Turkey first introduced five-year plans in the 1930s as part of the etatist industrialization drive. The first five-year plan began in 1934. A second plan was drafted but only partially implemented because of World War II. These early plans were largely lists of desirable projects, but they provided guÍÍÍÍidance for the development of infrastructure, mining, and manufacturing. During the 1950s, the Democrat Party (DP) eliminated central economic planning, but the 1961 constitution made social and economic planning a state duty. In 1961 the government established the State Planning Organization (SPO), which was given responsibility for preparing long-term and annual plans, following up on plan implementation, and advising on current economic policy. The SPO comes under the prime minister's office and receives policy direction from the High Planning Council (also seen as the Supreme Planning Council), which is chaired by the prime minister and includes cabinet ministers. The Central Planning Organization, the secretariat of the High Planning Council, formulates the strategy and broad targets on which the SPO bases detailed plans. Plan targets are binding for the public sector but only indicative for private enterprises.

SPO plans include--in addition to investment levels--macroeconomic targets, social goals, and policy recommendations for individual subsectors of the economy. Turkey was one of the first countries to develop regional planning, a major challenge given the limited development of eastern and southeastern Anatolia. The SPO has approached planning from a long-term perspective and drew up the First Five-Year Plan (1963-67) and the Second Five-Year Plan (1968-72) in the context of what should be accomplished by the mid-1970s. Similarly, development goals for 1995, including a customs union with the EC, were set in the Third Five-Year Plan (1973-77) and the Fourth Five-Year Plan (1979-83). Successive plans took stock of problems and previous accomplishments, but many policy suggestions were never effectively implemented.

Early plans were heavily weighted toward manufacturing, import substitution, and the intermediate goods sector. The economic and political disorder of the late 1970s, however, made it impossible to achieve plan targets. After the 1980 coup, the Fourth Five-Year Plan was modified to favor the private sector, labor-intensive and export-oriented projects, and investments that would pay for themselves relatively quickly. The Özal administration delayed the Fifth Five-Year Plan (1984-89) for one year to take account of the structural reform program introduced in 1983. Unlike earlier plans, the Fifth Five-Year Plan called for a smaller state sector. According to the plan, the state would take more of a general supervisory role than it had in the past, concentrating on encouraging private economic actors. Nevertheless, the state was to continue an aggressive program of infrastructure investments to clear bottlenecks in energy, transport, and other sectors.

In May 1989, the government published the 1990-95 Development Plan. The plan called for ove 100rall ec economic growth of 7 percent per year. The growtÍÍÍÍh of private-sector investment was targeted at an average of 11 percent per year, whereas the aim was to increase exports 15 percent per year. The inflation rate was targeted at 10 percent per year. As it developed, although high growth rates were maintained during the 1990-95 period, they came at the cost of increased foreign and domestic borrowing, which funded an inflationary government budgetary and monetary policy. Rapid rates of growth also were boosted by foreign direct investment. Excessive borrowing and domestic political problems led to a balance of payments crisis that sharply reduced domestic investment rates and ultimately led to a decline in incomes. Whereas the development plan had called for high growth rates and macroeconomic stability, Turkey actually has experienced high growth rates and macroeconomic instability.

Budget

Public-sector spending is the most important means of state intervention in the Turkish economy. The consolidated government budget comprises central government spending and a number of annexed budgets of such partially autonomous entities as the State Highway Administration, state monopolies, and some universities and academies. Local budgets and most SEE budgets generally are not included in the consolidated budget, nor are special and extrabudgetary funds. The most important of the latter are the Mass Housing Fund, financed from luxury-import duties the Defense Industry Support Fund, financed from levies on sales of gasoline, cigarettes, and alcoholic beverages and the Public Revenue Sharing Schemes Fund. The partially autonomous organizations are included in the calculations for the public-sector borrowing requirement (PSBR).

Since 1983 the Treasury, under the direct control of the prime minister's office, has had sole responsibility to raise domestic tax revenues. The Ministry of Finance and the SPO are mainly responsible for planning spending policies, but the minister of finance presents the annual budget to parliament, which approves the annual government budget and legislates supplementary appropriations as required during the fiscal year, at times making significant modifications.

Turkish governments have persistently run large budget deficits, which have fueled inflation, capital flight, and heavy foreign and domestic borrowing. At the heart of this problem is the political system, which tends to be largely unrepresentative even when democracy is formally operating. Prior to major elections, governments have been prone to boost spending, particularly salaries for government workers. Despite recent modest changes to this system, Turkish governments have been averse to increasing taxes to pay for their high spending. Taxes, excluding social security contributions, are still around 20 percent of GNP--the lowest figure among the member countries of the Organisation for Economic Co-operation and Development.

Prior to 1980, local administrations had limited revenue-earning power and depended heavily on funds transferred from the central government. Even with such transfers, local governments were often short of funds needed to provide services required during a period of rapid urbanization when many city dwellers lacked even the most basic services. After 1980 reforms significantly strengthened the revenue base of municipalities, in part by providing that 5 percent of government tax revenues would be withheld at the local level. In 1994 Çiller also attempted to increase the revenues that local governments might raise.

During the early and mid-1980s, the government made serious attempts to reduce Turkey's inflationary budget deficits, implementing policies to streamline government, improve public resources allocation, and modernize the tax system. The government, for example, designed tax reforms to increase revenues and to reduce inequities. In addition, the introduction of a lump sum tax on small businesses and a new system of income tax payments for self-employed people reduc 7b2 ed tax evasion. The government also started to tax farmers' incomes systematically for the first time since the 1920s. Other reforms strengthened tax administration, established new tax courts, and instituted heavier penalties for tax evasion.

Overall, the consolidated budget deficit declined during the 1980s as a result of the reform measures. During the decade, the deficit averaged 3 percent of GNP. However, the deficit went up in the 1990s, reaching 7.4 percent in 1991, 6.1 percent in 1992, 9.8 percent in 1993, and 8 percent in 1994 (see table 6, Appendix A). The 1994 figure includes a first-quarter budget deficit of 17 percent, which was sharply offset in subsequent quarters after the promulgation of the April 5 measures and tight supervision by the IMF. These measures more than reversed some of the increases in wages and other spending made in 1992 and 1993. Public-sector borrowing requirements have been much higher as a percentage of GNP. After averaging around 6 percent during the 1980s, they ranged from about 10 to 17 percent in the 1990s.

Data as of January 1995