Turkish Devaluation: Promises And Pitfalls

Date

1971

Author

Krueger O., Anna

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The devaluation of the Turkish Lira in August, 1970, offers the prospect that Turkey may, during the 1970's, enter a new phase of economic growth. If all goes well, the economy may embark upon a period of rapid growth, the primary stimulus to which will come from changed structural relations and rationalization of economic activity. With such an altered growth orientation, the prospects would indeed be rosy: whereas balance-of-payments difficulties, a rising capital output ratio, intensive resource accumulation, high-cost industry, and excess demand characterized Turkish economic growth during the 1960's, the 1970's might well be a period during which increasingly competitive Turkish industry enables more rapid growth without such excess demand or foreign exchange bottlenecks. Moreover, it is quite conceivable that a decline in the capital-output ratio could enable a lower rate of increase in the rate of resource accumulation, while simultaneously permitting more rapid growth. However, it is also possible that, within a fairly short period of time, domestic inflation and other phenomena will erode the potenti al gains that could have been achieved by devaluation. If that happens, the economy will quickly return to the atmosphere of shortages, high-cost production, and sellers' markets that prevailed during the late 1960's. Then it would be doubtful whether the seven per cent growth rate of the 1960's could be sustained. Indeed, the problems that charac terized the Turkish economy of the 1960's could intensify, resulting in slower growth, if not relative stagnation. Which of these outcomes occurs will depend, in large part, on go vernment policy over the next two years. Government policy, in turn may well depend upon the degree to which various groups within the economy understand the potential gains and losses likely to result from these policies. It is the purpose of this article to suggest some of the factors likely to determine the outcome of devaluation and its after math. The first section provides a brief explanation of the theory of devaluation under conditions of exchange control. The second section contains a brief analysis of the devaluation of 1958, and its effects. In the third section, there is a discussion of the problems of the Turkish payments system in the late 1960's, and the reasons why reform was desirable. A final section contains an evaluation of the factors upon which the success of the 1970 devaluation will depend.

URI

https://hdl.handle.net/11511/109172

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Department of Economics, Article