The London School of Economics and Political Science Sources of Economic Growth in Interwar Egypt and Turkey: Industrial Growth, Tariff Protection and the Role of Agriculture Ulaş Karakoç A thesis submitted to the Department of Economic History of the London School of Economics for the degree of Doctor of Philosophy, London, September 2014 Declaration I certify that the thesis I have presented for examination for the PhD degree of the London School of Economies and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without the prior written consent of the author. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 90,313 words. 2 Abstract This dissertation presents a paired case study of the growth performance of Turkey and Egypt in the interwar period, in order to shed fresh light on the income per capita divergence that occurred between them. First, we look at the extent and determinants of agricultural growth by estimating the net ag- ricultural output and decomposing the crop output into its components. It is shown that acreage expansion, population growth and improvement in yields led to rapid recovery in agricultural output in Turkey, whereas the increas- ingly intensive cultivation in Egypt was only able to offset the impact of land scarcity and the earlier deterioration in yields. We also fill a major empirical gap in the literature by estimating industrial output growth and argue that although the industrial take off started in both countries in the 1930s, the output growth in Turkey was much greater. Moreover, industrialisation was mainly driven by textiles in Egypt, whereas it was more balanced in Tur- key. Finally, we explore the sources of industrial output growth by focusing on textiles. The empirical analysis based on a partial equilibrium model im- plies that the impact of tariff protection on domestic growth was significant in both countries, yet it was complemented by the favourable movement of relative prices and wages and, in the case of Turkey, the increase in domestic incomes in the second half of the 1930s. Overall, it is argued that the greater expansion of domestic demand in Turkey, which was particularly driven by ag- ricultural growth, was not only responsible for the per capita divergence, but also combined with different degrees of tariff protection to lead to a notable variation between Turkey and Egypt’s industrial performance. Therefore, the dissertation has implications for the experience of agricultural economies after the Great Depression. It is argued that in the presence of passive monetary and fiscal policies, factor endowments, historical development paths and geo- graphy played a prominent role in determining the extent of recovery in the 1930s. 3 Acknowledgements My greatest gratitude goes to my supervisors Peter Howlett and Şevket Pamuk. They have always been patient, supportive and encouraging over the course of this project. This work would not have been completed without their in- valuable guidance. I only hope that I meet the high standards they expected from me. To be a part of LSE’s Economic History Department was intellectually stimulating and delightful, for which I owe all the faculty and fellows. I am specifically grateful to Max Schulze for encouraging me to return to LSE when I was getting lost in PhD applications. I am also grateful to TurkPetrol Foundation and Middle East Centre at LSE for the financial support that they provided when most needed. Such a long project would not have been possible without companionship. I would like to thank my family for their understanding, my dear old friends who I once left back in Turkey for which hopefully I was forgiven, the whole Thaxted Court community, those who joined me at the White Horse after sem- inars and other times and everybody who did not leave me alone in the ’dun- geon’. Within such a large group, I specifically have to express my gratitude for Alp Yücel Kaya, Burçak Gürsoy, Carlos Brando, Coşkun Tuncer, Esther Sahle, Gerardo Serra, Güneş Aşık, Joe Francis, Merve Kurt, Olga Soy, Pınar Ceylan, Rahşan Sönmez, Raphaelle Schwarzberg, Taylan Yenilmez, Thanasis Manis and Zeynep Kaparoğlu. Without them, this whole period would have been dull and unbearable. There were good times and bad times. Evrim Kaya has always been with me with her endless beauty, affection and wisdom. To her this dissertation is dedicated. 4 Glossary Ardeb Egyptian unit of volume = 198 litres. Cantar Egyptian unit of weight = 44.928 kilograms. Feddan Egyptian unit of weight = 1.038 Acres= 0.42 hectares. FO Foreign Office, UK. IUM İstatistik Umum Müdürlüğü, the central government statistical agency in Turkey, later DİE (Devlet İstatistik Enstitüsü). LE Egyptian Pound = 100 Piastres= 1000 Milliemes. Oke Egyptian unit of weight =1.248 kg. Okka Turkish unit of weigh=1.282 kilograms. Rotolis Egyptian unit of weight =0.44928 kilograms. TL Turkish Lira = 100 Piastres (Kuruş). 5 Contents 1. Introduction 16 1.1. Research Motivation: Why Did Egypt and Turkey Diverge in the 1930s? . 18 1.2. Historical Background . 21 1.2.1. Interwar Turkey: Recovery, Depression and Growth . 21 1.2.2. The Interwar Egyptian Economy: “Development Without Growth” . 28 1.3. Great Depression and Recovery in the 1930s: The Global Ex- perience . 36 1.3.1. Theory and Evidence . 36 1.3.2. Peripheral Economies Through the Depression: A Bless- ing in Disguise? . 41 1.4. Dissertation Contents and Structure . 48 2. Agriculture in Interwar Turkey: Overcoming Deflation 53 2.1. Introduction . 53 2.2. Revised Output Estimates . 55 2.3. Sources of Output Growth . 63 2.4. An Estimate of Agricultural Income . 72 2.4.1. Taxes . 73 2.4.2. Net Credit Inflow . 75 2.4.3. Per Capita Agricultural Income . 76 2.5. Conclusion . 78 2.6. Appendix . 80 3. Industrial Expansion in Interwar Turkey: New Estimates 91 3.1. Introduction . 91 3.2. Estimation Methods: An Overview . 93 6 Contents 7 3.3. Sectoral Output Estimates . 97 3.3.1. Textiles . 97 3.3.2. Leather Working . 118 3.3.3. Food Processing . 122 3.3.4. Other Sectors . 128 3.4. Weighting and Resultant Aggregate Index . 129 3.5. Conclusion . 138 3.6. Data Appendix . 140 4. Industrial Growth and Protectionism in Turkey: The Case of Tex- tiles 145 4.1. Turkey’s Trade Policy Choices in the Interwar Period . 146 4.2. Measuring the Impact of Protection on Industrial Growth . 151 4.3. Empirical Model . 154 4.4. Data . 158 4.5. Estimation Results . 163 4.6. Conclusion . 168 4.7. Data Appendix . 171 5. Agriculture in Interwar Egypt: Failure to Overcome Deadlock 174 5.1. Introduction . 174 5.2. Agricultural Value Added . 176 5.2.1. Crop Output and Output Decomposition . 176 5.2.2. Cultivation Costs . 184 5.2.3. Livestock output . 188 5.3. Farm Income . 196 5.4. Conclusion . 204 5.5. Data Appendix . 206 6. Estimating Industrial Growth in Egypt, 1919-1945 215 6.1. Introduction . 215 6.2. Methodology and Data: An Overview . 218 6.3. Sectoral Output Estimates . 220 6.3.1. Cotton Textiles . 220 6.3.2. Woollens . 227 6.3.3. Silk . 230 6.3.4. Food Processing and Tobacco . 236 Contents 8 6.3.5. Other Industries . 244 6.4. The Aggregate Output Index . 247 6.5. Conclusion . 252 6.6. Data Appendix . 255 7. Protection and Industrial Growth in Egypt: the Case of Textiles 264 7.1. The Shift Towards Protectionism . 264 7.2. Exploring the Sources of Textile Growth . 272 7.2.1. Data . 274 7.2.2. Estimation Results . 288 7.3. Conclusion . 292 7.4. Data Appendix . 294 8. Explaining the Sources of Economic Divergence Between Egypt and Turkey: New Insights 300 8.1. A Summary of Findings . 301 8.2. Protectionism and the Broader Policy Framework . 315 8.3. Conclusion . 322 A. Formulas for Decomposition of Crop Output 330 B. Solution of Reduced Form Output Equation 332 Bibliography 337 List of Tables 1.1. Main Economic Indicators for Turkey, 1913-1939 . 23 1.2. Main Economic Indicators, Egypt . 30 1.3. Trends in Egyptian Agriculture, 1917-1947 . 32 2.1. Cotton Output Series for Turkey, 1923-1939 . 57 2.2. Crop Output Decomposition, Turkey . 65 2.3. Regional Growth Rates of Wheat Yields and Acreage in Turkey, 1928-1939 . 71 2.4. Crop Acreages (Hectares) in Turkey, 1925-1940 . 82 2.5. Crop Prices (Piastres/Kg) in Turkey, 1925-1939 . 83 2.6. Crop Yields (Tons/Hectares) in Turkey, 1925-1939 . 84 2.7. Costs of Agricultural Production (TL Million) in Turkey, 1925- 1939 . 85 2.8. Aggregate Agricultural Output in Turkey, 1913-1939 . 86 2.9. Regional Wheat Acreage Figures (Hectares) in Turkey, 1928- 1939 . 87 2.10. Regional Wheat Yields in Turkey (Tons/Hectare), 1928-1939 . 88 2.11. Regional Average Rainfall in Turkey (Millimetres/Meter Square), 1929-1939 . 89 2.12. Estimates of Farm Income in Turkey, 1925-1939 . 90 3.1. Overview of Sectoral Output Measures for Turkey . 96 3.2. Cotton Output in Turkey (Tons), 1924-1940 . 100 3.3. Comparison with Existing Estimates of Cotton Textiles Output (Tons), Turkey . 102 3.4. Silk Output in Turkey, 1924-1940 (Tons) . 106 3.5. Carpet Output in Turkey, 1925-1939 . 109 3.6.