Is Import Substitution Being Revived in Turkey?

Turkey has implemented two important economic policies over the years: import substitution and export substitution. Many developing countries like Mexico, South Korea, and China have also implemented these strategies to catch up with the developed economies. The main motive was to replace foreign goods with domestic products to lower foreign dependency, accumulate capital faster, and increase investments. In other words, their goals were to minimize the imports/exports ratio in order to gather large capital amounts in the short term and gain the desired high annual growth rates. However, these policies did not work well for the developing countries, including Turkey.

The two figures above indicate Turkey’s volumes of imports and exports from 1960 to 2018. Both statistics follow a very similar path, with imports recording volumes higher than exports. In 1984, the Ozal government started implementing open economy policies to open the Turkish economy to the rest of the world. Exchanging foreign currencies and importing products freely were allowed. This stimulated consumption and Turkey enjoyed high economic growth rates for a while. After the foundation of the Istanbul Stock Exchange Market, Turkey started receiving more foreign investors as well. At the same time, to boost foreign direct investments, foreign investors received access to incentive packages that provided fewer tax rates, financial support, and even cheap fields for building factories. However, because the opening process was fast and not well-planned, the Turkish economy’s growth did not last long. The national saving rate was not enough to accumulate the desired amount of capital.

The political fluctuations in the country, the government’s poor populist practices, and many corruptions have caused various economic and financial crises in the country. While Turkey has enjoyed high economic growth rates at times and even attracted a large number of foreign investments from 2002 to 2016, there was always something off with its macroeconomic indicators. In fact, the Turkish exports never covered the Turkish imports. The elasticity and the quality of the Turkish exports have never been satisfactory, and the country has even ended up using the consequential strategy of devaluating the Turkish Lira against other currencies in recent years. Thus, it is highly likely that import substitution could be making an unwelcome comeback in Turkey in the near future.

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