEEs to GNP are drawn from Yiiksek Denetleme Kurulu,Kamu Iktisadi Tesebbusleri Genel Raporu (Higher Supervisory Board, Annual Report on the StateEconomic Enterprises, various years) (Ankara, Cesitli Yillar).

26For a valuable analysis of the causes underlying the mini-crisis of 1987, which led to the measuresof February 1988, see Sena Eken, Turkey: Economic Developments, Policies and Prospects (Ankara,1988), report prepared jointly by the Central Bank, State Planning Organization, and the Under-Secretariat of Treasury and Foreign Trade.

27For a detailed consideration of this issue, see Ziya Onis, "The Political Economy of Turkey in the1980s: The Anatomy of Unorthodox Liberalism," paper presented to the Middle East Studies Associa-tion Conference, Toronto, November 1989.

28See TUSIAD, Ozellestirme: KIT'lerin Halka Salisinda Basari Kosullari (Privatization: The Pre-conditions for Success in the Sale of SEEs to the General Public) (Istanbul, 1986), concerning theposition of domestic business on the privatization issue.

29For evidence regarding the dependence of Turkish firms on short-term bank financing, and theresulting high debt-equity ratios, see Betty Ya§er et al., A Comparison of the Selected Financial Ratiosof Private Manufacturing Firms in Turkey and U.S.A., 1983-1984 (Istanbul, 1988); Istanbul SanayiOdasi, Tiirkiye 'nin Be§yiiz Biiyiik Sanayi Kurulusu (The Istanbul Chamber of Industry, Turkey's FiveHundred Large Industrial Establishments, various years) (Istanbul, £esitli Yillar).

30The enterprises nominated for privatization in 1989 include Neta§ (switchboard equipment),Yemsan (animal feed), Petkim (petrochemicals), and Siimerbank (textiles and clothing).