Comparative analysis of total factor productivity during the process of economic opening of Turkey: A case study on the manufacture

With the announcement of 24th of January 1980 decisions, Turkey began to pursue export oriented industrialization policy. Liberal economic policies which are determined in accordance to market conditions took the place of import-substitution policies. Those neo-liberal policies adopted also spread to the international trade applications of Turkey. The new period that begins with financial liberalization in 1989 ended with a downturn in 1994. In order to decrease the inflation and to maintain the economic stabilization, 5th of April 1994 decisions were put into practice and in short term deteriorated macroeconomic indicators were targetted to be balanced again. Joinment of Turkey to The Customs Union and the preparation of the 7th 5 year development plan were the main components that determine the course of the economy at that time. Disinflation Programme that is announced on 9th of December 1999, aimed to combat with inflation through structural adjustment policies. However, in addition to unfullfillment of the the targets listed in Disinflation Programme, Turkish Economy was triggered to economic downturn firstly in November 2000 and then in February 2001. Following the Failure of the Disinflation Programme that depends mainly on exchange rate policies on 14th of April 2001 Transition Program to Strong Economy was announced. With this program, monetary and exchange rate polices were restructured. When the changes in foreign trade in this period evaluated, it could be easly observed that the export statistics exhibited ever increasing trend along the time interval at stake. However the rate of increase in import was higher than the increase in export which consequently brought deficit in foreign trade together. Even the financial crisis of 2008 has taken place in America, due to its global nature, its negative impacts spread to all the economies around the world. Between 2008 and 2009, while the global economy experiences unprecedented financial volatility period, it also witnessed the most severe recession of the history together with shrinking of trade. Productivity is the term that combines the inputs used along production process with outputs attained at the end of the process. In literature, in order to represent the level of productivity, the ratio of the value or magnitude of inputs used to the value or magnitude generated at the end of the production process -namely output- is widely used. While the physical expenditures directed to maintain certain level of production level decrease, the productivity increase. Productivity concept is related with the more efficient use of money spent, labor, energy, raw material and other mediums of production utilized along the production process. By using the factors of production in more effcient way there will ocur a decline in cost. And by this way increased competetiveness of the firm due to cost advantage will bring demand increase together. Thereby rise in productivity will result in upswing in production. Total Factor Productivity basicly points to the ratio of total outputs to total inputs. In order to calculate the Total Factor Productivity, it is necessary to begin with production function. Production function reveals the technical information that exhibit the relationship between factors of production and output. The change in the TFP embodies the change in production level that is resulted other than from capital and labor, to put it another way it embodies the change in technology level. Increase in TFP, corresponds to the unexplained residual which befits increase in production level that is not resulted from the increase in factors of production. Circumstantially, rise in TFP includes not only the increase in knowhow and technolgy but also the other factors of production that are excluded from the function -namely raw material, energy- together with the impacts of conjectural fluctuations and measurement errors. In this study, the nominal data collected from Turkish Statistical Institute and State Planning Organization are realized by taking 1980 as the base year. In this context the period that spans 1982-2008 is divided into three sub periods as 1982-1989, 1990-2001, 2003-2010. Due to the new-radical policy prescriptions launched in 1980, 1982-1989 period is chosen as the first interval. Critical importance of 1989 due to finacial liberalization and removement of all the barriers in front of the capital movements directed us to choose the following 12 year period as the second interval. The analysis eloborated in this thesis shows us that Turkish Manufacturing Sector?s TFP according to OLS method in 1982-1989 period is 0.0237 and is 0.0076 according to Fixed Effects model, 0.0363 according to calculations done through using Levinsohn ? Petrin estimation method. In 1990-2001 period, TFP according to OLS method in takes the value of 0.1808 and is 0.0853 according to Fixed Effects model, 0.1329 according to calculations done through using Levinsohn ? Petrin estimation method. And for the last subperiod, TFP according to OLS method in 1982-1989 period is 0.1354 and is 0.1060 according to fixed effects model, 0.1038 according to calculations done through using Levinsohn ? Petrin estimation method. The results Show us that for all three different subperiods, Turkish Manufacturing Industry?s growth speed of TFP exhibits similar pattern. Average value of the results are 11.93%; 0,9630% and 1.401% sequentially. By depending on the results directed from the calculations, it can be easily said that the export oriented industrialization process which begins with 24th of January Decisions brought productivity increase together in the sector at stake. And the parameters for the second interval indicates that financial liberalization resulted greater increase in productivity in the manufacturing sector compared to the 1982-1989 period. Despite the initial increse in productivity in the second sub period -that covers the 1994, 2000 and 2001 economic downturns- on average the rate of productivity was almost fixed. Transition to Strong Economy Program that is put into application after the economic crisis and in last sub-period TFP exhibited firstly increasing and then a steady trend on average. In the 2003-2010 period, foreign trade volume and GDP growth of Turkey increased prominently, however, the same can not be said for TFP of manufacturing sector.