Structural Adjustment Programs of the 1980s: A Comparative Study of Turkey and Mexico
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Development is a complicated procedure consisting of economic growth, improvement in the people's standard of living, reduction in unemployment level, and protection of the ecological system. However, the developing nations had a different understanding ·of development: for them, it meant economic growth and industrialization. Due to the economic success of the Soviet Union with its central planning, many countries chose a similar path, in which the cornerstones were import substitution · and government intervention in the economy. Import substitution requires a lot of protection and stimuli of domestic industries to replace previously imported goods; it looks inward but pays outward; and such a development model did not work f<>r the developing nations. With the first oil shock of 1973-74, the economic conditions of the developing countries began to be severely deteriorated as unemployment increased and the real per capita income declined. This situation worsened in the 1980s as the GNP growth turned negative and a lot of countries faced debt problems. The foreign· debt· problem introduced several important dynamics into the world money markets. The most recognizable change was the emergence of the International Monetary Fund (IMF) and the World Bank as the most prominent international financial institutions. The IMF basically gives loans to Third World nations which face debt and balance of payments problems and it evaluates their credit-worthiness. To be acceptable credit risks, a lot of the Third World nations had to implement a number of structural adjustment policies or austerity measures. Some of the basic components of the IMF stabilization program are: the devaluation of the currency, liberalization of the import regime, an anti-inflationary monetary policy and promotion of foreign investment. However, a lot of the Third World nations criticized these austerity measures, finding them irrelevant to their problems. In such an atmosphere, the Turkish government undertook substantial reforms on January 24, 1980. In Turkey, in the 1950s and the 1960s, import substitution was chosen as the leading policy. A lot of state owned enterprises were established in order to create a good industrial base. In the years between 1950-1980, economic growth was high, yet uneven for various problems: By the end of the 1950s, the prominent problem was the end of economic growth as a result of the lack of foreign exchange reserves. By 1977, exports were falling and economic growth was not as rapid as it previously had been. Inflation was accelerating and there were shortages of imports because foreign exchange reserves were depleted. Therefore, the Turkish government was forced to announce a reform package. The three main components of this reform package were exchange rate policy, price policy and stabilization policy. The Turkish Lira was devalued, administrative procedures were simplified, and controls over the prices of the state owned enterprises were removed. In the summer of 1982 the financial system collapsed and two top technocrats, who prepared the reform package, resigned. Consequently, the implementation of the reforms were undermined. When one of the top technocrats returned to power as the Prime Minister, the second phase of the reform program began. Again the main purpose was to liberalize the economy. After 1986, macroeconomic numbers began to deteriorate due to expansive fiscal policies and a lack of an anti-inflation program. Mexico's development path is very similar to that of Turkey's: an industrialization movement characterized by import substitution and government intervention in the economy. In the 1940s, the Mexican economy enjoyed high rates of economic growth, which was attained by increasing domestic demand with stimulation of the manufacturing sector. The discovery of large oil and natural gas fields in the 1970s was a huge plus for the Mexican economy. The high demand for oil on the international market, and the will of the Mexican authorities to keep export earnings high , led to a significant appreciation of the Peso. In 1982, because of expansionary fiscal policies, a worsening of the trade balance and mounting foreign debt, the Mexican economy was facing the most severe recession of the post war era. An austerity package, containing restrictive government spending, tight monetary policy and liberalization of the trade regime, was therefore implemented. In 1994, both Mexico· and Turkey faced financial crisis· because of hot money policy and a budget deficit satisfied by speculative investment. The austerity measures taken showed lots of similarities. There was a balance created, this balance is very shaky in both of the countries. Besides it is evident that the economies in both countries do not work to their potential and the governments should gradually implement more policies to finish the job that they have started.