**_Political_** _Economy of Policy Reform in Turkey 37_

decisively when it had Ozal's support was crucial. Reducing export subsidies and introducing a value-added tax also contributed to the stabilization, as well as to the fundamentals of Turkey's structural adjustment.

For political and institutional reasons, these measures did not realize their full fiscal potential. When export growth flagged, the government raised the export subsidies again in 1985-86. To enforce collection of the VAT, the government setup an elaborate rebate scheme. Besides drastically reducing the effective rate of the VAT, the scheme became a large entitlement program whose removal or serious reduction would arouse political protest. Also, the government did not follow through on complementary fiscal measures, such as permanently reducing subsidies to state enterprises and raising corporate income taxes.

Unlike the typical case of persistent moderate inflation, monetary financing of government deficits played an important role in Turkey up through 1988 (Anand, Rocha and Van Wijnbergen 1988; cf. Dornbusch and Fischer 1991). Expansion of central bank credit to the private sector was not a serious contributor to inflation.

The policy reforms of 1983-84 had been planned in advance of the election by Ozal and his top advisors, and, at least in broad outline, trade liberalization had been part of ANAP's electoral platform (Keesings 30: 32926). The ability of the government to modify quickly the trade incentive in January was an important result of the bureaucratic reforms in December, namely creating the UTFT. Several studies by the World Bank in the mid 1980s helped prepare the trade measures, but this was not a case of imposing reforms through conditionality, but more of technical assistance in an endeavor fully supported by the government.

To win political support for his program, Ozal exploited the theme of the absence of an alternative economic program. He pointed to the improved performance of the economy and to Turkey's renewed ability to attract external resources on a large scale, which contributed to the rapid recovery of the economy in the early 1980s (Celasun and Rodrik 1987; Celasun 1990). ANAP's popularity in the mid-1980s, also derived from measures which may be termed popular capitalism. Financial liberalization, for example the transition of positive real rates of interest on bank deposits, was instrumental in generating a new group of middle-income rentiers who directly benefitted from the program and added to ANAP's base of support. Similarly, the early features of the privatization program contributed to ANAP's success in the mid-1980s. The sale of revenue-share certificates was popular as a mechanism for extending property ownership to middle- and lower-income groups. The extensive housing program and the development of infrastructure extended basic amenities to many parts of the country.

Although trade reform was surely a less important factor in appealing to the voters in 1983 than the memory of the successful reforms in 1980 and the position of ANAP as the sole alternative to the military-sponsored parties, there was no sense that trade liberalization had been implemented in the face of substantial opposition. This was because much of the