_Political_ **_Econony_** _of Policy Reform_ **_in_** _Turkey 39_ welfare loss from the trade regime by' the late 1980s. The majority of the welfare loss was probably a dynamic one, arising because uncertainty discouraged investment and therefore reduced productivity growth. There remains considerable variation in protection because of EBF levies, although their absolute level is not high, often varying down to zero. This variation seems to have become more discretionary and created many opportunities for rentseeking. The multiplicity of tariffs, levies, QRs and incentives make it hard to tell at any point in time how the relative prices of inputs and outputs for a sector compare to those in the world market. Quantitative studies of effective protection, such as Olgun and Togan (1989, cited in OECD 1990/91, pp. 86-89) are based on legal tariff rates, and they do not systematically take account of the effects of QRs and export incentives. The lack of transparency and frequent changes were confusing not only to bureaucrats and academics, but also to firms. They were not sure how the trade regulations affected the relative profitability of two activities, but were relatively sure that those regulations would change in a year or two.

The geometry of Turkey's trade reforms, shown in figure 2, sheds light on the political economy. The trade liberalization of the early 1980s had two politically favorable features. First, the degree of distortion was very large initially, so the triangles of efficiency gain were large relative to the rectangles of transfers. As Rodrik shows elegantly, this increases the likelihood of reform. Also, Turkey was a classic case of the trade reform being packaged with a stabilization and external financing package that provided large and quick gains, overshadowing the distributional issues in the early 1980s (Rodrik 1992). In the mid 1980s, the triangles of efficiency gains were smaller and the policy makers had to rely more on rising income through steady growth to distract people from the distributional issues. By the late 1980s, the tremendous expansion of trade made the rectangles of redistribution very long and thus large even for small changes of the tariff rate. Large reductions in tariffs were no longer possible and large increases were out of the question, but even small changes became big favors because of the high volume. Protection became politicized again, in the context of a basically open trade regime.

In 1986-88, import policy vacillated. The number of items subject to restrictive licensing was reduced in May 1986, but in July the advance deposits for imports were increased, although they had been virtually eliminated in 1884-85. The import surcharge earmarked for the Price Stability and Support Fund was increased in December 1986 and then again in October 1987. In January 1988 the number of items requiring import licenses, which had slipped back up to 111, was reduced to 33, and customs tariffs were lowered for 234 items, including basic industrial inputs. This brought all tariffs rates under 50 percent, although this was partially off-set by applying surcharges to more goods and raising the stamp duty on imports. In 1988 total import taxes were 13 percent of the total value of imports, and 37 percent of the value of dutiable imports. Customs duties per se were less than one third of the total (Bateman and Arslan 1989, table 9).