THE TURKISH ECONOMY is being transformed in the 1990s from a state-led to a market-oriented economy. As in most economies undergoing market reforms, the process of change has caused severe internal dislocations. External economic "shocks" such as the Persian Gulf War of 1991 and the resulting United Nations (UN) embargo on Iraq have complicated the transition.

The Turkish economy's ongoing and turbulent reorientation has left the economy a study in contrasts. Modern industries coexist with pockets of subsistence agriculture. The major cities of western Anatolia are cosmopolitan centers of industry, finance, and trade, whereas the eastern part of the country is relatively underdeveloped. Several decades of state planning followed by economic liberalization have made industry Turkey's leading economic sector, even as most Turks continue to work on farms. Industry has undergone a fairly rapid transformation as a consequence of the far-reaching market reforms implemented in the 1980s and early 1990s. Despite the reforms, however, public enterprises continue to dominate raw-materials processing and the manufacture of heavy industrial and military goods. The smaller firms that dominate the private sector produce intermediate and consumer goods for domestic and foreign markets. The services sector is perhaps the most diverse, embracing large export-oriented marketing groups and world-scale banks as well as small shops and individual domestic workers.

To a large extent, the last 200 years in Turkey have been marked by its rulers' attempts to transform it into a modern European industrial nation. The Ottoman Empire encountered serious economic problems beginning in the eighteenth century with the imposition of unequal treaties, the capitulations (see Glossary), which affected trade and taxation. The tanzimat (reorganization) reforms of 1839-78, an important component of which was the reorientation of the economy toward development of an indigenous industrial base, led to deepening indebtedness to Western imperial powers by the end of the nineteenth century. This dependence on the West, which was seen as one of the main causes of Turkey's "backwardness," created the context for the economic policy of the new republic formed in 1923. The other important influence on the new leaders of the republic was the example of state planning in the Soviet Union. Given these influences, state planning was the route Turkey's new leaders took to modernize the country.

From the 1930s until 1980, the state pursued import-substitution industrialization by means of public enterprises and development planning. This policy created a mixed economy in which industrial development was rapid. However, during the post-World War II period the drawbacks of excessive state intervention became ever more apparent to policy makers and the public. State enterprises, which came to account for about 40 percent of manufacturing by 1980, were often overstaffed and inefficient their losses were a signi 1000 ificant drain on the government budget. State planninÍÍÍÍÍÍÍÍg targets were often excessively ambitious, yet they neglected such essential sectors as agriculture. Concentration on import substitution deemphasized exports, resulting in chronic trade deficits and a pattern in which periods of rapid growth, financed in part by foreign borrowing, led to balance of payments crises that necessitated austerity programs.

The rapid transition from an agricultural to an industrial society also produced distortions in the country's labor markets and led to unequal income distribution. As was the case in most developing countries, there was a high birth rate, which contributed to unemployment in the postwar period by causing the labor force to grow rapidly. In addition, the modernization of agriculture tended to make small farms economically nonviable. As a result, many rural people migrated to urban areas. Those who left farming, however, often lacked skills needed in modern industry and could find employment only in the informal sector of the urban economy. Meanwhile, industrial enterprises became more capital intensive, which increased productivity but reduced the demand for unskilled labor. At the same time, firms had trouble recruiting skilled employees.

In January 1980, the Turkish government undertook a major reform program to open the Turkish economy to international markets. Leading the reform was Turgut Özal, then deputy prime minister and minister for economic affairs. Özal became prime minister in 1983, following a three-year military regime, and served as president from 1989 until his death in 1993. Özal's reform program included a reduced state role in the economy, a realistic exchange rate and realistic monetary policies, cutbacks on subsidies and price controls, and encouragement of exports and foreign direct investment. During its early years, the liberalization program achieved considerable success in reducing external deficits and restoring economic growth. Despite significant foreign direct investment during the 1980s and early 1990s, however, Turkey's balance of payments remained burdened by an external debt of more than US$65 billion at the end of 1993. A balance of payments crisis occurred in 1994 in the aftermath of a domestic political crisis in the wake of deep divisions within the administration over economic policy and a sharp decrease in exports to Turkey's beleaguered neighbors, Iraq and Iran. This situation led to a steep fall in the Turkish lira (TL for value of the lira--see Glossary).

The success of the Özal program was predicated on developing satisfactory relationships with the country's economic partners and continued access to export markets. Rapid development required large capital imports because domestic savings were insufficient for needed investments. Foreign investors, attracted by Turkey's great economic potential and increasingly liberal economic policies, made major commitments to infrastructure projects during the mid-1980s. However, continued high inflation, as well as memories of the political instability of the late 1970s, caused investors to hesitate. These insecurities were heightened after the Iraqi invasion of Kuwait in 1990, the rise of strong Islamist (sometimes seen as fundamentalist) parties in the early 1990s, and persistent macroeconomic problems.

Whatever short-term difficulties Turkey faces, most observers believe the country's long-term economic prospects are good. Mining and agriculture provide raw materials for industry, and the growing and resourceful population provides abundant labor. Turkey is one of the few countries that is self-sufficient in food indeed it can export food to European and Middle Eastern markets. Economic reforms have led to increases in exports of processed foods, textiles, motor vehicles, and consumer durables. Considerable investments in tourism, the revitalization of banking, and upgraded transportation facilities should allow Turkey to compete in the international services market in the 1990s.

Turkey has mad 8c6 e great strides toward building close economic ties with Europe, and Turkey's leaders have promoted the country as a vital link between the industrial economies of Europe and the underdeveloped economies of the Middle East and Central Asia. On several fronts, however, Turkey suffered a number of setbacks in the early 1990s. A critical one was the embargo on Iraq. Because of it, Turkey lost a huge export market as well as fees for allowing Iraqi oil to pass through a pipeline on Turkish territory. In addition, Iran, a major trading partner in the 1980s, reoriented its trade directly with Europe and Asia in the late 1980s and early 1990s. Early expectations for commerce with the Central Asian countries have gone unfulfilled because of the economic and social dislocations they have suffered in breaking away from the Soviet Union. Worst of all, Turkey's political relations with Europe have deteriorated, mainly because of human rights abuses of its Kurdish population and increasing intolerance in Europe of Turkish immigrants. As a result, Turkey's accession to the European Union (EU--see Glossary) appeared increasingly unlikely to happen as targeted in 1995, despite its having been an associate member since 1963 of the EU's predecessor body, the European Community (EC--see Glossary), and having applied for full membership in 1987.

Data as of January 1995