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Uneven Centuries$

Sevket Pamuk

Print publication date: 2018

Print ISBN-13: 9780691166377

Published to Princeton Scholarship Online: May 2019

DOI: 10.23943/princeton/9780691166377.001.0001

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Economic Development and Institutional Change, 1914–1950

Economic Development and Institutional Change, 1914–1950

Chapter:
(p.184) 8 Economic Development and Institutional Change, 1914–1950
Source:
Uneven Centuries
Author(s):

Şevket Pamuk

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691166377.003.0008

Abstract and Keywords

This chapter explains how the period 1913 to 1950 was exceptionally difficult for Turkey. The country had to deal with the difficulties of the transition from being part of a larger empire to becoming a nation-state within new borders. Available data suggest income per capita declined by as much as 40 percent during World War I and remained depressed until the end of the War of Independence in 1922. Per capita incomes then increased rapidly in the 1920s and caught up with their pre-World War I levels and may have even slightly exceeded them by 1929. They then fell sharply, by more than 30 percent during World War II. Given these very large fluctuations in per capita income, it makes a big difference which end years are used in calculating the average growth rates for this period.

Keywords:   Turkey, nation-state, income per capita, World War I, War of Independence, World War II, growth rates

Economic Growth

Spanning two world wars and the Great Depression, the years from 1914 to 1950 were a difficult period for the world economy. The open economy model of the nineteenth century disintegrated under the pressure of two world wars and the Great Depression. Interventionism and protectionism emerged as new principles guiding economic policy during the Interwar years. These major events led to large fluctuations in the growth rates for the individual economies as well as the world economy. As a result of the differences in the impact of the two world wars and other causes, the per capita gap between North America and Western Europe widened significantly between 1913 and 1950. Extending a strong trend that began in the nineteenth century, the per capita income gap between developed and developing countries as a whole also continued to increase between 1913 and 1950.

How well different developing countries did during this difficult period also depended on the impact of the two world wars and the Great Depression. Countries that adopted greater interventionism and inward-oriented economic policies during the 1930s did better in terms of economic growth than countries that continued with the earlier strategies based on the export of agricultural products. However, in many developing economies, especially those that belonged to overseas empires of European powers, the open economy model and the specialization in agriculture continued. While per capita incomes rose in South America, Africa and especially Asia lagged behind. Among Asian countries, only Japan showed strong economic growth between the two wars, but it was severely impacted by World War II (table 8.1).

The period 1913 to 1950 was exceptionally difficult for Turkey. In addition to the two world wars and the Great Depression, the country had to deal with the difficulties of the transition from being part of a larger empire to becoming (p.185)

Table 8.1. GDP per Capita in the World and in Turkey, 1913–1950

GDP per Capita

Annual Rate of Increase (percent)

1913

1950

Western Europe

3460

4570

0.8

United States

5300

9550

1.6

Developed Countries

3960

6250

1.2

Eastern Europe excl. Soviet Union

1700

2100

0.6

Italy

2560

3500

0.9

Spain

2060

2200

0.2

Asia

700

720

0.1

Africa

640

890

0.9

Egypt

950

1050

0.3

Iran

800

1720

2.1

South America

1500

2500

1.4

Developing Countries

720

850

0.5

World

1500

2100

0.9

Turkey

1150

1600

0.8

Sources: Maddison 2007, pp. 375–86; Bolt and Van Zanden 2014, pp. 627–51; Pamuk 2006, pp. 809–28 for Turkey.

Note: GDP per capita are given in purchasing power parity (PPP) adjusted 1990 US dollars. For details, see chapter 2.

a nation-state within new borders. Available data suggest income per capita declined by as much as 40 percent during World War I and remained depressed until the end of the War of Independence in 1922. Per capita incomes then increased rapidly in the 1920s and caught up with their pre–World War I levels and may have even slightly exceeded them by 1929 (figure 8.1). Per capita incomes continued to rise at an average annual rate of 3.5 percent, or a total of 50 percent, until 1939. They then fell sharply, by more than 30 percent during World War II. The pre-war levels of per capita income were attained again only in the 1950s. In other words, 1939 was the year when per capita incomes reached their peak in the first half of the twentieth century. Given these very large fluctuations in per capita income as well as total population and total GDP, it makes a big difference which end years are used in calculating the average growth rates for this period.

Because finding data for the Ottoman era has been difficult, 1923, the year when the republic was established and the first year for which many data series as well as detailed national income accounts are available, has usually been used to assess Turkey’s economic performance during the first half of the twentieth century. Calculations that accept 1923 as the base year show that (p.186)

Economic Development and Institutional Change, 1914–1950

Figure 8.1. From Empire to the Nation-State, Basic Indicators for Turkey’s Economy, 1910–1950 (all indexes = 100 in 1929).

Sources: Author’s calculations based on the GDP per capita and population series discussed in chapter 2.

GDP per capita increased at an average annual rate of 2.5 percent and income per capita more than doubled until 1950. It was an important achievement for the young republic to attain positive rates of economic growth despite the major adverse shocks. However, taking 1923 as the base year leads to an overly optimistic assessment, as that year came at the end of a decade of wars during which per capita incomes declined by more than 30 percent from their 1913 levels. The rapid increases in income per capita from 1923 until 1929 were in fact due to the recovery to pre–World War I levels. For this reason, I have used 1913 as the base year when calculating the average growth rates until 1950. Using 1913 as the base year also makes it easier to compare Turkey with other countries during the first half of the twentieth century since most international series, including those of Maddison, also use 1913 as the base year. I have estimated total increase in per capita income for the entire period 1913–1950 at close to 40 percent and the average growth rate of GDP per capita at 0.8 percent per year.

Comparisons with other countries and regions as well as countries with similar population in southern Europe and the Middle East should provide additional insights into Turkey’s trajectory during this difficult period (figures 8.2 and 8.3). These figures show that the way each country or region fared in the two world wars made a big difference with regard to long-term economic performance. In both absolute and relative terms, Turkey was strongly affected by World War I but recovered during the 1920s and did well during the (p.187) 1930s, reaching a peak for the first half of the century in 1939. Turkey’s economy was once again hit hard by World War II, but the impact of that war was much more severe on the countries that participated in the military conflict. Italy and Spain continued to have higher levels of GDP per capita in comparison to Turkey during this period. GDP per capita levels rose in these two countries from 1913 to 1950 despite the two world wars and the Great Depression as well as the civil war in Spain. However, the gap between Italy and Spain, on the one hand, and the developed countries of Western Europe and the United States, on the other, continued to widen until 1950, as was the case for Turkey. The GDP per capita levels remained unchanged in Egypt, and the gap with the developed countries as well as with Turkey widened from 1913 to 1950. In comparison to Turkey, the impact of the two world wars on Egypt was more limited. However, while Turkey responded to the Great Depression with protectionism and industrialization, the same response was weaker in Egypt. Iran had lower GDP per capita levels than Turkey in 1913 but was able to raise them to Turkey’s levels by 1950 thanks to large revenues from oil. In comparison to Turkey, the impact of the two world wars, especially of World War I, was also more limited on Iran.

The proximate causes of the considerable increase in per capita incomes in Turkey during the 1930s deserve additional attention since this was a time of significant changes in economic policy. At the outset, it is easy to eliminate some of the possible causes of the increases in incomes. The macroeconomic policies the governments followed after 1929 did not fit the standard expansionary package later known as Keynesian. Budgets remained balanced and nominal money supply did not increase until the end of the 1930s. Exchange-rate policy also was not used as an instrument against the recession; the lira in fact gained against leading currencies during the 1930s as the latter were devalued. Moreover, exports did not play a leading role in the increases in income either. The limited demand for raw materials from the world markets, especially when combined with GDP increases in the second half of the 1930s, led to a decline in the share of exports in GDP from more than 11 percent in 1928–29 to less than 7 percent in 1938–39. Finally, it proved impossible to obtain additional resources through foreign borrowing, and foreign direct investment also remained low during the 1930s.

In the absence of fiscal, monetary, and exchange-rate policies, the protectionist policies implemented after 1929 emerged as the most important policy behind the revival of the urban economy. With the increases in tariffs and quotas imposed on the imports of manufactured goods, especially final goods, and a system of bilateral agreements in foreign trade, the ratio of imports to GDP declined rapidly from 13 percent in 1928–29, to less than 9 percent in 1932–33, and below 7 percent in 1938–39. With the decline of (p.188)

Economic Development and Institutional Change, 1914–1950

Figure 8.2. GDP per Capita in the World and in Turkey, 1913–1950 (PPP adjusted and as percentage of Western Europe and the United States).

Sources: Maddison 2007, pp. 375–86; Bolt and Van Zanden 2014, pp. 627–51; Pamuk 2006 for Turkey.

Economic Development and Institutional Change, 1914–1950

Figure 8.3. GDP per Capita in Four Other Countries and Turkey, 1913–1950 (PPP adjusted and as percentage of Western Europe and the United States).

Sources: Maddison 2007, pp. 375–86; Bolt and Van Zanden 2014, pp. 627–51; Pamuk 2006 for Turkey.

(p.189) imports, domestic manufacturing received a strong boost. Severe import repression thus created very attractive conditions for the domestic manufacturers after 1929. These mostly small and medium-sized producers achieved relatively high rates of output growth for the entire decade until World War II. Manufacturing output increased at annual rates above 8 percent or more than doubled during 1929–39 (Yücel 1996, pp. 89–130; Tezel 1986, pp. 102–3).

The sharp turn inward and import-substituting industrialization were not in conflict with global conditions during the 1930s. In fact, instead of trying to reverse or slow down the decline in agricultural prices, the government chose to let the urban economy and especially the manufacturing sector benefit from it. Lower raw material and food prices as well as lower wages created an opportunity for the manufacturing industry to generate higher profits and higher rates of investment. Public sector investments were also directed at the urban economy. In contrast, expenditures in rural areas, where more than 80 percent of the population continued to live and work, remained limited. This model was suited to the political preferences of the regime, because through protectionism and etatism, it created an economic structure that was more centralized and self-sufficient.

Another source of economic growth for Turkey’s economy in the 1930s was the strong performance of the agricultural sector. Despite the adverse movements in price, agricultural output rose by about 60 percent during the 1930s. By the end of the decade, Turkey was in a position to export not only the traditional cash crops but also significant quantities of wheat (Hirsch and Hirsch 1963, pp. 372–94, and 1966, pp. 440–57). A number of not mutually exclusive explanations may be offered for rising agricultural production in the face of declining prices. Some of these concern government policies. The abolition of the tithe in 1924 supported the small and medium-sized family enterprises and paved the way for agricultural recovery. Moreover, the construction of railways by the state helped increase production, especially in Central and Eastern Anatolia, by linking them to major urban markets (Tekeli and İlkin 2004c, pp. 286–321). A second explanation focuses on the demographic recovery and how family enterprises reacted to the decline in agricultural prices. The decline of the total population by about 20 percent during World War I and the War of Independence, as well as the loss of millions of draft animals, had struck a major blow to agricultural production. After the wars ended, Turkey’s population started rising rapidly, by approximately 2 percent annually. By the early 1930s, children born after World War I were beginning to contribute to the labor force in agriculture, and land under cultivation began to increase. Numbers of draft animals also increased by 40 percent during the same period.

(p.190) In other words, thanks to the demographic and to some extent the economic recovery of peasant households, the amount of cultivated land registered an important increase during the 1930s. Agricultural production during this decade was supported not only by the rise in the numbers of family farms but also by an increase in the average amount of land cultivated per farm. It thus appears that the small and medium-sized family enterprises responded to lower agricultural prices by using more family labor and cultivating more land to obtain a certain income or consumption level (Kuruç 2011, pp. 451–86; Shorter 1985, pp. 417–41).

By continuing to provide inexpensive foodstuffs and raw materials, the agricultural sector supported the growth in the urban economy, especially in the manufacturing sector. Without the strong performance from the agricultural sector, the gains in the urban economy could not be sustained during the 1930s. The peak in per capita incomes as well as per capita agricultural production, industrial production, and the share of investments in GDP was reached in 1939 (figure 8.1). The strong gains of the 1930s were reversed during World War II, however. Even though Turkey stayed out of the war, both agricultural and manufacturing output declined sharply due to the adverse conditions created by the war.

Industrialization and economic growth were reasonably robust during the 1930s. Yet one also needs to point to the limitations of structural change and economic transformation during the Interwar period as a whole. The urbanization rate and the share of the urban economy in the labor force remained below 20 percent in both 1939 and 1950, as can be seen in table 8.2. Moreover, the ratio of investments to GDP was also low and could not yet sustain higher levels of economic growth. Arthur Lewis, who has provided important insights into the early stages of industrialization in developing countries, has suggested that for sustainable industrialization and growth, the ratio of investment to GDP needs to reach at least 12 percent (Lewis 1954, pp. 139–91). Turkey did not reach this threshold before World War I as the ratio of investments to GDP was around 9 percent in 1913. The ratio of investments to GDP fluctuated between 9 percent and 11 percent during the 1930s (table 8.2). However, the same ratio declined to less than 10 percent during World War II and its immediate aftermath (Bulutay et al. 1974). The ratio of investments to GDP would rise permanently above 12 percent only in the 1950s (see table 10.2 in chapter 10). These basic indicators suggest that the transition from the empire to the nation-state, coming on top of two world wars and the global depression, had created tough and adverse conditions. The peasant economy remained mostly intact and the economic transformations of the 1930s, including industrialization, remained limited. (p.191)

Table 8.2. Basic Economic and Social Indicators for Turkey, 1913–1950

1913

1950

Population (millions)

16.5

20.9

Urbanization Rate (%)

Centers above 10,000 / Total Population

23

18

Life Expectancy at Birth (years)

32–33?

44 (M: 42; W: 46)

Literacy Rate (%)

14?

33 (M: 46; W: 19)

Average Years of Schooling of Adult Population

0.6

over age 15

Share of Agriculture in Labor Force (%)

75–80?

75–80?

Share of Agriculture in GDP (%)

50

42

Exports / GDP (%)

11

8

Imports / GDP (%)

14

8

Investment / GDP (%)

8

11

Revenues of Central Government / GDP (%)

13

15

Sources: Eldem 1970; Pamuk 1987, Bulutay et al. 1974; Tezel 1986 and Turkey, Türkiye İstatistik Kurumu (Turkish Statistical Institute) 2014.

It may be useful here to extend to the Interwar period the comparison with Egypt that I began for the nineteenth century in chapter 6. Even though Egypt’s involvement in the two world wars and their impact on the economy was much more limited, GDP per capita did not increase in Egypt between 1913 and 1950, while it increased by about 40 percent in Turkey (table 8.1 and figure 8.1). As a result, the gap in GDP per capita between the two countries widened considerably during this period. One basic reason for this difference is directly related to political economy and changes in economic institutions, including economic policies. In Egypt, landowners were much more powerful, and their power combined with the continued influence of Britain made it much more difficult to abandon the strategy based on agriculture and shift to protectionism and industrialization, even though the collapse of cotton prices had severe consequences for Egypt’s agriculture. In other words, both Egypt and Turkey experienced increases in tariffs and manufacturing activity. However, while protectionist measures including non-tariff barriers were much stronger in Turkey, both the rise in tariffs and the increases in industrial production remained more limited and imports continued to account for a larger share of domestic consumption in key sectors such as textiles in Egypt. Also important was the contrast in land availability. While additional agricultural land was available in Turkey, limits to cultivable land had been reached in Egypt before World War I. As a result, agricultural output could increase together with the demographic recovery and create additional demand for (p.192) manufactures in Turkey, but the same was not true in Egypt (Hansen 1991, pp. 64–109; Karakoç, Pamuk, and Panza 2017, pp. 149–54).

Income Distribution

The two world wars, recovery from each of them, and industrialization during the Great Depression led to large fluctuations not only in average incomes but also in the distribution of income. The extensive changes in political and economic institutions also shaped the distribution of income. Even if available data are not very detailed, the direction of changes in the distribution of income during the two world wars is reasonably well known. As average incomes declined by 30 percent or more in both world wars, income distribution became much more unequal. Because relative prices moved in favor of foodstuffs in both wars, those who had enough food to sell in the markets, large landowners, and merchants in the cities who were able to stockpile food were the main beneficiaries (Toprak 1982, pp. 313–44; Tekeli and İlkin 2004a, pp. 1–44). The urban poor, wage earners, and more generally urban population with low incomes faced the greatest difficulties in obtaining food.

During both wars, the government placed various demands on the small and medium-sized agricultural producers that made up the great majority of the population. How well they fared depended on how severe the government demands were and to what extent they were able to evade them. These demands changed from region to region during World War I and the government was not always successful in collecting taxes. It is also likely that the forced deportation and deaths of large numbers of Armenians in Eastern Anatolia as well as their flight to the neighboring regions during World War I had a strong negative impact on the income level in this region and increased inter-regional inequalities in the long term. World War II also had a significant effect on the economy as well as the distribution of income, but the impact was less severe in comparison to that of World War I as Turkey did not join the hostilities.

There were two other trends related to the ownership of physical assets during the world wars with important long-term consequences for the distribution of wealth and income. The first was the decline and destruction of physical assets such as buildings, plant and equipment and to a lesser extent agricultural land during both world wars and especially during World War I. Since higher income groups were the owners of these assets, their decline and destruction tended to make the subsequent distribution of wealth and income more equal. The second trend during both wars and their aftermath was the shift in the ownership of the assets of non-Muslims to Muslims. The massacres and deaths of many Armenians and the flight from Turkey of most of the rest (p.193) during World War I as well as the exchange of population, Orthodox Greeks for Muslims, arranged between the governments of Turkey and Greece in 1923 led to the transfers of the urban and rural properties of both Armenians and Greeks to Muslim Turks and Kurds. The Wealth Levy imposed ostensibly on wartime profiteers but demanded mostly from non-Muslims during World War II produced a similar if more limited result by shifting the ownership of some of the assets of the remaining non-Muslims residing in urban areas to Muslims.

The 1920s as well as the second half of the 1940s were periods of rapid recovery after many years of war. The pattern of increases in agricultural incomes as well as wages after both wars suggests that the gains from the economic recovery were distributed across most groups in both rural and urban areas. Another important event regarding income distribution during the Interwar period was the Great Depression. The large movements in international and domestic prices against agriculture and the government’s response in the form of protectionism and support for industrialization expanded the existing differences between the urban and rural areas in favor of the former (Tekeli and İlkin 1977, pp. 78–90; Tekeli and İlkin 1982). The abolition of the tithe in 1924 had eased the tax burden of agricultural producers, and the government did not attempt to reverse the decline in agricultural prices after 1929. As a result, agricultural incomes lagged behind those in urban areas that benefited from industrialization. Despite the considerable increase in agricultural output during both the 1920s and the 1930s, the share of agriculture and rural areas in total income was thus lower in 1939 in comparison to both 1929 and 1913. In fact, the existing national income accounts suggest that the gap between average incomes in the urban or non-agricultural sector and the average incomes in the agricultural sector rose to their highest levels of the past two centuries during the 1930s.

A comparison at the two end points of this period, 1913 and 1950, should provide important insights into the longer-term changes in the income distribution. Average incomes are estimated to have increased by about 40 percent from 1913 to 1950 within the area comprising Turkey today. It would be safe to say that a large share of this increase went to those in the urban areas, especially to those engaged in activities other than foreign trade. In contrast, the agricultural sector where the great majority of the population earned their living experienced limited gains during the same period. These broad trends probably apply to both more urbanized Western Anatolia and more rural Eastern Anatolia. Within the rural areas, the more commercialized regions and the more market-oriented producers tended to do better than the others, but they also lost more during the 1930s. Despite the rhetoric of the Republican People’s Party to the effect that the peasant was the true master (p.194) of the country, the rural areas did not receive significant amounts of compensating support from the government after 1929. In contrast, the urban economy benefited from favorable price movements, the severe repression of imports, the beginnings of import-substituting industrialization, as well as the policies of etatism.

As for the distribution within the urban economy, a simple measure, namely the ratio of wages to per capita incomes, can provide important insights in the absence of detailed data. As noted earlier, while average incomes were rising especially in the urban areas by as much as 40 percent or more from 1913 to 1950, real wages did not increase or increased very little during the same period. This simple measure thus suggests that during this period of protectionism and early industrialization, inequalities within the urban economy, as well as inequalities between urban and rural areas, were rising (for trends in real wages, see figure 9.3 in chapter 9; also Yavuz 1995, pp. 155–96).

Finally, the construction of new railroads in Central, Eastern, and Southeastern Anatolia during the Interwar period strengthened considerably the transport infrastructure in these less developed regions and their links to the rest of the country. However, because of the loss of most if not all of the Armenian population during World War I and because of the impact of the Kurdish rebellions during the Interwar period, these two regions were probably poorer in 1939 than in 1913. It is thus likely that the west-east differences in average incomes were higher in 1939 and 1950 than in 1913.

Role of Institutions and Institutional Change

After recovering from the impact of World War I until 1929, GDP per capita in Turkey increased at an average rate of 3 percent per annum during 1929 to 1939 thanks to high rates of protectionism and industrialization supported by demographic recovery and rising agricultural production. In what follows, I will focus on the Interwar period and especially the 1930s to assess the contributions and the limitations of the institutions and institutional changes associated with the new economic model during the transition from empire to the nation-state. I will argue that major changes in the international environment as well as far-reaching domestic changes in political institutions were responsible for the transformation of the formal economic institutions from those of an open economy in the nineteenth century to those of an inward-looking national economy during the Interwar period.

The far-reaching changes in Turkey’s political and economic institutions during the Interwar era came from two main sources. The end of the Ottoman Empire and the formation of a nation-state in Turkey under new leadership led to important changes in political institutions. In addition, the institutions (p.195) of the global economy and the institutions related to Turkey’s relations with the world economy changed dramatically after World War I. As a result, the new leadership at Ankara could establish new economic institutions and pursue policies of protectionism and industrialization shaped by economic nationalism and the goal to create new economic elites, a Muslim-Turkish bourgeoisie. These major changes in formal institutions played important roles in bringing about significant increases in per capita income during the Interwar period. However, they did not crowd out informal institutions but continued to interact with them. In fact, informal institutions continued to play key roles in both politics and economic development during these decades, in both rural and urban areas as well as state interventionism. For a more nuanced assessment of the role of institutions during this period, it is thus necessary to also examine both the formal and informal institutions as well as their interaction, how new institutions emerged as a result, and how they contributed to or hindered long-term economic development.

The institutions of the global economy and the institutions related to Turkey’s relations with the world economy changed dramatically between the nineteenth century and the Interwar period. The Ottoman government was bound by free trade treaties and had followed open economy policies during the nineteenth century. The economic institutions were shaped by the interaction between the central government and European governments and European companies until World War I. The interruption of external trade, the adoption of the principles of self-sufficiency, protectionism, and industrialization, and the shift to interventionism during World War I turned out to be the beginning of a long-term change in the economic model and the formal economic institutions. After the Great Depression began in 1929 and another world war soon appeared on the horizon, economic nationalism and concerns for self-sufficiency began to dominate economic policy. One basic reason for these radical economic changes was the new global circumstances. However, the dismantling of the Ottoman Empire and the formation of a nation-state in Turkey under new leadership also played a key role in the adoption of the new economic model.

As a result, the power of European states and European companies to influence the institutions and policies of the new nation-state was significantly less during the Interwar period in comparison to the nineteenth century. In the Lausanne Peace negotiations that concluded in 1923, the European governments reluctantly agreed to the end of the legal and economic privileges of the European citizens and companies. The new nation-state also gained the right to decide unilaterally on its own tariffs beginning in 1929. While some European companies continued their operations in Turkey during the Interwar period, many others, including banks and merchant houses, left during the (p.196) Great Depression and others, most prominently the railway companies, were bought out and nationalized by the government.

The end of the Ottoman Empire and the formation of a new nation-state in Turkey under new leadership led to important changes in political institutions. The War of Independence that lasted from 1920 to 1922 was supported by a broad coalition of the provincial notables, merchants, landowners, and religious leaders. After abolition of the sultanate and the caliphate and the proclamation of the Republic in 1923, however, Mustafa Kemal and his close associates moved to eliminate the opposition and began to adopt a narrower secular line (Zürcher 2004, pp. 166–95). In the nineteenth century, the central government had played a much more important role in shaping the formal economic institutions and policies than the various domestic groups including landowners and merchants. While the influence of European states and companies declined sharply during the Interwar period, the key role of the government and new state elites continued. The economic policies of the new leadership were shaped by economic nationalism and the goal to create a Muslim-Turkish bourgeoisie. The Muslim-Turkish private sector was weak and consisted mostly of small and medium-sized enterprises, however. As a result, industrialization led by the state was adopted as the basic development strategy in response to the Great Depression. A small number of large-scale state enterprises were established during the 1930s in key sectors such as manufacturing, banking, mining, and transportation.

As the new regime began to shape the new economic institutions and policies in the 1920s, however, consolidation of its power in the rural areas was an important priority. One important institutional change in the early years was the abolition of the tithe and tax farming in agriculture. Easing the tax burden of mostly small and medium-sized agricultural producers was an important goal. However, the abolition of the tithe also undermined what had remained of the power of the tax farmers and a key source of potential opposition to the new regime. Similarly, the prohibition of the activities of religious orders and networks did not entirely eliminate their activities but undermined their influence, especially in the provinces. Nonetheless, the cultural disconnect between the conservative peasantry and the secularizing policies of the new persisted. Despite the far-reaching changes in formal institutions and consolidating its power, the government was unable to increase its influence in the rural areas (Mardin 1973, pp. 169–90; Adaman, Akarçay, and Karaman 2015, pp. 166–85).

The role of the state in the economy as well as the aims and institutions of state interventionism also underwent important changes during the transition from the empire to the nation-state. In the nineteenth century, Ottoman leaders did not view the creation of a strong private sector in the urban economy (p.197) as a leading goal. The government’s initiatives for industrialization were oriented, for the most part, toward meeting the state’s own needs, for example. In contrast, economic development and the creation of a stronger Muslim-Turkish private sector by the state were adopted as major goals by the new nation-state. In the 1920s, the government in Ankara began developing new methods for developing a private sector selected from among Muslim-Turkish groups close to the new regime by using its small and large purchases, construction projects, and the tenders it launched for that purpose, as well as the credits extended by the new public sector banks. The adoption of state-led industrialization as the basic economic strategy during the 1930s undoubtedly complicated the picture and relegated the private sector to a secondary role. Nonetheless, the private sector remained in the big picture and state support for it continued through these mechanisms. The single-party regime thus remained narrowly based on urban groups close to the party. Instead of opening the political and economic institutions economy to broader groups, the regime reproduced the existing inequalities and also created new inequalities. These emerging institutions, in other words, the formal as well as informal rules of state interventionism, would develop, diversify, and gain permanence in the decades after World War II as the state continued to distribute privileges within the private sector and play key roles in the selection of the winners in the economy (Keyder 1987, pp. 71–115; Boratav 1981, pp. 165–90; Buğra 1994, pp. 35–95).

Changes in the banking sector reflected these far-reaching changes in power relations and in institutions. European banks had dominated the emerging formal banking sector during the nineteenth century. The Imperial Ottoman Bank, owned by French and British shareholders, fulfilled some of the functions of a central bank and also functioned as a commercial bank across the empire. Many European banks departed or were sold to local owners during the Interwar period, however. The central banking functions of the Imperial Ottoman Bank were eliminated with a government decree and later handed to the new Central Bank founded in 1930. The Ottoman Bank continued as a commercial bank owned mostly by French shareholders. Turkey’s banking system in the Interwar period thus consisted mostly of a small number of private and public sector banks.

İşbank, a semi-public bank committed to the development of the private sector, is a prominent example and indeed the symbol of the new economic model adopted by the Ankara government in the 1920s. From its early years, Işbank became an important instrument in the creation by the state of a new private sector led by Muslim businessmen. İşbank continued its prominent role in the economy during the second half of the twentieth century. After the Republican People’s Party left the government in 1950, the mostly symbiotic (p.198) relations between İşbank and the state changed. Nonetheless, the bank continued to pursue its activities, which extended beyond finance into areas like industrialization and development, with a status that was different from both a public bank and a private bank (Kocabaşoğlu 2001, pp. 1–298).

Sümerbank established in 1933 and and Etibank established in 1935 were new institutions that reflect the change in strategy in the early 1930s and the leading role of the state in industrialization. Sümerbank was founded to operate both as a bank and also as a leading manufacturer in textiles, the most important sector in import substitution. Its first large manufacturing facility was set up in Kayseri in 1935 with credits obtained from the Soviet Union, but its contribution to industrial production in the 1930s remained limited. After World War II, as control of the economy was transferred to the private sector, Sümerbank maintained its position among leading industrial enterprises. After Washington Consensus principles were embraced in 1980, the government decided to privatize Sümerbank. The privatization process, subject to many political and legal challenges, was also embroiled in corruption scandals and it could not be completed until 2001. In addition to banking, Etibank focused mostly on mining during the 1930s and after World War II. Its privatization after 1980 was also subject to corruption scandals and court cases that also continued into the twenty-first century (Tekeli and İlkin 1982, pp. 134–220).

The strategy based on strong protectionism and industrialization combined with the creation of a Muslim-Turkish private sector thus created moderately strong rates of economic growth in the urban areas. Another priority for the new regime was the expansion of the new institutions and the consolidation of its power in the rural areas where the great majority of the population lived. The results in this respect were mixed, however. The abolition of the tithe not only provided relief to family farms, it also undermined what had remained of the power of the tax farmers, a key source of potential opposition to the new regime. The government also tried to suppress the activities of religious orders and networks and develop new patronage networks linking the rural areas to the capital (Sayarı 2014, pp. 658–59). Despite the far-reaching changes in formal institutions, however, the capacity of the state to penetrate the provinces and especially rural areas remained limited. While the changes in formal institutions played important roles in bringing about significant economic growth until World War II, for a more nuanced assessment, it is thus necessary to examine the interaction between formal and informal institutions.

Limitations of the fiscal, administrative, and legal capacities of the state were not the only reason the new formal institutions did not crowd out informal institutions but continued to coexist with them. In addition, large numbers (p.199) of other institutions were also involved in the implementation of a new institution. Many of these institutions were shaped by values, beliefs, and social norms as well as interests and power relations. While political institutions and laws could change very quickly, values, beliefs, social norms, and related institutions changed more slowly. Of equal importance, the distribution of benefits from the enforcement of the new institutions was not always in line with the existing distribution of power. Powerful groups resisted institutional changes or exerted pressure to ensure that an institution operated in a way that was different from the intended aim. The conservative Muslim elites often made use of informal institutions including identity-based networks and patron-client relations in these conflicts. The establishment and then the closure of the Village Institutes is a good example of how powerful interests could oppose and reverse government policies and formal institutional change (Roland 2004, pp. 109–31; Starr 1979; Starr and Pool 1974, pp. 533–60; Mardin 1973, pp. 169–90).

In other words, the formal institutions by the new nation-state were accompanied by the two-way interaction between formal and informal institutions as well as the two-way interaction between institutions and economic outcomes. The preceding discussion suggests that the two-way interaction between institutions and social structure was equally important. One of the areas where the limitations of the reforms can be seen most starkly is the spread of education to the provinces and the rural areas. The new nation-state also placed a good deal of emphasis on secular education. Some progress was made at all levels of education, but the diffusion of education to rural areas where close to 80 percent of the population lived remained slow. In addition, education levels of women remained well behind those of men. In basic indicators of education, Turkey continued to lag behind other developing countries with similar GDP per capita levels, as I will discuss in the next section.

Opposition to the reforms and the new regime also came from those who controlled and benefited from some of the Islamic-Ottoman institutions. With the reforms of the nineteenth century, the vakıfs were brought under the control of the central government and their share in both agricultural lands and urban assets had declined. The new government in Ankara began to sell to private owners or transfer to the various public entities the remaining vakıf assets under government control (Öztürk 1995, pp. 109–471). Even though the importance of the vakıfs and their assets had declined, those who had controlled the vakıf lands and the other vakıf assets, and those who benefited from the incomes generated and the services they provided—families and religious orders as well as those who used and embraced the vakıfs for social and cultural reasons, thus remained opposed to many of the reforms.

(p.200) By the end of the 1930s, the vast majority of the population continued to live in rural areas and engaged in low-productivity agriculture. Even if the level of production was able to recover from the hard blows of two world wars and the Great Depression, small and medium-sized family farms using traditional technologies experienced very little transformation. With the decline in world market demand and prices, the countryside actually turned further inward during the Interwar period in comparison to the decades before World War I. The inequalities between the rural and urban areas increased significantly. It was very difficult to secure substantial increases in per capita incomes without the shift of the rural population from agriculture to the urban sector, where they could access more advanced technologies and achieve greater productivity.

Along with economic cleavages, religion and cultural values thus emerged as another axis of opposition in the countryside. The embrace of Islam and the spread of informal networks in response to the centralizing reforms of the secularist elites that began in the nineteenth century continued in the Interwar era. Although many of the provincial notables were integrated into the ranks of the Republican People’s Party, the cultural as well as economic disconnect between the conservative peasantry and the secularizing policies of the new regime at Ankara persisted.

Human Development

In Turkey as well as most other developing countries during the first half of the twentieth century, life expectancy at birth was low due to high mortality rates among all age groups, but especially among infants and children. As much as half or more of all deaths were among children under the age of five who died mostly of infectious diseases. Thanks to declines in both infant and adult mortality rates across the country, life expectancy at birth rose from 32–33 years in 1913 to more than 35 years in the 1930s and to 44 years (42 for men, 45 for women) in 1950 (table 8.2).

There were large fluctuations along the way, however. Life expectancy at birth declined sharply during World War I. Large numbers of military and civilian casualties during World War I suggest that life expectancy must have decreased to less than twenty-five years during the war. For large segments of the civilian population, hunger and disease remained a constant threat until the end of the war. Moreover, the decline in mortality after the war proceeded very unevenly. Large differences persisted in infant as well as adult mortality rates between urban and rural areas. In rural areas in the east, more than a third of all infants did not reach their first birthday. Life expectancy at birth (p.201) declined during World War II as well, but the decreases were much more limited in comparison to World War I. Even though there was some decline in food availability and nutrition, and mortality rates among infants, children, and the elderly rose particularly among the urban and rural poor, hunger and disease were not widespread during World War II in large part because Turkey did not participate in the war, but also due to a stronger economy and infrastructure. Nonetheless, infant mortality levels were still around 25 percent in 1950.

The new republic recognized the importance of health care. Resources allocated to health care increased, but public spending on health in rural areas where close to 80 percent of the population lived remained limited. Numbers of doctors, nurses, midwives, and other health-care personnel increased modestly from 1.9 per 10,000 population in 1928 to 2.5 in 1939 and more strongly to 4.4 in 1950. Equally important, growing knowledge and better health-care practices and more generally the discovery of better ways of doing things began to play an important role in these increases. Some improvements were achieved in the basic health services offered especially in the urban areas, and significant advances were achieved in the struggle against infectious diseases. An important part of the credit for the decline in child mortality in the urban areas must go to the control of disease through public health measures. With the increased presence of medical facilities, the fight against tuberculosis, malaria, and other contagious diseases, the discovery of antibiotics, some increases in income, and better nutrition, mortality rates started declining in Turkey in the 1930s (Akder 2010, pp. 220–24; Evered and Evered 2011, pp. 470–82). However, along with the gap in per capita income, the gap in life expectancy at birth between developed countries and developing countries including Turkey continued to increase during this period (Zijdeman and de Silva 2014, pp. 101–16; Deaton 2013, pp. 59–100).

The new nation-state also placed a good deal of emphasis on secular education. The educational system was completely secularized in 1924 and the religious schools were closed. The adoption of the Latin alphabet in 1928 was followed by literacy campaigns directed at adults across the country as well as efforts to expand the reach of schools. Some progress was made at all levels of education but the diffusion of education to rural areas where close to 80 percent of the population lived remained slow. Turkey continued to lag behind other developing countries with similar GDP per capita levels in basic indicators of education. Enrollment in elementary schools increased from about 30 percent of school-age children in 1930 to about 60 percent in 1950. However, fewer than half of the villages had elementary schools, and most schools had only one teacher for all students. Fewer than half of the students who attended (p.202) elementary school stayed long enough to graduate. Similarly, only 4 percent of the age group graduated from the various secondary schools, and less than 1 percent of the age group graduated from four-year universities in 1950.

One important reason for the slow improvement in outcomes was the limited fiscal resources of the state. Only a small fraction of the budget and the GDP was allocated to education. Similarly, incomes of the population were low and their opportunities were limited. They often preferred their children to work in the fields rather than attend school. There was political opposition as well. Especially in the provinces and in rural areas, the new schools were not easily accepted by the Muslim population and the conservative Muslim elites and the religious networks who did not embrace the ongoing reforms. The challenge of expanding public schools in the provinces and in rural areas and ensuring that girls attended the schools thus remained a major problem.

Large disparities persisted in enrollment rates between urban and rural areas, between men and women, and between the west and the east until 1950. In the Kurdish areas in the east, literacy and schooling rates remained the lowest in the country. Women’s literacy level rose from less than 5 percent in 1913 to 19 percent in 1950, while men’s literacy level increased from about 15 percent to 46 percent (Turkey, Turkish Statistical Institute, 2014). While Turkey was one of the earliest countries to extend suffrage to women in 1934, and while the daughters of the urban middle class who embraced the new secularism of the republic did benefit from the availability of education, and some areas of civil service and the professions were opened to them, progress on women’s education was very slow in the rural areas. Male-female differences remained high at all levels of schooling. In 1950, numbers of female students were about 60 percent of those of male students among elementary students and only 25 percent of those of male students amongt high school and university students. These gender differences were lower in urban areas and amongst middle- and higher-income groups but higher in rural areas, in less developed regions of the country, in the east and southeast, and in lower income groups (Arat 2008, pp. 391–96; Turkey, Turkish Statistical Institute, 2014).

There were attempts to extend the reforms to the villages, to spread modern techniques in agriculture, and to instill a secular and positivist attitude among the rural population. One important project of the early republic was the creation in 1940 of a limited number of Village Institutes in rural areas across the country. These new schools began to train young villagers in each region as primary school teachers as well as teachers of modern technical and agricultural skills to the rural population. The village institutes were very successful while they lasted, but with the transition to political pluralism after World War II, they began to be opposed fiercely by the conservative rural elites. As a result, the village institutes were reduced to ordinary teacher training (p.203) schools before 1950 by the Republican People’s Party itself and abolished altogether by the Democrat Party government in 1954 (Karaömerlioğlu 1998).

Average formal schooling received by adults over fifteen years of age increased slowly from about 0.5 years before World War I to about 1.2 years in 1950, while world averages increased from 2.0 to 3.2 years during the same period. These comparisons confirm that Ankara government’s efforts on education remained focused on the urban areas and did not reach the rural areas, where the great majority of the population lived until after World War II. In terms of schooling for adults, Turkey lagged behind not only the developed countries of Western Europe and the United States but also the averages for Latin America and China, about the same level as Egypt, and South and Southeast Asia, and above Sub-Saharan Africa (van Leeuwen and van Leeu-wen-Li 2014, pp. 88–97).