ASSESSING THE PRIVATIZATION EXPERIENCE IN TURKEY:
Implementation, Politics and Performance Results
Report Submitted to
Economic Policy Institute
A. Erinc Yeldan
Professor of Economics
LIST OF CONTENTS
I. Introduction: Main Objectives of this Research…………………………………………….. 3
II. Post-Liberalization Turkey………………………………………………………………… 4
II-1. Fiscal Policy and Debt Management……………………………………………………. 8
II-2. Labor Markets and the Position of Wage-labor………………………………………… 10
III. Privatization: Scope and Methods………………………………………………………... 11
IV: Economics of State Economic Enterprises………………………………………………. 15
Turkey launched its comprehensive structural adjustment reform program in January, 1980 under the guidance and proviso of the IMF and the IBRD. The major elements of the programme included the standard policy package often hailed as the “Washington consensus”: commodity trade liberalization, financial deregulation, and fiscal and monetary restraint. It also entailed a detailed programme of structural transformations addressing privatization of public assets; new labor laws mainly seeking to create a “flexible” labor market where labor’s right to organize in labor unions and to engage in collective bargaining are effectively curtailed. As for the rural economy, it further entailed elimination of producer price subsidies in agriculture, and replacing them with a targeted direct income transfer programme. All these shifts, needless to mention, created major repercussions in the commodity and labor markets, leading to significant sources of new surplus transfer mechanisms with the state playing an active role.
Privatization of public assets is regarded as one of the key mechanisms of such surplus transfer. Privatization programme was invigorated in Turkey starting 1986. Originally the privatization ideology was based on “economic efficiency” arguments based on the myth that private sector decisions are based on optimization calculus, whereas the public sector is inherently corrupt and its policies lead to waste. It was announced that initially some of the major public enterprises would be restructured to improve their financial performance, and then they would be on the sale list at “attractive” prices. Over the course of time, however, the main objective of privatization had shifted towards mainly revenue generation and financing of the public debt. Thus, a clear shift of focus has occurred away from efficiency arguments of the so-called technologically backward state enterprises, towards revenue generation from sale of the most technologically advanced and profitable enterprises.
Consequently, with the advent of the IMF’s Staff Monitoring Programme in 1998, there had been a re-newed and ambitious attempt over privatization of large-scale enterprises, such as the Petrol Ofisi (petroleum products and distribution agencies-POAS), Turkish Telecom Inc, GSM Licensing, Seka (the paper, cellulose and pulp plants), and the Turkish Airlines.
It will be the main objective of this research to analytically investigate and assess the privatization experience of Turkey over the post-1980 liberalization era from the points of view of workers’ rights, unionization, economic efficiency, resource allocation, and distributional impacts. The plan of the research Report is as follows: in the next section I will give a broad overview of the recent macroeconomic history of the Turkish economy. The neoliberal logic of the privatization programme rests mainly on debt management, and it is regarded important to cast the Turkish macro history in terms of deterioration of fiscal balances. This fragility, in turn, is regarded as an outcome of the explicit strategy of transferring income to the capital-owners together with a rather lax attitude towards taxation of capital incomes. Thus, the fiscal deficit is argued to be the epitome of a peripheral capitalist development where the public sector is often regarded as the bastion of privilege, and privatization of public assets is often seen as the major source of income to finance the ongoing income transfers to private capital, both national and international.
The third section of the Report focuses directly on the methods and economics of privatization experience in Turkey over the last two decades, while section four is directed to the study of the state economic enterprise (SEE) system in Turkey. Here, a careful evaluation is given of the SEEs in terms of technical efficiency, employment and profitability.
In section five, the Report will focus on two sectors where the public sector has traditionally been very active both in terms of employment and production: paper, cellulose and pulp industry and the petroleum and chemicals industry. This section will seek to address to questions such as “what are the likely outcomes of the privatized enterprises of POAS (petroleum distribution centers) and the Seka, Caycuma (paper factory)? What happened to the employment levels? Level and techniques of production? Unionization and labor rights? Conditions of work? Efficiency, before and after privatization?
Finally in section six the Report offers major conclusions of this study.
II. Post-Liberalization Turkey
Turkey’s post-1980 history of macroeconomic and political developments is observed to suffer persistent difficulties and wide fluctuations in national income, with conflicting policy adjustments. This observation parallels closely the overall thematic continuity of the ambitious programme of economic liberalization and market-led adjustments put into full force during the early 1980s. At the turn of the 3rd millennium, the most visible aspects of the current Turkish political economy context are the persistence of price inflation under conditions of a crisis-prone economic structure; persistent and rapidly expanding fiscal deficits; marginalization of the labor force along with the dramatic deterioration of the economic conditions of the poor; and the severe erosion of moral values with increased public corruption.
In Table 1, I tabulate the broad economic indicators and the key macro prices of the Turkish economy. The post-1980 Turkish adjustment path can be partitioned into two broad phases: “1981-1988” and “1989-to-2003”. The main characteristic of the first phase is structural adjustment with export promotion, albeit under a regulated foreign exchange system and controls on capital inflows. Over this period, integration to the global markets was achieved mainly through commodity trade liberalization. More importantly, both the exchange rate and direct export subsidies acted as main instruments for the promotion of exports and pursuit of macroeconomic stability. The period was also characterized by a severe suppression of wage incomes via hostile measures against organized labor. This “classic” mode of surplus creation reached its economic and political limits by 1988. Coupled with a new wave of populist pressures under approaching elections, organized labor succeeded in attaining significant increases in wages. Real wages in manufacturing, for instance, increased by 90% in cumulative terms between 1989-1991. Furthermore, beginning 1989, there had been a major shift in the public expenditure accounts towards more socially desirable ventures. An overall increase in both the share and level of public salaries, and investments on social infrastructure enabled the working masses to attain improved living standards.
<Table 1 here>
The post- 1988 structural shift could evidently be financed by taxing the bourgeoisie and by moving towards a more “fair” tax system. Yet, the strategic preference of the state was the maintenance of its present stance towards evasion of taxable capital incomes and of its lax attitude towards the so-called unrecorded private transactions. In this sense, one can easily argue that the strategic choice of the state to abstain from expanding its tax base over capital incomes has long created a structural fragility in the fiscal accounts. Through this mechanism, the appropriated surplus could have been kept within the confines of private capital, and as such, had constituted one of the major sources of capital accumulation under conditions of peripheral capitalism.
The main macroeconomic policy response to the increased wage costs and the culminating fiscal deficits was complete deregulation of financial markets. With the advent of elimination of controls on foreign capital transactions and the declaration of convertibility of the Turkish Lira in 1989, Turkey opened up its domestic asset markets to global financial competition. In this setting, the Central Bank lost its control over the exchange rate and the interest rate as policy instruments independent of each other, as these practically turned into exogenous parameters set by the chaotic conditions of financial arbitrage in the global markets. Thus, many scholars regard 1989 as a crucial year, segmenting the post-1980 economic development patterns of Turkey (see, e.g., Boratav, Yeldan and Kose, 2000; Yenturk, 1997, and Ekinci, 1998).
Given this broad division, Turkish economy is observed to go through four distinct cycles of growth-crisis-and adjustment. (See characterization in Table 1). The first covers broadly the period 1980-1988, with its main attribute being the increased export-orientation of the economy. Following the foreign exchange crisis of 1977-80 growth was re-invigorated following the introduction of a structural adjustment programme in January 1980 under the auspices of the World Bank and the IMF. The period was marked with commodity trade liberalization and export promotion along with a price reform aimed at reducing the state’s role in economic affairs. After the brief slow down in 1988, the 1989 policy maneuver of capital account liberalization served as one of the major policy initiatives to a new round of growth. This policy maneuver paved the way for injection of liquidity into the domestic economy in terms of short-term foreign capital (flows of “hot money”). Such inflows enabled, on the one hand, financing of the accelerated public sector expenditures, and also provided relief of the increased pressures of aggregate demand on the domestic markets by way of cheapening costs of imports. Consequently, the bonanza of cheap imported intermediates fuelled the second wave of the “growth-crisis” cycle between 1990-1994.
Rising current account deficits (as a ratio to the GNP, from 1.7% in 1990 to 3.6% in 1993), and a drastic deterioration of fiscal balances (with public sector borrowing requirement, PSBR, increasing its ratio to the GNP from 7.4% to 12.1% over the cycle) signaled the unsustainability of the post-1990 growth path. This prolonged instability reached its climax during the fourth quarter of 1993, when currency appreciation and the consequent current account deficits rose to unprecedented levels. With the sudden drainage of short-term funds in the beginning of January 1994, production capacity contracted, followed by continued fall in industrial output throughout that year. Together with this contraction, the post-1994 crisis management gave rise to significant shifts in income distribution, and to an intensification of the ongoing processes of transfer of the economic surplus from the industrial/real sectors and wage-labor, in particular, towards the financial sectors. Likewise, dollar-denominated wage costs decreased substantially and enabled export earnings to rise. In fact, the disequilibrium could have only been accommodated by the massive (downward) flexibility displayed by real remunerations of wage-labor. (See Figure 1 below). Manufacturing real wages declined by 30.1% in the private sector, and by 18.1% in the public sector in the aftermath of the 1994 crisis. Concurrently, the average mark-up rate in private manufacturing reached its highest value (47%) of the whole post-1980 liberalization era.
Growth was re-invigorated after 1995. This third cycle again characterized by massive inflows of short term foreign capital (hot money) flows lured by attractive real rates of interest and appreciation of the Turkish Lira. The cycle proved likewise unsustainable as the global deceleration following the contagion of the Asian and the Russian financial crises hit the Turkish economy starting August of 1998.
To combat the increased instability and to fight against the ongoing inflation, the Central Bank and the Under Secretariat of Treasury started to implement a disinflation programme in December 1999 under the guidance and direct supervision of the IMF. During the course of the programme the real gross domestic product (GDP), which has fallen by 5% in 1999, expanded at a rate of 7.6% in 2000; (the fourth growth cycle) but drifted into negative quarterly rates of growth following the first quarter of 2001. Of the expenditures over the gross domestic product, the deepest slump was witnessed in fixed investments, with contractions of –41.5% and –50.2% in the second half of 2001. Fixed investment expenditures are observed to continue their contractionary trend during the first two quarters of 2002 with real rates of growth of –26% and –1%.
The most direct indicators of the crisis over the financial markets were the rapid rate of depreciation of the TL, and the sudden hike of the rates of interest on the government’s debt instruments (GDIs). After the second quarter of 2001, the TL/US$ parity increased by quarterly rates of 96.5%, 116.5%, and 114.5%, and stabilized only after November of 2001. On the other hand, it is observed that the rise in the real rate of interest of the GDIs reached to 117.5% in the first quarter of 2001.
Given re-opening of the credit lines and resurgence of short-term foreign capital, Turkey has re-entered a new phase of growth driven by cheap imports and an over-valued Turkish Lira starting 2002. In 2003 the TL was overvalued by more than 30% against the US$ in purchasing power parity terms. Cost savings enabled by cheap foreign exchange fuelled import demand, and by the end of 2004 the Turkish current account deficit has already widened to above 5% of the GNP. It is not clear how long this new (fifth) cycle of growth would last given the rising external fragility and the volatile perceptions of the financial investors.
II-1. Fiscal Policy and Debt Management
Currently Turkey is in the midst of an IMF-led austerity programme that relies primarily on fiscal restraint. The fiscal authority has a clear mandate to generate a primary budget surplus (not counting the interest expenditures) of 6.5 percent for the public sector as a whole as a ratio to the gross national product (GNP). Spanning over a planning horizon 2001 to 2007, the primary surplus target is regarded necessary by the fiscal authorities to reduce the massive debt burden and the fragilities it imposes on the financial and the real commodity markets. Needless to assert, the current fiscal policy administration has important implications on both the macroeconomic environment and the microeconomic mechanisms of resource allocation, employment, and tax incidence.
As indicated above, the post-1990 macroeconomic balances recorded an unprecedented rise in the fiscal gap. The period witnessed a series of reluctant and failed attempts of tax reform. It can be directly noted that during the 1988-1992 period the major breakdown was accounted in the factor revenues item. These are the net factor income generated by the state economic enterprise system. Factor revenues of the state declined by NewTL 6 billion in these 4 years measured in real 1987 prices. This amount is approximately 3% of the GNP of the period. Thus, in four years, the Turkish public sector has lost revenue sources reaching nearly to 3% of the gross national product. This loss is significant not only in terms of its size, but also in terms of the shortness of the duration.
Following this period, transfer expenditures increased by almost 2-folds in real terms. The major item in this account is the interest payments. The rise in the domestic debt gave way to a rapid build up of interest rates which increased from 2.8% of the GNP in 1992, to 4.6% in 1993, and then to 6% in 1994. As fiscal deficits continued to be securitized, the stock of government debt instruments (GDI’s) grew rapidly to reach 20.2% of the GNP in 1997. By comparison, the stock of GDI’s only reached to 11% by mid-1992, disclosing that the size of the domestic debt stock increased by 2-folds as a share of the GNP in just five years.
All these developments led to a sharp decrease in the disposable income of the public sector especially after the 2001 crisis. The PSBR as a ratio of GNP stood around 10% on the average over 1990-1993. The peak of this ratio was witnessed in 1993, just before the financial crisis of 1994 (12.0%). Even though there were some improvements in the borrowing requirements of the state under the 1994/1995 crisis management, the PSBR rose again to an alarming rate of 9.4% in 1998, and to 15.5% in 1999. From Table 1 it can be read that over the period 2000-2003, the public disposable income declined by 30 percent in real terms. Such a decline had clearly devastating effects and generated strong pressures on the public sector borrowing requirement (PSBR).
The process of financial deepening was thus directly shaped by the financing needs of the public sector. In early 1990s the government granted a series of incentives to the banking sector for holding its debt instruments (GDIs). First of all the GDIs could be used as collateral and be held against the liquidity requirements. This process led to two important consequences: first and foremost, it substituted the fiscal policy against the monetary policy and hindered the central bank’s capacity to conduct monetary policy; and second, it enabled the Treasury to assume a monopoly power to regulate the distribution of domestic credit and crowded out the private sector.
One direct consequence of the regime switching to finance the PSBR was the unprecedented rise in the stock of securitizied debt (the stock of issues of GDI’s). Stock of GDI’s was only about 6% to the GNP in 1989, just when the liberalization of the capital account was completed. It grew rapidly, and reached almost 20% by 1997. Currently the securitizied debt stock is 74.5% to the GNP.
Under these conditions the fragility of the domestic asset markets gave way to high rates of real interest. Interest payments as a ratio of GNP increased very rapidly. From 1990 to 1996, the share of interest expenditures on domestic debt in aggregate GNP increased by 300%. In 1996 this ratio stood at 9 percent. In the second half of the decade, interest costs as a ratio to the GNP rose to as much as 21% in the crisis of 2001, and bounced back to 14.8% in 2003. One can contrast this magnitude, for instance, with the aggregate value added of the agricultural sector, whose share from the GNP is just only 15%. Thus, interest payments reach almost to aggregate agricultural value added, a sector which accounts for about half of the size of the active labor force!
Such a transfer of the financial surplus through very high real interest rates offered to the financial system would, no doubt, call for repercussions on the primary categories of income distribution. It is clear that creation of such a financial surplus would directly necessitate a squeeze of the wage fund and a transfer of the surplus away from wage-labor towards capital incomes, in general. It is possible to find evidence of the extend of this surplus transfer from the path of the private manufacturing real wages. I portray the dynamics of the private manufacturing real wages in Figure 1, denominated both in Turkish Lira, and also in the US$ terms. The figure further contrasts real wages against labor productivity.
<Figure 1 here>
After a brief surge over 1990-1993, real wages had plummeted during the 1994 financial crisis, and in a sense have borne the brunt of adjustment of the crisis. During 1995-2000, private manufacturing real wages have kept their momentum in general, although they could not recover their pre-1994 crisis levels. However, after the 2000/2001 wave of crises, real wages in private manufacturing faced a second cycle of contraction. This contraction was especially pronounced in US$ terms. In the meantime productivity gains in private manufacturing accelerated especially after the first quarter 2002. It is known that this productivity surge is due mostly to labor shedding, rather than increased labor efficiency originating from advances in technology. As of the last quarter of 2003, index of labor productivity scored 1.77-folds higher than real wages in TL, and 2.29-folds higher than the unit wage costs in US dollars.
The real wages contracted severely after the 2001 February crisis and this downward trend was maintained throughout 2002 and 2003. Calculated from 2000 to mid 2003, the decline in the private manufacturing real wages reached to 19.6%. The decline of wages in the public manufacturing sector has been 15.4% during the same period. Viewed from a longer time horizon, if the index of real wages were assumed 100 in 1997, it is observed that they fell to 82.2 index points in the private manufacturing sector. (See Figure 2.)
<Figure 2 here>
A close inspection of Figures 1 and 2 together is especially informative. This exercise shows very clearly, how in the Turkish economy speculative financial gains were financed through squeezing of real wages. Each rapid rise in the financial arbitrage is closely associated with a downward movement of real wages and involves a direct transfer of labor incomes towards capital, both domestic and foreign.
In summary, given the fiscal deterioration and a strategic preference of non-taxation of capital incomes and of the bourgeoisie in general, the state had two options for meeting its expenditures: foreign capital inflows and privatization receipts. Thus, in the Turkish context, the current privatization attempts should be regarded as an episode of revenue generation and surplus transfer to the capital-owners via the government’s budgetary deficit financing programme. It is to this issue I now turn my attention.
Privatization of public assets emerged as an official state ideology beginning 1985, in the aftermath of a conservative trade liberalization programme. The main ideological pillar of the initial attempts were announced as a matter of improving efficiency in production and reducing “excessive” employment and waste in the state enterprise system.
The overall approach was based on the neo-liberal dogma that state involvement in the economic decision making is inherently corrupt and almost always leads to wasteful “rent-seeking”. Thus, it was alleged, a transfer of ownership from public to the private sector would lead to elimination of political decision-making that is based on wasteful, inefficient and irrational behavior. What is missing in these arguments is the plain fact that rent-seeking is actually a natural and inherent component of peripheral capitalism, where the private capital is often nurtured by state support itself. In many instances, state’s direct involvement into the economic life either as a direct producer (of strategic material inputs at below market values) or as a regulator of the labor relations enabled the private capital to sustain its profitability and capital accumulation. Thus, the state enterprise system served actually as the main mechanism for private capital to ensure its viability, especially in the early stages of peripheral capitalist development.
The explicit objectives for the privatization programme were identified by a report of Morgan Guaranty Bank in 1986. (This report was commissioned by the government directly.) Accordingly, the privatization master plan would seek: (1) to transfer the decision making process from the public to private sector to ensure a more effective play of market forces; (2) to promote competition, improve efficiency and increase the productivity of public enterprises; (3)to enable a wider distribution of share-ownership; (4) to reduce the financial burden of the state economic enterprises (SEEs) on the general budget; and (5) to raise revenue for the Treasury. Over the course of time, however, the initially stated “efficiency” arguments would silently cease as stated objectives and the main objective of privatization would shift directly to revenue generation.
The first privatization attempt in Turkey was the sale of Teletas in 1988. This occurred through an “offer sale” where applicants were invited at a “set price”. Teletas was a highly profitable enterprise in the telecommunications industry. During the privatization process, 22 percent of the state shares were sold in the Istanbul Stock Exchange Market.
In what follows, five cement factories were sold to the French Soicete Ciment Français for $100 million in 1989. Later, the airport (ground) services were sold to the Scandinavian SAS service partner in 1989. Table 2 below gives a thorough list of the initial privatization cases of this period.
<table 2 here>
From 1991 to 1997 the leading sectors in the privatization line were cement industry, iron and steel, airport and ground services, aircraft tires, public banks, and electricity and energy. In most cases, those state shares which were less than 50 percent were either transferred fully to the private firms or sold via the Istanbul Stock Exchange.
The Turkish attempts to privatize its public assets generally took three modes of sales techniques: “block sales”, “public offers for floatation”, and “direct sales of assets and premises of the SEEs and their subsidiaries” (Karatas, 2001). As a sales method, “privatization via public offering” has been limited, while “block sales” accounted for more than a third of the privatization receipts. Reliance on block sales as a big-bang solution led to widespread allegations of fraud and corruption as well as undervaluation of the privatized assets. Figure 3 depicts the sale methods and gross revenues over 1985-2001.
<Figure 3 here>
It can be seen from the figure that the most widely used form of privatization method over 1985-2002 had been bloc-sales. Bloc-sales had constituted 61% of the offers of public assets, to be followed by 18% in international offerings and 11% of offerings via the Istanbul stock exchange market.
In Table 3, I portray the list of major privatizations and the sale proceeds from “bloc-sales”. Of the general total $1.5 billion, the manufacturing enterprises claim the bulk of the proceeds. Within manufacturing, cement industry represented the largest share with $990 million. Basic metals and metal products brought $144 million, food processing $115 million; rubber and plastics $43 million.
<Table 3 here>
The net account of privatization proceeds (net of expenses) is documented in Table 4. The Table gives the total balance of privatization income and expenses over 1985-2002. Official figures disclose that over a period of seventeen years, total gross revenues from privatizations reached $9.1 billion. About one-thirds of this figure was generated through bloc-sales, and 15% was achieved via public offerings. Only 5% came from sales in Istanbul Stock Exchange, despite the official claims that privatization receipts would generate widening of public ownership through the stock market and would lead to deepening of the financial transactions.
Expenditures related with privatization activities reached to $3.7 billion, bringing the net income to $5.3 billion. About half of the officially stated expenditures rose from decreased liabilities ($1.9 billion) and about 40% was due to the increase in receivables ($1.1 billion). Auditing and consulting expenses claimed about 8 percent of the total expenditures.
<Table 4 here>
Of the total net income of $5.3 billion, only $3.4 billion could have been transferred to the Treasury. This gives a ratio of 37% of net transfer, given total gross receipts of $9.1 billion. Net privatization revenues were meager across years, at best. The only major increase was recorded in 2000 ($2.1 billion) under the close supervision of the IMF Programme (see section II above). The immediate two years following 2000 brought only $260 million in total. The newest stand-by agreement covering May 2005 - May 2008 has more ambitions targets on privatization. In Article 33 of the Letter of Intent submitted to the IMF on 26 April 2005, for instance, it is stated that by the end of 2005, the major public assets on Petkim (petro-chemicals), Tüpras (Petroleum refineries), Edemir (iron and steel) and Turkish Telecom (telecommunications) will be sold. The Letter of Intent also states that the lower bound of the privatization receipts by the end of December 2005 will be no less than $1.5 billion and this target is to be regarded as a “performance indicator” of the “successful implementation of the IMF program.
What is really troublesome is the fact that of the total 188 enterprises that were privatized in the last twenty years, 65 of them are shut off, 8 of the had been liquidated and 16 of them are penalized for a total of $800 thousands in charges that they have not abided the conditions of the sale. (Cumhuriyet, 2 June 2005).
Thereby, on top of this failing performance of the privatized firms, the overall net gain of the Turkish Treasury reaching only to $3.4 billion, discloses the fact that privatization is s a costly activity and the state should not expect much of a net gain from sales of its assets. The remaining crucial question is then whether privatization could have brought the gains in efficiency and market profitability. To answer this question properly, I now turn to a direct assessment of the state economic enterprise system in Turkey.
State ownership and production of key strategic manufactures have a long history in Turkey. Since the early days of the Republic, the desire for rapid industrialization has been an official target. Given the limited private capital ownership and historical bottlenecks of peripheral capitalism, this was thought to be achieved under the leadership and guidance of the state.
The state economic enterprise (SEE) system currently employs about a quarter of the labor force in the manufacturing sector and produces about one-third of the value added. While it maintained a monopoly position in many strategic sectors –iron and steel, petrochemicals, and cellulose and pulp in particular, the political interferences in pricing and marketing had resulted in poor performance of the overall sector in many years.
In particular, the prices of the strategic industrial inputs were mostly used as an anti-inflationary cushion by holding back the necessary price adjustments especially during the 1980s and 90s. This policy led to severely dampening of the profits of the SEE system especially during the strong wage increases as witnessed in early 1990s. (See Figure 4)
<Figure 4 here>
In Figure 4, the net profit position of the SEEs is portrayed. The data are in fixed 1987 prices. It can be seen that after the collapse of profitability in early 1990s, the SEEs managed to increase their financial position starting 1996. Despite the brief deceleration of profitability during the 2001 crisis, the state enterprise system had been able to deliver modest positive profits in 2002 and 2003. In Table 5, I give detailed information on the SEE accounts where similar trends are captured.
<Table 5 here>
What is really important to note in analyzing this performance is the overall deceleration of capital investments for the SEE system. I portray this trend in Figure 5. It is very clear that fixed investments to the SEE system is on a downward trend, and fixed capital investments were cut by half by 1995. The peak of the 1998-2000 period was simply able to maintain the 1989 level. The post-2001 adjustments under the IMF programme had called for reductions in public investments and capital investments to the SEEs in 2003 had been reduced to less than a third of what they were in 1989 in real prices.
<Figure 5 here>
The ideological dogma that state should stop investing in its productive assets is one of the main features of the Turkish neo-liberal privatization episode. In the following section I will be giving more detailed data on the contractionary investments and labor shedding at the enterprise level during the privatization era.
What is equally important to note at this juncture is that, despite the ongoing divestments and labor shedding, the SEE system could have managed to maintain both its productivity (efficiency) and also its profitability (save for outright intentional mismanagement practices). Figure 6 discloses one of the key results of the SEEs in that respect: the SEE system as a whole maintained a steady inflow of factor income to the Treasury. Especially after the 1994 crisis the public enterprises transferred a significant source of income to the public balances.
<Figure 6 >
As a result, the borrowing requirement of the SEE system which had peaked in early 1990s (due to ideological preferences forcing the SEEs to borrow at high real rates of interest and to keep their final prices low to disinflate) had turned negative (the SEEs turned into creditors) by 2002 (Figure 7).
Thus, contrary to the official propaganda that the SEEs are loss-making, technologically inapt and over-staffed chaebols, the current position of the SEE system is that they are profit generating, financially viable enterprises. This verdict prevails despite the ideologically motivated divestment programme.
The technological efficiency of the public enterprise system is indeed a matter of debate in the Turkish public economics literature. Clearly, technological efficiency is a hard concept, and a firm’s technical performance depends on not only technological capability and managerial performance, but also on outside factors such as domestic and international demand conditions, market sentiment, and fluctuations in prices, as well as on a host of political factors outside the control of the firm.
Yet, given all these caveats, one of the most authoritative conclusions on the SEE technical performance states that “technical efficiency in the Turkish manufacturing sector is in a declining trend, (...) public and private enterprises averaged around the same efficiency level over 1974-1991. The impact of government ownership on the average efficiency level is not found statistically significant” (Taskin and Zaim, 2001). At a narrower level, Sevgili and Taymaz (1996) asserted that “ownership change in the privatized cement plants didnot largely improve efficiency (...) geographical location, local market share, and local cement demand seem to determine efficiency rather than ownership”.
Against this background, it is a very clearly observable fact that employment in the overall state enterprise system was lowered both before and during privatization. Özmucur (1997), for instance, remarks that the “decision to privatize” seems to be more significant than the actual privatization act itself, in so far as employment at the firm is considered. The threat of privatization on workers and their Union is real. The ideology of privatization has openly turned into a state-led weapon for the capital’s assault on labor unions.
In this section, I turn into a more detailed analysis of the Turkish privatization programme covering major public industrial enterprises, namely the petro-chemicals, iron and steel, and the pulp, cellulose, paper and paper products manufacturing sectors. As outlined below, each of the sectors have a long tradition as leaders of Turkish industrialization, and each privatization episode has been portrayed with un-legal acts, corruption, and with “irrational” marketing strategies.
Another fraudulent privatization episode was experienced at the Balikesir plant of SEKA. In March 2003, SEKA Balikesir was sold to the Albayrak group for $1.1 million. The plant’s market value was set at $51.2 million initially. At that date, the plant was employing a total of 372 workers and 80 administrative personnel. It is one of the two paper factories in Turkey that produce print paper.
The sale of the Balikesir plant was put off in return to a case opened by the Paper and Pulp Workers’ Union (Seluloz-IS). In October 15, 2003 the 2nd Administrative Court of Bursa has announced for the cancellation of the sale of the SEKA’s Balikesir plant as there had been a severe case of violation of public interest. In return the Albayrak group has petitioned at the Higher Court and continued operation of the plant, ignoring the Bursa Court decision.
The legal battle continues as of today where the Union and the Albayrak group are facing each other in a series of court battles. Currently, the production has stopped at the plant altogether...
Given this dogmatic ideological assault on labor, the workers of the SEKA Izmit plant resisted to the government’s decision to close the plant. They have taken over the plant with their families in January 2005. Their resistance gained a large support both in Izmit and also at the national level. With strong government pressure, however, the Ankara 9th Court had decided in favor of the closure procedures. In late February, the plant was transferred to the city municipality which had plans for transforming the factory into a resort park! The workers abandoned the plant in exchange for promises that they will be employed in the municipality (not necessarily at their professional positions). The irrationality and waste of the privatization dogma in the public paper manufacturing industry is beyond calculable levels either economically or socially.
ERDEMIR is a jointly owned iron and steel industrial complex which is on the privatization list since 30 April 1987. Erdemir is one of the leading steel enterprises in the world with an advanced technology enabling strong efficiency gains and high profit margins. Its currently installed steel production capacity is 3.5 million tons/year. Given the average total domestic demand of 7-8 million tons, Erdemir can meet almost half of the Turkey’s steel needs single-handedly. Erdemir is currently implementing a new investment programme totaling $2 billion and is planning to expand its installed productive capacity to 7 million tons/year.
Since the date of privatization decree, only 2.93% of public shares was sold at public offers. The results of this sale were many thousands of small investors from the household sector who had paid a total of $53 million to these shares. The government, not being satisfied with the past 18 years of privatization attempts, is currently preparing the sale of its remaining49.93% shares to a single purchaser via bloc-sale. Many of the largest steel corporations of the world among them the US Steel, Arcelor (French, Spanih and Luxemburg conglomerate), Corus (British and Holland company) Mittal (Indian) are expected to bid in the auction for bloc sale. At the outset no prospective domestic buyer is recognized yet.
The pre-auctioning process is by no means different than the previous episodes in privatization: politicized preferential considerations, mismanaged and often fraudulent managerial calculations of the “market-value” of the plants and equipment, and a dogmatic ideology that the privatization should be achieved under all costs, immediately!
In fact, one of the key political motivations of the Prime Minister Mr. Erdogan in preferring the sale of Erdemir to the Arcelor group is an attempt to gain French support in the upcoming membership negotiations with the EU. Mr. Erdogan has met with the French President, Mr. Chirac in late 2004, and already signed an initial agreement on the conditions of the sale of Erdemir to Arcelor. During these meetings, Mr. Erdogan has also showed an interest to the French Airbuses and tried to take the French public to the Turkish side by offering attractive deals on Erdemir as well.
V-4-1. Economics of ERDEMIR’s Privatization
Erdemir is a giant iron and steel complex with 9 plants employing more than 15,000 workers and technical staff. The complex was initially founded in 1961 as a joint venture with 35% of public ownership and private firms including Turkish Is Bank (30%), Ankara Chamber of Commerce (12.9%) and American Koppis (22.5%). Along the years Erdemir’s owners changed and the public’s share has increased to as much as 53%. The current auction plan is to offer 46.12% of the Privatization Administration shares and the 3.81% of the Investment Bank shares (totaling 49.93%) as bloc sale to one single buyer.
It has to be noted that the Erdemir complex is not limited only to an iron and steel industry. With the privatization package included is the following:
In this Report, the economic, political, and social aspects of the Turkish privatization episode are narrated with a detailed focus on the key industrial sectors. This episode has begun in mid-1980s, and has always been a concomitant feature of the neo-liberal orthodoxy that had been carried under the Washington consensus institutions’ directives since 1980.
Originally the privatization ideology was based on “economic efficiency” arguments based on the myth that private sector decisions are always rational and efficient, whereas the public sector is inherently corrupt and its policies lead to waste. Over the course of time, however, the main objective of privatization had shifted towards mainly revenue generation and financing of the public debt. Thus, a clear shift of focus has occurred away from efficiency arguments of the so-called technologically backward state enterprises, towards revenue generation from sale of the most technologically advanced and profitable enterprises.
In fact a critical feature of the Turkish privatization programme was that it was marked with an official decision to reduce investments towards the state-owned enterprises which were placed under the privatization list. Fixed investments to the state economic entreprise system has been on a continuous downward trend, where fixed capital investments were cut by half between 1985 and 1995. The post-2001 adjustments under the IMF programme had called for deeper reductions in public investments.
The main logic of reduced investments in the state-owned enterprises was to draw support to the fallacious argument that the public sector is “inherently inefficient”, and that its enterprises are always “loss-makers”. By cutting the required investment lines of the state enterprises, it was easier to “prove” that they were indeed “inefficient and backward”. Furthermore, it was projected that by declaring them as “technologically backward”, it would be easier to sell the strategically situated-high technology industrial complexes at cheaper prices. Thereby “Turkey would be able to attract foreign capital!” –the official motto of the neo-liberal orthodoxy.
Thus, in the Turkish context, the current privatization attempts ought to be regarded as an episode of revenue generation and surplus transfer to the capital-owners via the privatization programme under close supervision of international finance capital and the IMF.
Under these trends, if the privatization programme is realized as officially planned, it is clear that Turkey’s domestic production will fall beyond the rising demand; the country’s import dependence will be intensified, putting all sectors at risk. Given the unexpected fluctuations in the foreign exchange markets and the threats of financial speculations, the fact that Turkey is going to leave its strategic intermediate goods production to the caprices of the world markets is a very serious risk for all its industrial sectors.
In concluding, in Turkey, as elsewhere, privatization meant corruption, rent seeking, and unlawfull episodes aimed at transferring public property to the domestic and international capital at fire-sale prices...
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 Following Lippit (1985), the term “surplus creation” is used to refer to that portion of the gross domestic product which is higher and above than what is necessary to meet the socially-determined subsistence requirement. See Yeldan (1995) and Somel (2003) for an application of the concept to the Turkish economy.
 The primary surplus target is set at 5 percent for the central consolidated budget.
 The Uzan group was large multi-sector conglomerate with a diverse product market ranging from tele-communications to news media. Following Uzan’s political opposition to the current AKP government with the aid of its commercial TV channel and media groups, the Uzan’s activities were declared “illegal” in 2004 and the family members and executive officers were arrested.
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