The Ottoman state developed three social institutions, the devşirme (enslaved children levied from the Christian population of the Balkans, then trained as servants
of the sultan), millet, and the guild system.

The devşirme system provided an army of bureaucrats and soldiers with no ethnic, family, or regional loyalties other than those owed to the state. The devşirme system degenerated and came to an end by the 17th century.

With the millet system, the state developed a quasi-legal framework in which non-Muslim minorities were recognized as selfautonomous groups in their internal affairs. The state managed ethnic communities through their own religious institutions.

The failure of the entrepreneurial classes in the Ottoman Empire to develop into
dominant classes and to extend capitalist modes of production and relationships, as
happened in the Western world, could not be attributed to the influence of the religious ethic. Instead, this failure was due to the political position of economic classes vis-à-vis the dominant military-bureaucratic classes.

The contribution of craftsmanship to industrial development can be confined to their labor skills since they could not transform themselves into an industrial/ entrepreneurial class.

Attitudinal factors have little explanatory value in Muslim absenteeism in trade and
industry because the attitudinal characteristics of people basically reflect their positions in a socio-political and economic environment. The Ottoman political structures and the structure of markets and property rights provided little incentives for Muslims to engage in capitalist activities.

Political reform shifted power to the central bureaucracy and military elites known as Young Turks who undermined the power of the palace and whose main objective
was to attain power by an elite revolution. The bureaucrats and military officers, influenced by a western type of education and ideologies, organized within the Committee of Union and Progress (İttihat ve Terakki Cemiyeti-İTC) as an offspring of the Young Turk movement.

The objective to create an indigenous capitalist class was initiated by İTC rather than the Ottoman dynasty, which in earlier periods pursued no discriminatory economic policies against the minorities. In fact sometimes the bureaucrats searched for skilled minority artisans to establish and run factories that were completely financed by the state as a move to reduce the dependency on imports.

The making of a political system involves five tasks: state building, nation building, economy building, political participation, and distribution.

The focus of economic policy of the early decades of the Republic was based on the reconstruction and the recovery of agricultural production and replacement of a minority dominated merchant bourgeoisie with a national bourgeoisie that would support the new political leadership.

The state, in this period, achieved a level of social and political control and sought to rebuild the economy in line with its own socio-political engineering projects. The establishment of İş Bankası (Businessbank) is a typical example. The bank’s capital was what was left of the gold sent to Atatürk by the Muslim community of India to fight against occupying forces and to strengthen the Hilafet institution.

The bureaucracy considered itself to be the only legitimate class to control the means of economic and political governance. In this period, none of the institutional developments were directed to establishing autonomously functioning structures of a civil society, and the gap between the bureaucracy and civil masses became more apparent than ever

State capitalism (etatism or dirigisme) ignored market rationality in the preceding decade in order to increase the beneficiaries of the state; and thus, to increase the chance of regime survival. Neither was state capitalism concerned much about the objective of full employment nor the rights and protection of consumers and labor.

DP won the elections in 1950, and Turkey entered into a more liberal economic and political era. In 1950, the number of deputies connected with the civilian-military bureaucracy dropped from 47 per cent to 36 per cent, whereas landowners, merchants and professionals gained the rest of seats. The DP program emphasized the need for state investment in infrastructure, the withdrawal of the state from manufacturing sector which had no public service characteristics, and the creation of the conditions for the entry of foreign enterprises. This period was marked by capital
accumulation in the private sector through government credits originated from foreign aid program. Using the state agencies like the Industrial Development Bank to distribute aid funds increased state patronage and the inefficient use of public funds.

The developing world is attracted to the ISI policies despite its inbuilt contradictions
because it contributes to the legitimization of political regimes and parties in two ways. First is that the ISI fosters the industrial structure of a society and transforms an agricultural society into an industrial society. Second is that it destroys the ancient
customs and loyalties of a society which the reformist elite want to modernize.
With these contributions, the ISI is also to be blamed for failing to create an
entrepreneurial culture, competitive and democratic development.

One incident marked the beginning of interbourgeois conflict and its politicization. In the 1960s, a section of businessmen largely constituted by small and medium sized entrepreneurs was mobilized by a professor and businessman, Necmettin Erbakan. He won the leadership of the Union of Chambers (Türkiye Odalar ve Borsalar Birliği-TOBB) through a campaign against an AP backed candidate. Big business and the Prime Minister, Demirel, did not welcome Erbakan’s leadership of the TOBB. Demirel retaliated without hesitation by transferring the Chambers’ authority in import licensing to the Ministry of Trade. The conflict between Erbakan and the Prime Minister resulted in the elimination of Erbakan from the leadership of TOBB. Following this incident, Erbakan decided to take part in general elections with his close friends, became an independent MP in 1969 and formed his own party, the National Order
Party (Milli Nizam Partisi-MNP) in 1970. The Party accused AP of having become a tool of big and cosmopolitan business groups in Istanbul and having neglected the small businessmen of Anatolia

The strategy of import substitution tries to replace imports by domestically produced subsidies. The ISI strategy is contrasted with export promotion strategy (EPS) which is efforts concentrate on products that can be sold in world markets. Despite similarities there is also a difference between ISI (Import Substitution Industrialization) and etatism. ISI strategy increases the share of private sector by using state subsidies and enterprises in favor of private capital accumulation. In a sense, the state, rather than restricting, encourages private sector through building infrastructure, producing and providing intermediate products in a mixed economy. Although it is supported by Keynesian shift in the economies of developed world,
ISI strategy designed by IMF for developing economies is not equivalent of Keynesianism. Keynesianism was based on a policy of full employment, social security and other demand-based monetary policies.

The minority government of AP, with a standby agreement with IMF, prepared the structural adjustment programs (SAP) known as ‘24 January measures’. The main
policy recommendations included:
• Removing state control over interests and prices and increasing competition for state enterprises through elimination of government subsidies.
• Avoiding the destabilization of the economy through making arrangements to cope with fiscal deficits, inflation and external debt accumulation.
• Shifting from import substitution to an export promotion strategy, import liberalization, promotion of foreign investment and determination of realistic exchange rates.
• Concentration of public investment on the energy and transportation infrastructure
rather than manufacturing.

The export promotion strategies of the 1980s in Turkey led to fictitious exports. Fictitious exports were fabricated transactions to take advantage of export incentives, especially tax refunds. Fictitious exports included commercially worthless goods registered as goods eligible for incentives, recording export prices higher than
the actual price, and even alleging falsely to have exported goods while in fact nothing was exported. Since this practice helped money laundering and decreasing unofficial economic activities (off-the-record economy), the regulative policies could be adopted in the second half of 1980s when the negative reaction became intensified especially from general public and European countries.

Crowding out effect occurs when government involvement in market economy through a fiscal policy that increases government borrowing from loanable funds, thus increases interest rates, thus reduces private sector’s investment spending.