Beyond the orthodox paradox: the breakup of state-business coalitions in 1980s Turkey: overly-insulated policies generates uncertainties about the reforms as well as the government's commitment to them, further exacerbating macroeconomic instabilities and making a long-term secure economic environment a distant prospect.

• Author: Ozel, Isik
• Position: Strong and weak states: cases of governance

For many developing countries, the 1980s and 1990s were turning points in which major political and social alliances were transformed by major shifts in economic policy, from protectionist import-substitution industrialization strategies (ISI) to systematic market liberalization. As these transformations were taking place, the role of the state vis-a-vis the economy and societal actors changed, providing fertile ground for a burgeoning of new institutions with different preferences. Market reforms provided a strong base for a "critical juncture," (1) fostering political and economic reorientation in the domestic arena and giving rise to new alignments at both domestic and international levels. Coalitions between state and some societal actors affected the course of market reforms-and, in turn, were affected by them.

Understanding the multifaceted process of market reforms requires an analysis of state-business relations within this juncture, as these actors in many cases initiated intriguing alliances to carry out reforms. These coalitions transformed the interactions between state and business along with the actors themselves, as the actors are "re-structured" during the process of interaction. (2) Both formal and informal coalitions between state and societal actors were vulnerable due to the severe social and economic effects of the reforms, resulting in backlashes that eroded the very alliances on which the reforms flourished.

This is what happened in Turkey between state and business in the 1980s: the eager market reform coalition that formed between these actors in the early 1980s began to break down in the late 1980s, although the incumbent has been known to have formed the most pro-business government of the country's republican history. But why did it happen as it did? What caused the rupture between the reforming governments and business? Why do some alliances weather policy shifts while others do not?

In this article, I examine market reform coalitions (3) between business and the state in developing countries by focusing on coalition sustainability. I argue that the sustainability of state-business coalitions can be explained by institutional rather than purely economic factors: If business is incorporated into the policy-making process through institutionalized channels, coalitions will be sustainable in the longer term. Conversely, if decision-making is centralized through overly-privileged, autonomous agencies or individuals, coalitions may break down and hinder the reform process. Though market reforms call for decentralization, I argue that what many reforming countries end up with is even further centralization of the decision-making process, generating a major dilemma regarding the basic premises of the reforms. Another paradox is the further growth of the public sector during reforms, although the opposite is intended--resulting in re-alignments and de-alignments in the state's interaction with different societal actors.

Scholarship on the intertwined relationship between business and the state in developing countries has gone through numerous phases since the early 1970s. The first, focusing on the "late development" found in East Asia, (4) emphasized the capacity of the state to intervene and control societal interests, including those of business. It was assumed that business was either too weak to cooperate with the state or that its cooperation would result in corruption. Inspired by this literature, the first wave of studies on economic adjustment to market liberalization associated successful reforms with a central and autonomous authority insulated from societal interests and political pressures. Using the Chilean example of the "Chicago boys," who implemented drastic market reforms with little input from business or society, (5) this vein of analysis overestimated the role of autonomous technocrats and international financial institutions (IFIs) while largely disregarding societal actors.

Building on this, the prominent work of Haggard and Kaufman (6) saw as pivotal the ability of a central authority to overcome collective action problems and distributive conflicts, stating that successful reform depended on rulers who had personal control over economic decision-making, a cohesive "reform team," and the political authority to override bureaucratic and political opposition to policy change. Again, explanations focused on the roles of insulated technocrats as well as IFIs--particularly the loans provided by those agencies--in initiating market reforms. The role of domestic business was ignored. Businesses were left to adapt to the new policies after they were implemented, or worse, seen as an obstacle to reform (7) because of their dependence on substantial rents, protectionism and state policies that shifted resources to industry, (8) Market reform and the credibility of its programs depended on state leadership; (9) government, then, had to concentrate power, forming an autonomous technocratic team to overcome the protected businesses' resistance to reform.

Other scholars, however, criticized state-centric accounts of market reforms for ignoring a set of complex factors including pluralist pressures, institutional constraints and international conditions. (10) State-centric models often assumed an ideological homogeneity among top policy makers, leading to a one-sided conceptualization of power in which the state dictated policy to society without giving society a chance to respond. (11) By contrast, the more recent wave of literature suggests that a subtle balance of government, bureaucracy and business--and the coalitions between them--determine the outcomes of economic liberalization. (12) As opposed to top-down, state-centric approaches, this school emphasizes the crucial role of societal actors, especially business, and their necessary cooperation in the reform process. (13) Schneider (14) asserts that business-state relations determine the variation in economic performance among developing countries, and successful cooperation between the two results in successfully implemented reforms. Another branch in the coalition literature focusing on organizational aspects suggests that business associations play a central role in these new arrangements and likely benefit from committing to political and economic liberalization. (15)

The newer literature also points out a striking empirical puzzle: When a domestic business supports market reforms, it gives up the protection and nurturing of the state and becomes subject to fierce international competition. (16) Why would business be willing to do this? Several authors argue that in a severe crisis, if big businesses can adjust to reforms (17) and see opportunities offered by the market, (18) they may build a coalition with the state to implement reforms and become the new beneficiaries of export-oriented strategies. It is also underlined that multi-sectoral conglomerates are easier to adapt as they have the capability to shift their resources within their groups from the losing subsidiaries to the winning ones. (19)

These recent studies contribute substantially to the literature: yet, I argue that these too fall short of presenting the whole picture as they treat coalitions as more or less stable formations, focusing solely on their initial establishment. But coalitions are not stable; they are vulnerable and subject to erosion unless the necessary institutional arrangements exist. It is an error to assume that their sustainability is guaranteed. Reform coalitions in general are vulnerable to electoral pressures in a protracted crisis. (20) Moreover, market reforms are highly complex processes with extensive impact on the so-called "losers," which generate further electoral pressures. As these pressures increase, so does the incumbent's "discount rate." (21) Thus, political insecurity makes distributive strategies a likely option to retain office since the transition cost of reforms is inherently high. Reforms are, therefore, replete with backlashes. And coalition erosion may aggravate such backlashes, causing even greater electoral pressure on incumbents, leading to further degradation of state-business ties: a vicious, degenerative cycle. Thus, the picture is incomplete without tracing the sustainability of state-business coalitions in the long term. Twenty years into its market reforms, Turkey provides an ideal case.

BURGEONING ALLIANCE: LAUNCHING MARKET REFORMS

In May and June of 1979, the Turkish Industrialists and Businessmen's Association (TUSIAD) launched an extensive media campaign called "The Realist Way Out." The campaign was highly critical of the incumbent RPP (Republican People's Party) and attacked the government's development strategy--namely ISI--proposing instead major market reforms and a shift toward an export-oriented industrialization strategy (EOI). (22) Six months later, the RPP had to resign, and the right-of-center Justice Party came to power, implementing a radical reform package in line with the suggestions of the IMF in 1978, which the previous government had failed to implement due to already critical economic and social conditions in the country. (23)

This shift announced the end of a 50-year protectionist era. The so-called January 24 package (24) would pave the way for a critical juncture, transforming relations among state, business and other societal groups. Although the package was welcomed by business in general, it exacerbated mass protests, resulting in the suspension of reforms. The same year witnessed a return to authoritarianism through a military coup d'etat, making the juncture even more significant as the military government preserved the momentum of the market reforms. However, the reform process gained its major impetus from the right-of-center Motherland Party (MP), which came to power in 1983. Founded by Mr. Turgut Ozal, (25) the architect of the January 24 package, the...