_44 Political Economy of Policy Reform in_ **_Turkey_** The government's influence over the real exchange rate also declined in the late 1980s as the relaxation of legal constraint on the labor movement led to increasing strike actvity and more generous wage settlements. Nevertheless, the share of labor costs in value added was still low in 1990-91 relative to the rest of Southern Europe, and relative to the 1970s (OECD 1990/91: 99; Ozmucur 1991). Wages had not yet had a major effect on the real exchange rate, but the direction of pressure was definitely upward.

Labor unions became increasingly active after 1987, following the relaxation of restrictions on strike activity and wage bargaining. The pattern of labor union activity in the late 1980s and the early 1990s, in some ways, resembles the pattern of the late 1970s. Unions conceived their role as a self-interested pluralistic pressure group, pushing for the highest wage increases possible. They did not develop a longer-term vision in which sustainable real wage increases would be limited to increases in productivity. A comparison of the two key wage rounds in 1989 and 1991 reveals the evolution of union attitudes. The wage round of 1989 was mainly defensive -- a long-overdue attempt to recover what workers had lost in real terms during the decade. The wage round of 1991 was offensive, however, aimed to secure the maximum real wage increase (interview Enver Tacoglu, member of Turk f§ governing board, November 1991). This is understandable, given that labor's trust was destroyed by a long period of exclusion and by the refusal of business and other key groups to make reciprocal concessions, such accepting adequate taxation.

Real wages rebounded strongly starting in 1989, and this accompanied a real revaluation in purchasing terms. (See Table 1) The major private sector firms could afford to give substantial wage increases, especially in the export sectors, because they had enjoyed high profits in the 1980s and had been able to make productivity-enhancing investments. In the public sector, however, wage increases proved much more burdensome. Most stateowned firms had not increased productivity in the 1980s as fast as the private sector, so the wage increases often exceeded their profit margins, necessitating of central government subsidies, price increases and reduced sales.

# _Fiscal and monetary policy_

Going into the 1987 election the govemment stimulated a boom with fiscal expansion, while repressing inflation with restrained devaluation and stagnant public sector prices falling in real terms. Immediately after the election they raised public sector prices, to stem the losses by public enterprises, and resumed devaluations at a pace to keep the real exchange rate competitive. The government realized that the measures would cause average prices to rise, but expected, or at least hoped, that it would be one-time blip in the inflation rate, and not persist. The rise of electricity prices and other inputs to industry pushed inflation up from under 40 to almost 80 percent, and it did not come down quickly. Voters who had elected ANAP for its record of economic management felt betrayed and turned against ANAP in the municipal elections of March 1989.