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WorldDevelopmentVol.31,No.12,pp.2061–2084,2003 (cid:1)2003ElsevierLtd.Allrightsreserved PrintedinGreatBritain www.elsevier.com/locate/worlddev 0305-750X/$-seefrontmatter doi:10.1016/j.worlddev.2003.04.006 Limits to Alternative Forms of Capitalization: The Case of Anatolian Holding Companies GUU€L BERNA OO€ZCAN University of London, Egham, UK and MURAT C(cid:1)OKGEZEN * Marmara University, Istanbul, Turkey Summary.—Sincethelate1960s,alternativeformsofcapitalizationhaveemergedintheabsence ofaneffectivecapitalmarketsregimeinTurkey.Wecanseethesealternativeformsinthefailed attempts to create Anatolian holding companiesthrough the direct investment of small savings. This article shows how Anatolian holding companies became victims of poor institutional and regulatoryregimes,andhowthelackofinstitutionstopromoteimpersonaltrustintheeconomyin turn,permittedwidespreadabuses.Weidentifypopulistpolitics,laxoversight,andsocialnorms that incorporated gambling as three interlinked reasons which hindered the genesis and developmentofviablecapitalmarketreformandregulatoryinstitutionsinTurkey. (cid:1) 2003ElsevierLtd.Allrightsreserved. Keywords—capitalformation,financialmarkets,stateregulation,Anatolianholdingcompanies, Islamicfinance,Turkey 1. INTRODUCTION and the lack of institutions to promote imper- sonal trust in the economy that in turn per- In the 1970–90s, large multiownership com- mitted widespread abuses. panies, commonly referred to as Anatolian Our work highlights the importance of insti- holding companies, 1 were formed through tutional and regulatory regimes for creating small family investments. These holding com- viable capital markets in order to achieve eco- panies constituted an idiosyncratic model of nomicgrowth.ThefailureofAnatolianholding capital formation. They were both a response to the lack of industrial capital and a by- product of the politically charged strategy to *TheauthorsaregratefultoRoyalHolloway,Univer- initiate development and industrialization in sity of London and Turkish Academy of Sciences the country. We argue that where the rules of (TUBA) for their financial and institutional support. advanced capital formation and managerial OurspecialthanksgotoU(cid:1)ggurBekem,SabriC(cid:1)armıklı, enterprise (Chandler, 1992) fail to apply, alter- Jonathan Liebenau, Adnan S(cid:1)ahin, and II_lhan Tekeli native structures can emerge. In Turkey, this whose support and enthusiasm have been immensely alternative model occurred through multi- valuableforthecompletionofthispaper.Wealsothank ownership companies whereby thousands of the anonymous referee, whose remarks have been very small investors put their savings in holding helpfulinpreparingthefinalversionofthepaper,and companies that promised good returns while many policy makers and managers who shared their assisting small and medium-sized firms. Our experienceswithusduringourfieldworkinAnkaraand findings indicate however, that Anatolian Konya. We are solely responsible from the opinions holding companies became victims of the ab- expressedinthispaper.Finalrevisionaccepted:16April sence of institutional and regulatory regimes 2003. 2061 2062 WORLDDEVELOPMENT companies along with the persistent capital mental question for both scholars and policy market failures in Turkey lead us to ask two makersistofindthewaystosecureandnurture fundamentalquestions:whydidnoinstitutions regulatory regimes in order to serve the long- and regulatory regimes evolve along with the term interests of wider societal elements in changingneedsoftheeconomy?andwhywere economic development rather than the specu- existing controls so often subject to circum- lativeshort-termgainsofnarrowgroupsand/or vention and abuse? The answers lie in the dy- managers. The findings of this paper hold im- namic interaction between the politics of plications for studies on firm finance for small institution building and behavioral and social and medium enterprises [SMEs] (Becchetti & norms. We identify three factors that under- Trovato, 2002; Winker, 1999), Islamic finance mined market trust and institution building and economics (Kuran, 1995, 1996, 2003; leading to chronic failures and abuses: policy Warde,2000)andingeneralontheimportance formation was trapped in populist–clientalist of the politics of institution building and im- cycles with a slippery political center; lax over- personal trust for economic development. 2 sight practices were encouraged by the single- The article is divided into six sections. Sec- leader tutelage in party politics; and the social tion2considerstheviabilityofcapitalmarkets norms that allowed investors to accept flimsy for countries such as Turkey through a brief assurances and fuzzy legality as part of their critique of theoretical literature. Section 3 gamblinghabit. presents an analysis of Turkey’s experiments The limited investigation into Anatolian with capital markets. This is followed by two holding companies so far has prevented policy case studies on the formation of Anatolian makers from understanding opportunities and holding companies. In Section 5, we illustrate challenges offered by alternativecapital forma- thereasonsforpoormanagerialandregulatory tions. Despite the deficiencies and the business discipline. In conclusion we recommend the failures of the past, we believe that the con- key policy changes needed in the light of our tinuing attractiveness of multiownership com- findings. paniesasaformofalternativecapitalformation and utilization of small family investments in local projects deserves serious attention. We 2. CREATING AND INSTITUTING also think that this model is likely to be tried CAPITAL MARKETS again in Turkey and perhaps elsewhere. Cor- rectingtheunderlyingflawsiscrucialtoprevent Capital formation is essential for industrial hundreds of corporate collapses and massive andeconomicgrowth.Conventionalmodelsof lossofsmallshareholders’investments. capital formation stem from the experiences of The case of Anatolian holding companies advanced countries and fall into two broad also has certain similarities with the new cor- categories. The first one is the bank-centered porate landscape created through privatization corporatist model, which is credited with the schemes in Russia and Eastern Europe where success of German and Japanese post-war in- privatized company assets have been trans- dustrial restructuring. They worked under ferredthroughoftennontransparentandillegal conditionsofenforcedpoliticalstabilityandthe means.Ourfindingssupportstudiesonmarket focused determination of a reforming elite. In reform and institution building in former this model, ownership and control are closely Communist regimes where weak regulatory tied within a framework of institutional guar- controls, widespread mistrust, and the abuses antees and obligations (Miyajima, 1995). The still prevail in these markets (Blasi et al., 1997; second is the Anglo-Saxon open market model Kogut & Spicer, 2002). ofcapitalformationthroughstockmarkets.In Our study highlights a fundamental issue in the bank centered system, the close links be- economic development and regulatory reform tweenthebankingsystemandthemarketallow for many developing and post-communist companies to finance themselves through bank economies,thatistheneedtounderstandbetter loans. In this system firms raise capital by the links between socio-political forces and issuingnewsharesandtheownershipofafirm behavioral norms embedded in economic life. is diffused. Accordingly, shareholder rights are In order to allow imaginative solutions to protected and the ownership and control of emerge in the wake of an endemic lack of firms are separated. The bank-centered regime capital for industrialization, developing econo- issupportedbyawebofinstitutionsinmutually mies should not look for miracles. The funda- binding relationships with little respect for ALTERNATIVEFORMSOFCAPITALIZATION 2063 shareholder value (Bergloo€f, 1990; Charkham, Both the P-A argument and institutional 1994; La Porta, Lopez-de Silanes, & Shleifer, economics fail, however, to explain why there 1999).Althoughmanyhybridformsareemerg- have been corporate failures and abuses that ing through the growing activities of multina- periodically invited further regulation even in tional companies and with the increased effect the most advanced capitalist economy, the of liberalization and de-regulation, these two United States, and others such as the United modelsneverthelesspresentcleardistinctionsin Kingdom. The classic theory of discipline im- the ways firms raise capital (Hodges & Wool- plemented by the capital market over business cock,1993). 3 performance is ineffectual when stock prices The separation of ownership and control in have been manipulated through diluted ac- the Anglo-Saxon corporate tradition gave rise counting principles in the recent corporate to a vast literature examining the challenges of scandals unleashed first by the collapse of separationandwaystocopewiththediverging Enron and WorldCom and followed by others interests of the parties involved. The most in- in the United States. This trend of malpractice fluential of them, principal-agent theory [P-A], defiestheoreticalassumptionsaboutthemarket points out that the conflicting interests of disciplining businesses and managers. 5 When owners (principals) andmanagers(agents)of a notonlymanagersbutthemuchwiderbusiness firmgenerateagencycostsandinefficientfirms. community act to defy and misinform each To overcome this conflict, the P-A perspective otherinordertospeculateoncompanyshares, stresses the importance of aligning managerial the impact of regulation and measures to min- and shareholder interests (Jensen & Meckling, imize agency costs become irrelevant. 1976; Short & Kevin, 1999). Agency costs are Moreover, the maximization of self-interest minimized when management and shareholder in a capitalist economy is justified and the de- interests are aligned through the ownership structionofbusinessesisalsoseenaspartofthe structure (Alexander & Cohen, 1999) and innovative and creative side of the market. monitoring rights are secured to dissuade Thus, corporate collapses and share value ma- managers from pursuing their own interests at nipulationappearnotjustasan‘‘abuse’’butas theexpenseoftheowners(Alchian&Demsetz, anoutcomeofthe‘‘bullish’’behaviorofmarket 1972). To cope with agency costs, either man- capitalism. This fine line between regulation agers’interestsarebroughtclosertotheowners’ and entrepreneurial opportunism is best de- by tying managers’ compensation to the per- fended by Cressey (1980, p. 126): ‘‘Weak ac- formance of the firm, or the market must effi- counting controls are essential to modern ciently discipline managers’ opportunistic or business, just as weak police controls are es- disapprovedbehaviors. sential to modern democracy.’’ In the boom Institutional economists, on the other hand, and bust cycles of economic and technological emphasize the importance a regulatory frame- change,theissueofmanagerialabusealsoturns work, capable institutions and law as essen- intopartofanentrepreneurialdrivewhichfuels tial components of economic performance and marketgrowth. 6Therearearguablytwobene- corporategovernance(Lal,1998,2000).Alegal fitsofthesebusinesscycles:First,widersocietal system that guarantees monitoring rights, es- groups increase their earning during the tech- pecially the rights of small shareholders, and nological boom through employee shares and the market institutions that allow shareholders other schemes (Blasi et al., 2002). Second, the to monitor and react to the managerial team boom cycle nurtures technological innovation areprerequisitesforawell-functioning,market- andtriggersfurthercyclesofgrowthinthelong oriented system (Cheffins, 2000). Similarly, the term. self-regulatory regimes and code of practices EmergingmarketeconomiessuchasTurkey, put forward by the business community and however, suffer persistent abuse by managers, interest groups including government agencies, politicians and institutions (Blasi & Shliefer, shareholder associations and stock market in- 1996;Fenkner&Krasnitskaya,1999;Frydman stitutions play a crucial role in safeguarding et al., 1996; Kogut & Spicer, 2002). Neverthe- business practices. At the policy level, the im- less, there are important distinctions between portanceoftheregulatoryframeworkhasbeen capital market failures in advanced econo- recognized by national and supranational in- mies and the failures of developing countries stitutions in a rapidly changing and global to establish capital markets. While there are economy(Iskander&Chamlou,2000;Lannoo, larger and wider distributive effects and long- 1998, 1999). 4 term technological spillovers of capital market 2064 WORLDDEVELOPMENT manipulations in the former, the latter tend to ductive businesses (Alper & OO€ni(cid:1)s, 2001; Bora- depend on a narrow business base with no tav et al., 1996; Cizre-Sakallıo(cid:2)gglu & Yeldan, technological depth, leading to detrimental ef- 2000). Many experiments with capital markets fects for the economy and society. Thus, in also led to the chronic abuse of investors by developing economies, the adjustment to the governments, banks and businesses. boom and bust cycles of financial market ma- Thelongstandingpractice,datingbacktothe nipulationandfinancialliberalizationoftenhas late Ottoman period, was for businesses to use long-term destabilizing effects with widespread the informal money lending market [tefecilik]. painful outcomes (Alper & OO€ni(cid:1)s, 2001; Cizre- Speculation and unfair practices leading to Sakallıo(cid:2)gglu & Yeldan, 2000). confiscation of businesses and properties by We hold the premise that the politics of in- loan sharks continued despitebanking reforms stitution building and social and behavioral in the early 1920s (Guu€nluu€k, 1983). The banks normsdetermineeconomiclifeandthattrustin generally offered credits only to successful regulatoryregimescanbestbeunderstoodasa businesses or to new ones with good political product of the interaction of the state and so- connections. This bank-centered form of cor- ciety. Trust in economic life, Granovetter porate governance (see Table 1) 7 has long (1985) points out, is a product of social rela- functioned through cosy relations between tions and the obligations inherent in them, major business groups, industrialists and poli- rather than some generalized morality or in- ticians, as happens in other similar economies stitutional arrangements. Similarly, politics in- (Bu(cid:1)ggra,1994;Maxfield&Schneider,1997).This fluences the functioning of the market and exacerbated the gap between undercapitalized regulatory structures in a dynamic interaction small and medium-sized businesses and large with social norms. When individuals do not familyholdings.Manysmallandmedium-sized trust the state and its institutions, mere regu- enterprises (SMEs) were forced to raise their lation is insufficient to guarantee impersonal equity through these informal and segmented trust.Hence,whenthestatelosesitspowerand/ capital markets embedded in local and family or impartiality in law enforcement, the narrow networks(OO€zcan,1995a,1995b). groupinterestsofpoliticalclientstakeoverthe control of economic management, further un- (a) Bond market failures prior to 1980 dermining impersonal institutions and regula- tion. While accepting the flaws and paradoxes During the years of expanding import-sub- of trusting relationships and the persistent stitution policies, the government-financed in- threat of abuse, we agree with Shapiro (1987) dustrializationthroughthesinglemechanismof that impersonal trust permits more complex bank-centeredindustrialgrowth.Starting from developments in economic life by allowing in- the 1960s onward, Turkish governments re- dividualandorganizationalactorstoengagein complex relations on behalf of principles. The first wave of Anatolian holding compa- Table 1. Theroleofbankingfinanceinselectedcountries inthemid1980s nies illustrates how impersonal trust was neg- lectedbyregulatorsandthesecondshowshow Debtnequitya Bankloansntotal societal obligations and the moral grounds of liabilities Islam failed to guarantee the survival of these Germany 0.59 n.a. companies in the absence of credible institu- France 0.73 0.25 tions and regulation. Japan 0.77 0.39 Sweden 0.65 0.24 UnitedKingdom 0.55 0.1 3. TURKEY’S DISASTROUS USA 0.41 0.09 EXPERIMENTS WITH CAPITAL Turkey 0.62 0.51 MARKETS Source: For the figuresabout Turkey see Yener (1990) and Ersel and Sak (1986). For other countries see The Turkish experience with capital markets Bergloo€f(1990). hasbeendrivenbytheshort-termpoliticaland aThe ratios are for the year of 1983 for the countries financial objectives of governments, mainly to otherthanTurkey.ForTurkey,theaverageof1984–89 fund populist policies. The result of redistri- was taken as the base. Bank loans include short and bution and public sector spending has been to long-termloansandthedebtequityratioreferstoshort channel funds to rentiers rather than to pro- andlong-termliabilities/totalassets. ALTERNATIVEFORMSOFCAPITALIZATION 2065 sponded to the growing need for financial capital through bonds. In the absence of any capital, first with a set of measures to attract capital market regulation or stock exchange, foreignreservesandlaterwiththeintroduction businessessoughttotradetheirbondsinreturn of government and private bond markets. for cash. With the increased economic insta- Thus, transferable foreign currencyaccounts, 8 bility and high inflation during the first and were first introduced in 1967 to overcome the secondoilcrisesofthe1970s,thebank-centered shortage of foreign reserves and to fill the in- corporate regime collapsed. Many companies creasinggapinthebalanceofpayments.Under in need of cash consequently boosted the in- this system, the government offered higher in- formal money market and its loan sharks terest ratesthanEuropeanbankswith variable (Guu€nluu€k, 1983). Until the final collapse of the options for investors. But, the fast growth of economy at the hands of an International short-term interest had an inflationary effect Monetary Fund (IMF) program in 1978, the thatquicklybecameunsustainable.In1973,the balance of payments continued to deteriorate government announced the end of transferable whiletheexternaltradedeficitgrewsharplyand foreigncurrencyaccounts,butthisschemewas industrial stocks soared. re-introduced during 1975–79. During the first Thus,uptothe1980stheinformalbondtrade period of implementation, these accounts servedtheshort-termneedsofthegovernments, reached US $462 million, 70% of which was businessesandbondtradersalike.Thegovern- held by Turkish workers abroad. This was a mentsweremainlyconcernedwithbudgetdefi- significant capital injection into Turkish bank- citsandcurrentaccountbalancesattheexpense ing (Uysal, 1996). The Anatolian holding of the goals of long-term industrialization and companieswerefirstpromotedduringtheyears development due to strong populist policies of rising domestic savings when the savings (Cizre-Sakallıo(cid:2)gglu & Yeldan, 2000). The hold- accounts of Turkish workers became unsus- ing companies wanted to obtain capital for tainable due to short-term financial pressures. businessgrowthwithnofinancialandcorporate Along with industrial growth in the 1960s, accountability and the bond traders and inves- theamalgamationofsmallcompaniesledtothe tors were mainly interested in the short-term emergence of holding companies. At the same benefits of the bond trade. Thus, the semi-ille- time a new market for bonds and promissory galityofthebondmarketservedtheinterestsof notes emerged. This capital was used both by allwithoutanycollectivepressuretointroducea governments to finance investments and by moresophisticatedandinstitutionalizedcapital businessestogenerategrowth.Intheabsenceof market with regulations and punitive measures anymarketsforissuedpapersandshares,there forabusers.Shortlyaftertheeconomiccollapse appeared a thriving informal bond market. In of the late 1970s, this short-term opportunism 1961, the government re-structured the rules contributed to a massive disaster in capital governing savings bonds. The idea was to marketsandtheresultingsocialtrauma. provide capital for state spending in agricul- ture, industry and transportation through (b) Military coup and economic liberalization compulsorysavingsschemes.Thesebondswere in 1980 largelydistributedtowage-earningfamiliesand government employees as part of tax schemes. In 1980, soon after the post-coup market Seeing an opportunity for easy profits, small liberalization reforms, another frenzy occurred bond traders graduallyacquired manyof these intheformoflavishbondtrading.AsTurkey’s government bonds from families in need of pace of industrialization increased in line with ready cash until a further regulation in 1969 globaltrendsandliberaleconomicpolicies,the introduced limits on the trade. In 1972, these lackofcapitalmarketsbecameevenmoreacute. savings bonds were abolished, leading to the The governments issued promissory notes and elimination of the bond traders. other revenue-generating bonds in order to fi- Yet, informal bond trading and money nance growing government spending. 9 There lending continued to survive. A 1957 law reg- appeared a new function for informal money ulated private bonds and shares issued by the landingbankerstofillthevacuum.Theinformal holding companies and limited liability com- money-lending business which survived along- panies. This law also limited rates of return side bank-centered corporate finance for many issued through these bonds. Thus, tampering decades was elevated to a respectable business withtheflexibilityofbondreturnssignificantly status with political endorsements in the early narrowed the scope for generating financial 1980s.Hundredsofprivatebanksmushroomed 2066 WORLDDEVELOPMENT during 1980–81 (Berker et al., 1989; Din(cid:1)cel, governmentputlimitsonthefreemarketbond 1998;Guu€nluu€k,1983;Yıldırım,1998). trade and banned advertisements by market InJanuary1980 abankingregulationdecree bankers with a series of new decrees in Sep- removed state control over interest rates. In temberandOctober1981.Thisshranktheflow ordertoattractinformalandblackmoneyinto of cash and many bankers ran into difficulties the formal economy the decree also declared in paying back the interest. In panic, investors that banks could sell nonidentified short-term rushed to bankers demanding their deposits account bonds. But the major banks would back.ByDecember1981over250listedbankers only give credit to the most successful busi- went bankrupt and the total number of bank- nesses and the banks of family holding com- ruptinstitutionsmayhavenumberedmorethan paniesextendedcreditmainlytotheiraffiliated 1,000 (Din(cid:1)cel, 1998; Yıldırım, 1998).When the companies. While the bond and other paper banker scandal ended in collapse, the high trade grew rapidly with increased market ex- moral and financial costs included loss of sav- pectations of economic recovery, many busi- ings, collapsed businesses, runaway bankers nesses ended up borrowing from the market andfamilytragedies. 11Thegovernmentfinally bankersusingtheirbonds,promissorynotesor intervenedandforcedthebankruptciesofmany checks as equity. majorbankersandbondtradingagencies. High interest rates triggered a spree of in- Thiswasfollowedbytheresignationofthree vestments in banks and other money lending responsible ministers. The Economy Minister, businesses.Wageearnersinvestedtheirsavings, Mr. Kaya Erdem, shrugged off his responsi- pensioners their retirement bonuses, and many bilities with these words: ‘‘Our people have families even ended upselling their houses and gambled’’(Guu€nluu€k,2000).TheCapitalMarket other properties with the expectation of high Law was introduced and was soon followed returns. Encouraged by this craze, well-estab- by the establishment of the Istanbul Stock Ex- lished banks set up their own bond trading in- change in December 1985. These institutions stitutions with high interest rate accounts. didnothoweversignificantlyaltertheillsofthe Manyholdingcompaniesalsoestablishedtheir financial regime. own bond trading agencies. The only legal re- The bank-centered financial regime faced a quirement to be a market banker was to apply new wave of abuse at the hands of holding to the relevant town’s governorate with a peti- companiesandtheirpoliticalalliesthroughthe tion, and after several bureaucratic steps, any- 1990s. The deep economic crises in the late one could get permission. Small market 1990s forced the government to respond with bankers,however,tookhigherriskswithmuch new regulatory reforms under the IMF pro- higher interest rates, up to 140%, and traded gram. But despite the institutional and regula- their own promissory notes and personal toryamendmentstocreatecapitalmarkets,the checks in addition to company bonds. Some Istanbul Stock Exchange succeeded neither to bankers also played an intermediary role be- attractsignificantsavingsfrominvestors,norto tween large bond-trading banks and investors becomeasourceofraisingequityforAnatolian with tremendous success. 10 industrialists. As shown by Yurto(cid:1)gglu (2000), While holding companies went to well-estab- onlyasmallnumberofcompaniesaretradedin lished banks or used their own bond-trading the stock exchange and the total market capi- institutions, many small and medium-sized talizationisaround12%ofGDP.Inthishighly businesses in financial difficulty preferred bor- concentrated and centralized ownership struc- rowing from market bankers since their low ture,family-controlledholdingsowndirectlyor credibility and lack of political links barred indirectlymorethan75%ofallcompanyshares them from getting loans from the established and exercise majority control. Thus, an active banks. With the economy and businesses in market for corporate control or monitoring need of capital, the government remained si- sharesdoesnotexistgiventhelimitedopenness lent; and did not attempt to regulate the mar- and concentrated ownership of traded compa- ket.During1980–81,thetotalamountcollected nies. Consequently, takeovers and hostile bids bymarketbankerswasestimatedtobearound arenotpossiblethroughstockmarketdealings US $3.2 billion, one-quarter of total bank de- but rather companies change hands through posits. The formal banking sector lost massive politically linked financial and banking deals, revenues to informal bankers. manyofthemscandalous.Inthissystem,small By September 1981 the losses to the formal shareholdersarebeingpersistentlyabusedorat banking sector became unsustainable, and the best ignored. Public companies of family ALTERNATIVEFORMSOFCAPITALIZATION 2067 holdings traded on the stock market are being and Bursa. State-run enterprises and large used as yet another way to transfer funds into family holding companies controlled the ma- the holding system. jority of industrial establishments in the coun- Ordinary investors have prudently shied try. The price of many goods was subject to away from stock market dealings and often state or local authority approval. There was preferred foreign currency or real-estate in- almost no foreign direct investment and the vestments. This further limited the securities foreign exchange reserves were fragile and trade and took funds away from businesses. small. National per capita income was around Studies on household savings and investments US $700. The severe shortage of industrial quantify this trend and show that on average capital and the lack of industrial diversity and families retain their wealth in the form of real- diffusion in the country were recognized as the estate (85%) bank accounts (11%), and while main barriers to business development and securitiesaccountforonly2.3%(Eser,1999).A growth.Politicalactors,localcommunities,and recent study by the State Planning Organiza- individualswereacutelyawareofthisproblem. tion also highlights the remarkable growth of The idea of using small family savings and theshadoweconomyinTurkeythroughoutthe expatriate workers’ remittances for business 1990s. 12 establishments and industrial diffusion first These catastrophic experiments indicate that emerged in the early 1970s under the slogan of a pattern of abuse of investors occurred in an the ‘‘people’s sector’’ of the Republican Peo- environment where abusers have not been ples’ Party (CHP) (Goo€knel, 1981; Soral & punished and where honesty and dishonesty Tekeli, 1976). have been blurred in the eyes of the public. The people’s sector initiative was primarily Enforcement actions have also become a hos- an economic mechanism to generate finance tage of these relationships where legality and capital. At the same time, it was a means to illegalityhavehadparadoxicalinterdependency diffuse social market capitalism and material further eroding the state’s credibility. Thus, all prosperity through the widespread ownership parties hoped to maximize their returns by and participation of ‘‘the people.’’ This initia- benefiting from the gaps in the legal and insti- tive ambitiously aimed to achieve four major tutionalframeworkandthegenerallyweakrule goals: to support a successful form of demo- of law. cratic left politics, to initiate economic devel- opment through diffused and decentralized modes of production, to enhance popular par- 4.THERISEANDFALLOFANATOLIAN ticipation in the economy, and to create a new HOLDING COMPANIES form of public–private cohabitation and part- nership. These ideas were political but largely Against the background of persistent capital engineered by technocrats and a handful of market failures which undermined small inves- academics in the powerful State Planning Or- tors and entrepreneurial businesses alike, the ganization. The ideological justification was formation of Anatolian holding companies related to the Cold War realities of a NATO appeared to be a credible response by offering member country as well as the moderate so- direct investment opportunities in productive cialist teachings of the Republican Peoples’ activities. The belief in this form of alternative Partywhichwas inspiredbythesuccess stories capital formation was promoted through vari- of Yugoslav economic reforms (Ak Guu€nlere, ous agents of change such as academics, tech- 1975; Soral & Tekeli, 1976). nocrats, and politicians. But above all, the The political and agency actors of the pio- political ideologies of social democracy in the neering Anatolian holding companies wanted 1970s,andlaterpoliticalIslaminthe1980s,led tobenefitfromtherobustandgrowingratesof thewayaspromotersofeconomicdevelopment Turkish workers’ savings in Germany to over- with more social equality. come severe shortages of financial capital and hard currency (Van Renselaar & Van Velzen, (a) Pioneers: Anatolian holding companies 1975). 13TurkishmigrationtoWesternEurope and socialist ideals in the 1970s startedinthelate1950sandgrewveryquickly. From the early decades of this migration until In the 1970s, Turkey had a closed economy the first and second oil shocks of the 1970s, withlittleindustrialdiffusionbeyondahandful after which European countries closed their ofmetropolitan centerssuchasIstanbul,Izmir doors to emigrant workers, savings sent to 2068 WORLDDEVELOPMENT Turkey provided the main source of foreign worker’s companies had 60,000 investors with exchange. Thus, migrants’ remittances quickly total capital of TL500 million, around 36 mil- becameadominantsourceofforeignexchange lionUSdollarsin1975prices(VanRenselaar& and consequently the major source to balance Van Velzen, 1975, p. 131). 15 the trade deficit of the country. This was quite ThemajorityofAnatolianholdingcompanies similar to the experience of emigrants from (72%) were set up in priority development other southern European countries at the time regions identified by the State Planning Orga- such as Greece, Spain and Italy (King, 1984). nization and almost all of them (90%) were es- Savings of Turkish workers rapidly increased tablished away from major commercial and from a mere US $107.3 million in 1968 to US industrial towns. The inner Anatolian region $1,426.2 million in 1974 accounting for 40% witnessedthemostrapidcreationofAnatolian and63.5%offoreignpaymentsrespectively(see holding companies and attracted most invest- Table2).TheTurkishgovernmentfirsttriedto ment while the poorest towns in the east and channelthesesavingstovillagecooperativesin southeast had no investments. The investment the mid-1960s and later, encouraged by the incentives operated by the government played spontaneous workers’ investment companies a strong role in locational choices. In terms of established in Germany, attention turned to thesectoralcomposition, therewasanobvious ‘‘workers’ companies.’’ emphasis on industrialization as most of the The number of ‘‘workers’ companies’’ investments were in the traditional manufac- reached 322 by the-mid 1970s. As Van Ren- turing sector: investments concentrated on selaar and Van Velzen (1975) point out, the foodstuffs and beverages (23.4%), weaving and existing family-run companies failed to raise clothing(18.7%),constructionmaterial(14.1%), capitalthroughworkers’savingsduetothelack and animal feed (12.5%). An analysis of the of any stock market or experience with finan- shareholder composition indicated that the cial transactions. 14 The social networks of majority of these companies (87.5%) had more workers, their local origins, and family ties than 100 shareholders and a significant pro- played a role in the locational choices of in- portion (12.5%) had more than 2500 share- vestments. The workers took pride in the de- holders(Ertunaetal.,1975). velopment of and the contribution they made Weak institutional guarantees inhibited the to their towns (Ertuna et al., 1975). Yet, many survival and growth of Anatolian holding companies were launched and funds collected companies.Onlyahandfulofnewinstitutional without any investment feasibility analysis. players were created (see Table 4). Already Poorly educated and low skilled workers were existinginstitutions,suchastheStatePlanning unable to appreciate the importance of finan- Organization, jealously presided over the pro- cial and technical project planning and the in- cess. There was however a serious effort to stitutionalsettingforshareownership.Astudy create financial institutions to secure invest- conducted in 1973 covering 88 worker’s com- mentssuchastheCo-operativeBank,theState panies indicated that only 10 of them had in- Industry and Worker’s Bank [Devlet Sanayi ve vestment projects and they were able to gather II_(cid:1)s(cid:1)ci Yatırım Bankası], Social Security Funds, 19,439shareholderswithanaverageinvestment and the People’s Investment and Partnership of TL5, 250 (US $380) per share. These com- Limited [Halk Yatırım Holding Anonim Or- panies had altogether TL102, 2 million capital taklıgg(cid:1)ı]. Despite the efforts at institution build- (US$7.51million)ininvestmentsandbenefited ing, the initial euphoria was quickly replaced from TL33, 375,000 (US $2,490,000) in invest- with institutional conservatism as the State ment credits (Van Renselaar & Van Velzen, Planning Organization wanted to preside over 1975, pp. 124–125). By 1975, a selection of 77 theentireprocessthroughitsincentiveschemes. Table 2. MoneytransferredtoTurkeybyTurkishworkersabroadbetween1965and1974(in1,000USdollars) 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 Total 69,777 115,333 93,030 107,318 140,612 273,120 471,362 740,155 1,182.352 1,426.211 transfer Average 438 598 543 525 486 617 897.1 1,209 1,638 1,762 perworker Source:VanRenselaarandVanVelzen(1975,p.108). ALTERNATIVEFORMSOFCAPITALIZATION 2069 Again, the government failed to build an effi- tated abuses. Due to reduced visibility, share- cient institutional and regulatory structure to holders gradually lost their interest and failed governthenewformoffinancecapitalandthe to participate in a long-term engagement with corporate entities created. The result was a thecompaniestheyinvestedin.Theabsenceof dramatic failure rate among newly established bodies informing investors about the perfor- businesses. Most of the failed companies were mance of the firms and mechanisms to control bought by the state. Surviving ones lost their the managerial team (hire or fire them) further multiownership character. This experience not exacerbated the extent of abuses and the con- only damaged the local economies and the centration of shares in the hands of a few in- shareholdersbutalsocreatedpublicmistrustof dividuals, especially managers. 17 All of these similar initiatives. This meant small family factorsbutinparticularthedeficientregulatory savings either remained dormant or were regime contributed to the collapse of these channelled into speculative investments rather businessventuresbythelate1970s,evenbefore than to productive activities for industrial the 1980 military coup. growth. The outcome of this failure was also Thus, another form of investment for work- visible in the increasing property investments ers and a less inflationary form of hard cur- by Turkish emigrants in urban areas and holi- rency supply for the government was provided day resorts (Kele(cid:1)s, 1985). byworkers’companies.Butthemotivesofboth Early studies on Anatolian holding compa- investors and the policy makers diverged when niesstresstheinterruptionofpermanentcapital the early trust could not be maintained under inflow and managerial problems as the main the short-term pressures of seeing a concrete sources of the failures of workers’ companies return. Investors, although ambitious and en- (Balcı,1996;Ertunaetal.,1975;S(cid:1)enguu€n,1977; thusiasticaboutgeneratingjobsandbusinesses Yılmaz,1993). 16Manybusinessesfacedsevere in their homeland, did not fully trust the state, liquidity problems during their intermediate the managers or the social democratic princi- investment stage. Some also suffered from ex- plesofworkers’companies,andinvestedonlya port and import limitations. Financial prob- small proportion of their savings. lems originated from several sources. First, investors (typically workers) were not familiar (b) The second wave: Anatolian holding with investing in shares. Therefore they were companies and Islam’s conversion to capitalism shy to invest in such unknown assets. Second, frequentbusinessfailuresandhighexpectations After the dramatic collapse of the socialist discouraged them to invest in new ventures. ideals of the ‘‘people’s sector,’’ the second re- Third, since investments concentrated in areas vivalofAnatolianholdingcompaniescameasa where returns can be obtained in the long run, ‘‘newmodel’’andaspartof‘‘thejustorder’’of such as manufacturing industry, investments political Islam in Turkey. Despite remarkable yielded nothing for years. For this reason, similarities in form, it took place under condi- company shares were less attractive than al- tionsverydifferentfromthe1970s.Turkeyhad ternative investments such as real estate or itsthirdmilitaryinterventionin1980.Although gold. In addition; whereas it was difficult to sixyearsofstreetfightingandbloodshedended cash-in the company shares because of the with the coup, the new political regime, on the nonexistenceofastockmarket,thealternatives one hand, widened business opportunities and were easily traded. liberalism, but on the other hand, it narrowed Business problems stemmed both from thescopeofdemocracyinthecountry. Turkey managerial inability and abuses. Studies inves- enteredthe1990swithanopenliberaleconomy tigating the reasons for failure as well as our with export-led growth. The per capita income interviews indicate many poor decisions taken rose to US $5,000 as measured in purchasing either at the establishment and/or early opera- power parity. tionstages.Onceagainthetechnocraticnature Market deregulation opened many new of the initiative was apparent. Ertuna et al. business opportunities and Turkey witnessed a (1975) found that 23% of the people who took rapid rise in new business ventures and entre- investment decisions and 36% of board of di- preneurial activities. The growth of small and rector members had been civil servants. Man- medium-sized enterprises in many nonmetro- agerial fraud was another major source of politan towns and capital accumulation in problems. The distance between the managers the hands of people who had strong rural and shareholders who lived in Europe facili- traditional ties created a new generation of 2070 WORLDDEVELOPMENT capitalists (C(cid:1)okgezen, 2000; OO€zcan, 1995b). from mainly oil-rich countries to Islamic re- These capitalists developed a strong antipathy gimes such as Pakistan and later to secular re- toward the family cartels that controlled the gimes such as Turkey (Warde, 2000). But, country’s economy as well as the inefficient Islamic economics is a rather new scholarly state enterprises. This antagonism crystallized concern initially developed by Indian Muslim around a notion of hard-working, genuine thinkers during the years of India’s partition Anatolian people with Islamic traditions, as andthemostvisibleelementofthisconcernhas opposedtothecosmopolitananddisingenuous been Islamic banking. 20 Istanbul capitalists (C(cid:1)okgezen, 2000; Tugal, Euphoria around Islamic economics found 2002). These small-scale entrepreneurs in con- new strength in the Welfare Party and its affi- servativeAnatoliantownslaterplayedacrucial liated community and business organizations role in reforming Islamic politics and in build- that pioneered Anatolian holding companies ing the second wave of Anatolian holding amongTurkishworkersinGermany.Manybut companies (OO€zcan, 2000). not all Anatolian holding companies followed The new entrepreneurs desperately needed the Islamic finance principle of profit and loss more financial capital. Small investors and sharing or partnership finance through selling families, too, hoped to make long-term, in- issued bonds of companies and investors to come-generating investments in the growing individuals, families and businesses. Inits pure economy. Most of these small investors tradi- form, this was a micro capital formation tionally channelled money into the property throughthousandsofbondsandinvestors.The marketandlandspeculation.Butthisbeganto early attempts led by investors and managers change as the rhetoric of political Islam found and their agents proved to be enormously suc- popularsupportinTurkeyandamongTurkish cessful. These Anatolian holding companies workers abroad. Following the 1980 coup, quickly became romanticized and heroic sym- Islam became a favorable ideology against bols of ‘‘new industrialization and just order’’ communism and therefore was modestly pro- associated with Islamic populism. 21 moted by the army and Turkey’s major allies. This branding of moral salvation with ma- The number of Islamic groups, organizations terial benefits points out the core sentiment andpublicationsincreasedrapidlyinthe1980s. which made the so called Islamic economic TheincreasedpresenceofIslaminpoliticaland order attractive to ordinary investors. While social life was accompanied by an intensified Islamic rhetoric condemned the individualistic debate on development and modernization societies of the West for being immoral, indi- within Islam. vidualinterests,nevertheless,providedthecore Industrialization and business ventures be- motivation for investing in Anatolian holding came thesymbolsofIslamic modernization, an companies. This paradox is addressed by intellectual development which was led by A(cid:1)cıkel (1996) as the desire of repressed and Islamicscholarsandagroupofeducateddevo- marginalizedmassestoseekpowerwhileTugal teesfromthe1960s.ThisconversionofIslamto (2002) identifies Islamic populism with un- capitalism should be seen as part of deeper fulfilled aspirations and desires to change the changesinthepoliticalandideologicalsceneas hegemony. C(cid:1)akır (1995) among others (for ex- Turkey adjustedtotheturbulence andinequal- ample Goo€le, 1999) sees the rise of Islam as a ities created by late modernization and liberal movement against and in response to moder- capitalist development. 18 Already by the late nity. The Islamist party of the early 1990s, the 1980s, but especially during the 1990s, a new Welfare Party, used the shortcomings of secu- form of multiownership company emerged un- larism as part of its propaganda to show its der thebannerofIslamic economicrevivaland unique position in defending Islam and tradi- just order. This synthesis of industrialization, tionsaswellasjustsociety.Paradoxically,both development and Islam took decades to find a sterile secularism and political Islam have long receptiveaudiencebeyonditscoreengineersand survived side by side despite periodic clashes thinkerswithinpartypolitics. 19 in Turkey. Indeed, as Shankland (1999) illus- The enthusiasm with Islamic development trates, Islam and Islamic politics were rather andIslamicfinanceamongTurksalsofollowed well accommodated within the secular state a worldwide trend of the increasing popularity establishment. A(cid:1)cıkel (1996) goes further to of Islamic banking in Saudi Arabia around suggest that the Turkish–Islamic synthesis has 1970. The function of Islamic banking as a been the semi-official ideology of the Republic pious form of lending gradually spread out from the 1950s onward.

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WorldDevelopmentVol.31,No.12,pp.2061–2084,2003 (cid:1)2003ElsevierLtd.Allrightsreserved PrintedinGreatBritain www.elsevier.com/locate/worlddev 0305-750X/$-seefrontmatter doi:10.1016/j.worlddev.2003.04.006 Limits to Alternative Forms of Capitalization: The Case of Anatolian Holding Companies GUU€L BERNA OO€ZCAN University of London, Egham, UK and MURAT C(cid:1)OKGEZEN * Marmara University, Istanbul, Turkey Summary.—Sincethelate1960s,alternativeformsofcapitalizationhaveemergedintheabsence ofaneffectivecapitalmarketsregimeinTurkey.Wecanseethesealternativeformsinthefailed attempts to create Anatolian holding companiesthrough the direct investment of small savings. This article shows how Anatolian holding companies became victims of poor institutional and regulatoryregimes,andhowthelackofinstitutionstopromoteimpersonaltrustintheeconomyin turn,permittedwidespreadabuses.Weidentifypopulistpolitics,laxoversight,andsocialnorms that incorporated gambling as three interlinked reasons which hindered the genesis and developmentofviablecapitalmarketreformandregulatoryinstitutionsinTurkey. (cid:1) 2003ElsevierLtd.Allrightsreserved. Keywords—capitalformation,financialmarkets,stateregulation,Anatolianholdingcompanies, Islamicfinance,Turkey 1. INTRODUCTION and the lack of institutions to promote imper- sonal trust in the economy that in turn per- In the 1970–90s, large multiownership com- mitted widespread abuses. panies, commonly referred to as Anatolian Our work highlights the importance of insti- holding companies, 1 were formed through tutional and regulatory regimes for creating small family investments. These holding com- viable capital markets in order to achieve eco- panies constituted an idiosyncratic model of nomicgrowth.ThefailureofAnatolianholding capital formation. They were both a response to the lack of industrial capital and a by- product of the politically charged strategy to *TheauthorsaregratefultoRoyalHolloway,Univer- initiate development and industrialization in sity of London and Turkish Academy of Sciences the country. We argue that where the rules of (TUBA) for their financial and institutional support. advanced capital formation and managerial OurspecialthanksgotoU(cid:1)ggurBekem,SabriC(cid:1)armıklı, enterprise (Chandler, 1992) fail to apply, alter- Jonathan Liebenau, Adnan S(cid:1)ahin, and II_lhan Tekeli native structures can emerge. In Turkey, this whose support and enthusiasm have been immensely alternative model occurred through multi- valuableforthecompletionofthispaper.Wealsothank ownership companies whereby thousands of the anonymous referee, whose remarks have been very small investors put their savings in holding helpfulinpreparingthefinalversionofthepaper,and companies that promised good returns while many policy makers and managers who shared their assisting small and medium-sized firms. Our experienceswithusduringourfieldworkinAnkaraand findings indicate however, that Anatolian Konya. We are solely responsible from the opinions holding companies became victims of the ab- expressedinthispaper.Finalrevisionaccepted:16April sence of institutional and regulatory regimes 2003. 2061 2062 WORLDDEVELOPMENT companies along with the persistent capital mental question for both scholars and policy market failures in Turkey lead us to ask two makersistofindthewaystosecureandnurture fundamentalquestions:whydidnoinstitutions regulatory regimes in order to serve the long- and regulatory regimes evolve along with the term interests of wider societal elements in changingneedsoftheeconomy?andwhywere economic development rather than the specu- existing controls so often subject to circum- lativeshort-termgainsofnarrowgroupsand/or vention and abuse? The answers lie in the dy- managers. The findings of this paper hold im- namic interaction between the politics of plications for studies on firm finance for small institution building and behavioral and social and medium enterprises [SMEs] (Becchetti & norms. We identify three factors that under- Trovato, 2002; Winker, 1999), Islamic finance mined market trust and institution building and economics (Kuran, 1995, 1996, 2003; leading to chronic failures and abuses: policy Warde,2000)andingeneralontheimportance formation was trapped in populist–clientalist of the politics of institution building and im- cycles with a slippery political center; lax over- personal trust for economic development. 2 sight practices were encouraged by the single- The article is divided into six sections. Sec- leader tutelage in party politics; and the social tion2considerstheviabilityofcapitalmarkets norms that allowed investors to accept flimsy for countries such as Turkey through a brief assurances and fuzzy legality as part of their critique of theoretical literature. Section 3 gamblinghabit. presents an analysis of Turkey’s experiments The limited investigation into Anatolian with capital markets. This is followed by two holding companies so far has prevented policy case studies on the formation of Anatolian makers from understanding opportunities and holding companies. In Section 5, we illustrate challenges offered by alternativecapital forma- thereasonsforpoormanagerialandregulatory tions. Despite the deficiencies and the business discipline. In conclusion we recommend the failures of the past, we believe that the con- key policy changes needed in the light of our tinuing attractiveness of multiownership com- findings. paniesasaformofalternativecapitalformation and utilization of small family investments in local projects deserves serious attention. We 2. CREATING AND INSTITUTING also think that this model is likely to be tried CAPITAL MARKETS again in Turkey and perhaps elsewhere. Cor- rectingtheunderlyingflawsiscrucialtoprevent Capital formation is essential for industrial hundreds of corporate collapses and massive andeconomicgrowth.Conventionalmodelsof lossofsmallshareholders’investments. capital formation stem from the experiences of The case of Anatolian holding companies advanced countries and fall into two broad also has certain similarities with the new cor- categories. The first one is the bank-centered porate landscape created through privatization corporatist model, which is credited with the schemes in Russia and Eastern Europe where success of German and Japanese post-war in- privatized company assets have been trans- dustrial restructuring. They worked under ferredthroughoftennontransparentandillegal conditionsofenforcedpoliticalstabilityandthe means.Ourfindingssupportstudiesonmarket focused determination of a reforming elite. In reform and institution building in former this model, ownership and control are closely Communist regimes where weak regulatory tied within a framework of institutional guar- controls, widespread mistrust, and the abuses antees and obligations (Miyajima, 1995). The still prevail in these markets (Blasi et al., 1997; second is the Anglo-Saxon open market model Kogut & Spicer, 2002). ofcapitalformationthroughstockmarkets.In Our study highlights a fundamental issue in the bank centered system, the close links be- economic development and regulatory reform tweenthebankingsystemandthemarketallow for many developing and post-communist companies to finance themselves through bank economies,thatistheneedtounderstandbetter loans. In this system firms raise capital by the links between socio-political forces and issuingnewsharesandtheownershipofafirm behavioral norms embedded in economic life. is diffused. Accordingly, shareholder rights are In order to allow imaginative solutions to protected and the ownership and control of emerge in the wake of an endemic lack of firms are separated. The bank-centered regime capital for industrialization, developing econo- issupportedbyawebofinstitutionsinmutually mies should not look for miracles. The funda- binding relationships with little respect for ALTERNATIVEFORMSOFCAPITALIZATION 2063 shareholder value (Bergloo€f, 1990; Charkham, Both the P-A argument and institutional 1994; La Porta, Lopez-de Silanes, & Shleifer, economics fail, however, to explain why there 1999).Althoughmanyhybridformsareemerg- have been corporate failures and abuses that ing through the growing activities of multina- periodically invited further regulation even in tional companies and with the increased effect the most advanced capitalist economy, the of liberalization and de-regulation, these two United States, and others such as the United modelsneverthelesspresentcleardistinctionsin Kingdom. The classic theory of discipline im- the ways firms raise capital (Hodges & Wool- plemented by the capital market over business cock,1993). 3 performance is ineffectual when stock prices The separation of ownership and control in have been manipulated through diluted ac- the Anglo-Saxon corporate tradition gave rise counting principles in the recent corporate to a vast literature examining the challenges of scandals unleashed first by the collapse of separationandwaystocopewiththediverging Enron and WorldCom and followed by others interests of the parties involved. The most in- in the United States. This trend of malpractice fluential of them, principal-agent theory [P-A], defiestheoreticalassumptionsaboutthemarket points out that the conflicting interests of disciplining businesses and managers. 5 When owners (principals) andmanagers(agents)of a notonlymanagersbutthemuchwiderbusiness firmgenerateagencycostsandinefficientfirms. community act to defy and misinform each To overcome this conflict, the P-A perspective otherinordertospeculateoncompanyshares, stresses the importance of aligning managerial the impact of regulation and measures to min- and shareholder interests (Jensen & Meckling, imize agency costs become irrelevant. 1976; Short & Kevin, 1999). Agency costs are Moreover, the maximization of self-interest minimized when management and shareholder in a capitalist economy is justified and the de- interests are aligned through the ownership structionofbusinessesisalsoseenaspartofthe structure (Alexander & Cohen, 1999) and innovative and creative side of the market. monitoring rights are secured to dissuade Thus, corporate collapses and share value ma- managers from pursuing their own interests at nipulationappearnotjustasan‘‘abuse’’butas theexpenseoftheowners(Alchian&Demsetz, anoutcomeofthe‘‘bullish’’behaviorofmarket 1972). To cope with agency costs, either man- capitalism. This fine line between regulation agers’interestsarebroughtclosertotheowners’ and entrepreneurial opportunism is best de- by tying managers’ compensation to the per- fended by Cressey (1980, p. 126): ‘‘Weak ac- formance of the firm, or the market must effi- counting controls are essential to modern ciently discipline managers’ opportunistic or business, just as weak police controls are es- disapprovedbehaviors. sential to modern democracy.’’ In the boom Institutional economists, on the other hand, and bust cycles of economic and technological emphasize the importance a regulatory frame- change,theissueofmanagerialabusealsoturns work, capable institutions and law as essen- intopartofanentrepreneurialdrivewhichfuels tial components of economic performance and marketgrowth. 6Therearearguablytwobene- corporategovernance(Lal,1998,2000).Alegal fitsofthesebusinesscycles:First,widersocietal system that guarantees monitoring rights, es- groups increase their earning during the tech- pecially the rights of small shareholders, and nological boom through employee shares and the market institutions that allow shareholders other schemes (Blasi et al., 2002). Second, the to monitor and react to the managerial team boom cycle nurtures technological innovation areprerequisitesforawell-functioning,market- andtriggersfurthercyclesofgrowthinthelong oriented system (Cheffins, 2000). Similarly, the term. self-regulatory regimes and code of practices EmergingmarketeconomiessuchasTurkey, put forward by the business community and however, suffer persistent abuse by managers, interest groups including government agencies, politicians and institutions (Blasi & Shliefer, shareholder associations and stock market in- 1996;Fenkner&Krasnitskaya,1999;Frydman stitutions play a crucial role in safeguarding et al., 1996; Kogut & Spicer, 2002). Neverthe- business practices. At the policy level, the im- less, there are important distinctions between portanceoftheregulatoryframeworkhasbeen capital market failures in advanced econo- recognized by national and supranational in- mies and the failures of developing countries stitutions in a rapidly changing and global to establish capital markets. While there are economy(Iskander&Chamlou,2000;Lannoo, larger and wider distributive effects and long- 1998, 1999). 4 term technological spillovers of capital market 2064 WORLDDEVELOPMENT manipulations in the former, the latter tend to ductive businesses (Alper & OO€ni(cid:1)s, 2001; Bora- depend on a narrow business base with no tav et al., 1996; Cizre-Sakallıo(cid:2)gglu & Yeldan, technological depth, leading to detrimental ef- 2000). Many experiments with capital markets fects for the economy and society. Thus, in also led to the chronic abuse of investors by developing economies, the adjustment to the governments, banks and businesses. boom and bust cycles of financial market ma- Thelongstandingpractice,datingbacktothe nipulationandfinancialliberalizationoftenhas late Ottoman period, was for businesses to use long-term destabilizing effects with widespread the informal money lending market [tefecilik]. painful outcomes (Alper & OO€ni(cid:1)s, 2001; Cizre- Speculation and unfair practices leading to Sakallıo(cid:2)gglu & Yeldan, 2000). confiscation of businesses and properties by We hold the premise that the politics of in- loan sharks continued despitebanking reforms stitution building and social and behavioral in the early 1920s (Guu€nluu€k, 1983). The banks normsdetermineeconomiclifeandthattrustin generally offered credits only to successful regulatoryregimescanbestbeunderstoodasa businesses or to new ones with good political product of the interaction of the state and so- connections. This bank-centered form of cor- ciety. Trust in economic life, Granovetter porate governance (see Table 1) 7 has long (1985) points out, is a product of social rela- functioned through cosy relations between tions and the obligations inherent in them, major business groups, industrialists and poli- rather than some generalized morality or in- ticians, as happens in other similar economies stitutional arrangements. Similarly, politics in- (Bu(cid:1)ggra,1994;Maxfield&Schneider,1997).This fluences the functioning of the market and exacerbated the gap between undercapitalized regulatory structures in a dynamic interaction small and medium-sized businesses and large with social norms. When individuals do not familyholdings.Manysmallandmedium-sized trust the state and its institutions, mere regu- enterprises (SMEs) were forced to raise their lation is insufficient to guarantee impersonal equity through these informal and segmented trust.Hence,whenthestatelosesitspowerand/ capital markets embedded in local and family or impartiality in law enforcement, the narrow networks(OO€zcan,1995a,1995b). groupinterestsofpoliticalclientstakeoverthe control of economic management, further un- (a) Bond market failures prior to 1980 dermining impersonal institutions and regula- tion. While accepting the flaws and paradoxes During the years of expanding import-sub- of trusting relationships and the persistent stitution policies, the government-financed in- threat of abuse, we agree with Shapiro (1987) dustrializationthroughthesinglemechanismof that impersonal trust permits more complex bank-centeredindustrialgrowth.Starting from developments in economic life by allowing in- the 1960s onward, Turkish governments re- dividualandorganizationalactorstoengagein complex relations on behalf of principles. The first wave of Anatolian holding compa- Table 1. Theroleofbankingfinanceinselectedcountries inthemid1980s nies illustrates how impersonal trust was neg- lectedbyregulatorsandthesecondshowshow Debtnequitya Bankloansntotal societal obligations and the moral grounds of liabilities Islam failed to guarantee the survival of these Germany 0.59 n.a. companies in the absence of credible institu- France 0.73 0.25 tions and regulation. Japan 0.77 0.39 Sweden 0.65 0.24 UnitedKingdom 0.55 0.1 3. TURKEY’S DISASTROUS USA 0.41 0.09 EXPERIMENTS WITH CAPITAL Turkey 0.62 0.51 MARKETS Source: For the figuresabout Turkey see Yener (1990) and Ersel and Sak (1986). For other countries see The Turkish experience with capital markets Bergloo€f(1990). hasbeendrivenbytheshort-termpoliticaland aThe ratios are for the year of 1983 for the countries financial objectives of governments, mainly to otherthanTurkey.ForTurkey,theaverageof1984–89 fund populist policies. The result of redistri- was taken as the base. Bank loans include short and bution and public sector spending has been to long-termloansandthedebtequityratioreferstoshort channel funds to rentiers rather than to pro- andlong-termliabilities/totalassets. ALTERNATIVEFORMSOFCAPITALIZATION 2065 sponded to the growing need for financial capital through bonds. In the absence of any capital, first with a set of measures to attract capital market regulation or stock exchange, foreignreservesandlaterwiththeintroduction businessessoughttotradetheirbondsinreturn of government and private bond markets. for cash. With the increased economic insta- Thus, transferable foreign currencyaccounts, 8 bility and high inflation during the first and were first introduced in 1967 to overcome the secondoilcrisesofthe1970s,thebank-centered shortage of foreign reserves and to fill the in- corporate regime collapsed. Many companies creasinggapinthebalanceofpayments.Under in need of cash consequently boosted the in- this system, the government offered higher in- formal money market and its loan sharks terest ratesthanEuropeanbankswith variable (Guu€nluu€k, 1983). Until the final collapse of the options for investors. But, the fast growth of economy at the hands of an International short-term interest had an inflationary effect Monetary Fund (IMF) program in 1978, the thatquicklybecameunsustainable.In1973,the balance of payments continued to deteriorate government announced the end of transferable whiletheexternaltradedeficitgrewsharplyand foreigncurrencyaccounts,butthisschemewas industrial stocks soared. re-introduced during 1975–79. During the first Thus,uptothe1980stheinformalbondtrade period of implementation, these accounts servedtheshort-termneedsofthegovernments, reached US $462 million, 70% of which was businessesandbondtradersalike.Thegovern- held by Turkish workers abroad. This was a mentsweremainlyconcernedwithbudgetdefi- significant capital injection into Turkish bank- citsandcurrentaccountbalancesattheexpense ing (Uysal, 1996). The Anatolian holding of the goals of long-term industrialization and companieswerefirstpromotedduringtheyears development due to strong populist policies of rising domestic savings when the savings (Cizre-Sakallıo(cid:2)gglu & Yeldan, 2000). The hold- accounts of Turkish workers became unsus- ing companies wanted to obtain capital for tainable due to short-term financial pressures. businessgrowthwithnofinancialandcorporate Along with industrial growth in the 1960s, accountability and the bond traders and inves- theamalgamationofsmallcompaniesledtothe tors were mainly interested in the short-term emergence of holding companies. At the same benefits of the bond trade. Thus, the semi-ille- time a new market for bonds and promissory galityofthebondmarketservedtheinterestsof notes emerged. This capital was used both by allwithoutanycollectivepressuretointroducea governments to finance investments and by moresophisticatedandinstitutionalizedcapital businessestogenerategrowth.Intheabsenceof market with regulations and punitive measures anymarketsforissuedpapersandshares,there forabusers.Shortlyaftertheeconomiccollapse appeared a thriving informal bond market. In of the late 1970s, this short-term opportunism 1961, the government re-structured the rules contributed to a massive disaster in capital governing savings bonds. The idea was to marketsandtheresultingsocialtrauma. provide capital for state spending in agricul- ture, industry and transportation through (b) Military coup and economic liberalization compulsorysavingsschemes.Thesebondswere in 1980 largelydistributedtowage-earningfamiliesand government employees as part of tax schemes. In 1980, soon after the post-coup market Seeing an opportunity for easy profits, small liberalization reforms, another frenzy occurred bond traders graduallyacquired manyof these intheformoflavishbondtrading.AsTurkey’s government bonds from families in need of pace of industrialization increased in line with ready cash until a further regulation in 1969 globaltrendsandliberaleconomicpolicies,the introduced limits on the trade. In 1972, these lackofcapitalmarketsbecameevenmoreacute. savings bonds were abolished, leading to the The governments issued promissory notes and elimination of the bond traders. other revenue-generating bonds in order to fi- Yet, informal bond trading and money nance growing government spending. 9 There lending continued to survive. A 1957 law reg- appeared a new function for informal money ulated private bonds and shares issued by the landingbankerstofillthevacuum.Theinformal holding companies and limited liability com- money-lending business which survived along- panies. This law also limited rates of return side bank-centered corporate finance for many issued through these bonds. Thus, tampering decades was elevated to a respectable business withtheflexibilityofbondreturnssignificantly status with political endorsements in the early narrowed the scope for generating financial 1980s.Hundredsofprivatebanksmushroomed 2066 WORLDDEVELOPMENT during 1980–81 (Berker et al., 1989; Din(cid:1)cel, governmentputlimitsonthefreemarketbond 1998;Guu€nluu€k,1983;Yıldırım,1998). trade and banned advertisements by market InJanuary1980 abankingregulationdecree bankers with a series of new decrees in Sep- removed state control over interest rates. In temberandOctober1981.Thisshranktheflow ordertoattractinformalandblackmoneyinto of cash and many bankers ran into difficulties the formal economy the decree also declared in paying back the interest. In panic, investors that banks could sell nonidentified short-term rushed to bankers demanding their deposits account bonds. But the major banks would back.ByDecember1981over250listedbankers only give credit to the most successful busi- went bankrupt and the total number of bank- nesses and the banks of family holding com- ruptinstitutionsmayhavenumberedmorethan paniesextendedcreditmainlytotheiraffiliated 1,000 (Din(cid:1)cel, 1998; Yıldırım, 1998).When the companies. While the bond and other paper banker scandal ended in collapse, the high trade grew rapidly with increased market ex- moral and financial costs included loss of sav- pectations of economic recovery, many busi- ings, collapsed businesses, runaway bankers nesses ended up borrowing from the market andfamilytragedies. 11Thegovernmentfinally bankersusingtheirbonds,promissorynotesor intervenedandforcedthebankruptciesofmany checks as equity. majorbankersandbondtradingagencies. High interest rates triggered a spree of in- Thiswasfollowedbytheresignationofthree vestments in banks and other money lending responsible ministers. The Economy Minister, businesses.Wageearnersinvestedtheirsavings, Mr. Kaya Erdem, shrugged off his responsi- pensioners their retirement bonuses, and many bilities with these words: ‘‘Our people have families even ended upselling their houses and gambled’’(Guu€nluu€k,2000).TheCapitalMarket other properties with the expectation of high Law was introduced and was soon followed returns. Encouraged by this craze, well-estab- by the establishment of the Istanbul Stock Ex- lished banks set up their own bond trading in- change in December 1985. These institutions stitutions with high interest rate accounts. didnothoweversignificantlyaltertheillsofthe Manyholdingcompaniesalsoestablishedtheir financial regime. own bond trading agencies. The only legal re- The bank-centered financial regime faced a quirement to be a market banker was to apply new wave of abuse at the hands of holding to the relevant town’s governorate with a peti- companiesandtheirpoliticalalliesthroughthe tion, and after several bureaucratic steps, any- 1990s. The deep economic crises in the late one could get permission. Small market 1990s forced the government to respond with bankers,however,tookhigherriskswithmuch new regulatory reforms under the IMF pro- higher interest rates, up to 140%, and traded gram. But despite the institutional and regula- their own promissory notes and personal toryamendmentstocreatecapitalmarkets,the checks in addition to company bonds. Some Istanbul Stock Exchange succeeded neither to bankers also played an intermediary role be- attractsignificantsavingsfrominvestors,norto tween large bond-trading banks and investors becomeasourceofraisingequityforAnatolian with tremendous success. 10 industrialists. As shown by Yurto(cid:1)gglu (2000), While holding companies went to well-estab- onlyasmallnumberofcompaniesaretradedin lished banks or used their own bond-trading the stock exchange and the total market capi- institutions, many small and medium-sized talizationisaround12%ofGDP.Inthishighly businesses in financial difficulty preferred bor- concentrated and centralized ownership struc- rowing from market bankers since their low ture,family-controlledholdingsowndirectlyor credibility and lack of political links barred indirectlymorethan75%ofallcompanyshares them from getting loans from the established and exercise majority control. Thus, an active banks. With the economy and businesses in market for corporate control or monitoring need of capital, the government remained si- sharesdoesnotexistgiventhelimitedopenness lent; and did not attempt to regulate the mar- and concentrated ownership of traded compa- ket.During1980–81,thetotalamountcollected nies. Consequently, takeovers and hostile bids bymarketbankerswasestimatedtobearound arenotpossiblethroughstockmarketdealings US $3.2 billion, one-quarter of total bank de- but rather companies change hands through posits. The formal banking sector lost massive politically linked financial and banking deals, revenues to informal bankers. manyofthemscandalous.Inthissystem,small By September 1981 the losses to the formal shareholdersarebeingpersistentlyabusedorat banking sector became unsustainable, and the best ignored. Public companies of family ALTERNATIVEFORMSOFCAPITALIZATION 2067 holdings traded on the stock market are being and Bursa. State-run enterprises and large used as yet another way to transfer funds into family holding companies controlled the ma- the holding system. jority of industrial establishments in the coun- Ordinary investors have prudently shied try. The price of many goods was subject to away from stock market dealings and often state or local authority approval. There was preferred foreign currency or real-estate in- almost no foreign direct investment and the vestments. This further limited the securities foreign exchange reserves were fragile and trade and took funds away from businesses. small. National per capita income was around Studies on household savings and investments US $700. The severe shortage of industrial quantify this trend and show that on average capital and the lack of industrial diversity and families retain their wealth in the form of real- diffusion in the country were recognized as the estate (85%) bank accounts (11%), and while main barriers to business development and securitiesaccountforonly2.3%(Eser,1999).A growth.Politicalactors,localcommunities,and recent study by the State Planning Organiza- individualswereacutelyawareofthisproblem. tion also highlights the remarkable growth of The idea of using small family savings and theshadoweconomyinTurkeythroughoutthe expatriate workers’ remittances for business 1990s. 12 establishments and industrial diffusion first These catastrophic experiments indicate that emerged in the early 1970s under the slogan of a pattern of abuse of investors occurred in an the ‘‘people’s sector’’ of the Republican Peo- environment where abusers have not been ples’ Party (CHP) (Goo€knel, 1981; Soral & punished and where honesty and dishonesty Tekeli, 1976). have been blurred in the eyes of the public. The people’s sector initiative was primarily Enforcement actions have also become a hos- an economic mechanism to generate finance tage of these relationships where legality and capital. At the same time, it was a means to illegalityhavehadparadoxicalinterdependency diffuse social market capitalism and material further eroding the state’s credibility. Thus, all prosperity through the widespread ownership parties hoped to maximize their returns by and participation of ‘‘the people.’’ This initia- benefiting from the gaps in the legal and insti- tive ambitiously aimed to achieve four major tutionalframeworkandthegenerallyweakrule goals: to support a successful form of demo- of law. cratic left politics, to initiate economic devel- opment through diffused and decentralized modes of production, to enhance popular par- 4.THERISEANDFALLOFANATOLIAN ticipation in the economy, and to create a new HOLDING COMPANIES form of public–private cohabitation and part- nership. These ideas were political but largely Against the background of persistent capital engineered by technocrats and a handful of market failures which undermined small inves- academics in the powerful State Planning Or- tors and entrepreneurial businesses alike, the ganization. The ideological justification was formation of Anatolian holding companies related to the Cold War realities of a NATO appeared to be a credible response by offering member country as well as the moderate so- direct investment opportunities in productive cialist teachings of the Republican Peoples’ activities. The belief in this form of alternative Partywhichwas inspiredbythesuccess stories capital formation was promoted through vari- of Yugoslav economic reforms (Ak Guu€nlere, ous agents of change such as academics, tech- 1975; Soral & Tekeli, 1976). nocrats, and politicians. But above all, the The political and agency actors of the pio- political ideologies of social democracy in the neering Anatolian holding companies wanted 1970s,andlaterpoliticalIslaminthe1980s,led tobenefitfromtherobustandgrowingratesof thewayaspromotersofeconomicdevelopment Turkish workers’ savings in Germany to over- with more social equality. come severe shortages of financial capital and hard currency (Van Renselaar & Van Velzen, (a) Pioneers: Anatolian holding companies 1975). 13TurkishmigrationtoWesternEurope and socialist ideals in the 1970s startedinthelate1950sandgrewveryquickly. From the early decades of this migration until In the 1970s, Turkey had a closed economy the first and second oil shocks of the 1970s, withlittleindustrialdiffusionbeyondahandful after which European countries closed their ofmetropolitan centerssuchasIstanbul,Izmir doors to emigrant workers, savings sent to 2068 WORLDDEVELOPMENT Turkey provided the main source of foreign worker’s companies had 60,000 investors with exchange. Thus, migrants’ remittances quickly total capital of TL500 million, around 36 mil- becameadominantsourceofforeignexchange lionUSdollarsin1975prices(VanRenselaar& and consequently the major source to balance Van Velzen, 1975, p. 131). 15 the trade deficit of the country. This was quite ThemajorityofAnatolianholdingcompanies similar to the experience of emigrants from (72%) were set up in priority development other southern European countries at the time regions identified by the State Planning Orga- such as Greece, Spain and Italy (King, 1984). nization and almost all of them (90%) were es- Savings of Turkish workers rapidly increased tablished away from major commercial and from a mere US $107.3 million in 1968 to US industrial towns. The inner Anatolian region $1,426.2 million in 1974 accounting for 40% witnessedthemostrapidcreationofAnatolian and63.5%offoreignpaymentsrespectively(see holding companies and attracted most invest- Table2).TheTurkishgovernmentfirsttriedto ment while the poorest towns in the east and channelthesesavingstovillagecooperativesin southeast had no investments. The investment the mid-1960s and later, encouraged by the incentives operated by the government played spontaneous workers’ investment companies a strong role in locational choices. In terms of established in Germany, attention turned to thesectoralcomposition, therewasanobvious ‘‘workers’ companies.’’ emphasis on industrialization as most of the The number of ‘‘workers’ companies’’ investments were in the traditional manufac- reached 322 by the-mid 1970s. As Van Ren- turing sector: investments concentrated on selaar and Van Velzen (1975) point out, the foodstuffs and beverages (23.4%), weaving and existing family-run companies failed to raise clothing(18.7%),constructionmaterial(14.1%), capitalthroughworkers’savingsduetothelack and animal feed (12.5%). An analysis of the of any stock market or experience with finan- shareholder composition indicated that the cial transactions. 14 The social networks of majority of these companies (87.5%) had more workers, their local origins, and family ties than 100 shareholders and a significant pro- played a role in the locational choices of in- portion (12.5%) had more than 2500 share- vestments. The workers took pride in the de- holders(Ertunaetal.,1975). velopment of and the contribution they made Weak institutional guarantees inhibited the to their towns (Ertuna et al., 1975). Yet, many survival and growth of Anatolian holding companies were launched and funds collected companies.Onlyahandfulofnewinstitutional without any investment feasibility analysis. players were created (see Table 4). Already Poorly educated and low skilled workers were existinginstitutions,suchastheStatePlanning unable to appreciate the importance of finan- Organization, jealously presided over the pro- cial and technical project planning and the in- cess. There was however a serious effort to stitutionalsettingforshareownership.Astudy create financial institutions to secure invest- conducted in 1973 covering 88 worker’s com- mentssuchastheCo-operativeBank,theState panies indicated that only 10 of them had in- Industry and Worker’s Bank [Devlet Sanayi ve vestment projects and they were able to gather II_(cid:1)s(cid:1)ci Yatırım Bankası], Social Security Funds, 19,439shareholderswithanaverageinvestment and the People’s Investment and Partnership of TL5, 250 (US $380) per share. These com- Limited [Halk Yatırım Holding Anonim Or- panies had altogether TL102, 2 million capital taklıgg(cid:1)ı]. Despite the efforts at institution build- (US$7.51million)ininvestmentsandbenefited ing, the initial euphoria was quickly replaced from TL33, 375,000 (US $2,490,000) in invest- with institutional conservatism as the State ment credits (Van Renselaar & Van Velzen, Planning Organization wanted to preside over 1975, pp. 124–125). By 1975, a selection of 77 theentireprocessthroughitsincentiveschemes. Table 2. MoneytransferredtoTurkeybyTurkishworkersabroadbetween1965and1974(in1,000USdollars) 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 Total 69,777 115,333 93,030 107,318 140,612 273,120 471,362 740,155 1,182.352 1,426.211 transfer Average 438 598 543 525 486 617 897.1 1,209 1,638 1,762 perworker Source:VanRenselaarandVanVelzen(1975,p.108). ALTERNATIVEFORMSOFCAPITALIZATION 2069 Again, the government failed to build an effi- tated abuses. Due to reduced visibility, share- cient institutional and regulatory structure to holders gradually lost their interest and failed governthenewformoffinancecapitalandthe to participate in a long-term engagement with corporate entities created. The result was a thecompaniestheyinvestedin.Theabsenceof dramatic failure rate among newly established bodies informing investors about the perfor- businesses. Most of the failed companies were mance of the firms and mechanisms to control bought by the state. Surviving ones lost their the managerial team (hire or fire them) further multiownership character. This experience not exacerbated the extent of abuses and the con- only damaged the local economies and the centration of shares in the hands of a few in- shareholdersbutalsocreatedpublicmistrustof dividuals, especially managers. 17 All of these similar initiatives. This meant small family factorsbutinparticularthedeficientregulatory savings either remained dormant or were regime contributed to the collapse of these channelled into speculative investments rather businessventuresbythelate1970s,evenbefore than to productive activities for industrial the 1980 military coup. growth. The outcome of this failure was also Thus, another form of investment for work- visible in the increasing property investments ers and a less inflationary form of hard cur- by Turkish emigrants in urban areas and holi- rency supply for the government was provided day resorts (Kele(cid:1)s, 1985). byworkers’companies.Butthemotivesofboth Early studies on Anatolian holding compa- investors and the policy makers diverged when niesstresstheinterruptionofpermanentcapital the early trust could not be maintained under inflow and managerial problems as the main the short-term pressures of seeing a concrete sources of the failures of workers’ companies return. Investors, although ambitious and en- (Balcı,1996;Ertunaetal.,1975;S(cid:1)enguu€n,1977; thusiasticaboutgeneratingjobsandbusinesses Yılmaz,1993). 16Manybusinessesfacedsevere in their homeland, did not fully trust the state, liquidity problems during their intermediate the managers or the social democratic princi- investment stage. Some also suffered from ex- plesofworkers’companies,andinvestedonlya port and import limitations. Financial prob- small proportion of their savings. lems originated from several sources. First, investors (typically workers) were not familiar (b) The second wave: Anatolian holding with investing in shares. Therefore they were companies and Islam’s conversion to capitalism shy to invest in such unknown assets. Second, frequentbusinessfailuresandhighexpectations After the dramatic collapse of the socialist discouraged them to invest in new ventures. ideals of the ‘‘people’s sector,’’ the second re- Third, since investments concentrated in areas vivalofAnatolianholdingcompaniescameasa where returns can be obtained in the long run, ‘‘newmodel’’andaspartof‘‘thejustorder’’of such as manufacturing industry, investments political Islam in Turkey. Despite remarkable yielded nothing for years. For this reason, similarities in form, it took place under condi- company shares were less attractive than al- tionsverydifferentfromthe1970s.Turkeyhad ternative investments such as real estate or itsthirdmilitaryinterventionin1980.Although gold. In addition; whereas it was difficult to sixyearsofstreetfightingandbloodshedended cash-in the company shares because of the with the coup, the new political regime, on the nonexistenceofastockmarket,thealternatives one hand, widened business opportunities and were easily traded. liberalism, but on the other hand, it narrowed Business problems stemmed both from thescopeofdemocracyinthecountry. Turkey managerial inability and abuses. Studies inves- enteredthe1990swithanopenliberaleconomy tigating the reasons for failure as well as our with export-led growth. The per capita income interviews indicate many poor decisions taken rose to US $5,000 as measured in purchasing either at the establishment and/or early opera- power parity. tionstages.Onceagainthetechnocraticnature Market deregulation opened many new of the initiative was apparent. Ertuna et al. business opportunities and Turkey witnessed a (1975) found that 23% of the people who took rapid rise in new business ventures and entre- investment decisions and 36% of board of di- preneurial activities. The growth of small and rector members had been civil servants. Man- medium-sized enterprises in many nonmetro- agerial fraud was another major source of politan towns and capital accumulation in problems. The distance between the managers the hands of people who had strong rural and shareholders who lived in Europe facili- traditional ties created a new generation of 2070 WORLDDEVELOPMENT capitalists (C(cid:1)okgezen, 2000; OO€zcan, 1995b). from mainly oil-rich countries to Islamic re- These capitalists developed a strong antipathy gimes such as Pakistan and later to secular re- toward the family cartels that controlled the gimes such as Turkey (Warde, 2000). But, country’s economy as well as the inefficient Islamic economics is a rather new scholarly state enterprises. This antagonism crystallized concern initially developed by Indian Muslim around a notion of hard-working, genuine thinkers during the years of India’s partition Anatolian people with Islamic traditions, as andthemostvisibleelementofthisconcernhas opposedtothecosmopolitananddisingenuous been Islamic banking. 20 Istanbul capitalists (C(cid:1)okgezen, 2000; Tugal, Euphoria around Islamic economics found 2002). These small-scale entrepreneurs in con- new strength in the Welfare Party and its affi- servativeAnatoliantownslaterplayedacrucial liated community and business organizations role in reforming Islamic politics and in build- that pioneered Anatolian holding companies ing the second wave of Anatolian holding amongTurkishworkersinGermany.Manybut companies (OO€zcan, 2000). not all Anatolian holding companies followed The new entrepreneurs desperately needed the Islamic finance principle of profit and loss more financial capital. Small investors and sharing or partnership finance through selling families, too, hoped to make long-term, in- issued bonds of companies and investors to come-generating investments in the growing individuals, families and businesses. Inits pure economy. Most of these small investors tradi- form, this was a micro capital formation tionally channelled money into the property throughthousandsofbondsandinvestors.The marketandlandspeculation.Butthisbeganto early attempts led by investors and managers change as the rhetoric of political Islam found and their agents proved to be enormously suc- popularsupportinTurkeyandamongTurkish cessful. These Anatolian holding companies workers abroad. Following the 1980 coup, quickly became romanticized and heroic sym- Islam became a favorable ideology against bols of ‘‘new industrialization and just order’’ communism and therefore was modestly pro- associated with Islamic populism. 21 moted by the army and Turkey’s major allies. This branding of moral salvation with ma- The number of Islamic groups, organizations terial benefits points out the core sentiment andpublicationsincreasedrapidlyinthe1980s. which made the so called Islamic economic TheincreasedpresenceofIslaminpoliticaland order attractive to ordinary investors. While social life was accompanied by an intensified Islamic rhetoric condemned the individualistic debate on development and modernization societies of the West for being immoral, indi- within Islam. vidualinterests,nevertheless,providedthecore Industrialization and business ventures be- motivation for investing in Anatolian holding came thesymbolsofIslamic modernization, an companies. This paradox is addressed by intellectual development which was led by A(cid:1)cıkel (1996) as the desire of repressed and Islamicscholarsandagroupofeducateddevo- marginalizedmassestoseekpowerwhileTugal teesfromthe1960s.ThisconversionofIslamto (2002) identifies Islamic populism with un- capitalism should be seen as part of deeper fulfilled aspirations and desires to change the changesinthepoliticalandideologicalsceneas hegemony. C(cid:1)akır (1995) among others (for ex- Turkey adjustedtotheturbulence andinequal- ample Goo€le, 1999) sees the rise of Islam as a ities created by late modernization and liberal movement against and in response to moder- capitalist development. 18 Already by the late nity. The Islamist party of the early 1990s, the 1980s, but especially during the 1990s, a new Welfare Party, used the shortcomings of secu- form of multiownership company emerged un- larism as part of its propaganda to show its der thebannerofIslamic economicrevivaland unique position in defending Islam and tradi- just order. This synthesis of industrialization, tionsaswellasjustsociety.Paradoxically,both development and Islam took decades to find a sterile secularism and political Islam have long receptiveaudiencebeyonditscoreengineersand survived side by side despite periodic clashes thinkerswithinpartypolitics. 19 in Turkey. Indeed, as Shankland (1999) illus- The enthusiasm with Islamic development trates, Islam and Islamic politics were rather andIslamicfinanceamongTurksalsofollowed well accommodated within the secular state a worldwide trend of the increasing popularity establishment. A(cid:1)cıkel (1996) goes further to of Islamic banking in Saudi Arabia around suggest that the Turkish–Islamic synthesis has 1970. The function of Islamic banking as a been the semi-official ideology of the Republic pious form of lending gradually spread out from the 1950s onward.

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with little industrial diffusion beyond a handful of metropolitan engineered by technocrats and a handful of Bankası, Isß Bank, Ziraat Bank).
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