Institutional Structure, Government Policy and Economic Performance in Turkey

Hadi Esfahani ()
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Hadi Esfahani: Department of Economics, University of Illinois at Urbana-Champaign

No 9620, Working Papers from Economic Research Forum

Abstract: This paper studies the interaction of political institutions, government policies, and the economic performance in a developing country. The focus is on Turkey's economic history and the 'paradox of Turkish liberalism'. Except during the periods of war and post-war recovery, the fastest long-lasting growth episodes (1929-39 and 1961-77) have occurred under inward-looking, public-sector-oriented economic policies, while the episodes of slower and unstable growth (1951-60 and 1981-1991) have been associated with liberal, market-oriented policies typically considered more efficient by economists. It is argued that the main factor underpinning this outcome is the evolution of political institutions that inreased the government's commitment to its policies during the high-growth periods. During the other two periods, the potential efficiency of policies introduced by the government was seriously undermined by lack of commitment. Commitment was achieved in the first high-growth period by constraining political competition under a single-party rule, and in the second one by diffusing power, creating many veto filters on policy change, and introducing a comprehensive planning system. Although successful for well over a decade, neither mechanism was sustainable in the long run. Lack of long-run stability under these regimes and weakness of commitment under the other two acted as an engine of institutional change in Turkey. The results imply that striking a balance between commitment and flexibility in policymaking tends to be a more difficult problem in countries with a weak private sector and may act as an important factor behind institutional dynamics.

Date: 1996-11-07, Revised 1996-11-07
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