Central bank independence in Turkey: A neo-Gramscian analysis

Introduction

Central bank independence from political authorities has been one of the key aspects of the economic reform programmes in both developed and developing countries over the past two decades (Maman and Rosenhek, 2007). It has been a condition for entry into the single currency in the EU and a criterion used by credit rating agencies when evaluating the risk score of bonds issued in international capital markets. As a legal standard, it has been diffused widely, including in countries such as Albania, Argentina, the Czech Republic, Sweden, Kazakhstan, Belgium and New Zealand (Polillo and Guillen, 2005: 1770). Marcussen (2004: 6) states that 65% of all central banks are legally independent of other state authorities. Accordingly, it can be noted that independence has become a well-established standard of contemporary monetary order, which makes ensuring price stability the primary responsibility of a central bank. In April 2001, with law no. 4651, the Central Bank of the Republic of Turkey (TCMB) was granted independence – its primary objective being to achieve and maintain price stability.

Polillo and Guillen (2005) and Maxfield (1997) explain the worldwide spread of central bank independence through the globalization pressures stemming from intensive capital flows. These scholars emphasize that in the absence of credibility the outflow of financial capital leads to severe consequences for the macro-economic stability of countries, thus domestic structural policies have to be perceived as credible by investors. Although this explanation points to the role of market forces that impose the ‘best practice’ on states, adjusting national policies to the requirements of global markets is not automatic, and central bank independence cannot be seen as an inevitable outcome of market pressures (Kirshner, 2003: 647). The ‘investor confidence’ or ‘credibility’ arguments constitute more a justification for central bank independence than an explanation of its adoption (Kirshner, 2003: 653). Moreover, although this approach highlights the coercive power exercised by external actors, it overlooks how that pressure is mediated, processed and justified by domestic social forces that promote specific interests and related ideas.

Others, like McNamara (1998, 2002) and Marcussen (2004), point to the cognitive dimension of central bank independence. Similarly, King (2005) draws attention to the role of ideas and epistemic communities in shaping macro-economic institutions and policies. McNamara (1998: 62) emphasizes that ideas can guide policy-makers by illuminating a specific path; one that is determined by neo-liberal ideas stressing that inflation creates uncertainty over future price levels, high nominal interest rates and distorts growth. Neo-liberal ideas also stress that growth and employment can be attained only if price stability is achieved by preventing governments from intervening in the economy with expansionary policies. By focusing on the role of economic ideas, this literature explains how politicians were convinced of the positive effects of greater central bank autonomy. However, it fails to explain why some countries that would benefit economically from a more independent bank failed to implement such a reform.

Although acknowledging these arguments, this article argues that the Turkish Central Bank’s independence cannot be seen as purely a process of rational adaptation to the globalization process or as a pure ideational one, but rather as a hegemonic process in which social forces struggle for hegemony within the framework of a broader historical structure. Historical structures are socially constructed intersubjective frameworks for action that involve the interaction among ideas, material capabilities and institutions (Cox, 1996: 149). Based on this interaction, structures that are formed by collective human activity over time in turn shape the thoughts and actions of agents by imposing pressures and constraints (Cox, 1995: 33). These pressures do not, however, determine actions in any direct or mechanical way, since it is agents that intersubjectively decide whether to adjust or resist structural constraints. Thus, structure can be thought of as both determined by and determining the agency (Bieler, 2006: 123).

Such dialectical or reciprocal relations between structure and agents prevail over the understanding of structural change resulting only from external pressure. Instead of attributing a causal role to external factors, the method of historical structures helps to identify which social forces and what particular objectives lie behind change (Bieler, 2006: 123; Van Apeldoorn, 2002: 2). In particular, it avoids reductionism by putting emphasis on the open-ended struggle among various social forces over the realization of change (Gill, 1993; Gill and Law, 1989: 475).

Studying the Turkish case through the emphasis on the mutual relationship between social forces and historical structures would be useful not just for understanding Turkey but also transformations elsewhere. Turkey has been selected as a case study because the Turkish state has been undergoing a neo-liberal transformation since the 1980s. However, Turkey undertook long-term structural reforms such as central bank independence only very recently. Only with the emergence of market-oriented social forces did the Turkish economy shift in a more liberal direction. As of the early 2000s, Turkey is oriented towards global economic integration on the basis of the increased productive capacity of capital groups. This direction necessitated a more comprehensive transformation of the institutional and legal structure of the Turkish state in line with the requirements of the market-oriented actors. The constitutional amendments that facilitated the privatization of state-owned enterprises, diminishing administrative barriers to foreign direct investment (FDI) and giving legal independence to the Turkish Central Bank, were among the specific reforms implemented through the strategic reorientation of state institutions.

Such a reshuffling of state institutions reconfigured the representational power of Turkish social forces; for instance, it privileged the interests, strategies and alliances of national and transnational capital vis-à-vis other social groups. With the institutionalization of an anti-inflationary approach to macro-economic policy through the reform of the Turkish Central Bank (TCMB) in 2001, the hierarchy of the state institutions was restructured to the advantage of agencies that act as links between the world economy and the national economy. This restructuring altered the power balance not only between different state agencies, but also between social groups in favour of financial interests that benefit from monetary stabilization.

Rooted in a neo-Gramscian perspective, this article highlights how changes in historical structure, such as the globalization of finance and the rise of monetarist ideas, lead to the emergence of domestic social forces – such as market-oriented government officials and businessmen – that unite around the principle of price stability and change the role of government in monetary policy-making in Turkey. The article argues that the TCMB acquired independence due to the consent/hegemony generated and the intellectual leadership exercised by these outward-oriented social forces.

In exploring this proposition, the article utilizes an in-depth case study method that includes intensive interviews of major social forces such as the market-oriented bureaucrats of the Treasury and the Central Bank. The article also engages in a detailed process tracing the changing social relations of production, the emergence of international-oriented social forces, the changing interests, ideas, alliances and the changing common sense of Turkish people over the years. Such a process has been helpful in uncovering the dynamics of the ongoing neo-liberal reform process, including the TCMB’s independence, and the emergence of new power configurations in Turkey. Moreover, interviews that reflected the intersubjective realities of respondents were particularly crucial in revealing that the reform of central bank independence was not a function solely of the pressure of external actors.

Data examined for the analysis included primary sources such as parliamentary records, laws and regulations related to central bank independence, IMF letters of intent, EU Progress Reports on Turkey, the World Bank and IMF reports on the Turkish economy. Speeches, statements and interviews of leading political figures and high-level bureaucrats were collected from the websites of public institutions such as the Central Bank of Turkey and the Treasury.

Changing historical structure: The rise of transnational capital and monetarist ideas

The demise of the Bretton Woods system of fixed exchange rates together with the oil shocks that quickly followed contributed to the deregulation of financial markets with the lifting of restrictions on cross-border capital flows (Helleiner, 1994; Kirshner, 2003: 651). This material shift resulted in an intensified transnationalization of finance expressed in the establishment of a globally integrated financial market (Bieler, 2008: 86; Cox, 1996: 298–300). With the rise of non-bank financial firms or the so-called institutional investors, including pension funds, insurance companies and mutual funds as key players driving international capital flows to emerging markets, a further shift occurred in the nature of global financial markets (Prasad et al., 2003: 20). Assets under the management of institutional investors increased from $21 trillion to $53 trillion between 1995 and 2005 (IMF, 2007: 67). Moreover, assets managed by other less regulated institutions, such as hedge funds, accounted for $1.6 trillion in 2005 (Chandrasekhar, 2008: 5).

Given the density of global financial markets and the multiplicity of actors involved under open capital markets, central banks had to interact with much greater and more widespread participation in both domestic and foreign markets and lost their control over the exchange and interest rates as policy instruments independent of each other (Yeldan, 2006: 194, 195). Moreover, the liberalization of capital movements increased the structural power of financial capital, which made it considerably more difficult for central bankers to control monetary policy in the case of serious financial speculation (Yeldan, 2006: 196).

These developments were coupled with the revival of liberal economic ideas emphasizing that the nature of the state-led economy was anti-competitive and disruptive for economic growth (Baker, 1999). In particular, the failure of the Keynesian ‘managed money’ to provide solutions to the stagflation of the 1970s led to the rising influence of monetarist assumptions that favoured limiting a government’s discretion in economic policy (Van Apeldoorn, 2002: 66). For monetarists, monetary expansion higher than growth of the potential level of national output was the sole source of inflation (Hicks, 2004: 35; Marcussen, 1998). With the rise of the discourse that there was no alternative to market supremacy and that relying on the markets was good for everyone, the premises of liberal economic ideas became the generally shared understanding, or ‘common sense’. Common sense refers to the conception of the world or the primary mode of thinking a society uncritically shares and employs (Gramsci, 1971: 323). Motta (2008: 8) suggests that common sense should be thought of as a cognitive horizon or system of beliefs in which an existing social order is represented as natural and therefore legitimate.

The material and ideational shift in the world economy in the late 1970s marked a turning point in Turkey’s political, social and economic structure as well. At the heart of these changes lay the January 1980 structural adjustment programme that shifted the economic model based on import-substitution industrialization (ISI) to an export-oriented free market economy. Aimed at integrating with the global economy, this shift contributed to the development of a new historic bloc composed of outward-oriented social forces, including internationalized capital groups, market-oriented politicians, bureaucrats and intellectuals in Turkey. The concept of historic bloc reflects an alliance in which different identities and interests are incorporated within an active and largely legitimate system of rule (Gramsci, 1971: 366) organized around a set of hegemonic ideas forming the basis for an alliance between various social groups. Organized around the objective of achieving price stability, social forces that identify their interests with the further globalization of production and capital emerged as the main agents of the recent macro-economic transformation in Turkey.

The question of how that transformation was made possible is explained by analysing the consensus formation process of social forces through the concept of hegemony. Based on Gramsci’s work (1971), the concept of hegemony reflects the interaction between the economic base, civil society and political society (the state). It can be understood as the dominance of a certain way of life and thought that is diffused throughout society by the ruling groups and classes pursuing their interests in such a way that they are seen by ruled groups and classes as common or general interests (Gramsci, 1971: 160, 161, 182; Morton, 2007: 113). It thus refers to a relation between social forces, in which one group takes a leading role in gaining the active consent of other classes and groups through moral and intellectual leadership (Gramsci, 1971: 57). Hegemony can thus be seen as a combination of political and ideational power within a historic bloc maintaining its hegemonic status not primarily through coercion but rather through the creation of consensus.

What is crucial in the concept of hegemony is that it cannot be consensus alone; it necessarily includes conflict (Gramsci, 1971; Morton, 2007: 78). In any order, hegemony is neither complete nor a once-and-for-all achievement (Gramsci, 1971). This open-ended and conflict-ridden nature of hegemony implies that it is a process in which there are always dissident forces resisting the dominant system and do not give their consent, and the possibility always exists for the formation of social struggles and counter-hegemonic projects.

The role of ideas is thus crucial in the organization of hegemony, since they play an important role in shaping political struggles and outcomes. In a hegemonic struggle, several ideas confront each other until one of them tends to prevail; and the prevailing ideas contribute to the establishment of intellectual and moral unity and thus facilitate the dominant group’s enforcing hegemony over subordinate ones (Gramsci, 1971: 181, 182). For Cox (1981: 137, 138), ideas refer to both historically conditioned intersubjective meanings that play a significant role in the consolidation of hegemony and agent-specific collective ideas that contain particular views of what is good, just and legitimate in a society.

From a neo-Gramscian perspective, the power of ideas and discourse is not enough to ensure compliance with liberal economic policies; legal or administrative enforcement is required (Gill, 1996: 216). Ideational and material shifts in the global economy have thus been complemented with the creation or empowerment of institutions, which are particular amalgams of certain ideas and material power (Cox, 1993). Institutions complement market discipline with binding constraints or rules which are crucial for sustaining neo-liberal arrangements by ensuring that certain kinds of political change in the future become more difficult (Gill, 1992: 165, 1998). Such a conceptualization of institutions is called ‘new constitutionalism’, which refers to ‘the construction of legal or constitutional devices to remove or insulate substantially the new economic institutions from popular scrutiny or democratic accountability’ (Gill, 1992: 165). Central bank independence that reflects a shift from discretion-based to rules-based, or from politicized to depoliticized economic management, can thus be considered as the new constitutionalism of disciplinary neo-liberalism (Gill, 1998: 5–9).

Based on these insights, the central proposition examined in this article is that TCMB’s legal independence was shaped through market-oriented social forces within the framework of material, ideational and institutional shifts in broader historical structures. The following sections illustrate how these dynamics were at play in an important policy change in macro-economic governance in Turkey, namely the independence of the Turkish Central Bank.

The rise of outward-oriented social forces in Turkey

The macro-economic situation in Turkey changed very dramatically with implementation of the 1980 structural reforms, including the deregulation and liberalization of financial markets. After the elimination of controls on capital flows in 1989, Turkey opened its domestic asset markets to global financial competition and thus to speculative capital movements (Öniş and Bakır, 2007: 5; Yeldan, 2006). With the liberalization of capital markets, the Turkish economy became dependent on short-term capital flows, which increased from $83 billion in 1990 to $470 billion or 5.6% of the GNP in 1993 (Yeldan, 1998: 406). In order to attract transnational financial capital that would finance increasing growth in public expenditure, Turkish governments followed a policy of domestic currency appreciation and high real interest rates for Treasury bonds as of the early 1990s (Bakır, 2008: 6). This policy led to major structural changes in the domestic capital groups by linking their accumulation strategies to global markets through capital inflows (Ataç and Grünewald, 2008: 50).

In the 1990s, large interest rate differentials between foreign borrowing rates and government debt offered generous profit margins for financial circles in Turkey. Benefiting from high interest revenues, finance capital became the most advantaged segment of society. Ercan (2002: 30) states that the profits of banks increased from 11.7 billion TL in 1992 to 760 billion TL in 1998. Since the late 1980s, the Turkish banking sector has experienced a significant expansion and development in the number of banks, in employment, diversification of services and technological infrastructure. Capital liberalization in Turkey thus strengthened financial markets’ quest for stability-oriented policies, of which independent central banks were seen as guarantors.

The structural changes realized in the Turkish economy during the 1980s not only contributed to the emergence of capital groups that demanded a stable macro-economic environment but also changed central banking in Turkey in organizational and ideational terms. With the globalization of finance coupled with the rise of anti-inflationary ideas, institutions linked to the global economy, such as central banks, were given priority within a country’s economic governance (Cox, 1981: 146). Once becoming a background agent at the service of the Treasury, the TCMB moved forwards in the political process by undertaking a modernization process and reorienting monetary policy toward contemporary central bank practices.

In accordance with global financial and monetary imperatives, the TCMB insisted on focusing on the objectives of stable exchange rates and low inflation in order to create macro-economic stability and thus investor confidence. Its quest for achieving macro-economic stabilization created the basis for natural alliances between actors in financial markets who sought stable and predictable conditions for their operations (Baker, 1999: 93). More importantly, with its focus on price stability the TCMB reflected the priorities of market forces in the financial system, enabled penetration of the interests of the financial services into the state apparatus (Maman and Rosenhek, 2007: 258) and therefore ‘tilted the balance of power towards private monetary agents’ (Germain, 1993: 246). As part of their strategy of building the ground for a change in central banking management in Turkey and legitimating the required reform, the policy-makers acted as promoters of ideas emphasizing the necessity of central bank independence and price stability. Central bank independence can thus be conceptualized as the re-centring of social power in the hands of economic technocrats and financial interests that are embedded within the anti-inflationary policies of governments (Polillo and Guillen, 2005: 1769).

Changing central banking in Turkey: The role of globalizing bureaucrats

The principles of ensuring price stability and ending financing of public deficits through central bank resources have been widely accepted and diffused by transnational networks such as the Bank for International Settlement (BIS) (Marcussen, 2004). The IMF’s International Monetary and Financial Committee (IMFC) is another important forum that produces norms and standards for central banking (Marcussen, 2004). In its 1999 ‘Code of Good Practices on Transparency in Monetary and Financial Policies’, the IMF emphasized the importance of consolidating transparency and accountability principles in central banking (www.imf.org/external). These transnational fora provided intellectual leadership by which central bank officials shared a set of intersubjective beliefs about how the economy should be organized. In a transnational interaction with BIS and IMF officials, TCMB officials developed a coherent central bank culture around the principles of low inflation, sound finance and central bank independence (Bakır, 2007: 59).

Interviews conducted by Bakır (2007) and the author in 2007 with senior bureaucrats of the TCMB reveal that the notion of an independent central bank was highly internalized among TCMB officials. The officials interviewed, the speeches made by the various governors of the TCMB and the research reports of the TCMB staff indicate that the TCMB believed in the necessity of having independent central banks that sought to ensure the country’s financial and monetary stability without facing the pressures of the government and the interest groups. Central bank officials consider that it is a must for Turkey to fully comply with the universal norms and standards of the global economy.

For instance, Fatih Özatay, the former deputy governor of the TCMB (2001–2006), emphasized that in order to ensure stable prices central banks had to be insulated from political pressures to follow expansionary monetary policy for short-term gains. Özatay also highlighted that: ‘Today, strong economies are those that maintained monetary and financial stability through independent central banks’ (Interview no. 1). ¹ Hakan Kara, the general director of the Research Department of the TCMB, indicated that ‘funding governments [was] no longer the main purpose of a central bank; no modern central bank aim[ed] at achieving full employment any more. Today’s central banks have only one aim, which is to maintain price stability (Interview no. 2). ² Kara also stated that, ‘the TCMB, which seeks to become integrated with the Western economies, takes these trends and modern central banking into account while determining its long-term strategies’ (Interview no. 2).

The TCMB was eager to change its position within the state configuration and alter its relationship with the government. The argument that price stability would be the most appropriate objective for monetary policy had been promoted by various governors of the TCMB since the 1990s. In a speech delivered at the 64th Shareholders Executive Board Meeting on 25 April 1996, the then governor Gazi Erçel (1996–2001) defined the concept of central bank independence and emphasized that the most important responsibility of central banks was to prevent inflation, thus to ensure price stability (Erçel, 1996). To achieve that objective, the TCMB and other social forces that asked for an independent central bank aimed at winning the hearts and minds of subordinate groups. Since subordinate groups gave their consent if they perceived a certain policy benefited the entire society (Gramsci, 1971), the TCMB was presented as an apolitical agency working according to scientific criteria on behalf of the common good. Discursively, such perception was created through the insistence that low inflation and flexible markets provided greater economic prosperity for all (Gill, 1998: 17).

Süreyya Serdengeçti (2005a, b) and Durmuş Yılmaz (2006b), two recent former governors of the TCMB, constantly emphasized that price stability was the primary precondition for achieving economic and social stability, sustainable growth rates and employment in Turkey. Serdengeçti (2002: 5, 2005b) attributed the distorted distribution of wealth across Turkey to failure in achieving price stability for long periods of time and claimed that an independent TCMB would contribute to the welfare of society. Yılmaz (2006b) similarly emphasized that maintaining price stability gave people the confidence that money would retain its value over time, ensuring that price signals were a guide for markets functioning efficiently and establishing trust among economic agents in society. Yılmaz also (2006b) expressed that an independent central bank constituted a cornerstone for structural transformation towards good governance in Turkey.

In addition to preparing society for the idea of central bank independence, the TCMB drafted a new central bank law between 1996 and 2000. Having prepared the draft that would create an independent central bank in Turkey, the TCMB mobilized the Ecevit coalition government (1999–2002) to legislate it. The then TCMB governor Gazi Erçel stated in a press conference in October 2000 that:

[T]he success of the inflation targeting system depends on the existence of a strong institutional commitment regarding the price stability. Institutional commitment requires a central bank that is isolated from political influence, exerts a full control on monetary policy instruments and has a single objective of price stability. (TBMM Records, 24.4.2001:101, B:90 0:3)

As the former Undersecretary of the Treasury Faik Öztrak (2001–2003) indicated, support for the reform culminated after the November 2000 and February 2001 economic crises that gave the TCMB the evidence of the importance of ‘sound money’ as the primary goal of economic policy (Interview no. 3). ³ Policy-makers promoted the monetarist approach as a scientific and hence persuasive model explaining the reasons for the economic crises. With the draft treaty on central bank reform, the TCMB offered a concrete and technical package of the policy measures necessary to resolve the crisis. Economic crises opened a window of opportunity for the measures taking on the appearance of being right in the eyes of the public. As Turkish society put the blame for economic instability on irresponsible governments manipulating the economy for their populist aims, economic crises enabled market actors to present the supremacy of markets as good, legitimate and the only means of benefiting society at large.

The economic crises as a window of opportunity for generating consent/hegemony for TCMB reform

The economic crises shaped the prevailing distribution of power between state and society and between different state agencies (Bakır, 2007). New market-oriented actors became key players in introducing new policy and institutional models to the agenda. Kemal Derviş was recruited from the World Bank in order to deal with the 2001 economic crisis. Once in power, Derviş appointed market-oriented actors such as the governor of the Central Bank, Süreyya Serdengeçti, the Chairman of Banking Regulation and Supervision Agency, Engin Akçakoca and the Undersecretary of the Treasury, Faik Öztrak between 14 March and 3 April 2001. Quickly forming much needed coordination among the key economic bureaucratic agencies, Derviş played a critical role in implementation of the structural reform programme in Turkey that aimed at creating macro-economic stability and restructuring of the Turkish state (Keyman and Öniş, 2007: 12). He was also central in building mutual trust among the external and domestic actors involved in the process (Interview no. 3; see also Öniş and Şenses, 2007: 8).

The economic crises also increased the leverage of the important external actors (such as the IMF and the EU) who defined, legitimated and enforced inter-subjective understanding about the necessity of central bank independence. The IMF wanted Turkey to restructure its banking sector, which was seen as the main reason for the 2001 crisis and gave legal independence to the TCMB in exchange for the loans to be extended (Bakır, 2007: 75). The EU was another important external actor influential in reform of the TCMB. In the early 1990s, the EU member states themselves embarked on a process of granting independence to their central banks, since such reform was a precondition for membership in the European Monetary Union. In its Progress Report (2000: 48), the EU made it clear that Turkey had failed to make progress in reforming the TCMB in line with EU requirements. The EU suggested that price stability should be the first priority of the TCMB and that the government’s discretionary access to TCMB resources should be prevented.

The economic liberalization process in Turkey embedded in the IMF stand-by agreements and EU’s membership negotiations constitutes a decisive factor in the institutionalization of new relations between state and economy (Ataç and Grünewald, 2008: 50). Nevertheless, it should be noted that neither the IMF nor the EU had to force domestic actors to adopt certain ideas about macro-economic policy-making. In particular, the technocratic elite had already agreed to global norms on central banking and had adopted them as their own. The then Minister of the Economy, Derviş, stressed that the economic reforms, including the central banking law, were prepared by Turkey by its own cadres due to world experience and economic necessity, not as a result of the conditionality of the IMF or any other external actor (Derviş et al., 2005: 73).

What was important about the overlapping conditionalities of the IMF and the EU was their strengthening of the market-oriented social forces that used international opinion to influence ongoing domestic debates. Both external actors promoted the prevailing international consensus that emphasized causality between ‘central bank independence and price stability’ or between ‘price stability and economic growth’. This discourse was used by domestic actors who sought to justify that a particular policy was technically correct.

Mobilizing the support of external and domestic actors for macro-economic stability in Turkey, Kemal Derviş and reformist bureaucrats prepared the Strong Economy Programme that concentrated on tight monetary and fiscal policy along with an intensive structural reform agenda (Derviş et al., 2005: 73). Derviş presented the reform that provided legal independence to the TCMB as a major solution for the maladies of the Turkish economy (Bakır, 2008: 13). In his visit to the Turkish Parliament to defend the new central bank law in a commission hearing on 18 April 2001, he strongly argued that the legal independence of the TCMB was vitally important in bringing inflation down in the long term (Bakır, 2008: 13). In his speech to Parliament, Derviş justified the new law on the grounds that inflation led to inequality in income distribution and high real interest rates (TBMM Records, 24.4.2001:88, B:90 0:3).

Central bank reform was supported both by the parties constituting the coalition government (DSP, ANAP and MHP) and by one of the opposition parties (DYP). Nesrin Nas from ANAP, Masum Türker from DSP and Ufuk Söylemez from DYP argued for separation of the TCMB from political interference and presented price stability as an opportunity to modernize the TCMB that would catch up with new developments and standards in the world and the EU (TBMM Records, 24.4.2001:76-78, 81-83, B:90 0:2). The only opposition came from the Virtue Party on the grounds that TCMB was granted independence due to the conditionality imposed on Turkey by the IMF (TBMM Records, 24.4.2001:110, B:90 0:3).

Central banking reform became law on 25 April 2001 (law no. 4651). Article 4 of the law made a clear commitment to the TCMB’s achievement and maintenance of price stability and stipulated that all monetary policy would be carried out by the TCMB (Official Gazette, 05.05.2001/24393; TBMM Records, 24.4.2001:97, B:90 0:3). The same article indicated that the TCMB would support the growth and employment policies of the government only if not in conflict with the objective of price stability. Article 4 stipulated that the TCMB would determine the inflation target together with the government, but be fully independent in the conduct of monetary policy in compliance with that target.

In accordance with Article 56 of law no. 4651, the TCMB’s granting of credits to the Treasury and other public institutions was prohibited (TBMM Records, 24.4.2001:157, B:90 0:5). The TCMB could not purchase debt instruments issued by the Treasury or by public establishments and institutions in the primary market (Yılmaz, 2006a). This implied that public sector deficits would no longer be financed with credits and advances from the TCMB. By restraining one of the major historical roles of the TCMB, namely the monetization of fiscal deficits, the new law established strict lines between the duties of the TCMB and the Treasury and opened the path to the emergence of an independent central bank with the capacity to affect significantly the structure and functioning of the economy (Bakır, 2007).

Moreover, under Article 42 of the TCMB law, good governance notions such as transparency and accountability have gained significance in central banking. These principles require that the TCMB regularly reports to parliament and the public about its policies, thus making the public aware of the goals and instruments of monetary policy and whether the authorities are making a credible commitment to their announcements (Gutierrez, 2003). Protecting the central bank from government intervention in the implementation of its policies, accountability and transparency can be identified as principles institutionalizing the depoliticization of macro-economic policy-making. These principles can thus be seen as part of a ‘new constitutionalism’, which acts as the political–legal dimension of the wider discourse of market discipline (Gill, 1998: 5–9, 1995: 399, 2001: 47).

After these reforms institutionalizing monetary and fiscal constraints, the TCMB consolidated its position as the voice of market discipline within the national policy process. Since the sentiments of the markets would be given priority in the process of taking monetary policy decisions, the financial and business sector would receive expression at the core of domestic policy debates. This implies that the quest for low inflation is not a neutral, apolitical choice and explains the internalization of the independence of the TCMB among outward-oriented capital groups.

The internalization of arguments in favour of central bank independence

The issue of central bank independence was supported by the financial sector, which has a stake in price stability, since inflation harms this sector by distorting the credibility and predictability of the economy (Posen, 1995). The social groups that benefited from disciplinary monetary and financial policies – primarily the holders of mobile capital, such as the Turkish Industrialists and Businessmen Association (TÜSİAD) and the banking sector represented by the Banks Association of Turkey – emerged as the key private sector actors supporting central bank reform (Bakır, 2008: 13). The TCMB’s independence from national governments and its committing to the objective of price stability would substantially alter the balance of social power in favour of these groups. The financial sector thus formed the heart of the historic bloc supporting the policy of monetary stabilization and central bank independence as a safeguard to market instability that would be a hindrance to international capital flows (Ataç and Grünewald, 2008: 49).

The preferences of the non-financial, namely manufacturing, sector on central bank independence are not predetermined, but depend heavily on the exchange rate regime and the relationship between banks and industry (Quaglia, 2005: 553). In fact, the industrial sector does not favour the idea of central banks focusing solely on the objective of price stability at the expense of growth. However, the important point about the Turkish financial system is that almost all of the private banks belong to industrial groups and holding companies; thus the industrial and the financial sector are interconnected. This cross-ownership of banks and industry enables industrial capital organized under the form of holding companies appropriate banking profits as well (Ercan, 2002: 30).

Owing to the overlap of financial and industrial interests in Turkey, Turkish industrialists supported the TCMB’s independence, as the sector earned an increasingly high proportion of its profits from non-industrial activities – to a large extent the interest earnings from holding government securities (Alper et al., 2001). According to a survey carried out by the Istanbul Chamber of Industry (ISO), the share of non-industrial profits in the total profits of Turkey’s 500 largest industrial establishments increased from 33.3% in 1990 to 219% in 1999 (Yeldan, 2001: 156). In 1999, banks owned by Turkish holding companies controlled 85.3% of all government bonds (Ercan, 2002: 30).

The export sector is not a natural supporter of central bank independence, as the primary focus on price stability may lead to appreciated currency that decreases the competitiveness of export-oriented groups and may prove disadvantageous for the production structure (Quaglia, 2005). On the other hand, import-oriented groups benefit from appreciated currency as international products become cheaper (Quaglia, 2005). However, in the Turkish case, due to the internationalization of the dominant fractions of capital in Turkey, appreciation of the currency serves the interests of both inward and outward-oriented capital due to the high stock of foreign debt that they have accumulated in recent years (Ataç and Grünewald, 2008: 49). Since devaluation would increase their debt stock sharply, both capital fractions had a common interest in overvaluation of the Turkish Lira.

According to Hakan Kara, general director of the Research Department of TCMB, the structural dependency of the productive sector on imported products was another factor as to why both importers and exporters were in favour of a strong Lira (Interview no. 2; see also Ataç and Grünewald, 2008: 49). This holds true particularly for the car and household appliances industries in the export sector (Ataç and Grünewald, 2008: 49). Nevertheless, this is not the case as far as labour-intensive sectors such as textile are concerned. The textile sector was strongly opposed to overvaluation of the Turkish Lira that would weaken its competitiveness in world markets (Interview no. 2). The suppression of wages, however, was influential in the unification of different fractions of capital around the policy of appreciated currency and high interest rate policy (Ataç and Grünewald, 2008: 50). Between 1999 and 2002, real wages declined by nearly 30% and did not increase until 2006 (Ataç and Grünewald, 2008: 50). The repression of real wages enabled the Turkish export sector to keep its competitive position in the world market.

Based on these features, business associations such as TÜSİAD, heavily involved in the finance and industrial sectors, supported the reform process granting independence to the TCMB. Playing an important role in linking the Turkish economy to global markets, TÜSİAD identified the government’s access to the TCMB’s resources as one of the major problems leading to inflation. TÜSİAD, through its various research reports, engaged in promoting ideas that claimed a positive relation between low inflation levels and macro-economic stability. In its publications, TÜSİAD (2000: 65, 2001: 91, 2002a: 50, 2002b: 16) presented inflation as a social and political crisis that threatened social and macro-economic stability for decades in Turkey. In its report ‘Inflation and Growth Dynamics’, TÜSİAD (2002a: 38, 73) suggested the need to replace the traditional economic belief that inflation was the key to economic development with ideas that presented a reverse relationship between inflation and growth. It put forward that a 50% reduction in the level of inflation would increase growth rates by 2% to 3% (TÜSİAD, 2002a: 17). What made TÜSİAD successful in its efforts to promote price stability was that it did not seem worth pursuing narrow instrumentalist demands since it consistently emphasized that macro-economic reforms would increase the general well-being of Turkish society.

This hegemonic discourse was influential in the rise of general consensus on giving legal independence to the TCMB. However, consensus did not imply that the issue of TCMB’s independence was not challenged by resistance groups. Since the rates of inflation and the exchange rate have significant distributive effects, demands for sound monetary policies were by no means spread evenly throughout society (Watson, 2002). Just as exporters and importers have opposing preferences with regard to the exchange rate, debtors and creditors have different preferences with regard to inflation (Kirshner, 2003: 647). Therefore, owing to the highly politicized nature of monetary policy (Watson, 2002: 194), there were also resistance groups in Turkey that acted as vocal opposition to the stability programmes and the related disinflation policy pursued by the independent TCMB (Serdengeçti, 2005a: 4).

The opposition came from capital groups negatively influenced by the outcomes of central bank independence. The average annual inflation rate in Turkey was 25% between 1970 and 1979; 50% between 1980 and 1989; 75% between 1990 and 2001; but fell to 27% between 2001 and 2002. The inflation rate fell further to 17% in 2003, 8.6% in 2004 and 8% in 2005. This sudden decrease in the inflation rate negatively affected the interests of some of the capital groups (Bakır, 2007: 129). Serdengeçti (2005b) indicates that:

[T]hose groups that anticipate a general fall in the interest rates and the value of the TL try to distort expectations. When the value of the TL began to increase under floating exchange rates, these groups, not exclusively exporters began to lose money. As they used to make their investments in foreign currencies, they claim that the value of the TL is too high and demand that the TCMB decrease short term interest rates.

Serdengeçti (2005b) states that ‘these people that were used to make profits from the decades of economic instability are disturbed by the recently achieved economic and financial stability in Turkey’. It can, thus, be argued that neo-liberal projects did not necessarily need a coherent monolithic bloc behind them, since capital groups in Turkey were fragmented into different and competing interests. However, internationally oriented groups managed to marginalize the resistance groups through hegemonic discourses such as ‘ensuring credibility and economic stability’ and produced a large-scale alliance in civil society for central bank independence.

Conclusion

In contrast to existing ideational and market-based explanations, this article has examined the TCMB’s gaining of independence as a function of market-oriented social forces engendered by changes in broader historical structures, such as increasing mobility of capital across borders coupled with the rise of anti-inflationary ideas. By tracing the reconfiguration of domestic social forces within a broader historical structure, the article has investigated how those fractions embedded in global production and finance networks have driven the macro-economic transformation process and expanded neo-liberal market rules and practices in Turkey. By investigating why particular social forces asked for and promoted the adoption of central bank independence, the article has addressed the issue of the role of agency, ideas and discourse in state reconfiguration.

The article has emphasized that the greater integration of the Turkish economy within global markets since the 1980s has served the interests of outward-oriented industrial and financial capital in particular and thus has given rise to internationally oriented social forces in Turkey. Within Turkish capital, for instance, the TÜSİAD with its big, internationally connected and competitive members emerged as the most transnationalized fraction of Turkish capital. Due to their embeddedness in global financial and production networks via foreign trade and investments, TÜSİAD advocated a development model based on sound money and anti-inflationary growth.

The increasing flow of transnational capital to Turkey due to high interest rates increased financial markets’ surveillance of Turkish macro-economic policies. Investors sought low inflation and preservation of the value of the currencies in which bonds were denominated (Gill, 1998). Since governments’ keeping budget deficits and foreign debt sustainable enhanced their credibility to financial markets (Gill, 1997: 218, 219), the markets regarded greater central bank independence as a guarantee of macro-economic discipline. Gaining credibility vis-à-vis domestic and foreign investors was particularly important in Turkey, which often experienced economic fluctuations. Domestic capital therefore promoted the idea of central bank independence to ensure the credibility and predictability of the Turkish economy.

Such a change of direction in the realm of financial capital coincided with the direction of change in the TCMB that tended to have a ‘shared framework of thought’ with capital groups as regards the processes of social and economic policy (Gill, 1997: 220). Based on its technical expertise, the TCMB increased its relatively limited role in the economy and replaced the traditional emphasis on growth and full employment with the objective of ensuring price stability. As the TCMB took market sensitivity into consideration to inform its policy decisions, it reinforced prevailing patterns of social power in favour of capital groups that benefited from sound monetary and fiscal policies (Watson, 2002: 193).

Both the globalizing bureaucrats and the domestic capital groups united around the principle of price stability and identified governments’ arbitrary use of fiscal and monetary policy, reflected in the accumulation of public debt and inflation, as the source of economic problems. They demanded a clear definition and prioritization of the objectives of the TCMB for enhancing the credibility and effectiveness of monetary policy. In line with a neo-Gramscian emphasis on the interaction between structure and agency, giving legal independence to the Turkish Central Bank has been promoted by these social forces whose interests have been firmly rooted in material structures. To create consensus for a new central bank reform that would insulate monetary policy from political influence, they formulated concrete policy and institutional alternatives based on anti-inflationary ideas.

Anti-inflationary ideas that legitimate the discourse and action of market-oriented social forces were important in Turkey’s delegation of monetary policy to an independent central bank in 2001 with law no. 4651. The law prohibits the TCMB from providing loans to the government to finance budgetary deficits and from introducing inflationary monetary policies. This shift in the position and functioning of the TCMB represents a basic change in the power relations between different state agencies. The TCMB’s gaining autonomy refers to the reconfiguration or reorganization of the Turkish state along more technocratic lines that benefit holders of internationally mobile capital.