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Working Paper: Structural Adjustment & Urban Development in Istanbul

Dr Savvas Verdis

Cities Programme London School of Economics

Table of Contents Introduction............................................................................................................................3 A short history of world adjustment........................................................................................4 Turkey's experience with structural adjustment.....................................................................5 The Imagined World City........................................................................................................8 Conclusion...........................................................................................................................10 Illustrations...........................................................................................................................12 Bibliography.........................................................................................................................17

Introduction

"But current pressures […] are pressing a changing use of the city faster than the fabric of the city can respond, and indeed faster than the mix of labour skills and related attitudes and expectations can respond. The result is unemployment and under-employment, high adjustment costs in the physical fabric, and a lack of certainty of direction in the design of urban development strategies." (Townroe 1996).

The following essay will look at the impacts of a series of structural adjustment programmes (SAP's), implemented in Turkey from 1980 until today and assess how these have affected poverty, specifically rural poverty in Turkey and urban poverty in Istanbul1.

I will first discuss the general literature of the origins and impacts of SAP's in developing countries before looking at the case study of Turkey and Istanbul. I will first present a deep history of economic and financial crises that have plagued Turkey since the 1950's. To this day, Turkey remains the largest recipient of IMF funds in the world, and with every IMF transfer (another one is expected in early 2009) Turkey attempts to further 'refine' its yet unfinished structural adjustment process.

I will then address how such programmes, which have promoted short term investment and capital into cities such as Istanbul have heightened regional differences within Turkey, which has caused rapid urban migration. However because such short term capital has been invested in high yield sectors such as finance, insurance and real estate, no long term investment in the infrastructure of the city has yet to be realised. Although short term capital movements have created a very limited world city economy, which is constantly framed as the principal developmental goal, the majority of Istanbul now faces immense negative push factors such as overcrowding and poor living conditions exemplified by informal settlements known as gecekondus and informal sector jobs, which amount to 30% of the urban economy.

1 Although Turkey is classified as a middle income country according to OECD standards, I will utilise the United Nations Millennium Development Goals (MDG) indicators to analyse national poverty levels. The greatest proportion of Turkey's GDP is heavily concentrated on a number of metropolitan regions with the eastern side of the country living under conditions that record poorly on certain MDG indicators. I will also use urban level statistics and existing ethnographic research on Istanbul to speak about urban poverty in the city, which, although relatively invisible to MDG indicators, exists at the level of quality of housing, quality of employment, public infrastructure and measurements of quality of life.

A short history of world adjustment Although the IMF and the World Bank instituted major loan programmes since the 1950's, it was only until the 1980's that such loans to developing countries were accompanied with so called conditionalities. Typical conditionalities include the four '...ations'- stabilisation, liberalisation, privatisation and deregulation (Summers and Pritchett 1993). All are aimed, or at least this was the belief in the late 1970's and 1980's, at helping heavily indebted countries achieve more efficient resource use and better economic growth (ibid). A simple glance at the economic performance of adjustment nations however paints a mixed success story. Illustration 1, compares changes in levels of GDP and GDP per capita for several countries before and after adjustment. The results raise important questions on the success of SAP's as vehicles for economic growth.

To better understand such mixed results the historical context of structural adjustment needs to be seen both in terms of the world economy in the early 1970's and most importantly within the political economies of specific countries. The 1970's may be understood as the decade when years of inward focused economic development amongst developed countries were put to the test due to inflationary conditions that affected the world economy. Government spending which guaranteed a 'maximum employment society' through state owned enterprises and import substitution programmes in the developed economies were seen as a major cause for the massive inflationary pressures of the world economy in 1973 (Hewitt de Alcantara and UN Research Institute for Social Development. 1994). These inflationary pressures in the North, which were accompanied by steep rises in interest rates, were further accentuated by sudden oil price hikes in 1973 and 1978, which forced a lot of non oil producing countries in the developing world to face a massive debt crisis (ibid.).2 The worst indebted countries such as Mexico and Turkey could no longer raise finance from private banks, formerly willing to lend to central governments in the pre-1970's surplus era, which left multilateral agencies such as the World Bank and the IMF as the institutions of last-resort (Jimenez et al. 2002).3 In order to 2 Interest rates in the advanced economies of the west were increased in the late 1970's in order to attract foreign investment but this also increased the levels of debt of developing countries which now to repay loans in the new rates.

3 The oil price hikes in the early 70's created an increase in the amount of petrodollars in international banks that were willing to 'finance' the import substitution and development goals of developing countries.

However with the second oil price shock, many developed nations experienced high inflation and their corresponding high interest rates created a credit crisis in the debtor countries (Ray 1998). Indebted countries were now in a position of constantly loosing foreign reserves in repaying debt with no foreign currency inflows due to their policies of import substitution.

receive any such funds the consensus amongst the so-called Paris and London Clubs (the predominant groups of private and public banks of developed nations) was that free market economics (which involved the State giving up its central role in steering economic development), would be the best way for indebted nations to repay any future loans. It is important to note that the initial intentions of the multilateral agencies were to guarantee repayments rather than to alleviate poverty in indebted countries.4 If indebted nations could solve their balance of payments – they would be in a better position to meet their debt obligations. Indebted governments were asked to fully engage with the world economy and to transform their inward oriented policies towards world trade (Hewitt de Alcantara and UN Research Institute for Social Development. 1994). By engaging in world trade through the removal of trade barriers and the removal of home industry protection methods such as artificially high currency levels, indebted countries could quickly build foreign exchange reserves with which to meet debt obligation.5 Furthermore, the privatisation of state owned enterprises, the removal of artificially low prices for home produced goods and the reduction in public sector spending were all seen as vehicles to correct the balance of payments of debtor nations. That said none of the heavily indebted countries fully implemented the full SAP's shock doctrine at the rate that was suggested, with the exception of a minority of countries under dictatorial rule (Klein 2007).

Assessments of the overall success of adjustment programmes vary between serious failures (SAPRI Network 2004) to partial successes (Summers and Pritchett 1993). To better understand the impact of one such adjustment programme, I will now focus on Turkey's experience over the last thirty years and look at how adjustment has influenced levels of urban and rural poverty.

Turkey's experience with structural adjustment Similar to other developing countries caught in the debt crisis of the late seventies, Turkey started to loose its foreign exchange reserves under the new high interest rate period instituted by developed countries in the mid 1970's. Due to its low export policy, Turkey initially tried to repay its foreign debt through foreign worker remittances but these were not sufficient (Lavy and Rapoport 1992) and the country had to resort to further damaging short term loans from international banks (Cecen, A. Suut Dogruel and Fatma Dogruel 4 It is only in the late 1990's that the World Bank and the IMF started to focus in more country led approach to poverty alleviation and development.

5 Import substitution policies tend to push high exchange rates because demand for foreign exchange is low when imports are kept at a minimum (Ray 1998)

1994).

Coupled with low foreign exchange reserves, Turkey was also plagued by import substitution programmes that safeguarded a tradition of wage increases, which once acted as multipliers for the nation's enterprises (Kasaba 2008), (Atiyas 1995). Indeed Turkey's economic history in the 20th century may be summarised as one of public sector support by a centrist state, which until the 1980's promoted manufacturing growth, but which, was never sufficient to balance out the expenditure of the developmental state.6 As Ali Bayar has argued, Turkey looked to finance this fiscal deficit with currency devaluations both in 1958 and 1971 but these were soon followed by high levels of inflation with public spending still surpassing GDP growth (Bayar 1996). Indeed Turkish budget deficits due to public sector imbalances still remain high as shown in Illustration 6, with a major crisis in 2001, where public debt reached as high as 70% of GDP. When the Demirel government implemented the IMF's SAP in 1980 by devaluing the currency by 49%, one must have have questioned how different such adjustment would have been to previous ones. There were some fundamental differences. For once Turkey abolished price controls and the price of state enterprise goods increased, which benefited exports. Exports in Turkey increased from $2.9bn to $27bn between 1980 and 1999, however imports increased by an even greater amount (from $7.9bn to $45bn). This put enormous balance of trade deficits, never before experienced in the country. Secondly, the targeting of state enterprises had a huge impact on Turkey's wage bill. With the increasing cost of acquiring foreign exchange (hence capital goods) and the increased price of non subsidised home goods, private enterprises implemented dramatic wage cuts. Illustration 2, shows the sharp fall in labour costs in Turkey following adjustment, which averaged around -5% year on year from 1980 to 1988. This led to massive upheaval and following the 1989 elections, wages were suddenly increased by 21%, plaguing Turkey into further fiscal imbalances (Onaran 2002) with spiralling rates of inflation as shown in illustration 5.

This culminated in a further crisis in 1994, partly due to trade imbalance and partly to the continuing public deficits. Turkey returned to the IMF for further help in 1998 (Jimenez et al. 2002) (Celasun 1998).

The sharpest difference in the liberal adjustment projects of the 1980's and 1990's , came in the form of Turkey's new reliance on financial liberalisation that allowed the free flow of 6 The main exceptions are the 1950's private sector growth supported by US aid, but these never achieved the return to the state enterprise initiatives of the 1930's, 1960's and 1970's (Bayar 1996).

capital in and out of the country by 1989. This was believed to provide a new way to balance Turkey's chronic fiscal imbalances, but this short term capital actually achieved the opposite: “ In the presence of large inflows of short-term foreign capital, following the liberalisation of domestic financial systems and the drastic opening up of their capital account regimes, the countries involved inevitably experience a loss of export momentum and concurrent expansion in imports, resulting in unusually large current account deficits. Policy makers concerned with the health of the overall balance of payments tend to ignore the fact that this apparent equilibrium is very much a fragile equilibrium, based on large and yet highly reversible inflows of short-term capital, as external actors try to capitalise on high domestic interest rates in emerging markets� (Onaran 2002).

Illustration 7 shows the amount of foreign capital flows as % of the national GDP during the liberalised period 1987-1997. It is interesting to see that during this period, foreign direct investment into the country remained low and never exceeded 1% of the national GDP. The most important component of capital inflows were due to short term capital, which fluctuated between -4% to +4% of GDP. Although this is a comparatively low amount, it does show a pattern of boom and busts, which could never give the Turkish government a reliable source to balance its deficit. Furthermore, such inflows had a direct impact on the exchange rate, which undermined the level of exports and contradict the basic IMF strategy of improved trade balances under free markets. This new found regime of short term international investment was never invested in productive outputs and once again investments could not be matched with GDP growth, which induced further inflation (Onaran 2002).7 To one extent one may consider the recent growth in GDP and the cuts in the rate of inflation as the successful replacement of internal demand with external demand but as I will show, this falling internal demand coupled which is linked to falling wages and rising unemployment is putting pressure on the long term fundamentals of the economy.

Turkey's structural adjustment programme should not be understood as bringing new economic crisis to a country, which has been plagued with fiscal imbalances since the 1930's. However with their emphasis on privatisation and financial liberalisation, the 1980's and 1990's round of SAP's have induced a drop in the real level of wages, a negative trade balance as well as a reliance on foreign capital and foreign direct investment to provide economic growth. As of 2002, 27% of Turkey's population lived below the national poverty 7 More recently however, inflation has been successfully targeted with a period of export growth, but it remains to be seen if such growth is sustainable in 2009 under weak international demand.

line (Millenium Development Goals Indicators)8. Rather than focusing on the underlying causes of fiscal imbalance, mainly the weak labour market and long term private investment in industry, liberalisation focused on rapid economic growth through trade and financial liberalisation both of which failed to match the growth rates of previous import substitution programmes (Cecen, A. Suut Dogruel, and Fatma Dogruel 1994), (Onaran 2002).

Nowhere have the effects of structural adjustment been more manifested than in the city of Istanbul, which became the locus and conduit of short term capital, and speculation in nonproductive investments such as finance, insurance and real estate. This has placed a political emphasis on world city functions without placing enough attention on the existing manufacturing economy which amounts to 30% of the city's GDP or to its informal economy. It is this story that I will now trace, focusing specifically on the existence of a world city economy within a peripheral poverty.

The Imagined World City Istanbul has been the economic centre of both the Ottoman Empire and the Turkish Republic with natural advantages in trade due to its strategic location linking Asia to Europe and the Black Sea to the Mediterranean Sea. Although Istanbul lost a considerable amount of its population when the Kemalist Republic first tried to pull all investment out of the cosmopolitan city and into Turkey's new capital, Ankara, Istanbul has seen as steady growth in its population since the 1950's (Keyder 1999)9. The first wave of migration in the 1950's and 1960's came from the Black Sea and initially these migrants settled in informal settlements. They were attracted into the city's growing manufacturing sector which was further promoted through the country's import substitution policies. In fact the developmental state of the 1950's and 1960's focused its attention on the high growth manufacturing sector to the detriment of agricultural investment, which declined during this period and which further induced urban migration (Cihan 2008)10. By the time of the SAP's of the early 1980's, policies towards agricultural promotion did not change and this further 8 This is only a small improvement to the 28.3% in 1994 (ibid.)

9 Istanbul's population dropped from 1.6m to 800,000 in 1927 (Cihan 2008).

10 This is in line with the urban bias thesis developed by Michael Lipton and institutionalised in the World Bank's Berg report of 1981. The urban bias thesis is based on the fact that the agricultural sector has been unfairly taxed by import substitution policies such as high currency exchange rates, which had a negative impact of exports (Berg 1981). As such the World Bank encouraged developing countries to devalue their exchange rates in order to promote agricultural exports. A closer look at Turkey's agricultural sector during the period of adjustment shows a mixed programme of extreme and very low agricultural subsidies as shown in IIlustration 8.

increased urban migration into Istanbul which remains the biggest challenge facing the city. In the last twenty years, during the time of structural adjustment, Istanbul's population has more than doubled, which amounts to the largest population growth rates amongst OECD cities (Illustration 9). This is partly fuelled by a declining agricultural sector, which in 2006 accounted to 9.42% of value added, compared to 26% in industry. This has created immense regional differences within the country with Istanbul concentrating the greatest majority of the country's GDP output (Illustration 10)11. Rather than investing in the agricultural sector or alleviating poverty levels specifically in the eastern part of the country, Turkey implemented policies of rapid liberalisation in order to achieve rapid growth. Such policies were immediately made visible under Istanbul's first proliberalisation mayor Bedrettin Dalan who begun a pro-business make over of the city at a time when more and more migrant workers were moving into the city into informal housing areas: "Dalan embarked on a pro-business make-over of Istanbul: bulldozing the old streets along the shores of the Golden Horn, concreting the Bosphorus and Marmara corniches, throwing up new highways lined by monumental middle-class apartment blocks. This was a vision that showcased the ancient city for a new era of accumulation"(Cihan 2008) The informal housing areas were quickly transformed into concrete apartment blocks built to low standards in the surrounding areas of the city, which by 1992 amounted to 60% of the city's housing stock (ibid.) Interestingly it is exactly these populations, sceptical of the world city image in the period of liberalisation, which initiated a political change in the city.

Through local networks of kinship and of regional ties, specifically from Kurdish regions (it is believed that up to 1.5m Kurds moved into Istanbul in the 1990's), the Islamist Welfare Party of Tayyip Erdogan, which had previously employed local welfare services to gecekondus areas in the city such as Sultanbeyli, won the mayoral elections. Although Erdogan had initially promised investment to the periphery of the city, the economic crises that plagued the country between 1997-2001, prevented any real change in Istanbul12.

Just as the political promise of change was failing, the market reforms taking place within the city continued unabated throughout the 1990's and 2000's. By the early 1990's Istanbul was the locus of a fully liberalised Turkish market economy, but rather than investing in the human and physical capital of the city, both the Mayors and the Government relied on new 11 Regions such as Agri, Van and Mardin on the far east of the country have GDP per capita between $2,000 and $3,000 (OECD).

12 In fact Erdogan and Abdullah Gul ran for the national elections in 2002 under a pro EU & US agenda returning to a business as usual model of liberalisation.

international capital to achieve this developmental goal (Bora 1999) (Keyder 1999). Indeed the majority of the city's fastest growing sectors were the finance, insurance and real estate sectors (Jimenez et al. 2002); more than 100,000 jobs were added to these sectors between 1980 and 1990, but this only represented 13% of the services sector, which in itself represented only 7% of the Istanbul economy (Keyder 1999). One may indeed speculate on the representational power of the world city function, which exaggerated the illusion of economic development, whilst neglecting the core basis of the economy, which is still rooted in the manufacturing sector (specifically the textiles industry) and the informal sector.

In the words of Caglar Keyder, Istanbul remains a divided city (ibid.). Whereas the majority of the urban population is composed of recently arrived low skilled migrants and where the annual city GDP per capita is $8,465 (OECD), the core aspirations of the city were to transform it into a world city linking Europe to Asia13. Although such aspirations are national, they are most deeply felt in cities such as Istanbul where the large profits of transactions rooted in FIRE services are concentrated on a very small employment base, with the majority of the population working or living in informality and often not able to participate in Istanbul's central spaces of consumption (ĂœstĂźner and Holt 2007). One should never confuse a developing economy from an emerging economy. The latter is commonly used to refer to a peripheral country with high investment yields into which large volumes of foreign capital fly in and out of the economy. Indeed the Istanbul Stock Exchange was the best performing exchange in the world in 1999, but such funds as I have shown before can never be relied upon as sources of stable investment through which physical and human capital can be improved.

Conclusion With increased global competition in its manufacturing base, Istanbul has had aspirations to transform its economy into a higher value added services sector base. This requires long term investment both in physical infrastructure and in the development of human capital. Structural adjustment policies have, as of yet, not been able to deliver this transformation. On the contrary they have exacerbated the problem by heightening regional differences within Turkey, by extreme fluctuations in the national wage bill and in agricultural promotions, bringing a huge number of very low skilled migrants into cities 13 One may indeed question Istanbul's world city status, is such cities are typically exemplified by a service sector employment base (Sassen 2001).

such as Istanbul. Rather than embarking on long term programmes to alleviate regional differences and investing in urban infrastructure such as housing, transportation, and the formalisation of work, Istanbul has focused investment on short term sectors such as finance, insurance and real estate. Over the last few years a growing export sector has managed to finally control Turkey's fiscal balance, but more needs to be done to develop the country's own demand base, which can only be achieved through sustainable investment in human capital. Cities such as Istanbul provide opportunities to deliver such public services to a concentrated migrant population, but this will take time.

Istanbul is not the only city in the global periphery with aspirations to become a base for global city functions. Mumbai and Dubai are other examples. However cities located within countries plagued with rural poverty and large populations suffer from the daily inflow of low skilled migrant workers, which need to be housed and integrated in the formal economy. In such situations, a utilitarian perspective of accommodating the needs of the greatest majority must be implemented in line with long term programmes to transform the economic base of the city. Structural adjustment, at least in Turkey has increased regional differences by increasing rural poverty and bringing a rapid inflow of migrants which Istanbul's labour and physical fabric are unable to cope with.

Illustrations

Illustration 1: GDP Growth in select SAP Countries. Source: Kahn, 1993

Illustration 2: Relative unit of Labour Cost. Source: OECD

Illustration 3: Turkish Interest Rates since 1985. Source OECD

Illustration 4: Turkish Exchange Rate since 1985. Source: OECD

Illustration 5: Turkish Rate of Inflation since 1979. Source OECD

Illustration 6: Total Central Government Debt as % of GDP. Source: OECD

Illustration 7: Foreign Capital Flows as % of GDP. Source: Central Bank of Turkey

Illustration 8: Government support to agricultural sector. Source: OECD

Illustration 9: Average annual population growth (1995-2002). Source: OECD

Illustration 10: GDP is heavily concentrated in the Istanbul region: Source: OECD

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