The Case of Anatolian Holding Companies

24 Pages·2003·0.27 MB·English

WorldDevelopmentVol.31,No.12,pp.2061–2084,2003
(cid:1)2003ElsevierLtd.Allrightsreserved
PrintedinGreatBritain
www.elsevier.com/locate/worlddev 0305-750X/$-seefrontmatter
doi:10.1016/j.worlddev.2003.04.006
Limits to Alternative Forms of Capitalization:
The Case of Anatolian Holding Companies
GUU€L BERNA OO€ZCAN
University of London, Egham, UK
and
MURAT C(cid:1)OKGEZEN *
Marmara University, Istanbul, Turkey
Summary.—Sincethelate1960s,alternativeformsofcapitalizationhaveemergedintheabsence
ofaneffectivecapitalmarketsregimeinTurkey.Wecanseethesealternativeformsinthefailed
attempts to create Anatolian holding companiesthrough the direct investment of small savings.
This article shows how Anatolian holding companies became victims of poor institutional and
regulatoryregimes,andhowthelackofinstitutionstopromoteimpersonaltrustintheeconomyin
turn,permittedwidespreadabuses.Weidentifypopulistpolitics,laxoversight,andsocialnorms
that incorporated gambling as three interlinked reasons which hindered the genesis and
developmentofviablecapitalmarketreformandregulatoryinstitutionsinTurkey.
(cid:1) 2003ElsevierLtd.Allrightsreserved.
Keywords—capitalformation,financialmarkets,stateregulation,Anatolianholdingcompanies,
Islamicfinance,Turkey
1. INTRODUCTION and the lack of institutions to promote imper-
sonal trust in the economy that in turn per-
In the 1970–90s, large multiownership com- mitted widespread abuses.
panies, commonly referred to as Anatolian Our work highlights the importance of insti-
holding companies, 1 were formed through tutional and regulatory regimes for creating
small family investments. These holding com- viable capital markets in order to achieve eco-
panies constituted an idiosyncratic model of nomicgrowth.ThefailureofAnatolianholding
capital formation. They were both a response
to the lack of industrial capital and a by-
product of the politically charged strategy to *TheauthorsaregratefultoRoyalHolloway,Univer-
initiate development and industrialization in sity of London and Turkish Academy of Sciences
the country. We argue that where the rules of (TUBA) for their financial and institutional support.
advanced capital formation and managerial OurspecialthanksgotoU(cid:1)ggurBekem,SabriC(cid:1)armıklı,
enterprise (Chandler, 1992) fail to apply, alter- Jonathan Liebenau, Adnan S(cid:1)ahin, and II_lhan Tekeli
native structures can emerge. In Turkey, this whose support and enthusiasm have been immensely
alternative model occurred through multi- valuableforthecompletionofthispaper.Wealsothank
ownership companies whereby thousands of the anonymous referee, whose remarks have been very
small investors put their savings in holding helpfulinpreparingthefinalversionofthepaper,and
companies that promised good returns while many policy makers and managers who shared their
assisting small and medium-sized firms. Our experienceswithusduringourfieldworkinAnkaraand
findings indicate however, that Anatolian Konya. We are solely responsible from the opinions
holding companies became victims of the ab- expressedinthispaper.Finalrevisionaccepted:16April
sence of institutional and regulatory regimes 2003.
2061
2062 WORLDDEVELOPMENT
companies along with the persistent capital mental question for both scholars and policy
market failures in Turkey lead us to ask two makersistofindthewaystosecureandnurture
fundamentalquestions:whydidnoinstitutions regulatory regimes in order to serve the long-
and regulatory regimes evolve along with the term interests of wider societal elements in
changingneedsoftheeconomy?andwhywere economic development rather than the specu-
existing controls so often subject to circum- lativeshort-termgainsofnarrowgroupsand/or
vention and abuse? The answers lie in the dy- managers. The findings of this paper hold im-
namic interaction between the politics of plications for studies on firm finance for small
institution building and behavioral and social and medium enterprises [SMEs] (Becchetti &
norms. We identify three factors that under- Trovato, 2002; Winker, 1999), Islamic finance
mined market trust and institution building and economics (Kuran, 1995, 1996, 2003;
leading to chronic failures and abuses: policy Warde,2000)andingeneralontheimportance
formation was trapped in populist–clientalist of the politics of institution building and im-
cycles with a slippery political center; lax over- personal trust for economic development. 2
sight practices were encouraged by the single- The article is divided into six sections. Sec-
leader tutelage in party politics; and the social tion2considerstheviabilityofcapitalmarkets
norms that allowed investors to accept flimsy for countries such as Turkey through a brief
assurances and fuzzy legality as part of their critique of theoretical literature. Section 3
gamblinghabit. presents an analysis of Turkey’s experiments
The limited investigation into Anatolian with capital markets. This is followed by two
holding companies so far has prevented policy case studies on the formation of Anatolian
makers from understanding opportunities and holding companies. In Section 5, we illustrate
challenges offered by alternativecapital forma- thereasonsforpoormanagerialandregulatory
tions. Despite the deficiencies and the business discipline. In conclusion we recommend the
failures of the past, we believe that the con- key policy changes needed in the light of our
tinuing attractiveness of multiownership com- findings.
paniesasaformofalternativecapitalformation
and utilization of small family investments in
local projects deserves serious attention. We 2. CREATING AND INSTITUTING
also think that this model is likely to be tried CAPITAL MARKETS
again in Turkey and perhaps elsewhere. Cor-
rectingtheunderlyingflawsiscrucialtoprevent Capital formation is essential for industrial
hundreds of corporate collapses and massive andeconomicgrowth.Conventionalmodelsof
lossofsmallshareholders’investments. capital formation stem from the experiences of
The case of Anatolian holding companies advanced countries and fall into two broad
also has certain similarities with the new cor- categories. The first one is the bank-centered
porate landscape created through privatization corporatist model, which is credited with the
schemes in Russia and Eastern Europe where success of German and Japanese post-war in-
privatized company assets have been trans- dustrial restructuring. They worked under
ferredthroughoftennontransparentandillegal conditionsofenforcedpoliticalstabilityandthe
means.Ourfindingssupportstudiesonmarket focused determination of a reforming elite. In
reform and institution building in former this model, ownership and control are closely
Communist regimes where weak regulatory tied within a framework of institutional guar-
controls, widespread mistrust, and the abuses antees and obligations (Miyajima, 1995). The
still prevail in these markets (Blasi et al., 1997; second is the Anglo-Saxon open market model
Kogut & Spicer, 2002). ofcapitalformationthroughstockmarkets.In
Our study highlights a fundamental issue in the bank centered system, the close links be-
economic development and regulatory reform tweenthebankingsystemandthemarketallow
for many developing and post-communist companies to finance themselves through bank
economies,thatistheneedtounderstandbetter loans. In this system firms raise capital by
the links between socio-political forces and issuingnewsharesandtheownershipofafirm
behavioral norms embedded in economic life. is diffused. Accordingly, shareholder rights are
In order to allow imaginative solutions to protected and the ownership and control of
emerge in the wake of an endemic lack of firms are separated. The bank-centered regime
capital for industrialization, developing econo- issupportedbyawebofinstitutionsinmutually
mies should not look for miracles. The funda- binding relationships with little respect for
ALTERNATIVEFORMSOFCAPITALIZATION 2063
shareholder value (Bergloo€f, 1990; Charkham, Both the P-A argument and institutional
1994; La Porta, Lopez-de Silanes, & Shleifer, economics fail, however, to explain why there
1999).Althoughmanyhybridformsareemerg- have been corporate failures and abuses that
ing through the growing activities of multina- periodically invited further regulation even in
tional companies and with the increased effect the most advanced capitalist economy, the
of liberalization and de-regulation, these two United States, and others such as the United
modelsneverthelesspresentcleardistinctionsin Kingdom. The classic theory of discipline im-
the ways firms raise capital (Hodges & Wool- plemented by the capital market over business
cock,1993). 3 performance is ineffectual when stock prices
The separation of ownership and control in have been manipulated through diluted ac-
the Anglo-Saxon corporate tradition gave rise counting principles in the recent corporate
to a vast literature examining the challenges of scandals unleashed first by the collapse of
separationandwaystocopewiththediverging Enron and WorldCom and followed by others
interests of the parties involved. The most in- in the United States. This trend of malpractice
fluential of them, principal-agent theory [P-A], defiestheoreticalassumptionsaboutthemarket
points out that the conflicting interests of disciplining businesses and managers. 5 When
owners (principals) andmanagers(agents)of a notonlymanagersbutthemuchwiderbusiness
firmgenerateagencycostsandinefficientfirms. community act to defy and misinform each
To overcome this conflict, the P-A perspective otherinordertospeculateoncompanyshares,
stresses the importance of aligning managerial the impact of regulation and measures to min-
and shareholder interests (Jensen & Meckling, imize agency costs become irrelevant.
1976; Short & Kevin, 1999). Agency costs are Moreover, the maximization of self-interest
minimized when management and shareholder in a capitalist economy is justified and the de-
interests are aligned through the ownership structionofbusinessesisalsoseenaspartofthe
structure (Alexander & Cohen, 1999) and innovative and creative side of the market.
monitoring rights are secured to dissuade Thus, corporate collapses and share value ma-
managers from pursuing their own interests at nipulationappearnotjustasan‘‘abuse’’butas
theexpenseoftheowners(Alchian&Demsetz, anoutcomeofthe‘‘bullish’’behaviorofmarket
1972). To cope with agency costs, either man- capitalism. This fine line between regulation
agers’interestsarebroughtclosertotheowners’ and entrepreneurial opportunism is best de-
by tying managers’ compensation to the per- fended by Cressey (1980, p. 126): ‘‘Weak ac-
formance of the firm, or the market must effi- counting controls are essential to modern
ciently discipline managers’ opportunistic or business, just as weak police controls are es-
disapprovedbehaviors. sential to modern democracy.’’ In the boom
Institutional economists, on the other hand, and bust cycles of economic and technological
emphasize the importance a regulatory frame- change,theissueofmanagerialabusealsoturns
work, capable institutions and law as essen- intopartofanentrepreneurialdrivewhichfuels
tial components of economic performance and marketgrowth. 6Therearearguablytwobene-
corporategovernance(Lal,1998,2000).Alegal fitsofthesebusinesscycles:First,widersocietal
system that guarantees monitoring rights, es- groups increase their earning during the tech-
pecially the rights of small shareholders, and nological boom through employee shares and
the market institutions that allow shareholders other schemes (Blasi et al., 2002). Second, the
to monitor and react to the managerial team boom cycle nurtures technological innovation
areprerequisitesforawell-functioning,market- andtriggersfurthercyclesofgrowthinthelong
oriented system (Cheffins, 2000). Similarly, the term.
self-regulatory regimes and code of practices EmergingmarketeconomiessuchasTurkey,
put forward by the business community and however, suffer persistent abuse by managers,
interest groups including government agencies, politicians and institutions (Blasi & Shliefer,
shareholder associations and stock market in- 1996;Fenkner&Krasnitskaya,1999;Frydman
stitutions play a crucial role in safeguarding et al., 1996; Kogut & Spicer, 2002). Neverthe-
business practices. At the policy level, the im- less, there are important distinctions between
portanceoftheregulatoryframeworkhasbeen capital market failures in advanced econo-
recognized by national and supranational in- mies and the failures of developing countries
stitutions in a rapidly changing and global to establish capital markets. While there are
economy(Iskander&Chamlou,2000;Lannoo, larger and wider distributive effects and long-
1998, 1999). 4 term technological spillovers of capital market
2064 WORLDDEVELOPMENT
manipulations in the former, the latter tend to ductive businesses (Alper & OO€ni(cid:1)s, 2001; Bora-
depend on a narrow business base with no tav et al., 1996; Cizre-Sakallıo(cid:2)gglu & Yeldan,
technological depth, leading to detrimental ef- 2000). Many experiments with capital markets
fects for the economy and society. Thus, in also led to the chronic abuse of investors by
developing economies, the adjustment to the governments, banks and businesses.
boom and bust cycles of financial market ma- Thelongstandingpractice,datingbacktothe
nipulationandfinancialliberalizationoftenhas late Ottoman period, was for businesses to use
long-term destabilizing effects with widespread the informal money lending market [tefecilik].
painful outcomes (Alper & OO€ni(cid:1)s, 2001; Cizre- Speculation and unfair practices leading to
Sakallıo(cid:2)gglu & Yeldan, 2000). confiscation of businesses and properties by
We hold the premise that the politics of in- loan sharks continued despitebanking reforms
stitution building and social and behavioral in the early 1920s (Guu€nluu€k, 1983). The banks
normsdetermineeconomiclifeandthattrustin generally offered credits only to successful
regulatoryregimescanbestbeunderstoodasa businesses or to new ones with good political
product of the interaction of the state and so- connections. This bank-centered form of cor-
ciety. Trust in economic life, Granovetter porate governance (see Table 1) 7 has long
(1985) points out, is a product of social rela- functioned through cosy relations between
tions and the obligations inherent in them, major business groups, industrialists and poli-
rather than some generalized morality or in- ticians, as happens in other similar economies
stitutional arrangements. Similarly, politics in- (Bu(cid:1)ggra,1994;Maxfield&Schneider,1997).This
fluences the functioning of the market and exacerbated the gap between undercapitalized
regulatory structures in a dynamic interaction small and medium-sized businesses and large
with social norms. When individuals do not familyholdings.Manysmallandmedium-sized
trust the state and its institutions, mere regu- enterprises (SMEs) were forced to raise their
lation is insufficient to guarantee impersonal equity through these informal and segmented
trust.Hence,whenthestatelosesitspowerand/ capital markets embedded in local and family
or impartiality in law enforcement, the narrow networks(OO€zcan,1995a,1995b).
groupinterestsofpoliticalclientstakeoverthe
control of economic management, further un-
(a) Bond market failures prior to 1980
dermining impersonal institutions and regula-
tion. While accepting the flaws and paradoxes
During the years of expanding import-sub-
of trusting relationships and the persistent
stitution policies, the government-financed in-
threat of abuse, we agree with Shapiro (1987)
dustrializationthroughthesinglemechanismof
that impersonal trust permits more complex
bank-centeredindustrialgrowth.Starting from
developments in economic life by allowing in-
the 1960s onward, Turkish governments re-
dividualandorganizationalactorstoengagein
complex relations on behalf of principles.
The first wave of Anatolian holding compa- Table 1. Theroleofbankingfinanceinselectedcountries
inthemid1980s
nies illustrates how impersonal trust was neg-
lectedbyregulatorsandthesecondshowshow Debtnequitya Bankloansntotal
societal obligations and the moral grounds of liabilities
Islam failed to guarantee the survival of these
Germany 0.59 n.a.
companies in the absence of credible institu-
France 0.73 0.25
tions and regulation.
Japan 0.77 0.39
Sweden 0.65 0.24
UnitedKingdom 0.55 0.1
3. TURKEY’S DISASTROUS USA 0.41 0.09
EXPERIMENTS WITH CAPITAL Turkey 0.62 0.51
MARKETS
Source: For the figuresabout Turkey see Yener (1990)
and Ersel and Sak (1986). For other countries see
The Turkish experience with capital markets
Bergloo€f(1990).
hasbeendrivenbytheshort-termpoliticaland
aThe ratios are for the year of 1983 for the countries
financial objectives of governments, mainly to
otherthanTurkey.ForTurkey,theaverageof1984–89
fund populist policies. The result of redistri-
was taken as the base. Bank loans include short and
bution and public sector spending has been to long-termloansandthedebtequityratioreferstoshort
channel funds to rentiers rather than to pro- andlong-termliabilities/totalassets.
ALTERNATIVEFORMSOFCAPITALIZATION 2065
sponded to the growing need for financial capital through bonds. In the absence of any
capital, first with a set of measures to attract capital market regulation or stock exchange,
foreignreservesandlaterwiththeintroduction businessessoughttotradetheirbondsinreturn
of government and private bond markets. for cash. With the increased economic insta-
Thus, transferable foreign currencyaccounts, 8 bility and high inflation during the first and
were first introduced in 1967 to overcome the secondoilcrisesofthe1970s,thebank-centered
shortage of foreign reserves and to fill the in- corporate regime collapsed. Many companies
creasinggapinthebalanceofpayments.Under in need of cash consequently boosted the in-
this system, the government offered higher in- formal money market and its loan sharks
terest ratesthanEuropeanbankswith variable (Guu€nluu€k, 1983). Until the final collapse of the
options for investors. But, the fast growth of economy at the hands of an International
short-term interest had an inflationary effect Monetary Fund (IMF) program in 1978, the
thatquicklybecameunsustainable.In1973,the balance of payments continued to deteriorate
government announced the end of transferable whiletheexternaltradedeficitgrewsharplyand
foreigncurrencyaccounts,butthisschemewas industrial stocks soared.
re-introduced during 1975–79. During the first Thus,uptothe1980stheinformalbondtrade
period of implementation, these accounts servedtheshort-termneedsofthegovernments,
reached US $462 million, 70% of which was businessesandbondtradersalike.Thegovern-
held by Turkish workers abroad. This was a mentsweremainlyconcernedwithbudgetdefi-
significant capital injection into Turkish bank- citsandcurrentaccountbalancesattheexpense
ing (Uysal, 1996). The Anatolian holding of the goals of long-term industrialization and
companieswerefirstpromotedduringtheyears development due to strong populist policies
of rising domestic savings when the savings (Cizre-Sakallıo(cid:2)gglu & Yeldan, 2000). The hold-
accounts of Turkish workers became unsus- ing companies wanted to obtain capital for
tainable due to short-term financial pressures. businessgrowthwithnofinancialandcorporate
Along with industrial growth in the 1960s, accountability and the bond traders and inves-
theamalgamationofsmallcompaniesledtothe tors were mainly interested in the short-term
emergence of holding companies. At the same benefits of the bond trade. Thus, the semi-ille-
time a new market for bonds and promissory galityofthebondmarketservedtheinterestsof
notes emerged. This capital was used both by allwithoutanycollectivepressuretointroducea
governments to finance investments and by moresophisticatedandinstitutionalizedcapital
businessestogenerategrowth.Intheabsenceof market with regulations and punitive measures
anymarketsforissuedpapersandshares,there forabusers.Shortlyaftertheeconomiccollapse
appeared a thriving informal bond market. In of the late 1970s, this short-term opportunism
1961, the government re-structured the rules contributed to a massive disaster in capital
governing savings bonds. The idea was to marketsandtheresultingsocialtrauma.
provide capital for state spending in agricul-
ture, industry and transportation through (b) Military coup and economic liberalization
compulsorysavingsschemes.Thesebondswere in 1980
largelydistributedtowage-earningfamiliesand
government employees as part of tax schemes. In 1980, soon after the post-coup market
Seeing an opportunity for easy profits, small liberalization reforms, another frenzy occurred
bond traders graduallyacquired manyof these intheformoflavishbondtrading.AsTurkey’s
government bonds from families in need of pace of industrialization increased in line with
ready cash until a further regulation in 1969 globaltrendsandliberaleconomicpolicies,the
introduced limits on the trade. In 1972, these lackofcapitalmarketsbecameevenmoreacute.
savings bonds were abolished, leading to the The governments issued promissory notes and
elimination of the bond traders. other revenue-generating bonds in order to fi-
Yet, informal bond trading and money nance growing government spending. 9 There
lending continued to survive. A 1957 law reg- appeared a new function for informal money
ulated private bonds and shares issued by the landingbankerstofillthevacuum.Theinformal
holding companies and limited liability com- money-lending business which survived along-
panies. This law also limited rates of return side bank-centered corporate finance for many
issued through these bonds. Thus, tampering decades was elevated to a respectable business
withtheflexibilityofbondreturnssignificantly status with political endorsements in the early
narrowed the scope for generating financial 1980s.Hundredsofprivatebanksmushroomed
2066 WORLDDEVELOPMENT
during 1980–81 (Berker et al., 1989; Din(cid:1)cel, governmentputlimitsonthefreemarketbond
1998;Guu€nluu€k,1983;Yıldırım,1998). trade and banned advertisements by market
InJanuary1980 abankingregulationdecree bankers with a series of new decrees in Sep-
removed state control over interest rates. In temberandOctober1981.Thisshranktheflow
ordertoattractinformalandblackmoneyinto of cash and many bankers ran into difficulties
the formal economy the decree also declared in paying back the interest. In panic, investors
that banks could sell nonidentified short-term rushed to bankers demanding their deposits
account bonds. But the major banks would back.ByDecember1981over250listedbankers
only give credit to the most successful busi- went bankrupt and the total number of bank-
nesses and the banks of family holding com- ruptinstitutionsmayhavenumberedmorethan
paniesextendedcreditmainlytotheiraffiliated 1,000 (Din(cid:1)cel, 1998; Yıldırım, 1998).When the
companies. While the bond and other paper banker scandal ended in collapse, the high
trade grew rapidly with increased market ex- moral and financial costs included loss of sav-
pectations of economic recovery, many busi- ings, collapsed businesses, runaway bankers
nesses ended up borrowing from the market andfamilytragedies. 11Thegovernmentfinally
bankersusingtheirbonds,promissorynotesor intervenedandforcedthebankruptciesofmany
checks as equity. majorbankersandbondtradingagencies.
High interest rates triggered a spree of in- Thiswasfollowedbytheresignationofthree
vestments in banks and other money lending responsible ministers. The Economy Minister,
businesses.Wageearnersinvestedtheirsavings, Mr. Kaya Erdem, shrugged off his responsi-
pensioners their retirement bonuses, and many bilities with these words: ‘‘Our people have
families even ended upselling their houses and gambled’’(Guu€nluu€k,2000).TheCapitalMarket
other properties with the expectation of high Law was introduced and was soon followed
returns. Encouraged by this craze, well-estab- by the establishment of the Istanbul Stock Ex-
lished banks set up their own bond trading in- change in December 1985. These institutions
stitutions with high interest rate accounts. didnothoweversignificantlyaltertheillsofthe
Manyholdingcompaniesalsoestablishedtheir financial regime.
own bond trading agencies. The only legal re- The bank-centered financial regime faced a
quirement to be a market banker was to apply new wave of abuse at the hands of holding
to the relevant town’s governorate with a peti- companiesandtheirpoliticalalliesthroughthe
tion, and after several bureaucratic steps, any- 1990s. The deep economic crises in the late
one could get permission. Small market 1990s forced the government to respond with
bankers,however,tookhigherriskswithmuch new regulatory reforms under the IMF pro-
higher interest rates, up to 140%, and traded gram. But despite the institutional and regula-
their own promissory notes and personal toryamendmentstocreatecapitalmarkets,the
checks in addition to company bonds. Some Istanbul Stock Exchange succeeded neither to
bankers also played an intermediary role be- attractsignificantsavingsfrominvestors,norto
tween large bond-trading banks and investors becomeasourceofraisingequityforAnatolian
with tremendous success. 10 industrialists. As shown by Yurto(cid:1)gglu (2000),
While holding companies went to well-estab- onlyasmallnumberofcompaniesaretradedin
lished banks or used their own bond-trading the stock exchange and the total market capi-
institutions, many small and medium-sized talizationisaround12%ofGDP.Inthishighly
businesses in financial difficulty preferred bor- concentrated and centralized ownership struc-
rowing from market bankers since their low ture,family-controlledholdingsowndirectlyor
credibility and lack of political links barred indirectlymorethan75%ofallcompanyshares
them from getting loans from the established and exercise majority control. Thus, an active
banks. With the economy and businesses in market for corporate control or monitoring
need of capital, the government remained si- sharesdoesnotexistgiventhelimitedopenness
lent; and did not attempt to regulate the mar- and concentrated ownership of traded compa-
ket.During1980–81,thetotalamountcollected nies. Consequently, takeovers and hostile bids
bymarketbankerswasestimatedtobearound arenotpossiblethroughstockmarketdealings
US $3.2 billion, one-quarter of total bank de- but rather companies change hands through
posits. The formal banking sector lost massive politically linked financial and banking deals,
revenues to informal bankers. manyofthemscandalous.Inthissystem,small
By September 1981 the losses to the formal shareholdersarebeingpersistentlyabusedorat
banking sector became unsustainable, and the best ignored. Public companies of family
ALTERNATIVEFORMSOFCAPITALIZATION 2067
holdings traded on the stock market are being and Bursa. State-run enterprises and large
used as yet another way to transfer funds into family holding companies controlled the ma-
the holding system. jority of industrial establishments in the coun-
Ordinary investors have prudently shied try. The price of many goods was subject to
away from stock market dealings and often state or local authority approval. There was
preferred foreign currency or real-estate in- almost no foreign direct investment and the
vestments. This further limited the securities foreign exchange reserves were fragile and
trade and took funds away from businesses. small. National per capita income was around
Studies on household savings and investments US $700. The severe shortage of industrial
quantify this trend and show that on average capital and the lack of industrial diversity and
families retain their wealth in the form of real- diffusion in the country were recognized as the
estate (85%) bank accounts (11%), and while main barriers to business development and
securitiesaccountforonly2.3%(Eser,1999).A growth.Politicalactors,localcommunities,and
recent study by the State Planning Organiza- individualswereacutelyawareofthisproblem.
tion also highlights the remarkable growth of The idea of using small family savings and
theshadoweconomyinTurkeythroughoutthe expatriate workers’ remittances for business
1990s. 12 establishments and industrial diffusion first
These catastrophic experiments indicate that emerged in the early 1970s under the slogan of
a pattern of abuse of investors occurred in an the ‘‘people’s sector’’ of the Republican Peo-
environment where abusers have not been ples’ Party (CHP) (Goo€knel, 1981; Soral &
punished and where honesty and dishonesty Tekeli, 1976).
have been blurred in the eyes of the public. The people’s sector initiative was primarily
Enforcement actions have also become a hos- an economic mechanism to generate finance
tage of these relationships where legality and capital. At the same time, it was a means to
illegalityhavehadparadoxicalinterdependency diffuse social market capitalism and material
further eroding the state’s credibility. Thus, all prosperity through the widespread ownership
parties hoped to maximize their returns by and participation of ‘‘the people.’’ This initia-
benefiting from the gaps in the legal and insti- tive ambitiously aimed to achieve four major
tutionalframeworkandthegenerallyweakrule goals: to support a successful form of demo-
of law. cratic left politics, to initiate economic devel-
opment through diffused and decentralized
modes of production, to enhance popular par-
4.THERISEANDFALLOFANATOLIAN ticipation in the economy, and to create a new
HOLDING COMPANIES form of public–private cohabitation and part-
nership. These ideas were political but largely
Against the background of persistent capital engineered by technocrats and a handful of
market failures which undermined small inves- academics in the powerful State Planning Or-
tors and entrepreneurial businesses alike, the ganization. The ideological justification was
formation of Anatolian holding companies related to the Cold War realities of a NATO
appeared to be a credible response by offering member country as well as the moderate so-
direct investment opportunities in productive cialist teachings of the Republican Peoples’
activities. The belief in this form of alternative Partywhichwas inspiredbythesuccess stories
capital formation was promoted through vari- of Yugoslav economic reforms (Ak Guu€nlere,
ous agents of change such as academics, tech- 1975; Soral & Tekeli, 1976).
nocrats, and politicians. But above all, the The political and agency actors of the pio-
political ideologies of social democracy in the neering Anatolian holding companies wanted
1970s,andlaterpoliticalIslaminthe1980s,led tobenefitfromtherobustandgrowingratesof
thewayaspromotersofeconomicdevelopment Turkish workers’ savings in Germany to over-
with more social equality. come severe shortages of financial capital and
hard currency (Van Renselaar & Van Velzen,
(a) Pioneers: Anatolian holding companies 1975). 13TurkishmigrationtoWesternEurope
and socialist ideals in the 1970s startedinthelate1950sandgrewveryquickly.
From the early decades of this migration until
In the 1970s, Turkey had a closed economy the first and second oil shocks of the 1970s,
withlittleindustrialdiffusionbeyondahandful after which European countries closed their
ofmetropolitan centerssuchasIstanbul,Izmir doors to emigrant workers, savings sent to
2068 WORLDDEVELOPMENT
Turkey provided the main source of foreign worker’s companies had 60,000 investors with
exchange. Thus, migrants’ remittances quickly total capital of TL500 million, around 36 mil-
becameadominantsourceofforeignexchange lionUSdollarsin1975prices(VanRenselaar&
and consequently the major source to balance Van Velzen, 1975, p. 131). 15
the trade deficit of the country. This was quite ThemajorityofAnatolianholdingcompanies
similar to the experience of emigrants from (72%) were set up in priority development
other southern European countries at the time regions identified by the State Planning Orga-
such as Greece, Spain and Italy (King, 1984). nization and almost all of them (90%) were es-
Savings of Turkish workers rapidly increased tablished away from major commercial and
from a mere US $107.3 million in 1968 to US industrial towns. The inner Anatolian region
$1,426.2 million in 1974 accounting for 40% witnessedthemostrapidcreationofAnatolian
and63.5%offoreignpaymentsrespectively(see holding companies and attracted most invest-
Table2).TheTurkishgovernmentfirsttriedto ment while the poorest towns in the east and
channelthesesavingstovillagecooperativesin southeast had no investments. The investment
the mid-1960s and later, encouraged by the incentives operated by the government played
spontaneous workers’ investment companies a strong role in locational choices. In terms of
established in Germany, attention turned to thesectoralcomposition, therewasanobvious
‘‘workers’ companies.’’ emphasis on industrialization as most of the
The number of ‘‘workers’ companies’’ investments were in the traditional manufac-
reached 322 by the-mid 1970s. As Van Ren- turing sector: investments concentrated on
selaar and Van Velzen (1975) point out, the foodstuffs and beverages (23.4%), weaving and
existing family-run companies failed to raise clothing(18.7%),constructionmaterial(14.1%),
capitalthroughworkers’savingsduetothelack and animal feed (12.5%). An analysis of the
of any stock market or experience with finan- shareholder composition indicated that the
cial transactions. 14 The social networks of majority of these companies (87.5%) had more
workers, their local origins, and family ties than 100 shareholders and a significant pro-
played a role in the locational choices of in- portion (12.5%) had more than 2500 share-
vestments. The workers took pride in the de- holders(Ertunaetal.,1975).
velopment of and the contribution they made Weak institutional guarantees inhibited the
to their towns (Ertuna et al., 1975). Yet, many survival and growth of Anatolian holding
companies were launched and funds collected companies.Onlyahandfulofnewinstitutional
without any investment feasibility analysis. players were created (see Table 4). Already
Poorly educated and low skilled workers were existinginstitutions,suchastheStatePlanning
unable to appreciate the importance of finan- Organization, jealously presided over the pro-
cial and technical project planning and the in- cess. There was however a serious effort to
stitutionalsettingforshareownership.Astudy create financial institutions to secure invest-
conducted in 1973 covering 88 worker’s com- mentssuchastheCo-operativeBank,theState
panies indicated that only 10 of them had in- Industry and Worker’s Bank [Devlet Sanayi ve
vestment projects and they were able to gather II_(cid:1)s(cid:1)ci Yatırım Bankası], Social Security Funds,
19,439shareholderswithanaverageinvestment and the People’s Investment and Partnership
of TL5, 250 (US $380) per share. These com- Limited [Halk Yatırım Holding Anonim Or-
panies had altogether TL102, 2 million capital taklıgg(cid:1)ı]. Despite the efforts at institution build-
(US$7.51million)ininvestmentsandbenefited ing, the initial euphoria was quickly replaced
from TL33, 375,000 (US $2,490,000) in invest- with institutional conservatism as the State
ment credits (Van Renselaar & Van Velzen, Planning Organization wanted to preside over
1975, pp. 124–125). By 1975, a selection of 77 theentireprocessthroughitsincentiveschemes.
Table 2. MoneytransferredtoTurkeybyTurkishworkersabroadbetween1965and1974(in1,000USdollars)
1965 1966 1967 1968 1969 1970 1971 1972 1973 1974
Total 69,777 115,333 93,030 107,318 140,612 273,120 471,362 740,155 1,182.352 1,426.211
transfer
Average 438 598 543 525 486 617 897.1 1,209 1,638 1,762
perworker
Source:VanRenselaarandVanVelzen(1975,p.108).
ALTERNATIVEFORMSOFCAPITALIZATION 2069
Again, the government failed to build an effi- tated abuses. Due to reduced visibility, share-
cient institutional and regulatory structure to holders gradually lost their interest and failed
governthenewformoffinancecapitalandthe to participate in a long-term engagement with
corporate entities created. The result was a thecompaniestheyinvestedin.Theabsenceof
dramatic failure rate among newly established bodies informing investors about the perfor-
businesses. Most of the failed companies were mance of the firms and mechanisms to control
bought by the state. Surviving ones lost their the managerial team (hire or fire them) further
multiownership character. This experience not exacerbated the extent of abuses and the con-
only damaged the local economies and the centration of shares in the hands of a few in-
shareholdersbutalsocreatedpublicmistrustof dividuals, especially managers. 17 All of these
similar initiatives. This meant small family factorsbutinparticularthedeficientregulatory
savings either remained dormant or were regime contributed to the collapse of these
channelled into speculative investments rather businessventuresbythelate1970s,evenbefore
than to productive activities for industrial the 1980 military coup.
growth. The outcome of this failure was also Thus, another form of investment for work-
visible in the increasing property investments ers and a less inflationary form of hard cur-
by Turkish emigrants in urban areas and holi- rency supply for the government was provided
day resorts (Kele(cid:1)s, 1985). byworkers’companies.Butthemotivesofboth
Early studies on Anatolian holding compa- investors and the policy makers diverged when
niesstresstheinterruptionofpermanentcapital the early trust could not be maintained under
inflow and managerial problems as the main the short-term pressures of seeing a concrete
sources of the failures of workers’ companies return. Investors, although ambitious and en-
(Balcı,1996;Ertunaetal.,1975;S(cid:1)enguu€n,1977; thusiasticaboutgeneratingjobsandbusinesses
Yılmaz,1993). 16Manybusinessesfacedsevere in their homeland, did not fully trust the state,
liquidity problems during their intermediate the managers or the social democratic princi-
investment stage. Some also suffered from ex- plesofworkers’companies,andinvestedonlya
port and import limitations. Financial prob- small proportion of their savings.
lems originated from several sources. First,
investors (typically workers) were not familiar (b) The second wave: Anatolian holding
with investing in shares. Therefore they were companies and Islam’s conversion to capitalism
shy to invest in such unknown assets. Second,
frequentbusinessfailuresandhighexpectations After the dramatic collapse of the socialist
discouraged them to invest in new ventures. ideals of the ‘‘people’s sector,’’ the second re-
Third, since investments concentrated in areas vivalofAnatolianholdingcompaniescameasa
where returns can be obtained in the long run, ‘‘newmodel’’andaspartof‘‘thejustorder’’of
such as manufacturing industry, investments political Islam in Turkey. Despite remarkable
yielded nothing for years. For this reason, similarities in form, it took place under condi-
company shares were less attractive than al- tionsverydifferentfromthe1970s.Turkeyhad
ternative investments such as real estate or itsthirdmilitaryinterventionin1980.Although
gold. In addition; whereas it was difficult to sixyearsofstreetfightingandbloodshedended
cash-in the company shares because of the with the coup, the new political regime, on the
nonexistenceofastockmarket,thealternatives one hand, widened business opportunities and
were easily traded. liberalism, but on the other hand, it narrowed
Business problems stemmed both from thescopeofdemocracyinthecountry. Turkey
managerial inability and abuses. Studies inves- enteredthe1990swithanopenliberaleconomy
tigating the reasons for failure as well as our with export-led growth. The per capita income
interviews indicate many poor decisions taken rose to US $5,000 as measured in purchasing
either at the establishment and/or early opera- power parity.
tionstages.Onceagainthetechnocraticnature Market deregulation opened many new
of the initiative was apparent. Ertuna et al. business opportunities and Turkey witnessed a
(1975) found that 23% of the people who took rapid rise in new business ventures and entre-
investment decisions and 36% of board of di- preneurial activities. The growth of small and
rector members had been civil servants. Man- medium-sized enterprises in many nonmetro-
agerial fraud was another major source of politan towns and capital accumulation in
problems. The distance between the managers the hands of people who had strong rural
and shareholders who lived in Europe facili- traditional ties created a new generation of
2070 WORLDDEVELOPMENT
capitalists (C(cid:1)okgezen, 2000; OO€zcan, 1995b). from mainly oil-rich countries to Islamic re-
These capitalists developed a strong antipathy gimes such as Pakistan and later to secular re-
toward the family cartels that controlled the gimes such as Turkey (Warde, 2000). But,
country’s economy as well as the inefficient Islamic economics is a rather new scholarly
state enterprises. This antagonism crystallized concern initially developed by Indian Muslim
around a notion of hard-working, genuine thinkers during the years of India’s partition
Anatolian people with Islamic traditions, as andthemostvisibleelementofthisconcernhas
opposedtothecosmopolitananddisingenuous been Islamic banking. 20
Istanbul capitalists (C(cid:1)okgezen, 2000; Tugal, Euphoria around Islamic economics found
2002). These small-scale entrepreneurs in con- new strength in the Welfare Party and its affi-
servativeAnatoliantownslaterplayedacrucial liated community and business organizations
role in reforming Islamic politics and in build- that pioneered Anatolian holding companies
ing the second wave of Anatolian holding amongTurkishworkersinGermany.Manybut
companies (OO€zcan, 2000). not all Anatolian holding companies followed
The new entrepreneurs desperately needed the Islamic finance principle of profit and loss
more financial capital. Small investors and sharing or partnership finance through selling
families, too, hoped to make long-term, in- issued bonds of companies and investors to
come-generating investments in the growing individuals, families and businesses. Inits pure
economy. Most of these small investors tradi- form, this was a micro capital formation
tionally channelled money into the property throughthousandsofbondsandinvestors.The
marketandlandspeculation.Butthisbeganto early attempts led by investors and managers
change as the rhetoric of political Islam found and their agents proved to be enormously suc-
popularsupportinTurkeyandamongTurkish cessful. These Anatolian holding companies
workers abroad. Following the 1980 coup, quickly became romanticized and heroic sym-
Islam became a favorable ideology against bols of ‘‘new industrialization and just order’’
communism and therefore was modestly pro- associated with Islamic populism. 21
moted by the army and Turkey’s major allies. This branding of moral salvation with ma-
The number of Islamic groups, organizations terial benefits points out the core sentiment
andpublicationsincreasedrapidlyinthe1980s. which made the so called Islamic economic
TheincreasedpresenceofIslaminpoliticaland order attractive to ordinary investors. While
social life was accompanied by an intensified Islamic rhetoric condemned the individualistic
debate on development and modernization societies of the West for being immoral, indi-
within Islam. vidualinterests,nevertheless,providedthecore
Industrialization and business ventures be- motivation for investing in Anatolian holding
came thesymbolsofIslamic modernization, an companies. This paradox is addressed by
intellectual development which was led by A(cid:1)cıkel (1996) as the desire of repressed and
Islamicscholarsandagroupofeducateddevo- marginalizedmassestoseekpowerwhileTugal
teesfromthe1960s.ThisconversionofIslamto (2002) identifies Islamic populism with un-
capitalism should be seen as part of deeper fulfilled aspirations and desires to change the
changesinthepoliticalandideologicalsceneas hegemony. C(cid:1)akır (1995) among others (for ex-
Turkey adjustedtotheturbulence andinequal- ample Goo€le, 1999) sees the rise of Islam as a
ities created by late modernization and liberal movement against and in response to moder-
capitalist development. 18 Already by the late nity. The Islamist party of the early 1990s, the
1980s, but especially during the 1990s, a new Welfare Party, used the shortcomings of secu-
form of multiownership company emerged un- larism as part of its propaganda to show its
der thebannerofIslamic economicrevivaland unique position in defending Islam and tradi-
just order. This synthesis of industrialization, tionsaswellasjustsociety.Paradoxically,both
development and Islam took decades to find a sterile secularism and political Islam have long
receptiveaudiencebeyonditscoreengineersand survived side by side despite periodic clashes
thinkerswithinpartypolitics. 19 in Turkey. Indeed, as Shankland (1999) illus-
The enthusiasm with Islamic development trates, Islam and Islamic politics were rather
andIslamicfinanceamongTurksalsofollowed well accommodated within the secular state
a worldwide trend of the increasing popularity establishment. A(cid:1)cıkel (1996) goes further to
of Islamic banking in Saudi Arabia around suggest that the Turkish–Islamic synthesis has
1970. The function of Islamic banking as a been the semi-official ideology of the Republic
pious form of lending gradually spread out from the 1950s onward.