A WORLD BANK COUNTRY STUDY PU - 3 6 qI TURKEY Industrialization and Trade Strategy . v TURKEY Industrialization and Trade Strategy This report is based on the findings of a special economic mission which visited Turkey in May-June 1981. The mission was led by Bela Balassa and consisted of Jayanta Roy (Deputy Mission Chief), Tony Bell, Sheetal Chand, David Davis, Isabelle Girardot-Berg, Seok Hyun Hong, Michel Noel, Turgut Ogmen, Pasquale Scandizzo, Harbaksh Sethi, Jose de Silva Lopes, Gurushri Swamy, Martin Wolf and Helen Chin. The mission chief is responsible for the scope and overall conclusions of the report. Europe, Middle East and North Africa Regional. Office The World Bank Washington, D.C., U.S.A. The World Bank issues country economic studies in two series. This report is a working document and is, as such, part of an informal series based wholly on materials originally prepared for restricted use within the Bank. The text is not meant to be definitive, but is offered so as to make some results of internal research widely available to scholars and practitioners throughout the world. A second, more formal series entitled World Bank Country Economic Reports is pub- lished tor the Bank by The Johns Hopkins University Press, Baltimore and London. Titles of these and all other bank publications may be found in the Catalog of Publications, which is available free of charge from World Bank, Publications Unit, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. The views and interpretations in this report are the authors' and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting in their behalf. Copyright © 1982 The International Bank for Reconstruction and Development/The World Bank The World Bank enjoys copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, permission for reproduction of any part of this report is hereby granted provided that full citation is made. Library of Congress Cataloging in Publication Data Main entry under title: Turkey, industrialization and trade strategy. (A World Bank country study) "This report is based on the findings of a special ecconormlic mission which visited Turkey in May-June 1981. The mission was led by Bela Balassa." 1. Turkey--Industries. 2. Industrial promotion --Turkey. 3. Turkey--Commerical policy. I. Balassa, Bela A. II. World Bank. Europe, Middle East, and North Africa Regional Office. III. Se- ries . HC492.T858 1982 338.09561 82-13570 ISBN 0-8213-0046-6 TURKEY INDUSTRIALIZATION AND TRADE STRATEGY Table of Contents Page No. COUNTRY DATA ....................................... ............... INDUSTRIALIZATION AND TRADE STRATEGY: AN OVERVIEW i - vi PART I THE SUMMARY REPORT Chapter 1: INTRODUCTION 1 Inward-Oriented Industrialization, 1963-73 1 Policy Responses to External Shocks, 1973-78 1 The 1980-81 Policy Reforms 2 The Effects of the 1980-81 Policy Measures 3 The Need for a Medium-Term Strategy 4 Chapter 2: PRODUCTION INCENTIVES 5 Exchange Rate Policy 5 Incentives to Industrial Exports 5 Industrial Protection 7 Import Protection vs. Export Subsidies 7 Industry vs. Agriculture 8 Recommendations 8 Chapter 3: THE FINANCING OF ECONOMIC ACTIVITY 10 The Supply of Money 10 Interest Rates and the Demand for Money 11 The Costs of Intermediation of the Banking System 11 The Development of the Capital Market 12 The Allocation of the Domestic Financial Assets of the Banking Sector 12 Selective Credit Policies 14 Recommendations 14 Chapter 4 THE SYSTEM OF TAXATION AND INVESTMENT INCENTIVES 16 Tax Revenue 16 Direct Taxes 16 Indirect Taxes 17 Domestic Investment Incentives 17 Foreign Investment Incentives 18 Recommendations 19 Chapter 5 INDUSTRIAL DEVELOPMENT AND EXPORTS 21 Policies and Performance 21 Research and Development 21 Training 21 Export Marketing 22 Comparative Advantage 22 Marketing Prospects 23 Recommendations 23 Chapter 6 STATE ECONOMIC ENTERPRISES IN MANUFACTURING 24 The Role of the SEEs 24 SEE Performance 25 Causes of Inefficieitcies 25 Price Liberalization 26 Reforming the SEEs 26 Recommendations 27 Chapter 7 AGRICULTURAL DEVELOPMENT AND EXPORTS 28 Production and Export Trends 28 Capital-Intensive Development in Agriculture 29 Price Policy 29 Incentiveis and Export Performance 30 Prospects 31 Comparative Advantage 31 Recommendations 32 Chapter 8 TOURISM 33 Recent Trends 33 Domestic Resource Costs and Foreign Exchange Receipts 34 Prospects Until 1990 34 Recommendations 34 PART II: THE MAIN REPORT Chapter 1: INTRODUCTION 37 A. Economic Policies and Performance Prior to the January 1980 Reforms 37 1. Inward-Oriented Industrialization, 1960-73 37 2. External Shocks, Policy Responses, and Economic Growth 1973-78 39 B. The 1980-81 Policy Reforms 47 1. The Measures Applied 47 2. The Effects of the 1980-81 Policy Measures 49 C. The Need for Medium-Term Policies 51 1. Medium-Term Policy Framework 51 2. The Structure of the Report 51 Chapter 2; PRODUCTION INCENTIVES 53 Introduction 53 A. The Exchange Rate Regime 54 1. Exchange Rate Policy in the Late Seventies and After the 1980 Reform 54 2. Changes in the Real Exchange Rate 54 3. Recommendations 56 B. Incentives to Industrial Exports 56 Introduction 56 1. The Export Tax Rebate Scheme 58 2. The Export Credit Scheme 67 3. The Foreign Exchange Allocation Scheme 74 4. The Temporary Import Regime 75, 5. The Foreign Exchange Retention Scheme 78 6. Incentives to Export-Oriented Investments 80 and Income Tax Reductions for Exporters 7. Estimation of the Combined Export Subsidy 82 and Export Exchange Rate 8. Recommendations 87 C. Measures of Import Protection in Industry 90 1. Tariff and Tariff-type Measures 90 2. The Import Regime 96 3. Recommendations 104 D. The General Structure of Production Incentives 106 1. The Bias Against Exports 106 E. Production Incentives: Industry vs. Agriculture 109 Chapter 3; THE FINANCING OF ECONOMIC ACTIVITY 122 A. The Resources of the Financial Sector 122 1. Introduction 122 2. The Supply of Money and its Influence on the 122 Availability of Financing 3. Interest Rates and the Demand for Money 128 B. The System of Financial Intermediation 133 1. The Structure of the Banking System 133 2. The Cost of Intermediation of the 135 Banking Sector 3. The Development of the Capital Market 142 C. The Utilization of Financial Resources 148 1. Allocation of the Domestic Financial Assets .148 of the Banking Sector 2. The Financing of Public Administrations 150 3. The Financing of Public Enterprises 155 4. General Comments on Selective Credit Policies 159 5. Medium and Long-Term Credits 162 6. Agricultural Credits 164 7. Export Credits 166 Annex 3.1: A Systew of Subsidized Export Credits 170 Related to Value Added Chapter 4 THE SYSTEM OF TAXATION AND INVESTMENT INCENTIVES Table 4.1 Turkey: Tax Revenue as a Percent of Gross National Product, 1970-80 175 4.2 Turkey; Individual Income Tax Rate Schedule 177 4.3 Turkey: Tax Burden oa' the Personal Income Tax; Some Examples 179 4.4 Turkey: International Comparison of Social Security Rates Borne by Employers, 1975 184 4.5 Turkey; The Production Tax 186 4.6 Turkey; International Comparison of Retail Prices of Regular Gasoline 189 4.7 Turkey: Estimated Revenue Effect of Tax Changes in 1981 193 4.8 Turkey: Foreign Investment Under the Encouragement Scheme 195 4.9 Turkey: Sectoral Breakdown of Investment Licenses Issued Under the Domestic Incentive Law, 1976-79 196 4.10 Turkey; Characteristics of Investment Licenses Issued in 1980 and in January-August 1981 Under the Domestic Incentive Law 199 Chapter 5; INDUSTRIAL DEVELOPMENT AND EXPORTS Table 5.1 Growth in Manufacturing Production and Exports in Four Mediterranean Countries 205 5.2 Structure and Growth of Manufacturing 207 5.3 Capital Requirements per Job in 1980 210 5.4 Value Added per Worker in Manufacturing 1979 211 5.5 Sectoral Distribution and Growth of Employment 212 5.6 Commodity Composition of Exports and Contribution to Export Growth, 1972-1980 213 5.7 Projections of Manufactured Exports & Production 215 5.8 Investment in Manufacturing Industry 218 5.9 Private Manufacturing Investment, 1980 219 5.10 Capacity Utilization of Selected Industrial Subsectors, 1980 220 5.11 R&D Expenditures 223 5.12 Wages in Manufacturing 226 5.13 Employment per TL Billion of Output (Jobs) 1979 228 5.14 Industrial Exports to Middle East Countries by Major Products 237 5.15 Cotton Yarn Production, Consumption and Exports 239 5.16 Cotton Fabrics Production, Consumption and Exports 239 Chapter 6: STATE ECONOMIC ENTERPRISES IN MANUFACTURING 246 A. Role and Performance of the State Economic Enterprises in Manufacturing 246 1. The Role of State Economic Enterprises 246 2. Characteristics of Public and State Economic Enterprises and their Place in the Economy 247 3. Some Measures of Performance of State Economic Enterprises in Manufacturing 249 B. Causes of Poor Economic and Technical Performance 257 1. General Economic Policy 257 2. The Legal Framework for State Enterprises 258 3. Procedures for Government Control and Public Accountability 258 4. Price Signals Facing State Economic Enterprises 263 5. Management and Organization of State Economic Enterprises 265 6. Investment and Operating Inefficiencies of State Economic Enterprises in Manufacturing 267 7. Conclusion 269 C. Changes in the Environment of State Economic Enterprises Since January, 1.980 270 1. Reform of State Enterprise Pricing 270 2. Reform of the Allocation of Investment 273 3. Reform of State Enterprise Financing 273 4. Reform of Personnel Policy 274 5. The Response of State Economic Enterprises to Changes in the Environment 274 6. Conclusion 275 D. An Agenda for Reform 276 1. Market Discipline for State Economic Enterprises in Manufacturing 277 2. Transition Problems 280 3. Assessment of Current Proposals for Reform 282 4. Concluding Remarks 285 Chapter 7; AGRICULTURAL DEVELOPMENT AND EXPORTS 286 Introduction 286 A. General Characteristics of Agricultural Development and Exports 286 1. Changes in Cultivated Area and Production 286 2. Export Performance 288 3. Input Use in Agriculture 290 B. Government Intervention in Output Markets 295 1. Price Support Policy 295 2. External Trade Policy 298 3. Input Pricing Policy 302 C. Incentives and Export Performance 304 1. Nominal and Effective Protection 304 2. Effects of Incentives in Exports 304 D. Market Prospects for Agricultural Exports 317 1. Agricultural Exports to the EEC and the Middle East 317 2. Prospective Developments 319 E. Agricultural Sector Model 326 1. Static Simulations 326 2. Dynamic Simulations 331 F. Recommendations 333 1. Product Policies 333 2. Input Policies 335 Chapter 8: TOURISM 337 Introduction 337 A. Recent Trends 337 1. International Tourist Traffic 337 2. Tourist Accommodations 342 3. Employment 346 4. Foreign Exchange Receipts 346 5. Domestic Resource Costs of Earning Foreign Exchange from Tourism 349 B. Prospects Until 1990 349 1. Competitiveness 349 2. Increasing Turkey's Market Share 351 3. Required Investments '351 4. Prospective Foreign Exchange Receipts and Employment 352 C. Policies for Tourism Development 353 1. A Ten-Year Plan 353 2. Expansion of Accommodation Capacity 353 3. Hotel Finance 355 4. Civil Aviation 357 5. Market Promotion 358 Annex 8.1: Domestic Resource Costs of Earning Foreign Exchange from Tourism 360 PART III; METHODOLOGICAL AND STATISTICAL ANNEX Annex I; A SECTOR MODEL OF TURKEY'S AGRICULTURE 365 A. Introduction 365 B. The Model 365 C. Base Year Solution and Validation of the Model 366 D. Comparative Advantage and Effective Protection 367 E. Gains and Losses from Protection and Free Trade Scenarios 371 F. Projections to 1990 379 G. Some Conclusions 382 Appendix I: Agricultural Sector Model for Turkey: The Data 384 Annex II; STATISTICAL TABLES 401 LIST OF TEXT TABLES PART II; THE MAIN REPORT Page No. Chapter 1: INTRODUCTION Table 1.1 Balance of Payments Effects of External Shocks and of Policy Responses to these Shocks (US$ million) 40 1.2 Balance 6f Payments Effects of External Shocks and of Policy Responses to these Shocks (percent) 41 1.3 Interest, Debt Service and Debt Service Ratios 42 1.4 Real Exchange Rates in Turkey, 1967-1981 44 1.5 Domestic Expenditure Shares, Incremental Capital- Output Ratios and Growth Rates 45 Chapter 2; PRODUCTION INCENTIVES I Table 2.1 Real Exchange Rates vis-a-vis the Deutsche Mark, 1967-1981 55 2.2 Export Tax Rebate Rates, 1975-1981 59 2.3 The Sectoral Profile of Export Tax Rebate Lists in Manufacturing; Frequency Table; May 1981 61 2.4 The Sectoral. Profile of Export Tax Rebates Lists; Frequency Table; Changes between 1980 and May 1981 62 2.5 Export Tax Rebates, 1975 - Second Quarter 1981 63 2.6 Export Tax Rebates in the Manufacturing Sector, 1979 - Second Quarter 1981 65 2.7 Interest Rate Structure 68 2.8 Export Credit Used 70 2.9, Export Credit Used in the Manufacturing Sector, 1979 Second Quarter 1981 72 2.10 Foreign Exchange Allocation 76 2.11 Foreign Exchange Allocation with Certificate in the Manufacturing Sector, 1979 - Second Quarter 1981 77 2.12 Temporary Imports with Payment, 1980 79 2.13 Foreign Exchange Retention: 1979 - First Four Months 1981 81 2.14 Shares of Specific Export Subsidies in the Combined Export Subsidy; 1979 Second Quarter 1981 85 2.15 Exports Subsidies: Summary Evolution 1979 - fiecond Quarter 1981 86 2.16 Estimation of the Real Export Exchange Rate 88 2.17 Nominal Tariff Protection in the Manufacturing Sector 92 2.18 Nominal Tariff Protection in the Manufacturing Sector (By aggregated I-0 Sector) 93 2.19 Effective Tariff Protection in the Manufacturing Sector 95 2.20 Effective Tariff Protection in the Manufacturing Sector (By aggregated T-0 Sector) 97 2.21 Rates of Guarantee Deposits on Imports 101 2.22 Imports by Source: 1978 - First Quarter 1981 103 2.23 Nominal Implicit Protection Coefficients (NPC) and Nominal Tariff Protection Coefficients (NTP) for Selected Manufactured Products 105 2.24 Estimation of the Tariff Induced Bias Against Exports 107 Appendix Table I Estimation of the Combined Export Subsidy in the Manufacturing Sector: 1979 110 2 Estimation of the Combined Export Subsidy in the Manufacturing Sector: 1980 112 3 Estimation of the Combined Export Subsidy in the Manufacturing Sector; First Quarter 1981 114 4 Estimation of the Combined Export Subsidy in the Manufacturing Sector: Second Quarter 1981 116 5 Items Transferred from Liberalized List II to Liberalized List I 118 6 Former Quota Items Transferred to Liberalized List I 119 7 Former Quota Items Transferred to Liberalized List II 120 Chapter 3: THE FINANCING OF ECONOMIC ACTIVITY Table 3.1 Survey of the Banking Sector of Turkey 123 3.2 Factors Determining the Monetary Base 124 3.3 Multiplier of the Monetary Base 126 3.4 Demand for Money 129 3.5 Interest Rates on Deposits 130 3.6 Currency and Bank Deposits 131 3.7 The Turkish Banking System 134 3.8 Costs of Funds from Deposits Which May be Used for Non-Preferential Credit 137 3.9 Operating Costs and Profits of Deposit Money Banks 140 3.10 Operating Costs of Commercial Banks in Several OECD Countries 141 3.11 Bonds Issued 144 3.12 Distribution of the Total Domestic Financial Assets of the Banking Sector 149 3.13 The Financing of Public Administrations by the Banking System 151 3.14 Consolidated Budget 152 3.15 Financing of State Economic Enterprises 156 3.16 Claims of the Banking Sector on Public Enterprises 158 3.17 Liabilities of Investment and Development Banks 163 3.18 Interest Rates and Rediscount Rates on Agricultural Credits 165 3.19 Interest Costs to the Borrower of Export Credits as Compared with General Credits 167 Annex Table A 3.1 Example for Export Credit Subsidization 172 Chapter 4: THE SYSTEM OF TAXATION AND INVESTMENT INCENTIVES 174 Introduction 174 A. The Tax System 174 1. Overview 174 2. Direct Taxes 176 3. The Social Security System 183 4. Indirect Taxes 184 5. The Revenue Effects of Alternative Tax Schemes 191 B. Investment Incentives 194 1. Overview 194 2. Domestic Investment Incentives 196 3. Foreign Investment Incentives 200 4. Policy Recommendations 201 Chapter 5: INDUSTRIAL DEVELOPMENT AND EXPORTS 204 Introduction 204 A. The Structure and Development of the Manufacturing Industries 206 1. Sectoral Composition 206 2. Ownership 206 3. Size Distribution 206 4. Regional Distribution 208 5. Capital Intensity 208 6. Labor Productivity 209 7. Employment in Manufacturing 211 B. The Development of Exports 212 1. Manufactured Exports 212 2. Construction Contracts 216 C. Investments and Capacity Utilization 217 1. Changes in Investment Over Time 217 2. Private Sector Investment 219 3. Public Sector Investment in Manufacturing 221 D. Factors Affecting Productivity 222 1. Research Activities 222 2. The Organization of Research 224 3. Labor Training 224 E. Comparative Advantage 226 1. Manufacturing in General 226 F. Markets and Institutions 234 1. Marketing Constraints 234 2. Export Development and Promotion Center 234 3. Export Trading Companies 235 4. Market Prospects in the Middle East 236 5. Market Prospects of Industrial Exports to EEC 238 Annex 5.1: EEC Relations 241 Chapter 6: STATE ECONOMIC ENTERPRISES IN MANUFACTURING Table 6.1 Public Sector Shares in Manufacturing Industry, 1979 249 6.2 Ratio of Public to Private Output per Unit of Input 251 6.3 Rates of Return on Some DYB Sub-projects 253 6.4 Ratios of Domestic to Border Prices of Selected State Enterprise Products, 1970-76 and 1981 254 6.5 Gross Profit (Loss) and Financing Requirements of State Manufacturing Enterprises, 1979 255 6.6 Exports and Imports of Major State Manufacturing Enterprises, 1980 257 6.7 Real Wage Level in Public and Private Manufacturing Industries, 1975 264 6.8 Program and Actual -Financial Performance of Five State Manufacturing Enterprises in 1980 272 Chapter 7: AGRICULTURAL DEVELOPMENT AND EXPORTS 7.1 Cultivated Area by Major Crops 287 7.2 Exports of Agricultural Commodities 289 7.3 Regional Cropping Patterns 290 7.4 Climate 291 7.5 Agriculture; Estimates of Incremental Capital Output Ratios 292 7.6 Fertilizer Supply and Consumption 1978 293 7.7 Comparison of Optimum and Actual Fertilizer Use, 1978 294 7.8 Agricultural Support Prices 296 7.9 Comparison of Domestic and Border Prices of Major Agricultural Commodities, 1980 ' 300 7.10 Major Agricultural Exports, Calendar Years 1976-1980 301 7.11 Fertilizer Subsidies as a Percentage of Retail Price 302 7.12 Official Retail Prices of Fertilizer in 1979 and 1980 302 7.13 Nominal and Effective Protection Coefficients in Agriculture 305 7.14 Nominal Protection Coefficients: Wheat and Cotton 306 7.15 Nominal Protection Coefficients for Fruits 310 7.16 Fruits and Vegetable Processing Sector: Capacity Utilization and Performance 313 7.17 Estimated Costs of Production of Fruit Juice Concentrate and Pulp, 1980 315 7.18 The Share of EEC in Agricultural Exports of Turkey 318 7.19 EEC Common Tariffs on Citrus Fruit Imports and Concessions to Turkey 322 7.20 Distribution of Citrus Exports from Turkey, 1973 and 1979 322 7.21 EEC Tariffs and Concessions to Turkey 324 7.22 Exports of Fresh Vegetables from Turkey 325 7.23 Free Trade Solution - Equilibrium Exchange Rate 327 7.24 Free Trade Solution - With Minimum Consumption Constraints 329 7.25 Value Added; Projected Compound Rate of Annual Increase (%) under Free Trade (1990) 332 Chapter 8: TOURISM Table 8.1 Arrivals of Visitors, 1963-1980 338 8.2 Distribution of Foreigners Arriving in Turkey, by Nationality, 1972-80 339 8.3 Distribution of Foreigners Arriving in Turkey by Months and Means of Transport, 1980 340 8.4 Distribution of Foreigners Arriving in Turkey by Country of Nationality and Means of Transport 341 8.5 Registered Accommodation Capacity, December 31, 1980 343 8.6 Bed Occupancy Rates in a Sample of Establishments, 1975-80 , 344 8.7 Wages and Gross Operating Profits as a Proportion of Revenues for Selected Hotels, 1980 345 8.8 Tourism Receipts and Merchandise Exports, 1963-1980 347 8.9 Average Expenditures by Tourists, 1963-1980 348 8.10 Package Prices to Competing Mediterranean Destinations, July-August, 1981 350 Annex Table A 8.1 Calculation of Domestic Resource Costs of Earning Foreign Exchange from Tourism 363 A 8.2 Estimated 1980 Replacement Cost of Accommodation Establishments 364 PART III: METHODOLOGICAL AND STATISTICAL ANNEX Annex I; A SECTOR MODEL OF TURKEY'S AGRICULTURE A 1.1 Comparison of Production Levels Between Actual, 1978 Data and Model Solution 368 A 1.2 Comparison of Base Year, Import, Export and Endogenous Prices 369 A 1.3 Turkey: Analysis of Comparative Advantage in Agriculture in 1978 370 A 1.4 Patterns of Production, Consumption and Trade Under Present and Free Trade Scenarios 372 A 1.5 Comparison of Trade Balance Under Present and Free Trade Scenario 374. A 1.6 Comparison of Restricted Trade/Devaluation Scenario (Scenario 1) with Free Trade/Overvalued Exchange Rate Scenario (Scenario 2) 375 A 1.7 Free Trade Solution-with Minimum Consumption Levels 376 A 1.8 Import-Export Balance in the Free Trade Minimum Consumption Solution 377 A 1.9 Gains and Losses from Free Trade 378 A 1.10 Average Annual Percentage Increase in Production by Product Under Alternative Trade Scenarios: Projections to 1990 380 A 1.11 Shadow Prices of Land Constraints 381 Appendix Table I.1 Crop Production Activities 385 I.2 Livestock Production Activities 387 I.3 Resource Availability 389 I.4 Conversion Factors 390 I.5 Output Prices 392 I.6 Yields 393 I.7 The Demand Elasticities Used in the Model 394 I.8 Foreign Trade Statistics .395 ANNEX II: STATISTICAL TABLES Table Number Page No. Section 1: Population and Employment 1.1: Demographic Characteristics 402 1.2; Labor Force, Employment and Uniemployment 403 1.3: Employment in Manufacturing Industry 404 1.4: Annual Emigration and Workers Employed Abroad 405 1.5: Employment by SEEs 406 Section 2: National Income Accounts 2.1 Gross Domestic Product at Current Prices by Sectoral Origin 407 2.2: Gross Domestic Product at 1968 Prices by Sectoral Origin 408 2.3: Expenditure on Gross National Product at Current Prices 409 2.4: E.cpenditure on Gross National Product at 1968 Prices 410 2.5: Sectoral Fixed Investment at Current Prices by Government and Private Sector, 1972-1980 411 2.6; Sectoral Fixed Investment at 1976 Prices by Government and Private Sector, 1972-1980 412 Section 3: Foreign Trade and Balance of Payments 3.1; Balance of Payments 413 3.2: Commodity Composition of Exports 414 3.3: Commodity Composition of Imports 415 3.4: Invisible Receipts and Payments 416 3.5: Geographical Distribution of Exports 417 3.6: Geographical Distribution of Imports 418 Section 4: External Debt 4.1: Long-term Debt Outstanding 419 4.2: Disbursements Received from Long-term Loans 420 4.3: Long-term Loan Commitments Received 421 4.4: Average Terms of Long-Term Public Sector External Commitments Received 422 Section 5: Public Finance 5.1: Consolidated Budget Summary 423 5.2: Consolidated Government Revenue 424 5.3: Internal Public Debt 425 5.4: Profit and Loss Account of SEEs 426 5.5: Financing of Investment by SEEs 427 5.6 Fixed Investment by SEEs 428 Section 6: Money and Banking 6.1: Money and Banking 429 6.2: Distribution of Central Bank Creaits 430 6.3: Consolidated Commercial Bank Credits 431 6.4: Composition of Bank Deposits 432 6.5: Lending and Deposit Interest Rates 433 Section 7: Prices and Wages 7.1; Price Indices 434 7.2: Average Daily Wages of Workers by Economic Activity 435 7.3: Trends in Real and Nominal (Daily) Wages 436 7.4: Government Salaries by Grades, 1970-1979 437 7.5: Public and Private Sector Wages 438 7.6: Collective Agreements and Coverage in Turkey 439 Section 8; Agriculture 8.1; Principal Land Use 440 8.2 Land Areas for Cereals, Pulses, and Industrial Crops 441 8.3; Output of Cereals, Pulses and Industrial Crops 442 8.4; Yields of Cereals, Pulses and Industrial Crops 443 8.5; Output of Nuts and Fruits 444 8.6: Use of Major Agricultural Inputs 445 8.7: Agricultural Support Prices 446 8.8: Official Prices of Agricultural Inputs 447 Section 9: Industry 9.1: Output of Selected Industrial Goods 448 9.2: Value of Manufacturing Production 449 9.3; Fixed Investment in Manufacturing 450 9.4; Sectoral Distribution of Establishments, Employment, Output, Value Added and Investment in Public Manufacturing Industry - 1979 451 9.5: Sectoral Distribution of Establishment, Employment, Output, Value Added and Investment in Private Manufacturing Industry - 1979 452 9.6; Production Figures for the first ten months of 1979, 1980, and 1981 453 9.7: Output of Petroleum, Coal and Major Minerals 454 9.8: Production of Electricity (Gross) 455 Map **** ** * Symbols Used in Statistical Tables Not available Zero or negligible TURKEY CURRENCY EQUIVALENTS Currency Unit Jan. 1980 /1 Oct. 1980 June 30, 1981 Sept. 1, 1981 US Dollar TL 70.0 /2 TL 83.50 /2 TL 100.00 /2 TL 120.00 TL 1 = US$ 0.01 US$ 0.01 US$ 0.01 US$ 0.01 /1 Since January 1980, the rate is being adjusted for the differential inflation between Turkey and its major trading partners. TL 100/$1.00 was used for this report. /2 Except for imports of fertilizers and insecticides/pesticides, as well as raw materials and inputs for their manufacture, for which the rate was TL 55/$1.00 in January 1980, and is TL 70.0/$1.00 from October 1980, and TL 85.34/$1.00 from April 15, 1981. GLOSSARY OF ABBREVIATIONS BIS - Bank of International Settlements CTLD - Convertible Turkish Lira Deposit CPI - Consumer Price Index DRC - Domestic Resource Costs DRS - Debt Reporting System GATT - General Agreement on Trade and Tariffs IGEME - Export Development Center ILO - International Labor Office ITC - International Trade Center LIBOR - London Interbank Offer Rate LFPR - Labor Force Participation Rate MB - Monetary Base M< - Medium and Long-term MI - Annual Survey of Manufacturing Industries MIC - Middle Income Countries OECD - Organization for Economic Cooperation and Development SDR - Special Drawing Rights SEE - State Economic Enterprise SII - Social Insurance Institute SIS - State Institute of Statistics SPO - State Planning Organization TCEA - The Turkish Confederation of Employer Associations TEK - Turkish Electricity Authority TL - Turkish Lira TPAO - Turkish Petroleum Company TSKB - Industria.l Development Bank of Turkey VAT - Value Added Tax FISCAL YEAR .March 1 - February 28 TURKEY-COUNTRY DATA Population: 44.8 million (1980) GNP Per Capita: US$1460 (1980) Amount Average Annual Increase (x) Share of GDP at Market Prices (%) (million US$ (at constant 1980 prices) (at current prices) Indicator at current prices) 1980 1965-70 1970-75 1975-80 1965 1970 1975 1980 NATIONAL ACCOUNTS Gross domestic product /a 56,617 6.6 7.5 2.8 100.0 100.0 100.0 100.0 AgriculturL 12,112 3.1 4.4 2.7 30.7 26.4 26.2 21.4 Industry /b 13,529 9.5 9.5 2.9 16.6 17.2 18.0 23.9 Services 27,925 8.2 8.0 3.7 42.9 46.5 46.0 54.5 Consumption 47,918 5.8 7.0 2.5 84.6 82.8 84.8 82.4 Gross investment 13,022 11.7 12.9 1.8 16.7 20.1 23.7 25.4 Exports of goods and NFS 4,130 7.9 7.3 0.9 6.1 5.8 6.1 7.1 Imports of goods and NFS 8,453 11.2 13.8 -3.5 7.4 8.7 14.5 14.8 Gross national savings 9,764 11.6 11.9 3.3 15.8 18.8 18.4 20.1 Average Annual Increase (X) Composition of Merchandise Trade (%) (at constant 1980 prices) (at current prices) 1970-75 1975-80 1965 1970 1975 1980 MERCHANDISE TRADE Merchandise exports 2,910 -0.8 4.6 100.0 100.0 100.0 100.0 Primary /c 1,863 -4.3 4.6 80.0 83.0 64.1 64.0 Industrial products 1,047 17.0 4.7 20.0 17.0 35.9 36.0 Merchandise imports 7,667 12.4 -4.7 100.0 100.0 100.0 100.0 Food 308 9.9 -17.6 6.0 9.3 8.3 4.0 Petroleum 3,620 18.5 9.9 10.0 7.0 17.0 47.2 Machinery & equipment /d 1,435 9.9 -16.2 39.9 39.8 38.5 18.7 Other 2,304 12.1 -6.4 44.1 43.9 36.'2 30.1 1975 1976 1977 1978 1979 1980 PRICES AND TERMS OF TRADE GDP deflator 15.1 17.7 22.1 30.2 48.3 100.0 Exchange rate 14.4 16.1 18.0 24.3 36.4 76.4 Export price index 60.4 62.8 68.9 73.0 85.9 100.0 Import price index 48.6 49.1 54.2 61.7 72.8 100.0 Terms of trade index 124.3 127.9 127.1 118.3 118.0 100.0 As % of GDP (at current prices) 1965 1970 1975 1980 PUBLIC FINANCE Current revenue 15.0 22.6 22.0 19.8 Current expenditure 10.0 11.8 12.6 11.5 Surplus (+) or deficit (-) -2.0 -2.3 -0.4 -4.8 Investment expenditure 4.7 5.7 4.2 3.9 Transfers 5.0 7.5 5.5 9.2 Foreign financing 1.8 1.6 0.3 0.2 1965-70 1970-75 1975-80 OTHER INDICATORS GNP growth rate (%) 6.8 7.7 2.6 GNP per capita growth rate (%) 4.1 5.0 0.3 ICOR 2.9 2.9 5.7 Marginal savings rate (%) 28.2 19.5 30.8 Import elasticity 1.7 1.8 -1.3 /a At inarket prices; components are expressed at factor cost and will not add due to exclusion of net indirect taxes and subsidies. /b Includes mining and quarrying, manufacturing, and electricity, gas, and water. Ic Includes agriculture and mining and quarrying. /d Includeq mnetal products and machinery, electrical appliances, and transportation vehicles. TURKEY-BALANCE OF PAYMENTS, EXTERNAL CAPITAL AND DEBT (.illion US* *t current prices) Population: 44.8 million (1980) GNP Per Capita: US01460 (1980) Actual Proiected 1970 1975 1976 1977 1978 1979 1980 1981 1983 1985 BALANCE OF PAYMENTS Net exports of goods & NFS 342 3067 2993 3880 1953 2442 4293 3853 3937 3537 Exports of goods & NFS 754 215Z 2742 2556 3106 3257 4102 5530 8295 12271 Imports of goods & NPS 1096 5219 5735 6436 5059 5699 8396 9383 12232 15808 Vorkers' Remittances 273 1312 983 982 983 1694 2071 2500 2916 3354 Net transfers 91 23 15 12 - - - - - - Current account balance -58 -1892 -2295 -3572 -1710 -1771 -3196 -2634 -3035 -3164 Direct private investment 92 251 163 169 147 200 100 220 284 369 Public M6LT (gross) /a 271 334 720 997 1017 4321 /d 2489 2453 3082 3521 Amortization on M<7a (excl. debt relief) -146 -175 -203 -234 -336 -414 -914 -982 -1992 -2424 Public M6LT (net) /a 125 159 517 763 681 3907 1575 1471 1090 1097 Debt Relief (amortization only) - - - - - - 814 533 811 -224 Other capital /b 27 1065 1503 2074 1030 -2410 1099 651 1072 2175 Change in reserves (- = increa.e) -186 417 112 566 -148 74 -392 -241 -222 -253 International reserves 612 1404 1292 726 874 800 1192 1433 1825 2312 eservesasmonths of iports * 7 3 3 1 2 2 2 2 2 2 Actual 1972 1975 1976 1977 1978 1979 1980 GROSS DISBURSEMENTS Official grants - - - - - Gross disbursements of M< loans 372 324 720 997 1017 4321 /c 2489 Concess ional 261 100 167 193 227 596 909 Bilatera'l 139 69 81 130 192 510 849 IDA 4 18 21 19 8 3 - Other multilateral 118 13 65 44 27 83 60 Non-conce- s ional ill 224 553 804 790 3725 /c 1580 Official export credits 1 47 57 47 91 202 283 IBRD 25 91 117 146 165 277 313 Other multilateral 27 48 54 5 35 11 35 Private /c 58 38 325 606 499 3235 /c 949 EXTERNAL DEBT Debt outstanding and disbursed /d 2538 4475 6883 10943 14313 15791 17119 Official 2273 2980 3275 3648 5970 7198 9265 IBRD 92 288 391 512 648 890 1157 IDA 99 144 163 181 188 190 184 Other 2082 2548 2721 2955 5134 6118 7924 Private /a 246 340 558 1104 1144 4101 /e 5007 Short-ter. 19 1155 3050 6191 7199 4492 2847 Debt outstanding including undisburaed (public and private) 3560 6086 9207 13736 17554 19794 22875 DEBT SERVICE Total debt service /e 224 291 368 418 532 689 712 Payments 161 175 203 234 336 414 100 Interest 63 116 165 184 196 275 612 Total debt service as X exports of goods + NFS + workers' remittances 11.8 8.4 9.9 11.8 13.0 13.9 11.5 Total debt service as X GNP 1.3 0.8 0.9 0.9 1.0 1.2 1.2 Average interest rate on new loans (X) 4.4 7.3 7.2 7.6 6.9 11.2 8.5 Official 4.5 6.4 7.1 7.6 6.3 4.4 Private 6.8 8.7 7.8 7.6 8.2 13.7 Average maturity of new loans (years) 22.1 13.1 12.7 11.7 13.2 11.1 8.2 Official 26.0 18.6 17.3 14.5 15.6 23.5 Private 11.0 5.1 10.2 8.9 7.6 7.1 BANK GROUP EXPOSURE (2) IBRD DOD/total DOD 3.7 8.7 10.2 10.8 9.5 7.7 6.8 IBRD disbursements/total gross disbursements 6.7 27.2 16.3 14.6 16.2 6.4 12.5 IBRD debt service/total debt service /e 5.1 10.5 11.7 15.0 15.4 15.3 18.8 IDA DOD/total DOD 3.9 4.3 4.3 3.8 2.7 1.6 1.1 IDA disbursements/total gross disbursements 1.1 5.4 2.9 1.9 0.8 0.1 - IDA debt service/total debt service /e . 0.4 0.6. 0.6 0.5 0.4 0.4 0.4 As X of Debt Outstanding at End of Most Recent Year (1980) TERMS STRUCTURE Maturity structure of debt outstanding (2) Maturities due within 5 years 40.7 Maturities due within 10 years 60.3 Interest structure of debt outstanding (X) Interest due within first year 5.7 /a Includes private guaranteed and non-guaranteed debt. /b Includes errors and emissions, and for projected years it includes 0et IMF, and unidentified capital inflows. 7T Includes $2,638 million of consolidated ahort-term debt. /d Includes stock of ahort-term, and debt relief, but excludes IMF borrowing. 7e Takes account of debt relief due to debt rescheduling, and excludes interest on ahort-term debt. INDUSTRIALIZATION AND TRADE STRATEGY AN OVERVIEW Background i. Development policies in Turkey traditionally favored import substitution over exports and industry over agriculture, with public enterprises playing an important role in the economy. After initial successes, these policies encountered increasing difficulties as high-cost import substitution, aggravated by inefficiencies in public enterprises, led to a decline in the productivity of investment. ii. Until 1977, high rates of economic growth were nevertheless maintained by raising the share of investment in the gross domestic product. The rise in investment was financed by savings from workers' remittances and, following the quadrupling of oil prices, increasingly by foreign borrowing. Rising external indebtedness, in turn, raised questions concerning Turkey's creditworthiness. As a result, foreign borrowing practically ceased in 1978, creating a foreign exchange scarcity that aggravated the adverse economic effects of the import-substituting policies. The 1980-81 Policy Measures iii. The policy reforms introduced in January 1980 aimed not only at redressing the economic situation, but also at changing the development strategy Turkey followed for several decades. The newly-adopted strategy has entailed moving towards outward orientation and giving an increased role to market forces. iv. The measures applied in January 1980 included the devaluation of the Turkish lira from TL47 to TL70 to the U.S. dollar; duty-free entry of imported inputs used in export production; the simplification of the procedures involved in obtaining export incentives and import licenses; the streamlining of administrative regulations on investment incentives, with the reorientation of priorities towards export-oriented activities, agriculture, and tourism; a more positive attitude taken towards foreign investment; and the liberalization of the prices charged by the state economic enterprises. In July 1980, the rediscount rate of the Central Bank on short-term notes was raised to a considerable extent and interest rates paid to savers, and charged to borrowers, were freed. In January 1981, the system of income taxes was reformed, imports liberalized, and additional export incentives provided; these were further supplemented by increases in export tax rebates and daily adjustments in the exchange rate in May 1981. In July 1981, interest rates on bonds were freed and their indexation allowed. v. While the January 1980 reforms had some immediate effects, their impact was delayed by reason of the unsettled domestic conditions until September 1980. The main achievements subsequently have been the rapid expansion of exports, with their dollar value rising by 64 percent between the first ten months of 1980 and of 1981; the rise in foreign investment, reaching anlestimate of $110 million in 1981 as compared to $33 million in 1980; increases in time deposits and certificates of deposits, from TL 123 billion in September 1980 to TL 450 billion in September 1981; and a decline in the rate of inflation from a peak of 133 percent between February 1979 and February 1980 to slightly below 35 percent in the second half of 1981. However, with sluggish business conditions associated with the stabilization measures applied, private investment remained stationary and there was little change in industrial employment in the face of increases in the labor force. The Need for Medium-Term Policies vi. The important measures taken so far would nieed to be complemented by further actions in order to fully implement Turkey's newly-adopted development strategy. This will require time; given the long period of inward orientation and the limited use of the market mechanism, in particular in the public sector, the changeover cannot be affected overnight. Nor is this desirable since firms in the private and the public sectors need to adjust to the changing circumstances. At the same time, for firms to adjust, they need considerable certainty as to the shape of things to come. vii. This objective would be served by the adoption of a medium-term policy framework. Such a framework would incorporate measures aimed at encouraging efficient exports and import substitution, promoting savings and investment, fostering modernization and technical change, and reforming the state economic enterprises. There is further need for establishing an appropriate institutional structure to formulate and to implement medium-term policies. Finally, government regulations and the process of their practical implementation would need to be simplified. Encouraging Exports and Efficient Import Substitution viii. Efficient exports and import substitution would be encouraged by increasing reliance on the exchange rate as a policy instrument in the place of import protection and export subsidies. Furthermore, as long as inflation is more rapid in Turkey than in its major trading partners, continued adjustments in exchange rates are necessary to maintain the competitiveness of Turkish exports. ix. To reduce the bias against exports and to promote efficient investments, the existing high levels of import protection would need to be lowered to a considerable extent. There is further need to lessen disparities in rates of import protection and to rationalize the use of instruments of protection. While carrying out these tasks will require time, both to limit economic disruptions and to avoid a substantial deterioration of the balance of payments, it would further be desirable to make public a time-table on the reform of the system of protection, so as to prepare firms for the changes to be made. x. The reform would need to include, first of all, the gradual replacement of import licensing by tariffs, with priority given to liberalizing the importation of intermediate products and mnachinery. It would further be desirable to establish a tariff ceiling that would be attained over a transitional period of five years, during which time differences in tariff rates would also be reduced. The tariff ceiling may be set at 30 percent, with additional incentives granted to infant industries on a temporary basis and on a degressive scale. To the extent possible, infant industry incentives should be provided in the form of production and investment subsidies rather than tariffs, so as to encourage exporting. This is of particular importance in the electrical and non-electrical machinery, machine-tool, and electronics industries, which may be regarded as infant industries in Turkey, because the exploitation of economies of scale will not generally be possible in the confines of the domestic market. xi. With increased reliance placed on the exchange rate, the extent of export subsidies should be reduced and the procedures involved simplified. This may involve lowering rates of credit subsidies and relating them to value added in exports; eliminating the additional five percent of tax rebate provided to exporters whose annual exports exceed $15 million; and reconsidering the partial deductibility of exports, and increments in exports, from taxable income. xii. Parallel with reductions in export subsidies, it would be desirable to extend the free trade treatment of exports by ensuring duty-free access to all inputs used in export production. Furthermore, to permit Turkish firms to better compete abroad in exporting durable goods, there would be need for a medium-term credit facility, complemented by an export credit guarantee scheme. Credit facilities for investments in tourist accommodations also need to be improved, and institutional and tax measures taken to improve the marketing of manufactured and agricultural exports and tourism. xiii. The exploitation of Turkey's agricultural potential would necessitate rationalizing the price system, limiting government interventions, as well as institutional changes. For traded crops, such as wheat, barley, and cotton, where Turkey holds a small share in the world market, domestic prices should be adjusted to the trend in world market prices, with interventions limited to setting guaranteed floor prices in years of low prices and levying an export tax in years of high prices. It would further be desirable to provide credit to finance input purchases and the holding of stocks by farmers at realistic interest rates, to establish a crop insurance scheme, and to further encourage the involvement of the private sector in foreign trade. For traditional exports, such as tobacco, hazelnuts, raisins, and figs, which are subject to market limitations abroad, export taxes should be set with a view to discourage undesirable expansion while ensuring adequate foreign exchange earnings. Further changes towards establishing rational prices for agricultural inputs would be desirable and, among institutional measures, improvements in transportation facilities should receive particular attention. Promoting Savings and Investment xiv. The restructuring of the economy in the process of increased outward orientation would necessitate new investments. This, in turn, requires higher domestic savings as well as foreign investment in Turkey, while ensuring the efficient allocation of investment funds. Apart from the measures proposed in Para. viii, to xiii, these objectives would be served by reforming the tax system, the system of financial intermediation, and investment incentives. xv. Increases in private savings may be attained if the taxation of interest earnings and capital gains is limited to real returns by making adjustments for inflation. To promote business savings, the profits of corporations and unincorporated businesses should also be adjusted for inflation through the revaluation of assets and changes in the treatment of inventories. While the implementation of these measures would lower tax - iv - revenues, the loss would be compensated through the introduction of the value added tax. In preparing for the introduction of the VAT, indirect taxes may be raised to provide the necessary revenues. xvi. Reducing the spread between interest rates paid by borrowers and received by depositors through the elimination of the financial transactions tax as well as the lowering of the cost of holding reserves with the Central Bank would further increase the availability, and decrease the cost, of investible funds to the private sector. Reducing the deficit of the public sector would also have such an effect. This is a particularly urgent task, lest "crowding out" occurs through limitations on the availability of credit and its high cost to the private sector. xvii. The efficient allocation of investible funds would be promoted by revitalizing capital markets and limiting the scope and extent of selective credits. This objective would also be served, and private investment promoted, through further simplifications and greater automaticity in the granting of investment incentives and the use of incentive measures that do not favor capital-intensive investments. xviii. Additional measures need to be taken to attract new foreign investment, so as to increase the amount of capital resources available and to bring managerial, technical, and marketing know-how to Turkey. In particular, liberal and unambiguous rules should be established as regards the repatriation of capital and dividends. It would further be desirable to eliminate the requirement of co-operation with state economic enterprises as a condition for foreign investment in certain activities. Finally, Turkey could become a more attractive location for foreign investors, if the lira was made convertible as is being envisaged by the government. Fostering Modernization and Technical Change xix. A priority task for the further development of Turkish industries is to ensure technological progress and to provide for labor training. This is necessary in order to provide modern inputs for user industries and to shift towards skill-intensive activities, where Turkey's comparative advantage will increasingly lie in the future. xx. The government may contribute to the promotion of technological progress through the establishment of specialized institutions of applied research. Such institutes may play an especially important role in certain engineering branches and in the chemical industry. At the same time, their establishment would need to be complemented by granting tax incentives for research and development to private firms. xxi. These measures should be part of a medium-term plan of science and technology, which should further provide for the development of technical universities that represent a link between research and the training of scienLists and engineers. The training of technicians and skilled workers would also be promoted through the establishment of specialized schools and courses, as well as through tax benefits to firms undertaking training. -v- xxii. Efforts made to promote research and training would benefit, in particular, the electrical and non-electrical machinery, machine tool, and electronics industries. These industries may also receive supplementary investment incentives and preferential medium-and long-term credit on infant industry grounds. They could further be assisted through the establishment of specialized industrial parks where ancillary activities would be available. At the same time, the development of the industrIes in question requires considerable flexibility to respond to changing world market conditions that can best be served by relying on private initiative. Correspondingly, it would be desirable to forego the implementation of government investments in these industries which, at any rate, would largely involve the duplication of existing facilities. Reforming the State Economic Enterprises xicii. The reform proposals under review represent important changes in increasing the independence of the SEEs. They would need to be complemented by other measures as regards organizational issues and the choice of new investments. Turkey may profitably follow the example of Hungary in decentralizing decision-making and ensuring competition among producing units in the public sector. This would require breaking up industry-wide SEEs and giving firm managers the freedom to decide on production, prices, and on employment, with a view to maximizing profits. In basic industries where technological considerations do not permit breaking up the SEEs, domestic prices should be linked to world market prices, with allowance made for acceptable levels of protection, as long as the conditions of import competition are not established. xxiv. In the process of integrating the SEEs in the. market economy, one should equalize the conditions under which private and public firms operate by eliminating credit and other subsidies to the SEEs and equalizing corporate income tax rates. Eventually, new investments in the SEEs should be financed in the same way as private investment. This, however, would'require considerable improvements in the operation of the SEEs. xxv. As long as investment decisions are not delegated to the enterprises, and financing is provided by public development banks, new investments should be subject to economic project evaluation at world market prices. The re- evaluation of projects included in the investment program of the State Planning Organization would also be necessary as a follow up to the Bank's Public Sector Investment Review. This, in turn, would necessitate establishing an economic project evaluation capability. Policy Interdependence and Macroeconomic Considerations xxvi. The elimination of inefficient investment projects would permit limiting the size of the public investment program. The reduction of the deficit of the public sector would further necessitate economizing on public consumption expenditures. In this way, one may reverse recent tendencies that increased the use of resources by the public sector at the expense of the private sector. xxvii. These considerations indicate the interdependence of decisions concerning the public and the private sectors. The measures affecting the - vi - generation of savings and investment and incentives to particular activities are also interdependent. For one thing, increasing the availability of investible funds is required to develop efficient exports and import substiltution. For another thing, rationalizing the system of incentives is necessary to ensure the appropriate choice of investments. xxviii. Correspondingly, the simultaneous implementation of the proposed medium-term policy measures is needed for each of them to have maximum effect. Their full implementation may permit attaining an export growth rate of nearly 18 percent, and a GDP growth rate of about 5 percent, in the 1981-85 period. xxix. High rates of economic growth would generate increased employment. Greater outward orientation would also contribute to employment as exports tend to be more labor intensive than import substitution, ),oth in industry and in agriculture. Employment would further benefit as a result of changes in investment incentives that would make them more neutral in their effects on the choice of techniques, reductions in social charges paid by firms, as well as the elimination of existing discrimination in export and investment incentives against small-and medium-scale enterprises. xxx. At the same time, the growth of output and employment in the process of structural transformation will continue to require foreign assistance to Turkey. It should be recognized by the international community that the shift from inward-to outward-orientation is a long process, necessitating considerable investments which cannot be financed from domestic savings alone. P A R T I T H E S U M M A R Y R E P O R T ...... .. -.. CHAPTER 1. INTRODUCTION 1. Following several decades of basically inward orientation of policies, in January 1980 Turkey adopted a development strategy that has entailed moving towards outward orientation and giving an increased role to market forces. This present report examines the policy conditions of the full implementation of this strategy, and proposes the adoption of a medium-term policy framework for the purpose. It follows earlier Bank reports "Turkey: Policies and Prospects for Growth" (December 12, 1979) and "Public Sector Investment Review" (December 7, 1981). A separate report will deal with energy. Inward-oriented Industrialization, 1963-73 2. Development policies in Turkey traditionally favored import substitution over exports and industry over agriculture. The application of these policies permitted rapid industrial growth as the imports of nondurable consumer goods and their inputs were replaced by domestic production. The prodVcts in question well-suited the conditions existing in Turkey as they tended to be labor-intensive and did not require sophisticated technology or large-scale operations. 3. While Turkey established some industries producing intermediate products at an early stage, it was after the possibilities for import substitution in nondurable consumer goods and their inputs were exhausted that the replacement of the imports of intermediate products and producer and consumer durables became the dominant force in its industrial development. These products require sophisticated technology and large-scale production for efficient operations, resulting in high cost manufacture in the limited domestic market. Costs were especially high in capital-intensive intermediate products, which were at the center of the investment program of the public sector. Correspondingly, incremental capital-output ratios rose from 1.6 in 1963-67 to 2.4 in 1968-72 in the manufacturing sector. At the same time, incremental capital-output ratios increased from 1.9 to 2.3 in agriculture, where the policies applied favored import substitution crops and capital- intensive production techniques. 4. Notwithstanding the fall in the productivity of investment, Turkey was able to avoid a decline in the rate of economic growth as rapid increases in workers' remittances permitted a rise in the rate of investment. With the rapid growth of population, increases in per capita incomes were nevertheless substantially smaller in Turkey than in Southern European countries that had greater outward orientation. Policy Responses to External Shocks, 1973-78 5. Along with other newly-industrializing countries, Turkey experienced external shocks of considerable magnitude after 1973, including the quadrupling of oil prices and the subsequent world recession. Rather than limiting aggregate demand to remedy the resulting balance-of-payments deficit, the response of successive Turkish governments to these external shocks was to borrow abroad in order to maintain past rates of economic growth. In fact, economic growth accelerated in the years immediately following 1973, as a large proportion of the borrowed funds was invested. -2- 6. The acceleration of the rate of economic growth added to Turkey's import needs. At the same time, export market shares declined to a considerable extent as exports were adversely affected by the appreciation of the real exchange rate -- the nominal exchange rate adjusted for changes in relative prices at home and abroad - and by the adverse effects of high protection. Notwithstanding increased protection, Turkey did not save foreign exchange through import substitution as expanding industries required considerable amounts of foreign materials, intermediate products and machinery, while increased investment activity necessitated additional machinery imports. Also, in the absence of fuel-saving measures, Turkey increasingly relied on imported petroleum. 7. Rather than adjusting to the situation created by external shocks, the economic policies followed by Turkey thus added to the adverse balance-of- payments effects of these shocks, requiring increased foreign borrowing. The debt-service ratio, defined as the ratio of interest payments and amortization to merchandise exports, increased from' 14 percent in 1973 to 33 percent in 1977 as a result, raising questions as to Turkey's creditworthiness. 8. The consequent difficulties encountered in further borrowing created a foreign exchange scarcity that aggravated the adverse economic effects of the policies applied. With increased import restrictions and the implementation of high-cost investments in the public sector, the incremental- capital output ratio in the manufacturing sector reached 4.7 in 1973-77 while the ratio attained 4.0 in agriculture. At the national economy level, the incremental capital-output ratio rose from 2.9 in 1963-73 to 5.1 in 1973-79 and, after a tempo:rary increase from 6.6 percent in 1963-73 to 7.7 percent in 1973-76, the rate of economic growth declined to 2.1 percent in 1976-79. The 1980-81 Policy Reforms 9. The policy reforms introduced in January 1980 aimed not only at redressing the economic situation but also at changing'the development strategy Turkey followed during several decades. The new strategy involved moving towards greater outward orientation and giving an increased role to market forces. 10. The Turkish lira was devalued from TL 47 to TL 70 to the U.S. dollar in January 1980. Subsequent adjustments led to a further depreciation of'the lira in real terms (i.e. after adjustment for changes in relative prices) vis- a-vis the dollar. In turn, with the rise of the U.S. dollar in the first half of 1981, the lira appreciated against other currencies in real terms, but this tendency was reversed after June 1981. By October 1981, the Turkish lira depreciated in real terms by 22-25 percent vis-a-vis the U.S. dollar, 5-7 percent vis-a-vis the German mark, and 10-12 percent vis-a-vis the currencies of Turkey's major trading partners compared to its 1973 level. 11. In January 1980, the procedures involved in obtaining export incentives were simplified, and exporters were given the right to import materials and intermediate products dutyfree under the foreign exchange allocation scheme. Additional export incentives were granted in January 1981 and indirect tax rebate rates were raised in May 1981. -3- 12. On the import side, the principal change effected in January 1980 was the streamlining of the operation of the import regime that involved reducing the waiting period for import licenses and providing foreign exchange allocations automatically once the licenses were granted. This was followed by the liberalization of imports in January 1981, involving the elimination of quotas and transfers from the restricted list (Liberalization List II) to the free list (Liberalization List I). 13. Administrative regulations concerning investment incentives were also simplified and the time needed for making decisions substantially reduced. Furthermore, a reorientation of priorities occurred, with greater emphasis being placed on export-oriented activities, agriculture, and tourism. 14. Decision-making on foreign direct investment, too, was simplified. All relevant measures were consolidated in one department and the taking of decisions accelerated. At the same time, some previously off-limit sectors, such as food processing, oil, and wining, were opened to foreign investment and foreign investors were generally accorded the same incentives as domestic investors. 15. In January 1980, the prices charged by the state economic enterprises (SEEs) were liberalized and consumer subsidies were eliminated or greatly reduced. Further price adjustments occurred subsequently, although the prices of coking coal, fertilizer, and sugar continue to be controlled and informal controls are applied to some other products. 16. In. July 1980, the rediscount rate of the Central Bank on short-term notes was raised from 14 percent to 26 percent and interest rates paid to savers, and charged to borrowers, were freed. While at the beginning a "gentlemen's agreement" enforced by the cartel of commercial banks limited the extent of the increases, interest rates rose to a considerable extent on deposits as well as on loans in early 1981 as the pressure of competition rendered the agreement largely ineffective. Also, in July 1981, interest rates on bonds were freed and their indexation allowed. 17. The system of income taxes was reformed in January 1981, involving substantial reductions in personal income tax rates that had not been adjusted for inflation during the preceding years, and bringing small businesses, the liberal professions, and farmers within the purview of the income tax system. Also, decisions were taken to replace the compl4cated and inefficient system of indirect taxes by value added taxation. The Effects of the 1980-81 Policy Measures 18. The January 1980 reforms had some immediate effects. The premium on the lira in the parallel exchange market, that averaged 50 percent in 1979, declined to 5 percent. Also, the liberalization of prices lessened distortions in resource allocation and reduced the deficit of the SEEs. As a result, the net borrowing requirements of the public sector decreased, making it possible to lower the rate of growth of the money supply. 19. On the whole, however, the economic effects of the reforms were retarded by reason of the unsettled conditions existing in Turkey at the time. Until September 1980, there was considerable political uncertainty, and -4- production was disrupted as a result of intensifying violence, declining labor discipline, and increasing strike activity, with 7.7 million workdays lost in the first eight months of 1980 compared to 1.1 million workdays in 1979. 20. These considerations largely explain why the dollar value of exports in the first eight months of 1980 hardly exceeded that for the corresponding period in 1979. The situation changed in the following months, and the dollar value of exports in the remainder of the year was 63 percent above that for the same period in the preceding year. Exports continued to rise rapidly in 1981, with their dollar value in the first ten months of the year exceeding the figure for the comparable period of the previous year by 64 percent. Increases were concentrated in manufactured goods that experienced a rise of 120 percent in the latter period. Product groups with the largest increases included textiles and clothing, cement, glass, iron and steel, nonelectrical machinery and transport equipment, with the Middle East becoming an increasingly important market. 21. Also, increases occurred in the issuance of domestic investment licenses and the share of agriculture in the total rose to a considerable extent. However, with sluggish business conditions associated with the application of restrictive monetary policies, domestic private investment remained stationary in 1981 after declining by 20 percent in 1980. 22. Foreign direct investment increased in the second half of 1980, and rose further in 1981, with investments totalling approximately $110 million, compared to $33 million in 1980 and a cumulative total of $228 million at the end of 1979. However, about 85 percent of foreign investment involved the use of non-guaranteed trade arrears from blocked accounts in the Central Bank. 23. With lesser reliance on Central Bank credits by the public sector and limitations on private credit, the rates of growth of reserve money fell from 56 percent in 1979 to 48 percent in 1980. The ratio of the money supply to GNP declined from 20 percent to 15 percent during the same period. Furthermore, in response to rising interest rates, time deposits and certificates of deposit doubled between July 1st and December 1980, and increased two-and-a-half times between December 1980 and December 1981. Finally, after having reached a peak of 133 percent in February 1980, when the effects of the freeing of SEE prices and of the January 1980 devaluation were felt, year-to-year increases in wholesale prices were less than 50 percent a year later and slightly below 35 percent in the second half of 1981. The Need for a Medium-Term Strategy 24. The measures taken in 1980 and in 1981 represent important steps in the implementation of Turkey's newly-adopted development strategy. They would need to be complemented, however, by further measures to fully effect the changeover to an outward-oriented economy that relies chiefly on market forces. This will require time; given the long period of inward orientation and the limited use of the market mechanism, in particular in the public sector, the changeover cannot be effected overnight. Nor is this desirable, since firms in the private and in the public sectors have to adjust to the changing circumstances. At the same time, for firms to adjust, they need considerable certaint- as to the shape of things to come. -5 25. This purpose would be served by the adoption of a medium-term policy framework. Such a framework would incorporate measures aimed at encouraging exports and efficient import substitution, promoting savings and investment, fostering modernization and technical change, and improving the operation of the state economic enterprises. The application of this framework, in turn, would necessitate appropriate institutional arrangements. This may take the form of establishing a high-level council consisting of economic ministers to develop a medium-term strategy and designating a government agency, most suitably to State Planning Organization, to work out the relevant measures in co-operation with other government bodies. 26. Notwithstanding the improvements made since January 1980, government regulations and their practical implementation remain cumbersome in Turkey. To reduce the resulting uncertainty in business decisions and the cost of complying with the regulations, there is a need to simplify the regulations and to streamline their practical implementation. 27. . This report will consider measures that may be taken in the framework of a medium-term development strategy. These measures will be grouped under the following headings: production incentives, the financial system, the system of taxation and investment incentives, industrial development and exports, state economic enterprises in manufacturing, agricultural development and exports, and tourismn. CHAPTER 2. PRODUCTION INCENTIVES Exchange Rate Policy 28. With the exchange rate lagging behind increases in domestic prices, the Turkish lira appreciated in real terms by about 30 percent vis-a-vis the U.S. dollar and by 20 percent vis-a-vis the currencies of Turkey's major trading partners between 1973 and the fourth quarter of 1979. The large devaluation of January 1980 and subsequent adjustments in exchange rates more than offset these changes, giving rise to a depreciation of the real exchange rate by 5 percent vis-a-vis the U.S. dollar and 15 percent vis-a-vis the currencies of the major trading partners over its 1973 level by the third quarter of 1980. 29. Between the third quarter of 1980 and the second quarter of 1981, the Turkish lira depreciated further vis-a-vis the U.S. dollar but appreciated in real terms against other currencies, with the real exchange rate vis-a-vis the currencies of the major trading partners returning to approximately the 1973 level in June 1981. This tendency was revised subsequently, and the lira depreciated by about 10 percent vis-a'-vis the currencies of Turkey's major trading partners between June and October 1981. Incentives to Industrial Exports 30. In the course of the last two decades, a series of measures were taken to provide incentives for industrial exports in the form of indirect tax rebates, access to preferential credits, foreign exchange allocation and retention schemes, and temporary import permits. However, until January 1980, the impact of these measures was limited by the overvaluation of the Turkish -6- lira as well as the dispersion of responsibilities for export incentives among various ministries. 31. Decision-making on export incentives was consolidated in January 1980, and exporters were given the right to import materials and intermediate inputs dutyfree under the foreign exchange allocation scheme. In January 1981, income-tax reductions were granted on new exports as well as on increments in exports and interest rates on export-oriented investments were reduced. Furthermore, in April 1981, indirect tax rebate rates were raised by five percentage points across-the-board and firms whose exports exceeded a certain limit received additional rebates. 32. Following the recent changes, tax rebate rates vary between 5 and 20 percent on industrial products, classified into eight categories. While the rebates are designed to compensate for taxes levied at earlier stages of production, in practice the classification of the commodity depends also on its profitability in export markets. Also, an additional rebate of 5 percentage points is provided to firms whose exports exceed $4 million a year and a further 5 percentage points to firms with exports in excess Qf $15 million a year. 33. The purpose of export credits is to finance production for exports; the credits may reach 80-90 percent of the value of industrial exports, granted for up to eight months. Export credits are provided at preferential rates; they are exemDted from the financial transactions tax and pay one-half of the interest equalization tax; and they further benefit from a rebate on the rate of interest. Since February 1981, the average interest cost of export credits was 19 percent compared to 49 percent on one-year nonpreferential loans. At the same time, a guarantee deposit of 15-20 percent is required on export credits while non-preferential borrowers need to hold compensating balances of up to 30 percent with the banks. 34. Under the foreign exchange retention scheme, industrial exporters may retain one-half of their net foreign exchange earnings and may transfer the foregrn currencies thereby obtained to other users. Under the foreign exchange allocation scheme, they have access to foreign currencies for the dutyfree importation of materials and intermediate products and for the duty- inclusive importation of equipment, generally up to 60 percent of the value of their exports. A higher limit, 80 percent, applies to exporters holding a foreign purchase order that comes under the temporary import regime. The subsidy equivalent of these schemes, however, declined to a considerable extent after January 1980, owing to the large decrease in foreign exchange premia on the parallel exchange market. In turn, the income tax reduction scheme introduced in January 1981 provides considerable subsidies to exports. 35. Excluding the foreign exchange premia, average subsidy rates on industrial exports declined from 14 percent in 1979 to 8 percent in 1980, subsequently rising to 10 percent in the first quarter, and 11 percent in the second quarter of 1981. The decline between 1979 and 1980 was largely due to the fact that the growth of the various subsidy schemes did not keep up with the rapid expansion of exports while the newly-introduced income tax reductions on exports led to increases in export subsidies after 1980. In turn, the real export exchange rate, adjusted for export subsidies, rose by 3 or 21 percent between 1979 and the second quarter of 1981, depending on the -7- price index utilized. These results indicate the increased incentives industrial exports received after January 1980; export incentives increased further afterwards as the Turkish lira depreciated by 10 percent in real terms between June and October 1981, irrespective of the choice of the price index. 36. Export subsidy rates on industrial exports vary to a considerable extent among commodity categories. In the second quarter of 1981, subsidies exclusive of the foreign exchange premium were the highest on nonferrous metal (37 percent), followed by cement (27 percent), and transport equipment (24 percent). In turn, subsidies averaged 3 percent on rubber products and on beverages. Industrial Protection 37. Under its inward-oriented strategy, Turkey had provided extensive protection to domestic producers through tariffs and quantitative import restrictions. Tariffs have remained unchanged in recent years while some measures of import liberalization were taken in January 1980 and in January 1981. 38. According to information derived from tariff schedules, which do not allow for the effects of duty exemptions, industrial tariffs average 53 percent on non-EEC imports and 44 percent on EEC imports that enter at preferential rates in the framework of Turkey's Association Agreement with the European Common Market. At the same time, tariff rates vary to considerable extent among sectors and among products. Limiting attention to protection against the EEC that is the principal source of Turkish imports, tariffs are the highest on leather and fur products (107 percent), plastic products (94 percent), and beverages (77 percent); they are relatively low on chemicals (32 percent), non-ferrous metals (22 percent), and iron and steel (19 percent). 39. Variations in effective rates of tariff protection, representing the protection of value added, are even greater, due to the variability of tariffs on inputs. Effective tariff rates range from 256 percent on tobacco, 189 percent on sugar and 167 percent on plastic products to negative effective protection on fertilizers, petroleum and coal products, non-alcoholic beverages and cotton ginning. 40. The data do not allow for the protective effects of quantitative restrictions in the form of import licensing, the estimation of which would have required comparing domestic and foreign prices. In cases where such comparisons were made, the difference between domestic and foreign prices exceeded 30 percent in nine out of the thirteen cases. Considering further that, notwithstanding the measures of import liberalization taken since January 1980, 70 percent of total imports (50 percent of non-oil imports) are subject to import licensing, it would appear that quantitative import restrictions continue to raise the level of protection above that indicated by the tariff to a substantial extent. Import Protection vs. Export Subsidies 41. With import protection exceeding export subsidies by a large margin, the incentive system :till involves a bias against exports in Turkey. In the -8- second quarter of 1981, tariffs on industrial imports averaged 44 percent compared to average export subsidies of 11 percent. At the same time, tariff rates understate the extent of import protection as they fail to allow for the effects of quantitative restrictions. 42. Differences between tariff and subsidy rates are especially large for plastic products (107 and 1.3 percent) leather and fur products (94 and 4 percent), and beverages (77 and 4 percent). Export subsidies slightly exceed tariffs in cases of iron and steel (21 and 19 percent) and nonferrous metals machinery (26 and 23 percent), but these results are likely to be reversed if consideration is given to the protective effects of import licensing. Industry vs. Agriculture 43. The system of protection applied in Turkey discriminates against agriculture that has protection rates substantially lower than industry, the average was 26 percent in 1978 and it does not appear to have changed much between 1978 and 1980. Furthermore, within agriculture, support pricing as well as input subsidies have benefited import-substitution crops, such as wheat, sugarbeet, sunflower, and tea, over export products, including fruits, vegetables, and livestock. Recommendations 44. Rapid increases in Turkish exports since September 1980 have responded to incentives in an improved political and economic climate but have also been conditioned by the availability of unused capacity. In the long run, high export growth can be maintained only if export oriented investments are undertaken. At the same time, as long as producers expect the maintenance of existing levels of protection, they will find it more profitable to invest in production for domestic markets. Variations in protection levels introduce further distortions in the choice of investments and, more importantly, in the choice of production methods. Also, high protection provides little incentive for the rationalization of production and improvements in technology. 45. These considerations point to the desirability of lowering the level of import protection and rationalizing its structure. While such a task cannot be accomplished overnight, to limit economic disruptions and to avoid a substantial deterioration in the balance of payments, private investment decisions should be guided by future -- lower -- levels of protection. This purpose can be served by the government announcing its intention to reduce and to rationalize import protection. To prepare producers for this eventuality, a timetable should be made public on the reform of the system of protection, to be carried out over a period of, say, five years. 46. The reform should include, first of all, replacing import licensing by tariffs over the transitional period of five years. Import licensing provides additional protection, the extent of which is not known with any confidence. It also involves administrative interventions, often on a case- by-case basis, and interferes with the operation of market forces. By contrast, tariffs act automatically and provide a choice to the user between imported and domestic products, taking account of factors such as price, quality and delivery dates. -9- 47. In preparing for the liberalization of import licensing, it would be necessary to establish a list of items, the importation of which is effectively prohibited at present as they do not appear on either liberalization lists. Import liberalization should take the form of annual transfers of prohibited items to Liberalization List II and that of items from Liberalization List II to List I, with priority given to liberalizing the importation of intermediate products and machinery. 48. Furthermore, a tariff ceiling should be established, to be attained in annual instalments over the transitional period of five years, during which time differences in tariff rates should also be reduced. The tariff ceiling may be set at 30 percent with additional incentives granted to infant industries on a temporary basis and on a degressive scale. To the extent possible, infant industry incentives should be provided in the form of production or investment subsidies rather than tariffs so as to encourage exporting. This is of particular importance in the electrical and non- electrical machinery, machine-tool and electronics industries, which may be regarded as infant industries in Turkey, because the exploitation of economies of scale will not generally be possible in the confines of domestic markets. 49. Reductions in import protection would necessitate adjustments in the exchange rate in order to maintain balance-of-payments equilibrium. It would further be desirable that the exchange rate be increasingly used as a policy instrument to promote exports in the place of export subsidies. 50. First of all, with the proliferation of subsidies, their effects on particular export products are difficult to gauge, whereas the impact of exchange rate changes is easily ascertainable. The effects of exchange rate changes are also automatic and do not require the administrative procedures involved in granting subsidies, which may discourage small and medium-sized exporters. At the same time, export subsidies are subject to retaliation unider GATT rules and developed countries may apply retaliatory measures once Turkish exports substantially increase in value. Finally, subsidies to export value tend to encourage the use of imported inputs in export activities, while exchange rate changes bear on value added in exports. This is because a devaluation raises the domestic currency equivalent of the export price, as well as that of the price of imported inputs, thereby encouraging the use of domestic inputs. 51. The first candidate for reducing export subsidies is the preferential export credit that provides subsidies of 30 percent to exporters who have access to such credits. Also, credit subsidies should be granted on the basis of value added in exports, as discussed in Para. 87 below. In turn, it would be desirable to establish a medium-term credit facility, complemented by an export credit guarantee scheme, so as to permit Turkish firms to better compete abroad in exporting durable goods since foreign firms generally provide medium-term credits and benefit from credit guarantee schemes. As a first step towards this goal, export credit and insurance schemes in effect in other countries should be reviewed. 52. Existing regulations as to the partial deductability of the value of new exports, and of increments in exports, from taxable income would also need to be modified. The present system tends to discourage small exporters by - 10 - imposing a minimum export value of $250,000 for manufactured exports. One may further envisage reducing the extent of this subsidy for all exporters. 53. As regards the tax rebate on exports, it would be desirable to eliminate the second additional five percent rebate provided to firms that export more than $15 million a year. A first step in this direction is being taken by limiting the application of additional rebates to amounts above the thresholds cited in Para. 31. One may further welcome the intention expressed by the government to calculate the rebates on the basis of value added in exports (net foreign exchange earnings). At the same time, it would be desirable to extend the additional rebate to the exports of fruits and vegetables that may be considered an infant industry in Turkey. 54. Parallel with reductions in export subsidies, it would be desirable to extend the free trade treatment of exports. In this connection, one may welcome proposed legislation to make the importation of prohibited items for export production automatic, to eliminate tariffs on machinery used in export production, and to exempt domestic inputs used in export manufacture from production taxes. It is further recommended to extend the privilege of duty- free importation to all producers of the principal domestic inputs used in export production. Early passage of legislation on the establishment of free trade zones would also be desirable. 55. Increasing reliance on the exchange rate as against import tariffs and export subsidies would improve the profitability of agricultural exports that are presently discriminated against in favor of manufactured products. As discussed in Paras. 180-185, further changes in incentives to agriculture would be desirable, so as to approach world market price relations with respect to products as well as inputs. 56. Finally, as long as inflation is more rapid in Turkey than in its major trading partners, it will be necessary to continue the current policy of making adjustments in exchange rates in line with the inflation differential. It is of particular importance to maintain competitiveness vis- a-vis European currencies, given the importance of the EEC as a trading partner and a competitor in Turkey's major markets. CHAPTER 3. THE FINANCING OF ECONOMIC ACTIVITY The Supply of Money 57. The acceleration of inflation in the second half of the 1970s found its origin in the rapid increase of the money supply. This, in turn, reflected the pressure under which the process of base money creation operated. The Central Bank had to accommodate almost automatically the growing borrowing requirements of public administrations and public enterprises. Increases in the scope of selective credits further contributed to the rapid expansion of the monetary base, because of their dependence on low interest credits provided by the Central Bank. 58. The supply of money is also influenced by variations in the multiplier of the monetary base. These variations have in large part been due to the fact that the reserve ratios imposed on bank deposits differ widely, depending on the types of credits extended by the banks. Reserve ratios range from nil on medium-and long-term credits to less developed regions, 5 percent on export credits and on medium- and on long-term credits to priority sectors, and 10 percent on other medium-and long-term credits to 30 percent on time deposits and 35 percent on sight deposits. Interest Rates and the Demand for Money 59. Interest rates on time deposits were kept at artificially low levels in face of accelerating inflation during the late 1970s, with real interest rates of -30 percent on six-month deposits in 1978 and in 1979 and -45 percent in 1980. Negative real interest rates contributed to the decline in the demand for money, defined as currency plus commercial, savings, and public deposits in deposit :noney banks, with its ratio to GNP falling from 27.9 percent in 1971-75 to 16.6 percent in 1980. The decline was even greater, from 20.8 percent to 10.4 percent, if one excluded commercial sight deposits, which comprise the compensating balances banks require their borrowers to hold. 60. Legal limitations on interest rates paid on time deposits were eliminated in July 1980. While initially increases in interest rates were limited under a "gentlemen's agreement," enforced by a cartel of commercial banks, by early 1981 the pressures of competition rendered the agreement largely ineffective. Interest rates were raised to 50 percent on one-year and subsequently on six month deposits leading to rapid increases in time deposits and in certificates of deposit. Although there has been some shift from sight deposits, the freeing of interest rates has had a positive impact on the demand for money by households and it appears to have contributed to increases in the rate of household savings. The Costs of Intermediation of the Banking System 61. The Turkish banking system is characterized by the high costs of intermediation, with a spread of more than 30 percentage points between the after-tax returns earned by depositors and the interest costs paid by borrowers. Several factors contribute to this spread: the withholding tax on interest earnings from time deposits; the low interest rates earned by banks on their liquidity and reserve requirements; contributions to the Differential Interest Rate Rebate Fund; the financial transations tax; and the high margin of operating costs and profits of the banks. 62. The withholding tax on time deposits is 25 percent, reducing the after-tax equivalent of the 50 percent interest rate on one-year time deposits to 37.5 percent; under proposed legislation, the rate of the withholding tax would decline to 20 percent, thereby raising the after-tax interest rate to 40 percent. In turn, interest rates charged on one year nonpreferential loans are 36 percent, rising to 49 percent if account is taken of the 15 percent levy accruing to the Differential Interest Rate Rebate Find and the 15 percent financial transactions tax. Making allowance for compensating balances, the effective interest rate for nonpreferential borrowers may approach 70 percent. (The contribution to the Differential Interest Rate Rebate Fund declines to 10 percent on January 1, 1982.) 63. At the same time, the 15 percent liquidity requirement for large banks, with an average net yield of 14 percent and the 30 percent legal - 12 - reserve requirement, with an average net yield of 20 percent, raise the cost of funds derived from one-year time deposits to the banks to 76 percent. And while non-interest bearing sight deposits have lower reserve requirements, in the first nine months of 1981 practically the entire increase in deposits with the banks consisted of time deposits and certificates of deposit. 64. Deposit money banks in Turkey had a ratio of operating costs and profit margins to assets of 8 percent in 1977, rising to 11 percent in 1980. This compares with ratios of 3 to 5 percent in other OECD countries. High operating costs in Turkish banks reflect reliance on non-price competition in the form of heavy advertising, luxurious installations, and the establishment of many branches at the time when there was no interest rate competition. It is too early to judge if competition has become sufficiently strong to induce substantial improvements in the operational efficiency of the banks. The Development of the Capital Market 65. The Turkish stock exchange does practically no business at present; bonds and stocks traded are placed generally through securities dealers. There have been few issues of shares and, despite rapid increases in recent years, the amount of private bond issues has remained small in absolute terms, due in part to legal limitations on interest rates and in part to the lack of a secondary market. In turn, while the introduction of 3 and 6 months Treasury bills in June 1980 led to competition with time deposits at commercial banks, following increases in interest rates on these deposits Treasury bills and bonds and bond issues by the State Investment Bank do not provided interest rates sufficiently attractive to private buyers and have been sold largely on a compulsory basis to banks and public institutions. 66. The law on capital markets, passed in July 1981, has freed interest rates on private bonds and introduced a system of indexation. It has also established the conditions for a more effective organization and control of the issue of financial assets. The development and regulation of stock exchanges for trading stocks and bonds should now be rigorously pursued. The Allocation of the Domestic Financial Assets of the Banking Sector 67. The rise in the ratio of the domestic financial assets of the banking system to GNP from 45.5 percent in 1975 to 55.7 percent in 1977, and its subsequent decline to 38.9 percent in 1980, reflected the expansionary monetary policy followed in the first period and the tightening of that policy in the following three years. At the same time, the combined share of claims on public administrations and public enterprises in the total assets of the banks increased from 47.9 percent in 1975 to 55.5 percent in 1977 and rose further to 60.8 percent in 1980. It thus becomes apparent that the public sector, comprising the public administrations and the public enterprises, were the main beneficiary of domestic credit expansion until 1977 and that the restrictive monetary policy of subsequent years affected this sector much less than the private sector. This conclusion follows despite a small improvement in the first half of 1981 when the combined shares of public administration and public enterprises declined to 58.2 percent of the total assets of the banks. - 13 - 68. The Central Bank financed 58 percent of the cash deficit in the consolidated budget of public administrations, amounting to 4 percent of GNP, in fiscal year 1980/81 at an interest rate of 0.75 percent. In turn, according to projections made in December 1981, the deficit for fiscal year 1981/82 would be about 1.2 percent of GNP, with the Central Bank financing approximately matching the total, In 1982/83, however, Central Bank financing is projected to decline below one-half of the deficit that would amount to about 1 percent of GNP. 69. The decline in the deficit of public administrations represents a welcome change compared to earlier years. This is because the financing by the banking system, and particularly by the Central Bank, of large budgetary deficits hinders the conduct of monetary policy and reduces the availability of funds to the private sector. In the event of large budgetary deficits, there is the risk that ceilings to credit expansion will not be maintained and the excessive growth of the money supply will jeopardize the objectives-of- fighting inflation and correcting the balance of payments deficit. If, alternatively, a strict control of credit expansion is maintained in spite of large borrowing requirements for the budget, there is the danger of "crowding out" of credit to the private sector. This "crowding out" will operate not only in a system which guarantees absolute priority to the satisfaction of the Treasury borrowing needs but also in a system under which the Treasury would compete without special privileges for the limited credit resources available. In this last hypothesis, interest rates might rise to such an extent that private investments with satisfactory rates of return could not be financed, with a negative impact on the future growth of the economy. 70. The financial resources needed by state economic enterprises (SEEs) to finance their losses, their investments in fixed capital, and increases in their working capital' amounted to 14.1 percent of GNP in 1979. Following substantial increases in the prices of most of the SEEs, their losses in real terms were reduced by more than one-half in 1980. However, the real value of their investment expenditures continued to increase. In 1980, as well as subsequently, these expenditures have been subject to upward revision. 71. Thus, the financial requirements of the SEEs continued to be high, compared with the size of the financial system and the magnitude of domestic savings in Turkey. At the same time, the reported losses are understated by reason of the lack of adjustment made for inflation and for indirect subsidies, such as subsidies on interest rates. 72. Budgetary transfers and subsidies provided nearly one-half of the financial needs of the SEEs in 1980. These subsidies increased the deficit in the consolidated budget, accounting for 15 percent of total budgetary expenditures in 1980. Another important source of SEE financing, approximately three-tenths of the total, was bank borrowing on preferential terms. About one-half of the credits, destined in large part for the Soil Products office, were supplied by the Central Bank at low interest rates thereby contributing to money creation. Finally, one-fourth of the financial needs of the SEEs were provided through the accumulation of arrears vis-a-vis suppliers on which interest was generally not paid, giving rise to an involuntary subsidy by these suppliers. - 14 - Selective Credit Policies 73. The Turkish financial system is characterized by the widespread use of selective credit policies to the benefit of agriculture, exports, state economic enterprises, housing, small artisans and traders, certain types of investment, regional development, local authorities, tourism, maritime navigation, etc. Credit preferences are provided through a complex set of instruments, including low interest rates on credits and rediscounts by the Central Bank; levies and subsidies on interest rates paid to and received from the Differential Interest Rate Rebate Fund; differential reserve requirement,s on bank deposits against different types of credits; minimum ratios imposed on banks as regards the proportion of certain selective credits in their total portfolio; and the channelling of financial resources on particularly favorable terms through specialized institutions like the Agricultural Bank, the State Investment Bank, and the Tourism Bank. 74. The high rate of subsidization of selective credit has led to excess demands and leakages to uses for which selective credits were not intended. At the same time, given the ceilings imposed on various types of selective credits, legitimate needs could not be fully met, making it necessary to use rationing. Recommendations 75. Various changes would be desirable in the financial system, so that it can fully discharge its function of providing financial intermediation, generating savings, and contributing to the efficient allocation of investible resources. It would further be necessary to ease existing constraints on monetary policy that impart an inflationary bias to the financial system. 76. To begin with, there is need to reduce the cost of intermediation by the banking system. After-tax real interest rates of 1.9 percent on one-year deposits, calculated at an annual inflation rate of 35 percent, limit the availability of savings. In turn, real interest rates ranging up to 25 percent impose a considerable burden on non-preferential borrowers. 77. To encourage savings, the taxation of interest receipts should be limited to yields adjusted for inflation. It would further be desirable to reduce the cost of financial intermediation by raising the interest rates the Central Bank pays on reserves held against time deposits and eliminating the financial transactions tax. 78. At the same time, for reductions in these charges to lead to higher interest rates to savers and/or lower interest rates to borrowers, it is necessary to ensure competition among banks and to increase competition from the capital market. Competition among banks may be increased by implementing the announced policy of accepting applications for the establishment of new domestic banks and of subsidiaries of foreign banks and allowing the diversification of existing banks. If additional measures appear necessary, the government may consider forbidding public sector banks to participate in cartel-type arra-ngements and introducing legislation against restrictive practices by banks. - 15 - 79. Apart from increasing competition in the financial sector by providing alternatives to savers as well as to borrowers, the development of capital markets would improve the possibilities for medium-and long-term financing. In this connection, particular attention needs to be given to establishing rules and regulations for the trading of bonds in the secondary market, with a view to encouraging such trading. 80. The recent freeina of interest rates and the establishment of indexation for private bonds need to be followed by raising interest rates on Treasury bills and bonds, so as to make them competitive with private bonds. At the same time, to reduce the inflationary effects of the budget deficit one should limit the financing of the public sector deficit by the Central Bank. 81. Notwithstanding changes in the mode of financing, budget deficits create stringency in financial markets, thereby leading to "crowding-out" of private borrowers, with adverse effects on the growth prospects of the economy. Correspondingly, priority needs to be given to reducing the deficit of the public sector. This would require limiting the size of the pubiic investment program and economizing with public consumption expenditures. In this connection, one may welcome the recent decision of the Treasury to limit budgetary transfers to the SEEs to TL220 billion in 1982 even if this amount will not be sufficient to provide the funds to finance the investment programme approved by the SPO. 82. It would also be desirable to eliminate the credit subsidies provided to public enterprises. Apart from improving the efficiency of financial markets, this would represent a move toward equalizing the conditions under which public and private firms operate. Eventually, the long-term financing of public and private firms would need to be put on the same footing as suggested in Para. 154. 83. The system of selective credits, too, has constrained the ability of the Central Bank to pursue monetary targets. The Central Bank has been called upon to accommodate a substantial part of selective credits, in particular for agriculture and exports, through refinancing. At the same time, the system of selective credits has imposed a considerable burden on nonpreferential borrowers through various charges that directly or indirectly finance the subsidized credits; it has increased the fragmentation of financial markets and reduced competition among financial, institutions; it has impaired the efficiency of the allocation of resources and distorted economic calculations; it has increased the operating costs of the financial system, due to the need to implement and supervise selective credit controls and the fragnentation of the financial markets; and it has led to leakages of part of the subsidized credits to uses for which they were not intended while failing to fully provide for legitimate needs. 84. These considerations suggest the need to reform selective credit policies. To begin with, credit preferences should be granted only in cases where economic considerations so warrant. Also, the extent of the subsidy should be reduced, both to minimize the possibility of leakages to unintended uses and to limit the risks of distortions in resource allocation. Efficiency would also be served, and transparency ensured, if the present complex system of subsidization was replaced by interest rebates from the Differential Interest Rate Rebate Fund. At the same time, it would be desirable to reduce - 16 - reliance on the Central Bank in financing selective credits so as to improve its ability to conduct monetary policy. 85. There are valid reasons for subsidizing medium-and long-term credits. However, in the place of the preferential financing by the Treasury and the Social Security System, it would be desirable that development and investment banks rely on bond issues. This would permit increasing the availability of medium-term and long-term financing and would further contribute to the development of capital markets. 86. Medium-and long-term credits should continue to be provided to agriculture. At the same time, it would be desirable to eliminate the monopoly position of the Agricultural Bank in granting such credits, thereby permitting competition among banks. Consideration should further be given to eliminating the subsidization of short-term agricultural credit while ensuring increased access to such credit to all agricultural producers. 87. The automatic refinancing of export credit has interfered with the conduct of monetary policy and has led the Central Bank, on at least one occasion, to stop such refinancing. These difficulties may be avoided if the proportion of export credits refinanced by the Central Bank is varied in accordance with the needs of controlling the money supply. At the same time, interest subsidies -- to be paid from the Differential Interest Rate Rebate Fund -- should be reduced and be related to value added in exports, rather than to the amount of credit provided. This could be accomplished by classifying exports in several categories according to the share of value added and providing subsidies on the basis of actual export performance. CHAPTER 4. THE SYSTEM OF TAXATION AND INVESTMENT INCENTIVES Tax Revenue 88. After rising from 15.6 percent in 1970 to 19.2 percent in 1977, slightly below the average of 19.6 percent for a sample of twenty middle income countries, the tax to GNP ratio in Turkey declined to 16.8 percent in 1980. The decline was largely due to the inelasticity of indirect taxes (with respect to GNP) and the elimination of the import stamp duty. It occurred notwithstanding the high elasticity of the personal income tax that reflected the effects of "bracket creep" under rapid inflation. As a result of these changes, the contribution of direct taxes to total tax revenue increased from 37.2 percent in 1970 to 62.1 percent in 1980, while the share of indirect taxes on domestically produced goods declined from 26.4 percent to 14.2 percent and that of taxes on imports fell from 24.2 percent to 12.3 percent. (Taxes on services account for the remainder.) Direct Taxes 89. In 1980, personal income taxes accounted for 83 percent of the revenue derived from direct taxes in Turkey. About two-thirds of personal income taxes were paid by wage and salary earners, who carried a high tax burden due to the lack of adjustment of the,tax schedule with inflation. A worker earning the minimum wage of TL 61 thousand a year paid 27.5 percent of his income in personal income taxes. This proportion rose to 36.4 percent for workers earning TL 155 thousand a year, the average wage in high-wage - 18 - 96. A variety of incentives are provided to approved projects. Capital goods are admitted duty free in cases when domestic substitutes are not available. Approved investments are exempted from the building construction tax and receive interest rebates up to 25 percent. Furthermore, an allowance of 30 percent of the cost of fixed investment is provided in the form of deductions from taxable income for projects of at least TL 20 million. 97. The allowance is 60 percent for investments in underdeveloped regions and 50 percent for export-oriented investments and tourism whereas the minimum size of investment eligible for the incentive is TL 10 million for designated priority sectors and TL 4 million for agriculture. Firms undertaking export- oriented investments are obligated to export generally 75 percent of the output of the new project, with an annual minimum of $500 thousand ($200 thousand for underdeveloped regions). 98. Historically, the bulk of investment licenses were issued to manufacturing activities, which received 93 percent of the total in 1979. The share of agriculture increased from 2 percent in 1979 to 13 percent in 1980 but declined again to 5 percent. In the same year, the direct employment effects of all promoted investments were estimated at 116 thousand. Foreign Investment Incentives 99. Despite a nominally liberal foreign investment law, neglect by the authorities, combined with bureaucratic impediments, effectively discouraged foreign investment in Turkey in the past. These difficulties were compounded by the difficulties associated with the repatriation of capital and dividends, particularly after the onset of the foreign exchange crisis in late 1977. As a result, the cumulative amount of foreign investment in Turkey totalled only $228 million at the end of 1979. 100. In 1980, authority for granting permits to foreign investors was consolidated in the Foreign Investment (Promotion) Department of the SP0. Foreigners can now invest in any sector that is open to domestic entrepreneurs and receive similar incentives, although they are subject to different conditions. In certain industries, such as food, furniture, buses and lorries, and clothing, a commitment is required to export a certain share of the output. In other areas, such as diesel engines, machine tools, and electronic goods, co-operation with SEEs is required. Finally, with some exceptions, the share of foreign capital cannot exceed 49 percent, unless special dispensation is granted by the Council of Ministers. 101. Foreign investment in Turkey amounted to $33 million in 1980 and is astimated at $110 million in 1981. However, about 85 percent of foreign irnvestment involved using non-guaranteed trade arrears from blocked accounts with the Central Bank. Despite the improvements made, the economic slowdown and limitations and uncertainties as regards the repatriation of capital and dividends have caused investors to take a wait-and-see attitude as far as the use of new funds is concerned. - 19 - Recommendations 102. A basic requirement of the tax system is to generate adequate revenue with minimal distortions and an equitable sharing of the tax burden while encouraging savings and private investment. The government has taken steps to reduce inflation-induced distortions in the personal income tax and to spread the burden of taxation more equitably. It is also planning to introduce a value added tax (VAT). 103. Despite the important contribution made by recent reforms, there is scope for further adjustments so as to generate a system of personal income taxes that provides adequate incentives to work effort and savings. To protect wage and salary earners from the effects of prospective inflation on income taxes, it would be desirable to put regular inflation adjustments into effect, as proposed by the Ministry of Finance. One may also welcome the proposed acceleration of reductions in tax bracket rates and, in particular, the government's intention to lower the minimum income tax rate to 28 percent and the maximum rate to 52 percent by 1985. 104. It would also be desirable to modify existing regulations that treat increases in the nominal value of financial and other assets as ordinary income. With rapid inflation, these provisions involve the taxation of capital that discourages savings. This can be avoided if capital gains taxation is applied only to inflation-adjusted values. In the face of possible difficulties of implementation, consideration may be given to excluding capital gains from taxable income. 105. Profits of corporations and unincorporated businesses should also be adjusted for inflation for purposes of taxation. This calls for implementing without delay the proposals made for the the revaluation of assets, so as to avoid taxing firms on "phantom profits" owing to inadequate allowance for depreciation based on historical values. Revaluation profits should be exempted from taxation and one should provide for the appropriate treatment of inventories, so that the costs of inputs are not understated. Finally, differences in tax rates on the profits of private corporations, unincorporated businesses, and public enterprises should be eliminated and these rates equalized at 40 percent. A legislative proposal to this effect has in fact been made. 106. Social security contributions of 18.5 to 24.0 percent paid by employers on wages and salaries in Turkey are high by the standards of middle- income countries; these charges raise production costs and tend to discourage labor-intensive activities. To improve international competitiveness and to increase employment, it would be desirable to reduce social security charges. This could be accomplished by improving the management of the social security system, re>icing certain benefits, such as pensions, that appear excessive, and financing some of the social expenditures from the general budget. 107. The introduction of VAT would eliminate distortions in production and consumption that result from the existing system of indirect taxes. Given the administrative complications involved, sufficient resources should be provided to prepare the introduction of VAT. During the transitional period, the - 20 - existing indirect taxes should be placed on a fully ad valorem basis and their scope broadened. 108. The introduction of VAT would not affect excise taxes on luxury goods. In fact, excise taxes on these commodities would need to be increased in conjunction with the reform of the system of import protection described in Para. 48. For the sake of conservation, there is also need to increase taxes on energy, which are considerably lower in Turkey than elsewhere in Europe. 109. The recommendations made for reduci:ig bracket rates and inflation- indexing the personal income tax, limiting the taxation of interest earnings and capital gains to real (inflation-adjusted) returns, abolishing the financial transactions tax, reducing corporate tax rates on private corporations, and introducing inflation cost accounting for depreciation and inventories, would represent a loss to the government budget. Together with the abolition of domestic production taxes and sales taxes, the revenue loss would amount to 6-7 percent of GNP. This would be more than offset by the VAT applied at a basic rate of 10 percent, with certain exclusions, which would provide revenue equalling 6 to 9 percent of GNP. Correspondingly, it should be possible to transfer the financing of some of the social expenditures to the general budget. At the same time, in preparing for the introduction of the VAT, indirect taxes may be raised to provide the necessary revenues. 110. Despite the progress made since January 1980, there is need for further simplification in the administrative procedures used to provide investment incentives. To increase automaticity in decision-making and to reduce uncertainty for would-be investors, it would be advisable to replace the "positive" list of eligible activities by a "negative" list that would designate a limited number of products, which do not receive incentives. Additional incentives would need to be granted to encourage the electrical and nonelectrical machinery, machine tools, and electronic industries that may be considered infant industries in Turkey. 111. One should further consider eliminating procedures that favor domestic market orientation, including the use of the domestic supply-demand technique for assessing the desirability of a project and the preference given to domestically produced machinery. Also, in order to avoid giving encouragement to capital-intensive industries and production methods, it would be desirable to extend the deductibility of investment from taxable income to working capital or, preferably, to replace this by income tax holidays, and to reduce the present minimum level of eligibility, which discriminates against smaller enterprises that tend to be labor intensive. 112. The measures taken after January 1980 to promote foreign investment should be complemented by additional measures to attract new capital to Turkey. To begin with, liberal and unambiguous rules should be established on the repatriation of capital and dividends, providing treatment comparable to countries that compete with Turkey for foreign capital. It would further be desirable to eliminate the requirement of co-operation with SEEs as a condition for foreign direct investment in certain engineering activities. Also, Turkey would become a more attractive location for foreign investors if the lira was made convertible as is presently envisaged by the government. Finally, there is need for increased promotion, inter alia involving the establishment of investment bureaus abroad, and for making efforts to - 22 - training, rather than providing general training that would supply transferable skills. 119. An exception is the mining sector, where Etibank has extensive training facilities and provides financial support to trainees. Its training facilities have, however, not been fully utilized. Furthermore, with declining funding, the number of workers receiving after-hours training in the program established under the Ministry of Industry has considerably decreased. Export Marketing 120. The government has organized only a small number oL trade fairs and visits to foreign trade fairs. It has established an Export Promotion Training Center (IGEME); but it mainly engages in documentation on a limited scale and has neither the staff nor the budget to mount an effective export promotion effort. 121. In recognition of the need to support export activities, in July 1980 the government passed a decree providing preferential credits, priority access to foreign exchange, and duty drawbacks to trading companies. Trading companies also receive additional tax rebates of 5 or 10 percentage points depending on whether their annual exports are between $4 million and $15 million or exceed the latter figure. Comparative Advantage 122. Turkey's comparative advantage in manufactured exports rests on its natural resources, labor, and location. Natural resources yield a variety of agricultural, forestry, and mineral-based products for further transformation. Labor costs are substantially below those of Turkey's European trading partners, although exceed labor costs in Far Eastern countries. 123. Correspondingly, Turkey's comparative advantage does not 'ie in the simplest, most labor-intensive goods, nor in the most capital-interisive products. Rather, it lies in the large range of goods between the two extremes, and increasingly skill-intensive products. At the same time, closeness to European, Middle Eastern, and North African markets gives Turkey an advantage in exporting goods with a relatively high weight-to-value ratio. 124. Its relatively low wages and proximity to markets provide advantages to Turkey in textiles, garments, and other made-up products. Also, the combination of low-cost skills with the availability of forestry resources provide possibilities for expanding the exportation of furniture. In addition to processed food discussed in Para. 176 below, Turkey's natural resource endowment also favors the production and export of leather products and of mineral-based glass, ceramics, sanitary ware, and chemicals. 125. In the longer term, Turkey's comparative advantage will increasingly lie in electrical and non-electrical machinery, machine-tools, and electronics. These industries tend to be skill intensive and Turkey should be able to increasingly participate in the international division of labor in the European area through the production of parts, components, and accessories; also, it can manufacture products that conform to demands in the Middle East. - 23 - Marketing Prospects 126. The Middle East has assumed inc-reased importance as a market for Turkish exports, with its share rising from 14 percent in 1978 to 22 percent in 1980 and to 43 percent in the first ten months of 1981. Apart from processed food, the principal export commodities have included clothing, automotive products, iron and steel products, cement and glass. 127. While Middle Eastern markets are becoming increasingly important to Turkish firms, exports from Turkey represent only a small proportion of the manufactured imports of these countries. For example, in 1979, Turkey provided only one-half of one percent of the manufactured imports of the capital-surplus oil exporting countries (Iraq, Kuwait, Libya, and Saudi Arabia). And while one should cautiously interpret the recent upsurge in sales to the warring Iran and Iraq, Turkey has excellent possibilities to export relatively simple engineering goods, cement, and various chemi cals, in addition to processed food, to the nearby markets of the Middle East. Cultural ties provide a further advantage to Turkey in these markets. 128. The rapid growth of exports to the Middle East and the slow expansion of the exports of textiles and clothing have reduced the share of the European Common Market in Turkish manufactured exports. Nevertheless, this share was 33 percent in the first ten months of 1981 and Turkey has possibilities for further increasing its exports to the EEC under the Association Agreement that provides for preferential entry. 129. Textiles and clothing are, however, subject to quotas under the Multifiber Arrangement. While quotas for several products have not been binding and expectations are that Turkey would receive preferential treatment in the allocation of future quotas, much of the expansion in textiles and clothing exports to EEC markets would have to take the form of upgrading product composition and quality. In turn, the EEC provides a large and growing market for engineering products. Recommendations 130. On the example of Korea, the government may contribute to the promotion of technological progress through the establishment of specialized institutes of applied research. Such institutes may play an especially important role in certain engineering branches and in the chemical industry. 131. The establishment of applied research institutes should be complemented by tax incentives to research and product development undertaken by private firms. This should be part of a medium-term plan of science and technology, which would also provide for the further development of technical universities. 132. Technical universities represent a link between research and the training of scientists and engineers. The training of technicianis and skilled workers should be promoted through the establishment of specialized schools and courses as well as through tax benefits to firms undertaking training. Tax incentives for research and training would promote a shift from hardware to software, which is necessary at Turkey's present stage of development. - 24 - 133. Efforts made to increase research and training would benefit, in particular, the electrical and non-electrical machinery, mach½ne-tool, and electronics industries. These industries are relatively undeveloped in Turkey compared to basic metals where government investment played an important role and the automotive sector that expanded at high costs in the protected domestic market. As noted in Para. 48, the former group of industries may receive further incentives on infant industry grounds. Rather than protection, such incentives should aim at reducing the cost of production, in order to provide low-cost inputs to other industries and to encourage exports. 134. Incentives to the electrical and nonelectrical machinery, machine- tool, and electronics industries may take the form of low-interest medium-term credits and higher than average tax allowances on new investments. One should further examine the feasibility of establishing specialized industrial parks where ancillary activities would be available. Finally, the services of foreign engineering consultants may be obtained to review plant layout and the organization of work, with a view to recommending productivity improvements. 135. In turn, there is a need for devising a long-term strategy for the automotive industry, to avoid further duplication of production facilities and to ensure vertical specialization in efficient plants. In view of the difficulties of consolidating producers that manufacture different cars and belong to different business groups, this may be sought in the direction of specialization agreements with the principals abroad, involving the exportation of some parts and components and the importation of others. 136. The export incentives discussed in Chapter 2 could be usefully complemented by measures taken to promote marketing abroad. This could be accomplished by establishing an institution that is engaged in the collection of market information, the provision of advice to exporters, and promotional activities, including the organization of trade fairs and foreign commercial missions. For such an organization to be effective, it should have branches abroad, both to identify markets and to solicit orders, on the example of KOTRA in Korea and CACEX in Brazil. 137. However, a public institution of export promotion can only play a supporting role to private firms. Turkey's large business groups are capable of mounting an export promotion effort but small and medium size firms can rarely export directly. Correspondingly, trading firms may play an important role as they do in countries such as Japan and Korea. Their recent proliferation, provides evidence of#the response to incentives, but the extent of tax incentives should be reduced as suggested in Para. 53. CHAPTER 6. STATE ECONOMIC ENTERPRISES IN MANUFACTURING The Role of the SEEs 138. Eight firms established under Law 440 governing public enterprises account for much of the economic activity of the SEEs in Turkish manufacturing. These are the Turkish Sugar Corporation (TSF), Sumerbank (producing largely textiles), the Pulp and Paper Corporation (SEKA), the Petrochemical Corporation (Petkim), the Nitrogen Industry Corporation (Azot), the Turkish Cement Corporation (TCS), the Turkish Iron and Steel Corporation, - 25 - the Machinery and Chemical Corporation (MKEK). Two firms established under corporate law, the Endemir Steel Corporation and the Igsas Fertilizer Corporation, are of further importance. 139. Public enterprises provided almost all of the production of steel, alcoholic beverages, tobacco, and petroleum and more than half of cement, fertilizer, sugar, paper and paper products, and printing and publishing in 1979; they also manufactured textiles, clothing, machinery, transport equipment and a variety of other products. Excluding the firms established under corporate law, the SEEs accounted for 32 percent of production value, 30 percent of value added, and 36 percent of employment in the Turkish manufacturing sector in the same year. SEE Performance 140. Available data on value added, employment and fixed investment indicate the declining efficiency of public sector enterprises compared to private enterprises in Turkish manufacturing. While the share of the public sector in value added in manufacturing fell from 51 percent in 1970 to 30 percent in 1979, its share in employment remained virtually constant at about 36 percent, and its share in fixed investment in manufacturing increased from 39 percent to 50 percent. 141. These findings are supported by sectoral, project, and product data. Whereas in 1963 output per unit of all factor inputs combined was higher in the public sector than in the private sector Ln six out of fourteen industries, by 1976 this number fell to three. Also, economic rates of returns in five public investment projects for the expansion and modernization of existing facilities ranged between 8 and 17 percent, below the rates usually expected from such projects. Finally, among the 28 products for which price information is available, domestic prices exceeded world market (border) prices by more than 40 percent in 15 cases. Low capacity utilization, poor management, excessive energy use, and overmanning were further signs of inefficiencies. Finally, with the major exception of cement, the manufacturing SEEs contributed little to exports and had a large import surplus. Causes of Inefficiencies 142. Several factors explain to the observed inefficiences of these SEEs during the 1970s. The government relied almost exclusively on the SEEs to establish highly capital-intensive industries producing intermediate goods, such as steel, chemicals, petrochemicals, paper and non-ferrous metals, in which Turkey does not have a comparative advantage. Decisions on investments were made by the State Planning Organization, dominated largely by import- substitution considerations, with little regard for efficiency and costs. Also, investr.ents were often characterized by inadequate project design, lower than efficient scale and inappropriate location, and they frequently experienced considerable delays and large cost overruns in actual implementation. 143. The supervising ministries intervened in the day-to-day operation of the state economic enterprises but the SEEs were not stubject to cost discipline or to effective auditing. Nor did managers have incentives to 26 - reduce costs and there were no real penalties for poor performance. Rather, both the Board of Directors and managers were largely political appointees and they carried out directives by the supervising ministries, e.g. to increase the work force beyond the needs of production in the late seventies. 144. Together with technical and skilled workers, managers had civil service status and were greatly underpaid while unskilled workers were overpaid compared to private industry, leading to the loss of technical and skilled manpower. On the average, wages were higher than in private industry whereas capital was subsidized. High protection was a further source of distortions as it excluded foreign competition, with most SEEs producing intermediate goods having a monopoly position in domestic markets. Price Liberalization 145. Until January 1980, SEEs were subject to price control. Differences between actual costs and revenues were considered "duty losses" and were generally reimbursed by the Treasury. Prices were freed on January 1, 1980, although some formal and informal controls remain. The price of coking coal, fertilizer, and sugar continue to be controlled, informal controls apply to newsprint, and according to the Ministry of Industry and Technology informed the mission that it operates with an unofficial price ceiling of the tariff- inclusive cif price plus 30 percent. Less carefully rationalized interventions also exist. 146. The liberalization of prices has much improved the financial situation of the manufacturing SEEs, the major exception being the SEKA which has experienced increasing losses due in large part to the limitations imposed on the price of newsprint. At the same time, profits are overstated by reason of inadequate depreciation allowances, budgetary transfers, and credit subsidies. Also, the improved financial situation of the SEEs reflects in part the large increases in payment arrears to private suppliers. Reforming the SEEs 147. The government has been giving the issue of state enterprise reform considerable attention. It has established the guiding principles of the reform, has prepared draft reform proposals, and has taken interim measures in regard to personnel. The guiding principles of the proposed reform are unexceptionable. They include the minimization of political interference, the decentralization of decision making, the rationalization of the structure of individual SEEs, the clarification and concentration of responsibility for the control of SEEs, and rewards for success to managers. 148. The reform proposals envisage reorganizing productive SEEs into holdings, each of which would have a number of subsidiary companies. In the manufacturing sector, there would be nine holdings: textiles and clothing, sugar, paper, cement, minerals, fertilizer, iron and steel, machinery and equipment, and a bank for workers abroad. 149. Each holding would have an annual shareholders' meeting or general assembly, consisting of appointed and elected members. The general assembly would appoint the full-time chairman, five part-time board members, and the general manager of the holding as well as the managers of the subsidiary - 27 - companies. Under a recent decree, the managers and skilled personnel will not have civil service status; their compensation has been increased substantially; and they will receive incentive payments for performance. 150. The general assembly wotuld decide on general policy isues and provide pearly directives to the subsidiaries. Overall policy guidance for the holdings would be set by a high level Coordination Committee and the performance of the holdings would be periodically monitored by the responsible ministry on the basis of performance criteria, including increases in production, productivity, and profit. The holdings would be self-financing, with budgetary transfers limited to equity infusions for new investment,, Recommendations 151. The abolition of civil service status for managers and skilled personnel and the increases in their compensation represent important steps in reforming the SEEs. The proposals for extending the decision-making power of the managers, and making them responsible to a general assembly, also have considerable merit. However, by providing several performance criteria, the proposals do not ensure that profitability be the sole guiding principle for the SEEs. Also, the effective responsibilities of the high-level Coordinating Committee and the role of the ministries in monitoring performance are not entirely clear and the management structure may give rise to conflicts within the holding. Finally, the single industry coverage of the holdings would continue to limit domestic competition. 152. Turkey may profitably follow the example of Hungary in decentralizing decision-making and ensuring competition among producing units in the public sector. This would require breaking up the industry-wide SEEs whenever technological considerations permit and giving firm managers the freedom to decide on production, prices and, employment, with a view to maximizing profits. At the same time, for profit maximization to serve the national interest, an efficient pricing environment would need to be created. 153. The establishment of an efficient pricing environment would involve, first of all, the equalization of the conditions under which private and public firms operate, by eliminating credit and other subsidies to the SEEs and equalizing corporate income tax rates. At the same time, subsidies may be provided to achieve particular social objectives, such as regionalization. This should not, however, be limited to public firms. 154. Furthermore, steps would need to be taken towards reducing and equalizing protection rates as described in Chapter 2. In the meantime, in basic industries where technological considerations do not permit breaking up the SEEs, domestic prices should be set periodically on the basis of the estimated world market price, with allowance made for acceptable levels of protection. 155. Also, while the equity capital of the SEEs may be provided by the government, borrowing should come from financial institutions on the same terms as those facing major private borrowers. Eventually, private and public banks, as well as the capital markets, may provide financing for both private and public enterprises. This, however, would require considerable improvements in the operation of the SEEs. _____________________________ - _._. _-. - 29 - 162. Within agriculture, import substituting crops were benefited at the expense of export crops; the bulk of government investment was for large irrigation projects; input subsidies to machinery complemented by preferential credits encouraged the expansion of capital-intensive activities; and subsidies to fertilizers and low water charges led to inefficient resource usage. Correspondingly, increases in output were largest in the case of relatively capital intensive import substitution crops, including cereals, sugarbeet, sunflower and tea, while the production of major export crops showed a mixed pattern and the growth of agricultural exports hardly exceeded one percent a year. Capital-Intensive Development in Agriculture 163. The capital-intensive character of Turkey's agricultural development in the pre-1980 period is indicated by the more than tenfold increase in the number of tractors between 1960 and 1979, reaching a ratio of one tractor per 37 hectar. Over the same period, the use of equipment associated with labor- intensive techniques declined. Capital-intensity also increased as low water charges did not encourage the intensification of irrigated land and only about one-half of the area equipped for irrigation was actually irrigated. 164. As a result, incremental capital-output ratios in Turkish agriculture rose from 1.9 in 1966-68 to 2.3 in 1968-72 and to 4.0 in 1973-78. The capital-intensity bias of Turkish agricultural growth also contributed to the underutilization of labor while discriminating against labor-intensive sectors such as fruits and vegetables. Surplus labor in agriculture during the peak season was estimated at 4 percent of the total labor force while rural-urban migration contributed to an increase in nonagricultural unemployment from 4 percent in 1967 to 9 percent in 1977. Price Policy 165. Until 1980, the government set support prices for 23 major agricultural products, the principal exception being fruits and vegetables. It had a procurement monopoly for sugarbeet, tobacco and tea while public sector agencies purchased varying shares of the output of other crops. Support prices were intended to serve as guaranteed floor prices but in the inflationary environment of 1978 to 1980 they fell behind market prices. As a result, the public sector agencies were unable to fulfil their procurement targets. 166. Commodities that were subject to support prices were marketed by the SEEs and sales cooperatives at prices fixed below cost, with the government absorbing the resulting losses. In the course of the Tanuary 1980 reforms, authority granted to the marketing organizations to set consumer prices according to actual costs. Consumer subsidies were greatly reduced on meat and sugar while, despite substantial reductions, considerable subsidies remain on bread. Among inputs, subsidies were reduced in several stages on fertilizer atid the government has decided to raise water charges so as to cover the cost of operating and maintaining irrigation schemes. Finally, the government reduced the number of commodities under price support to 16 in 1981. - 30 - 167. Prior to January 1980, minimum export prices were set by the government and exports of several agricultural commodities were limited through licensing whenever, in the judgment of the Ministry of Commerce, domestic supply was insufficient to provide for domestic demand. Furthermore, a multiple exchange rate system was applied that discriminated against agricultural exports. Since January 1980, minimum export prices have been abolished for most agricultural exports and the export licensing system has been discontinued, the principal exception being livestock. Also, a unified export exchange rate has been adopted, with the large devaluation of January 1980 increasing the profitability of agricultural exports, that was, however, in part offset by the introduction of a system of flexible levies. Incentives and, Export Performance 168. Interventions in output and input markets under Turkey's inward- oriented strategy led to distortions compared to international price relationships. Calculations of effective protection for the year 1978 indicate that, in the agricultural sector, sugarbeet, olives and corn were the most heavily protected. In turn, apart from traditional exports (hazelnuts, tobacco, raisins, and figs) where Turkey's dominant market position justifies the imposition of export taxes, the system of protection applied discriminated against cotton, fruiits, vegetables, and livestock through overvalued exchange rates and high prices of nonagricultural inputs, including transportation and packaging materials. 169. Among import substitution crops, exports of wheat occurred in periods of high output but necessitated subsidies. In the case of tea, procurement at high prices without quantity limitations led to the accumulation of large stocks and poor quality production. For sugar, protection gave rise to the rapid expansion of production at high costs. After January 1980, more realistic support prices have been adopted for wheat and limitations have been imposed on the planting and delivery of tea. However, increased sugar prices have further encouraged the growth of domestic production. 170. As a result of high support prices and relatively low export taxes, the production of traditional exports was above the optimal level, leading to the accumulation of stocks in the hands cf the government that was the residual buyer. After Januar-y 1980, the government has reduced area allotments and imposed ceilings on deliveries. However, increases in support prices have generally been excessive, encouraging the expansion of production, and export taxes have been set overly low. 171. Among other agricultural exports, the expansion of cotton production served largely the domestic textile industry that grew behind high protection. In turn, the imposition of official prices on cattle and sheep, the government monopoly in meat exports, and quantitative limitations imposed on export sales constrained official exports while encouraging smuggling. Recent measures in the form of the removal of the official price for cattle and sheep and the abolition of the government export monopoly have improved the situation. 172. Unlike other agricultural products there was minimal government intervention in the production and exports of fresh fruits and vegetables. Correspondingly, production responded to export demand, leading to - 31 - specialization according to comparative advantage. However, fruits and vegetables suffered discrimination as a result of price support and input subsidies to competing crops. Also, it experienced the cost-raising effects of transport regulations. The recent extension of the foreign exchange retention and allocation schemes to the exports of fruits and vegetable2 will, however, benefit these products although the removal of the export tax rebate will reduce the profitability of exports. Prospects 173. Geographical proximity has made the EEC Turkey's principal market for agricultural products. But, the share of EEC has declined over time, due in part to the imposition of import restrictions on several agricultural products and in part to the development of Middle Eastern markets. 174. The prospects of Turkish agricultural exports to the EEC will be affected by the recent, or prospective, entry of Greece, Portugal, and Spain as well as by the elimination of tariffs on Turkish agricultural exports to the Common Market by 1987. The effects of these changes will vary from product to product and will be affected by quota limitations. 175. Cotton is imported free of duty into the EEC and the prospects for Turkish exports will only depend on the domestic supply-demand balance. Tobacco, hazelnuts, raisins, and figs are subject to quotas, and competition from Greece is expected to reduce Turkish exports below the quota limit. However, there are good possibilities for expanding the exports of pistachio nuts that are not subject to quota. 176. Nor are pulses subject to quota and export possibilities will depend entirely on supply conditions in Turkey. Also, Turkey has advantages in early season fruits and vegetables, which will be accentuated with the removal of the EEC tariff, and there are possibilities for increasing the exports of several processed fruits and vegetables to Common Market countries. However, increased competition from Spain is likely to limit the exports of olives and citrus fruits. 177. Fresh and processed fruits and vegetables have especially good market prospects in the Middle East. Turkey also has excellent possibilities to increase its exports of sheep and lamb to this area. Finally, there is a market for processed cereals in some of the Middle Eastern countries. Comparative Advantage 178. A simulation model has been used to examine Turkey's comparative advantage in agriculture. While the results are tentat.jve, it appears that a move to world market prices, with optimal export taxes applied to exports that face inelastic foreign demand, would lead to increases in the production of feedgrains, tobacco, cotton, pulses, vegetables, fruits, and ovine products. In turn, the production of the major cereals would decline as would that of sunflower, sugarbeet, beef, and dairy products. 179. The simulation shows a 39 percent increase in agricultural output, a fivefold increase in exports, and a rise in imports (included input imports) by one-half under the assumption that, apart from optimal taxes on traditional - 32 - exports, the domestic prices of agricultural products and their inputs were equated to world market prices while the productive conditions existing in 1978 remained unchanged. The increase in production would be 20 percent, agricultural exports would rise fourfold and imports by one-half if prices received and paid by producers equalled world market prices but 1978 consumption levels were maintained by the use of consumption subsidies. The direction of changes in the output of particular commodities would be similar, however, in the two cases. 180. Projections have further been made for the year 1990, on the assumption that past trends in yields and investments would continue. The results show an average annual rate of growth of 5.7 percent under a policy of free trade, with optimal export taxes on traditional exports, exceeding historical growth rates by a considerable margin. The output of tobacco, cotton, fruits, vegetables, and sheep would grow above, and that of wheat, barley, roots, and beef below, historical rates. These results reflect changes in the allocation of land as well as the more efficient use of inputs under optimal policies. Recommendations 181. The 1980-81 policy reforms have brought improvements in several respects. In particular. the large devaluation of the exchange rate has provided increased incentives to exports; reductions in consumption subsidies have led to the more rational pricing of foodstuffs and to lower budgetary deficits; and increases in the prices of fertilizer and plant-protection materials have encouraged their more efficient use. 182. The following recommendations aim at further improvements in the context of Turkey's outward-oriented development strategy. While the recommendations concentrate on measures necessary for Turkey to realize the efficiency gains that can be attained through the better utilization of the country's agricultural potential, various institutional constraints will need to be addressed to fully exploit the country's comparative advantages. They include measures to improve agricultural research and extension, veterinary services, and marketing information and promotion systems. 183. For traded crops, such as wheat, barley, and cotton, for which Turkey holds a small share of the world market., there is need to take additional steps in the direction of freer trade and less government intervention. This would mean, first of all, letting domestic prices adjust to the trend in world market prices, with interventions limited to setting guaranteed floor prices that would assure farmers the.recovery of costs in years of low world prices and levying export taxes to keep domestic prices at desired levels. Moreover, credit at realistic interest rates should be provided to finance input purchases and the holding of stocks by farmers and a crop insurance scheme established. Finally, it would be desirable to further encourage the involvement of the private sector in foreign trade. 184. The prices of traditional exports, such as tobacco, hazelnuts, raisins, and figs, should be maintained at levels that discourage undesirable expansion while avoiding foreign exchange losses from declining marginal revenues. These measures may be implemented over a period of five years, so - 33 - as to avoid sudden unfavorable effects on producers' incomes. Gradual adjustment is of particular importance for perennial crops. 185. As regards sugarbeet, the appropriateness of a policy aimed at self- sufficiency may be questioned. While improvements could be made through the introduction of modern production, storage, and processing techniques, Turkey has a comparative disadvantage in sugarbeet production and alternative crops would need to be sought. Correspondingly, further investment in sugar factories is not desirable and pricing policy should aim to ensure the production of sugarbeet at levels necessary for full capacity utilization of existing factories. 186. The removal of restrictions on livestock exports should be completed to exploit Turkey's comparative advantages in Middle Eastern markets where the importation of live sheep is preferred. Meat exports should be further encouraged through the establishment of adequate cold chain facilities and improvements in transportation. Apart from removing regulations that limit competition in the domestic transport industry, foreign companies should be permitted to expand their transport operations in Turkey. Furthermore, there is need for public investment in roads and ports to improve the quality and capacity of the road network and to upgrade port capacity. 187. , Improvements in transportation facilities would also be necessary to promote the exports of fruits and vegetables. At the same time, the exports of horticultural products should be made eligible for the additional indirect tax rebates provided to large exporters, including trading firms. Furthermore, the removal of import restrictions on inputs, such as packing materials, would be desirable to promote the exports of processed fruits and vegetables. 188. The undesirable expansion of the use of heavy mechanical equipment should be discouraged by eliminating the subsidies provided in particular through preferential, low interest, loans. The government's intention to remove subsidies to the production and distribution of fertilizers over a five-year period is also to be welcomed. 189. The government has accepted the principle of raising water charges to more appropriate levels. This would involve, as a first step, recovering the cost of the operation of irrigation schemes. Further steps would need to be taken to link water charges to the more efficient use of irrigated land. The water charge should be made of two parts: (a) a per hectare charge, independent of water use, increasing with the size of the irrigated area owned by the farmer, and (b) a volumetric charge, proportional to the amount of water used by the farmer and calculated as a percentage of value added per hectare of a relatively intensive cropping pattern. CHAPTER 8. TOURISM Recent Trends 190. Tourism accounts for more than one-tenth of the exports of goods and services in Turkey. While tourist arrivals declined from a peak of 1.6 million in the late 1970s to 1.3 million in 1980 due to political uncertainties, Turkey should be able to reverse this trend as competitive - 34 - prices, together with excellent climate, beaches and sightseeing, make it an attractive tourist destination. 191. Reductions in tourist arrivals lowered occupation rates as well as profits in tourist accommodations. In 1980, average gross operating profit in the eleven hotels for which data are available was 15.6 percent of total revenues, compared to a worldwide average of 26.7 percent, with little left for return on investment once allowance is made for fixed charges. A contributing factor was the failure to allow hotel prices to rise with costs, in particular labor costs, with the ratio of the wage bill to total revenue averaging 45.8 percent, compared to a worldwide average of 31.2 percent. Domestic Resource Costs and Foreign Exchange Receipts 192. While tourist arrivals declined by 15 percent in 1980, reported foreign exchange receipts from tourism increased by 16 percent, raising average daily expenditures to $22.60. But,the year-earlier figure appears to have been an underestimate as tourists utilized the parallel foreign exchange market where much higher rates could be obtained prior to the January 1980 devaluation. 193. Average daily expenditures by foreign tourists in Turkey slightly exceed the estimated figures for Greece ($21.00), Spain ($21.50), and Morocco ($18.20) while falling short of the figure for Tunisia ($37.60) that reflects lesser "dilution" by cruise passengers and one-day excursionists. At the same time, foreign exchange leakages in the form of payments to, and imports from, abroad are relatively low in Turkey, not exceeding 8 percent. 194. The domestic resource cost of earning foreign exchange from international tourism was estimated at TL 65.6 per U.S. dollar in 1980, 15 percent below the average official exchange rate of TL 76.0 for the year. It is substantially below costs in many other foreign exchange earning activities in Turkey and would decline further with increased capacity utilization. Prospects Until 1990 195. Mediterranean tourism is expected to rise at an average annual rate of 6 percent during the 1980s. Turkey should be able to increase its share from 1.2 percent to 1.6 percent during this period, provided that appropriate policies are followed. Correspondingly, the number of tourist arrivals in Turkey would rise by 9 percent a year. An increase of this magnitude is, modest by the standards of other Mediterranean countries at a similar stage of tourism development and may be considered a conservative'figure. Nor is there much of a danger of cultural dislocation, given the large size of the country and the importance of domestic tourism. At the same time, even allowing for increases in occupancy rates, attaining this result would require nearly doubling accommodation capacity. Recommendations 196. The establishment of physical facilities should be part of an overall plan, aiming at the mobilization of public and private resources in tourism over the next ten years. Such a plan would include, inter alia, matching targets for capacity increases with prospective traffic flows; appropriately - 35 - scheduling public sector investments in infrastructure; encouraging private investment, both domestic and foreign, in tourism; adopting civil aviation policies aimed at optimizing returns to the economy as a whole; and establishing an effective market promotion program. 197. Even though additional supporting infrastructure will be required for longer term tourism development, there are immediate possibliities for augmenting accommodation capacity where infrastructure is already in place or where only minor network extensions are needed. In the next few years, one should promote superstructure investments where such immediate possibilities exist, either in established tourist destinations or in planned integrated resorts. 198. The Ministry of Tourism and Information has rightly decided to concentrate immediate efforts in 5 out of the 106 project areas that have been under development or study. However, even in these areas, including Side and South Antalya on the Mediterranean coast, Koycegiz on the South Aegean Coast, Istanbul, and Cappadocia, priority should be given to installations where infrastructure exists and investments in additional accommodation capacity can be rapidly made. 199. While returns are high in non-hotel tourism activities, such as shopping, entertainment, and internal transport, the profitability of hotels in Turkey, as. elsewhere, is modest. Accordingly, capturing the potential benefits of tourism as a whole necessitates providing adequate loan finance on suitable terms to complement equity funds that are available from the private sector. Altnough private sector participation is likely to come from domestic sources, foreign participation would be desirable in order to provide capital as well as expertise and marketing experience. 200. In providing increased loan finance, the existing large preferential margin on loans by the Tourism Bank could be reduced. At the same time, there can be little justification for further direct hotel investment by the Tourism Bank that has received emphasis in the past. For one thing, the private sector can be attracted to priority tourism zones that are well-equipped with infrastructure. For another thing, the Tourism Bank's funds would be more effective as a credit source which can attract other (equity) funds. 201. At present only 36 percent of international visitors exclusive of cruise passengers, arrive by air. Air charter operations, which could reduce per passenger costs and thus stimulate demand, are in their infancy in Turkey. While this is partly explained by the low total accommodation capacity at individual destinations in relation to the passenger-carrying capacity of charter airplanes, the protectionist attitude favoring the commercial interests of the Turkish Airlines (THY) has also been an inhibiting factor and needs modification. 202. To realize Turkey's tourism potential, civil aviation policy should be reconsidered, with a view to ensuring convenient and least-cost access. This would necessitate weighing the financial interest of THY against the economic returns in the tourism sector and the economy as whole. Air charter operations, by both domestic and foreign airlines, should be encouraged. Also, on the basis of reciprocity, foreign airlines s.iould be granted P A R T I I T H E M A I N R E P O R T P A R T I I T H1 E M A I N R E P O R T CHAPTER 1 INTRODUCTION A. Economic Policies and Performance Prior to the January 1980 Reforms 1.1 Following several decades of inward orientation, in January 1980 Turkey adopted a development strategy that has entailed moving towards outward orientation and giving an increased role to market forces. This report examines the policy conditions for the full implementation of this strategy and proposes the adoption of a medium-term policy framework for this purpose. It follows earlier Bank reports "Turkey: Policies and Prospects for Growth" (December 12, 1979) and "Public Sector Investment Review" December 7, 1981). A separate report will deal with energy. 1. Inward-Oriented Industrialization, 1960-73 1/ Characteristics of the Policies Followed in Turkey 1.2 Development policies in Turkey traditionally favored import substitution over exports and industry over agriculture. The application of these policies permitted rapid industrial growth as the imports of nondurable consumer goods and their principal inputs were replaced by domestic production. The products in question tend to be labor intensive and do not require large-scale production for efficient operations, with costs rising relatively little at lower output levels. They thus well-suited the conditions existing in Turkey. 1.3 While Turkey established some industries producing intermediate products at an early stage, it was after the possibilities for import substitution in nondurable consumer goods and their inputs were exhausted that the replacement of imported intermediate products and producer and consumer durables by domestic production became the dominant force in its industrial development. These industries, however, offered cohditions less favorable to Turkey. They required large-scale production for efficient operations, with costs substantially higher at the low output levels imposed by limitations of the domestic market. Such was the case, in particular, in the automobile industry where production occurred at a small fraction of optimal output level leading to high costs in the production of parts ai-id components as well as in assembly. Economies of scale are of further importance in the manufacture of intermediate products, such as steel, petroleum de1'wntives and chemicals, which were in the center of the investment program r,f the public sector that traditionally played an important role in the Turkish economy. These products are also highly intensive in capital that is a scarce resource in Turkey. 1/ This section draws on Bela Balassa, "Policies for Stable Economic Growth in Turkey," paper presented at the Conference on "The Role of Exchange Rate Policy in Achieving the Outward Orientation of the Turkish Economy," held in Istanbul in July 1979. The paper was puiblished in the Proceedings of the Conference and reprinted as Essay 13 in Bela Balassa, The Newly Industrializing Countries in the World Economy, New York, Pergamon Press, 1981. -38 - 1.4 These characteristics of "second-stage" import substitution, aggravated by the inefficiencies experienced in public enterprises that account for one-third of manufacturing output in Turkey, led to a decline in the productivity of investment and raised the capital requirements of employment creation. The incremental capital-output ratio in the manufacturing sector rose from 1.6 in 1963-67 to 2.4 in 1968-72 while the amount of investment per job created increased from TL 267 thousand to TL 363 thousand in terms of 1976 prices. Also, incremental capital-output ratios rose from 1.9 to 2.3 in agriculture, where the policies applied favored import-substitution crops and capital-intensive production methods. 1.5 At the same time, net foreign exchange savings in second-stage import-substitution industries were relatively small as these industries required imported materials, intermediate products, and machinery, the full utilization of which was not assured in the confines of the domestic market. Furthermore, import savings were obtained at a high cost to the domestic economy. According to calculations made for the second half of the sixties, the domestic resource cost of net foreign exchange savings ih import substituting industries was, on the average, 3.4 times higher than that of net foreign exchange earnings in export industries, which suffered discrimination as a result of the policies followed. Finally, the contribution of import substitution to the growth of the manufacturing sector, that was positive in the 1963-68 period, turned negative in 1968-73. 1.6 Notwithstanding the fall in the productivity of investment, Turkey was able to avoid a decline in its rate of economic growth as rapid increases in workers' remittances permitted raising the rate of investment. Workers' remittances rose from practically nil in 1966 to 5.6 percent of GNP in 1973, nearly matching the value of merchandise exports. With a considerable portion of workers' remittances being saved, the share of gross domestic investment in GDP increased from 16.0 percent in 1963-67 to 18.0 percent in 1968-72. Comparisons of Growth Performance 1.7 Despite increases in investment shares, growth rates of per capita incomes were substantially lower in Turkey than in Southern European countries characterised by greater outward-orientation, including Greece, Portugal, and Spain. Thiis conclusion also applies, though differences in growth performance are smaller, if comparisons are made with Yugoslavia, where a partial reversal of outward-oriented policies occurred during the sixties. In the 1960-73 period, per capita incomes rose at an average annual rate of 6.8 percent in Greece, 6.9 percent in Portugal, 5.7 percent in Spain, 5.2 percent in Yugoslavia, and 3.8 percent in Turkey. At the same time, GNP growth rates in Turkey were overstated by reason of price distortions that led to the overestimation of the contribution of the manufacturing and the service sectors to GNP growth. 1.8 Price distortions reflected the high protection of manufacturing industries that discriminated against primary and manufacturing exports and primary production in general. Correspondingly, the share of foreign trade in the national economy was considerably lower in Turkey than in other Southern European countries. In 1973, the average ratio of merchandise exports and imports to GNP was 7.8 percent in Turkey as against 14.7 percent in Greece, - 39 - 21.2 percent in Portugal, 10.5 percent in Spain, and 19.9 percent in Yugoslavia. 1.9 In reducing the share of foreign trade in the national econany through import substitution and discrimination against exports, the inward- oriented policies followed in Turkey entailed considerable costs for the national economy that were rising over time. While the adverse effects of these policies were temporarily alleviated through increases in workers' remittances, Turkey was not well prepared for the external shocks it experienced after 1973. 2. External Shocks, Policy Responses, and Econonic Growth 1973-78 1/ The Balance-of-Payments Effects of External Shocks and of Policy Responses to These Shocks 1.10 Along with other newly-industrializing countries (NICs), Turkey suffered external shocks of considerable magnitude in the 1973-78 period. These included the quadrupling of oil prices in 1973-74 and the world recession of 1974-75, followed by a relatively slow recovery. The balance of payments effects of the deterioration of the terms of trade, calculated as the difference between the current price values of imports and exports and their constant price values at the average prices of the years 1971-73, equalled 5.1 percent of GNP in Turkey in the 1974-78 period. Taking further account of the shortfall in exports due to the deceleration of world demand, the balance-of- payments effects of external shocks totalled 5.4 percent of GNP during this period (Tables 1.1 and 1.2). 1.11 Rather than restricting aggregate demand to remedy the balance-of- payments deficit, the response of successive Turkish governments to external shocks was to borrow abroad in order to maintain past rates of economic growth. In fact, economic growth accelerated after 1973 as the share of gross domestic investment in GDP increased fron 17.5 percent in 1963-73 to 22.7 percent in 1974-76 (Table 1.3). 1.12 The acceleration of econanic'growth, in turn, added to Turkey's import needs. Also, in the absence of fuel saving measures, Turkey increasingly relied on imported energy while the share of nonfuel imports in its GNP remained approximately unchanged. Finally, Turkey lost market shares in traditional as well as in nontraditional exports, further adding to foreign borrowing requirements. As a result, additional net external financing requirements came to exceed the adverse balance-of-payments effects of external shocks. 1/ This section draws on Bela Balassa, "The Policy Experience of Newly Industrializing Economies after 1973 and the Case of Turkey," paper presented at the Second Conference on The Role of Exchange Rate Policy in Achieving the Outward Orientation of the Turkish Economy, held in Istanbul on July 1-2, 1981. The paper in question also describes the methodology applied in the calculations. Table 1.1 Balance of Payments Effects of External Shocks and of Policy Responses to these Shocks (US$ million) Average Average 1974 1975 1976 1977 1978 1974-78 1974 1975 1976 1977 1978 1974-78 Balance of Payments Effects NEWLY INDUSTRIALIZING ECONOMIES OUTWARD ORIENTED NIC's External Shocks Terms of Trade Effects 11922 15439 11118 9770 11094 11869 3611 4421 2530 1970 3011 3108 Export Volume Effects 465 3441 2147 4827 6074 3391 14 1490 738 1993 2533 1354 Together 12387 18879 13265 14597 17168 15259 3625 5911 3267 3963 5544 4462 Policy Responses Additional Net External Financing 15053 14184 3112 -793 -2907 5730 2609 1686 -2901 -4441 -4592 -1528 Increase in Export Share -767 -90 600 1838 3404 997 463 890 2357 3094 4360 2233 Import Substitution -2417 1406 5659 8867 11399 4983 -237 1325 2088 3872 5090 2428 Effects of Lower GDP Growth Rate 517 3381 3894 4685 5271 3550 790 2010 1723 1438 686 1329 Together 12387 18880 13265 14597 17168 15259 3625 5911 3267 3963 5544 4462 INWARD ORIENTED NIC's TURKEY External Shocks Terms of Trade Effects 8311 11018 8589 7800 8084 8760 1007 1807 1691 2289 1539 1667 Export Volume Effects 451 1951 1409 2834 3540 2037 13 132 92 158 186 116 Together 8762 12970 9998 10634 11624 10797 1020 1939 1783 2447 1725 1783 Policy Responses Additional Net External Financing 12444 12498 6013 3648 1686 7258 1426 2389 2083 2883 1018 1960 Increase in Export Share -1230 -980 -1757 -1257 -956 -1236 -148 -109 31 -208 -42 -95 Import Substitution -2180 81 3571 4995 6309 2555 -245 -275 -210 -159 737 -31 Effects of Lower GDP Growth Rate -273 1371 2171 3247 4386 2220 -13 -66 -121 -68 13 -51 Together 8762 12970 9998 10633 11624 10797 1020 1939 1783 2447 1725 1783 Source: Bela Balassa, "The Policy Experience of Newly-Industrializing Economies After 1973 and the Case of. Turkey," paper presented at the Second Conference on The Role of Exchange Rate Policy in Achieving the Outward Orientation of the Turkish Economy, held in Istanbul on July 1-2, 1981. Table 1.2 Balance of Payments Effects of External Shocks and of Policy Responses to These Shocks (percent) Average Average 1974 1975 1976 1977 1978 1974-78 1974 1975 1976 1977 1978 1974-78 Balance of Payments Effects NEWLY INDUSTRIALIZING ECONOMIES OUTWARD ORIENTED NIC's External Shocks Terms of Trade Effects/GNP 3.7 4.6 3.1 2.6 2.8 3.3 7.4 8.9 4.6 3.3 4.5 5.6 Export Volume Effects/Exports 1.8 12.6 6.7 14.1 15.8 10.7 0.1 12.9 4.8 12.2 13.3 9.2 Export Volume Effects/GNP 0.1 1.0 0.6 1.3 1.5 1.0 0.0 3.0 1.4 3.3 3.8 2.4 External Shocks/GNP 3.8 5.6 3.8 3.9 4.4 4.3 7.5 12.0 6.0 6.6 8.3 8.0 Policy Responses Additional Net External Financing/GNP 4.6 4.2 0.9 -0.2 -0.7 1.6 5.4 3.4 -5.3 -7.4 -6.9 -2.7 Increase in Export Market Shares/Exports -2.9 -0.3 1.9 5.4 8.8 3.2 4.1 7.7 15.5 18.9 23.0 15.2 Import Substitution Effects/Imports -6.0 3.7 14.6 21.8 25.5 12.3 -1.7 10.1 13.6 22.8 25.2 15.3 Effects of Lower GNP Growth Rate/Imports 1.3 8.9 10.1 11.5 11.8 8.8 5.8 15.3 11.2 8.5 3.4 8.4 INWARD ORIENTED NIC's TURKEY External Shocks Terms of Trade Effects/GNP 3.0 3.9 2.9 2.5 2.5 2.9 3.5 5.8 5.1 6.6 4.3 5.1 Export Volume Effects/Exports 3.0 12.7 8.4 15.9 18.2 12.0 1.4 15.0 8.1 17.7 16.7 11.8 Export Volume Effects/GNP 0.2 0.7 0.5 0.9 1.1 0.7 0.0 0.4 0.3 0.5 0.5 0.4 External Shocks/GNP 3.2 4.5 3.4 3.4 3.6 3.6 3.5 6.2 5.3 7.0 4.8 5.4 Policy Responses Additional Net external Financing/GNP 4.5 4.4 2.0 1.2 0.5 2.4 5.0 7.7 6.2 8.3 2.8 6.0 Increase in Export Market Shares/Exports -8.1 -6.4 -10.4 -7.1 -4.9 -7.3 -16.4 -12.4 2.7 -23.4 -3.8 -9.7 Import Substitution Effects/Imports -8.2 0.3 15.3 21.0 25.8 10.4 -11.8 -11.9 -8.5 -6.3 41.8 -1.4 Effects of Lower GNP Growth Rate/Imports -1.0 5.5 9.3 13.7 18.8 9.0 -0.6 -2.9 -4.9 -2.7 0.7 -2.3 Source: See Table 1.1 Table 1.3 Interest, Debt Service and Debt Service Ratios (in US$ millions, current prices) 1971 1972 1973 "1972" 1974 1975 1976 1977 1978 NEWLY INDUSTRIALIZING ECONOMIES Debt Service 4749 6157 8416 6441 10340 12526 16100 20324 29601 Merchandise Exports 16533 20951 32005 23163 42802 41522 53515 64317 78103 Debt Service Ratio 28.7 29.4 26.3 27.8 24.2 30.2 30.1 31.6 37.9 OUTWARD ORIENTED NIC's Debt Service 843 1195 1725 1254 2347 2583 3485 4215 5750 Merchandise Exports 5980 7780 12771 8844 18619 17686 25065 30375 38528 Debt Service Ratio 14.1 15.4 13.5 14.2 12.6 14.6 13.9 13.9 14.9 INWARD ORIENTED NIC's Debt Service 3906 4962 6691 5186 7993 9943 12615 16109 23851 Merchandise Exports 10553 13171 19234 14319 24183 23836 28450 33942 39575 Debt Service Ratio 37.0 37.7 34.8 36.2 33.1 41.7 44.3 47.5 60.3 TURKEY Debt Service 140 169 189 166 251 261 415 570 583 Merchandise Exports 677 885 1317 960 1538 1401 1960 1753 2288 Debt Service Ratio 20.7 19.1 14.4 17.3 16.3 18.6- 21.2 22.5 25.5 Sources: See Table 1.1. - 43 - 1.13 The observed changes in export and import shares are explained by the policies applied. Exports were discouraged by the appreciation of the real exchange rate -- the nominal exchange rate adjusted for changes in relative prices at home and abroad -- as well as by the adverse effects of import protection on exports. Between 1973 and 1978, the real exchange rate appreciated by 10 or 13 percent vis-a-vis the U.S. dollar and by 10 or 14 percent vis-a-vis the currencies of Turkey's major trading partners, depending on the choice of the domestic price indices (Table 1.4). Exports were also discouraged as increased import restrictions, in particular on automobiles and machinery, made production for domestic markets highly profitable and raised the cost of domestically produced inputs. 1.14 Notwithstanding high protection, Turkey did not save foreign exchange through increased import substitution. For one thing, the rise in domestic investment necessitated higher machinery imports. For another thing, expanding industries required considerable amounts of imported materials, intermediate products, and machinery. Inward-vs. Outward-Orientation 1.15 Turkey represented an extreme case of inward-oriented policies, coupled with reliance on foreign borrowing, in the 1973-78 period. Other newly-industrializing countries pursuing inward-oriented policies during this period included Argentina, Brazil, Israel, Mexico, Portugal and Yugoslavia. In these countries, foreign borrowing was used to offset about two-thirds of the balance-of-payments effects of external shocks, on the average, with domestic adjustment accounting for the remainder. While the countries in question lost export market shares, this was more than offset by savings in imports that resulted from a deceleration of economic growth and reductions in import shares. 1.16 In turn, newly-industrializing countries characterized by outward- orientation were able to surmount the adverse balance-of-payments effects of external shocks through domestic adjustment. Outward-oriented policies, providing similar incentives to exports and to import substitution as well as across industries, had been applied since the early sixties in Korea, Singapore and Taiwan; such policies were adopted by Chile and Uruguay after 1974. This group of countries increased their export market shares to a considerable extent, reduced import shares, and accepted a temporary reduction in the rate of economic growth for the sake of avoiding large foreign indebtedness. 1.17 With export shares rising, and import shares decreasing, over time, by the end of the period domestic adjustments more than offset the adverse balance-of-payments effects of external shocks in outward-oriented NICs. Correspondingly, debt service ratios, defined as the ratio of interest payments and amortization to merchandise exports, in these countries remained practically unchanged during the period under consideration (Table 1.5). 1.18 iy contrast, debt service ratios rose from 35 percent in 1973 to 60 percent in inward-oriented economies. The increase was the largest in Turkey, Table 1.4 Real Exchange Rates in Turkey, 1967-1981 Index of Relative Index of Relative Prices Index of the Real Exchange Rate vis-a-vis Exchange Rate Index of the Prices vis-a-vis vis-a-vis The Currencies of Turkey's Period Lira/Dollar Exchange Rate the United States Turkey's Trading Partners The US Dollar Trading Partners A B A B A B A B 1967 9.000 63.6 69.2 68.2 81.4 80.3 91.9 93.3 78.1 79.2 1968 9.000 63.6 69.6 66.6 85.0 81.3 91.4 95.5 74.8 78.2 1969 9.000 63.6 71.9 69.4 88.2 85.1 88.5 91.6 72.1 74.7 1970 11.500 81.3 74.1 73.9 87.9 87.7 109.7 110.0 92.5 92.7 1971 14.917 105.4 83.1 83.2 95.3 95.4 126.8 126.7 110.6 110.5 1972 14.150 100.0 93.8 93.9 100.9 101.3 106.6 106.5 99.1 98.1 1973 14.150 100.0 100.0 100.0 100.0 1(0.0 100.0 100.0 100.0 100.0 1974 13.927 98.4 109.2 108.5 108.7 107.1 92.8 94.2 93.9 95.3 1975 14.442 102.1 110.0 108.5 108.7 107.1 92.8 94.1 93.9 95.3 1976 16.053 113.4 121.6 121.4 125.6 125.3 93.3 93.4 90.3 90.5 1977 18.002 127.2 142.1 146.5 142.1 146.5 89.5 86.8 89.5 85.8 1978 24.282 171.6 201.1 209.3 186.9 194.6 85.3 82.0 91.8 88.1 Ql 21.379 151.1 176.8 180.5 165.7 169.1 85.5 83.7 91.2 88.1 Q2 25.250 178.4 190.5 197.9 165.7 169.1 85.5 83.7 91.2 89.4 Q3 25.250 178.4 206.5 214.8 190.7 198.4 86.4 83.1 93.6 89.9 Q4 25.250 178.4 219.9 230.0 197.9 214.2 - 81.1 75.0 90.1 83.3 1979 31.078 219.6 292.9 326.1 254.3 294.3 75.0 67.3 86.4 74.6 Q1 25.250 178.4 239.5 259.3 216.6 234.5 74.5 68.8 82.4 76.1 Q2 28.360 200.4 276.4 306.1 254.4 291.7 78.5 65.5 78.8 71.1 Q3 35.350 249.8 303.7 342.0 270.7 304.9 82.3 73.0 92.3 82.9 Q4 35.350 249.8 339.3 375.5 303.1 335.4 73.6 66.5 82.4 74.5 1980 76.038 537.4 529.7 537.5 486.9 494.2 101.5 100.0 110.4 108.7 QI 61.595 435.3 453.2 4'6.1 407.3 418.9 96.1 93.4 106.9 103.9 QII 75.529 533.8 525.9 526.9 478.7 479.6 101.6 101.3 111.5 111.3 QIII 80.095 566.0 535.9 541.8 487.5 492.9 105.6 104.5 116.1 114.8 QIV 86.934 614.4 598.4 610.0 574.1 585.3 102.7 100.7 107.0 105.0 1981 Ql 94.589 668.5 635.7 622.3 657.6 643.7 105.2 107.4 101.7 103.9 QII 102.836 726.8 639.0 628.6 716.4 704.5 113.7 115.6 101.4 103.2 June 107.647 760.8 668.5 647.7 773.3 749.3 113.8 117.5 98.4 101.5 QIII 118.854 840.0 678.0 678.2 794.8 795.2 123.9 123.9 105.7 105.6 July 114.148 806.7 666.5 660.3 785.6 778.3 121.0 122.2 102.7 103.6 August 120.968 854.9 673.0 674.8 807.4 809.5 127.0 126.7 10'.9 105.6 September 121.445 858.3 694.4 700.0 791.4 797.9 123.6 122.6 108.5 107.6 October 124.274 878.3 705.0 717.4 786.5 800.0 124.6 122.4 111.7 109.8 Sources: 1967-1978 - B. Balassa, Growth Policies and the Exchange Rate in Turkey, July 21, 1979. 1979-1981 - TMF, International Financial Statistics, various issues. - State Planning Organization, Turkey - Mairn Economic Indicators; 1979-1981, May 1981. Notes: - The index of the real exchange rate han been calculated by adjusting on index of the nominal exchange rate for changes in wholesale prices at home and abroad. Calculations for Turkey's principal trading parLners, covering 63.8 percent of Turkish exports and 67.6 percent of Turkish imports in 1973, (the United States, Belgium, France, Germany, Italy, Netherlands, Switzerland, and United Kingdom) have been made by weighting with the sum of exports and imports combined in the year 1973. The sources of Turkish wholesale price indices are: A: Business Research and Publications Department of the Department of Commerce B: Chamber of Commerce, Istanbul. Table 1.5 Domestic Expenditure Shares, Incremental Capital-Output Ratios and Growth Rates 1963-73 1973-76 1976-79 1973-79 1963-73 1973-76 1976-79 1973-79 Domestic Expenditure Shares NEWLY INDUSTRIALIZING ECONOMIES OUTWARD ORIENTED NIC's (as a percentage of GDP) Private Consumption 68.5 67.7 64-.4 66.1 70.5 65.9 61.2 63.5 Public Consumption 11.6 12.0 13.5 12.7 12.6 12.9 13.0 13.0 Total Consumption 80.1 79.7 77.9 78.8 83.1 78.8 17.2 76.5 Gross Domestic Investment 21.7 25.0 25.0 25.0 20.1 25.8 27.3 26.5 Net Foreign Investment -1.7 -4.7 -2.9 -3.8 -3.2 -4.6 -1.5 -3.0 Incremental Capital-Output Ratios 3.0 4.5 4.3 4.4 3.0 4.9 .2.7 3.4 Growth Rates (constant prices) GNP 7.1 5.1 5.8 5.4 7.4 5.9 9.7 8.4 @ Population 2.4 2.4 2.4 2.4 2.1 1.8 1.7 1.8 Per Capita GNP 4.7 2.7 3.4 3.0 5.3 4.1 8.0 6.6 Domestic Expenditure Shares INWARD ORIENTED NIC's TURKEY (as a percentage of GDP) Private Consumption 68.3- 68.0 65.1 66.6 72.0 72.7 65.9 66.9 Public Consumption 11.4 11.9 13.7 12.8 12.8 12.2 12.2 11.8 Total Consumption 79.7 79.9 78.7 79.3 84.8 84.9 78.0 79.6 Gross Domestic Investment 21.7 24.8 24.5 24.7 17.5 22.7 25.5 24.9 Net Foreign Investment -1.5 -4.7 -3.2 -4.0 -2.3 -7.6 -3.5 -4.5 Incremental Capital-Output Ratios 3.1 4.4 4.9 4.6 2.9 2.8 12.6 5.3 Growth Rates (constant prices) GNP 6.9 5.0 5.0 4.9 6.6 7.7 2.1 5.1. Population 2.5 2.6 2.6 2.6 2.5 2.5 2.5 2.5 Per Capita GNP 4.4 2.4 2.4 2.3 4.1 5.2 -0.5 2.6 - 46 - where debt service ratios increased from 14 percent in 1973 to 33 percent in 1977, declining to 26 percent in 1978 when foreign liquidity problems limited further borrowing. Adjustment Policies and Economic Growth 1.19 Their successful domestic adjustinent made it possible for outward- oriented NICs to accelerate their economic growth in the second half of the period. Thus, after declining from 7.4 percent in 1963-73 to 5.9 percent in 1973-76, GNP growth rates in this group reached 9.7 percent between 1976 and 1979, averaging 8.4 percent in the entire 1973-79 period. In turn, grcwth rates fell from 6.9 percent in 1963-73 to 5.0 percent in 1973-76 in inward- oriented NICs and remained at this level thereafter. At the same time, after an acceleration of economic growth, from 6.6 percent in.1963-73 to 7.7 percent in 1973-76, average growth rates were only 2.1 percent in Turkey in 1976-79 (Table 1.3). 1.20 Outward-oriented NICs had a favorable growth performance, notwithstanding the fact that they suffered considerably larger external shocks than countries characterized by inward orientation. In the years 1974 to 1978, the balance-of-payments effects of these shocks averaged 8.0 percent of GNP in the first group and 3.6 percent in the second. (With a total of 5.4 percent, Turkey exceeded the average for the inward-oriented group.) 1.21 The superior growth performance of outward-oriented NICs may be largely explained by the greater f'lexibility and efficiency of their economies. Having been exposed to foreign competition, firms could better adopt to changing conditions in the world market. Export orientation also permitted the exploitation of economies of scale in the manufacturing industries of outward-oriented economies. At the same time, providing similar incentives to domestic and to export sales, as well as across industries, contributed to the efficient allocation of resources, and of increments in resources, under an outward-oriented strategy. 1.22 In turn, the bias against exports and the considerable dispersion of incentive rates reduced the efficiency of resource allocation in inward- oriented economies, whose reliance on domestic markets also limited the exploitation of economies of scale and provided little incentive for improvements in productivity. In several inward-oriented NICs, efficiency in resource allocation suffered further as a result of increased protection after 1973. 1.23 Efficiency differences are reflected in incremental capital-output ratios that remained at relatively low levels in countries pursuing outward- oriented policies but showed substantial increases under inward orientation. Between 1963-73 and 1973-79, These ratios rose from 3.0 to 3.4 in outward- oriented NICs and from 3.1 to 4.6 in inward-oriented NICs. 1.24 The increase in incremental capital-output ratios was particularly pronounced in Turkey, from 2.9 in 1963-73 to 5.1 in 1973-79. This increase reflected the adverse effects of inward-orientation of the Turkish economy that were aggravated as a result of the import restrictions introduced during this period. A further contributing factor was the implementation of high- cost investments by public enterprises. With the high share of public - 47 - investment, incremental capital-output ratios in the manufacturing sector reached 4.7 in 1973-77 while the amount of investment per job created attained TL 572 thousand in terms of 1976 prices. At the same time, incremental capital-output ratios reached 4.0 in agriculture where the policies applied increasingly favored import-substitution crops and capital-intensive production methods. 1.25 Savings performance, too, was more favorable in countries pursuing outward-orientated policies than under inward-orientation. Thus, average domestic savings ratios increased from 16.9 percent in 1963-73 to 23.5 percent in 1974-79 in outward-oriented NICs while they hardly changed in inward- oriented NICs. 1.26 Various factors contributed to these results. To begin with, there is evidence that a larger than average proportion of incomes derived from exports is saved. Furthermore, higher GNP growth rates under export orientation raised the average savings ratio as the percentage of incomes saved rises at higher income levels. Finally, interest rate policies and investment incentives were generally more conducive to savings in countries put-suing outward-oriented policies than was the case under inward orientation. 1.27 Turkey provides an exception among inward-oriented NICs, inasmuch as its domestic savings ratio rose from 15.2 percent in 1963-73 to 16.3 percent in 1973-79. This increase may be explained in large part by the rise in workers' remittances, a higher than average proportion of which is saved. B. The 1980-81 Policy Reforms 1. The Measures Applied 1.28 In the absence of improvements in Turkey's foreign exchange position through increased exports, import substitution, or a deceleration of the rate of economic growth, continued foreign borrowing led to doubts concerning Turkey's creditworthiness. By 1978, borrowing possibilities were by-and-large exhausted and this fact, together with the lack of improvements in the balance of trade, gave rise to foreign exchange shortages and contributed to the economic slowdown. At the same time, domestic savings were adversely affecZed by negative interest rates as the acceleration of inflation was not matched by higher nominal interest rates. 1.29 Despite efforts made at stabilization, the situation deteriorated further in 1979. The real exchange rate appreciated again, contributing to further losses in export market shares. Also, the foreign exchange stringency was aggravated as the inflow of funds from abroad gave place to an outflow. Finally, the government's budgetary position deteriorated to a considerable extent, due chiefly to the large deficits of the state economic enterprises, syphoning off funds from the private sector and adding to the money supply. As a result of these influences, inflation accelerated while GNP declined in absolute terms. 1.30 The January 1980 reforms aimed not only at redressing the situation characterized by economic disruptions but also at changing the development strategy Turkey followed for several decades. The new strategy involved - 48 - moving towards outward orientation and giving an increased role to market forces. 1.31 The Turkish lira was devalued from TL 47 to TL 70 per U.S. dollar, with further adjustments made that more than offset the effects of price increases on the real exchange rate in the first nine months of 1980. As a result, between the fourth quarter of 1979 and the third quarter of 1980, the Turkish lira depreciated in real terms by about one-half vis-a-vis the U.S. dollar as well as vis-a-vis the currencies of Turkey's major trading partners, exceeding its 1973 level by 5 percent in the first case and by 15 percent in the second. With the subsequent rise of the U.S. dollar, the lira appreciated in real terms against other currencies until June 1981, when the real exchange rate vis-a-vis the currencies of Turkey's major trading partners returned to approximately its 1973 level. This tendency was reversed in subsequent months, however, and between June and October 1981 the lira depreciated by 10 percent in real terms. 1.32 In January 1980 exporters were given the right to import materials and intermediate products duty-free under the foreign exchange allocation schetne. At the same time, the procedures involved in granting export incentives were simplified. In January 1981, income tax reductions were granted on new exports and increment in exports and interest rates on export- oriented investments were reduced, and in May 1981, indirect tax rebate rates were increased. 1.33 On the import side, the principal change effected in January 1980 was the streamlining of the operation of the import regime that involved reducing the waiting period for licenses and providing foreign exchange allocations once the licenses were granted. This was followed by the liberalization of imports in January 1981, involving the elimination of quotas and transfers from the restricted list (Liberalization List II) to the free list (Liberalization List I). 1.34 Administrative regulations concerning investment incentives were also simplified and the time needed for making decisions substantially reduced. Furthermore, a reorientation of priorities occurred, with greater emphasis being placed on export-oriented activities, agriculture, and tourism. 1.35 Decision-making on foreign direct investment, too, was simplified. All relevant measures were consolidated in one department and the taking of decisions accelerated. At the same time, some previously off-limit sectors, such as food processing, oil, and mining, were opened to foreign investment and foreign investors were accorded the same incentives as domestic investors. 1.36 Tn January 1980, the piices charged by the state economic enterprises (SEEs) were liberalized and consumer subsidies eliminated or greatly reduced. The immediate effects of this policy were considerable, with price increases ranging from 45 percent for gasoline to 300 percent for paper and 400 percent for fertilizer. Further-price adjustments occurred afterwards, although bread continues to be subsidized, the prices of coking coal, fertilizers, and sugar continue to be controlled and informeal controls apply to some other products. 1.37 In July 1980, the rediscount rate of the Central Bank on short-term notes was raised from 14 percent to 26 percent and interest rates paid to - 49 - savers, and charged to borrowers, were freed. Although initially a "gentlemen's agreement" enforced by the cartel of commercial banks limited the extent of the increases, interest rates subsequently rose to a considerable extent on both deposits and loans as the pressure of competition rendered the agreement largely ineffective. In February 1981 rates on time deposits of one-year duration reached 50 percent and rates on loans of similar duration 38 percent, with the cost of nonpreferential credit approaching 70 percent if account is taken of contributions to the Differential Interest Rate Rebate Fund, the financial transaction tax and the holding of a 30 percent compensating balance. Finally, in July 1981, interest rates on bonds were freed and their indexation introduced. 1.38 The system of income taxes was reformed in January 1981. The reform involved substantial reductions in personal income tax rates that had not been adjusted for inflation during the preceding years. Also, the reform aims at bringing unincorporated business and farmers within the purview of the system of income taxes. Finally, decisions were taken to replace the complicated and inefficient system of indirect taxes by value added taxation. 2. The Effects of the 1980-81 Policy Measures 1.39 The January 1980 reforms had some immediate effects. The premium on the lira in the parallel exchange market, that averaged 50 percent in 1979, declined to 2-3 percent. At the same time, notwithstanding further increases in oil prices in 1980, with the rise totalling 150 percent since 1978, Turkey was able to avoid the foreign exchange stringency that characterized the 1978- 79 period. 1.40 Furthermore, apart from lessening distortions in resource allocation, increases in SEE prices lowered the net borrowing requirements of the public sector by reducing the deficits of the SEEs. With lesser reliance on central bank credits by the public sector and limitations on private credit, the rate of growth of reserve money fell from 56 percent in 1979 to 48 percent in 1980. The ratio of the money supply to GNP declined from 20 percent to 15 percent during the same period. 1.41 On the whole, however, the economic effect,~ of the reforms were retarded by reason of the unsettled conditions existing in Turkey at the time. Until the September 1980 military takeover, there was considerable political uncertainty and production was disrupted as a result of intensifying violence, declining labor discipline, and increasing strike activity, with 7.7 million workdays lost in the first eight months of 1980 as compared to 1.1 million workdays in 1979. 1.42 These considerations largely explain why the dollar value of exports in the first eight months of 1980 was only 11 percent above that for the corresponding period in 1979. The situation changed in the following months, and the dollar value of exports in the remainder of the year exceeded that for the same period of the preceding year by 63 percent. Even larger increases were shown for manufactured exports that surpassed the corresponding 1979 figure by 75 percent in the September-December period, compared to an increase of 4 percent in the January-August period. 1.43 Manufactured exports continued to rise rapidly in the first ten months of 1981, exceeding the figure for the comparable period of the previous - 50 - year by 120 percent while the dollar value of total exports rose by 64 percent. The Middle East accounted for a large part of the increase, with its share reaching 43 per'cent compared to 13 percent in 1979 and 22 percent in 1980. In turn, the share of the European Common Market fell from 43 percent to 33 percent, although exports to this area increased by one-fourth between the first ten months of 1980 and 1981. Product groups with the largest increase included textiles and clothing, cement, glass, iron and steel, nonelectrical machinery, and transport equipment. 1.44 The provision of domestic investment licenses also increased and the share of agriculture in the total rose from 2 percent in 1979 to 13 percent in 1980, with a decline of 5 percent occurring afterwards. However, with sluggish business conditions associated with the application of restrictive monetary policies, domestic private investment remained stationary in 1981 after declining by 20 percent in 1980. 1.45 Foreign investment increased in the second half of 1980, although it remained small in absolute terms. For the year as a whole, the actual amount of foreign investment was $33 million, in contrast with yearly net flows of -10 to +15 million dollars in the 1974-79 period and a cumulative total of $228 million at the end of 1979. It should be added, however, that about 85 percent of foreign investment entailed the use of non-guaranteed trade arrears from blocked accounts in the Central Bank. This was also the case in 1981 when foreign investments reached $110 million. 1.46 In response to rising interest rates, time deposits and certificates of deposit increased to a considerable extent. They doubled between July 1st and December 31, 1980 and increased two-and-a-half times in the first nine months of 1981. By contrast, the increase had been only 7 percent in the first half of 1980. 1.47 Increases in wholesale prices, brought about in part by the effects of the freeing of SEE prices and of the January 1980 devaluation, peaked in February 1980, when the year-to-year increase was 133 percent according to the index of the Ministry of Commerce. A year later, a rise of 47 percent was observed the July 1980-July 1981 increase was 38 percent, and a rise of slightly less than 35 percent is estimated for the second half of 1981. Similar trends are exhibited by the index of the Istanbul Chamber of Commerce. 1.48 Increases in wages will affect the rate of inflation in the future. Following the January 1981 tax reform, negotiated increases have been kept to 10 percent plus TL 3000, representing an average increase of about 12-15 percent before taxes and 40-45 percent after taxes. At the same time, wage increases in the informal sector are limited by sluggish business conditions and the resulting rise in unemployment. 1.49 The decline in private investment and the increase in unemployment are the concomitants of the process of adjustment underway in Turkey. At the same time, there are encouraging signs as the decline of GNP by 1 percent in 1980 is expected to be followed by a rise of about 4 percent in 1981. However, the upturn of domestic private investment has not yet occurred. - 51 - C. The Need for Medium-Term Policies 1. Medium-Term Policy Framework 1.50 It has been noted that the January 1980 nieasures simultaneously aimed at redressing the situation characterized by economic disruptions and at changing Turkey's development strategy towards outward orientation and the greater use of the market mechanism. Additional measures have subsequently been taken and progress has been made towards both objectives, despite the external difficulties Turkey has experienced as a result of the 150 percent increase in oil prices between 1978 and 1980. 1.51 Further actions would need to be taken, however, in order to fully implement Turkey's newly-adopted development strategy. This will require time; given the long period of inward orientation and the limited use of the market mechanism, in particular in the public sector, the changeover cannot be effected overnight. Nor is this desirable since firms in the private and in the public sectors need to adjust to the changing circumstances. At the same time, for firms to adjust, they need considerable certainty as to the shape of things to come. 1.52 This purpose would be served by the adoption of a medium-term policy framework. Such a framework would incorporate measures aimed at encouraging exports and efficient import substitution, promoting savings and investment, improving the operation of the state economic enterprises, and fostering modernization and technical change. The application of this framework, in turn, would necessitate appropriate institutional arrangements. This may take the form of establishing a high-level council to develop the medium-term strategy and designating a government agency, most suitably the State Planning Organization, to work out the relevant measures in cooperation with other government bodies. 1.53 Notwithstanding the improvements made since January 1980, govermnent regulations and their practical implementation remain overly cumbersome in Turkey. In order to reduce the cost of complying with the regulations and uncertainty in business decision-making, there would be need to simplify regulations and to streamline their practical implementation. 2. The Structure of the Report 1.54 This report considers measures that may be taken in the framework of Turkey's medium-term development strategy in regard to industrialization and trade, with attention given to the need for the simplification of existing regulations. The first part of the report analyses incentive policies, including production incentives, the financial system, as well as the tax system and investment incentives; the second part examines sectoral issues in industry, agriculture, and tourism that have a bearing on Turkey's industrialization and trade strategy. The report will review the policies followed before and after January 1980, indicate the effects of these policies, and make recommendations for the future. 1.55 Production incentives include the exchange rate, export incentives, and import protection in the form of tariffs and quantitative import restrictions, all of which bear on the allocation of resources among sectors as well as on exports and import substitution. The operation of the financial - 52 - system, encompassing the central bank, the deposit money banks, development and investment banks, and the social security institutions, is influenced by reserve requirements, interest rate policies, the financing of the public sector, as well as selective credits. At the same time, the financial system, together with the tax system, affects the generation of savings and on the allocation of these savings among alternative investment opportunities. Incentives to domestic and foreign investment will also influence the rate of investment and its sectoral allocation. 1.56 In the discussion of sectoral issues, consideration will be given to Turkey's comparative advantage in industry, agriculture, and tourism and to measures that may be given to exploit these advantages. Apart from marketing that has relevance for all three sectors, emphasis will be given to the promotion of technological development and labor training in regard to industry, to efficient pricing and improvements in transportation facilities in the case of agriculture, and to the need for increased accommodation facilities with respect to tourism. - 53 - CHAPTER 2 PRODUCTION INCENTIVES Introduction 2.1 Over the last two decades, economic activity in Turkey has been influenced by a complex system of production incentives which favored iindustry over agriculture as well as import substitution over exports in both sectors. Agricultural exports were taxed through overvalued exchange rates and/or levies as well as by various policy measures that have benefitted import substitution crops. In turn, while a series of measures were taken to provide incentives to industrial exports, these were far overshadowed by protection to domestic industry in the form of tariffs, import licensing, import quotas, and restricted access to foreign exchange. 2.2 The 1980-81 policy reforms brought improvements in several respects. The large devaluation of the Turkish Lira in January 1980 provided increased incentives to agricultural as well as to industrial exports. At the same time, the responsibilities for export promotion, which up to then had been dispersed among various ministries, were centralized in a new department within the State Planning Organization (SPO), the "Office of Incentives and Implementation " (TUD). Also, exporters were given the right to import materials and intermediate inputs duty-free under the Foreign Exchange Allocation Scheme. In May 1980, the Foreign Exchange Retention Scheme was extended to include exporters of fresh fruits and vegetables and Turkish contractors abroad. In January 1981, exporters were granted income tax reductions and export oriented investments received increased incentives. Finally, in May 1981, indirect tax rebates were raised by 5 percentage points across the board and large exporting firms received additional rebates. 2.3 The Government also took steps to liberalize the Import Regime. In January 1980, import regulations were simplified and commercial banks were allowed to retain a higher proportion of foreign exchange deposited with them. In January 1981, the Quota List was abolished and about 200 items were transferred from the restricted List to the free Import List. 2.4 In this Chapter, the system of production incentives in Turkey is examined, with consideration given to incentives in the industrial sector and to relative incentives in agriculture vs. industry. In Section A, the exchange rate policy applied in the late seventies and following the 1980 reform is described and changes in the real exchange rate estimated. The system of incentives to industrial exports is analyzed in Section B. Section C deals with the measures of import protection in the industrial sector. In Section D, the general structure of production incentives in industry is examined. Finally, Section E evaluates relative incentives to agriculture vs. industry. - 54 - A. The Exchange Rate Regime 1. Exchange Rate Policy in the Late Seventies and After the 1980 Reform 2.5 In the course of the 1970's, adjustments in the official exchange rate were made in large steps and at irregular intervals. Following the depreciation of the Turkish lira by 40 percent in August 1970, the exchange rate remained virtually unchanged in terms of the US dollar until mid-1975. After two small devaluations in 1975 and 1976, the official exchange rate was fixed at TL 19.25 to the US dollar in September 1977, TL 25.00 in March 1978 and TL 26.50 on April 5, 1979. On June 11, 1979, the exchange rate was set at TL 35.00 to the dollar, with a premium of TL 12.10 on all sales of foreign currency except for traditional agricultural exports, and on all purchases of foreign currency except for the importation of crude oil and its derivatives and the raw materials used in producing fertilizer. On January 25, 1980, the Turkish lira was devalued to TL 70 per US dollar, and further adjustments in the exchange rate were made at more frequent although irregular intervals. Sincq May 1, 1981, daily adjustments in the exchange rate have been made by the Central Bank. 2. Changes in the Real Exchange Rate 2.6 Compared with the situation existing in 1973, by the fourth quarter of 1979, the real e change rate 1/ appreciated by 26 percent or 34 percent vis-a-vis the US dollar and by 18 percent or 25 percent vis-a-vis the currencies of Turkey's major trading partners, depending on whether use is made of wholesale price published by the Ministry of Conmnerce or the Istanbul Chamber of Commerce (Alternatives A and B, respectively in Table 1.4). The large devaluation of January 1980 and subsequent exchange rate adjustments led to a substantial depreciation of the real exchange rate in the first nine months of 1980. Between the fourth quarter of 1979 and the third quarter of 1980, the Turkish lira depreciated in real terms by 44-45 percent vis a vis the US dollar as well as vis-a-vis the currencies of Turkey's major trading partners, exceeding its 1973 level by 5 percent in the first case and by 15 percent in the second. 2.7 A further depreciation occurred vis-a-vis the US dollar in the fourth quarter of 1980 that continued during the first half of 1981. In turn, with the rapid rise of the dollar, the Turkish lira appreciated in real terms against other currencies, with real exchange rate vis-a-vis the currencies of Turkey's major trading partners returning to approximately its 1973 level by June 1981 (Table 1.4). In particular, between the third quarter of 1980 and June 1981, the exchange rate, vis-a-vis the German Mark was maintained at TL 44-45, while prices rose by 5 percent in Germany and by over 25 percent in Turkey. However, the real exchange rate depreciated to a considerable extent after June 1971 and by October 1981 it exceeded the 1973 level by 22-25 percent vis-a-vis the US doll'ar, 5-7 percent vis-a-vis the German Mark, and 10-12 percent vis-a-vis the currencies of Turkey's major trading partners. 1/ The index of the real exchange rate has been calculated by adjusting an index of the nominal exchange rate for changes in wholesale prices at home and abroad. - 55 - Table 2.1: REAL EXCHANGE RATES VIS-A-VIS THE DEUTSCHE MARK, 1967-1981 (Base 1973 = 100) Index of the Index of Relative Index of the Real Exchange Rate Exchange Rate Prices vis-a-vis Exchange Rate vis- Period Lira/DM Lira/DM Germany a-vLs the DM A B A B 1967 2.2500 42.5 62.2 61.3 68.3 69.3 1968 2.2500 42.5 64.6 61.8 65.7 68.8 1969 2.2824 43.1 68.1 65.7 63.3 65.6 1970 3.1421 59.3 69.3 69.2 85.3 85.4 1971 4.2732 80.7 76.9 77.0 104.9 104.8 1972 4.4377 83.8 88.6 88.6 94.6 94.6 1973 5.2945 100.0 100.0 100.0 100.0 100.0 1974 5.3818 101.6 115.4 111.6 88.0 91.0 1975 5.8700 110.9 120.2 118.5 92.3 93.6 1976 6.3753 120.4 134.0 133.8 89.9 90.0 1977 7.7535 146.4 161.9 167.0 90.4 87.7 1978 12.0890 228.3 244.2 254.1 93.5 89.8 Q1 10.2982 194.5 208.2 212.4 93.4 91.6 QII 12.1581 229.6 229.8 238.8 99.9 96.1 QIII 12.5801 237.6 252.6 262.8 94.1 90.4 QIV 13.4689 254.4 274.3 296.8 92.7 85.7 1979 16.9556 320.2 381.7 425.0 83.9 75.3 Ql 13.6148 257.1 304.4 329.5 84.5 78.0 QII 14.9681 282.7 356.9 395.2 79.2 57.8 QIII 19.4637 367.6 398.1 448.3 92.3 82.0 QIV 20.0170 378.1 454.8 503.4 83.1 75.1 1980 41.8320 790.1 732.3 743.2 107.9 106.3 Ql 34.7327 656.0 617.7 635.3 106.2 103.3 QII 41.7172 787.9 715.6 716.9 110.1 109.9 QIII 45.1087 852.0 749.3 757.6 113.7 112.5 QIV 45.4866 859.1 841.7 858.0 102.1 100.1 1981 Q1 45.3316 856.2 898.6 879.7 95.3 97.3 QII 45.2208 854.1 903.5 888.7 94.5 96.1 June 45.4074 857.6 943.2 914.1 90.9 93.8 QIII 48.8568 922.8 946.4 946.7 97.5 97.5 July 46.7839 883.6 935.7 927.0 94.4 95.3 August 48.3679 913.5 938.9 941.3 97.3 97.0 September 51.5187 973.1 964.6 972.5 100.9 100.1 October 55.1789 1042.2 974.8 991.4 106.9 105.1 Sources; - IMF, International Financial Statistics, various issues - SPO, Turke-Main Economic Indicators, May 1981 Notes: - A: Business Research and Publications Department: Department of Commerce - B: Chamber of Commerce, Istanbul (294I, p. 18) - 56 - 3. Recommendations 2.8 The increased flexibility observed in foreign exchange policy since January 1980 constitutes a major achievement, contrasting with the policies followed over the past 20 years. The introduction of day-to-day exchange rate variations since May 1, 1981 is also a welcome development. 2.9 At the same time, as long as inflation is more rapid in Turkey than the major trading partners, it will be necessary to continue the current policy of making adjustments in exchange rates in line with the inflation differential. It is of particular importance to maintain competitiveness vis-a-vis European currencies, given the importance of the EEC as a trading partner and a competitor in Turkey's major markets. 2.10 Also, increased reliance should be placed on the exchange rate as against export subsidies and import protection. As shown in the followihg, export subsidies have increased in importance recently and only limited progress has been made in liberalizing imports. B. Incentives to Industrial Exports Intro^duction 2.11 In the course of the last two decades, a series of measures were taken by Turkish authorities to provide incentives for industrial exports in the form of indirect tax rebates, access to preferential export credits, foreign exchange allocation and retention schemes and temporary import permits. However, until January 1980, the impact of these measures was limited by the overvaluation of the Turkish lira as well as by the dispersion of responsibilities among various ministries. 2.12 The tax rebate scheme is designed to compensate exporters for taxes levied at earlier stages of production. The rebate rates were originally calculated separately for each export product. In January 1975, the system was simplified by grouping the products in 10 lists and applying a standard rebate rate on f.o.b. export value to all products in each list. Moreover, the rebate rates applied within each list were adjusted upwards by five percentage points in cases where the firm's export earnings exceeded UStl.8 million. In conjunction with the June 1979 devaluation, the basic rebate rates were reduced and several categories combined. At the same time, the ceiling for the application of the supplemental rebate rate was raised to US$3.5 million. 2.13 Access to short-term finance was made available to Turkish exporters through the liberal policy pursued by the Central Bank for rediscounting export credits, while strict limitations were enforeed on the rediscount of other com,mercial bank credits. Export credits were granted at preferential rates; they were exempted from the financial transactions tax and were paying one-half of the interest equalization tax; and they were benefitting from a rebate on the rate of interest. - 57 - 2.14 Prior to 1979, exporters were allowed to retain 25 percent of their net foreign exchange earnings to import, subject to the relevant customs duties, intermediate inputs and equipment used in export production. In April 1979, the foreign exchange retention was raised to 50 percent of net foreign exchange earnings and exporters were allowed to transfer their rights to their suppliers. Furthermore, under the foreign exchange allocation scheme, exporters had access to foreign currencies for the importation of materials, intermediate products and equipment, generally up to 60 percent of the value of their exports. 2.15 In January 1980, the responsibilities for export promotion, which up to then had beer. dispersed among various ministries, were centralized in a new department within the State Planning Organization (SPO), the "Office of Incentives and Implementation" (TUD). At the same time, exporters were allowed to import materials and intermediate products duty free under the foreign exchange allocation scheme. 2.16 In May 1980, the foreign exchange retention scheme was ex,tended to include Turkish contractors abroad, though these were allowed to retain only 10 percent of their net foreign exchange earnings. Moreover, exporters were allowed to transfer their rights not only to their own suppliers but to any industrial user. in January 1981, income tax reductions were granted on new exports and increases in exports and export oriented investments received increased incentives. Finally, in May 1981, indirect tax rebate rates were raised by five percentage points across the board and firms whose exports exceeded US$15 million a year received additional rebates. 2.17 The combined export subsidy, which takes into account the subsidy element of export credit, tax rebates, foreign exchange allocation and retention schemes, and duty exemptions, declined substantLially following the 1980 devaluation, largely because the subsidy equivalent of foreign exchange allocations and retentions decreased with the fall of the premium on parallel market transactions. Some decreases were experienced also in other subsidy items as the provision cf subsidies did not keep up with the Arowth of exports. However, these decreases were more than offset by the devaluat'in of the Turkish lira. 2.18 In turn, the effects of the appreciation of the lira in real terms vis-a-vis the currencies of the major trading partners between the third quarter of 1980 and the second quarter of 1981 were partly compensated by an increase in the combined export subsidy. This rasulted largely from the increase in indirect tax rebate rates introduced in May Ii31, the increased impact of duty exemptions on imported inputs for exports, and the introduction of income tax benefits for exporters. And, the subsequent depreciation of the lira led to further improvements in the export exchange rate (the official exchange rate adjusted for export subsidies). - 58 - 1. The Export Tax Rebate Scheme Evolution of the Scheme 2.19 The original aim of the Export Tax Rebate Scheme was to reimburse exporters for indirect taxes paid at the last and at earlier e,-;ages of fabrication. At the same time, exporters were exempted from indirect taxes payable on their sales in foreign markets. Such a scheme does not provide export subsidies, but on-ly provides equal treatment to all producers as far as indirect taxes are concerned. 2.20 Table 2.2 summarizes the evolution of the export rebate rates from 1975 to the present. Until June 1979, the basic rebate rates ranged from 30 percent on List I items to 5 percent on List VII items for exporters with annual export revenues below US$1.o million, and were raised by five percentage points for exporters above that ceiling. Items classified under Lists VIII through X were subject to specific rebate rates, which were however granted in relatively few cases. 2.21 In conjunction with the June 1979 devaluation, the basic rebate rates were reduced and several categories combined; at the same time, the ceiling for the application of the 5 percent supplemental rebate was raised to US$3.5 million. The new rates ranged from 15 percent on List I to nil on List IX, with specific rebates applied on List X items, consisting of packaging products. 2.22 In May 1981, the ceiling for the application of the 5 percent supplemental rebate was raised to US$4 million, and a second supplemental rebate was introduced for firms with annual export earnings in excess of US$15 million, entitling them for a rebate of 10 percentage points above the ba., rate. While in May 1981 only 4 trading companies exceeded the USI15 iJ.4IYion ceiling, a number of firms surpassed this limit in the following months. At the same time, the basic rebate rates were raised and increased differentiation introduced, with a 20 percent rebate rate applied on List I items, 17.5 percent on List II, 15 percent on List III, 12.5 percent on List IV, 10 percent on List V, 7.5 percent on List VI, 5 percent on Lists VII and VIII and 0 percent on List IX. 2.23 The classification of products is based essentially on the estimation of the amount of indirect taxes paid on direct and indirect inputs. Since January 1980, consideration has also been given to the domestic cost of production relative to the export priceo 2.24 Four categories of indirect taxes are taken into account in determining the indirect tax content of the product: (i) production tax paid on raw materials and intermediate goods; (ii) taxes on labor; (iii) taxes on direct expenses (energy and water, packaging, interest); (iv) taxes on indirect expenses (amortization, sales expenses and others). - 59 - Table 2.Zi EXPORT TAX REBATE RATES, 1975-1981 (in percent) --From 09/75 to 06/79--- --From 06/79 to 04/81---- -----------From 04/81----------- List E US$1.8 M E US$1.8 M E US$3.5 N E US$3.5 M E US$4 M E US$4 M E US315 M /1 E US$15 M 1 30 35 15 20 20 25 30 2 25 30 10 15 17.5 22.5 27.5 3 20 25 5 10 15 20 25 4 15 20 5 5 12.5 17.5 22.5 5 10 15 5 5 10 15 20 6 5 10 5 5 7.5 12.5 17.5 7 5 /2 10 /2 5 5 5 10 15 8 Specific Specific 5 5 5 10 15 9 Specific Specific 0 0 0 0 0 10 Specific Speci tic Specific Specific Specific Specific Specific /1 For composition of the lists, see Table 2.3 /2 Export ceiling; US$1.4 million Source: IKA (Economic and Commercial News Agency), Daily Bulletin. (02901) p. 12 - 60 -- 2.25 In practice, ho3-t.ver, if the product is profitable on the export market despite the indirect taxes paid on its inputs, the tax rebate rate actually applied may be lower than indicated by the computation of the indirect tax content. In turn, goods may be ciassified under Rebate List I, even if their indirect tax content is lower than 20 percent, in cases when rebating the estimated indirect tax content would not be sufficient to ensure the profitability of the product on the export market. 2.26 Table 2.3 shows the sectoral profile of export te.x rebate lists for 16 sectors in the manufacturing sector, accounting for 93 percent of exports in 1979, on the basis of the lists in effect since May 1981. Among 483 products under export rebate lists for the 16 sectors retained in the study, 107 products have been included in List IV, 101 products in List II and 100 products in List III; there are no products on Lists IX and X, which pertain to fresh fruits and vegetables and packaging materials, as these products are not covered by the investigation. 2.27 Relatively high rebate rates are applied in the case of fabricated metal products, with Lists II and III dominating, noni-electrical machinery, with the highest concentration observed on List I, followed by Lists III and II, and transport equipment, with the highest number of products on List I, followed by List II. In turn lower rebate rates are applied in the case of food processing, which are concentrated on List VI, and for chemicals, which are concentrated on List V. 2.28 Table 2.4 shows changes between the rebate lists in effect in 1980 and since May 1981 for the 16 industrial sectors. Among a total of 300 items for which changes have occurred, 186 represented transfers between the lists and 114 new additions to the lists. 2.29 In all cases, the observed transfers were from lists with lower rebate rates to lists with higher rates. The highest occurrence of transfers is observed for fabricated metal products, followed by non-ferrous metals, non-electrical machinery, electrical machinery and iron and steel. In turn, the largest number of additions have occurred in the case of non-electrical machinery, followed by fabricated metal products and food processing. Impact of the Scheme 2.30 Table 2.5 shows total exports, exports receiving tax rebates, and the amount of the rebates from 1975 to the second quarter of 1981. The share of exports subject to tax rebates reached a peak of 50 percent in 1977 and declined in subsequent periods to 23 percent in the first quarter of 1981. This evolution is paralleled by the decline in the average ratio of tax rebates to the value of exports receiving rebates from 22 percent in 1977 to 8 percent in the first quarter of 1981. - 61 - Table 2.3: THE SECTORAL PROFILE OF EXPORT TAX REBATE LISTS IN MANUFACTURING: FREQUENCY TABLE; May 1981 (In No. of Product Occurrences) I-0 Sector Code Sector List List List List List List List List List List Total I II III IV V VI VII VIII IX X 11-16 Food Process- ii,g 8 8 9 9 2 20 0 0 0 0 56 17-18 Beverages 0 2 2 2 2 1 0 0 0 0 9 21-22 Textiles & Clothing 2 5 6 3 4 0 1 1 0 0 22 23 Leather & Fur Products 1 0 2 0 0 0 0 0 0 0 3 27 Paper & Paper Products 0 0 5 14 1 0 0 0 0 0 20 29-31 Chemicals 0 1 5 11 32 20 7 7 0 0 83 34 Rubber Products 1 1 3 2 0 0 0 0 0 0 7 35 Plastic Products 0 7 1 11 0 3 0 1 0 0 23 36 Glass & Glass Products 0 0 1 17 6 3 0 1 0 0 28 37 Cement 0 3 2 1 2 0 0 0 0 0 8 39 Iron & Steel 1 17 4 1 0 0 0 0 0 0 23 40 Non-ikc.rous Metals 0 12 2 9 3 2 2 0 0 0 30 41 Fabricated Metal Products 0 23 39 5 0 0 0 0 0 0 67 42 Non-Electrical Machinery 22 10 16 3 0 0 0 0 0 0 51 44 Electrical Machinery 8 4 1 19 0 0 0 0 0 0 32 43,45- Transport 48 Equipment 11 8 2 0 0 0 0 0 0 0 21 Total 54 101 100 107 52 49 10 10 0 0 483 Source: Export Tax Rebate Lists, IGEME, May 1981. Table 2.4:. THE SECTORAL PROFILE OF E-XPORT T1tX REBATES LISTS. FREQUENCY TABLE: CLIANGES BETWEEN 1980 and May 1981 (in No. of Product Occurrences) 1-0 Sector Code Sector List I List II List III List IV List V List Vt List VII List VIII Lists IX-X All Lists Trans- Trans- Trans- Trans- Trans- Trans- Tras- Trans- Trans- fer New Total fer New Total fer New Total fer New Tota1 fer N-i Total Er, Ne,. Total fet New Total fer New Total fer New Total 11-16 Food Process- ing 31 7 10 0 0 0 0 0 0 0 0 0 0 2 2 0 3 3 0 0 0 0 0 0 0 3 12 15 17-18 Beverages 0 0 0 2 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 2 21-22 Te,ttiles & Clothing 0 2 2 0 0 0 0 1 1 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 0 0 3 3 23 Leather & Fur *Products 0. 1 0 0 0 0 0 0 0 0 0 n 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 27 Paper & Paper Products 0 0 0 0 0 0 4 7 10 2 12 0 0 0 0 0 0 0 0 0 0 0 0 0 13 6 19 29-31lChe'icals 0 0 0 0 0 0 0 2 2 0 0 0 1 6 7 0 0 0 1 0 1 0 3 3 0 2 11 13 34 Rubber Products 1 0 1 1 0 1 5 0 5 2 C) 0 0 0 0 4 4 0 13 0 0 0 0 0 9 4 13 35 Plastic Products 0 0 0 6 0 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6 0 6 36 Clsas & Glass Products 0 0 0 0 0 0 0 0 0 1 1 2 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 2 37 Cement 0 0 0 4 0 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 0 4 39 Iron &Steel 0 0 0 14 0 14 0 0 0 0 1 1 0 0 0 3 0 3 0 0 0 0 0 0 0 17 1 18 40 Non-Farrous Metals 0 0 0 15 0 15 5 0 5 8 3 1I 2 0 2 0 0 0 0 5 5 0 0 0 0 30 8 38 41 Fabricate Metal Products 0 0 0 21 2 23 23 22 45 0 1 1 3 0 0 0 0 0 0 0 0 0 0 0 0 44 25 69 42 Non-Electrical Machinery 0 21 21 7 5 12 10 0 11 7 0 7 0 0 0 0 0 0 0o 0 0 0 0 0 0 26 26 52 44 Electrical 4345Nachinery 3 5 8 3 0 3 0 3 0 13 6 1q 0 o 0 0 0 0 0 0 0 0 0 0 0 19 11 30 48 Transport Equipeient 3 5 8 5 1 6 0 0 0, 1 0 1 0 .0 0 0 0 0 0 0 0 0 0 0 0 0 6 15 Total 11 40 53. 78 8 86 47 29 86 42 14 5;, 4 8 12 3 7 10 1 5 6 0 3 3 0 186 114 300 Source: EBA Newsletter, various issues * 63 - Table 2.5: EXPORT TAX REBATES, 1975 SECOND QUARTER 1981 Total Exports Tax Share of Exports Ratio of Tax Rebates Exports Receiving Rebates Subject to Tax to the Value of Tax Rebates Rebate in Total Exports Receiving Tax Exports Rebates (TL Million)---------------------(Percent)--------------- 1975 20,075 7,412 1,279 36.9 18.6 1976 30,768 14,434 3,117 46.9 21.6 1977 31,339 15,575 3,400 49.7 21.8 1978 55,358 19,734 2,938 35.6 14.9 1979 75,744 24,597 3,290 32.5 13.4 1980 230,730 55,030 4,905 23.9 8.9 First Quarter 1981 96,199.1 22,242.0 1,841.0 23.1 8.3 Second Quarter 1981 96,351.4 35,877.2 3,489.0 37.2 9.7 Source; Central Bank (0291I) p. 59 - 64 - 2.31 However, following the modification of the rebate lists in May 1981, the share of exports subject to tax rebates increased from 23 percent to 37 percent between the first and the second quarter in 1981. Over the same interval, the ratio of tax rebates to the value of exports receiving rebates rose from 8 to 10 percent as a result of the increases in rebate rates introduced in May 1981. 2.32 Total exports, exports receiving tax rebates, and the amount of the rebates are shown in Table 2.6 for the 16 industrial sectors. The combined exports of the 16 sectors represented 31 percent of total exports in 1979, 33 percent in 1980, 37 percent in the first quarter of 1981 and 52 percent in the second quarter of 1981, reflecting the increased share of manufacturing exports. These exports accounted for 75 percent of all exports receiving tax rebates in 1979, 89 percent in 1980, 93 percent in the first quarter of 1981 and 84 percent in the second quarter of 1981. 2.33 In the 16 sectors under study, the share of exports receiving tax rebates in total exports decreased from 79 percent in 1979 to 65 percent in 1980 and 58 percent in the first quarter of 1981, but remained much above the average ratio for all sectors of activity, which was 33 percent in 1979, 24 percent in 1980 and 23 percent in the first quarter of 1981. Excluding the 16 industrial sectors, the ratios were 8 percent in 1979, 3 percent in 1980 and 2 percent in the first quarter of 1981. In the second quarter of 1981, the share of exports receiving tax rebates in the 16 industrial sectors increased again to 61 percent, compared with an average 37 percent for all sectors. The corresponding ratio was 6 percent excluding the 16 industrial branches. 2.34 Among the 16 industrial sectors, the share of exports receiving tax rebates remained above the 60 percent level for textiles and clothing, cement and fabricated metal products over the four periods of observation. However, the share rem:dined below 30 percent for beverages and iron and steel throughout the same period. 2.35 In 1979, average tax rebate rates on eligible exports ranged from 27 percent for non-electrical machinery to 5 percent for non-ferrous metals. Rates higher than 15 percent were observed for glass and glass products, cement, transport equipment and non-electrical machinery, while only two sectors, beverages and non-ferrous metals, showed rebate rates of less than 10 percent. 2.36 In the 16 industrial sectors, the overall average rebate rate declined from 14 percent in 1979 to 9 percent in 1980. This decline was due to reductions in the rebate rates, rather than to changes in the composition of exports, as the overall average for 1980 on the basis of 1979 export shares was also 9 percent. In 1980, average rebate rates ranged from 19 percent for transport equipment to 5 percent for plastic products; they exceeded 10 percent for transport equipment and non-electrical machinery. In the first quarter of 1981, the overall average declined to 8 percent, slightly exceeding the 7 percent figure estimated on the basis of 1979 export shares. Table 2.6a: EXPORT TAX REBATES IN THE MANUFACTURING SECTOR, 1979 - SECOND QUARTER 1981 (in TL Million) 1979 1980 I-0 Total Eligible Percentage Share Tax Tax Rebate Total Eligible Percentage Share of Tax Tax Rebate Total Sector Exports Exports of Eligible Exports Rebate Rate Exports Exports Eligible Exports in Rebate Rate Exports Code Sector (1) (2) in total Exports (3) (4) (5)=(4):(2) (6) (7) Total Exports (8) (9) (10)=(9):(7) (11) 11-16 Food Processing 3,543.3 1,566.8 44.2 172.6 11.0 10,366.8 6,948.2 67.0 478.3 6.9 6,182.1 17-18 Beverages 574.0 128.8 22.4 8.7 6.8 4415.1 73.5 1.7 4.2 5.7 1,354.3 21-22 Texciles & Clothing 11,595.8 11,595.8 100.0 1,635.0 14.1 32,549.9 27,166.0 83.5 2648.6 9.8 13,920.4 23 LeaEher & Fur Products 1,404.4 1,045.9 74.5 107.1 10.2 3,907.9 1,050.5 26.9 63.4 6.0 1,441.0 27 Paper and Paper Products 98.5 32.3 32.8 4.4 13.6 277.1 189.3 68.3 9.2 4.9 236.7 19-31 Chemicals 793.8 760.9 95.9 102.5 13.5 6,127.6 2,201.5 35.9 166.3 7.6 2,542.6 34 Rubber Products 67.2 11.1 16.5 1.6 14.4 795.2 669.3 84.2 33.9 5.1 536.9 35 Plastic Products 53.1 53.1 100.0 6.9 13.0 462.9 462.9 100.0 20.8 4.5 489.2 36 Glass & Glass Products 1,100.0 720.1 65.5 125.0 17.4 2,373.9 2,002.5 84.4 130.1 6.5 1,749.0 37 Cement 1,290.7 1,290.7 100.0 205.2 15.9 3,201.5 2,099.0 65.6 130.4 6.2 1,008.4 39 Iron and Steel 978.9 21.3 2.2 2.6 12.2 2,511.2 65.9 2.6 4.1 6.2 1,338.0 40 Non-Ferrous Metals 457.1 145.3 31.8 7.4 5.1 1,422.6 1,422.6 100.0 111.0 7.8 722.1 41 Fabricated Metal Products 179.0 127.4 71.1 15.0 11.8 647.9 555.2 85.7 39.1 7.0 369.4 42 Non-Electrical Machinery 400.8 400.8 100.0 107.8 26.9 1,748.8 698.9 40.0 73.9 10.6 1,181.9 44 Electrical Machinery 148.6 118.9 80.0 16.6 14.0 873.5 587.8 67.3 43.4 7.4 319.2 43,45-48 Transport Equipment 846.6 463.3 54.7 119.7 25.8 3,774.3 2,592.5 68.7 496.8 19.2 2,400.4 Total 23,532.2 18,482.5 78.5 2,638.1 14.3 75,456.8 48,785.6 64.7 4,453.5 9.1 35,791.6 Source: SPO, Office of Implementation and Incentives. (290I, p. 19 and 20) Table 2.6b: EXPORT TAX REBATES IN THE MANUFACTURING SECTOR, 1979 - SECOND QUARTER 1981 (continued) (in TL Million) First Quarter 1981 Second Quarter 1981 Eligible Percentage Share Tax Tax Rebate Total Eligible Percentage Share Tax Tax Rebate Exports of Eligible Exports Rebate Rate Exports Exports of Eligible Exports Rebate Rate (12) in total Exports (13) (14) (15)=(14):(12) (16) (17) in total Exports (18) (19) (20)=(19):(17) 2,540.7 41.1 155.6 6.1 7,623.0 2,864.0 37.6 174.1 6.1 125.3 9.3 6.3 5.0 1,059.2 127.9 12.1 7.1 5.6 11.721.1 84.2 984.6 8.4 19,560.6 12,810.4 65.5 1,366.7 10.7 0 0 0 - 1,788.3 1,595.0 89.2 146.3 9.2 27.4 11.6 1.4 5.1 222.5 63.2 28.4 5.1 8.1 754.5 29.7 38.5 5.1 2,366.8 2,366.8 100.0 116.0 4.9 181.8 33.9 9.0 5.0 339.7 339.7 100.0 17.0 5.0 32.3 6.6 2.7 8.4 1,019.7 177.1 17.4 11.7 6.6 387.4 22.1 19.4 5.0 2,553.2 1,169.3 45.8 58.7 5.0 1,008.4 100.0 50.4 5.0 5,305.4 3,135.5 59.1 348.9 11.1 67.0 5.0 3.4 5.1 1,690.9 379.5 22.4 51.4 13.5 722.1 100.0 62.8 8.7 796.3 796.3 100.0 51.0 6.4 369.4 100.0 20.7 5.6 508.1 508.1 100.0 53.9 10.6 566.3 47.9 63.8 11.3 1,282.8 522.4 40.7 62.8 12.0 205.0 64.2 11.5 5.6 461.0 259.5 56.3 21.6 8.3 1,998.6 83.3 314.3 15.7 3,048.9 2,937.9 96.4 589.9 20.1 20,707.3 57.9 1,744.4 8.4 49,626.4 30,052.6 60.6 3,082.2 10.3 - 67 - 2.37 In turn, in the second quarter of 1981, the overall average rebate rate increased to 10 percent. With the exception of chemicals, plastic products and non-ferrous metals, all sectors participated in the increase, with average rebate rates increasing by more than four percentage points for iron and steel, fabricated metal products, and transport equipment. Average rebate rates exceeded 10 percent for textile and clothing, cement, iron and steel, fabricated metal products, non electrical machinery and transport equipment, with an average rebate rate of 20 percent estimated in the latter case. The increase in the overall average rebate rate largely reflects an increase in rebate rates across sectors, as the overall average rebate rate estimated in the second quarter of 1981 on the basis of 1979 export shares was 9 percent. 2. The Export Credit Scheme Evolution of the Scheme 2.38 Industrial exporters may have access to export credits through two different channels: (i) in cases when a firm does not hold a letter of credit for its prospective export transaction, it may apply to TUD to obtain an Export Encouragement Certificate upon making an export pledge, and then turn to a commercial bank for obtaining the credit; (ii) in cases when a firm holds such a letter of credit, it may apply directly to the commercial bank. The credit limit, and the conditions of the export credit are determined differently under each alternative. 2.39 Credit Limits: In the case of requests submitted to TUD for credits with Certificate, the credit limit is determined by the use of two methods: (i) evaluation at cost, where the relevant indicator is the production cost in terms of domestic currency; and (ii) export price evaluation, with the f.o.b. price in dollar terms as the relevant measure. In the case of the evaluation at cost, the credit limit is calculated at 80 percent of the value of the transaction for all products belonging to Rebate Lists I to IX. In the case of the export price evaluation, the credit limit is calculated at 80 percent of the value of the transaction for products belonging to Rebate Lists I to III, 75 percent for products on Lists IV to VI, and 70 percent for products on Lists VII to IX. 2.40 The credit limit for the Certificate is then set according to the lower result obtained by the two types of evaluation. However,, for firms exporting more than US$15 million per year, the credit limit is determined according to evaluation at cost, and set at 90 percent of the value of the transaction. Finally, in the case of requests submitted directly to commercial banks for export credits without Certificate, the credit limit is set in principle at 100 percent of the amount of the letter of credit, although banks do not exceed 80 percent of that amount in practice. Table 2.7: INTEREST RATE STRUCTURE (in Percent) ---------197 --------- -------------------------------190----------------------------------------------------------1981------------------------- Until Februarv 29 March I - June 30 From Julv 1 Until February 8 Since February 9 Short-term General Short-Term General Short-Term General Short-Term General Short-term General Short-Term General Export Short-term Export Short-term ExDort Short-term Export Short-Term Export Short-term Export Short-term Credit /l Credit Credit Credit Credit Credit Credit Credit Credit Credit Credit Credit Base Rate 9.00 16.00 9.0n 16.nn 17.0n 21.nn 22.n0 11.0n 22.00 32.00 22.s5 36.n0 Transaction Tax - 4.00 - 4.00 - 5.25 - 7.75 - 8.00 - 5.4n Interest Equalization Levy 0.90 2.40 0.90 2.40 1.70 3.15 7.2n 4.65 2.20 4.R0 2.25 5.70 Commission 2.00 2.00 2.00 2.00 2.00 2.n0 2.00 2.no 2.00 2.nn 2.00 2.nn Effective Interest Rate 11.90 24.4n 11.Q0 24.40 20.7n 31.4n ?A.20 4s.4n 26.20 46.80 26.75 4q.10 Rebate - 4.00 - - 4.n0 - - 5.*5 - - 7.70 7.70 - - 7.88 Final Cost to Borrower 7.90 24.40 7.9n 24.40 14.75 31.4n l8.50 45.40 18.50 46.80 18.87 49.10 Sources: - OECD, Economic Surveys, Turkey, Narch 1981 - EBA, various issues /I Note: General Short-term Credit: 1 year. (n290I) p. 13 and 14. - 69 - 2.41 Interest Rates; Table 2.7 summarizes the comparative evolution of interest rates charged on short-term export credits and on general short-term credit from 1979 to 1981. In 1979, and up to February 29, 1980, the application of the 15 percent financial transaction tax (from which export credits are exempted), the interest equalization levy (respectively 10 percent for export credits and 15 percent for general short-term credits), and the 2.0 percent commission on the amount of the loan levied by banks, resulted in an effective interest rate of 11.9 percent for export credits and 24.4 percent for general short-term credits, as compared to a basic rate of 9.0 percent and 16.0 percent respectively. After deduction of a rebate of 4.0 percent on export credits, the final cost to the borrower was estimated at 7.9 percent for export credits as against 24.4 percent for general short-term credit, yielding a subsidy of 16.5 percentage points during that period. After increasing slightly to 16.7 percentage points between March 1 and June 30, 1980, the subsidy component of export credits increased considerably after the freeing of interest rates in July 1980, reaching 26.9 percentage points in the second half of 1980, 28.3 percentage points in the first month of 1981 and 30.2 percentage points after February 9, 1981. 1/ 2.42 A gua7-antee deposit of 20 percent of the amount financed by the bank, in cach or in the form of a payment undertaking, is required on export credits with Certificate and 15 percent on export credits without Certificate. In turn, on the whole, commercial banks require compensating balances of 30 percent on general short-term credit. Commercial banks may rediscount up to 75 percent of the credit to the Central Bank. 2.43 Other Credit Conditions: The term of export credits is up to 8 months, but firms may request an extension of the term to 12 months. In cases where at least 60 percent of the export pledge has been fulfilled, extension is granted in most instances. However, in cases where the realization rate is lower, extension is granted only under special conditions. Defaults are penalized by an increase in the interest rate, the imposition of stamp and other duties, and the loss of the guarantee deposit. Impact of the Scheme 2.44 In the first half of the 1970's, export credits represented 3 percent of total credit by the Central Bank; it averaged 6 percent in the second half of the decade (see Table 2.8). Between 1976 and 1980, the share of export credits in total Central Bank credit rose from 4 percent to 7 percent. While export credits with Certificate only represented 18 percent of total export credits on average between 1970 and 1975, their share in the total averaged 58 percent between 1976 and 1980. In turn, the share of export credits without Certificate, which represented 49 percent 1/ The data do not include the effect of increasing interest rates on export credits to 27.0 percent in late 1979, since the calculations presented in this Chapter do not extend beyond the second quarter of 1981. For the relevant estimates, see Table 3.19. Table 2.8: EXPORT CREDIT USED (in TL million) Export Percentage Export Percentage Percentage Percentage Total Percentage Credit Share in Credit Share in Export Share in Export Share in Total Central Export Share in with Export without Export Preparation Export Promotion Export Year Bank Credit Credit Total Credit Certificate Credit Certificate Credit Credit Credit Credit Credit 1970 15,552 1,026 6.6 195 19.0 418 40.7 76 7.4 337 32.8 1971 17,279 847 4.9 135 15.9 301 35.5 55 6.5 356 42.0 1972 20,466 659 3.2 39 5.9 298 45.2 40 6.1 282 42.8 1973 28,780 1183 4.1 136 11.5 704 59.5 99 8.4 244 20.6 1974 52,592 882 1.7 266 30.2 347 39.3 77 8.7 192 21.8 1975 66,198 2,115 3.2 467 22.1 1,240 58.6 35 1.7 373 17.6 1970-75 Average 3.3 18.4 49.3 5.7 26.6 1976 110,621 4,667 4.2 2,210 47.4 2,073 44.4 56 1.2 328 7.0 0 1977 189,699 7,583 4.0 4,005 52.8 2,649 34.9 71 0.Q 858 11.3 1978 241,886 14,020 5.8 6,369 45.4 6,289 44.9 92 0.7 1,270 9.1 1979 382,138 20,848 5.5 13,735 65.9 4,882 23.4 - 0 2,231 10.7 1980 655,183 42,769 6.5 25,822 60.4 11,217 26.2 - 0 5,730 13.4 1976-80 Average 5.7 58.0 30.2 0.2 11.6 1970-80 - Average 5.4 55.3 31.5 0.6 12.6 Source; Central Bank (0290I) p. 18. - 71 - of total export credits in the first half of the 1970's, fell to 30 percent of the total between 1976 and 1980. Export preparation credit and export promotion credit (for exports of fresh fruits and vegetables) accounted for the remainder. 2.45 In early 1981, a sharp increase in the use of the export credit facility has been observed. According to TUD authorities, total export credit given, both with and wiihoucL LertifricaLe, amournLed Lo TL 83 billion at the end of May, 1981 as against a Central Bank ceiling of TL 85 billion for the first half of the year. This evolution generated suspicion at the Central Bank that part of these credits may be diverted to the short-term domestic market by firms that take advantage of the differential between the subsidized rate and the commercial rate, despite the penalties involved in the non-realization of the export pledge. At the end of May 1981, the Central Bank instructed commercial banks to stop the processing of applications for export credits and to start inquiries about applicants without previous export performance records. 1/ The temporary freeze on export credits imposed by the Central Bank was lifted at the end of June 1981. 2/ 2.46 Table 2.9 shows the evolution of export credit used for the 16 industrial sectors which represented 94 percent of total export credits with Certificate given in the manufacturing sector in 1979, 92 percent in 1980, 77 percent in the first quarter of 1981 and 95 percent in the second quarters of 1981. In the 16 industrial sectors, the ratio of export credit used (both with and without Certificate) to export values decreased from 60 percent in 1979 to 32 percent in 1980, and 20 percent both in the first and second quarters of 1981. While this tendency may in part be explained by delays in the utilization of export credits already granted, it largely reflects the fact that the global ceiling for export credits was increased less rapidly than exports. 2.47 In line with the changing composition of exports, the pattern of export credit used (both with Certificate and without Certificate) shows a tendency of diversification between 1979 and the first quarter of 1981, which is reversed however in the second quarter of 1981. The share of engineering industries, including fabricated metal products, non-electrical machinery, electrical machinery, and transport equipment, increased from 11.5 percent in 1979 to 20.9 percent in 1980 and 24.6 percent in the first quarter of 1981, but declined subsequently to 15.7 percent in the second quarter of 1981. By contrast, the combined share of textiles and food processing in total export credits declined from 62.5 percent in 1979 to 59.5 percent in 1980 and 32.4 percent in the first quarter of 1981. It increased subsequently to 63.1 percent in the second quarter of 1981. 1/ Note; IBA Newsletter No. 3293, June 1, 1981. 2/ Note; EBA Report No. 487, June 29, 1981. Table 2.9a: EXPORT CREDIT USED IN THE MANUFACTURING SECTOR, 1979 SECOND QUARTER 1981 (in TL Million) 1979 1980 I-0 Export Credit Export Credit Export Credit Total Export Credit Export Credit Export Credit Total Sector w/ Certificate w/ Certificate w/o Certificate Export Credit w/ Certificate w/ Certificate w/o Certificate Export Credit Code Sector Given /1 Used /2 Used 14 Used Given 11 Used 12 Used 14 Used 13 13 15 - 11-16 Food Processing 2,046.0 599.1 354.9 954.0 7,472.4 2,348.7 922.9 3,271.6 17-18 Beverages 0 0 0 0 64.0 17.3 6.8 24.1 21-22 Textiles and Clothing 14,955.1 4,907.4 2,907.3 7,814.7 25,258.8 7,926.7 3,114.7 11,041.4 23 Leather and Fur Products 657.6 563.9 334.1 898.0 1,266.7 397.2 156.1 553.3 27 Paper and Paper Products 0 0 0 0 0 0 0 0 29-31 Chemicals 682.0 264.3 156.6 420.9 1,487.4 466.3 183.2 649.5 34 Rubber Products 584.6 52.9 31.3 84.2 617.6 190.0 74.6 264.6 35 Plastic Products 487.1 193.8 114.8 308.6 718.0 224.5 88.2 312.7 36 Glass and Glass Products 682.0 581.5 344.5 926.0 1,194.3 379.9 143.3 529.2 37 Cement 779.4 440.5 261.0 701.5 2,228.9 690.8 271.4 962.2 39 Iron and Steel 0 0 0 0 1,687.3 535.4 210.4 745.8 40 Non-Ferrous Metals 292.3 193.3 114.8 308.6 1,626.0 518.1 203.6 721.7 41 Fabricated Metal Products 1,071.7 123.2 73.1 196.4 1,835.3 569.9 223.9 793.8 42 Ron-Electrical Machinery 535.8 158.6 94.0 252.6 2,991.3 932.6 366.4 1,299.0 44 Electrical Machinery 535.7 35.2 20.9 56.1 2,770.4 863.5 339.3 1,202.8 43, 45-48 Transport Equipment 1,047.3 696.0 412.3 1,108.3 3,843.4 1,208.9 475.0 1,683.9 24,356.6 8,810.5 5,219.6 14,029.9 55,061.8 17,269.5 6,785.9 24,055.6 /1 Total export credit given in each period of observation has been derived from TUD data. /2 Total export credit used in each period of observation has been derived as the geometric average of the stock of credit observed at the beginning and at the end of the period. /3 In 1979, sectoral shares for export credit with Certificate _iven have been derived by assuming proportionality with export pledges. In that same year, sectoral shares for export credit with Certificate used have been derived by assuming proportionality with realization of export pledges in 1979. /4 In each period of observation, sectoral shares for export credit with Certificate have been applied in the case of export credit without Certificate. /5 In 1980 and in the first and second quarter of 1981, export credit with Certificate used by sector has been derived by applying the utilization rate of total export credit with Certificate to credit given by sector. Sources: - SPO, Office of Incentives and Implementation - Central Bank Table 2.9b: EXPORT CREDIT USED IN THE MANUFACTURING SECTOR, 1979 SECOND QUARTER 1981 (continued) (in TL Million) First Quarter 1981 Second Quarter 1981 Export Credit Export Credit Export Credit Total Export Credit Export Credit Export Credit Total w/ Certificate w/ Certificate w/o Certificate Export Credit w/ Certificate w/ Certificate w/o Certificate Export Credit Given 11 Used 12 Used 14 Used Given 11 Used 12 Used 14 Used 15 15 2,936.3 703.9 409.4 1,113.3 3,845.5 950.6 821.1 1,771.7 O 0 0 0 0 0 0 0 3,086.2 739.6 430.1 1,169.7 9,020.8 2,230.1 1,926.2 4,156.3 814.9 196.0 114.0 310.0 55.1 15.2 13.1 28.3 94.7 22.3 13.0 35.3 125.0 30.3 26.2 56.5 1,685.1 405.4 235.8 641.2 358.3 91.0 78.6 169.6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 444.3 106.9 62.2 169.1 871.1 217.4 187.8 405.2 2,234.6 534.6 310.9 845.5 773.3 192.2 166.0 358.2 674.1 160.4 93.3 253.7 1,666.7 414.6 358.2 772.8 2,035.3 490.1 285.0 775.1 469.8 116.3 100.5 216.8 68.3 17.8 10.4 28.2 281.7 70.8 61.1 131.9 368.7 89.1 51.8 140.9 650.9 161.8 139.8 301.6 129.3 31.2 18.1 49.3 644.6 161.8 139.8 301.6 4,000.6 957.9 557.1 1,515.0 1,633.8 404.5 349.4 753.9 18,572.4 4,455.3 2,591.2 7,046.3 20,396.6 5,056.6 4,367.8 9,424.4 - 74 - 3. The Foreign Exchange Allocation Scheme Evolution of the Scheme 2.48 The foreign exchange allocation scheme ensures priority access to foreign exchange for exporters who already have obtained an export credit with or without Certificate and to exporters who do not have an export credit, but make an export pledge to TUD. Since January 1980, the allocation can be used for the duty-free importation of raw, intermediate and packaging materials in expert production, as well as for the duty-inclusive importation of equipment destined for removing specific bottlenecks encountered in production for export. However, the total amount of the foreign exchange allocation may not exceed 60 percent of the f.o.b. value of the export pledge. 2.49 Export projects are evaluated by TUD to determine their foreign exchange content. Since May 1981, a distinction has been made between projects with a foreign exchange content of less than 60 percent, for which only a cursory evaluation is undertaken, and projects with import content higher than 60 percent, for which an in-depth analysis is carried out. 2.50 Upon receiving an Encouragement Certificate, which determines the amount of foreign exchange to be allocated to their project, exporters apply to the Ministry of Commerce for a Foreign Exchange Permit, which has to be delivered within four months of the application, but is obtained normally within one to two weeks. Under the January 1980 reform, importation had to be completed within four months following the receipt of the Permit. Since May 1981, however, the realization period has been extended to 6 months. If the importation is not completed within this period, the Ministry of Commerce may extend it by another 6 months upon delivery of a new Certificate by TUD. 2.51 The Encouragement Certificate, together with the Domestic Production Position Certificate, issued by the Ministry of Industry and Technology, also allows exporters to import machinery and equipment that is not included on the Liberalization Lists, and whose importation is therefore otherwise prohibited. 2.52 Since May 1981, firms that have received an export credit (with or without Certificate) and have fulfilled their pledge within a 12-month period may, within four months of the completion of their pledge, apply to TUD for a foreign exchange allocation corresponding to the raw, auxiliary and packaging materials used for the realization of that export. This retrospective foreign exchange allocation may represent at most 80 percent of the f.o.b. value of the pledge and entitles the exporters to import at most 50 percent duty-free for further use for its future exports, the remaining 50 percent corresponding to imports inclusive of duty. 2.53 Guarantee deposit rates are 10 percent for the first allocation made to a particular exporter, 5 percent and 1 percent for the second and third allocations, respectively, if previous pledges are fulfilled without - 75 - extension. Starting with the fourth allocation, TUD only requires a payment guarantee from the exporter. If the export pledge is not fulfilled within a 12-month period, the guarantee is retained for a Special Export Credit Fund for fresh fruits and vegetables. In cases when at least 80 percent of the pledge is fulfilled, the guarantee is released in proportion to the amount realized above the 50 percent limit, but the remainder is retained for the Export Credit Fund. Impact of the Scheme 2.54 As shown in Table 2.10, foreign exchange allocations are subject to a ceiling, which was increased from US$11 million in 1970 to US$170 million in 1979, but declined to US$147 million in 1980. During the 1970-80 period, allocations of foreign exchange represented an average of 89 percent of the ceiling, while foreign exchange used represented 81 percent of the allocations. The latter estimate, however, is biased downwards in periods of rapid export growth, as part of the foreign exchange allocated in the course of 1980 will only be utilized in the first months of 1981 due to extensions granted to firms. If 1980 is excluded, the average share of foreign exchange used is 92 percent. 2.55 Table 2.11 shows the evolution of foreign exchange allocations and foreign exchange used for the 16 manufacturing sectors which represented 74 percent of total allocations in 1979, 91 percent in 1980, 73 percent in the first quarter of 1981 and 84 percent in the second quarter of 1981. During the 1979-80 period, textiles had the highest share of foreign exchange used under the allocation scheme, with 33 percent of the total, followed by transport equipment (28 percent) and non-ferrous metals (9 percent). During the first quarter of 1981, the share of textiles was estimated at 30 percent against 23 percent for transport equipment. In the second quarter of 1981, the share of textiles increased to 34 percent, while that of transport equipment declined further to 21 percent. Besides textiles, sectors with increasing shares are chemicals, from 5 to 6 percent, plastic products, from 1 to 7 percent, iron and steel, from 6 to 10 percent, fabricated metal products, from 2 to 3 percent, and electrical machinery, from 3 to 4 percent. Besides transport equipment, declining shares are observed for rubber products, non-ferrous metals and non-electrical machinery. 4. The Temporary Import Regime Evolution of the Scheme 2.56 Before the January 1980 reform, industrialists holding a purchase order from a foreign firm had to apply through the Ministry of Industry to the Temporary Import Commission in order to obtain the benefits available under the Temporary Import Regime. For approved projects, customs duties on requisite imports were deposited, but refunded in full on export. The necessary imports had to be realized within 6 months of the permission being granted and exports within 12 months following the date of importation. - 76 - Table 2.10: FOREIGN EXCHANGE ALLOCATION (in TL Million) Year Central Bank Foreign Exchange Foreign Exchange Allocation Utilization Ceiling Allocation Used Rate Rate (1) (2) (3) (2):(1) (3):(2) 1970 126.5 115.3 109.2 91.2 94.7 1971 134.3 107.8 99.7 80.3 92.5 1972 290.1 261.1 241.8 90.0 92.6 1973 141.5 61.5 42.6 43.4 69.3 1974 139.3 108.8 107.2 78.1 98.5 1975 274.4 247.4 227.0 90.2 91.8 1976 594.0 591.2 400.4 99.5 67.7 1977 360.0 186.6 171.6 53.2 89.6 1978 1,214.1 1,189.5 1,181.5 98.0 99.3 1979 5,283.3 4,478.1 4,315.5 84.8 96.4 1980 11,177.6 10,706.9 6,041.4 95.8 56.4 Weighted average 80.9 88.7 (92.2)/l /1 Excluding 180. Source: Central Bank Table 2.11: FOREIGN EXCHANGE ALLOCATION WITH CERTIFICATE IN THE MANUFACTURING SECTOR, 1979 - SECOND QUARTER 1981 (in TL Million) 1979 1980 First Quarter 1981 Second Quarter 1981 I-0 Foreign Foreign Foreign Foreign Foreign Foreign Foreign Foreign Sector Exchange Exchange Exchange Exchange Exchange Exchange Exchange Exchange Code Sector Allocacion /1 Used /2 Allocation Used /2 Allocation Used /2 Allocation Used /3 11-16 Food Processing 136.2 131.3 397.1 224.0 491.6 277.3 448.5 253.0' 17-18 Beverages 0 0 0 0 0 0 0 0 21-22 Textiles and Clothing 1,076.6 1,037.7 3,135.7 1,768.5 1,594.7 899.4 3,460.9 1,952.2 23 Leather & Fur Products 0 0 0 0 128.1 72.2 48.4 27.3 27 Paper & Paper Products 0 0 0 0 0 0 0 0 29-31 Chemicals 149.5 144.2 439.1 247.7 68.6 38.7 597.3 336.9 34 Rubber Products 106.3 102.5 312.4 176.2 26.6 15.0 47.0 26.5 35 Plastic Produjcts 20.0 19.2 58.3 32.9 178.2 100.5 695.4 392.3 36 Glass & Glass Products 69.7 67.3 207.9 117.3 75.5 42.6 187.6 105.8 37 Cement 13.3 12.8 37.0 20.9 0.9 0.5 0.3 0.2 39 Iron and Steel 182.8 176.2 536.0 302.3 124.2 70.0 994.7 561.1 40 Non-Ferrous Metals 315.6 304.3 916.9 517.1 269.4 151.9 576.4 325.1 41 Fabricated Metal Products 49.9 48.1 144.8 81.7 149.1 84.1 280.7 158.3 42 Non-Electrical Machinery 159.5 153.7 462.9 - 261.1 479.5 270.4 350.5 197.7 44 Electrical Machinery 106.3 102.5 313.7 176.9 517.5 291.9 388.2 219.0 43, Transport Equipment 937.0 903.2 2,735.5 1,542.8 1,212.5 683.9 2,106.6 1,188.3 44-48 Total 3,322.7 3,190.2 9,697.3 5,469.4 5,315.5 2,998.4 10,182.5 5,743.8 /1 Sectoral Shares for foreign exchange allocations were derived by assuming proportionality with 1980 observations. /2 Foreign exchange used by'sector was derived by applyirg the utilization rate for total foreign exchange allocations to foreign exchange allocated by sector. /3 Foreign exchange used in the second quarter of 1981 was derived by assuming tlhe same utilization rate as in the first quarter of 1981. Sources: - SPO, Office of Incentives and Implementation - Central Bank (0290I) p. 4 - 78 - 2.57 Under the reform introduced in January 1980, the Temporary Imports Commission has been dismantled and its duties and authorities transferred to TUD. Applications previously made to the Ministry of Industry and Technology are now made to TUD, under provisions differing for imports without payment arid imports with payment (the former in the framework of transactions with foreign partner firms). 2.58 In the case of imports without payment, firms obtaining TUD approval under the temporary import regime are allowed to import all inputs described in their proposal, whether included on the Liberalization Lists or prohibited. Customs duties on these goods are deposited with the Customs Administration and returned after fulfillment of the export pledge. -In the case of imports with payment, only goods included in the Liberalization Lists may be imported. 2.59 As in, the case of the foreign exchange allocation scheme, raw, intermediate and packaging materials used in the production of exports may be imported duty-free. By contrast with the foreign exchange allocation scheme where imports may not exceed 60 percent of the f. o.b. value of the export pledge, the foreign exchange allocation given in the framework of the temporary import regime may reach 80 percent of the pledge. But, the determination of the foreign exchange content is subject to a stricter control under the temporary import regime, with the Ministry of Customs responsible for investigating goods at their importation and before exporting. The wastage allowance is determined by TUD. Impact of the Scheme 2.60 The sectoral breakdown of foreign exchange allocations under the temporary import regime in 1980 is presented in Table 2.12. In that year, foreign exchange allocations under the regime amounted to US$16.1 million, or 11.5 percent of total foreign exchange allocations with Certificate, which amounted to US$140.8 million (see Table 2.10). In 1980, the iron and steel sector, which accounted for 58 percent of export pledges, received 73 percent of foreign exchange allocations under the temporary import regime. By contrast, the textile sector, which accounted for 34 percent of export pledges, only received 19 percent of foreign exchange allocations in that same year. 5. The Foreign Exchange Retention Scheme Evolution of the Scheme 2.61 Prior to 1979, exporters had access to 25 percent of their net foreign exchange earnings to import, subject to the relevant customs duties, intermediate inputs and equipment used in export production. In April 1979, the foreign exchange allocation was raised to 50 percent of net foreign exchange earnings and exporters were allowed to transfer these rights to their suppliers. In May 1980, the scheme was extended to include exporters of fresh fruits and vegetables and Turkish contractors abroad, though these were allowed to retain only 10 percent of their net foreign exchange earnings. Moreover, exporters were allowed to transfer their rights not only to their own suppliers but to any industrial user. . .. .. ... ........... - 79 - Table 2.12: TEMPORARY IMPORTS WITH PAYMENT, 1980 (in US$ thous&nds) Export Foreign Exchange Sectors Pledge Allocation Iron & Steel 15,723.5 11,849.0 Chemicals 427.2 194.1 Machinery 27.4 12.5 Plastic Products 890.0 500.2 Metal Products 61.4 31.4 Textiles 9,128.0 3,130.1 Automotive Industry 1,014.7 423.7 TOTAL 27,272.2 16,141.0 Source: SPO, Office of Incentives and Implementation - 8n - Impact of the Scheme 2.62 Table 2.13 summarizes the evolution of the foreign exchange retention scheme between 1979 and the first four months of 1981. The share of eligible exports 1/ under the retention scheme increased from 35 percent in 1979 to 61 percent during the first four months of 1981, reflecting changes in export composition and the extension of the scheme beyond industrial exports to include exports of fresh fruits and vegetables. In the same period, the share of foreign exchange transferred under the retention scneme in eligible exports declined from 11 percent to 7 percent. Part of the explanation is that the rate applicable to net foreign exchange earnings was only 10 percent for fresh fruits and vegetables exports as against 50 percent for industrial exports. 6. Incentives to Export-Oriented Investments and Income Tax Reductions for Exporters Incentives to Export-Oriented Investments 2.63 Before the January 1980 reform, investment incentives were provided in support of a development strategy that emphasized import substitution activities. Following the 1980 reform, some reorientation of priorities has been effected, with greater emphasis being placed on export-oriented activities. At the same time, the authority for granting investment incentives has been centered at TUD, which is responsible for issuing Investment Encouragement Certificates on the basis of detailed investment proposals. In the case of export-oriented investments, Encouragement Certificates specify the amount out of production that the firm will export. The incentive measures include remissions of customs duties on investment goods. investment allowances, and interest rebates on medium and long-term credits. In the case of export-oriented investments, the investment allowance is 50 percent as compared to the general rate of 30 percent 2/ Income Tax Reduction for Exporters 2.64 Since 1981, industrial exporters with annual export revenues in excess of US$250,000 have been allowed to deduct up to 20 percent of their annual export revenue from taxable income during the first year. In subsequent years, the deduction is 30 percent on increments in exports and 15 percent on the original amount. One-fourth of these deductions are provided in addition to trading firms. Furthermore, the deductions are extended 1/ Note: Eligible exports, are equated to industrial exports in 1979. In 1980, the estimate is derived by adding exports of fresh fruits and vegetables from May to December to industrial exports. For the first 4 months of 1981, the total of industrial exports and exports of fresh fruits and vegetables has been retained. Foreign exchange transactions of Turkish contractors abroad were not included in the computation of the base for eligible exports. 2/ For a detailed analysis of investment incentives, see Chapter 4, para 4.67 to 4.76. - 81 - Table 2.13; FOREIGN EXCHANGE RETENTION: 1979-FIRST FOUR MONTHS 1981 (in US$ thousand) Share of Eligible Exports in Total Foreign Exchange Retention Total Eligib]e Exports transferred under Rate Period Exports Exports (in percent) Retention Scheme (in percent) 1979 2,261,195 785,083 34.7 83,812 10.7 1980 2,910,122 1,523,681 52.4 135,738 8.9 January- April 1981 1,337,482 816,249 61.0 53,299 6.5 Sources: - Central Bank - SPO - 82 - to exporters of fresh fruits and vegetables and marine products, as well as to foreign exchange earnings of companies engaged in tourism, while construction companies abroad are fully exempted from the income tax. The benefit to exporters is however reduced as a result of the withholding tax applied to deductions from taxable income on account of exports. 1/ 7. Estimation of the Combined Export Subsidy and Export Exchange Rate Combined Export Subsidy 2.65 Appendix tables 1 through 4 present the estimation of the combined export subsidy in the 16 selected industrial sectors from 1979 to the second quarter of 1981. 2.66 The subsidy component of export credit has been calculated by applying the interest subsidy rate to export credit used by sector in each period of observation. For the calculation of the subsidy component of the tax rebate scheme, it has been assumed that the tax rebate ratio oberved in 1980 and in the first quarter of 1981 exactly compensates for the indirect taxes paid on inputs, thereby yielding a zero net rebate in those two periods of observation. In 1979, the subsidy component of the tax rebate has been derived as the difference between the average tax rebate rates and the corresponding rates for each branch in 1980. In the second quarter of 1981, the subsidy component of the tax rebate has been estimated by the 5 percent increase in tax rebate rates in effect since May 1981, without adjusting for the additional rebates received by large exporters. In turn, the estimation of the subsidy component of the Foreign Exchange Allocation and Foreign Exchange Retention Schemes has been carried out by using average ratios of the parallel to the official exchange rates. 2/ 3/ Finally, the subsidy component of the duty exemption in effect since 1980 on imports of intermediate inputs by exporters holding a Foreign Exchange Certificate has been estimated by average nominal tariff protection 1/ The method of calculation used is explained in para 2.67 below. 2/ Monthly average exchange rates from IMF, International Financial Statistics, have been retained as estimates for the official exchange rate. Monthly average estimates from MEBAN Securities have been used as estimates for the parallel market exchange rate. 3/ In the second quarter of 1981, in the absence of data for May and June, the base for the calculation of the foreign exchange retention scheme has been estimated by retaining the retention rate observed in the January-April 1981 period. - 83 - coefficients on intermediate inputs in the industrial sector (see Section C, para. 2.92). The subsidy element of the temporary import regime has not been taken into account in the calculations. Nor do the figures make allowance for increased incentives to export-oriented investment. 2.67 The subsidy equivalent of income tax reductions on exports has been estimated on the assumption that one-fifth of profits are distributed to shareholders. With withholding tax rates of 33.3 percent on distributed profits and 20 percent on undistributed profits, the average withholding tax on reductions from taxable income on account of exports will be 22.67 percent compared to the corporate income tax rate of 50 percent, i.e. a difference of 27.33 percent. Calculating with a deduction of 20 percent from taxable income, the subsidy will equal 5.47 percent on industrial exports. Since the corporate income tax for 1981 is payable in the second quarter of 1982, this amount needs to be discounted in order to obtain present values. Discounting at the non-preferential interest rate of 70 percent a year, the present value of the subsidy will be 2.84 percent in the first quarter of 1981 and 3.22 percent in the second quarter. 2.68 In the four periods of observation, the combined export subsidy has been estimated both including and excluding the foreign exchange premium implicit in the foreign exchange allocation and retention schemes. Excluding the foreign exchange premium, the weighted average export subsidy was 14.0 percent in 1979. It was 9.8 percent under the third estimating hypothesis, excluding both the foreign exchange premium and the subsidy component of the indirect tax rebate. After declining to 8.2 percent in 1980, the combined subsidy irncreased to 9.9 percent in the first quarter, and to 11.1 percent in the second quarter, of 1981. This evolution is practically entirely due to changes in export subsidies across sectors rather than to changes in export shares, as shown by comparisons with weighted average subsidy rates of 8.3 percent, 9.9 percent and 10.9 percent estimated in 1980 and the first and second quarter of 1981 on the basis of 1979 export shares. Similar considerations apply to export subsidy rates including the foreign exchange premium that averaged 27.1 percent in 1978, 9.0 percent in 1980, 11.0 percent in the first quarter of 1981, and 11.6 percent in the second quarter of 1981. 2.69 Amdng the most important export products, in 1979 the average subsidy rate exclusive of the foreign exchange premium was 15.4 percent for textiles and clothing, and 6.3 percent for processed food. Average subsidy rates in 1980 fell to 8.7 percent for textiles and clothing but increased to 7.6 percent in the case of processed food. 2.70 In the first quarter of 1981, The largest increases in export subsidy rates were shown for cement, reaching 27.4 percent compared to 6.8 percent in 1980, for non-ferrous metals, from 15.8 percent to 36.9 percent, and for transport equipment from 14.3 percent to 24.4 percent in 1981. By contrast, declines were registered for textiles and clothing, rubber and plastic products, fabricated metal products, non-electrical machinery and electrical machinery. -84- 2.71 Between the first and the second quarters of 1981, average export subsidy rates increased substantially for textiles and clothing (from 6.5 to 11.7 percent). for paper and paper products (from 7.2 to 11.0 percent), for iron and steel (from 9.1 to 21.2 percent), for fabricated metal products (from 8.1 to 15.5 percent) and for electrical machinery (from 19.2 to 29.2 percent). By contrast, average export subsidy rates declined in the case of leather and fur products, chemicals, cement, non-ferrous metals and transport equipment. 2.72 Table 2.14 shows the evolution of the shares of specific export subsidies in the combined export subsidy from 1979 to the second quarter of 1981. In all four periods, export credit accounted for the largest share in the combined export subsidy, with 36 percent in 1979, 79 percent in 1980, 53 percent in the first qruarter of 1981 and 51 percent in the second quarter of 1981. In turn, the share of indirect tax rebates fell from 15 percent in 1979 to 0 percent in 1980 and in the first quarter of 1981, and increased to 2 percent in the second quarter of 1981. The combined shares of foreign exchange allocation and retention schemes declined from 48 percertt in 1979 to 9 percent in 1980, and, after a temporary rise to 10 percent in the first quarter of 1981 fell again to 4 percent in the second quarter of 1981. In turn, the share of duty exemptions, which were first introduced in 1980, accounted for 11 percent of the combined export subsidy in that same year, 12 percent in the first quarter of 1981 and 16 percent in the second quarter of 1981. Finally, the subsidy equivalent of income tax reductions, introduced in January 1981, accounted for 26 percent of the total in the first quarter, and 28 percent in the second quarter, of 1981. 2.73 The evolution of the combined export subsidy over the four periods of observation can be explained by comparing the evolution of the subsidy base and subsidy rates for each type of subsidy. As shown in Table 2.15, the decline in the combined export subs.dy (excluding both the foreign exchange premium and the subsidy component of indirect tax rebates) between 1979 and in 1980 is essentially due to 'a decline in the volume of export credit with respect to total manufactured exports, from 59.6 percent in 1979 to 31.9 percent in 1980. This decline more than offsets the increase in the subsidy component of export credit, from 16.5 percent in 1979 to 22.5 percent in 1980, resulting in a net decline in the ratio of export credit subsidy to total manufactured exports from 9.8 percent in 1979 to 7.2 percent in 1980. 2.74 The ratio of export credit to the volume of manufactured exports declined further in 1981. This decline was more than offset, however, by the rise in the rate of credit subsidy, the increase in the tax rebate rate, the h4igher share of exports benefiting from tax exemptions and, in particular, the introduction of income tax reductions for exporters. At the same time, for more recent periods, the estimates understate the extent .of export subsidization because they exclude the additional tax rebate provided to large exporters as well as incentives to export-oriented investments. - 85 - Table 2.14: SHARES OF SPECIFIC EXPORT SUBSIDIES IN THE COMBINED EXPORT SUBSIDY: 1979 SECOND QUARTER 1981 (In percent) First Quarter Second Quarter 1979 1980 1981 1981 Export Credit 36.2 79.3 52.5 50.8 Indirect Tax Rebate 15.3 0.0 0.0 1.9 Foreign Exchange Allocation 27.1 3.8 4.9 2.5 Foreign Exchange Retention 21.3 5.6 5.3 1.6 Duty Exemption 0.0 11.4 11.5 15.6 Income Tax Reduction 0.0 0.0 25.8 27.6 Total 100.0 100.0 100.0 100.0 Table 2.15: EXPORTS SUBSIDIES: SUMMARY EVOLUTION 1979-SECOND QUARTER 1981 (In Percent) 1979 1980 First Quarter 1981 Second Quarter 1981 Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Subsidy Base Ratio of Subsidy to Subsidy Base Subsidy Subsidy Subsidy Base Ratio of Subsidy to Subsidy Base Subsidy Subsidy To Total Subsidy Total To Total To Subsidy To Total To Total Subsidy Total To Total To Subsidy To Total Manufactured To Subsidy Manufactured Manufactured Base Manufactured Manufactured To Subsidy Manufactured Manufactured Base Manufactured Exports Base Exports Exports Exports Exports Base Exports Exports Exports Export Credit 59.6 16.5 9.8 31.9 22.5 7.2 19.7 29.4 5.8 19.4 29.9 5.8 Indirect Tax Rebate 78.5 5.3 4.1 64.6 0.0 0.0 57.9 0.0 0.0 6.4 3.3 0.2 Foreign Exchange Allocation 13.6 54.1 7.4 7.2 4.7 0.3 8.4 6.4 0.5 11.8 2.4 0.3 Foreign Exchange Retenion 10.7 54.1 5.8 10.7 4.7 0.5 9.2 6.4 0.6 7.3 2.4 0.2 Duty Exemption 13.6 0.0 0.0 7.3 14.2 1.0 8.4 15.1 1.3 11.8 15.3 1.8 Income Tax Reduction - - - - - - 100.0 2.8 2.8 100.0 3.2 3.2 Total - - 27.1 - - 9.0 - - 11.0 - - 11.6 Total, Excluding Foreign Exchange Premium - - 14.0 - - 8.2 - - 9.9 - - 11.1 Source: See Text Tables - 87 - Export Exchange Rate 2.75 The index of the export exchange rate vis a vis Turkey's trading partners has been estimated by adding the export subsidy rates (both including and excluding the foreign exchange premium) for 1979, 1980, and the first and second quarter of 1981 to the nominal exchange rate (Table 2.16). Adjusting further for relative prices at home and abroad, we find that, between 1979 and 1980, the real export exchange rate vis-a-vis Turkey's major trading partners depreciated to a considerable extent, despite the reduction observed in the export subsidy rate between these two periods. This is due to the fact that the depreciation of the Turkish lira, estimated at 28 percent (Index A) and 46 percent (Index B) in real terms between 1979 and 1980, more than offset the 18 percentage points reduction in the subsidy rate (including the foreign exchange premium) during the same period. The real export exchange rate depreciated even more between 1979 and 1980 if estimation is made with the export subsidy excluding the foreign exchange premium; 22 percent utilizing Index A and 39 percent utilizing Index B. 2.76 In turn, between 1980 and the first quarter of 1981, the appreciation of the real exchange rate partially offset by increases in export subsidies induced an appreciation of the real export exchange rate by 7 percentage points (Index A) and by 4 percentage points (Index B), when using the export subsidy rate including the foreign exchange premium, and by 8 percentage points (Index A) and by 4 percentage points (Index B) when using the export subsidy rate excluding the foreign exchange premium. 2.77 Between the first and the second quarters of 1981, too, the appreciation of the real exchange rate of the lira vis-a-vis Turkey's major trading partners and the rise in the export subsidy rate exerted opposite forces on the real export exchange rate, with the two effects approximately balancing each other. After June 1980, however, the exchange rate appreciated to a considerable extent in real terms (Tables 1.4 and 2.1) while the export subsidy schemes did not undergo changes. 8. Recommendations 2.78 Between 1979 and 1980, foreign exchange policy assumed increased importance in influencing the competitiveness of Turkish exports on foreign markets. In the first and second quarter of 1981, export subsidies assumed a greater role, but this tendency has subsequently been reversed. It would be desirable to place increasing reliance on the exchange rate in the future. Table 2.16; ESTIMATION OF THE REAL EXPORT EXCHANGE RATE (Base 1979 = 100) Nominal Exchange Index of the Export Index of the Index of Relative Prices Index of the Real Index of the Real Export Rate vis-a-vis Exchange Rate Subsidy Export vis-a-vis Exchange Rate vis-a-vis Exchange Rate vis-a-vis Period the US Dollar 1979 = 100 Role Exchange Rate Turkey's Trading Partners Turkey's Trading Partners Turkey's Trading Partners A B A B A B Hypothesis I: Export Subsidy Coefficient In cluding Foreign Exchange Premium 1979 31.078 100.0 27.1 127.1 100.0 100.0 100.0 100.0 100.0 100.0 1980 76.038 244.7 9.0 267.0 191.5 167.9 127.8 145.7 109.7 125.1 First Quarter 1981 94.589 304.4 11.0 337.9 258.6 218.7 117.7 139.2 102.8 121.6 Second Quarter 1981 102.914 331.1 11.6 369.5 281.7 239.4 117.5 138.3 103.2 121.2 Hypothesis II: Export Subsidy Coefficient Excluding Foreign Exchange Premium 1979 31.078 100.0 14.0 114.0 100.0 100.0 100.0 100.0 100.0 100.0 1980 76.038 244.7 8.2 264.8 191.5 167.9 127.8 145.7 121.3 138.3 First Quarter 1981 94.589 304.4 9.9 334.5 258.6 218.7 117.7 139.2 113.5 134.1 1 Second Quarter m 1981 102.836 330.9 11.1 367.6 281.7 239.4 117.4 138.2 114.5 134.7 m Source: See text tables Notes; A; Ministry of Commerce B: Istanbul Chamber of Commerce - 89 - 2.79 First of all, with the proliferation of subsidies, their effects on particular export products are difficult to gauge, whereas the impact of exchange rate changes-is easily ascertainable. The effects of exchange rate changes are also automatic and do not require the administrative procedures involved in granting subsidies which may discourage small and medium-sized exports. At the same time, export subsidies are subject to retaliation under GATT rules and developed countries may apply retaliatory measures once Turkish exports substantially increase in value. Finally, subsidies to export value tend to encourage the use of imported inputs in export activities, while exchange rate changes bear on value added in exports. This is because a devaluation raises the domestic currency equivalent of the export price, as well as that of the price of imported inputs, thereby encouraging the use of domestic inputs. 2.80 In the case of some of the subsidy measures, the Turkish authorities have attempted to take account of differences in value added in exports on a case-by-case basis. With the increasing number of exporters, however, case-by-case decision-making encounters increasing difficulties and the simplification of the procedures applied becomes necessary. 2.81 The first candidate for reducing export subsidies is the preferential export credit that provides subsidies of over 30 precent to exporters who have access to such credits. Also, as noted in Chapter 3, credit subsidies should be granted on the basis of value added in exports. In turn, it would be desirable to establish a medium-term credit facility, complemented by an export credit guarantee scheme, so as to permit Turkish firms to better compete abroad in exporting durable goods, since foreign firms generally provide medium-term credits and benefit from credit guarantee schemes. As a first step towards this goal, export credit and insurance schemes in effect in other countries should be reviewed. 2.82 Existing regulations on the partial deductability of the value of new exports, and of increments in exports, from taxable income would also need to be modified. The present system tends to discourage small exporters by imposing a minimum export value of $250,000 for manufactured exports. One may further envisage reducing the extent of this subsidy for all exporters. 2.83 As regards the tax rebate on exports, it would be desirable to eliminate the second additional 5 percent rebate provided to firms that export more than US$15 million a year. A first step in this direction is being taken by limiting the application of additional rebates to amounts above the lower limits cited in para. 31. One may further welcome the intention expressed by the Government to calculate the rebates on the basis of value added in exports. At the same time, it would be desirable to provide the additional rebate also on the exports of fruits and vegetables that may be considered an 'infant activity' in Turkey. 2.84 Parallel with reductions in export subsidies, it would be desirable to extend the free trade treatment of exports. In this connection, one may welcome proposed legislation to make the importation of prohibited items for export produlction automatic, to eliminate tariffs on machinery used in export production and to exempt domestic inputs used in export manufacture from production taxes. It is further recommended to - 90 - extend the privilege of duty-free imp,rtation to all producers of domestic inputs used in export production. Early passage of legislation on the establishment of free trade zones would also be desirable. 2.85 Placing increased reliance on the exchange rate would improve the profitability of agricultural exports that are presently discriminated against in favor of manufacturing products. As discussed below, further changes in incentives to agriculture would be desirable so as to approach world market price relations with respect to products as well as inputs. C. Measures of Import Protection in Industry 2.86 Since the end of the 1950's, Turkey has followed an import substitution strategy which has provided considerable protection to domestic industry through a system of import licensing, import quotas, and restricted access to foreign exchange, in addition to tariffs. 2.87 The tariff rates applied on general imports have only been subject to minor modifications since the last revision of the Customs Code in 1973. However, the introduction and the subsequent modification of special tariff rates on EEC imports has led to a duality in the structure of tariff protection in Turkey. 2.88 Annual import programs have itemized commodities under the free import list (Liberalization List I), the restricted list (Liberalization List II), the Quota list, the EEC consolidated list, and the list including imports under bilateral clearing arrangements. Furthermore, until January 1980, the Central Bank determined the amount of foreign exchange available for import transfers, and thus controlled allocations of foreign exchange. 2.89 In January 1980, import regulations were simplified and commercial banks were allowed to retain a higher proportion of foreign exchange deposited with them. Reforms introduced in January 1981 carried further the liberalization process, in particular through the abolition of the Quota list and the transfer of some items from the restricted list to the free import list. 1. Tariff and Tariff-type Measures Evolution of the Tariff Structure 2.90 Under an Additional Protocol to the 1963 Agreement of Association, signed between the EEC and Turkey in November 1970, Turkey agreed to eliminate customs duties over a period of 12 years on a list of commodities amounting to about 50 percent of its imports from the EEC (List 1). These include chemical fertilizers and some other chemical products, lead, zinc, copper, nickel and their products, as well as rubber products and electronic products. For the remaining imports (List 2), tariffs were to be eliminated over a period of 22 years. - 91 - 2.91 Customs duties on commodities on List 1 were reduced by 10 percent, and on List 2 by 5 percent on January 1, 1973. A second round of reductions of 10 percent on List 1 items and 5 percent on List 2 items occurred on January 1, 1976. These reductions were to be followed by a series of annual reductions starting January 1, 1978, leading to the elimination of tariffs on List 1 items by 1985 and on List 2 items by 1995. However, after the reductions undertaken in January 1976, further scheduled tariff reductions have been postponed sine die. Currently, Turkish authorities are considering the possibility of resuming tariff reductions on imports from the EEC. Estimation of Nominal Tariff Protection 2.92 Average nominal tariff protection coefficients (NTP)l/ in the manufacturing sector have been estimated on the basis of the tariff schedule in effect since 1976, both for the general tariff rates and the special rates on EEC imports.2/ NTP coefficients derived from the general tariff schedule vary from 1.09 for iron and steel to 3.00 for processed tobacco products. Sugar refining, alcoholic beverages, clothing, leather and fur products, footwear and plastic products have NTP coefficients higher than 2 (Table 2.17). The weighted average nominal tariff protection coefficient estimated on the basis of the special EEC reduced rate is 1.44 as compared to 1.53 for the general tariff, i.e. a difference of 6 percent (Table 2.18). The differences are in the 10 - 12 percent range for other food processing, clothing, footwear, wood furniture and fixtures, pharmaceutical products, cement and non-electrical machinery; they reach 24 percent for motor vehicles. However, the NTP coefficient for iron and steel is higher for imports from the EEC than for general imports. This is due to the fact that the base for applying the EEC reductions is constituted by a reference tariff which far exceeds the general tariff in effect in the case of most iron and steel products. 1/ The nominal tariff protection coefficient is defined as one plus the ad-valorem tariff rate. For example, if the tariff is 20 percent, the NTP coefficient will be 1.20. Due to tariff exemptions, collected tariffs are lower than the scheduled tariffs. The ratio of tariff collections to total imports excluding inputs into export production, was 13.7 percent in 1980; data for individual commodity groups are not available. 2/ Note: The NTP coefficients have been derived in three steps. For each 4-digit SIC category, simple average tariff rates were calculated on the basis of tariffs for 6-digit customs nomenclature items. Weighted average tariff rates were then derived for each 2-digit input-output category by weighting 4-digit SIC average tariff rates by the corresponding values of output in 1979. Finally, weighted average tariff rates were derived for aggregate input-output categories defined for comparability with the 16 sector breakdown retained for the estimation of the combined export subsidy coefficient. For the calculation of the special rates on EEC imports, tariffs on imports from the 6 original EEC countries have been retained in the analysis. - 92 - Table 2.17: NOMINAL TARIFF PROTECTION IN THE MANUFACTURING SECTOR I-0 Sector Nominal Tariff Protection Coefficient Sector General Tariff EEC Tariff Code 11 Slaughtering & Meat Preservation 1.672 1.661 12 Fruits & Vegetable Canning and Preserving 1.679 1.679 13 Vegetable & Animal Oils & Fats 1.424 1.357 14 Grain Mill Products 1.394 1.363 15 Sugar Refining 2.053 2.031 16 Other Food Processing 1.630 1.436 17 Alcoholic Beverages 2.079 1.914 18 Non Alcoholic Beverages 1.375 1.325 19 Processed Tobacco 3.000 2.800 20 Ginning 1.200 1.160 21 Textiles (excl. ginning) 1.754 1.648 22 Clothing 2.005 1.820 23 Leather and Fur Products 2.128 1.938 24 Footwear 2.000 1.800 25 Wood Products 1.366 1.325 26 Wood Furniture and Fixtures 1.850 1.680 27 Paper and Paper Products 1.577 1.504 28 Printing and Publishing 1.267 1.198 29 Fertilizers 1.203 1.163 30 Pharmaceutical Products 1.268 1.147 31. Other Chemical Products 1.430 1.333 32 Petroleum Refinery 1.300 1.177 33 Petroleum & Coal Products 1.160 1.098 34 Rubber Products 1.423 1.343 35 Plastic Products 2.188 2.069 36 Glass & Glass Products 1.635 1.560 37 Cement 1.691 1.501 38 Non Metallic Mine':al Products 1.684 1.524 39 Iron and Steel 1.091 1.142 40 Non Ferrous Metals 1.296 1.234 41 Fabricated Metal Products 1.555 1.470 42 Non Electrical Machinery 1.428 1.289 43 Agricultural Machinery 1.303 1.243 44 Electrical Machinery 1.418 1.299 45 Shipbuilding and Repairing 1.300 1.264 46 Railroad Equipment 1.238 1.157 47 Motor Vehicles 1.506 1.217 48 Other Transport Equipment 1.491 1.424 49 Other Manufacturing Industries 1.526 1.369 Source: Mission Estimates - 93 - Table 2.18: NOMINAL TARIFF PROTECTION IN THE MANUFACTURING SECTOR (By aggregated I-0 Sector) Nominal Tariff I-0 Sector 1Q79 Protection Coefficient Sector Output General EEC Code (TL Million) Tariff Tariff 11-16 Food Processing 139,226.5 1.638 1.538 17-18 Beverages 13,604.4 1.908 1.771 21-22 Textiles & Clothing 149,838.6 1.760 1.652 23 Leather & Fur Products 5,095.3 2.128 1.938 27 Paper & Paper Products 19,242.0 1.577 1.504 29-31 Chemicals 102,686.2 1.370 1.318 34 Rubber Products 18,220.8 1.423 1.343 35 Plastic Products 17,289.4 2.188 2.069 36 Glass & Glass Products 9,349.5 1.635 1.560 37 Cement 20,219.0 1.691 1.501 39 Iron & Steel 77,838.3 1.091 1.192 40 Non Ferrous Metals 24,497.0 1.296 1.234 41 Fabricated Metal Products 38,342.6 1.555 1.470 42 Non Electrical Machinery 37,442.8 1.428 1.289 44 Electrical Machinery 43,217.4 1.418 1.299 43, 45-48 Transport Equipment 76,936.9 1.443 1.232 Weighted Average 1.532 1.442 Source: Mission Estimates - 94 - Estimation of Effective Tariff Protection 2.93 Effective tariff protection (ETP) coefficients 1/ have been estimated on the basis of input-output relationships derived from a 1973 input-output matrix in a 64 sectoral breakdown, of which 39 sectors produce tradeables. The technical coefficients used in the estimation express, for each input-output sector, direct plus indirect use of tradeable inputs, after completing the decomposition of non-tradeables into their tradeable and value added components. 2.94 ETP coefficients estimated from the general tariff are slightly lower than 1 in the case of cotton ginning, fertilizers, and iron and steel (Table 2.19). This result indicates that the tariff strticture has a net discriminatory effect for the three input-output categories. It is consistent with the presence of reverse tariff escalation through the input-output chain for these categories. For example, in the case of cotton ginning, a tariff rate of 20 percent on output compares with an average tariff rate of 21.5 percent on intermediate inputs. The tariff rate for fertilizers is on average 20 percent on output as against an average tariff rate of 22.6 percent on intermediate inputs. Finally, in the case of iron and steel, the average tariff rate on output is 9.1 percent compared with an average tariff rate of 9.3 percent on intermediate inputs. 1/ Note: The effective tariff protection coefficient is equal to one plus, the effective tariff protection rate. In turn, the effective tariff protection rate is equal to ti- jaji where ti = weighted average nominal tariff rate on tradeable output category i; tj = weighted average nominal tariff rate on tradeable input category j; aji= technical coefficient expressing direct plus indirect use of tradeable input category j in the production of output category i. - 95 - Table 2.19: EFFECTIVE TARIFF PROTECTION IN THE MANUFACTURING SECTOR Effective Tariff I-0 Protection Coefficient Sector Code Sector General EEC Tariff Tariff 11 Slaughtering and Meat Production 3.731 3.824 12 Fruit and Vegetable Canning and Reserving 2.221 2.225 13 Vegetable and Animal Oils and Fats 1.758 1.532 14 Grain Mill Products 1.605 1.749 15 Sugar Refining 2.909 2.894 16 Other Food Processing 2.247 1.580 17 Alcoholic Beverages 2.316 2.069 18 Non Alcoholic Beverages 1.335 0.912 19 Processed Tobacco 3.846 3.555 20 Ginning -0.081 0.737 21 Textiles (excl. ginning) 2.092 1.908 22 Clothing 2.064 1.848 23 Leather and Fur Products 2.800 2.451 24 Footwear 2.005 1.783 25 Wood Products 1.524 1.45Q 26 Wood Furniture and Fixtures 2.304 2.013 27 Paper and Paper Products 1.698 1.616 28 Printing and Publishing 1.137 1.072 29 Fertilizers 0.953 0.962 30 Pharmaceutical Products 1.214 1.077 31 Other Chemical Products 1.424 1.323 32 Petroleum Refinery 1.411 1.229 33 Petroleum and Coal Products 1.006 0.960 34 Rubber Products 1.388 1.307 35 Plastic Products 2.813 2.675 36 Glass and Glass Products 1.714 1.644 37 Cement 1.888 1.640 38 Non-metallic Mineral Products 1.795 1.607 39 Iron and Steel 0.996 1.147 40 Non-Ferrous Metals 1.304 1.243 41 Fabricated Metal Products 1.923 1.705 42 Non-Electrical Machinery 1.469 1.292 43 Agricultural Machinery 1.254 1.261 44 Electrical Machinery 1.461 1.305 45 Shipbuilding and Repairing 1.309 1.263 46 Railroad Equipment 1. 387 1.090 47 Motor Vehicles 1.565 1.205 48 Other Transport Equipment 1.584 1.481 49 Other Manufacturing Industries 1.557 1.325 Source: Mission Estimates 96 - 2.95 Among these three product categories, only cotton ginning and fertilizers have an effective protection coefficient lower than 1 under the special EEC tariff, with estimates of 0.74 and 0.96 respectively. In the case of iron and steel, the ETP coefficient estimated on the basis of the special EEC tariff is 1.15, as a result of the higher NTP coefficient on output observed in the case of the special EEC tariff for this product category. 2.96 An ETP coefficient higher than 3 is estimated in the case of slaughtering and meat production as well as for processed tobacco, both under the general tariff and the special EEC tariif The coefficients are between 1.5 and 3.0 for 22 sectors in calculations based on the general tariff and for 17 sectors in calculations based on the special EEC tariff. The ETP coefficients estimated on the basis of the general tariff increase by more than 20 percentage points under the special EEC tariff for other food processing, non-alcholic beverages, railroad equipment and motor vehicles. 2.97 Table 2.20 presents weighted average ETP coefficients for the 16 industrial sectors. For these sectors, an overall ETP coefficient of 1.75 is estimated under the general tariff (average NTP = 1.53) as compared to an ^ETP of 1.58 under the special EEC tariff (average NTP =1.44). ETP coefficients range from 1.00 for iron and steel to 2.81 for plastic products under the general tariff, and from 1.13 for transport equipment to 2.68 for plastic products under the special EEC tariff. 2.98 Among the 16 industrial sectors under study, ETP coefficients exceed 2 in the case of food processing, beverages, textiles and clothing, leather and fur products, and plastic products, under the general tariff estimation. The ETP coefficients estimated on the basis of the general tariff decrease by more than 10 percentage points for food processing, beverages, leather and fur products, cement, fabricated metal products, non-electrical machinery, electrical machinery and transport equipment, under the special EEC tariff estimation. 2. The Import Regime Evolution 2.99 From the end of the 1950's, Import Programs itemized the commodities eligible for importation under each of two lists: the Liberalization List, providing for free importation, and the Quota List. Commodities not enumerated on either list were not legally importable, unless a specific authorization was issued by the Government. 2.100 The first Import Program was promulgated in September 1958, the second in February 1959 and the third in August 1959. Thereafter, Import Programs were issued semi-annually. -97- Table 2.20: EFFECTIVE TARIFF PROTECTION IN THE MANUFACTURING SECTOR (by Aggregated I-0 Sector) Effective Tariff I-0 1979 Protection Coefficient Sector Code Sector Output General EEC (TL million) Tariff Tariff 11-16 Food Processing 139,226.5 2.282 1.995 17-18 Beverages 13,604.4 2.078 1.789 21-22 Textiles & Clothing 149,838.6 2.091 1.907 23 Leather & Fur Products 5,905.3 2.800 2.451 27 Paper & Paper Products 19,242.0 1.698 1.616 29-31 Chemicals 102,686.2 1.321 1.229 34 Rubber Products 18,220.8 1.388 1.307 35 Plastic Products 17,289.4 2.813 2.675 36 Glass & Glass Products 9,349.5 1.714 1.644 37 Cement' 20,219.n 1.888 1.640 39 Iron & Steel 77,837.3 0.996 1.147 40 Non Ferrous Metals 24,497.0 1.304 1.243 41 Fabricated Metal Products 38,342.6 1.923 1.705 42 Non Electrical Machinery 37,442.8 1.46q 1.292 44 Electrical Machinery 43,217.4 1.461 1.305 43, 45-48 Transport Equipment 76,936.9 1.490 1.128 Weighted Average 1.749 1.581 Source: Mission Estimates - 98 - 2.101 In 1964, the Liberalization List was divided into Liberalization List I, consisting essentially of raw materials and spare parts not competing with domestic production, for which importation remained free, and Liberalization List II, consisting of intermediary and final goods manufactured in Turkey, for which a licensing scheme was instituted. in 1969, the validity of the Liberalization Lists was extended to the full year, while the Quota List was issued under the mid-year Import Program. Between two-thirds and three-quarters of all imports entered under the Liberalization Lists and the Quota List, taken together (Table 2.26). 2.102 Other categories of imports are the "Bilateral Agreement Imports", the "Self Financed Imports" and, since 1971, the "European Community Consolidated Import List". The Bilateral Agreement List, issued separately from the Import Program, enumerates the items eligible for importation from countries with which Turkey has bilateral trade agreements. However, no item is eligible for importation under the Bilateral Agreement List unless included on one of the lists of the Import Program. Self-financed imports are mainly goods imported in connection with investmerkts made under project aid.l/ In September 1971, Turkey freed from quantitative restrictions goods covering about 35 percent of its imports from EEC in 1967, by establishing a consolidated list of "Liberalized Imports from the EEC". The elimination of quotas on all imports from EEC was to be achieved over a period of 18 years by gradually extending this list according to a timetable; further liberalization has been postponed however for the time being. 2.103 Imports under Liberalization List I: Imports of raw materials and spare parts not competing with domestic production have been allowed freely under Liberalization List I. Under the 1981 Import Program, imports under Liberalization List I are projected at US$1.5 billion against total imports of US$9.0 billion, or 16.7 percent. By comparison, imports under Liberalization List II are projected at US$6.3 billion, or 70.0 percent of the total under the Program. Within the latter, crude oil account for 39 percent of total imports. 2.104 Imports under Liberalization List I are subject to an import permit, which is given by the Central Bank to authorized banks after deposit of a guarantee. In the case of imports realized by payment against letters of credit, the Central Bank requires that the TL equivalent of the required foreign exchange be deposited at an authorized bank. In the case of payment against goods or documents, a supplementary guarantee is required on the TL equivalent of the transaction. 2.105 The validity of the import permits was 6 months until 1981. Under the 1981 Import Program, banks have been authorized to grant extensions of import permits up to 8 months, while under "force majeure" conditions, the Ministry of Trade can do so up to 12 months. 1/ See Krueger, A: Foreign Trade Regimes and Economic Development: Turkey; Columbia University Press, New York, 1974, pp. 137-138. - 99 - 2.106 Imports under Liberalization List II: Imports under Liberalization List II are subject, in addition to the import permit given by the Central Bank, to an import license which may be obtained from the Trade Ministry for goods under List IIA, from the Ministry of Industry and Technology for goods under List IIB, and from the Ministry of Energy and Natural Resources for petroleum products, classified under List IIC. In 1981, Liberalization List IIA contained 231 items, mainly chemicals, paper products, glass and glass products, and appliances. In the same year, Liberalization List IIB contained 566 items, mainly intermediate goods from the chemical, iron and steel, non-ferrous metals and fabricated metal products industries, as well as some parts and accessories. List IIC, containing 16 items, pertained to crude oil and its derivatives. 2.107 Import licenses are given on the basis of estimates of productive capacity made by the Chamber of Industry. Guidelines for capacity estimation call for one shift system and 300 working days a year, except for products such as cement where technology requires additional shifts. Firms planning to increase the number of shifts must apply to the Ministry of Industry for a revision of their estimated productive capacity in order to obtain import licenses for the necessary intermediate inputs. 2.108 Under the 1981 Import Program, about 200 items which were previously included in on List II were transferred to List I. The total value of imports for these items has been estimated on the basis of 1980 Customs data at US$284. million or 3.8 percent of total imports in that same year. Appendix Table 5 presents the sectoral breakdown of the items by the 2-digit customs nomenclature category. The main product categories affected by the transfer are chemical products (US$30 million), tanning ana dyeing extracts (US$25 million), and machinery and mechanical appliances (US$24 million). 2.109 Imports under the Quota List: Until 1981, both commodity-specific and user-specific quotas were in effect in Turkey; commodity-specific quotas were further allocated between industrialists and importers. Industrialists were limited to use the commodity subject to quota in their own production, and imports under licenses granted under the quota could not legally be resold. By contrast, imports under importers' quotas could be made for the purpose of resale without processing. User-specific quotas were of two general types: (i) those cover:ing the import needs of particular types of assemblers and manufacturers; and (ii) investmerit goods quotas. Under the first category, a quota was set aside for the importation of goods required in the production process, with firms operating under these quotas being subject to domestic content requirements. Investment goods quotas were set for private sector investments and for public sector investments, respectively. 2.110 Under the 1981 Import Program, quota lists have been abolished. About one-third of the items subject to quotas have been transferred to Liberalization List I. The total value of imports for these items has been estimated at US$63.9 million, or 0.8 percent of total imports in that - 100 - year. Appendix Table 6 presents the sectoral breakdown of the items transferred by 2-digit Customs Code category. The main product categories affected by the transfer are electrical machinery and equipment (US$20.9 million), chemical products (US$15.9 million) and machinery and mechanical appliances (US$10.0 million). 2.111 The remaining quota items have been transferred to Liberalization List II. The total value of imports for these items in 1980 is estimated at US$630 million, or 8.3 percent of total imports in that same year. As shown in Appendix Table 7, imports valued at US$44 million have been transferred to Liberalization List IIA, subject to the licensing authority of the Ministry of Trade, while US$685 million worth of imports have been transferred to Liberalization List IIB under the licensing authority of the Ministry of Industry and Technology. The main product categories affected by the transfer are machinery and mechanical appliances (US$129 million), vehicles other than railway and tramway (US$127 million), and artificial resins and plastic materials (US$111 million). Finally, certain items, mainly miscellaneous chemical products, have been cancelled, for a total value,of US$63 million. 2.112 Imports under the Miscellaneous List; Imports allowed under the Miscellaneous List are classified by end-use. They pertain to investment goods in the public and private sectors, materials required to be imported by exporters holding Encouragement Certificates, and goods imported for "urgent needs". The importation of these goods is conditional upon obtaining a Domestic Production Position Certificate from the Ministry of Industry and Technology, which certifies the need for import in the absence of an adequate domestic production capability. 2.113 Imports of Items Not Included on the Lists: The importation of items not included on the lists is de facto prohibited, unless specific authorization is issued by the Government. Although a comprehensive list of these items has not been compiled, several durable and non-durable consumer goods do not appear on either list. For example, among durable consumer goods, motor cars (Customs Category 87.02.11), washing machines (Customs Category 85.12.50) and TV sets (Customs Category 85.15.20) are not included on the lists. 2.114 Guarantee Deposits: Foreign exchange allocations are made following the deposit of a cash guarantee with the Central Bank, which varies according to the type of imports (industrial or commercial) and the list under which the importation is undertaken. Table 2.21 shows the evolution of the guarantee deposit rates from 1958 to 1981 by import list .and by type of imports. Guarantee deposit rates remained relatively low until mid-1963, when they were raised from 10 percent to 30 percent on the Liberalized List and from 10 percent to 20 percent on the Quota List. In 1965 the rates were raised to 70 percent on Liberalization List I and 100 percent on Liberalization List II; they reached 90 percent and 150 percent on Lists I and II respectively in 1969, while rates of 20 percent and 50 percent were in effect on industrialists' and importers' quota lists in the same year. - 101 - Table 2.21: RATES 'OF GUARANTEE DEPOSITS ON IMPORTS (in Percent) Liberalization List I Liberalization List II Quota List Year Industrial Commercial Industrial Commercial Industrial Commercial 1958 - - - - 20 1959 10 10 - - - 10-15 1960 10 10 - - - 10 1961 10 10 - - - 10 1962 10 10 - - - 10 1963 10-30 10-30 - - 10 10-20 1964 30 30 30 30 10 30 1965 70 70 100 100 10 30 1966 70 70 100 100 10 30 1967 70 70 100-125 100-125 10 30 1968 70 70 100-125 100-125 10 30 1969 90 90 120-150 120-150 20 50 1970 90 90 150 150 20 50 1971 50 50 40 40 20 25 1972 50 50 40 40 20 25 1973 25-50 25-50 10-20 10-20 5 10 1974 20 20 10 10 5 10 1975 20 20 10 10 5 10 1976 20 20 10 10 10 10 1977 20 20 10 10 10 10 1978 30 30 15 15 10 10 1979 25 40 25 40 25 40 1980 15 30 10 20 10 20 1981 10 20 10 20 - Sources: Krueger A: Foreign Trade Regimes and Economic Development: Turkey, Columbia University Press, New York, 1974, p 288. Central Bank. . .. . . .------ - 102 - 2.115 The rates were lowered to 50 percent on List I and 40 percent on List II in 1971, and to 25 percent and 10 percent during the second half of 1973. They remained relatively stable until 1978, when they were raised to 30 percent and 15 percent on Liberalization Lists I and II respectively. In 1979, guarantee deposit rates were increased under every instance, with the exception of those applicable to industrial importers under Liberalization List I, which were reduced from 30 to 25 percent. 2.116 In 1980, guarantee deposit rates were lowered across all categories by 10 to 20 percent, and further reductions occurred in 1981. Guarantee deposit rates are at present 10 percent for industrial importers and 20 percent for commercial importers, both for imports under Liberalization Lists I and II. However, the guarant'ne is 1 percent for temporary imports, petroleum products, electrical energy, fertilizers, sugar, oil seeds and processed oil, medicine products, parts for the assembly industry, and investment goods under the Miscellaneous List. The importation of cast iron and certain iron and steel products is subject to a guarantee of 10 percent for both industrial and commercial importers. Impact 2.117 The evolution of imports by source from 1978 to the second quarter of 1981 is shown in Table 2.22. In 1978, imports under the Liberalization Lists amounted to US$3,200 million, or 69.6 percent of total imports in that year. After a slight decrease in 1979, the share of imports under the Liberalization Lists increased to 73.0 percent and 80.5 percent of total imports in 1980 and in the first quarter of 1981, respectively. This evolution was, however, largely due to the increase in the share of oil in total imports. Thus, the share of non-oil products imports under the Liberalization Lists declined from 39.3 percent of total imports in 1978 to 33.2 percent in 1979, 34.0 percent in 1980 and 32.1 percent in the first quarter of 1981. At the same time, the share of non-Program imports in total imports declined from 12.0 percent in 1978 to 7.5 percent in the first quarter of 1981. In turn, between the first and the second quarters of 1981, the share of imports under the liberalization lists declined from 80.5 percent to 72.1 percent, largely as a result of the decline in the share of oil imports from 48.4 percent to 31.7 percent over the same interval. By contrast, the share of non-program imports increased from 7.5 percent to 12.6 percent over the same interval, following the increase in project credits from US$132 million in the first quarter to US$225 million in the second quarter of 1981. 2.118 After increasing their share in total imports from 17.0 to 19.2 percent between 1978 and 1979, imports under the Quota List represented 14.3 percent of total imports in the course of 1980. Despite the abolition of the Quota List in January 1981, available data 1/ for the first qurter of 1981 show US$253.8 million of imports under the heading "Import Goods Under Allocations", compared with US$212.6 million for imports under the Quota List in the first quarter of 1980. The comparable estimate for the second quarter of 1981 is US$289.0 million. 2/ 1/ See EBA Newsletter, June 11, 1981. 2/ See EBA Newsletter, August 25, 1981. Table 2.22: IMPORTS BY SOIJRCE: lQ7R-FTRST O1TARTER lQgI (US$ Thousands) Percentage Percentage Percentage First Ouarter Percentage Second Quarter Percentage Import Category 187R Share 1Q78 Share 1qRn Share lqRI Share 1QRI Share Liberalization Lists 3,206,445 68Q.6 3,386,6n8 67.n 3,66n,n54 73.0 1,85n,nI2 80.5 1,54n,643 72.1 of which: Crude & Petroleum Products 1,305,1R 30n.3 1,712,nn4 33.R 1,Q56,765 3q.0 l,ll?,Rln 48.4 676,753 31.7 Other 1,805,313 3Q.3 1,684,604 33.2 1,703,289 34.0 737,2n2 32.1 R63,Q10 40.4 Quota List 7R3,641 17.0 873,632 1Q.2 717,437 14.3 753,75n 1l.n 2R8,QQ4 13.5 Bilateral Agreements 63,sOn 1.4 lng,194 2.2 inn,475 2.0 22,571 1.0 37,866 1.8 Program Imports 4,048,036 88.0 4,478,434 sR.4 4,777,866 R8.3 2,126,333 Q2.5 1,867,623 R7.4 NATO-Infrastructure 11,7n0 0.3 1n,617 0.2 15,04Q 0.3 2,Q31 n.1 5,265 0.2 Private Foreign Capital 22,5nn n.5 7n,870 1.4 27,6n0 n.6 15,472 0.7 1n,142 n.s Project Credits 3Q3,878 8.6 356,26Q 7.0 4n0,310 R.2 132,nRl 9.7 224,698 1n.5 Imports with Waiver 119,762 2.6 123,325 2.4 75,748 1.- 2n,368 1.n 1R,nRl n0R (a) Waiver (1n7,137) (2.3) (ln0,36) (2.1) (n.a.) (-) (n.a.) - (n.a.) - (b) Grants (12,625) (0.3) (14,92Q) (0.3) (n.a.) (-) (n.a.) - (n.a.) Others 3,147 0.1 28,817 0.6 n0,78n 0.2 RIO 0.n 0II,56 n.9 Non-Program Imports 55n,Q8R 12.n 988,qQR 11.6 53R,488 In7 171,613 7.5 26Q,742 19.6 Total 4,58Q,n24 1n0.n S,06Q,432 1nn.n 5,n06,494 100.0 2,2Q7,886 inn.n 2,137,165 0nn.n Source: EBA Newsletter, various issues. - 104 - Comparison of Implicit and Tariff Protection for Selected Manufacturing Products 2.119 Table 2.23 presents a comparison of nominal tariff protection coefficients and nominal implicit protection coefficients derived from comparisons between domestic and border prices for 13 selected manufactured products in 1980.1/ In the case of comparisons between domestic and CIF import prices, the ratio of implicit to tariff protection coefficients ranges from 1.01 for motorcycles and 1.09 for shock absorbers to 3e15 for brass products (M58) and 3.21 for brass products (M53). In turn, in the case of comparisons between domestic and f.o.b. export prices, the ratio of implicit to tariff protection coefficients ranges from 1.03 for gate valves to 2.48 for brass bibcocks. The ratio is in the 1.30-1.55 range for portland cement, trucks, minibuses and pickups. 3. Recommendations 2.120 The reforms introduced in the framework of the 1981 Import Program represent an important step toward the liberalization of imports in Turkey. The abolition of the Quota List, the transfer of items from Liberalization List II to Liberalization List I, and the reduction of the guarantee deposit rates are of relevance in this respect. 2.121 However, further steps could be taken over the medium-term to carry on the liberalization process begun with the 1981 Import Program. First, it would be necessary to establish a comprehensive list of the items that are not included in the Liberalization Lists, and whose importation is effectively prohibited. Next, a timetable should be announced on the transfer of items from this list to Liberalization List II, and from Liberalization List II to Liberalization List I, with priority given to liberalizing the importation of intermediate products and machinery. The aim should be to eliminate quantitative import protection over a period of five years. 2.122 Furthermore, a tariff ceiling should be established, to be attained in annual installments over the transitional period of five years. The tariff structure would also need to be revised in order to reduce inter-industry differences in tariffs and to avoid cases of reverse escalation, when the tariff is higher on the principal input than on the product itself. 1/ Another set of ratios between domestic and border prices, not prepared under a comparable basis, is presented in Chapter 6 (Table 6.4). - 106 - 2.123 The tariff ceiling may be set at 30 percent. The ceiling should apply to luxury goods as well, lest their domestic production be encouraged. At the same time, the consumption of luxuries may be restricted by the use of excise taxes that apply equally to imported and to domestically produced goods. 2.124 Additional incentives may be granted to infant industries on a temporary basis and on a degressive scale. To the extent possible, infant industry incentives should be provided in the form of production or investment subsidies rather than tariffs so as to encourage exporting. This is of particular importance in the electrical and non-electrical machinery, machine tool, and electronics industries, wehich may be regarded infant industries in Turkey, because the exploitation of economies of scale will not generally be possible in the confines of domestic markets. D. The General Structure of Production Incentives 1. The Bias Against Exports 2.125 Table 2.24 shows average export subsidy coefficients and average nominal tariff protection coefficients for the 16 industrial sectors, together with estimates of the tariff-induced bias against exports. The measure of the bias against exports is defined as the ratio of the average nominal tariff protection coefficient to the average export subsidy coefficient 1/, less one. A positive estimate therefore indicates discrimination against exports, while a negative result shows net incentives in favor of exports. 2.126 The results indicate the existence of an anti-export bias in the 16 industrial sectors combined in all four periods of observation. An anti-export bias was estimated for each of the 16 industrial sectors, with the exception of electrical machinery in 1980, non-ferrous metals and transport equipment in the first quarter of 1981, and iron and steel and nion-ferrous metals in the second quarter of 1981. The extent of the bias is generally lower for engineering sectors, including fabricated metal products, non-electrical machinery, electrical machinery and transport equipment, for which it remains less than 40 percent in each observation period. By contrast, a large bias is estimated in the case of food processing, beverages, textiles and clothing, and leather and fur products, for which estimates in excess of 40 percent are obtained in each period of observation. The extent of the average bias increased from 31.3 percent in 1979 to 33.0 percent in 1980, but declined afterwards to 31.2 percent in the first quarter, and to 29.8 percent in the second quarter, of 1981. However, under import licensing, this estimate does not provide an appropriate indication of the bias against exports since tariffs underestimate the extent of import protection. In fact, increases in the real export exchange rate point to improvements in export incentives while exchange rate changes do not affect the rate of import protection under licensing. 1/ The estimate of the average export subsidy excluding the foreign exchange premium has been retained. Table 2.23: NOMINAL IMPLICIT PROTECTION COEFFICIENTS (NPC) AND NOMINAL TARIFF PROTECTION COEFFICIENTS (NTP) FOR SELECTED MANUFACTURED PRODUCTS Import Export Nominal Implicit Nominal Tariff Ratio Implicit- Tariff Domestic Price Price Protection Protection Tariff Code Product Price (CIF) (FOB) Coefficient Coefficient Protection 74.03.11 (II) Brass (MS 53) 615 TL/p 145TL/p 4.240 1.320 3.21 74.03.11 (II) Brass (MS 58) 645 TL/p 155 TL/p 4.161 1.320 3.15 87.06.93 (II) Shock Absorbers 1,177 TL/p 884 TL/p 1.331 1.225 1.09 87.09.40 (NL) Motorcycles 38,371 TL/p 24,700 TL/p 1.553 1.540 1.01 25.23.12 (NL) Portland Cement 6,707 TL/T 3,770 TL/T 1.779 1.200 1.48 73.40.10 (NL) Pig Iron Casting 140 TL/leg 73.7 TL/leg 1.900 1.675 1.13 U 84.61.00 (II) Brass Bibcocks 340 TL/p 81.9 TL/p 4.151 1.675 2.48 84.61 (II) Gate Valves 295 TL/p 171.6 TL/p 1.719 1.675 1.03 84.61 (II) Wash Basin Mixers 4,416 TL/p 1,622 TL/p 2.723 1.675 1.63 84.61 (II) Chrome Bibcocks 851 TL/p 222 TL/p 3.833 1.675 2.29 87.02.21 (NL) Trucks 3,030,000 TL/p 1,782,000 TL/p 1,782,000 TL/p 1,700 1.225 1.39 87.02.21 (NL) Minibuses 1,380,000 TL/p 737,700 TL/p 737,700 TL/p 1,868 1.225 1.52 87.02.21 (NL) Pickups 1,128,000 TL/p 700,900 TL/p 700,900 TL/p i,609 1.225 1.31 Source: Mission Estimates Note: II: item belonging to List II NL: not included in the lists. Table 2.24a: ESTIMATION OF THE TARIFF INDUCED BIAS AGAINST EXPORTS 1979 1980 Nominal Export Tariff Nominal Export Tariff Tariff Subsidy Induced Tariff Subsidy Induced I-0 Protection Coefficient Bias Against Protection Coefficient Bias Against Sector Code Sector Coefficient 1/ Exports 2/ Coefficient 1/ Exports 2/ 11-15 Food Processing 1.538 1.044 0.473 1.538 1.076 0.429 17-18 Beverages 1.771 1.000 0.771 1.771 1.001 0.769 21-22 Textiles and Clothing 1.652 1.111 0.487 1.652 1.087 0.520 23 Leather and Fur Products 1.938 1.106 0.752 1.938 1.032 0.878 27 Paper and Paper Products 1.504 1.000 0.504 1.504 1.000 0.504 29-31 Chemicals 1.318 1.087 0.213 1.318 1.029 0.281 34 Rubber Products 1.343 1.207 0.113 1.343 1.111 0.209 35 Plastic Products 2.069 1.959 0.056 2.069 1.170 0.768 36 Glass and Glass Products 1.560 1.139 0.370 1.560 1.056 0.477 37 Cement 1.501 1.090 0.377 1.501 1.068 0.405 39 Iron and Steel 1.192 1.000 0.192 1.192 1.082 0.102 40 Non-Ferrous Metals 1.234 1.111 0.111 1.234 1.158 0.066 41 Fabricated Metal Products 1.470 1.181 0.245 1.470 1.292 0.138 42 Non-Electrical Machinery 1.289 1.104 0.168 1.289 1.180 0.092 44 Electrical Machinery 1.299 1.063 0.222 1.299 1.336 -0.028 43, 45-48 Transport Equipment 1.232 1.216 0.013 1.232 1.143 0.078 Weighted Average 1.442 1.098 0.313 1.442 1.084 0.330 Source: See text tables. 1/ EEC Tariff Estimation was retained. 2/ The tariff induced bias against exporters is defined as 1 + ti - 1 where ti = tariff rate and si = export subsidy rate. 1 + si Table 2.24b: ESTIMATION OF THE TARIFF INDUCED BIAS AGAINST EXPORTS (continued) First Quarter 1981 Second Quarter 1981 Nominal Export Tariff Nominal Export Tariff Tariff Subsidy Induced Tariff Subsidy Induced Protection Coefficient Bias Against Protection Coefficient Bias Against Coefficient -/ Exports 2/ Coefficient 1/ Exports 2/ 1.538 1.091 0.410 1.538 1.122 0.371 1.771 1.028 0.723 1.771 1.042 0.700 1.652 1.065 0.551 1.652 1.117 0.479 1.938 1.105 0.754 1.938 1.044 0.856 1.504 1.072 0.403 1.504 1.110 0.387 1.318 1.104 0.194 1.318 1.072 0.229 1.343 1.033 0.300 1.343 1.045 0.285 _ 2.069 1.079 0.918 2.069 1.127 0.836 o 1.560 1.060 0.472 1.560 1.086 0.436 c 1.501 1.274 0.178 1.501 1.055 0.423 1.192 1.091 0.093 1.192 1.212 -0.017 1.234 1.369 -0.099 1.234 1.259 -0.020 1.470 1.081 0.360 1.470 1.155 0.273 1.289 1.083 0.190 1.289 1.118 0.153 1.299 1.192 0.090 1.299 1.292 0.005 1.232 1.244 -0.010 1.232 1.154 0.068 1.442 1.099 0.312 1.442 1.111 0.2-98 - 109 - E. Production Incentives; Industry vs. Agriculture 2.127 The system of production incentives in Turkey has discriminated against agricultural exports, in particular through overvalued exchange rates and government policies that have chiefly benefitted import substituting crops, such as wheat and sugar beets, to the exclusion of potential foreign exchange earners, such as horticultural products and livestock. 2.128 On the basis of 1978 data, the average effective protection coefficient (EPC) in agriculture is estimated at 1.40 percent. Among non-traditional exports, the EPC is lower than 1 for livestock (beef; 0.97) and citrus fruits (0.79). By contrast, among non-traditional exports, the EPC is highest in the case of olives (3.89), sugar beet (3.15), rye (2.51), pulses (2.31), fresh grapes (2.22), and rice (1.26). Among traditional exports, EPCs lower than 1 are estimated in the case of tobacco (0.66), and hazelnuts (0.37), while an EPC superior to 1 is obtained in the case of raisins (2.03). 1/ 2.129 These results contrast with the weighted average effective tariff protection (ETP) coefficient for the 16 industrial branches retained in the analysis, estimated at 1.75 on the basis of the general tariff and at 1.58 on the basis of the EEC tariff. Among the 16 industrial branches, ETP coefficients lower than 1 were observed in three cases only under the general tariff, namely cotton ginning, fertilizers and iron and steel, while an ETP higher than 1 was estimated in the latter case under the special EEC tariff. These estimates, howevet, represent a lower bound for protection, as quantitative measures raised protection levels across industrial branches. 2.130 The policy measures recommended in this Chapter, by lowering effective protection in the industrial sector, would reduce discrimination against agriculture in Turkey. At the same time, policy recommendations presented in Chapter 6, which would bring domestic prices in agriculture in line with world market prices, would reduce discrimination in favor of import substituting crops as against export crops. 1/ See Chapter 7, Table 7.13. Comparison of effective tariff protection coefficients for 1980 in industry is made with 1978 effective protection coefficients in agriculture, as protection levels have changed little since. Appendiy Table la: ESTIMATION OF THE COMBINED EXPORT SUBSIDY IN THE MANUFACTURING SECTOR: 1979 (TL Million) Foreign Exchange I-0 Export Credit Used Indirect Tax Rebate Allocation Used Foreign Exchange Retained Sector "ode Sector Base Rate Subsidy Base Rate Subsidy Base Rate Subsidy Base Rate SubsiTy 11-16 Food Processing 954.0 16.50 157.4 1,566.8 4.1 64.2 131.3 54.1 71.0 379.2 54.1 205.1 17-18 Beverages 0 16.50 0 128.8 1.1 1.4 0 54.1 0 61.4 54.1 33.2 21-22 Textiles & Clothing 7,814.7 16.50 1,289.4 11,595.8 4.3 498.6 1,037.7 54.1 561.4 1,240.8 54.1 671.3 23 Leather & Fur Products 898.0 lf.50 148.2 1,045.9 4.2 43.9 0 54.1 0 150.3 54.1 81.3 27 Paper & Paper Products 0 16.50 0 32.3 8.7 2.8 0 54.1 0 10.5 54.1 5.7 29-31 Chemicals 420.9 16.50 69.4 760.9 5.9 44.9 144.2 54.1 78.0 84.9 54.1 45.9 34 Rubber Products 84.2 16.50 13.9 11.1 9.3 1.0 102.5 54.1 55.5 7.2 54.1 3.9 35 Plastic Products 308.6 16.50 50.9 53.1 8.5 4.5 19.2 54.1 10.4 5.7 54.1 2.1 36 Glass & Glass Products 926.0 16.50 152.8 720.1 10.4 78.5 67.3 54.1 36.4 117.7 54.1 63.7 37 Cement 701.5 16.50 115.7 1,290.7 9.7 125.2 12.8 54.1 6.9 138.1 54.1 74.7 39 Iron & Steel 0 16.50 0 21.3 6.0 1.3 176.2 54.1 95.3 104.7 54.1 56.6 40 Non Ferrous Metals 308.6 16.50 50.9 145.3 0 0 304.3 54.1 164.6 48.9 54.1 26.5 41 Fabricated Metal Products 196.4 16.50 32.4 127.4 4.8 6.1 48.1 54.1 26.0 19.2 54.1 10.4 42 Non Electrical Machinery 252.6 16.50 41.7 400.8 16.3 65.3 153.7 54.1 83.2 42.9 54.1 23.2 44 Electrical Machinery 56.1 16.50 9.3 118.9 6.6 7.8 102.5 54.1 55.5 15.9 54.1 8.6 43, 45-48 Transport Equipment 1,108.3 16.50 182.9 463.3 6.6 30.6 903.2 54.1 488.6 90.6 54.1 49.0 Total 14,029.3 2,314.9 18,482.5 976.1 3,203.1 1,732.8 2,517.5 1,362.2 Soturce: See text tables Appendix Table lb: ESTIMATION OF THE COMBINED EXPORT SUBSIDY IN THE MANUFACTURING SECTOR: 1979 (continued) (TL Million) Excluding Foreign D'ity Exemption Export Subsidy Exchange Premium Manufactured Export Subsidy Rate Base Rate Subsidy Total Excluding Foreign And Indirect Goods Exparts Total Excluding Foreign Exchange Premium Taxn Rebate Exchange Premium 131.3 0 0 497.7 221.6 157.4 3,543.7 14.0 6.3 0 0 0 34.6 1.4 0 574.0 6.0 0.2 1,037.7 0 0 3,020.7 1,788.0 1,289.4 11,595.8 26.0 15.4 0 0 0 273.4 192.1 148.2 1,404.4 19.5 13.7 0 0 0 8.5 2.8 0 98.5 8.6 2.8 144.2 0 0 238.2 114.3 69.4 793.8 30.0 14.4 102.5 0 0 74.3 14.9 13.9 67.2 110.6 22.2 19.2 0 0 68.9 55.4 50.9 53.1 129.8 104.3 67.3 0 0 331.4 231.3 152.8 1,100.0 30.1 21.0 12.8 0 0 322.5 240.9 115.7 1,290.7 25.0 18.7 176.2 0 0 153.2 1.3 0 978.9 15.7 0.1 304.3 0 0 242.0 50.9 50.9 457.1 52.9 11.1 48.1 0 0 74.9 38.5 32.4 179.0 41.8 21.5 153.7 0 0 213.4 107.0 41.7 400.8 53.2 26.7 102.5 0 0 81.2 17.1 9.3 148.6 54.6 11.5 903.2 0 0 751.1 213.5 182.9 846.6 88.7 25.2 3,203.1 0 6,386.0 3,291.0 2,314.9 23,532.2 27.1 14.0 Appendix Table 2a: ESTIMATION OF THE COMBINED EXPORT SUBSIDY IN THE MANUFACTURING SECTOR: 1980 (TL Million) Foreign Exchange I-0 Export Credit Used Indirect Tax Rebate Allocation Used Foreign Exchange Retained Sector Code Sector Base Rate Subsidy Base Rate Subsidy Base Rate Subsidy Base Rate Subsidy 11-16 Food Processing 3,271.6 22.53 737.1 6,948.2 0 0 224.0 4.7 10.5 1,109.2 4.7 52.1 17-18 Beverages 24.1 22.53 5.4 73.5 0 0 0 4.7 0 472.4 4.7 22.2- 21-22 Textiles & Clothing 11,041.4 22.53 2,487.6 27,166.0 0 0 1,768.5 4.7 83.1 3,482.8 4.7 163.7 23 Leather & Fur Products 553.3 22.53 124.7 1,050.5 0 0 0 4.7 0 418.1 4.7 19.7 27 Paper & Paper Products 0 22.53 0 189.3 0 0 0 4.7 0 29.6 4.7 1.4 29-31 Chemicals 649.5 22.53 146.3 2,201.5 0 0 247.7 4.7 11.6 655.7 4.7 30.8 34 Rubber Products 264.6 22.53 59.6 669.3 0 0 176.2 4.7 8.3 85.1 4.7 4.0 35 Plastic Products 312.7 22.53 70.5 462.9 0 0 32.9 4.7 1.5 49.5 4.7 2.3 36 Glass & Glass Products 529.2 22.53 119.2 2,002.5 0 0 117.3 4.7 5.5 254.0 4.7 11.9 37 Cement 962.2 22.53 216.8 2,099.0 0 0 20.9 4.7 1.0 342.6 4.7 16.1 39 Iron & Steel 745.8 22.53 168.0 65.9 0 0 302.3 4.7 14.2 268.7 4.7 12.6 40 Non Ferrous Metals 721.7 22.53 162.6 1,422.6 0 0 517.1 4.7 24.3 152.2 4.7 7.2 41 Fabricated Metal Products 793.8 22.53 178.8 555.2 0 0 81.7 4.7 3.8 69.3 4.7 3.3 42 Non Electrical Machinery 1,299.0 22.53 292.7 698.9 0 0 261.1 4.7 12.3 187.1 4.7 8.8 44 Electrical Machinery 1,202.8 22.53 271.0 587.8 0 0 176.9 4.7 8.3 93.5 4.7 4.4 43, 45-48 Transport Equipment 1,683.9 22.53 379.4 2,592.5 0 0 1,542.8 4.7 72.5 403.9 4.7 19.0 Total 24,055.6 5,419.7 48,785.6 5,469.4 256.9 8,073.7 379.5 Source; See text tables (02941) p.5 and 6 Appendix Table 2b: ESTIMATION OF THE COMBINED EXPORT SUBSIDY IN THE M-ANUFACTURING SECTOR: 1980 (continued) (TL Million) Duty Exemption Export Subisdy Manufactured Export Subsidy Rate Base Rate Subsidy Total Excluding Foreign Goods Export Total Excluding Foreign Exchange Premium Exchange Premium 224.0 21.1 47.3 847.0 784.4 10,366.8 8.2 7.6 0 18.1 0 27.6 5.4 4,415.1 0.6 0.1 1,768.5 18.7 330.7 3,065.1 2,818.3 32,549.9 9.4 8.7 0 26.6 0 144.4 124.7 3,907.9 3.7 3.2 0 15.0 0 1.4 0 277.1 0.5 0 247.7 11.9 29.5 218.2 175.8 6,127.6 3.6 2.9 176.2 16.4 28.9 100.8 88.5 795.2 12.7 11.1 32.9 24.5 8.1 82.4 78.6 462.9 17.8 17.0 117.3 12.1 14.2 150.8 133.4 2,373.9 6.4 5.6 20.9 10.4 2.2 236.1 219.0 3,201.5 7.4 6.8 302.3 12.4 37.5 232.3 205.5 2,511.2 9.3 8.2 517.1 12.0 62.1 256.2 224.7 1,422.6 18.0 15.8 81.7 13.1 10.7 196.6 189.5 647.9 30.3 29.2 261.1 8.5 22.2 336.0 314.9 1,748.8 19.2 18.0 176.9 12.9 22.8 306.5 293.8 873.5 35.1 33.6 1,542.8 10.4 160.5 631.4 539.9 3,774.9 16.7 14.3 5,469.4 776.7 6,832.8 6,196.4 75,456.8 9.1 8.4 Appendix Table 3a: ESTIMATION OF THE COMBINED EXPORT SUBSIDY IN THE MANUFACTURING SECTOR: FIRST QUARTER 1981 (TL Million) Foreign Exchange I-0 Export Credit Used Indirect Tax Rebate Allocation IJsed Foreign E change Retained Sector Code Sector Base Rate Subsidy Base Rate Subsidy Base Rate Subsidy Base Rate Subsidy 11-16 Food Processing 1,113.2 29.39 327.2 2,540.7 0 0 277.3 6.4 17.7 567.5 6.4 36.3 17-18 Beverages 0 29.39 0 125.3 0 0 0 6.4 0 124.3 6.4 8.0 21-22 Textiles & Clothing 1,169.7 29.39 343.8 11,721.1 0 0 899.4 6.4 57.6 1,277.9 6.4 81.7 23 Leather & Fur Products 310.0 29.39 91.1 0 0 0 72.2 6.1. 4.6 132.3 6.4 8.5 27 Paper & Paper Products 35.3 29.39 10.4 27.4 0 0 0 6.4 0 21.7 6.4 1.4 29-31 Chemicals 641.2 29.39 188.4 756.5 0 0 38.7 6.4 2.5 233.4 6.4 14.9 34 Rubber Products 0 29.39 0 181.8 0 0 15.0 6.4 1.0 49.3 6.4 3.2 35 Plastic Products 0 29.39 0 32.3 0 0 100.5 6.4 6.4 44.9 6.4 2.9 36 Glass & Glass Products 169.1 29.39 49.7 387.4 0 0 42.6 6.4 2.7 160.6 6.4 10.3 37 Cement 845.5 29.39 248.5 1,008.4 0 0 0-5 6.4 0.0 92.6 6.4 5.9 39 Iron & Steel 253.7 29.39 74.6 67.0 0 0 70.0 6.4 4.5 122.8 6.4 7.9 40 Non Ferrous Metals 775.1 29.39 227.8 722.1 0 0 151.9 6.4 9.7 66.3 6.4 4.2 41 Fabricated Metal Products 28.2 29.39 8.3 369.4 0 0 84.1 6.4 5.4 33.9 6.4 2.2 42 Non Electrical Machinery 140.9 29.39 41.4 566.3 0 0 270.4 6.4 17.3 108.5 6.4 6.9 44 Electrical Machinery 49.3 29.39 14.5 205.0 0 0 291.9 6.4 18.7 29.3 6.4 1.9 43, 45-48 Transport Equipment 1,515.0 29.39 445.3 1,998.6 0 0 683.9 6.4 43.8 220.4 6.4 14.1 Total 7,046.3 2,071.0 20,707.3 0 2,998.4 191.9 3,286.9 210.3 Source: See text tables Appendix Table 3b: ESTIMATION OF THE COMBINED EXPORT SUBSIDY IN THE MANUFACTURING SECTOR: FIRST QUARTER 1981 (continued) (TL Million) Duty Exemption Income Tax Reduction Export Subsidy Manufactured Export Subsidy Rate Base Rate Subsidy Base Rate Subsidy Total Excluding Foreign Goods Exports Total Excluding Foreign Exchange Premium Exchange Premium 277.3 21.1 58.5 6,182.1 2.84 175.6 615.3 561.3 6,182.1 10.0 9.1 0 18.1 0 1,354.3 2.84 38.5 46.5 38.5 1,354.3 3.4 2.8 899.4 18.7 168.2 13,920.4 2.84 395.3 1,046.7 907.3 13,920.4 7.5 6.5 72.2 26.6 19.2 1,441.0 2.84 40.9 164.3 151.2 1,441.0 11.4 10.5 0 15.-D 0 236.7 2.84 6.7 18.5 17.1 236.7 7.8 7.2 38.7 11.9 4.6 2,542.6 2.84 72.2 282.6 265.2 2,542.6 11.1 10.4 15.0 16.4 2.5 536.9 2.84 15.2 21.9 17.7 536.9 4.1 3.3 100.5 24.5 24.6 489.2 2.84 13.9 47.8 38.5 489.2 9.8 7.9 42.6 12.1 5.2 1,749.0 2.84 49.7 117.6 104.6 1,749.0 6.7 6.0 0.5 10.4 0.1 1,008.4 2.84 28.6 283.1 276.8 1,008.4 28.1 27.4 70.0 12.4 8.7 1,338.0 2.84 38.0 133.7 121.8 1,338.0 10.0 9.1 151.9 12.0 18.2 722.1 2.84 20.5 280.4 266.5 722.1 38.8 36.9 84.1 13.1 11.0 369.4 2.84 10.5 37.4 29.8 369.4 10.1 8.1 270.4 8.5 23.0 1,181.9 2.84 33.6 122.2 98.0 1,181.9 10.3 8.3 291.9 12.9 37.7 319.2 2.84 9.1 81.9 61.3 319.2 25.7 19.2 683.9 10.4 71.1 2,400.4 2.84 68.2 642.5 584.6 2,400.4 26.8 24.4 2,998.2 452.6 35,791.6 1,016.5 3,942.4 3,539.7 35,791.6 11.0 9.9 Appendix Table 4a: ESTIMATION OF THE COMBINED EXPORT SUBSIDY IN THE MANUFACTURING SECTOR: SECOND QUARTER 1981 (In TL Million) 1-0 Export Credit Used Indirect Tax Rebate Foreign Exchange Allocation Used Foreign Exchange Retained Sector Code Sector Base Rate Subsidy Base Rate Subsidy Base Rate Subsidy Base Rate Subsidy 11-15 Food Processing 1,771.3 30.23 535.5 174.1 3.33 5.8 253.0 2.4 6.1 537.4 2.4 12.9 17-18 Beverages 0 30.23 0 7.1 3.33 0.2 0 2.4 0 49.0 2.4 1.2 21-22 Textiles and Clothing 4,156.3 30.23 1,256.4 1,366.7 3.33 45.5 1952.2 2.4 46.9 1,347.8 2.4 32.4 23 Leather and Fur Products 28.3 30.23 8.6 146.3 3.33 4.9 27.3 2.4 0.7 104.6 2.4 2.5 27 Paper and Paper Products 56.5 30.23 17.1 5.1 3.33 0.2 0 2.4 0 11.7 2.4 0.3 29-31 Chemicals 169.6 30.23 51.3 116.0 3.33 3.9 336.9 2.4 8.1 190.3 2.4 4.6 34 Rubber Products 0 30.23 0 17.0 3.33 0.6 26.5 2.4 0.6 16.1 2.4 0.4 35 Plastic Products 0 30.23 0 11.7 3.33 0.4 392.3 2.4 9.4 75.1 2.4 1.8 36 Glass and Glass Products 405.2 30.23 122.5 58.7 3.33 2.0 105.8 2.4 2.5 174.8 2.4 4.2 37 Cement 358.2 30.23 108.3 348.9 3.33 11.6 0.2 2.4 0.0 454.6 2.4 10.9 39 Iron and Steel 772.8 30.23 233.6 51.4 3.33 1.7 561.1 2.4 13.5 128.0 2.4 3.1 40 ron-Ferrous Metals. 216.8 30.23 65.5 51.0 3.33 1.7 325.1 2.4 7.8 62.6 2.4 1.5 41 Fabricated Metal Products 131.9 30.23 39.9 53.9 3.33 1.8 158.3 2.4 3.8 62.2 2.4 1.5 42 Non-Electrical Machinery 301.6 30.23 91.2 62.8 3.33 2.1 197.7 2.4 4.7 64.3 2.4 1.5 44 Electrical Machinery 301.6 30.23 91.2 21.6 3.33 0.7 219.0 2.4 5.3 46.1 2.4 1.1 43, 45-48 Transport Equipment 753.9 30.23 227.9 589.9 3.33 19.6 1188.3 2.4 28.5 222.4 2.4 5.3 Total 9,424.4 2,849.0 3,082.2 102.6 5,743.8 137.9 3,547.0 85.1 Source: See text tables Appendix Table 4b: ESTIMATION OF THE COMBINED EXPORT SUBSIDY Ih THE MANUFACTURING SECTOR: SECOND QUARTER 1981 (TL Million) Duty Exemption Income Tax Reduction Export Subsidy Manufactured Export Subsidy Rate Base Rate Subsidy Base Rate Subsidy Total Excluding Foreign Goods Exports Total Excluding Foreigr Exchange Premium Exchange Premium 253.0 21.1 53.4 6,481.2 3.22 208.7 822.4 793.4 6,481.2 12.7 12.2 0 18.1 0 1,059.2 3.22 34.1 35.5 44.3 1,059.2 3.4 4.2 1952.2 18.7 365.1 19,560.6 3.22 629.9 2,376.2 2,296.9 19,560.6 12.1 11.7 27.3 26.6 7.3 1,788.3 3.22 57.6 81.6 78.4 1,788.3 4.6 4.4 0 15.0 0 222.5 3.22 7.2 24.8 24.5 222.5 11.1 11.0 336.9 11.9 40.1 2,366.8 3.22 76.2 184.2 171.5 2,366.8 7.8 7.2 26.5 16.4 4.3 339.7 3.22 10.9 16.2 15.2 339.7 4.8 4.5 392.3 24.5 96.1 1,019.7 3.22 32.8 140.5 129.3 1,019.7 13.8 12.7 105.8 12.1 12.8 2,553.2 3.22 82.2 226.2 219.5 2,553.2 8.9 8.6 0.2 10.4 0.0 5,305.3 3.22 170.8 301.6 290.7 5,305.3 5.7 5.5 561.1 12.4 69.6 1,690.9 3.22 54.4 375.9 359.3 1,690.9 22.2 21.2 325.1 12.0 39.0 796.3 3.22 25.6 141.1 131.8 796.3 17.7 25.9 158.3 13.1 20.7 508.2 3.22 16.L 84.1 78.8 508.2 16.5 15.5 197.7 8.5 16.8 1,282.8 3.22 41.3 157.6 151.4 1,282.8 12.3 11.8 219.0 12.9 28.3 461.0 3.22 14.8 141.4 135.0 461.0 30.7 29.2 1188.3 10.4 123.6 3,048.9 3.22 98.2 503.1 469.3 3,048.9 16.5 15.4 5,743.8 877.1 48,484.6 1,561.2 5,612.5 5,389.4 48,484.6 11.6 11.1 - 118 - Appendix Table 5: ITEMS TRANSFERRED FROM LIBERALIZED LIST II TO LIBERALIZED LIST I Code No. Name $ Value ($1000) 14 Vegetable Plaiting lnd Carving Materials 8.2 15 Animal and Vegetable Fats and Oils and their Cleavage Products 2,315.4 28 Inorganic Chemicals, Organic and Inorganic Compounds of Precious Metals 18,010.5 29 Organic Chemicals 151,581.2 30 Pharmaceutical Products 1,614.1 32 Tanning and Dyeing Extracts, Tanning and their Derivates 25,203.7 35 Albuminoidal Substances, Glues 201.1 37 Photographic and Cinematographic Goods 3,877.0 38 Miscellaneous Chemical Products 30,430.9 39 Artificial Resins and Plastic Materials 1,106.6 40 Rubber, Synthetic Rubbers, Factice 1,754.7 59 Twine, Cordage, Ropes and Cables 644.1 68 Articles of Stone, of Plaster, of Cement, of Asbestos, of Mica 234.7 73 Iron and Steel 6,445.6 76 Aluminum 306.6 80 Tin 10,871.0 81 Other Base Mf-cals Employed in Metallurgy 26.9 82 Tools, Implements, Cutlery Spoons and Forks 1,537.9 84 Boilers, Machinery and Mechanical Appliances 24,073.9 85 Electrical Machinery and Equipment 593.6 86 Railway and Tramway, Locomotives 0.n 90 Optical, Photographic, Cinematographic Instruments 2,137.1 95 Articles and Manufactures of Carving or Moulding Material 1,359.7 Total 284,334.5 Source: - SPO - Customs - 119 - Appendix Table 6: FORMER QUOTA ITEMS TRANSFERRED TO LIBERALIZED LIST I Code No. Name $ Value ($1000) 09 Coffee, Tea, Mate and Spices 303.1 13 Raw Vegetable Materials of a Kind Suitable for Use in Dyeing or in Tanning 138.7 15 Animal and Vegetable Fats and Oils and their Cleavage Products 464.3 17 Sugar and Sugar Confectionery 0.0 25 Sal, Sulphur, Earths and Stone 0.0 27 Mineral Fuels, Minerals Oils and Products of Their Distillation 21.4 28 Inorganic Chemicals, Organic and Inorganic Compounds of Precious Metals 204.8 29 Organic Chemicals 15.5 32 Tanning and Dyeing Extracts, Tanning and their Derivates 126.8 34 Soap, Organic Surface-active Agents 11.4 35 Albuminoidal Substances, Glues 2.0 37 Photographic and Cinematographic Goods 29.8 38 Miscellaneous Chemical Products 15,875.1 39 Artificial Resins and Plastic Materials 15938.2 40 Rubber, Synthetic Rubbers, Factice 2,891.6 44 Wood and Articles of Wood 17.7 48 Paper and Paper Board Articles 6,855.8 4q Printed Books, Newspapers, Pictures 57.5 51 Man-made Fibers 272.0 53 Wood and Other Animal Hair 0.0 59 Twine, Cordage, Ropes and Cables 0.3 73 Iron and Steel 371.0 76 Aluminum 9.1 79 Zinc 12.7 82 Tools, Implements, Cutlery Spoons and Forks 125.6 83 Miscellaneous Articles of Base Metal 0.6 84 Boilers, Machinery and Mechanical Appliances 10,1n6.5 85 Electrical Machinery and Equipment 20,897.7 90 Optical, Photographic, Cinematographic Instruments 2,692.8 91 Clocks and Watches 34.7 92 Musical Instruments 66.2 96 Brooms, Brushes, Feather Dusters 51.9 98 Miscellaneous Manufactured Articles 256.7 Total 63,851.2 Source: - SPO - Customs - 120 - Appendix Table 7: FORMER QUOTA ITEMS TRANSFERRED TO LIBERALIZED LIST II Code No. Name $ Value ($1000) A. Under Ministry of Trade 08 Edible Fruit and Nuts 453.5 09 Coffee, Tea, Mate and Spices 642.4 13 Raw Vegetable Materials of a Kind Suitable for Use in Dyeing or in Tanning 7(00.7 27 Mineral Fuels, Minerals Oils and Products of their Distillation 465.q 36 Explosives, Pyrotechnic Products 120.5 37 Photographic and Cinematographic Goods 7,285.3 39 Artificial Resins and Plastic Products 576.4 40 Rubber, Synthetic Rubbers, Factice 52.2 48 Paper and Paper Board Articles 238.5 52 Metallized Textiles 56.4 55 Cotton 0.0 57 Other Vegetable Textile Materials 0.0 59 Twine, Cordage, Ropes and Cables 67.0 64 Footwear, Gaiters and the like 1.0 70 Glass and Glassware 66.3 71 Pearls, Precious and Semi-precious Stones 11.3 73 Iron and Steel 502.7 82 Tools, Implements, Cutlery Spoons and Forks 214.4 83 Miscellaneous Articles of Base Metal 203.4 84 Boilers, Machinery and Mechanical Appliances 29,235.3 85 Electrical Machinery and Equipment 18.2 90 Optical, Photographic, Cinematographic Instruments 665.6 91 Clocks and Watches 1,763.3 92 Musical Instruments 317.2 97 Toys, Games and Sports Requisites 7.4 98 Miscellaneous Manufactured Articles 41.9 Total 43,706.9 B. Under Ministry of Technology and Indust-y 25 Salt, Sulphur, Earths and Stone 65.0 26 Metallic Ores 1,548.8 28 Inorganic Chemicals, Organic and Inorganic Compounds of Precious Metals 1,472.0 29 Organic Chemicals 11,877.3 32 Tanning and Dyeing Extracts 10,244.7 35 Albuminoidal Substances 545.5 38 Miscellaneous Chemical Products 52,936.5 3Q Artificial Resins and Plastic Materials 110,960.3 - 121 - 13 Rubber, Synthetic Rubbers 155.0 44 Wood and Articles of Wood 65.3 48 Paper and Paper Board Articles 69,347.1 49 Printed Books, Newspapers, Pictures 103.6 51 Man-made Fibres 286.0 54 Flax and Ramie 110.1 59 Twine, Cordage, Ropes and Cables 22,184.4 68 Articles of Stone, of Plaster, of Cement 3,228.8 69 Ceramic Products 6,562.0 70 Glass and Glassware 1,807.5 71 Pearls, Precious and Semi-precious Stones 327.4 73 Iron and Steel 26,901.3 74 Copper 633.5 76 Aluminium 236.3 82 Tools, Implements, Cutlery Spoons and Forks 2,906.3 83 Miscellaneous Articles of Base Metal 174.5 84 Boilers, Machinery and Mechanical Appliances 128,954.1 85 Electrical Machinery and Equipment 67,775.4 87 Vehicles other than Railway or Tramway Rolling Stocks 126,934.6 94 Furniture and Parts 29.6 98 Miscellaneous Manufactured Articles 202.1 Total 648,575.2 C. The below items have been cancelled 28 Inorganic Chemicals 363.4 32 Tanning and Dyeing Extracts 0.0 38 Miscellaneous Chemical Products 52,775.2 53 Wood and Other Animal Hair 0.0 83 Miscellaneous Articles of Base Metal 9.5 84 Boilers, Machinery and Mechanical Appliances 5,662.4 87 Vehicles other than Railway and Tramway Rolling Stocks 3,701.2 91 Clocks and Watches 0.0 Total 62,511.7 (1) Transfer to List II Total 692,282.1 (2) Cancelled 62,51.1.7 (3) Net Transfer to List II Total 629,770.4 (1 minus 2) Source; - SPO - Customs 122 - CHAPTER 3 THE FINANCING OF ECONOMIC ACTITIVY A. The-Resources of-the Financial Sector 1. Introduction 3.1 The financial sector of Turkey comprises; (a) the banking system; (b) the Social Security System (Social Insurance Agency, Pension Fund, Banks Pension Funds, Army Mutual Fund); (c) private insurance companies; (d) collective savings institutions and credit cooperatives; (e) securities malrkets; and (f) unorganized money markets. The banking system dominates the entire financial sector. The total consolidated assets of all the banks (Central Bank, deposit money banks and investment and development banks) at the end of 1980 amounted to almost TL 2,500 billion, or about 55 percent of the GNP of that year. 3.2 Among non-bank financial institutions, only the Social Security System has substantial financial assets. However, most of these assets consist either of bank deposits or of bonds issued by the State Investment Bank. The contribution of the Social Security System to the financing of economic activities is therefore automatically included in the analysis of the banking system. 3.3 The securities (or capital) market is the only other segment of the Turkish financial sector which has some significance. But the volume of business transacted in this market in 1980 accounted for only about 1 percent of the total consolidated assets of the banking system. The size of the remaining financial institutions - insurance companies, collective savings institutions and credits cooperatives - is even smaller. The amount of financial resources channelled through unorganized money markets is also said to be small, although it is not possible to estimate it. 3.4 In these conditions, the analysis of the financing of economic activity in Turkey presented below focusses primarily on the banking sector. Nevertheless attention will also be paid to the capital market, which in the future should play a more important role within the financial system. In the discussion, emphasis will be given to the generation of financial resources, the conditions under which they are transferred, and the efficiency of their allocation. Note will further be taken of the implications for monetary policy of the rules under which financial institutions operate. 2. The Supply of Money and its Influence on the Availability of Financing The Growth of the Money Supply 3.5 The volume of financial resources of the banking system is determined by the stock of money and by other net domestic and foreign liabilities of the system. Table 3.1 shows that, among these influences, the money supply has been the most important, although net foreign liabilities have increased rapidly in recent years. - 123 - Table 3.1: SURVEY OF THE BANKING SECTOR OF TURKEY /1 (Billions of TL, year end) June 1977 1978 1979 1980 /4 1981 Credits, bonds and 441.1 562.7 844.6 1,358.9 1,685.5 participations Money supply /2 269.5 363.3 578.7 966.0 1,163.8 Other liabilities of the banking sector; Bonds 39.3 45.2 51.9 59.9 59.5 Net foreign liabilities 74.9 100.8 160.8 380.6 393.9 Other net domestic liabilities /3 57.4 53.4 53.2 -47.6 68.3 441.1 562.7 844.6 1,358.9 1,685.5 /1 Central Bank, deposits money banks and investment and development banks. /2 M2 (currency in circulation, sight deposits with deposit money banks, deposits of public enterprises and other sectors not belonging to the public administrations in the Central Bank, time deposits witth deposit money banks) plus public deposits in deposit money banks. /3 Including equity. 7T Provisional figures. 3.6 During the 1971-77 period, the money supply, defined in a broader sense (see Table 3.1) increased at an average annual rate of 27 percent. The money supply increased by 34 percent in 1978 (on the basis of yearly averages), 46 percent in 1979, and 63 percent in 1980. 1/ These results were affected by changes in the monetary base and in the money multiplier. The Monetary Base 3.7 The monetary base increased at an annual average rate of 31 percent between 1971 and 1977, calculated from year end values. The corresponding growth rates for 1978, 1979 and 1980 were 43 percent, 50 percent and 1/ Due to seasonality, the data reported for the first. half of 1981 will not be commented on in the following. 124- 48 percent, respectively. This occurred as the contractionary effects of the decrease of net foreign assets of the Central Bank and of compulsory import deposits were more than compensated by the rapid rise of the Central Bank claims on public administrations, 1/ public enterprises, deposit money banks, and investment and development banks (Table 3.2). Table 3.2; FACTORS DETERMINING THE MONETARY BASE (Millions of TL; end of the period) June 1971 1977 1978 1979 1980 1981 Net foreign assets 6.7 -65.2 -88.1 -136.9 -368.4 -403.1 Net domestic assets Public administrations 14.1 93.1 154.8 263.0 528.9 580.3 excluding decrease in net foreign assets (13.6) (75.7) (98.9) (n.a.) (223.7) (n.a.) Public enterprises 5.3 45.5 66.0 121.2 177.4 178.9 Deposit money banks 7.4 96.3 125.2 162.9 274.7 309.5 Investment and development banks 1.3 37.1 42.3 48.3 49.8 49.5 Import deposits -1.6 -46.5 -70.8 -99.5 -99.9 -93.1 Other items, net -2.8 -8.7 -13.2 -35.3 -83.9 -91.6 TOTAL 30.3 151.6 216.1 323.6 478.5 530.3 Source; Central Bank of Turkey 3.8 Adjusting for changes in the Turkish lira value of foreign liabilities, which have their counterpart in the decrease of net foreign assets, the financing of the consolidated budget deficit by the Central Bank has been the major factor contributing to the increase in the monetary base. This issue will be further examined in paras. 3.81-3.95 and consideration will be given to measures that may be taken to reduce the impact of the budgetary deficits on money supply. 1/ For the definition of public administrations, see Table 3.12. - 125 - 3.9 Another importapt factor contributing to the increase in the monetary base has been the credits the Central Bank extended to public enterprises. The main beneficiaries of these credits have been the State Monopolies and the Soil Products Office, although some of the industrial state economic enterprises, too, have received considerable financial support in recent years. In addition to direct c-edits, the SEEs have benefited from budgetary transfers based on funds provided by the Central Bank to the Treasury. Finally, they have absorbed most of the credits extended by the Central Bank to the State Investment Bank and other investment and development banks. The problems which need to be faced and the solutions which may be adopted to reduce the inflationary effects of the financing of public enterprises will be considered in paras. 3.96-3.104. Chapter 6 provides further discussion of the financing of the manufacturing SEEs. 3.10 The loans of the Central Bank to deposit money banks reflect mainly the operation of selective credit policies. These loans are to a large extent oriented towards the financing of agriculture, the financing of medium- and long-term credits, and the financing of export credits. In several cases the implementation of selective credit policies is entirely dependent on credits provided by the Central Bank at low interest rates, thus limiting the freedom of action of the Central Bank. The problems created by such a situation, and possible solutions, will be analyzed in paras. 3.105-3.144. Reserve Requirements and the Supply of Money 3.11 The multiplier of the monetary base has undergone substantial fluctuations in recent years (Table 3.3), thereby creating difficulties for the conduct of monetary policy. These fluctuations find their origin in variations both of the ratio of currency in circulation to total deposits (c) and of the ratio of the required reserves of deposit money banks in cash or as deposits in the Central Bank to total deposits (r). 3.12 Variations of the ratio of currency to deposits are determined by the preferences of households and enterprises. They can not therefore easily be controlled by the monetary authorities. In turn, variations in the ratio of reserves to total deposits depend on the regulations established by the authorities as regards liquidity and reserve requirements as well as on the compliance of the banks with such regulations. 3.13 Liquidity reserves are held in the form of vault cash, free sight deposits with the Central Bank, Treasury bills and government bonds. The minimum ratio of liquidity reserves to total deposits (with the exclusion of interbank deposits) is 10 percent in the case of small banks, 12 percent in the case of medium sized banks and 15 percent in the case of large banks. The liquidity ratio has been a convenient device to create a captive demand for government securities by deposit money banks, even though the yields of these securities are not attractive. 3.1.4 Required reserves consist of deposits which banks have to maintain in the Central Bank. They equal 35 percent of sight deposits and 30 percent of time deposits, with lower ratios applying to the deposits which are used to - 126 - Table 3.3; MULTIPLIER OF THE MONETARY BASE (Billion TL; year end values) June 1977 1978 1979 1980 1981 Monetary base 151.6 216.1 323.6 478.5 530.3 Reserve requirements on Convertible TL Deposits 8.9 10.2 12.3 3.5 n.a. Corrected monetary base (B) 142.7. 205.9 311.3 475.0 n.a. M2 243.5 328.0 527.8 881.9 1,059.6 Public deposits in deposit money banks 26.0 35.3 50.9 84.1 104.2 Money Supply defined in a broader sense (M) 269.5 363.3 578.7 966.0 1,163.8 Currency in circulation (C) 63.0 93.8 143.7 221.9 230.1 Total deposits included in M (D) 206.5 269.5 435.0 744.1 947.4 Reserves of deposit money banks (R) 79.7 112.0 167.7 253.0 291.3 c = C D 0.305 0.348 0.330 0.298 0.243 r = R; D 0.386 0.416 0.386 0.340 0.307 Multiplier k = M ; B (1 + c) ; (c + r) 1.889 1.764 1.858 2.033 n.a. Source; Central Bank of Turkey extend credits receiving preferential treatment under the selective credit policy. Since July 1, 1980, these ratios have been as follows: (a) medium and long term credits for investments in F,riority sectors as indicated in the General Incentives Tables, 5 percent; (b) medium and long term credits for investments in underdeveloped regions, 0 percent; (c) housing credits by the Real Estate and Credit Bank, 5 percent; (d) credits to small enterprises and artisans by the Halk Bank, 20 percent; (e) credits for manufactured goods exports, 5 percent; and (f) medium term operational and export credits, not - 127 - included in the above categories, 10 percent. The Central Bank pays interest rates of 8 percent and 16 percent on the reserves required against sight and time deposits, respectively. After the payment of a levy to the Differential Interest Rate Rebate Fund (2 percent) and of the financial transactions tax (15 percent), the net earnings of money banks on reserves held against sight and time deposits are 6.8 percent and 11.9 percent respectively (see notes to Table 3.8). 3.15 Banks which do not comply with the regulations on reserve requirements must pay a penalty rate of 35 percent on the deficiency, which after the inclusion of the transactions tax of 15 percent and of the interest which would be earned on the reserves corresponds to a total cost of 47 percent for reserves against sight deposits and 52 percent for the reserves against time deposits. Such costs do not however impose an adequate penalty, given the fact that the marginal cost of financial resources derived from deposits has been in the order of 50 percent, as explained in para. 3.40. It is therefore not surprising that on July 1, 1981 the deficiencies on required reserves amounted to 37 billion TL, which corresponds to more than 15 percent of total required reserves. A large part of the deficiency had its origin in the Agricultural Bank, which belongs to the public sector and is the largest bank in Turkey. 3.16 The system of required reserves has made it possible to mobilize, at a comparatively low cost for the Central Bank, a substantial proportion of the financial resources collected by deposit money banks for the financing of budgetary deficits, public enterprises, and selective credits. In turn, the lower ratios required against deposits used for preferential credits have made these credits more attractive to the banks. At the same time, regulations on reserves increase considerably the cost of financial intermediation (a point which is analysed in paras. 3.39-3.42) and they mean that the multiplier of the monetary base is comparatively low and may be subject to substantial fluctuations. 3.17 The fluctuations of the monetary multiplierl arising out of variations in the ratio of reserves to deposits are due to: (a) the differences in the minimum required reserves ratios imposed on sight deposits and time deposits and variations in the amounts of those two types of deposits; (b) the special reductions of required reserve ratios on deposits which are used to extend some types of selective credits, and the variation in the amounts of those credits; and (c) changes in the extent of non-compliance of reserve requirements by deposit: money banks. The possibilities of controlling the supply of money and conducting monetary policy would improve considerably if these different sources of instability of the money multiplier were corrected. It would therefore be desirable to reduce the disparity between the different reserve ratios and to enforce the stricter observance of reserve requirements by the banks. 3.18 In order to achieve the stricter observance of reserve requirements by the banks, the penalty rates on deficiencies would need to be increased. If such penalty rates were not sufficiently effective in the case of public sector banks, complementary forms of action might be necessary. - 128 - 3.19 The elimination of lower reserve ratios for preferential credits would reduce variations in the money multiplier and would offer further advantages as described in paras. 3.114-3.117. However, the difference of 5 percent points between the existing ratios for sight and time deposits may be maintained as they reflect differences in the "moneyness" of these deposits. 3. Interest Rates and the Demand for Money The Demand for Money 3.20 In recent years the demand for money expressed as a percentage of GNP declined substantially, as shown in Table 3.4. The increase of the velocity of the circulation reflected essentially the flight from money caused by accelerating inflation and the persistance of strongly negative real interest rates. In 1979 and 1980, the tightness of monetary policy was another contributing factor as increases in the money supply became insufficient to accomodate price rises due to adjustments of controlled prices, wage increases, and the devaluation of the exchange rate. As a consequence of credit scarcity, economic agents accumulated large amounts of arrears vis-a-vis each other. That process has in a certain way replaced one of the normal functions of money, thus contributing to a pronounced increase in its velocity. 3.21 The figures in Table 3.4 are much influenced by the behaviour of deposits of business enterprises (commercial sight deposits). The ratio of these deposits tp GNP during the second half of the 1970's exceeded the average for the first half. This was due to the practice of banks to require the holding of compensating balances in the form of commercial sight deposits for a certain proportion of their loans (reaching often 30 percent). While it is impossible to estimate what have been the proportions of the required and the voluntary deposits in the total amount of commercial sight deposits, the analysis of the demand for money will become more meaningful if commercial sight deposits are subtracted from M2, as it is done in the last line of Table 3.4. With this correction, the ratio of M2 to GNP is shown to have declined by one-half between 1971-75 and 1980, thereby limiting the ability of the banking system to perform its function of financial intermediation. 3.22 The decline in the demand for currency was comparatively moderate as these balances are kept mainly for transactions purposes. By contrast, the demand for savings sight deposits fell from an average of 9.1 percent of GNP in 1971-75 to 3.7 percent in 1980. This decline is expalined by the fact that savings sight deposits are not used extensively for payment in Turkey and the real interest rates on these deposits were kept at strongly negative levels. Thus, nominal interest rates on savings sight deposits were 2.5 percent in the early seventies, 3 percent from October 1974 until July 1980 and 5 percent since July 1, 1980 as compared with average inflation rates close to 20 percent in the period 1972-77 and 53 percent, 64 percent and 107 percent in 1978, 1979 and 1980, respectively. 129 - Table 3.4: DEMAND FOR MONEY (percentages of GNP) /1 1971-75 1976 1977 1978 1979 1980 1. Currency 5.9 5.6 5.9 6.0 5.2 4.0 2. Commercial sight deposits 4.4 5.7 6.1 5.7 5.2 4.7 3. Savings sight deposits 9.1 8.5 8.3 7.2 5.4 3.7 4. m1 (1) + (2) + (3) 19.5 19.8 20.4 18.9 15.9 12.4 5. Time deposits 5.7 4.5 3.7 3.0 2.7 2.7 6. M2 (4) + (5) 25.2 24.3 24.1 21.9 18.6 15.1 7. Public deposits 2.7 2.8 2.6 2.3 1.9 1.5 8. Total (6) + (7) 27.9 27.1 26.7 24.2 20.5 16.6 9. M2, less commercial sight 20.8 18.6 18.0 16.2 13.4 10.4 deposits (6) - (2) /1 The average demand in a given year was calculated as the geometric average between the values at the beginning and at the end of that year. Source: Central Bank of Turkey 3.23 Demand for time deposits fell particularly markedly from 5.7 percent of GNP in 1971-75 to 2.7 percent in 1980. The interest rates paid on these deposits were subject to ceilings fixed by law until July 1980. From that date until January 1981 ceilings determined by a gentlemen's agreement among banks were in force. Subsequently, however, owing to the scarcity of loanable funds resulting from a tight monetary policy and the increased competition from non-bank financial intermediaries, the agreement began to break down and interest rates paid on time deposits were substantially increased. 3.24 Real interest rates on six month time deposits averaged -30 percent in 1978 and 1979, and about -45 percent in 1980. In February 1981, nominal interest rates were raised to 42 percent in six month deposits and to 50 percent in one year deposits, compared to rates of 12 percent and 20 percent, respectively up to June 1980. In July 1981, interes' rates on six-month deposits were increased further to 50 percent. In turn, in the second half of 1981, the rate of inflation was slightly below 35 percent a year. - 130 - Table 3.5: INTEREST RATES ON DEPOSITS (percentages) 10/1/74 4/1/78 5/1/78 3/1/78 7/1/78 9/27/80 1/1/81 2/9/81 7/9/81 Public 1.0 0 0 0 0 0 0 0 0 Commercial 0 2.0 0 0 0 0 0 0 0 Savings /I 0-3 months 3.0 3.0 3.0 3.0 5.0 5.0 5.0 5.0 5.0 3-6 months 6.0 6.0 8.0 8.0 45.0 6-12 months 6.0 9.0 12.0 12.0 15.0 15.0 32.0 42.0 50.0 12-24 months 9.0 12.0 20.0 20.0 33.0 33.0 40.0 50.0 50.0 2-3 years /2 16.0 22.0 22.0 34.0 34.0 40.0 50.0 50.0 3-4 years /2 20.0 24.0 24.0 35.0 35.0 40.0 50.0 50.0 more than 4 years /2 /2 /2 /2 36.0 36.0 40.0 50.0 5(.0 Certificates of deposits issued to bearers 6 months 15.0 15.0 32.0 40.0 50.0 6-12 months 33.0 33.0 40.0 50.0 50.0 12-24 months 34.0 34.0 40.0 50.0 50.0 /1 As from 7/1/80 deposits in foreign exchange by emigrant workers have been receiving an additional 5 percentage points. Previously, they were receiving an additional 10-15 percentage points. /2 Interest rate determined between the bank and the depositor. Source: Central Bank of Turkey 3.25 The freeing of interest rates after July 1980 increased the demand for time deposits. While the amount of total time deposits deflated by the average of the consumer price indexes of Ankara and Istanbul declined by about 33 percent from December 1979 to June 1980, this decline was offset by an increase of the same of magnitude in the following six months. In the first nine months of 1981 a further increase of about 150 percent was recorded as against price increases of 19 percent. This result is td some extent due to a - 131 - shift from sight to time deposits, induced by the larger difference in their respective interest rates. Nevertheless, it appears that the increase in time deposits contributed to the growth of money demand (M2) in real terms. Thus, the fact that the real value of currency in circulation plus savings deposits increased by 19 percent from December 1980 to June 1981 seems to be a clear sign, when contrasted with the experience of earlier years, that more attractive interest rates for time deposits are stimulating the overall demand for money by households (See Table 3.6). And, apart from increasing the proportion of the savings of households channelled through the banking system, the volume of these savings is likely to have risen in consequence of the new interest rate policy. Table3.6: CURRENCY AND BANK DEPOSITS /1 Dec. Dec. June Dec. June 1978 1979 1980 1980 1981 Billion TL Currency in circulation 113.7 182.9 202.2 278.6 294.5 Commercial sight deposits 86.0 154.5 175.5 286.0 278.5 Savings deposits 147.3 225.3 250.1 370.5 528.8 Sight 103.3 142.6 160.8 193.5 192.7 Time 44.1 82.6 89.3 177.0 /2 336.1 /1 Others 35.7 52.7 52.8 89.0 110.6 Indices (Dec. 1978 = 100) Cost of living index /2 100.0 176.7 275.0 319.3 354.4 Time deposits deflated by the cost of living index 100.0 97.1 67.0 99.0 215.4 Currency in circulation plus savings deposits deflated by the cost of living index 100.0 87.3 62.0 71.9 85.7 /1 Including certificates of deposit. 77 Average of the cost of living indices of Ankara and Istanbul with the base adjusted in such a way as to produce the value 100 in December 1978. Source; Central Bank of Turkey - 132 - 3.26 The continuation of these developments in the future will bring substantial benefits for the development and stabilization of the Turkish economy. It will provide more savings for domestic investment, thereby contributing to modernization and the acceleration of growth in the Turkish economy. Furthermore, it will permit a larger expansion of bank credit for given balance of payments and inflation targets, and thereby ease the situation in productive sectors whose levels of activity depend on the amount of credit available. 3.27 With an inflation rate of 35 percent, real interest rates on six months and one year time deposits are 11.1 percent. However, after the payment of the withholding tax of 25 percent, after-tax real yields become 1.9 percent; yields would increase to 3.7 percent under the planned introduction of the withholding tax to 20 percent. The Taxation of Interest Rates on Time Deposits and Certificates of Deposit 3.28 It is apparent that the tax on the part of interest earnings which offsets the effects of inflation on the real value of the time deposits is in fact a tax on capital. At the same time, the burden of the tax on the cost of financial intermediation is greater in situations of high inflation, when the need to stimulate savings becomes particularly acute. For instance, the 25 percent withholding tax adds 12.5 percentage points to the cost of bank intermediation of funds from one year time deposits when the interest rate is 50 percent, and only 5 percentage points when a lower inflation rate makes it possible to maintain the same after tax real return with a nominal interest rate of 20 percent. 3.29 In order to avoid taxing capital, it is suggested that the tax on interest earnings from time deposits be limited to the real value of such earnings. For purposes of taxation, real earnings may be defined as the excess of the nominal interest rate over the inflation rate. At the same time, changes in inflation rates require flexibility in interest rates paid on time deposits. 3.30 At present, banks show great reluctance in accepting time deposits with fixed interest rates for periods exceeding six months. This reluctance is understandable in view of the risks that would arise if inflation and consequently interest rates would decline substantially during the period of the deposit. One way of avoiding that difficulty is to introduce certificates of deposit with indexed interest rates and maturities of 1 to 4 years. The formula for the indexation of interest rates in certificates of deposit should be the same which is applied to bond interest rates, as explained in paras. 3.71-3.77. - 133 - B. ThP System of Financial Intermediation 1. The Structure of the Banking System The Central Bank 3.31 As shown in Table 3.7, the size of the Central Bank within the financial sector is comparatively large and it has been growing faster than other banking institutions. This is explained by; (a) the preference of the population for maintaining a large proportion of its money balances in curreaicy issued by the Central Bank (Table 3.4); (b) the high rates of reserves which deposit money banks are required to maintain with the Central Bank; and (c) the concentration in the Central Bank of a high proportion of the foreign liabilities of the banking system. In turn, the Central Bank plays an important role in financing the budget deficits of the public administration and of some SEEs and in inplementing selective credit policies. Deposit Money Banks 3.32 Deposit money banks alone are entitled to receive deposits from the public. In June 1981, there were 40 such banks, of which 11 were public. Most of the public sector deposit money banks were specialized in particular activities. This was the case of the Agricultural Bank (T.C. Ziraat Bankasi) the Estate Credit Bank (Istanbul Emiyet Sandigi), the People's Bank (T. Halk Bankasi, specialized on credits to handicrafts and small traders), the Maritime Bank (Denizcilik Ban]casi), the Sumerbank (specialized in financing mining activities of the public sector), the Housing Bank (T. Emlak Kredi Bankasi) and the Provincial Bank (Iller Bankasi, specialized in financing local administrations). In June 1981 there was 29 private deposit money banks, of which 4 were foreign, but more foreign banks have beep Astablished since then. More than 80 percent of the business transacted by pcivate deposit money banks is concentrated in the six largest banks. All the others, including the foreign banks, are comparatively small. Several of them are local banks with only 1 or 2 offices. Investment and Development Banks 3.33 Investment and development banks include two public institutions--the State Investment Bank and the Tourism Bank-and three private banks, of' which the Turkish Industrial Development Bank (TSKB) is the largest. The State Investment Bank receives most of its resources from bond sales to the Social Security System and concentrates its activity in financing the investments of. state economic enterprises. The Tourism Bank is very small. The private development banks get most of their resources from foreign loans (provided by the World Bank, the European Investment Bank and other official financial institutions) and use these resources essentially to provide medium and long term loans to private enterprises. Table 3.7; THE TURKISH BANKING SYSTEM (end of the year figures) 1975 1980 June 1981 Number Total Assets /1 Number Total Assets /1 Number Total Assets /1 of Billion Percentage of Billion Percentage of Billion Percentage Banks TL of Total Banks TL of Total Banks TL of Total Central Bank 1 122.4 29.2 1 1,387.6 43.7 1 1,627.2 40.5 Deposit Money Banks 38 242.0 57.7 38 1,588.2 50.0 40 2,173.2 54.1 Public 10 125.9 30.0 10 790.5 24.9 11 1,034.7 25.8 Private 28 116.1 27.7 28 803.0 25.1 29 1,138.5 28.3 National 23 107.6 25.6 24 756.2 23.8 33 1,060.8 26.4 Foreign 5 8.5 2.0 4 46.8 1.5 6 77.7 1.9 Investment and Development Banks 4 55.2 13.1 5 200.1 6.3 5 215.9 5.4 Public 2 48.8 11.6 2 146.8 4.6 2 145.7 3.6 Private 2 6.4 1.5 3 53.3 1.7 3 70.2 1.7 TOTAL 43 419.6 100.0 44 3,175.9 100.0 46 4,016.3 100.0 /1 Consolidated for inter-deposit money bank transactions and for inter-investment and development bank transactions. Source: Central Bank of Turkey. - 135 - Main Problems of the Turkish Banking System 3.34 The main problems of the Turkish banking system have been: (a) insufficiency of competition; (b) narrow specialization of some of the most important public banks; and (c) high costs of intermediation of the banks. The insufficiency of competition was until July 1980 mainly the result of the legal regulation of interest rates. The situation has however improved since then and particularly since the cartel agreement for fixing deposit interest rates broke down in the beginning of 1981. 3.35 The specialization of most of the public deposit money banks and of development and investment banks has created fragmented markets, thereby hindering competition. In addition, it has negatively affected the efficiency of the allocation of financial resources. 3.36 The high cost of the intermediation of the banks has adversely affected savings and investment and given rise to distortions. It has been due a large part to the taxation of interests from deposits and bank loans and the high liquidity and reserve requirements imposed on the banks. Another important factor has been the contribution of high operating expenses and profits of the banks. 2. The Cost of Intermediation of the Banking System The Spread Between Average Deposit and Lending Interest Rates 3.37 On the basis of the structure of deposits and of their respective interest rates in September 1981, the average yields for depositors, after the payment of the withholding tax, was of about 19 percent. In turn, although costs are low for export credits and other types of subsidized credits, on non-preferential credits they usually exceed 50 percent and may approach 70 percent, depending on the proportion of the loan proceeds which is kept as non-interest bearing compensating deposits required by the banks. 1/ This large spread adversely affects savings and investments and raises the financial costs of the firm. 3.38 Several factors contribute to the large spread between the net returns to depositors and the gross costs to the borrowers: (a) the withholding tax of 25 percent on the interest from deposits; (b) the liquidity and the reserve requirements imposed on deposits and the low interest rates earned by banks on the funds allocated tco these reserves; (c) the contributions to the Differential Intere -. Rate Rebate Fund which apply to most bank credits; (d) the financial transaction tax levied on practically all the revenue earning operations of the banks; and (e) the high margin for operating costs of the banks. The taxation of interest from deposits was considered in paras. 3.28-3.29; the remaining factors will be taken up in turn. 1/ Table 3.19 shows the cost of a one-year non-preferential loan to be 49 percent; the holding of a 30 percent compensating balance would raise this cost to 70 percent. - 136 - The Cost Effects of Liquidity and Reserve Requirements 3.39 The effects of the liquidity and the reserve requirements, calculated on the assumption that the banks fully comply with these requirements, on the cost of the funds from deposits available for non-preferential lending by large banks are shown in Table 3.8. 1/ The table further shows that, in late 1981, the cost of funds available for lending was -15 percent on commercial and public deposits, -5 percent on saving sight deposits, 67 percent on three months time deposits, and 76 percent on six month and one year time deposits. This compares with interest rates of 36 percent on short-term loans. 3.40 It can be concluded that the marginal cost to the banks of the funds obtained through time deposits much exceeds the marginal revenue from non-preferential credits. This means that the banks are not maximizing profits when they accept time deposits under present conditions. If they continue to compete for these deposits, this is because they give higher priority to the enlargement or maintenance of their market share than to short-run profit maximization. While they can afford this policy because, with the low interest rate for sight deposits, their average costs are still below the average returns, it is clearly unsustainable in the long run. This is the case, in particular, since in the first nine months of 1981 practically the entire increase on deposits with the banks consisted of time deposits and certificates of deposits. The continuation of this tendency would have adverse consequences by (a) increasing the cost of credit to borrowers; (b) creating pressures to reduce the interest rates paid on time deposits; and (c) increasing the risk of bankruptcy for the weaker banks, with damaging effects for the stability and the extent of competition within the Turkish financial system. 1/ The calculations of Table 3.8 can be explained by considering for instance the case of a six month time deposit of 1,000 TL. The annual interest as such a deposit would be 500 TL. After the deduction of the liquidity and the reserve requirements, large banks can use only 550 TL of such a deposit for general credits. It can be roughly assumed that on average the liquidity requirement consists half of cash and free deposits in the Central Bank (for which no interest is paid) and half of Treasury bills with an average yield of 28 percent free of taxes. The earnings on the liquidity requirement correspondling to a deposit of 1,000 TL are therefore approximately 150 x 0.5 x 0.28 = 21 TL. The required reserves receive an interest of 26 percent from the Central Bank, which after the payment of a levy of 2 percentage points to the Differential Interest Rate Rebate Fund and of the transactions tax of 15 percent on the interest earnings of the bank corresponds to a net yield of 20.4 percent. The reserve of 300 TL required on a one year deposit of 1,000 TL provides thus a revenue to the bank of 300 x 0.204 = 61 TL. Af-ter deduction of the interest earned on the liquidity and reserve requirements, the net cost of the 550 TL available for general credits, out of a one year time deposit, is therefore 500 - 21 - 61 = 418, which corresponds to a rate of 76 percent. (The calculation takes the case when banks fully conform to their reserve requirements.) - 137 - Table 3.8: COSTS OF FUNDS FROM DEPOSITS WHICH MAY BE USED FOR NON-PREFERENTIAL CREDITS Over Commercial Saving Three Month Six Month and Public Sight Time Time Unit Deposits Deposits Deposits Deposits 1. Amount of deposit (TL) 1,000 1,000 1,000 1,000 2. Liquidity requirement /1 (TL) 150 150 150 150 3. Reserve requirement (TL) 350 350 300 300 4. Available for lending (l)-(2)-(3) (TL) 500 500 550 550 5. Interest rate paid by the bank (%) 0 5 45 50 6. Average net yield on the liquidity requirement /2- (%) 14 14 14 14 7. Net yield on the reserve require- ment /3 (%) 15.3 15.3 20.4 20.4 8. Interest cost (l)x(5) (TL) 0 .50 450 500 9. Earnings on the liquidity require- ment (2)x(6) (TL) 21 21 21 21 10. Earnings on the reserve require- ment (3)x(7) (TL) 54 54 61 61 11. Total cost of funds available for lend- ing (8)-(9)-(10) (TL) -75 -25 368 418 12. Rate of total cost of funds available for lending (11);(4) (%) -15 -5 67 76 /1 Liquidity requirement for large banks. 77 Average net yield of the liquidity requirement on the assumption that half of that requirement consists of currency and non-interest bearing deposits at the Central Bank and half consists of Treasury bills with an interest rate of 28 percent, free of tax. /3 Net earnings on reserve requirements: Commercial, Public and Time Sight Savings Deposits Deposits 1. Interest rates on reserve requirements 20% 26% 2. Levy to the Differential Interest Rate Rebate Fund 2% 2% 3. (1)-(2) 18% 24% 4. Transactions tax: 15% of (3) 2.7% 3.6% 5. Net yield: (3)-(4) 15.3% 20.4% - 138 - 3.41 The situation may be improved by reducing the burden imposed on the cost of credit by the liquidity and the reserve requirements. One way of achieving this objective is to reduce the ratio of required reserves. But this alternative would increase the money multiplier, making it more difficult to conduct monetary policy in a non-inflationary way. A more appropriate procedure would be for the Central Bank to pay higher interest rates on reserves against time deposits. These rates should in principle be equal to the rates paid by the commercial banks to their depositors. 3.42 In turn, one may eliminate interest on reserves against sight commercial deposits and sight savings deposits, which at present have a net yield of 15.3 percent and provide a profit to the banks if we disregard the operational and administrative costs of collecting and processing these deposits. The elimination of the interest rates paid by the Central Bank on reserves against sight deposits, together with increases of the interest rates on reserves against time deposits, would correct the distortions, which at present strongly affects the comparative profitability of the two types of deposits. Contributions to the Differential Interest Rate Rebate Fund 3.43 Under existing regulations, deposit money banks have to make the following contributions to the Differential Interest Rate Rebate Fund; (a) interest earnings on short term export credits and on long term priority credits over 5 years are subject to a levy of 10 percent of those earnings; (b) interest earniT)gs on all other types of bank credits are subject to a levy of 15 percent; (c) interest received from the Central Bank on required reserves is subject to a levy of 2 percent; and (d) the Central Bank must transfer to the Fund 10 percent of its earnings from credits to SEEs. 3.44 The resources of the Fund are used to grant subsidies to borrowers and to banks for several types of preferential credits, including short term credits to exports, credits to agriculture, some medium term credits housing credits, credits to small traders and artisans and commercial banks' credits to SEEs. Thus far, the revenues of the Fund have exceeded its expenditures and a substantial balance of unused resources has accumulated. A reduction of the levy on interest earnings derived from non-priority credits has come into effect on January 1, 1982. Further reductions may be contemplated in the course of a reconsideration of the mechanisms of credit subsidization that is taken up in Section C below. The Financial Transactions Tax 3.45 The financial transactions tax is levied on interest earnings received by the banks. Export credits and some other specific financial operations are however exempt from the tax. Although the rate of the tax has been recently reduced from 25 to 15 percent, its impact on the cost of credit continues to be important. Since the tax is levied on nominal interest earnings and not on real values, its negative effects on investment and on savings tend to be particularly strong in situations of rapid inflation. An example will help to clarify the distortive effects of that tax. If the - 139 - inflation rate was 20 percent and the nominal rate inclusive of the transactions tax was 32 percent, the borrower would pay 6 percent as net real interest rate and 4.8 percent of the loan as tax. If the inflation rates was 40 percent, in order to achieve an after tax real interest rate of 6 percent, the nominal interest rate would have to be 56.9 percent and the tax would correspond to 8.5 percent of the loan. In the first case the tax would increase the real interest cost by 80 percent; in the second case, it would increase the cost by 140 percent. While the financial transactions tax is an important source of fiscal receipts, equalling about 4 percent of total tax revenue, its detrimental effects on rates and on borrowing recommend its elimination. Operating Costs 3.46 The legal regulations of interest rates that were in force until 1980 gave the banks the possibility of maintaining high costs of operation. Under these regulations, interest rates on deposits were strongly negative in real terms and the margin between deposit and lending interest rates was very large. Since interest rate competition was not possible and since the business of attracting deposits was highly profitable, banks resorted to non-price competition in the form of heavy advertising, the building of luxurious instalations, and the opening of many branches, resulting in overstaffing. As a result, operating costs become very high. A rough way of assessing such costs is to express them in percentage of the total volume of business as measured by total assets, as it is done in Table 3.9. 3.47 Comparable ratios for selected OECD countries are presented in Table 3.10. The comparison between the two tables shows that the costs of banking operations in Turkey were abnormally high in 1977 and have been rising in subsequent years. The best way to achieve the gradual reduction of these costs is to stimulate competition among banks and between banks and other financial institutions. The Stimulation of Competition in the Banking System 3.48 There is need to ensure active competition in financial markets, so as to minimize the risk that, under the present conditions of credit scarcity, the proposed reduction of the withholding tax on interest from deposits, the payment of higher interest rates on required reserves against time deposits, and the elimination of the transactions tax on interest from banking loans would raise profits for the banks. Under competition, the banks and other financial institutions are forced to pay attention to the efficiency of their operations and to the reduction of their costs while keeping their profits at moderate levels. In turn, the benefits of the reduction of the costs of intermediation are transmitted to savers and to borrowers, with consequent increases in savings and investment and gains in economic efficiency. - 140 - Table 3.9: OPERATING COSTS AND PROFITS OF DEPOSIT MONEY BANKS (Billions of TL and percentages) Unit 1977 1978 1979 1980 1. Personnel Expenses TL 14.8 24.2 40.4 72.5 billion 2. Other expenses " 10.6 14.6 19.5 39.5 3. Total operating costs 25.4 38.8 59.9 112.0 4. Profits 3.4 4.0 3.9 20.3 5. Total costs plus profits 28.8 42.8 63.8 132.3 6. Volume of business / t 383.7 525.4 749.3 1,213.4 Ratios; 7. Operating costs to volume of business % 6.6 7.4 8.0 9.2 8. Operating costs plus profits to volume of business % 7.5 8.1 8.5 10.9 9. Personnel expenses to total operating costs % 58.3 62.4 67.4 64.7 /1 Geometric average of total assets (without interbank deposits) at the beginning and the end of the year. Source: Central Bank of Turkey - 141 - Table 3.10: OPERATING COSTS OF COMMERCIAL BANKS IN SEVERAL OECD COUNTRIES (in percent) Ratio of operating Ratio of operating costs to the volume costs plus profits to Ratio of staff costs of business the volume of business to operating costs 1975 1977 1975 1977 1975 1977 Denmark 3.1 2.9 4.9 4.4 72.2 68.7 France 2.4 2.2 3.4 3.1 65.2 65.8 Netherlands 2.8 2.4 3.9 3.5 66.0 64.8. Norway 3.7 3.5 4.9 4.7 59.2 59.2 Switzerland 2.5 2.4 4.5 4.3 67.4 66.7 USA 2.2 2.5 3.4 3.8 53.5 52.9 Greece /1 2.4 2.5 3.1 3.7 81.3 83.6 Spain 3.0 3.6 3.1 3.7 77.0 78.1 /- 4 largest banks. Source: J. S. Rewell - "Interest Rate Margins and the Costs of Intermediation", OECD, Paris, 1980. 3.49 Since 1980 substantial progress has been made in introducing more active competition on the Turkish banking system. For one thing, the legal regulations of interest rates were eliminated in Jure 1980, except as regards sight deposits. For another thing, the cartel of banks became progressively less operative as competition from small banks and from bond dealers increased. 3.50 It is too early to judge if, after these changes, competition became sufficiently strong to induce substantial improvements in the operating efficiency of the banks. The authorities should therefore maintain the competitive situation of the banking sector under close scrutiny anid should be prepared to take appropriate measures in the event that the reduction of the charges on the banks does not lead to commensurate changes in interest rates. These measures may include: a. Forbidding the banks from the public sector to participate in cartel type agreements. However, in order that they contribute significantly to competition, the average efficiency of public sector banks should not be lower than that of private banks at present--a condition which does not appear to be satisfied at present; and - 142 - b. Introducing legislation against restrictive business practices by the banks if cartel type agreements or other actions that would distort or hinder the action of the mechanisms of competition were to emerge again; In any case, it would be desirable a. to accept applications for the establishment of new domestic banks and of subsidiaries of foreign banks, provided that appropriate conditions are met; b. to allow the diversification of specialized banks. This would have scveral advantages; it would expose the specialized banks to more competition from other banks, both in attracting deposits and in granting credits, and would therefore stimulate them to reduce their operating costs; it would improve the efficiency in the allocation of resources, which at present' is hindered by the artifical segmentation of the market; it would strengthen the financial stability of the specialized banks, since it would allow them to spread their risks over a larger range of operations and of economic sectors; anid it would create conditions for the exploitation of economies of scale in the banks' operations. (Permitting the diversification of specialized banks, which are mostly in the public sector, is compatible with the establishment of specialized banks in the private sector, such as merchant banks and wholesalers. Such banks can play a useful role in a diversifying economy and they should be given exceptions from the minimum capital requirements of TL 4 billion, established by the Ministry of Finance); and c. to develop capital markets, along the lines which are analysed in the following. 3. The Development of the Capital Market The Regulation of Capital Markets 3.51 The capital market in Turkey is very small. The stock exchange does almost no business at present; bonds and stocks traded are placed generally through securities dealers. 3.52 A new law on the capital market was passed in July 1981. The main objective of the law is to provide greater security to savers who buy shares and bonds and to encourage them to participate in the equity of companies or to contribute to their long term financing by subscribing bonds. In order to attain this objective, the new law has established the conditions for a more effective organization and control of the issue and trade of financial assets. The relevant provisions include; the creation of a Council for the Control and Regulation of Capital Markets, which will set the requirements for and approve all public issues of private bonds and stocks; the regulation of the activites of the intermediaries; and the establishment of rules for the creation of investment corporations and investment funds. - 143 - 3.53. It will further be necessary to enforce precise accounting standards and to regulate the activites of auditors, with the purpose of ensuring their adequate professional qualifications and of defining their responsibility for improperly audited financial statements. There is also need to provide for the protection of shareholder minorities in companies with publicly issued shares. Finally, it will be essential to develop and to regulate the stock exchanges for trading shares and bonds. The Market for Shares 3.54 The issues of shares amounted to TL 372 million in 1978, TL 312 million in 1.979 and TL 1,173 million in 1980. Most of the larger companies are closely held by family groups and the supply of shares which can be traded in the market is very limited. The improvements which will result from the capital markets law can however contribute to the dynamization of the market for shares. This is highly desirable, given the need to increase the equity of business firms and to offer a greater variety of financial instruments to savers. Whatever improvements are made, however, it is not likely that the proportion of total private savings channelled to productive enterprises through the share markets will be very substantial in the next few years. This conclusion follows because of the difficulties concerning the correct reporting of the financial situation and profitability of enterprises with publicly issued shares and because the lack of sufficient diversification of supply and demand in the market for equity raises the danger of speculative manipulations by a few buyers or sellers. For these reasons, it is probable that in the near future the most promising perspectives in the securities markets lie in bond issues and in bond trading. The Bond Market 3.55 The bond market comprises both bonds and bills issued by the Treasury and bonds issued by the State Investment Bank and by private enterprises. Despite rapid increases in recent years (Table 3.11) bringing the total amount of outstanding issues at the end of 1980 to about TL 30 billion, the market for private bonds is very small compared with total deposits in the banking system of TL 742 billion. In turn, most of the Treasury bonds and bills are absorbed by deposit money banks to satisfy liquidity requirements. Similarly, the bonds issued by the State Investment Bank have been placed almost exclusively with the Social Security Institutions on conditions which would not be attractive to private institutions. 3.56 In addition to the regular bond market, operating on the basis of organized bond dealers, there is also an unorganized money market which is not covered by the statistics of Table 3.11. This market, in which interest rates of more than 100 percent are paid to savers and more than 120 percent and even 150 percent are required from borrowers, is very risky. It is expected that the new law of capital markets will induce the intermediaries of unorganized money markets to become organized and to comply with the rules which are indispensable to avoid many of the high risks to which the market are subject. - 144- Table 3.11: BONDS ISSUED (Billion TL) Public Sector State Invest- T.E.K. Private Treasury illent Bank Bank Total Sector Total 1977 29 s5 20.2 0.4 40.1 1.4 41e5 1978 20.0 15.0 0.5 35.5 2.0 37.5 1979 35.4 7.6 0.4 43.3 4.8 48.1 1980 80.0 8.1 0.8 88.9 17.1 106.0 1981 (Jan.-Oct.) 115.0 - - 115.0 13.0 128.0 Source: Central Bank of Turkey Treasury Bonds and Bills 3.57 The securities issued by the Treasury comprise government bonds and Treasury bills. Government bonds were issued in recent years with an interest rate of 20 percent. They had long term maturities but offered the possibility of being cashed by the Central Bank on demand, including all the interest acrrued orn a daily basis. The amounts of these bonds held by households and other voluntqry purchasers is small. Many of them have been redeemed after the interest rates on time deposits became more attractive. 3.58 The issue of short term Treasury bills started in 1980. They have maturities of 3 and 6 months and generally have an interest rate of 28 percent, net of taxes. The introduction of these bills led to competition with time deposits at commercial banks. Following increases in interest rates on time deposits and on certificates of deposits, however, the Treasury bills are not sufficiently attractive to savers. Correspondingly, only about 10 billion TL of 6-months Treasury bills have been sold to the public and deposit money banks have taken up three-fourth of the outstanding issues to comply with their liquidity requirements. 3.59 In order to expand substantially the amounts of government securities sold on a voluntary basis to households and to other private savers, as suggested below, interest rates must became more attractive. Since one year deposits predominate among time deposits, rates on these deposits may be taken as the benchmark in setting the interest rates on Treasury bonds and bills. At the same time, the sale of goverrnment securities should be more aggressive and it should be made not only through the Central Bank and deposit money banks but also through bond dealers. - 145 - 3.60 An important limitation of Treasury bonds and bills as an instrument of financing budget deficits is that they may be cashed at any moment. This is an inevitable consequence of the fact that there is no secondary market for securities in Turkey. The appropriate way to ensure the liquidity of bonds is to create a secondary market for them rather than to offer guarantees of automatic redemption by the Central Bank at any time. The Issue of Bonds by Public Enterprises 3.61 Among public enterprises, only the State Investment Bank and to a much smaller extend the T.E.K. Bank (housing bank) have issued bonds in recent years. The bonds issued by the State Investment Bank have been placed exclusively in Social Security Institutions. Their interest rate in recent years has been 20 percent and their maturities have been of 20 years. The possibilities of subscription of State Investment Bank bonds by the Social Security Institutions have declined in recent years with the rapid reduction of the financial surpluses of these institutions. The State Investment Bank may therefore find it useful to find alternative sources of finance in the form of bond issues that may be subscribed by the public. Such funds should be offered with an interest rate much above the level of 20 percent which Social Security Institutions have been forced to accept. This would imply that interest ratea on credits of the State Investment Bank to SEEs could not be as heavily subsidized as they have been up to. now. 3.62 At the same time, the SEEs should be encouraged to issue their own bonds at competitive rates of interest. NeVertheless, given the poor financial situation of many of the SEEs, it is likely that in some cases there would be no demand for their bonds unless they would be guaranteed by the State Investment Bank or, in exceptional cases, by the Treasury. It may be preferable to assist SEEs by means of such guarantees rather than by interest rate subsidies and by Treasury grants and loans, which bring heavier burdens to the budget. Interest Rates on Private Bonds 3.63 Until July 1, 1981 the issue of private bonds was constrained by legal ceilings imposed on interest rates. The ceilings of 28 percent on bonds with a maturity up to 3 years and of 32 percent on bonds over 5 years were maintained without any change since July 1980, despite the substantial increases in interest rates on time deposits which took place since then. If those ceilings had been strictly observed, the bond market would have been completely paralyzed. But the legal regulations were circumvented by the practice of selling bonds at discounted prices, so that the effective interest rates on private bonds were in fact determined by the market. 3.64 Given this situation, the elimination of ceilings or bond interest rates was much overdue. Such elimination, undertaken in July 1981, was accompanied by the introduction of a system of indexation of interest rates, which is described in paras. 3.71-3.77. - 146 - Maturities of Private Bonds 3.65 Bonds issued by private companies usually have maturities of 3 or 5 years. The issuing companies are however committed to redeem 3 or 5 years bonds which are presented to them after one or two years, respectively, following the date of issue. In these conditions, in effect the maturity of all private bonds is variable and borrowers have only the guarantee of a minimum maturity of 1 or 2 years. During the initial period of 1 or 2 years, bonds can also be cashed at bond dealers although with some penalties for the holders. 3.66 The present system has important shortcomings; it implies that the guaranteed maturity of debts incurred through the issue of bonds is extremely short; it may give rise to sudden problems of liquidity for the debtor companies or for bond dealers, particularly if there are substantial changes in interest rates; and it involves limitations and costs as regards the possibilities of bond holders of converting them into cash in the short run. As noted in regard to Treasury bonds, the best solution to ensure liquidity for bonds is to establish a secondary market. Conditions of Competition between Bond Dealers and Banks 3.67 The practice of price discounts on issues of private bonds has made it possible for bond dealers to pay more attractive interest rates than those of time deposits in banks and at the same time to earn good profits. Thus, for instance, bond dealers were offering in the first semester of 1981 interest rates of 53 percent on six month funds and 60 percent on one year funds, as compared with 42 percent and 50 percent for six months and for one year time deposits, respectively. The interest rates offered to savers by bond dealers may have influenced the decisions of the banks to increase substantially interest rates on time deposits at the beginning of 1981. 3.68 Banks however complain that bond dealers have benefitted from unfair conditions of competition, because they do not have to bear the costs of reserve requirements and because in the past they have not been subject to the financial transactions tax. The complaint concerning the costs of reserve requirements is undoubtedly valid, as can be concluded from the results presented in Table 3.8, and provides an additional justification for the payment of adequate interest rates on the reserves required against time deposits that would eliminate this distortion. In turn, the distortions resulting from the financial transactions tax have been eliminated by recent legislation which has extended the incidence of this tax to the interests received by bond dealers. There are however legal disputes in this area and bond dealers continue to claim that the transactions tax does not apply to their operations. The best solution would be to eliminate the financial transactions tax alto6ether as proposed in para. 3.45. 147 - Secondary Market for Bonds 3.69 As noted above, the creation of a secondary market for bonds would be essential to provide them with a satisfactory degree of liquidity without having recourse to the existing system of early redemption. The establishment of this market would encourage the introduction of medium and long-term bonds; it would make it comparatively easy for savers to transform their bond holdings into cash at any moment; it would reduce the costs that savers have to bear in the purchase or sales of bonds; and it would enlarge their choice among different financial instrument. 3.70 With specified exceptions, all trading of publicly issued bonds and shares should occur exclusively on the Stock Exchange. This would permit focusing all trading in one place, thereby increasing liquidity and depth in the market and permitting all buying and selling interests to interact. Investors would thus be assured of obtaining the best prices and execution for their orders. Indexation of Interest Rate 3.71 Since there are great uncertainties as regards future inflation rates in Turkey, it would be practically impossible to issue bonds with effective medium or long term maturities if interest rates were fixed. Given the close correspondence that must be maintained between inflation rates and interest rates, the issue of bonds with maturities of several years and fixed interest rates would involve high risks for the borrowers and for the savers. In a secondary market the prices of medium and long term bonds with fixed interest rates would fluctuate widely, each time there would be changes in the interest rates prevailing in the market. 3.72 The problem has been dealt with by the recent introduction of a system of indexed interest rates. Under this system, the interest rate at the time of the issue of the bonds (il) is determined freely while in subsequent years it varies with the rate of inflation so as to maintain the real interest rate constant. The interest rate in for the n-th year after the issue of the bonds is given by the formula ~l+' 1 + Pn-1 I + in = (I1 + il1) () 1 + PO where PO and Pn-l are the inflation rates of years 0 (the 12 months preceding the date of issue of bonds) and year n-l. The "real interest rate" rn in year n, defined on the basis of the inflation rate of the preceding year, is given by I + in I + i _ 1 + r = - 1 + r n 1 + pn- 1 + PO 3.73 The formula has however some dangers in situations of declining inflation. Since indexation is based on past rather than on expected inflation, when inflation is declining substantially the real cost of interest payments measured on the basis of past inflation rates may increase very sharply. This, in turn, may have feed-back effects on inflation, thus making it more difficult to reduce it further in subsequent periods. - 148 - 3.74 The ideal solution would be to use expected inflation rates rather than past inflation rates in the indexation formula. But expected inflation rates can never be predicted accurately and savers or borrowers would lose confidence in the system if the forecasting errors were considerable. One possible solution would be to announce interest rates at the beginning of each period on the basis of the expected inflation rate and to adjust at the end of the period the interest payment by adding or deducting an amount corresponding to the difference between the expected inflation rate used in the indexation formula and the inflation rate actually recorded. 3.75 Thus, if the expected inflation rate at the beginning of year n was Pn' the provisional interest rate announced for that year would be 1 + P 1 + in = (+ il) (I + p) At the end of year n an interest supplement would be paid or deducted on the basis of a rate given by dn = P (Pn ( pnn 3.76 At the same time, the indexation of the principal would be preferable to the indexation of the interest rates. Following the setting of interest rates by the issuer, the indexation of the principal would take place at the end of each year on the basis of the inflation of the preceding 12 months. The indexation of the principal would have the advantage of avoiding the problems of liquidity borrowers have to face when they are required to pay high nominal interest rates and would avoid the shortening of the effective maturity of the loans that occurs under indexed interest rates. 3.77 The indexation of interest rates may however have practical advantages. In particular, it is less likely to engender the extension of indexation to wages and prices, which would increase resistance against future reductions of inflation. C. The Utilization of Financial Resources 1. Allocation of the Domestic Financial Assets of the Banking Sector 3.78 Changes in the financial claims of the banking system (comprising the Central Bank, deposit money banks and investment and development banks) on public administrations, public enterprises, private enterprises and households are shown in Table 3.12. The increase in the ratio of these assets to GNP until 1977 and its subsequent decline reflect the expansionary monetary policy followed in the first period and the tightening of monetary policy in the following three years. It further appears that the financing requirements of the public sector, comprising the public administration and the public enterprises, were the main driving force behind the expansion of credit and other domestic financial assets of the banking system up to 1977 and that the restrictive monetary policy of subsequent years affected the public sectors much less than the private sector. (It should be remarked in this context that it is more meaningful to take the total claims on public administrations and on public enterprises together than each of them separately because of the transfers which take place from the Treasury to SEEs). 149 - Table 3.12; DISTRIBUTION OF THE TOTAL DOMESTIC FINANCIAL ASSETS OF THE BA.NKING SECTOR (year end) June 1975 1976 1977 1978 1979 1980 1981 Percentages of the total financial assets of the banking sector Claims on Public Administrations 19.7 18.3 22.5 26.6 28.7 35.9 35.0 Claims on Public Enterprises 28.1 32.9 33.0 31.1 31.1 24.9 23.2 Claims on Private Enterprises and Households 52.1 48.7 44.4 42.3 40.1 39.2 41.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Percentages in relation to GNP Claims on Public Administrations 9.0 9.5 12.5 13.4 13.1 14.0 n.a. Claims on Public Enterprises 12.8 17.1 18.5 15.7 14.2 9.7 n.a. Claims on Private Enterprises and Households 23.7 25.3 24.8 21.4 18.3 15.2 n.a. Total 45.5 51.9 55.7 50.5 45.7 38.9 n.a. Definitions: (a) the public administrations comprise the General Budget Administrations, some of the Annexed Budget Administrations, Local Administrations and some other Public Institutions; (b) public enterprises comprise state economic enterprises, some of the Annexed Budget Administrations, including in particular the State Monopolies, and other enterprises controlled either by the central government or the local authorities; (c) private enterprises and households comprise incorporated and unincorporated private business firms and households. Source: Central Bank of Turkey - 150 - 3.79 Thus, the rates of domestic financial resources utilized in the public sector in relation to GNP increased from 21.8 percentage in 1975 to 31.0 percent in 1977, while that for the private sector increased only from 23.7 percent to 24.8 percent. Under the impact of the tightening of monetary policy in the subsequent three years, the ratio declined by 7.3 percentage points in the public sector and 9.6 percentage points in the private sector between 1977 and 1980. Correspondingly, the combined shares of public administration and of public enterprises in the total financial claims of the banking sector rose from 47.9 percent in 1975 to 55.5 percent in 1977 and again to 60.8 percent in 1980. The data point to the existence of a "crowding out" of financing to the private sector by the borrowing requirements of the public administration and the public enterprises. Such "crowding out" has had a negative influence on private investments, adversely affecting the prospects for the future growth of the economy. This conclusion follows despite a small improvement in the first half of 1981, when the combined shares of public administration and public enterprises declined to 58.2 percent of the total assets of the banks. 3.80 In the following, the problems involved in financing public administrations and public enterprises will be examined. Subsequently, issues relating to selective credit policies will be taken up, with special attention given to medium term credits, agricultural credits and export credits. 2. The Financing of Public Administrations The Sources of Finance for the Consolidated Budget Deficit 3.81 The financing of public administrations can be analysed on the basis of two different sources of data: the statistics compiled by the Central Bank (Table 3.13) and the budgetary accounts organized by the Ministry of Finance (Table 3.14). It would be difficult to establish a correspondence between these two sources. For one thing, there are problems created by the lack of coincidence between the budgetary year, which runs from March 1 to the end of February, and the calendar year, on which the Central Bank statistics are based. For another thing, the coverage of the two sources is different. For instance, the consolidated budget includes the State Monopolies under the heading "Annexed budgets.", while in the Central Bank statistics these are classified as public enterprises; in turn, the Central Bank statistics include local authorities, which are not covered by the consolidated budget. 3.82 In spite of these discrepancies, the two sources of information usefully complement each other. The consolidated budget represents the dominant part of the borrowing needs of public administrations, which have been covered mainly by Central Bank credits to the Treasury. The purchase of government bonds and of Treasury bills by deposit money banks has been another source of finance, although less important than Central Bank credits. The contributions of foreign credits and of bonds placed outside the banking system have been negligible. - 151 - Table 3.13: THE FINANCING OF PUBLIC ADMINISTRATIONS BY THE BANKING SYSTEM Amounts outstanding in billions of TL; year end figures Jtune 1977 1978 1979 1980 1981 Central Bank 83.5 139.4 249.2 563.6 674.2 Credits 45.2 56.6 91.7 188.7 234.6 Bonds 0.1 0.1 1.0 1.0 0.1 Other 38.3 82.8 156.5 373.9 439.5 Deposit Money Banks 23.7 32.3 41.6 62.9 79.8 Credits 7.5 9.7 10.9 10.3 14.4 Bonds 16.2 22.6 30.6 52.6 65.4 Investment and Development Banks 1.8 1.5 1.7 1.8 2.9 Total 109.0 173.3 292.5 628.3 756.9 Source: Central Bank of Turkey 3.83 Aside from credits, the Central Bank has accumulated large amounts of other claims over the public administrations, as shown in Table 3.13. These claims represent essentially the responsibility of the Treasury for the foreign exchange losses on Central Bank liabilities expressed in foreign currency and for the exchange rate guarantees provided to convertible Turkish lira deposits shown in Table 3.2. Such losses have not been recorded in the consolidated budget. 3.84 The credits provided by the Central Bank to the Treasury earn an interest rate of 0.75 percent. Until recently, reliance on such credits for financing the budget deficit has been a major factor of money creation. Efforts have been made since the beginning of 1980 to lessen reliance on this method of inflationary financing. Thus, ceilings on the expansion of Central Bank credits to the public sector have been imposed. - 152 - Table 3.14: CONSOLIDATED BUDGET (Billions of TL) 1977 1978 1979 1980 1981 /1 1981 /2 1982 Revenues 188 288 507 860 1,485 1,485 2,002 Expenditure 240 340 595 1,063 1,561 1,525 2,062 Personnel 75 116 190 335 444 n.a. n.a. Other current 23 40 70 162 331 n.a. n.a. Investment 50 64 95 167 338 n.a. n.a. Transfers 92 120 240 399 447 n.a. n.a. Budge'¢ deficit -52 -52 -88 -203 -76 -40 -60 Advance payments -5 -15 -1 -23 -20 -30 -16 Deferred payments 15 6 43 38 -42 -10 -40 Cash deficit -42 -61 -46 -187 -138 -80 -116 Financed by: Central Bank 31 36 35 109 108 85 50 Other domestic borrowing, net 13 14 34 60 62 60 65 Foreign resources -1 0 5 6 - -33 5 Changes in holdings of deposits and currency and others 0 -2 -11 -22 -33 -32 -4 Errors and ommissions -1 13 -17 34 - - /1 Original estimate. /2 Revised estimate. Source; Ministry of Finance of Turkey Financing the Public Deficit Outside the Central Bank 3985 The observance of the ceilings on the expansirin of Central Bank credit to the public sector requires the reduction of 'he consolidated budget deficit and/or the financing of a larger proportion of that deficit from sources outside the Central Bank. The results achieved until now with regard to each of these alternatives have been far from satisfactory. - 153 - 3.86 Despite a decline of about 10 percent of public expenditures in real terms, the cash deficit of the consolidated budget of public administrations reached 4 percent of GNP in the fiscal year 1980/81 as tax revenues decreased 15 percent in real terms. In turn, according to the projections made in December 1981, the deficit of the consolidated budget in fiscal year 1981/82 would be about 1.2 percent of GNP. 3.87 The Central Bank financed 58 percent of the cash deficit of the consolidated budget of public administrations in fiscal year 1980/81 at an interest rate of 0.75 percent. Central Bank financing would approximately equal the reduced deficit for fiscal year 1981/82 and it is projected to finance one-half of the total in 1982/83, representing a decrease by over one-half in absolute terms compared to 1980/81. At the same time, borrowing from outside the Central Bank, mostly in the form of Treasury bills acquired by deposit money banks in complying with their liquidity requirements, would remain approximately unchanged, 3.88 The decline in the deficit of public administrations, and in the financing of this deficit by Central Bank, represents a welcome change compared to earlier years. This is because the financing by the banking system, and particularly by the Central Bank, of large budgetary deficits hinders the conduct of monetary policy and reduces the availability of funds to the private sector. Thus, there is the risk that ceilings to credit expansion will not be maintained and that the excessive growth of money supply will jeopardize the objectives of fighting inflation and correcting the balance of payments deficit. If, alternatively, a strict control of credit expansion is maintained in spite of large borrowing requirements for the budget, there is the danger of "crowding out" of credit to the private sector. This "crowding out" will operate not only in a system which guarantees absolute priority to the satisfaction Qf the Treasury borrowing needs, but also in a system under which the Treasury would compete without special privileges for the limited credit resources available. In this last hypothesis, interest rates might rise so much that private investments with satisfactory rates of returns could not be financed, with a negative impact on the future growth of the economy. 3.89 In such conditions, the Turkish authorities need to continue to attach the highest priority to the reduction of the budget deficit. While improvements are projected as a result of the reduction of the inflationr rate, which in the last few years eroded fiscal revenues, there is further need for limiting public investment and economizing on public consumption expenditures. 3.90 Another requirement is that public authorities rely much less on credits provided by the Central Banik to finance the budgetary deficit. Since these credits have been granted at an interest rate of 0.75 percent at a time of very high inflation, they have been a powerful instrument used by the government to collect, through the Central Bank, the inflationary tax levied on banknote holdings and on bank deposits. Apart from the distortions created by the inflation tax, this procedure contributed to a rapid expansion of the monetary base. - 155 - 3. The Financing of Public Enterprises The Financing Needs of State Economic Enterprises 3.96 In the second half of the 1970's there was a rapid expansion of the financial needs of state economic enterprises to finance their losses, their investments in fixed capital and the increase in their working capital. As shown in Table 3.15, the total financing requirements of those enterprises rose from TL 47.7 billion in 1975 to 308.1 in 1979, which corresponds to an increase of 80 percent in real terms, using the wholesale price index as deflator, In 1979 these requirements amounted to 14 percent of GNP. This was a very high ratio if one takes into account that in 1979 the total consolidated financial assets of the banking system equalled only to about 50 percent of GNP and that the gross domestic savings rate was of- about 20 percent. 3.97 Following substantial increases in the prices of most of the state economic enterprises, their losses in real terms were reduced by more than half in 1980. However, the real value of their investment expenditures continued to increase. In 1980, as well as in'subsequent years, these expenditures have been subject to upward revisions. 3.98 in the absence of revised estimates for accounts receivable, it is not possible to indicate the total financial requirements of the state economic enterprises for 1980 and beyond. Excluding this item, financing needs increased from TL 230 billion in 1979 to TL 372 billion in 1980 and to TL 544 billion in 1981, with a projected decline to TL 492 billion inl 1982 that is however subject to revision. Also, the reported losses would have been much higher if adjustments were made for the effects of inflation and for indirect subsidies, such as subsidies on interest rates, on the operating results. Thus the figures for depreciation in Table 3.15 are based on historical costs which became obsolete after the inflation of recent years and, in most cases, bear no relation to present replacement costs (see also Chapter 6). 3.99 It can be concluded that it will be necessary to pursue the efforts made to improve the profitability of SEEs, with the aim that they finance an increasing proportion of their investments from internally generated resources. Given the constraints imposed by the objective of stabilizing the economy, it will also be necessary to scale down the investment program of SEEs, since otherwise there is the risk that these investments will crowd out more efficient investments of the private sector. - 155 - 3. The Financing of Public Enterprises The Financing Needs of State Economic Enterprises 3.96 In the second half of the 1970's there was a rapid expansion of the financial needs of state economic enterprises to finance their losses, their investments in fixed capital and the increase in their working capital. As shown in Table 3.15, the total financing requireimenits of those enterprises rose from TL 47.7 billion in 1975 to 308.1 in 1979, which corresponds to an increase of 80 percent in real terms, using the wholesale price index as deflator. Ir. 1979 these requirements amounted to 14 percent of GNP. This was a very high ratio if one takes into account that in 1979 the total consolidated financial assets of the banking system equalled only to about 50 percent of GNP and that the gross domestic savings rate was of about 20 percent. 3.97 Following substantial increases in the prices of most of the state economic enterprises, their losses in real terms were reduced by more than half in 1980. However, the real value of their investment expenditures continued to increase. In 1980, as well as in'subsequent years, these expenditures have been subject to upward revisions. 3.98 In the absence of revised estimates for accounts receivable, it is not possible to indicate the total financial requirements of the state economic enterprises for 1980 and beyond. Excluding this item, financing needs increased from TL 230 billion in 1979 to TL 372 billion in 1980 and to TL 544 billion in 1981, with a projected decline to TL 492 billion in 1982 that is however subject to revision. Also, the reported losses would have been much higher if adjustments were made for the effects of inflation and for indirect subsidies, such as subsidies on interest rates, on the operating results. Thus the figures for depreciation in Table 3.15 are based on historical costs which became obsolete after the inflation of recent years and, in most cases, bear no relation to present replacement costs (see also Chapter 6). 3.99 It can be concluded that it will be necessary to pursue the efforts made to improve the profitability of SEEs, with the aim that they finance an increasing proportion of their investments from internally generated resources. Given the constraints imposed by the objective of stabilizing the economy, it will also be necessary to scale down the investment program of SEEs, since otherwise there is the risk that these investments will crowd out more efficient investments of the private sector. Table 3.15: FINANCING OF STATE ECONOMIC ENTERPRISES (Billions of TL) 1975 1976 1977 1978 1979 1980 /1 1986 /2 1981 /1 1981 /2 1982 /1 1982 /2 (1) Investment in fixed capital and stocks 38.2 50.6 62.9 80.6 171.7 322.5 459.2 432.7 534.1 433.0 539.8 (2) Losses before taxes 4.4 16.9 36.2 52.0 75.5 61.1 23.1 4.5 6.6 38.0 -47.1 (3) Taxes 1.1 1.3 1.6 1.8 3.6 10.1 14.6 37.9 36.8 49.2 (4) Increases in accounts receivable 8.6 21.9 28.7 32.7 77.6 -18.1 (5) Total (1)+(2)+(3)+ (4) 52.3 90.7 129.4 167.1 324.4 375.6 (6) Minus depreciation -4.6 6.2 -12.1 -20.1 -16.3 -21.3 -23.2 -28.3 -33.9 -50.2 (7) Total outside resources needed 47.7 84.5 117.3 147.0 308.1 354.3 (8) Transfers and - subsidies 23.5 36.0 76.6 58.1 98.9 163.4 290.0 (8.1) Budgetary transfers 10.5 18.4 31.7 40.0 83.4 148.4) (8.2) Transfers - ) from the ) 149.4 248.5 238.2 239.0 242.6 petroleum ) fund 2.6 1.1 1.9 3.7 7.0 12.2) U (8.3) Subsidies and other items, net 10,4 16.5 43.0 14.4 8.5 2.8 51.0 (9) Borrowing 12.8 39.1 37.4 53.7 130.7 104.3 103.0 (9.1) From the Central Bank 5.9 21.5 23.2 19.0 54.1 51.6 49.8 40.0 22.2 40.0 20.0 (9.2) From the State Investment ) Bank ) 11.7 10.3 9.1 14.4 17.4 16.2 25.5 26.7 25.0 33.8 (9.3) From other ) 6.9 sources ) 5.9 3.9 25.6 62.2 35.3 38.0 (10) Changes in accounts payable 11.4 9.2 3.4 35.1 78.5 86.6 (11) Total resources provided (8)+(9)+(10) 47.7 84.3 117.3 147.0 308.1 354.3 /1 Original estimate 7T Revised estimate Source; Ministry of Finance - 157 - Sources of Finance for Public Enterprises 3.100 As shown in Table 3.15, a large proportion of the financial needs of the SEEs has oeen covered by transfers and subsidies from budgetary sources. These transfers and subsidies have been an important cause of the budgetary deficits of recent years, accounting for 15 percent of the total expenditures of the consolidated budget in 1979 and in 1980, with a share of 14 percent projected for 1981 and 1982. Part of the subsidies and transfers were designed to compensate certainl SEEs for the fact that they had to supply products and services at prices which did not cover their costs. Notwithstanding the general price .ncrease which occured in January 1980, this continues to be the case with the Soil Products Office and some other state enterprises which are involved in the purchase of agricultural products and in guaranteeing minimum support prices to producers. In other cases, subsidies and transfers are grant:ed to compensate for losses and to finance new investments. The analysis of the system of subsidies for manufacturing SEEs is presented in Chapter 6. The only point to be stressed here is that efforts are necessary to reduce the amounts of subsidies granted to SEEs since, without sufficient progress in this, it will be difficult to reduce the budgetary deficit to levels consistent with the objectives of reducing inflation, of increasing domestic savings and of improving the efficiency in the allocation of resources. In this connection, one may welcome the recent decision of the Treasury to limit budgetary transfer to the SEEs to TL 233 billion in fiscal 1982, even if this amount will not be sufficient to provide the funds to finance the investment program approved by the SPO. 3.101 The increase in the amounts of accounts payable has become ano,ther important source of finance for SEEs in recent years, as shown in Table 3.15. To some extent this increase reflects the rise in the nominal value of debts resulting from inflation. However, it is in part a consequence of the comparatively tight monetary policy of recent years that affected the financing of state enterprises. The resulting accumulation of arrears by the SEEs vis-a-vis their suppliers has transferred the financial burden to these suppliers and, since in most cases interest are not paid on arrears, provided the SEEs with subsidies born involuntarily by their suppliers. In these conditions, an-important objective should be to reduce the level of the debts of public enterprises to their suppliers. 3.102 Credits obtained directly from the Central Bank by means of Treasury guaranteed bills have also been an important source of finance for some public monopolies and state economic enterprises. This has been particularly the case of enterprises which intervene in the purchases of agricultural products, like the Tobacco Monopoly, the Soil Products Office, the Sugar Factories, the Tea Industry and the Fish and Meat Industries (Table 3.16). Since 1980 the Central Bank has also granted credits to SEEs purchasing electricity, coal and agricultural equipment. - 158 - Table 3.16: CLAIMS OF THE BANKING SECTOR ON PUBLIC ENTERPRISES Amounts outstanding at the end of the period Billions of TL June Nov. 1977 1978 1979 1980 1981 1981 Central. Bank 46.5 67.6 123.7 180.2 193.9 233.8 State monopolies 15.2 21.4 28.1 35.7 51.5 60.8 Soil Products Office 18.6 21.5 25e5 40.2 30.6 63.7 Sugar Factories 6.0 9.4 15.5 29.6 29.2 28.6 Tea Industry 3.3 5.6 11.1 12.9 12.8 12.8 Meat and Fish Industry 2.2 4.2 7.0 10.2 17.9 18.3 Others 1.2 5.5 36.5 51.6 51.9 49.6 Deposit money banks 36.2 40.4 78.0 136.7 174.4 Credits 30.1 33.7 65.1 117.4 158.1 Participations and others 6.1 6.7 12.9 19.3 16.3 Investment and development banks 77.8 94.9 114.5 118.7 133.6 Credits 74.9 90.8 109.3 117.4 132.8 Participations and others 2.8 4.1 5.2 1.2 0.8 Source: Central Bank of Turkey. 3.103 Al' the credits of the Central Bank to public enterprises have had short term maturities, in general 9 months, but in fact many of them have not been repaid on their maturities. Their interest rate in recent years has been only 10 percent. The shares of credits to public enterprises in the total credits and other financial claims of the Central Bank were 16.9 percent in 1978, 19.5 percent in 1979 and 16.5 percent in 1980. Those credits were therefore an important factor in the expansion of money supply and consequently an obstacle to the control of that supply. 3.104 The granting of subsidized credit to the SEEs by the Central Bank has been a method of providing these enterprises with privileged access to finance at very low interest rates. Credits to these enterprises by deposit money banks and by investment and development banks have also been subsidized. A high proportion of credits of deposit money banls to public enterprises consists of loans of the Sumerbank andl of the Etibank to their own affiliated - 159 - enterprises at preferential rates. Furthermore, SEEs receive from the Differential Interest Rate Rebate Fund an interest rate subsidy of 5 percentage points on their credits from private banks, and the banks which grant those credits receive from the same Fund subsidy of 1 percentage point. Finally, the credits of investment and development banks to SEEs consist essentially of loans for investment granted by the State Investment Bank, with maturities of 20 years and interest rates of 21.5 percent. Recommendation for abolishing the subsidization of interest rates to public enterprises are made in Chapter 6. 4. General Comments on Selective Credit Policies Selective Credit Policies in Turkey 3.105 The widespread use of selective credit policies is one of the most important features of the Turkish financial system. Selective credits are provided to agriculture, exports, state economic enterprises, housing, small artisans and traders, certain types of investment, regional development, local authorities, tourism, maritime navigation, etc. Credits are provided through a complex set of instruments, includings; (a) low interest rates on credits and rediscount by the Central bank; (b) levies and subsidies on interest rates paid to and received from the Differential Interest Rate Rebate Fund; (c) differential reserve requirements on bank deposits, related to the types of credits on which the funds from these deposits are used; (d) minimum ratios imposed on banks as regards the proportions of certain selective credits in their portfolios; and (e) channelling of financial resouces on particularly favorable terms through specialized institutions like the Agricultural Bank, the State Investment Bank, the Halk Bank, the Tourism Bank and others. Justifications for Selective Credit Policies 3.106 It can be argued that selective credit policies have been an inevitable consequence of the system of legal ceilings or lending rates which was maintained until June 1980. Since these ceilings constrained interest rates to levels lower than those which would prevail in a free market, a process of credit rationing became inevitable. Problems of credit rationing became much less important following increases of interest rates to more r..alistic levels, particularly since the beginning of 1981. At the same time, under the restrictive credit policy followed, certain types of credits (for instance to smaller clients) and certain types of loans (for instance longer term loans) may be affected more seriously than others, favoring the application of selective credit policies. 3.107 Another justification for selective credit policies has been that financial markets do not allocate credit according to their social productivity, because of the prevailing disparities between market and social costs and returns. It has thus been claimed that one of the basic aims of selective credit policies is to offset the consequences of such disparities. 3.108 However, more often than not, disparities between private and social costs and returns have been due to government *interferences with the price mechanism. In such cases, it will be preferable to eliminate price controls - 160 - themselves or to bring the controlled prices to more realisti- levels than to compensate the distortions which result from them by subsidizing interest rates. 3.109 The existence of externalities provides another frequent justification for selective credit policies. The problem is that in practice there are enormous difficulties to measure adequately external economies and diseconomies. The experience with economic planning in Turkey and in most industrializing countries illustrates such difficulties very clearly. Many of the investments included in the Development Plans which were supported by subsidized credits, by high protection, and by fiscal incentives, have produced very low social rates of return. Moreover, interest rate subsidies are not the most adequate instrument to compensate external economies. For one thing, their cost may be higher than that of other methods of support. For another thing, they tend to stimulate capital intensive industries and production processes. 3.110, Other arguments in favor of selective credit policies are based on the lack of correspondence between the maturity pattern of bank loans and social time preference, which is for instance reflected in the commercial banks' favoring short term credit over medium and long term loans. In the past t.is preference has been due in large part to the interest rate regulations and to the uncertainties regarding future inflationary trends. With the development of competition in the banking sector, interest rates will tend to reflect more closely the risks as perceived by the lenders and this should encourage the flow of financial resources to medium and long-term uses. Nevertheless, these flows may not be sufficient to provide for all legitimate needs for subsidies to medium and long term credits for investments. 3.111 Finally, the imperfections of the credit market in Turkey may provide a basis for certain types of subsidized credits. Banks and some of the largest borrcwing firms of the private sector belong to the same economic groups. Also, one finds evidence of the "security syndrome", with preference given in the distribution of credits to large borrowers, who are well known by bank managers and who can provide sufficient guarantees for their loans.. The Costs of Selective Credit Policies 3.112 It must be recognized, however, that controls cannot always prevent leakages of subsidized credits to purposes for which they were not intended. Also, subsidized credits may displace other forms of finance which would otherwise be available. Their effects on the real allocation of resources may consequently be more limited than it would appear on first sight. 3.113 At the same time, selective credit policies in Turkey have involved considerable costs. They include; the maintenance of high reserve requirements in deposit money banks; the charges resulting from the insufficient level of interest rates on reserves against time deposits; the costs to the Central Bank of low interest rates on its advances and rediscounts; the levies on lending interest rates which are paid to the Differential Interest Rate Rebate Fund; the losses of the Social Security - 161 - Institutions caused by the low interest rates on the bonds which those institutions are forced to buy from the State Investment Bank; and costs born directly by the'Treasury. 3.114 Interest rate subsidies or compulsory reserve ratios for certain types of assets held by the financial institutions do not have an impact on the budget, but nevertheless involve social costs. These include distortions in the efficiency of financial and other resources; interference with the conduct of monetary policy; costs associated with the implementation and the supervision of controls, both for the authorities and for the institutions which have to comply with the regulations; and the excess of the costs of specialized institutions over those of general purpose banks. Also, the system of selective credits has reduced competition among financial institutions and has limited ability of the Central Bank to pursue monetary policy objectives. 3.115 For these reasons, recourse to selective credit policies should be moderated. In many cases alternative incentives, such as tax benefits or subsidies, may be preferable. In the following, recommendations will be made for improving the system of selective credits in Turkey. Improvements in the System of Selective Credits 3.116 First, t'-e cost of selective credit policies should be substantially reduced. Such a reduction could be achieved by limiting selective credits to a narrower range of operations and by reducing the incidence of the interest rate subsidization. This is a necessary condition for eliminating the distortions resulting from the insufficient interest rates paid on required reserves, the existence of differential reserve requirements, and the pressures for the excessive expansion of the money supply. The reduction of the scope and extent of interest rate subsidies would also limit leakages into other sectors and would improve the allocation of financial resources by reducing incentives to capital-intensive activities and by correcting the distortions created by large differences of interest rates paid on different types of credits. 3.117 Second, the dependence of the system of selective credits on Central Bank rediscounts and on differential ratios of reserve requirements should be reduced. It would be preferable to base the mechanism of credit subsidization on subsidies from the Differential Interest Rate Rebate Fund. Under this alternative, the cost of subsidization would become clearer and would be more easily controlled. Also, the adverse effects of selective credits on the conduct of monetary policy would be alleviated. 3.118 One should further reduce the specialization of the banking system, as in para. 3.50. In particular, it would be advantageous to give the specialized banks possibilities to compete for instance by issuing bonds with maturities over one year. The increase in competition would bring benefits in the operating eLficiency of banks and would create wider possibilities of choice for the users of selective credits. - 162 - 3.119 In principle, selective credit policies should be contracted or medium and long term credits, credits to agriculture, and creditsto exports. These will be discussed in the following. 5. Medium and Long-Term Credits The Existing System of Medium and Long-Term Credits 3 120 Medium and long-term credits for investment are granted by deposit money banks and by investment and development banks. Deposit money banks are required by law to allocate at least 20 percent of their portfolio to medium and long-term credits. Most of the banks are able to fulfill this requirement by granting medium term credits to enterprises belonging to the same holding. Enterprises which are not closely related to one of the deposit money banks do not have however have the possibility to obtain medium and long-term credits from commercial banks. The current practice is to renew successively, on their maturities, a large proportion of short term credits, which thus are in fact transformed into medium term credits. 3.121 Among investment and development banks which distribute medium and long-term credits, the most important are the State Investment Bank (Devlet Yatirim Bankasi), whose activity is exclusively that of financing investments of state economic enterprises, and the TSKB (T. Sinai Kalkinma Bankasi) which specializes in medium and long term credits to private manufacturing firms. However, their influence on project selection is limited, in view of the fact that the proportions of total investment, both of the public and of the private sector, which are financed by them are comparatively modest. Moreover, their share has declined in recent years. The proportion of credits granted by investment and development banks in the total credits of the banking system to the productive sector (public and private enterprises and households) fell from 24.9 percent in 1978 to 16.1 percent in 1979. 3.122 The decline of the relative position of investment and development banks has been due to the constraints these banks face in mobilizing financial resources. They can not receive deposits and their bond issues have been insignificant as shown in Table 3.11. Correspondingly, they have been dependent essentially on foreign loans, Central Bank credits, Treasury loans to the State Investment Bank and bonds subscribed by the Social Security System, whose financial possibilities are however becoming exhausted. 3.123 The investment credits granted by the State Investment Bank have long term maturities and lately their interest rate has been 21.5 percent. The interest rates on credits granted by TSKB vary according to the nature of the credits, the sources of funds used, and the amounts of interest rate subsidies. At the end of the first half of 1981, representative rates were 13.1 percent for loans expressed in foreign currency, when exchange risk is borne by the borrower; 22.3 percent in medium term credits for export oriented projects in underdeveloped regions receiving an interest rate subsidy of 40 percent; 32 percent in medium term credits for general investment credits with an interest rate subsidy of 25 percent; and 48 percent in non-subsidized medium term credits for working capital. At the same time, the incentives to - 163 - the banks for granting medium and long term credits have included preferential rediscount rates, lower required reserves ratios, and interest rate subsidies paid by the Differential Interest Rate Rebate Fund. Table 3.17; LIABILITIES OF INVESTMENT AND DEVELOPMENT BANKS Billion TL; end of year June 1977 1978 1979 1980 1981 Foreign liabilities /1 11.3 16.6 30.2 53.1 56.2 Liabilities to the Central Bank 35.8 41.7 47.2 48.7 48.3 Liabilities to Public Administrations 4.6 6.4 5.5 8.8 16.5 Liabilities to the Social Security System 38.0 43.3 49.7 56.5 56.0 Other liabilities 14.9 16.4 30.0 34.5 38.9 Total 104.6 124.4 162.6 201.6 215.9 /1 Foreign liabilities in billions of dollars: 1977; 0.58; 1978: 0.65; 1979: 0.85; 1980; 0.59. Improvements in the System of Medium and Long-term Credits 3.124 In the area of medium and long-term credits one would need to deal with the following problems; (a) the creation of possibilities for attracting more financial resources to the investment and development banks; (b) the establishment of unambiguous rules for adjusting periodically interest rates on medium and long-term credits in accordance with changes in inflation rates, and (c) the extent and the method of subsidization of medium and long-term credits. 3.125 As regards the attraction of financial resources to the development and investment banks, the best solution would be to encourage these banks to become more active in issuing medium and long-term bonds, to be placed directly in households and other non-financial agents. These bonds would have indexed interest rates in the way described in paras. 3.71-3.77. At the same time, in becoming more active in the issue of bonds, the development anrd investment banks would contribute to the development of capital markets. 3.126 The issue of bonds is of particular importance for the State Investment Bank because of the declining contributions of the Social Security System. However, if the State Investment Bank will obtain a substantial - 164 - amount of its resources by issuing bonds with competitive interest rates, its loans to state economic enterprise will have to be made in conditions closer to those of the market. 3.127 The subsidization of interest rates on medium term credits should follow the general rules discussed in para. 3.116. First, while there may be good reasons to maintain subsidies for certain types of investment credits, these'should be moderate in order to avoid excessive costs and risks of leakages; second, the subsidies should be based on contributions from the Differential Interest Rate Rebate Fund and not on low-cost credits granted by the Central Bank, the Treasury or the Social Security System; and third, if certain investments require more substantial subsidies, it may be preferable to grant cash subsidies related to pre-defined objectives rather than to subsidize interest rates, which distorts the combinations of productive factors used. 6. Agricultural Credits 3.128 , The shares of agricultural credits in the total credits granted by the banking system to public and private enterprises and households were 23.9 percent in 1971, 22.6 percent in 1975 and 20.0 percent in 1980. The comparable percentages for the contribution of agriculture to GNP were 29.5 percent in 1971, 29.0 percent in 1975 and 21.7 percent in 1980. 3.129 The agricultural credits comprise credits to public enterprises which intervene in the market for agricultural products with the purpose of guaranteeing agricultural support prices (State Monopoly for Tobacco, Soil Products Office for cereals, Tea Industry, Meat and Fish Industry, and Milk Industry); credits for agricultural support granted by Agricultural Sales Cooperatives and financed by the Agricultural Bank; and other types of credits, granted by Agricultural Credit Cooperatives and financed mainly by the Agricultural Bank or granted by commercial banks. Practically all the credits to the above public enterprises, and more than two thirds of the credits financed by the Agricultural Bank and deposit money banks, have been refinanced by the Central Bank. In recent years, the Central Bank has thus financed directly or indirectly more than 80 percent of agricultural credits. 3.130 The high dependence of agricultural credits on Central Bank financing is a consequence of the system of interest rate subsidization for agricultural credits which has been in force. The interest rates for agricultural credits which were in force in the first half of 1981 are shown in Table 3.18. If one considers that the interest rates on preferential bank credits were at least 50 percent, it is apparent that the subsidies have been at least 40 percentage points on agricultural credits to the Soil Products Office and other public enterprises and 20 to 25 percentage points on agricultural credits financed by the Agricultural Bank and refinanced by the Central. Bank at very low rediscount rates. 165 - Table 3.18: INTEREST RATES AND REDISCOUNT RATES ON AGRICULTURAL CREDITS May 1981 I. Interest and Rediscount Rate of The Central Bank 1. Short term credits to the Soil Products Office and other public enterprises 10.0% 2. Rediscount rates on credits granted by the Agricultural Bank 2.1 Short term credits to Agricultural Credit Cooperatives and Unions 19.5% 2.2 Short term credits to Agricultural Sales Cooperatives 17.5% 2.3 Medium and long-term agricultural credits 18.75% 3. Rediscounts on credits granted by other banks 3.1 Short terms and medium term agricultural credits 26.00% 3.2 Long term agricultural credits 28.75% II. Costs to the Borrower of Credits Financed by the Agricultural Bank 1. Short term credits Interest rate 22.0% Transaction tax 3.3% 25.3% 2. Medium term credits Interest rate 24.0% Transaction tax 3.6% 27.6% 3.131 The system of subsidization involves important negative consequences. First, the fact that it is based almost exclusively on cheap Central Bank credits creates conflicts with the objectives of monetary policy. These conflicts were especially serious in 1980 when the Soil Products Office was at risk of being forced to interrupt its purchases. of cereals at a critical moment, if the ceilings to the expansion of Central Bank domestic assets were not increased. 3.132 Second, the fact that agricultural credits financed by the Agricultural Bank are very cheap as compared with other types of credit makes their supply scarce in relation to demand. A process of rationing thus becomes inevitable. Borrowers will often try to get more credit than they need for their agricultural operations and there will be inevitably leakages into other uses. In time, other borrowers will not be able to get all the agricultural credit they need and will forced to use more expensive types of credits. In particular, small farmers often have to address themselves tq unorganized money markets where lenders have been charging interest rates in excess of 100 percent. - 166 - 3.133 These difficulties could be corrected to a large extent if the recommendations made concerning changes in selective credit policies were applied to agricultural credits. Specifically, it would be desirable to introduce the following changes; (a) There should be more competition for the Agricultural Bank in the field of agricultural credits. Benefits established in favor of agricultural credits granted by the Agricultural Bank, should be extended to the same types of credits granted by other banks. More competititon would benefit farmers both by offering them wider possibilities of choice and by creating pressures towards greater efficiency in agricultural credit operations. (b) The subsidization of agricultural credits should be substantially reduced. Medium and long-term agricultural credits should be subsidized in accordance with the rules and priorities established for medium and long-term credits in general and consideration should be given to eliminating the preferential treatment of short term agricultural credits while ensuring access to credit to all agricultural producers. (c) The system of subsidization should be based on contributions from the Differential Interest Rate Rebate Fund and not on automatic access to rediscounts from the Central Bank at low interest rates. 7. Export Credits The System of Export Credits 3.134 Exporters obtain export credits from the banks to finance the production, purchase, storage, packaging and transportation of goods for export. The schemes for export credits in effect are described in Chapter 2. 3.135 The borrowers who receive short term export credits benefit from the following incentives; (a) the interest rate charged is in general 22.5 percent (and it may be even lower) as against 36 percent for nonpreferential credits; (b) the interest is exempt from the financial transactions tax levied on other cr-edits; (c) the contribution to the Differential Interest Rate Rebate Fund is 10 percent of the interest charged, as against 15 percent for other credits; and (d) the borrower receives from the Differential Interest Rate Rebate Fund a subsidy of 35 percent of the interest rate charged on credits for industrial exports and of 25 percent on other export credits. 3.136 The total effect of these incentives is shown in Table 3.19. It is apparent that cost of short term export credits is at least 25 percentage points lower than for nonpreferential short term credits (the calculation excludes the cost of holding compensating balances). For export credits with a maturity of 12 months and covering 80 percent of export value, the subsidy is 24 percentage points. a:;; - 167 - Table 3.19; INTEREST COSTS TO THE BORROWER OF EXPORT CREDITS AS COMPARED WITH GENERAL CREDITS (December 1981) Non-Preferential Export Credits Credits (one-year) Interest rate charged by the bank 36.0% 27.0% Contribution to the Interest Rate Rebate Fund 5.4% /1 2.7% Commission 2.0% 2.0% Transactions tax 5.7% - Subsidy} from the Interest Rate Rebate Fund - -9.5% /2 Tot;al Cost 49.1% 22.3% /2 /1 The levy accruing to the Interest Rate Rebate Fund declines to 10 percent as of January 1, 1982. /2 For industrial exports; for other exports, the subsidy from the Interest Rate Rebate Fund is 5.33 percent and the total cost to the borrower is 21.12 percent. 3.137 The banks which grant export credits receive substantial incentives, whose purpose is to increase their willingness to provide such credits. These incentives include; (a) the legal requirement according to which export credits must account for at least 15 percent of the total credits of each bank, (b) the automatic refinancing by the Central Bank of 65 percent of the value of the export pledge or of the letter of credit or of the maximum of exports of the last three years at a rediscount rate of 18.5 percent, when the interest rate charged by the bank is 22.5 percent and (c) the reduction of the required reserves ratio to 5 percent or 10 percent with regard to funds used in industrial exports and other exports, respectively, as against normal ratios of 35 percent and 30 percent. 3.138 The margin of 6 percent (including a 2 percent commission) which the banks get on the part of their export credits which is refinanced by the Central Bank corresponds roughly to the operating expenses involved. In turn, the benefit the banks derive from the reduction of required reserves is approximately the same as the loss resulting from the interest rate of 22.5 percent on export credits compared with 36 percent on general credits. - 168 - Problems Raised by the Existing System of Export Credits 3.139 There are valid reasons for providing incentives to exports in the form of export credits. Even with an adequate exchange rate policy, exports may need some subsidization in order to offset the bias against them resulting from the protection of industries which rely mainly or exclusively on the domestic market. Also, the infant industry argument may justify granting differential benefits to new exports of industrial goods. However, the system of export credits presently applied in Turkey has various shortcomings. 3.140 To begin with, the total subsidies granted to borrowers are excessively high and do not appropriately reflect Turkey's economic interest in subsidizing value added in exports. Also, the high subsidies may have led to leakages of export credits to domestic operations. Finally, the strong dependence of the system of export credits on rediscounts in the Central Bank create risks of the excessive expansion of the monetary supply. Expo'rt Credits and Monetary Policy 3.141 The total amount of export credits granted by the Central Bank increased 28 percent from December 31, 1980 to April 24, 1981, while all other Central Bank credits to productive activities (excluding short term advances to the Treasury but including credits to public monopolies and State Enterprises) increased only 3 percent. The expansion has been so rapid that in May 1981 the Central Bank was forced to delay the rediscounting of expolt credits. This was however only the first sign of the difficulties which would have to be faced in monetary policy if the Central Bank continued undefinitely to finance 65 percent of the value of exports. If exports continue to grow rapidly, as it is expected, export credits cannot grow at the same rate without serious risks of an excessive expansion of the monetary base. 3.142 A possible way to deal with this problem is to change periodically the percentage of the value of export credits which can be refinanced by the Central Bank in accordance with the requirements of the control of money supply. It would further be desirable to replace the contribution of low rediscount rates for the subsidization of export credits by an increase of the subsidies granted by the Differential Interest Rate Rebate Fund, in line with recommendations made earlier in regard to all selective credits. At the same time, as suggested in Chapter 2, rates of subsidization of export credit should be reduced. The Incidenvce of Subsidies to Export Credits 3.143 An additional consideration is that the export subsidies granted through low interest rates on export credits are related to the value of exports rather than to value added. As a consequence, the effective rate of subsidization of value added varies widely and in an inverse proportion with value added. Thus, a subsidy of 24 percent on the value of exports corresponds to an effective rate of subsidization of 120 percent on exports with a value added share of 20 percent but only 30 percent on exports with a - 169 - value added share of 80 percent. The system thus tends to give greater benefits to exports which bring a smaller contribution to the balance of payments and to the expansion of domestic production. 3.144 In order to avoid these distortions, it would be desirable to relate export credits to value added in exports. A possible solution is described in the Annex to the present Chapter. This solution has the following characteristics: (a) the banks would continue to receive incentives (although different from those being-applied at present) designed to stimulate them to finance 80 percent of the value of exports, with maturities corresponding to the average cycle of production up to the date of export; (b) only a certain proportion of the export credits, proportional to value added in exports would be subsidized so as to provide approximately equal rates of effective subsidization of value added in exports; (c) interest rate subsidies on the proportion of export credits be subsidized would be paid from the Differential Interest Rate Rebate Fund; (d) the amount of the export credits to be subsidized would be determined every three or six months by applying the percentages determined under (b) to the value of actual exports during the preceding 3 or 6 months. - 170 - Annex 3.1 Page 1 of 4 A System of Subsidized Export Credits Related to Value Added The following procedure may be utilized to extend export credit subsidies in relation to value added to exports and the length of the period of production: (a) The amount of the export credit would be set so as to equal a proportion of export value (for instance 80 percent as at present) that is sufficiently high to cover production needs. The maturity would equal to the average length of the period from the beginning of production to the time of export. The banks would continue to receive incentives sufficient to maintain their interest in export credits. These incentives would consist of preferential access to rediscount and, if necessary, a subsidy of 2 or 3 percentage points from the DifferentLal Interest Rate Rebate Fund. (b) A certain proportion of the amount of the export credit mentioned in a. would benefit from a uniform rebate of the interest rate, which would be paid by the Differential Interest Rate Rebate Fund. That proportion would be calculated in accordance with the methods explained below. (c) The part of the export credits which would not be subsidized would pay the same interest rate which is applied to general credits with the same maturity. Both the subsidized and the nonsubsidized part of the export credits would benefit from preferential access to rediscounting in the Central Bank but the rediscount rates would not be subsidized. (d) The interest on export credits would be calculated and paid at the end of three (or six) months. (e) At the moment of the quarterly (or half yearly) payment of interest, the exporter would be required to present proof of the amounts of foreign currency sold to the Turkish banking system in the previous three (or six) months as a result of his export activities. (f) All exported products would be classified in several categories, based on value added in exports. A possible solution would involve five categories with value added shares of 75-100 percent, 55-75 percent, 40-55 percent, 30-40 percent, and 23-30 percent. Exports with value added at less than 23 percent would not receive credit subsidies. Value added is defined as the difference between the f.o.b. price of the exported products and c.i.f. cost of the direct and indirect imported inputs, including the amortization of imported equipment. iCid0S¢rSi ....i .. ...' ;$ .' :'i'.;'.:''q :. ,.'' ........................... '- '-............,... . ,, - 171 - Annex 3.1 Page 2 of 4 (g) A very rough estimate of average value added, based on the industrial statistics of the sector producing that product, will suffice. It is only in cases where value added is on the borderline between two different categories that a more careful calculation will be needed. In the cases of some industrial goods, it would be necessary to specify not only the products but also their processes of production (as it is done in the rules of origin applied in free trade areas). Thus, for instance, cloth produced from imported yarn might fall in a lower category than cloth made from domestic yarn. (h) The Government would publish lists of goods classified in each category. In elaborating the lists, criteria other than value added may also be introduced, distinquishing between new materials and manufactured goods and separating infant activities within the latter. - 172 - Annex 3.1 Page 3 of 4 Table A 3.1; EXAMPLE FOR EXPORT CREDIT SUBSIDIZATION /1 Categories Share of Ratio of subsidized Annual interest Effective rate of of products value export credits in rate subsidy as subsidization as added in relation to exports percentage of percentage of the export during the previous annual value of domestic value price /2 3 months /2 exports /3 added /4 (1) (2) (3) (4) (5) I 75%-100% 47% 7.0% 9.3%-7.'O% II 55%-75% 35% 5.2% 9.4%-6.9% I1I 40%-55% 25% 3.8% 9.5%-6.9% IV 30%-40% 19% 2.8% 9.3%-7,1% V 23%-30% 14% 2.1% 9.1%-7.0% /1 Based on a subsidy of 15 percentage points on the interest rate of one-year export credits. /2 The limits of the percentages of domestic value added in each category and the percentages of column (3) have been determined in such a way as to provide effective rates of subsidization on value added of approximately 7% to 9% cf. in column (5). /3 If the rebate on annual interest rates is 15 percentage points, the maturity of the export credits is 1 year and if the exports of a given year are denoted by X, the annual interest rate subsidy as a percentage of annual exports for goods of Category 1 with 100 percent value added is; (0.47x X xO.15) ; X = 0.07. /4 The intervals of column (5) are determined by dividing the percentages of column (3) by the limits of the intervals of value added in column (2). - 173 - Annex 3.1 Page 4 of 4 Table A3.1 shows the ratio of subsidized credits in different categories in the case of 3 months export credits that will provide an effective rate of subsidy of approximately 20 percent on value added (If the subsidized export credits had maturities of six months, their amount would be calculated by dividing the ratios shown in (3) of the table by 2.) The administrative complications involved in the proposed system would be easily manageable. The case of agricultural products, raw materials and homogeneous industrial goods like cement, steel, and petrochemicals, value added ratios can be determined from technical coefficients for a wide range of manufactured goods. Subsidization would be based on actual exports, thus reducing the risks of leakages of the subsidized credits to nonintended purposes. This is the reason why it is suggested that interest be paid at the end of each quarter (or each six-month period) and that subsidized export credits should have maturities of 3 months (or 6 months).and be based on the export receipts of the previous 3 months (or 6 months). However, in cases of exports with large-seasonal fluctuations, it would be preferable that the maturity of the export credits cover the entire export season and that the amount of such credits would be determined at the end of the same season. - 174 - CHAPTER 4 THE SYSTEM OF TAXATION AND INVESTMENT INCENTIVES Introduction 4.1 Turkey is currently in the midst of a far reaching reform of the tax system, involving approximately twenty-four tax bills that have been implemented or are under active consideration by the authorities. The motivation of the reform is the wish to rectify perceived inadequacies of the tax system. With the important exception of the personal income tax, the tax system was not an elastic source of revenue, while the elastic personal income tax and other claracteristics of the tax system have resulted in increasingly uneven burdens being placed on different sectors and groups of income recipients that have affected compliance and was not conducive to increased work effort. Nor has the system of indirect taxes been conducive to efficient resource allocation, including the promotion of exports. Finally, investment incentives have generally favored capital-intensive activities. 4.2 This chapter examines some of the issues posed by the present tax system and investment incentives as they bear on the industriali- zation and trade strategy and on the general modernization of the economy. Also, an assessment is undertaken of the reforms so far implemented and proposals for further reforms are made. In the chapter, direct and indirect taxes and investment incentives are separately considered. A. The Tax System 1. Overview 4.3 After rising from 15.6 per cent in 1970 to 19.2 per cent in 1977 (slightly below the average of 19.6 per cent for a sample of 20 middle income countries), the tax to GNP ratio in Turkey has declined to 16.9 per cent, owing in part to the inelasticity of indirect taxes and in part to the elimination of the import stamp duty (Table 4.1). For the period as a whole, the elasticity of the tax system with respect to GNP was 1.0, which, in the absence of major tax adjustments during the period, approximates the built-in elasticity. Within this average, the personal income tax had an elasticity of 1.2 during the period, reflecting the effects of "bracket creep" under rapid inflation. There was a further slight increase in the GNP share of the tax on banking and insurance transactions, but shares in GNP of all other indirect taxes declined. In particular, the domestic production tax dropped from 1.7 per cent of GNP to 1.2 per cent of GNP; the tax on monopoly products, or excises, from 1.4 per cent to 0.7 per cent of GNP; the production tax Table 4.1. Turkey: Tax Revenue as a Per Cent of Gross National Product, 1970-80 Period 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Elasticity 1/ Taxes on income 5.5 5.9 6.1 6.9 6.9 8.1 8.9 10.0 10.8 10.3 10.3 1.2 Personal income tax 4.5 5.0 4.8 5.2 5.3 6.3 7.0 7.9 8.4 8.4 8.6 1.2 Corporate income 1.1 0.8 0.9 1.0 0.9 1.0 1.0 0.9 1.3 0.8 0.8 1.0 Other -- 0.1 0.3 0.7 0.8 0.8 0.9 1.2 1.0 0.9 0.8 Taxes on wealth 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.2 0.8 Taxes on goods 4.1 4.5 4.2 4.0 3.1 3.9 4.0 3.4 3.0 2.9 2.4 0.8 Domestic production tax 1.7 1.5 1.7 1.4 1.3 1.4 1.6 1.5 1.4 1.4 1.2 0.9 Petroleum tax 0.5 0.6 0.6 0.5 0.3 0.4 0.2 0.1 0.1 0.1 -- 0.2 Tax on monopoly products 1.4 1.4 0.8 1.1 0.6 1.3 1.4 0.8 0.7 0.8 0.7 0.8 Retail sales tax -- 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.1 0.9 Other 0.6 0.8 0.8 0.8 0.7 0.6 0.7 0.8 0.6 0.4 0.4 ... Taxes and fees on services 1.9 2.0 1.9 1.9 1.7 1.9 2.0 2.0 1.9 1.6 1.8 1.0 Banking and insurance tax 0.8 0.8 0.8 0.8 0.8 0.9 0.9 1.0 0.9 0.8 1.0 1.1 Stamp duty 0.7 O06 0.6, 0.7 0.6 0.7 0.8 0.8 0.7 0.6 0.6 1.0 Other 0.4 0.6 0.5 0.4 0.3 0.3 0.2 0.2 0.3 0.2 0.2 Taxes on imports 3.8 3.8 3.9 3.8 3.4 3.7 4.0 3.6 3.3 3.0 2.1 0.9 Customs duties 0.9 0.9 1.0 0.9 0.9 0.9 0.9 0.7 0.5 0.5 0.5 0.8 Production tax on imports 0.9 1.0 1.0 1.0 1.0 1.0 1.4 1.1 0.8 0.6 0.8 0.9 Production tax on imported petroleum 1.0 1.0 1.1 1.0 0.7 0.8 0.6 0.7 0.4 0.3 0.2 0.5 Import stamp duty and other 1.0 0.9 0.8 0.9 0.8 1.0 1.1 1.1 1.6 1.6 0.6 ... Total tax revenue 15.6 16.3 16.2 16.8 15.3 17.7 19.0 19.2 19.1 17.8 16.9 1.0 Source: Turkish authorities. 1/ Buoyancy determined by regressing log of revenue on log of GNP and estimating the coefficient of the GNP term. - 176 - on imported petroleum from 1.0 per cent to 0.2 per cent of GNP; and customs duties from 0.9 per cent to 0.5 per cent of GNP. Finally, the elimination of the customs stamp duty reduced the ratio of import taxes to GNP by 1.0 percentage points. 4.4 As a result of these changes, the contribution of direct taxes to total tax revenue increased from 37.2 per cent in 1970 to 62.1 per cent in 1980, with a corresponding decline in the contribution of indirect taxes. In particular, the share of indirect taxes on domesti- cally produced goods declined from 26.4 per cent to 14.2 percent and that of taxes on imports from 24.2 per cent to 12r3 per cent (taxes on services account for the remainder). 2. Direct Taxes 4.5 This category comprises the personal and corporate income taxes, taxes on capital gains, taxes on the ownership of real estate and motor vehi,cles, and inheritance and gift taxes. Because of their importance, the following discussion concentrates on personal and corporate income taxes, with further attention given to capital gains taxation. Personal Income Tax 4.6 In 1976, the last year for which detailed statistics are available, the personal income tax was paid by 4.1 million persons. One fifth of taxable income recipients filed annual returns, one seventh paid according to the lump sum assessment scheme, while the remaining two thirds, principally wage and salary earners, had their taxes withheld at source. Around 30 per cent of personal income taxes collected originated from those filing annual tax returns and 65 per cent from employees; those assessed according to the lump sum scheme, principally small businesses, artisans, and professions, hardly paid any tax. Among those filing annual tax returns, the principal contribution was made by unincorporated businesses. The contribution of agricultural income earners was negligible and only small amounts were generated by taxing income from immobile (mainly rentals), and from mobile (principally dividends and interest), capital. 4.7 The relatively high share of the personal income tax on wages and salaries reflects both rapid inflation and lack of adjustment of the tax schedule. Until 1981, there was virtually no adjustment in brackets, tax rates or the size of deductible personal allowances, all of which remained at the levels shown in Table 4.2. Consequently, inflation and real income growth pushed the average taxpayer into ever higher brackets. In 1980, a worker earning US$2,000 per annum had 60 per cent of his wage withheld.. In order to avoid the resulting increase in real tax burdens, employees and employers relied increasingly on nontaxable in-kind payments, including allowances for clothing, housing, and so forth. Keeping the tax schedule unchanged in the fact of massive inflation is bound to have adversely affected work effort. And while these adverse effects were partly alleviated by the proliferation of - 177 - Table 4.2. Turkey: Individual Income Tax Rate Schedule (In Turkish liras) Former Schedule New Schedule 1/ Average Average Marginal effective Marginal effective tax rate 2/ tax rate 3/ tax rate 2/ tax rate 3/ Taxable income (In per cent) Taxable income (In per cent) 0 - 2,500 10.0 10.0 0 - 1,000,000 40.0 40.0 5,000 15.0 12.5 3,000,000 45.0 43.3 10,000 20.0 16.2 5,000,000 50.0 46.0 25,000 25.0 21.5 10,000,000 60.0 53.0 55,000 35.0 28.9 15,000,000 70.0 58.7 115,000 45.0 37.3 25,000,000 75.0 65.2 265,000 55.0 47.3 above 25,000,000 66.0 66.0 490,000 60.0 53.1 715,000 65.0 56.9 1,000,000 68.0 60.0 above 1,000,000 60.0 60.0 Memorandum: Tax-free minimum allowance's Old (TL) New (TL) General allowances (per year) 1,800 7,200 Special allowances for wage and salary earners 1,900 54,000 Total allowances 3,600 61,200 1/ Effective 1981 fiscal year. 2/ Applied to the increment in bracket limits. Since taxable income is shown on a cumulative basis, the increment in bracket limits is obtained by subtracting adjacent taxable income levels. 3/ This is determined by applying the marginal tax rates to the corresponding taxable income slabs in a given level of taxable income so as to obtain the total tax liability. The latter is then divided by total taxable income. - 178 - in-kind payments, they represented a retrograde step in the modernization of the economy. In-kind payments also involved an economic cost by limiting the workers' choices. 4.8 In January 1981, the individual income tax schedule was reformed. Deductible allowances have been increased from a maximum of TL 3,600 to TL 61,200 (Table 4.2). Income brackets have been redefined, with the first bracket now corresponding to the entire bracketed range of the replaced sciiedule. However, the initial marginal tax rate has been set at 40 per cent, much ex,ceeding the initial rates to be found in other middle-income countries. The legislation specifies a one percentage point annual reduction in tax bracket rates for the next five years. This will reduce the beginning marginal rate to 35 per cent and the top rates to 70 per cent for incomes up to TL 25 million and to 61 per cent above that level. 4.9 It is estimated that the January 1981 reform will reduce by one third the effective tax burden on wage and salary income from the present 60 per cent to around 40 per cent. The tax relief is linked to moderation in wage and salary increases that is expected to dampen the rise in wage costs to employers in 1981. Calculations of thXe change in tax burden resulting from the reform are shown in Table 4.3 for three wage and salary levels. A worker earning the minimum wage of TL 61,200 per annum will escape taxation, whereas formerly he would have paid 27.5 per cent of his income. Those earning the average wage An higher-wage industries will also enjoy a reduction in tax burden. However, high income earners will be subject to a higher tax burden than under the former schedule. 4.10 The virtually tax exempt status of small businesses and profes- sions that are subject to lump sum taxation has been eliminated, by revising tax criteria, including presumptive income limits, to better accord with the inflation that has occurred. Although roughly the same number of small businesses pay lump sum taxes as the number of persons who file annual returns, the average effective tax paid by the former was only TL 260 in 1976 compared to TL 13,274 paid by the latter. According to the new tax provisions, incomes between TL 50,000 and TL 225,000 will be subject to lump sum taxation at 40 per cent of assessed income, with the minimum amount paid being TL 15,000. It is estimated that additional revenue generated from this source will amount to TL 30 billion as against the less than TL 0.5 billion that used to be collected annually. 4.11 Unincorporated businesses, farmers, and private professions with incomes above the newly specified limits of lump sum taxation file annual declarations. However, they will now also be subject to advance tax pay- ments in five categories, ranging from TL 50,000 to TL 600,000. The liabi- lity for advance payment will be determined by special tax commissions on the basis of information on the size and location of the business and earn- ings capacity of the taxpayer. The advance payments themselves will be - 179 - Table 4.3. Turkey: Tax Burden of the Personal Income Tax: Some Examples 1/ Former Schedule New Schedule Tax Tax Tax Burden Tax Burden (In TL) (In per cent) (In TL) (In per .cent) 1. Minimum wage (TL 61,200 per annum) 16,805 27.5 2. Average wage in higher-wage industries (TL 155,000 per annum) 56,472 36.4 37,520 24.2 3. High income (TL 25 million) 15,000,000 60.0 -- 65.2 1/ These are constructed for a single income earner using the rates and exemptions stated in Table 4.2. made in three equal installments in March, June, and November. The intro- duction of installment payments will permit avoiding the long lag of about 18 months that formerly characterized the earning of income and collection of tax to considerable benefit to the taxpayer in an inflationary environ- ment. 1/ 4.12 Three sets of measures have been introduced to increase the taxation of agricultural income. First, the tax criteria applied to farmers have been redefined, greatly reducing the number of small farmers who will remain tax exempt. Income declarations are now required of all farmers who own more than one tractor, or a harvester, or land exceeding a certain size, or annual sales receipts exceeding TL 500,000 per annum. Second, whereas formerly 70 per cent or more of sales receipts was deductible to provide for the costs of generating income, the maximum 1/ For the deleterious effect of collection lags on government revenue, see S.N. Erbas, "Effects of Inflationary Finance on Tax Revenue Under Progressive Tax Structures with Collection Lags: An Application to Turkey." Unpublished, International Monetary Fund, Washington, D.C., April, 1981. - 181 - tax of 40 per cernt on assessed income is excessive both from the view- point of ensuring compliance and the self-financing of investment for businesses that have limited access to capital markets. 4.17 The potential number of taxpayers required to make annual declarations has been greatly increased and it would be desirable to make appropriate administrative provisions to ensure compliance. The system of advance payments for such taxpayers, while designed to generate substantial additional revenue in 1981, imposes a risk on traders and others whose incomes are subject to substantial fluctuations, and who have limited access to credit markets, Consideration should be given to the adoption of an averaging system that more closely corresponds to the profit or income cycle over the year. Corporate Income Tax 4.18 Formerly, the corporate income tax was paid by companies and cooperative societies at a rate of 25 per cent. In addition, a 20 per cent withholding tax was levied on the remaining profits, irrespective of whether or not distributed, thereby adding 15 percentage points to the corporate tax rate. Finally, a 3 per cent fiscal balance tax was levied on profits, resulting in an aggregate corporate income tax rate of 43 per cent. These taxes have now been consolidated into a 50 per cent corporate income tax rate that is to apply to the 1981 assessment year. However, state economic enterprises (SEE) continue to be subject to a pref.~rential rate of 35 per cent. 4.19 The recent reform has also modified the tax treatment of dividends. Under the previous system, dividends were subject to a 20 per cent withholding tax, which could be credited against the tax liability on the dividends. This device for reducing the double taxation of dividends has now been modified to provide more favorable treatment to distributed profits in excess of TL 2 million (about US$15,000 at the exchange rate in effect in December 1981) per taxpayer and to effectively exempt amounts below this threshold from the individual income tax. To the dividends received is added the imputed corporate tax component (50 per cent). The tax liability is computed on the resulting amount, against which the imputed corporate tax component is credited. The effect, taking account of the new personal income tax schedule, is to reduce somewhat the effective rate of tax on dividends. 4.20 It is hoped that the more favorable treatment of paid-out divi- dends will encourage closely-held corporations to go public, raising more funds through equity issues. In addition, in order to promote the establishment of corporations, the law exempts from tax any increase in book values resulting from the conversion of an unincorporated business into a corporation, thereby providing a one-time relief from capital gains taxes. Profits earned through participation by a corporation in another corporation are also exempted from corporate income tax. At the same time, the period for which losses could be deducted from - 182 - corporate income has been reduced from 5 years to 3 years. The system of depreciatioa allowances, which involves a straight line depreciation balance method over a period of 8-10 years, has been retained. As before, accelerated depreciation allowances are provided with the approval of the Ministry of Finance for circumstances such as double shift operations. 4.21 Several issues are raised by the present state of the corporate income tax structure. The tax in its present form does not appear satisfactory from the point of view of promoting industrialization. This is because it is not neutral as between different forms of business organizations. 4.22 Although there is merit in promoting broader-based corporations to facilitate the development of capital markets and to spread risks, unincorporated businesses are likely to pay a tax rate of 40 per cent, below the 50 per cent corporate tax rate. Reducing the corporate tax rate to 40 per cent would equalize the two rates at levels comparable to those in other middle-income countries. The same rate should be applied to the SEEs as there is no rationale for them to pay lower taxes. Also, corporations could be subjected to a scheme similar to the advance payments scheme for unincorporated businesses. There is at present a substantial lag between the assessment year and the time taxes are finally paid. 4.23 A legislative proposal to equalize corporate income tax rates at 40 per cent has, in fact, been made. The proposed reduction in the rate for private business can be expected to promote saving and risk taking. While the more attractive treatment of distributed earnings should increase the availability of risk capital, corporations will have to continue to rely to a considerable extent on self-financing. At any rate, the propensity to save is probably higher on the part of corporations than on distributed profits. 4.24 A matter of urgency is the treatment of depreciation in the present inflationary environment as inflation cost accounting is lacking. As a consequence, true profits, reckoned on the basis of maintaining plant, equipment, and other income-generating assets, are overstated. The inflation-induced reduction in the real financial liabilities of the firm provides only a partial offset because of the dominance of ,;jelf- financing. The taxation of these "phantom" profits involves taxing capital and discriminating against longer lasting investment. This is of particular importance as receipts from corporate income taxes more than tripled in 1981. 4.25 To avoid these adverse consequences, it would be desirable to calculate depreciation on a replacement cost basis. Replacement cost is, however, difficult to define in cases when exact substitutes for the capital good to be replaced are not available, owing to intervening technological progress. A possible solution would be for the authorities to determine appropriate price indices for different categories of capital - 183 - goods. Regulations to this effect are in preparation and their intro- duction is of considerable urgency. At the same time, revaluation profits should be exempted from taxation. 4.26 Consideration should further be given to the appropriate treat- ment of inventories. The widespread use of the First-In-First-Out (FIFO) method of valuation understates the costs of using and replenishing inventories in an inflationary environment. As is done in the United States and several other countries, firms should be allowed to use the more appropriate Last-In-First-Out (LIFO) method of valuation. This results in the affected inputs being valued at their current procure- ment costs, thereby more accurately reflecting the influence of inflation on the costs of production and thus avoiding the overstatement of profits. 3. The Social Security System 4.27 In 1980 around 27 per cent of the employed labor force was covered by various social insurance schemes. The major institutions involved are the State Pension Fund, which provides coverage for civil servants, the Social Insurance Institution for private sector and other public sector employees, and a similar institution for the self-employed. Contributions are assessed as percentages of the payroll or earnings and are payable by the employer and the employee. The benefits provided are for work injury, sickness and maternity, disability, old age, and death. No unemployment benefits are available. 4.28 Owing to the financial difficulties of the social security funds, contribution rates were raised in 1981. For employers, rates were raised from a range of 14.5 to 20 per cent to a range of 18.5 to 24 per cent. As is indicated in Table 4.4, using 1975 data, contribution rates for employers in Turkey are on the high side compared to other middle-income countries. Since these social securily contributions are essentially payroll taxes, they increase the cost of labor to the firm. Contributions paid by employees have also been raised from 7 per cent to 9 per cent of earnings. 4.29 In a context where it is desirable to improve international competitiveness and also to increase employment, it is important to restrain the rise in wage costs. Insofar as higher social security contributions are a causative factor, it may be necessary to reduce the contribution rates. This is especially desirable since it can be expected that, as the modernization of the economy proceeds, additional forms of social security, particularly to provide for some unemploy- ment relief and more comprehensive medical benefits, will be demanded. It may be accomplished by improving the management of the social security system, reducing certain benefits, and financing some of the social expenditures from general budget. At present the social security funds are owed large sums of money by employers, amounting to some TL 20 billion in 1980. Furthermore, some of the benefits, particularly with regard to retirement, appear excessively generous. Thus, a worker who - 184 - Table 4.4. Turkey: International Comparison of Social Security Rates Borne by Employers, 1975 (Per cent of payroll) Turkey Greece Israel Taiwan Mexico Turkey (1981) Disability, old age, and death 7.0 8.5 2.9 6.4 3.8 11.0 Sickness and maternity 5.0 4.5 0.4 -- 5.6 6.0 Work injury 0.5-6.0 0.5-1.0 0.7-4.0 -- 0.2-5.6 1.5-7.0 Unemployment -- 2.0 0.8 -- -- Family allowances -- 1.0 1.4 -- 1.0 Total 12.5-18.0 16.5-17.0 6.2-9.5 6.4 9.6-15.0 18.5-24.0 Sources: Social Security Programs Throughout the World, 1975, U.S. Depart- ment of Health, Education and Welfare, and State Planning Organization. pays premia for 14 years can retire after 25 years of service with a nontaxable pension amounting to 60 per cent of salary. Finally, on the question of financing from the general budget, see below. 4. Indirect Taxes 4.30 Several of the proposed measures will reduce the amount of revenue generated from direct taxes. Correspondingly, increased reliance would need to be placed on other sources of revenue. The proposed intro- duction of a value-added tax provides such an opportunity. This will be discussed below, following an analysis of existing indirect taxes. 4.31 A wide variety of indirect taxes are levied on domestically produced goods and services, imports, and consumption. Ranked in terms of revenue, the most important indirect taxes are the domestic production tax that is levied at the manufacturer's level on items produced locally, the banking and insurance transaction tax (financial transaction tax), the production tax on imports and the tax on monopoly or excisable products, such as tobacco and alcoholic beverages (Table 4.1). There is a retail sales tax levied on services and on certain luxury goods - 185 - that was introduced in 1970, but this has not been a major source of revenue and currently amounts to less than one-tenth of the tax on mono- poly products. Energy-related taxes, particularly the petroleum taxes, were an important source of revenue in the early 70's but have since suffered a large decline. 4.32 Despite the wide variety of indirect taxes, the range of goods and services covered is narrow. In order to raise revenue, tax bases, particularly imports, are subject to multiple taxation. Although the majority of rates are of an ad valorem nature, important items, such as petroleum products, are largely subject to specific duties. The discus- sion that follows emphasizes production and sales taxes, energy-related taxes, the banking and insurance financial tax, and considers the VAT reform proposal. Production Taxes 4.33 The production taxes are levied on four specified lists of items. The first three comprise domestically produced items while the fourth list consists of a range of imported manufactured goods that compete with domestic production (Table 4.5). 1/ The first list ircludes produced inputs such as cement, textile yarns, synthetics, and various metals that are subject to rates ranging from 12.5 per cent for cement and wood products to 75 per cent on valuable stones that enter into the production of luxury items. The second list is made up essentially of consumer durables (motor vehicles, watches, stereophonic equipment), subject to rates varying from 5 to 40 per cent, while the third list includes a variety of excisable commodities sold either by the private sector or through state monopolies. Rates for items on the third list range from 5 per cent for soft drinks to 70 per cent for alcoholic beverages. Finally, the fourth list consists of imported items that are fabricated from inputs specified in list 1 and some other items, and are subject to rates ranging from 10 per cent for imported items manufactured out of cement to 60 per cent for fur based products. 4.34 The rationale for the system of production taxes, which has remained essentially unchanged since its inception in 1957, is to avoid the cascading of tax rates that resulted from the prior system of turnover taxes by providing different treatment to successive production categories (stages of production). In cases like motor vehicles, some of whose inputs, such as metal goods or rubber, are subject to indirect taxation, rebates are provided roughly in the amount of the taxes paid on inputs. In order to ease tax administration, the rebates are given on a product-by-product basis, according to specified schedules that impute input contents. Different schedules are provided for items intended for domestic consumption and for exports. 1/ In the revenue classification adopted in Table 4.1, certain tax components- namely, the monopoly tax and the production tax on imports of the production law have been taken out in order to better show the nature ofthe tax. -186- Table 4.5. Turkey: The Production Tax l/ Tax Rate (In per cent) I. Inputs 1. Cement, fire bricks; and wood products 12.5 2. Metals a. Iron industrial group 12.5 - 15.0 b. Copper industrial group 30.0 c. Other industrial metals 30.0 - 50.0 3. a. Petroleum group TL 0.05-1.62/kg. b. LPG TL 0.40/kg. 4. Electricity and gas (TL 0.1-0.3/Kwh) 5. Rubber and synthetics 25.0 6. Furs; bones, horn, etc.; and valuable stones (jewelry) 75.0 7. Paper and paper board; and glass 15.0 - 50.0 8. Textile materials (yarns) 12.0 9. Toilet articles 15.0 - 30.0 II. Finished Products 1. Gun powder, guns, explosive materials (ammunition) 25.0 2. Matches (TL 6/1,000 sticks) 3. Vehicles 5.0 - 15.0 4. Clocks 20.0 - 40.0 5. Audio equipment 10.0 - 20.0 6. Photograph and cinema equipments 18.0 7. Ceramic products 20.0 - 40.0 8. Tires (rubber); specified medical supplies; detergents and other specified chemical agents; pressed boards and specified wood products; specified construction material; and household appliances 4.0 III. Coffee, Cacao, Glucose, Cola Drinaks (with or without alcohol) 1. Coffee TL 50/kg. 2. Cacao, cacao oil 30.0 3. Drinks with or without alcohol which are produced by the private sector 5.0 - 70.0 4. Glucose 25.0 5. Monopoly products, tobacco, alcohol, drinks, etc. 70.0 6. Cocoa concentrate 40.0 7. Salt 10.0 IV. Imports 1. Finished products from cement and fire bricks; and wood products 10.0 2. Metal goods 18.0 - 25.0 3. Rubber goods 25.0 4. Goods made of paper and hard boards 15.0 5. Goods made of glass 18.0 6. Textile products 12.5 - 18.0 7. Furs; accessories from animal products; and accessories from valuable metals and stones 60.0 8. Coffee and cacao products 25.0 9. Goods and materials in specified customs tariff schedule 15.0 - 35.0 1/ As amended in the Law (f April 1981 effective from May 1, 1981. The law provides discretionary authority to lower the rates by a maximum of 80 per cent and subsequently to restore up to the originalJ rates. - 187 - 4.35 The production taxes levied on imported items that are specified in the fourth list provide additional protection to domestic substitutes. The protection accorded is not directed at specific commodities but rather at the kinds of commodities that can be produced from the specified inputs, an approach that is intended to promote higher stages of processing. The production taxes on imports are levied in addition to the customs duties, stamp duties, wharf duties, quotas, and administrative regulations, and their implications for protection are assessed together with these other elements in Chapter 2 of this report. Here, the general remark may be made that it is more appropriate from an efficiency stand- point for the protective element of the production taxes (i.e., rates in excess of the production taxes levied on domestically produced commodities) to be incorporated in the tariff structure. 4.36 Effective from 1981, regulations on production taxes have been amended, involving increases in the range of items covered in certain of the lists, particularly list II, and some downward adjustments in the rates levied, with the net revenue effect for 1981 estimated as a loss of TL 9 billion. (These rates have been incorporated in Table 4.5.) Rebating schedules applicable to exports have also been revised. They are examined in Chapter 2 of the report. 4.37 Despite the recent changes, production taxes continue to have several shortcomings. Being limited to specific product categories, the production tax is not sufficiently broad based; the specific rates applied do not vary with inflation; and new products are not covered. At the same time, producers are required to maintain invoices for certain products on the list but not for others, thereby raising possibilities for substi- tution and evasion. 4.38 Furthermore, rebates do not fully cover. taxes paid on imports used in production for domestic use. And, the reb Ates are not provided at the time of outlay but long after the sale of the product. Conse- quently, the manufacturer is placed at a disadvantage with respect to foreign competitors. 4.39 Reliance on specific taxes may also lead to unintended distortions affecting input and product mix. Thus, for certain lines of production based on glass inputs, the existence of plastics or paper products that are substitutes and are subject to different rates of tax, may induce substitution in favor of the lowest taxed items. And, in the absence of automatic rebating, taxing the input component raises the cost of domestically produced capital goods compared to imports. 4.40 Avoiding the aforementioned problems will require a comprehensive reform involving the abolition of much of the production tax law. Scope for this is provided on the lines of the currently envisaged value-added tax (VAT). This will be examined subsequently. -188- The Sales Tax 4.41 The retail sales tax is applied on the basis of two lists of specified activities or commodities. The first list comprises services such as those provided by restaurants and nightclubs, while the second list consists of additional services and consumer durables such as audio equipment,' furs, furniture, carpets. Until the recent reform in May 1981 the tax was collected according to two schedules, the first providing for lump sum taxes (varying for different types of establish- ments), or, at the choice of the establishment, ad valorem rates ranging from 10 to 15 per cent on sales, that the establishment could apply in order to cover the lump sum payment. The second schedule had rates varying from 1 to 30 per cent that were levied on the basis of vouchers issued for each purcliase, with firms required to fully remit proceeds to the tax authority. 4.42 The sales tax has been reformed by simplifying the two schedules andclevying a tax of 3 per cent. However, the tax is still levied on Gpecific lists of items that renders the administration of the tax difficult and generates distortions such as substitution in consumption of nontaxed items. Approaches to the resolution of the problems associated with the sales tax are dealt with in the section on the introduction of the VAT. Energy-related Taxes 4.43 Energy-related taxes are levied, essentially on a specific basis, on the ownership of motor vehicles, the purchase of motor vehicles, various petroleum products, both domestically produced and imported. An ad valorem duty on imported petroleum is also levied. With the exception of the latter, revenue receipts from these sources have not kept pace with inflation, essentially the result of not adjusting the specific duties. 4.44 Table 4.6 provides an international comparison of the retail prices of gasoline and shows the extent of the disparity in prices charged in Turkey and in several Western European countries. Until recently, the retail price of gasoline in Turkey was one half or less of the prices charged in most Western European countries. In part, this reflected the influence of controlled prices that governed domestic production, but the disparity in taxes levied was also significant. 4.45 The artificially low prices may have contributed to increases in energy consumption in Turkey after the first oil shock in 1974. Between 1973 and 1978, the volume of oil imports increased by 68 per cent. Even if some offset is allowed for the decline in domestic produc- tion that occurred during the period, the volume increase is still over 50 per cent. - 189 - Table 4.6. Turkey: International Comparison of Retail Prices of Regular Gasoline (In U.S. dollars per U.S. gallon) Turkey Germany Greece Israel Italy Portugal Spain 1970 consumer prices 0.46 0.58 0.64 0.51 0.78 0.74 0.53 Of which: taxes 0.21 0.42 0.40 0.35 0.61 0.08 0.31 1971 consumer prices 0.39 0.66 0.76 0.64 0.92 0.75 0.57 Of which: taxes 0.22 0.45 0.45 0.45 0.72 0.04 0.31 1972 consumer prices 0.42 0.75 0.76 0.54 0.99 0.79 0.60 Of which: taxes 0.23 0.54 0.45 0.38 0.77 0.09 0.33 1973 consumer prices 0.42 1.18 0.88 0.62 0.99 0.85 0.78 Of which: taxes 0.23 0.83 0.18 0.43 0.76 0.10 0.39 1974 consumer prices 0.75 1.27 1.70 1.26 1.69 1.41 1.16 Of which: taxes 0.27 0.77 0.50 0.35 1.15 0.46 0.38 1975 consumer prices 0.72 1.25 1.66 1.45 1.66 1.63 1.14 Of which: taxes 0.26 0.78 1.01 0.31 1.13 0.61 0.37 1976 consumer prices 0.63 1.39 1.59 1.64 1.74 1.87 1.21 Of which: taxes 0.23 0.79 0.91 b.60 1.13 0.88 0.33 1977 consumer prices 0.58 1.44 1.81 1.84 2.06 1.78 1.39 Of which: taxes 0.21 0.87 0.93 0.80 1.48 0.77 0.34 1978 consumer prices 1.31 1.68 1.99 1.36 2.16 1.93 1.53 Of which: taxes 0.24 0.99 1.12 0.42 1.56 1.01 0.41 1979 consumer prices 1.32 2.09 2.79 2.32 2.44 2.17 2.29 Of which: taxes 0.27 1.13 1.17 1.03 1.61 1.14 0.47 1980 consumer prices 2.09 2.46 2.85 ... 3.08 3.14 2.81 Of which: taxes 0.14 1.23 0.99 ... 1.89 1.64 1.05 Source: U.S. Department of Energy, International Petroleum Annuals for various years. - 190 - 4.46 The retail price of gasoline in Turkey was substantially increased after January 1980, reducing the differences vis-a-vis Western European countries. Nevertheless, considerable differences remain, pointing to the need for increases in taxes for purposes of conservation. The same purposes may be served by taxing large automobiles more heavily and through tax incentives for energy saving to industry and households. A step in this direction was recently taken through increases in the specific taxes on the purchase and use of motor vehicles, ranging from 4 to 10 times of the amounts formerly levied. In order to avoid frequent recourse to discretionary actions, it would be more appropriate for these rates to be expressed in ad valorem terms, particularly for the vehicle purchase tax. Consideration may also be given to increasing taxes on household durables. Additional inicentives to promote energy conservation could be provided in the form of investment incentives. The Banking and Insurance Financial Tax 4.47 The general rate of the banking and insurance financial tax, levied on gross receipts such as interest on loans, commissions, and fees was 25 per cent until December 1980. A special rate of 20 per cent was applied to rediscounting operations while foreign exchange transactions were subject to a low nominal rate. Among the exemptions provided are proceeds from intrabank transactions, profits from equity in fully-owned nonbanking institutions, profits from equity in financial institutions, interest receipts on treasury bond holdings, receipts from guaranteed lending to small businesses, life and export insurance premia, and credits granted on projects with an export guarantee under the investment incentive provisions. 4.48 With effect from May 1981, the financial tax on banking and insurance has been reduced to 15 per cent. Nevertheless, it continues to raise the costs of financial intermediation that both hampers savings in financial assets and impedes the efficient functioning of the financial system as discussed in Chapter 3. Although an important source of revenue, its abolition would be desirable. The Value-added Tax Proposal 4.49 For several years, there has been support for the introduction of a value-added tax (VAT), essentially on the lines adopted by the EEC countries, in order to overcome the difficulties associated with the production tax and the sales tax. The proposal is currently at all advanced stage of formulation and the authorities have indicated a desire to introduce the VAT in 1982. 4.50 The proposed VAT is of the consumption type based on the so- called credit system, whereby a rate is applied to the total sales of the enterprise with credit given for VAT paid on inputs. The intended coverage is comprehensive, including all industrial and agricultural - 191 - production, imports, commerce, the liberal professions, and services such as posts and telecommunications. In principal, all enterprises that are currently not exempt from income tax liabilities would be covered. The major exemptions to be admitted are exports of goods and services, banking and insurance, extension services for agriculture, the construc- tion of sea, air, and railway vehicles, and a variety of social and cultural activities. The proposed basic rate of tax is 10 per cent, with a 9 per cent rate to be applied to the sales of retailers subject to the lump sum income tax scheme, and a 13 per cent rate to enterprises engaged in other services that are subject to lump sum taxes. At the same time, unlike common practice in the EEC countries that provides for full rebating of taxes paid on investment goods in the year of purchase, a tax credit phased over five equal yearly installments is proposed. 4.51 It is intended that the VAT substitute for parts of list I (excluding petroleum products and liquefied gas), as well as for lists II and IV of the production tax (see Table 4.5), but not for list III that comprises excisable or monopoly commodities. Other taxes to be substi- tuted are the sales tax and the taxes on posts and telecommunications, transport services, betting pools, and sugar production. 4. 52 The VAT would have the important benefit of neutrality as it would apply equally to all final sales. This would help eliminate existing distortions that interfere with production and consumption patterns, and it would facilitate border tax adjustments in compliance with GATT requirements. Finally, the proposed treatment of investment goods would be more systematic than at present. 4.53 The success of the VAT will, however, depend on its being intro- duced in an appropriate fashion. The authorities plan to introduce the VAT by January 1, 1984. In view of the complexity of the VAT, there will be need to allocate considerable administrative and other resources for this purpose. 4.54 Appropriate administrative arrangements will be necessary to ensure that the VAT is satisfactorily implemented. This may in turn require a postponement of the implementation date. In the process of transition, steps could be taken to prepare for the introduction of the VAT. To begin with, production taxes should be placed on a fully ad valorem basis and consideration should be given to broadening the base of the retail sales tax. Furthermore, the protective element embedded in the production or sales taxes on selected imports should be removed and incorporated in the tariff structure, so as to clearly demarcate the revenue and protective functions. 5. The Revenue Effects of Alternative Tax Schemes 4.55 Some estimates of the revenue effect of the tax reform program currently under way are presented in Table 4.7. The comprehensive nature of the reform and the volatility of the inflation rate make it particularly - 192 - difficult to estimate these revenue effects, which should, therefore, be treated with caution. In terms of revenue, the most important reform is that of the individual income tax. The reform adjusts downward the tax burden on wage earners but more than compensates by imposing a system of advance payments on unincorporated business, the revenue benefit of which, however, is of a one shot nature; the new agricultural tax; inflation induced adjustments in the lump sum taxes; and a higher withholding rate on interest and dividends paid out. At the same time, some downward adjustments in indirect taxes have been made (see Table 4.7). 4.56 In attempting to increase the tax burden on unincorporated businesses and farmers, who virtually escaped taxation in the past, the reform essentially establishes new levies that will make considerable demands on the tax administration. In anticipation of this, several important amendments have been made to tax procedural laws. Businesses are now required to display publicly signs indicating the amount of tax paid. So-called local committees, whose purpose is to determine tax liabilities, have been reformed to include greater official representation. Standards have also been set for acceptable bookkeeping and accounting, both to facilitate tax assessment and collection and to pave the way for the VAT. 4.57 The law has also been amended to avoid undue delays in the settlement of tax conflicts, that formerly took up to six years. Penalty interest rates on unpaid taxes have been increased from 32 to 43 per cent for the first year and from 24 to 36 per cent for the following years, and the 100 per cent ceiling over four years has also been abolished. Nevertheless, the penalties are still overly low compared to interest rates and in effect make the postponement of tax payments profitable. 4.58 The tax reforms recommended in this chapter include, inter alia, reductions in bracket rates and inflation indexing of the individual income tax; inflation cost accounting for both unincorporated and corporate business; reductions in the corporate profit tax rate on private business; reduction in interest and dividend withholding rates and avoidance of taxes on real capital; abolition of distortionary taxes such as the banking and insurance financial tax, the domestic production taxes (except for excisables) and the sales tax. Such adjustments would involve substantial losses in revenue. The abolition of the afore- mentioned indirect taxes alone would result in a loss in revenue amounting to about 4.0 per cent of GNP, while reductions in direct taxes may result in a further loss of revenue amounting to 2-3 per cent of GNP. 4.59 In order to make up for this revenue loss, new taxes of a less distortionary nature will need to be substituted, preferably in step with the replacement or modification of some of the old taxes. The most appropriate solution is to introduce a comprehensive VAT that has been planned by the Government. Taking note of the limited exemptions and - 193 - Table 4.7. Turkey: Estimated Revenue Effect of Tax Changes in 1981 (In billions of Turkish liras) 1981 1981 1982 1980 Estimated Estimate Budget Collections effect of (total (total (Provisional) new measures revenue) 1/ revenue) 1 Individual income tax 385.7 140.0 646.9 721.5 Of -which: Advance payments ... (170.0) Lump-sum taxes ... (30.0) ... ... Agricultural taxes ... (50.0) ... Withholding tax on movable and inmovable capital incomes ... (20.0) ... Other measures ... (10.0) ... ... Transfer to wage earners ... (-140.0) Corporate income tax 37.1 15.0 126.0 130.0 Capital gains on tax ... -0.8 4.2 7.0 Fiscal balance tax 34.9 -9.0 49.0 56.0 Motor vehicles tax 3.0 6.0 8.0 7.0 Inheritance and gift tax 2.1 -0.2 4.0 3.7 Domestic production tax 54.2 9.0 82.9 88.0 Production tax on import 35.1 -- 56.0 67.9 Sales tax 5.2 6.0 6.0 6.7 Motor vehicles sales tax 3.0 10.0 7.5 8.0 Real estate purchase tax 11.7 1.0 13.4 1.5.5 Banking and insurance ta 42.9 -7,5 75.0 75.0 Building construction ta 0.5 2.0 1.2 4.2 Stamp duty 27.3 26.0 47.5 60.0 Fees 6.3 35.0 15.6 18.5 Other 98.2 -- 183.8 170.5 Total tax ievenue 747.2 236.0 1,327.0 1,459.5 Sources: "Recent Amendments in the Turkish Tax System," General Directorate of Revenues, Republic of Turkey, Ankara, February 1981, for estimated effect of c'hanges; and Turkish authorities for other data. 1/ Inclu8ive of new measures shown in the second column. - 194 - exclusions to the VAT proposal and applying the basic rate of 10 per cent, suggests a potential revenue of 6-9 per cent of GNP. Additional revenue would also be forthcoming from higher energy-related taxes. Hence, in addition to the indirect taxes, mainly on production and sales, that the VAT proposal replaces, there is scope for implementing reforms of the system of direct taxes on the lines outlined earlier and also for the abolition of the financial tax on banking and insurance. Consequently, it would be possible to transfer the financing of some of social expendi- tures to the general budget. B. Investment Incentives 1. Overview 4.60 In order to promote investment in activities and areas regarded as desirable, a number of incentives are granted. Until the change in policy stance in 1980, investment incentives were provided in support of an investment strategy that emphasized heavy state invofvement and concen- tration on capital-intensive industries and processes. This' was part of an inward-oriented strategy that initially involved the substitution of imported consumer goods and, as such opportunities were exhausted, the substitution of imported inputs and capital goods. 1/ Moreover, foreign investment was effectively discouraged and, for a country of Turkey's size and potential, cumulative foreign direct investmeat at the end of 1979 was a mere US$228 million (Table 4.8). 4.61 The sectoral distribution of investment certificates or licenses issued in 1979 for domestic investment (Table 4.9) showed a bias in favor of manufacturing, which accounted for 93 per cent of the total. Despite the considerable potential in agriculture, its share amounted to only 2 per cent, while services that include tourism and supportive activities such as trading and banking accounted for another 2 per cent of the total. The share of mining was also about 2 per cent and that of energy was negligible. 4.62 A number of features resulting from the change in policy on investment incentives in 1980 should be noted. In order to simplify cumbersome administrative procedures, the basic authority for granting incentives to domestic investment has been centered in a newly created Office of Incentive and Implementation (TUD) in the State Planning Organization (SPO). Incentives for foreign direct investment, which are generally the same as those for domestic investment--although certain of of the conditions governing their use differ--are now under the authority of a Foreign Investment (Promotion) Department in the SPO. 1/ This process appears characteristic of inward oriented economies with the result that progressive stages of substitution involve increasingly more capital intensive forms of investment. See B. Balassa, "Incentives Policies in Brazil," World Development, Vol. 7 (1979), pp 1023-42. - 195 - Table 4.8. Turkey: Foreign Investment Under the Encouragement Scheme (In millions of U.S. dollars) Period Amounts Cumulative pre-1960 17.3 17.3 1961-70 88.2 105.5 1971-73 91.8 197.3 1974 -7.7 189.6 1975 15.1 204.7 1976 8.9 213.6 1977 9.2 222.8 1978 11.7 234.5 1979 -6.4 228,1 1980 1/ 33.0 261.1 1981 110.0 2/ 459.1 Source: S.P.0. 1/ Approximately 85 per cent of the investment shown is financed through drawing down of blocked accounts arising from unguaranteed suppliers credits. 2/ Estimate. - 196 - Table 4.9. Turkey: Sectoral Breakdown of Investment Licenses Issued Under the Domestic Incentive Law, 1976-79 (In billions of Turkish liras) 1976 1977 1978 1979 Value % share Value % share Value % share Value % share Agriculture 0.7 1.1 1.0 0.5 2.2 1.5 2.2 2.4 Mining 2.0 3.0 2.4 0.6 10.4 7.0 2.0 2.1 Manufacturing 53.0 80.2 190.4 68.9 129.1 87.2 80.1 93.0 Energy 0.4 0.6 76.9 27.7 1.4 0.9 0.3 0.3 Services 10.0 15.1 6.2 2.3 5.1 3.4 2.1 2.2 Total 66.1 100.0 277.0 100.0 148.1 100.0 86.7 100.0 Source: S.P.O. 4.63 There have also been changes in the incentive measures and in conditions that need to be satisfied for investment incentives to be granted. At the same time, some reorientation in priorities has been effected, with greater emphasis being placed on export-oriented activities, agriculture, and tourism. In the discussion that follows, domestic and foreign investment incentives are considered separately. The discussion concentrates on the procedures for granting the incentives and the nature of the incentives. Recommendations for generalizing and simplyfing investment incentives are also made. 2. Domestic Investment Incentives Procedures and Criteria 4.64 The process for obtaining incentives is begun by submitting three copies of a project feasibility survey providing basic financial, technical, and economic data to TUD. On checking for consistency with the activities to be encouraged in the General Incentives List (GIL), pre- liminary approval is granted. Next, a detailed feasibility report is submitted, which the TUD evaluates using criteria such as the balance of domestic supply and demand of the product to be produced, the capacity of the project, the potential for export, and the scope for foreign .,. .... ,,,, , .=...... ... ..... ....,¢..... .. - 197 - exchange savings. On approval of the detailed proposal, an Investment Encouragement Certificate is issued, listing the particular incentives to be provided ,the project and the special conditions, such as export commitments, to be imposed. This constitutes the basis for issuing the so-called implementation certificates. 4.65 In order to take advantage of the allowances specified in the investment encouragement certificate, a separate application for an Invest- ment Allowance Certificate has to be submitted to the SPO. For relief from customs duties to be granted, a Domestic Manufacturing Situation Certificate is also required. This certificate is obtained from the Ministry of Industry and Technology, essentially establishing that the investment good is not produced domestically, and is then submitted to the SPO for endorsement In the tourism sector, a Tourism Establishment Certificate has first to be obtained from the Ministry of Tourism and Information, which determines that-the proposed project satisfies criteria laying down standards for facilities and so forth, and is then submitted to the SPO for approval, together with the incentive application. 4.66 Exceptions from the criteria laid down are approved on a case by case basis on application to the SPO. If a project is proposed that does not feature in the GIL, the SPO on determining that the project is in the interests of the country can have the activity gazetted in the GIL. In case of a change in plans that involve adjustments in invest- ment outlays of 20 per c(ent or more from the amount featured in the approved Investment Encouragement Certificate, a separate application has to be made. Incentive Measures 4.67 The general and specific incentive measures that different sectors and activities are eligible for are stated in the GIL and include remissions of customs duties, investment allowances, and interest rebates. Remission of import related duties on the investment good can be substan- tial since it includes not only the tariff, but stamp duty, wharfage, etc. Depending on the activity, but only if the item imported is not manufactured at home, either a full exemption or deferrals, involving payments in five equal annual installments, are provided. 4.68 The duty free entry of capital goods tends to encourage capital- intensive industries and production methods. The same conclusion applies to the general allowance of 30 per cent of the cost of approved invest- ment that is limited to fixed capital. It is deductible from taxable income, provided that the size of the project is at least TL 20 million. No carry forward of any excess of the allowance over taxable income is provided. Whereas, formerly, the allowance was limited only to the own equity financed part of the investment, there is now no restriction on the mode of financing. However, a more restrictive condition has been introduced, which requires that the imported capital good be new. In addition, enterprises now have to place a so-called "finance fund" on - 198 - deposit with the Central Bank to cover the cost of the approved invest- ment that the firm draws down as the investment progresses. The counter- value of this deposit can also be deducted from taxable income, provided the deposit does not exceed 25 per cent of such income or the total cost. 4.69 The basic investment allowance is modified for particular purposes. A maximum of 60 per cent is provided for investments in under- developed regions that are listed in the GIL, and 50 per cent for Lnvest- ments that are export-oriented or engaged in tourism. Turkish engineering and construction firms are granted full exemption from the corporate income tax on any earnings repatriated from activity abroad. Finally, for designated priority sectors, the minimum size of investment that is eligible for incentives is reduced to TL 10 million and to TL 4 million for agriculture. 4.70 The benefit to the firm of the investment allowance depends on the size of the allowance and the extent of the distribution of profits. The following example takes the case of a firm that receives the 60 per cent maximum allowance and distributes one-fifth of its profits to share- holders. With distributed profits being subject to a withholding tax of 33 1/3 per cent, and undistributed profits to 20 per cent, the average withholding tax on the investment allowance will be 22.67 per cent. The incentive provision thus reduces the effective corporate income tax from 50 per cent to 33.60 per cent on profits that correspond to the amount invested (the weighted average of the 22.67 per cent withholding tax on the 60 per cent inves;,i--ent allowance, and the 50 per cent corporate income tax on the remaining 40 per cent of the value of investment). 4.71 Export-oriented investment encouragement certificates carry the particular feature of including export guarantees which specify the amount out of production that the firm will export. A general rule stated in the GIL is that a minimum of 75 per cent of the annual production from the concerned investment has to be exported for a period of five years, with the amount of annual exportation not to fall below a designated amount--US$500,000 or US$250,000 for underdeveloped regions. In 1980, US$1.4 billion of such commitments were undertaken. 4.72 In order to reduce borrowing costs, interest rate rebates to a maximum of 25 per cent are provided on medium and long-term credits for investments that are encouraged. There is some variation in the interest rebates, depending on whether an export guarantee or commitment is made, the location of the project, and its priority classification. As described in Chapter 3, the rebates are paid out from a special fund maintained by the Central Bank that is financed from levying a charge on certain categories of bank loans. 4.73 Another investment incentive is the exemption from the lump sum building construction tax, where the rates levied vary from TL 125 per square meter for constructions up to 25 square meters. to TL 1,000 per square meter for constructions exceeding 100 square meters. Finally, projects with an export guarantee are exempted from the banking and insurance financial tax. - 199 - 4.74 The SPO is empowered to monitor investments that have received encouragement certificates in order to ensure compliance with the conditions imposed. Any failure in compliance can be penalized by the suspension of the incentives provided. However, the follow up procedures are generally regarded as perfunctory. Despite widespread non-compliance, especially with firms' export guarantees, there have been few cancella- tions or limitations of the incentives provided. 4.75 The GIL lists 14 activities to be promoted in the agriculture sector, 168 activities in manufacturing of which the largest number (25) are in chemicals, 9 activities in the energy sector, and 15 in services ranging from transportation to tourism. Investments in less developed regions and in export activities in these sectors receive additional benefits. 4.76 Some of the characteristics of investment encouragement certificates issued in 1980 and in the first eleven months of 1981 are summarized in Table 4.10. The sectoral distribution of these certi- ficates shows a large increase in the share of agriculture in 1980. Table 4.10. Turkey: Characteristics of Investment Licenses Issued in 1980 and in January-August 1981 Under the Domestic Incentive Law Foreign Investment Value of exchange Employment cost per investment requirement content per employee Sector (TL billion) % share (TL billion) 1/ (thousands) (TL million) (1) (2) (1) (2) (1) (2) (1) (2) (1) (2) Agriculture 27.6 41.3 13.3 4.5 1.9 1.1 2.4 8.2 11.5 5.0 Mining 3.7 14.0 1.8 1.5 0.9 4.7 1.0 3.7 3.7 3.8 Manufacturing 161.6 429.0 78.0 47.3 61.6 182.0 45.2 52.1 3.6 8.2 Energy 13.7 0.6 6.6 0.1 5.8 0.1 0.1 0.1 137.0 4.9 Services 0.5 422.8 0.3 46.6 -- 232.0 1.8 51.6 0.3 8.2 Total 207.0 907.7 100.0 100.0 70.1 419.9 50.5 115.7 4.1 7.8 Source: S.P.0. Note: (1) year of 1980; (2) January-November 1981. 1/ Converted at Ti 76 to the U.S. dollar in 1980 and Ti 108 to the dollar in January-November 1981. As against the foreign exchange requirement, export pledges of TL 162.2 billion made for a five-year period. - 200 - Agriculture's share declined again in the first eleven months of 1981, however, as investment promotion in manufacturing industries and, in particular, in service industries, increased. The foreign exchange requirement of promoted investment for the procurement of Dlant and equip- ment, amounts to over two-fifths of total investment value. The employ- ment effect of promoted investments is relatively small compared to the size of the estimated unemployed labor force. Despite attempts on the part of the authorities to promote investment in under-developed regions of Turkey, especially since 1976, there has been limited success. In 1980 and in the first eleven months of 1981, four-fifths of the value of investment permits issued were for the more developed regions. 3. Foreign Investment Incentives Encouragement of Foreign Investment 4.77. As is noted in Table 4.8, foreign investment in Turkey has been very small. Despite a nominally liberal foreign investment law, neglect by the authorities combined with bureaucratic impediments effectively disoouraged foreign investment in the past. These problems were com- pounded by difficulties associated with profit repatriation, particularly with the onset of foreign exchange crises in late 1977. 4.78 The authorities wish to encourage foreign private investment, with a view to increasing the supply of investible resources, alleviating the foreign exchange burden, and promoting transfer of technology, manage- ment, and marketing capabilities. Foreign investors can now invest in any sector that is open to domestic entrepreneurs and receive similar incen- tives, although they are subject to different conditions. The Foreign Investment Department (FID) issues permits under its own authority for foreign capital participation in an investment of less than US$50 million, provided that the foreign equity share is between 10 and 49 per cent. However, these limitatio-as are merely a screening process and approval for proposals outside of these limits is generally provided on recommend- ation by th-e FID to the Council of Ministers. Guidelines for Foreign Investment 4.79 While practically all sectors listed in GIL are now open to foreign investment, some qualifications do apply. For certain industries, such as food, furniture, buses and lorries, clothing, a commitment is required that a proportion of total production, ranging from 25 per cent for lorries to 60 per cent for furniture, will be exported. In certain sectors that are controlled by public sector ventures, for example, TUMOSAN for diesel engines, TAKSAN for machine tools, and TESTAS for electronic goods, cooperation with these entities is required as a condition for foreign capital participation. 4.80 The general restrictions on equity ratio do not apply to tourism projects that require a capacity of at least 400 beds, with a minimum of 60 per cent allocated to foreign tourists. Investments involving Turkish workers abroad who contribute at least 25 per cent of the outlay are - 201 - freed from any restriction on the foreign equity share. This also applies to all investments inv6lving capital participation from the Middle East oil-producing countries, provided the project can generate exports to that region. 4.81 Any deviations from the conditions and values specified in the law, for example, involving capacity expansion, are approved by the FID on a case-by-case basis. In the case of participation of foreign banks in existing or newly founded banks, following a preliminary examination by FID, its recommendations are submitted to the Council of Ministers for decision after consultation with the Ministry of Fiinance and the Ministry of Commerce. 4.82 Foreign investment in Turkey amounted to $33 million in 1980 and approximately $110 million in 1981. Ninety per cent of foreign investment is in electrical machinery, vehicles, and food industry, and about one half of the foreign capital originates in Germany and France. About 85 per cent of foreign investments, however, involve using non- guaranteed trade arrears from blocked accounts with the Central Bank, arising from outstanding unguaranteed foreign trade credits. Despite the liberalization and streamlining of procedures, the economic slowdown and uncertainties as regards the repatriation of capital and earnings have caused investors to take a wait-and-see attitude before committing addi- tional resources from abroad. 4. Policy Recommendations 4.83 The substantial streamlining of procedures that has been effected has contributed to increases in investment applications. Nevertheless, there is scope for further improvements in the process of granting investment incentives. The procedures involve a large number of certificates of various kinds and despite a salutory reduction in processing lags, the inconveniences involved can be substantial. Furher efforts should, therefore, be made to reduce the nuisance effects of some of the bureaucratic procedures. 4.84 Despite attempts by the authorities to change priorities and in particular to favor exports, agriculture, and services such as tourism, some of the procedures tend to favor domestic market oriented manufactur- ing. This arises from dependance on the domestic supply-demand technique for assessing the desirability of a project, and is accentuated by requiring that plant and equipment be domestically produtced to the extent possible. The latter can lead to high cost production, thereby increasing pressure for further protection from imports. 4.85 Further questions arise concerning the use of a "positive" list, which specify the investments eligible for incentives. While some of the sectoral designations are quite broad and investors may apply for incentives also in sectors that are not included in the list, this involves additional administration and creates uncertainty. The rising number of rejections of applications for incentives also increases uncertainty and may in particular discourage smaller firms from applying. - 202 - 4.86 A more appropriate solution would be to establish a "negative" list that would designate a limited number of products, which do not receive incentives. This may include cases where foreign market limitations exist, e.g., cotton fabrics, or there is excess capacity in a sector that is oriented towards domestic markets, such as automobiles. At the same time, additional incentives may be provided to encourage those lines of activity such as engineering industries, that may be considered infant industries in Turkey. 4.87 Some of the investment incentives favor capital-intensive activities. The investment allowances apply only to investment in fixed assets, for example, and should be extended to cover investment in working capital. Ideally, a case could be made for replacing investment allow- ances by tax holidays that do not discriminate between capital and labor and do not provide proportionately greater benefits to less profitable firms than to firms with higher profits. Relief for investment in plant and equipment should take the form of depreciation allowances that relate to economic life, and are appropriately adjusted for inflation so as not to tax real capital. 4.88 In order to avoid a bias in favor of shorter-lived capital, consideration could be given to deducting any excess of the investment allowance over income in future years. The discrimination against smaller firms associated with the minimum size of investment to TL 20 million is inappropriate, particularly from the point of view of promoting employment. Smaller firms are typically labor intensive and in the absence of an investment encouragement certificate they are also denied access to foreign exchange and credit facilities. 4.89 Limiting the investment allowance only to new equipment may hinder the adoption of technologies more appropriate for Turkey's circum- stances and consideration could be given to extending the deduction to imports of second-hand equipment. Also, such incentive could be extended to cover the costs of research and development. Finally, consideration should be given to promoting energy-saving processes. 4.90 Providing encouragement to foreign investment can be of benefit particularly if multinational corporations are attracted since these can play an extremely important role in export marketing. Turkey could become attractive to multinational firms as a producer,of parts and components, in the engineering industries and for triangular arrangements, with the processing of imports originating in Common Maiket countries for exportation to the Middle East. It could also benefit from the sale of products through foreign distributors and brand name suppliers. 4.91 Foreign investors are particularly sensitive to political sta- bility, host country attitude toward foreign investors, repatriation of profits and capital. On balance, the incentives provided appear adequate although the remarks made above with regard to domestic investment incen- tives and administration apply here as well. - 203 - 4.92 While until recently there were considerable difficulties with the repatriation of capital, under current procedures repatriation is allowed with conversion to foreign currency at exchange rates applying at the time of repatriation. Nevertheless, delays occur in large part because of disputes over the valuation of equity holdings. There have also been difficulties with the repatriation of profits derived from investments undertaken before 1980. 4.93 These restrictions and procedures do not apply to new foreign investments approved by the FID. It would be desirable that improvemenss in procedures be accompanied by promotional efforts abroad. Finally, it would be desirable to eliminate the requirement of cooperation with SEEs as a condition for foreign investment in certain engineering branches. - 204 - CHAPTER 5 INDUSTRIAL DEVELOPMENT AND EXPORTS Introduction 5.1 The main thrust of past industrial development strategy in Turkey has been import substitution. The principal policy instruments have been investment allocation to the State Economic Enterprises and high levels of protection for private industry. 5.2 This strategy produced certain results. Manufacturing production registered an average annual growth of over 10 percent during the 1960-1973 period that compares favorably with other Southern European countries (Table 5.1). The share of the manufacturing in GNP rose from 13 percent in 1960 to 15 percent in 1973. Also, structural change occurred as the proportion of intermediate and investment goods in total value added increased over time. However, in per capita terms, Turkey did not match the performance of other Southern European countries and a variety of structural problems arose; low industrial efficiency; increased capital-intensity; and a strong anti-trade bias (export growth in Turkey in the 1960-1973 period was only 3 percent a year compared to about 12 percent for Greece and Spain). 5.3 These problems resulted in Turkey being caught in an impasse when the original momentum of import substitution was spent. In fact, in response to external shocks suffered after 1973, successive Turkish Governments increasingly relied on foreign borrowing. This permitted maintaining high growth rates for a while but reliance on foreign borrowing undermined Turkey's creditworthiness. With shortages of foreign exchange, growth decelerated and per capita incomes eventually declined. In response to this situation, Turkish policy makers initiated an economic reform involving increased outward orientation, with greater reliance on market forces. 5.4 This chapter examines some of the issues related to industrial development and exports. Apart from providing an overview of the structure and development of manufacturing industries and of manufactured exports, the chapter examines the principal factors affecting the growth of productivity, such as research and development and labor training. It also analyzes the comparative advantage and foreign market possibilities of Turkish industry, with attention given to preferential access to the EEC market and sales in Middle Eastern markets. - 205 - Table 5.1; GROWTH IN MANUFACTURING PRODUCTION AND EXPORTS IN FOUR MEDITERRANEAN COUNTRIES Turkey Greece Portugal Spain Growth in Manufacturing Production (%) 1960-1973 10.2 10.7 9.1 10.2 1973-1976 8.3 4.1 -1.0 3.1 1976-1979 2.1 4.4 6.3 /L 9.5 /1 1973-1979 5.2 4.2 1.9 /2 5.6 /2 Manufacturing Share in GDP (%) 1960 11 14 27 27 1973 15 18 31 26 1976 15 18 31 25 1979 19 17 33 28 Total Merchandise Export (U.S. $ million) 1960 321 203 327 726 1973 1,317 1,454 1,862 5,162 1976 1,960 2,558 1,820 8,712 1979 2,261 3,877 3,354 18,196 Growth in Total Merchandise Export (%) 1960-1973 3.0 11.8 6..4 12.3 1973-1976 1.0 11.5 3.1 7.6 1976-1979 3.8 6.8 14.7 15.3 1973-1979 0.5 8.8 4.3 11.1 Value of Manufactured Exports' (US$ million) 1960 38 19 176 126 1973 245 537 1,297 3,206 1976 493 1,253 1,231 6,035 1979 650 1,612 1,357 13,331 Share of Manufactured Exports (%) 1960 12 9 54 17 1973 19 37 70 62 1976 25 49 68 69 1979 29 42 40 73 /1 1976-78. -2 1973-78. Source: World Development Report, International Trade Statistics, and EPO, World Bank. - 206 - A. The Structure and Development of the Manufacturing Industries 1. Sectoral Composition 5.5 As shown in Table 5.2 (the figures exclude enterprises with fewer than 10 workers), a substantial part of manufacturing production in 1979 was still closely linked with primary producing sectors. About 16 percent of manufacturing value added originated in processed food, beverages and tobacco, with an additional 15 percent generated in the processing of minerals and wood. Textiles and apparel, based largely on domestically produced cotton, were the most important sector, accounting for 19 percent of manufacturing value added in 1979; they also provided a large share of Turkish manufacturing exports. 5.6 In terms of growth rates, wood products (10 percent), chemicals (14 percent), non-metallic minerals (11 percent), and engineering products (12 percent) were the leading sectors in the 1967-79 period. Within the latter group, non-electrical machinery grew by 13 percent a year, electrical machinery registered an annual average growth of 16 percent, and transport equipment 10 percent. As a result, engineering industries accounted for 17 percent of manufacturing value added in 1979 as compared to 10 percent in 1967. 2. Ownership 5.7 In 1979, 32 percent of manufacturing value added originated from the public sector, which also provided 36 percent of employment. 1/ The public sector is dominant in tobacco (91 percent of production), petroleum (87 percent) and paper and paper products (60 percent). It also has a large share in basic metals, especially in steel and aluminum. The private sector, on the other hand, is involved primarily in light industries such as textiles and clothing, furniture and wood products, rubber and rubber products, and non-metallic minerals, as well as in engineering industries, such as electrical and non-electrical machinery and transport vehicles. 3. Size Distribution 5.8 On the whole, small (establishments with less than 50 workers) and medium-scale establishments (employing 50-200 workers) are predominant in Turkish manufacturing. 2/ By contrast, large establishments dominate the public sector. While only 7 percent of private establishments employ more 1/ A fuller discussion is found in Chapter 6. 2/ IBRD: Turkey - Prospects for Small- Medium-scale Industry Development and Employment Generation. 1980 Table 5.2; STRUCTURE AND GROWTH OF MANUFACTURING /1 (constant 1968 prices, million TL)) Value added Growth (% per year) Share in rnanufacturing (%) Sector 1967 1973 1979 1967-73 1973-79 1967-79 1967 1973 1979 Food and Beverages 2,184 3,039 3,391 5.7 1.8 3.7 17.0 13.5 11.5 Tobacco Processing 1,311 1,959 1,415 6.9 -5.3 0.6 10.2 8.7 4.8 Textiles and Apparel (including shoes) 2,017 3,670 5,637 10.5 7.4 8.9 15.7 16.3 19.1 Wood products and Furnitures and Fixtures 141 90 442 -7.2 30.4 10.0 1.1 0.4 1.5 Paper and Paper Products 270 563 472 13.0 -2.9 4.8 2.1 2.5 1.6 Printing and Publishing 206 315 354 7.4 1.9 4.6 1.6 1.4 1.2 Leather and Fur Products 26 7 89 -19.9 150.4 0.8 0.2 0.0 0.3 Rubber Products 450 540 1,091 3.1 12.4 7.6 3.5 2.4 3.7 Chemicals 758 1,531 3,686 12.4 15.8 14.1 5.9 6.8 .12.5 Petroleum Refining and Petrol and Coal Products 1,979 3,692 1,828 11.0 -11.1 -0.7 15.4 16.4 6.2 Non-metallic Mineral Products 565 1,058 2,005 11.0 11.2 11.1 4.4 4.7 6.8 Basic Metals 1,028 2,229 2,713 13.8 3.3 8.4 . 8.0 9.9 9.2 Metal Products 655 833 1,386 4.1 8.9 6.4 5.1 3.7 4.7 Machinery 385 901 1,592 15.2 10.0 12.6 3.0 4.0 5.4 Electrical Machinery 244 585 1,386 15.7 15.5 15.6 1.9 2.6 4.7 Transport Equipment 630 1,508 1,976 . 15.7 4.6 10.0 4.9 6.7 6.7 TOTAL 12,848 22,520 29,463 9.8 4.6 7.1 100.0 100.0 100.0 /1 Establishments employina 10 or more workers. Source; SIS and Mission calculation. - 208 - than 200 workers, this is the case for about 80 percent of establishments in the public sector, and the average public manufacturing establishment is roughly 10 times the size of the average private manufacturing establishment. 1/ 5.9 The data refers to establishments employing more than 10 workers. Between 1970 and 1977 the total number of these establishments increased from 4,819 to 8,537, or by 77 percent. The increase was even larger in the mediujm (50-200) and small scale industry (10-49) sectors, wlhere the number of establishments rose by 88 percent and 82 percent, resprctively. 5.10 -Turkey's industry suffers from the problem of uneconomically small size of establishments. The technically optimal scale of establishment exceeds the average size by a factor of ten in ethylene, bricks, and tractors, and by a factor of twenty or more in sulfuric acid and diesel engines. 2/ This is in part the result of the import-substituting strategy applied that permitted small establishments to be set up, often with the duplication of facilities, in the protected domestic market. 4. Regional Distribution 5.11 Istanbul accounted for 42 percent of the total number of establishments, followed by Marmara, Izmir and Ankara regions with 14 percent, 10 percent and 8 percent, respectively, in 1977. 3/ Istanbul also had the highest concentration in most industries, especially in chemicals (62 percent), engineering industries (52 percent) and textiles (47 percent). 4/ 5. Capital Intensity 5/ 5.12 Calculations of capital-labor ratios are fraught with difficulties due largely to the valuation of capital. In the 1972-75 period, capital intensity was on the average about 50 percent higher in public than in 1/ K. Ebiri, Z. Bozkurt and A. Culfaz; Capital and Labor in the Turkish Manufacturing Industry. SPO 1977 2/ Ebiri et al op. cit. Table 2.1, p. 28. 3/ 1978-83 Plan, SPO. 4/ IBRD Turkey; "Prospects for Small- Medium-Scale Industry Development and Employment Generation", op cit p. 20 Table 6. 5/ Estimates of capital stock were derived by depreciating existing capital stock and adding new investment to it. A benchmark was provided by the 1965 SP0 data on capital stock in "Turkiye Imalat Sanayiinde Sermaye ve Isgucu." (Capital and Labor in Turkish Manufacturing Industry), Ankara, December 1977. The relative efficiency of public and private sectors in terms of comparative use of capital and labor by public and private enterprises between 1963 and 1976 is examined in Anne Krueger.and Baran Tuncer, "Estimating Total Factor Productivity Growth in a Developing Country" World Bank Staff Working Paper No. 422. The main findings of the paper are summarized in Chapter 6. - 209 - private sector enterprises; the ratio would be even higher if overstaffing in public enterprises was avoided. 1/ Part of the explanation lies in the prevalence of private firms in light industries and engineering that have relatively low capital-labor ratios; these ratios are generally high in intermediate product industries where public firms predominate (Table 5.3). 6. Labor Productivity 5.13 During the 1965-1975 period, average labor productivity (value added per worker) in the private sector increased by 9 percent a year compared with 7 percent a year in the public sector. 2/ Private sector industries with above-average productivity growth rates included engineering, tobacco processing, paper, rubber and petroleum. 5.14 In 1979, private sector exhibited higher levels of labor productivity in all sectors except for wearing apparel (Table 5.4). In manufacturing as a whole, labor productivity was on the average 30 percent higher in the private than in the public sector. However., the public sector paid 32 percent higher average wages and salaries than the private sector. 1/ Ebiri et al p. 25. 2/ Ibid. Comparable series to cover recent period is not available. - 210 - Table 5.3; CAPITAL REQUIREMENTS PER JOB IN i980 Industry Capital requirements per job (TL million) Ranking Crude Oil Extraction 95.2 1 Fertilizer 36.2 2 Oil Refining 30.7 3 Energy 25.7 4 Iron and Stisel 17.8 5 Cement 16.1 6 Paper 12.7 7 Flour and Flour Products 8.2 8 Fruit and Vegetable Processing 8.1 9 Skin and Fur 6.8 10 Sugar 6.5 11 Agriculture Machinery 6.1 12 Slaughter House 5.3 13 Beverages 5.1 14 Motorvehicles 5.0 15 Furniture 4.9 16 Textiles 4.8 17 Plastics 4.8 18 Tobacco 4.5 19 Vegetable Animal Fat 4.1 20 Electrical Appliances 3.9 21 Metal Works 3.8 22 Clay Products 3.6 23 Raw Material Extracting 3.5 24 Apparel 2.2 25 Drugs 2.0 26 Stone Extracting 1.6 27 Construction Materials 1.5 28 Shoe 1.2 29 Source; State Planning Organization; "Briefing given to the Council of Ministers on results obtained from Economic Stability Measures" October 24, 1980. - 211 - Table 5.4: VALUE ADDED PER WORKER IN MANUFACTURING 1979 (TL Thousand) Industry Public Private Processed Food 222 348 Beverages 603 689 Tobacco 402 461 Textiles 236 413 Wearing Apparel 339 206 Fur and Leather Products - 294 Wood and Cork 287 392 Furniture and Fixtures 231 638 Paper 225 638 Printing and Publishing 291 417 Chemicals 881 1,045 Petroleum 2,210 2,380 Rubber and Rubber Products 117 539 Non-Metallic Minerals 291 415 Basic Metals 267 657 Metal Products 1,014 387 Machinery 372 414 Electrical Machinery 231 534 Transport Equipment 312 530 Miscellaneous 250 310 Total 374 482 Source; SPO, Calculated from Tables in Statistical Annex 7. Employment in Manufacturing 5.15 Between 1967 and 1973, the manufacuring sector played an important role in absorbing increments to the labor force, which was growing at 1.2 percent a year during this period. The rate of growth of manufacturing employment has however declined from 4.6 percent a year in 1967-73 to 1.7 percent a year in 1973-79 (Table 5.5). The decline in the rate of growth of manufacturing employment was partially attributable to the slowdown in the expansion of manufacturing value added, from 9.8 percent in l967-73, to 4.9 percent in 1973-79 (Table 5.2). Another factor was the government's import substituting development strategy, which channelled a large part of industrial investment to capital-intensive industries and projects, particulary in the public sector. Thus, expressed in 1976 prices, the - 212 - average capital cost per job creaced in the manufacturing sector increased from TL 267 thousand during the First Plan period (1963-67) to TL 572 thousand in the Third Plan period (1973-77). 1/ Table 5.5: SECTORAL DISTRIBUTION AND GROWTH OF EMPLOYMENT Annual Percent Shares Growth Rates 1967 1973 1979 1967-73 1973-79 Agriculture 77.0 66.1 62.5 -0.3 -0.2 Industry /1 7.9 11.1 11.8 4.3 2.2 Manufacturing (7.2) (10.0) (10.3) (4.6) (1.7) Services 15.1 22.8 25.7 3.9 4.0 Total 100.0 100.0 100.0 1.2 1.2 /1 Includes mining, manufacturing, electricity, gas and water. Source: SPO. B. The Development of Exports 1. Manufactured Exports 2/ 5.16 Historically, government policies in Turkey were not conducive to export expansion. The strong anti-trade bias of the development strategy applied is demonstrated by the fact that merchandise exports constituted only 4 percent of GNP in 1979, compared to an average of 20 percent for 55 middle-income developing countries. Moreover, exports were largely confined to foods and a few traditional manufactured products such as textiles, and leather products. With some notable exceptions, Turkish firms tended to export occasional surpluses and appeared disinclined to invest with a view to continuing export commitments. Even this modest effort should be largely credited to the private sector, which accounted for about 85 percent of manufactured exports. 5.17 Manufactured exports experienced a period of rapid growth in the early 1970s, following the devaluation of 1970, and their share in total merchandise exports increased from 10 percent in 1970 to 25 percent in 1/ Turkey; Labor Intensive Industry Project -- Staff Appraisal Report. World Bank, 1981. p. 4, footnote 3. 2/ The composition of industrial exports is shown in Table 5.6. Manufactured exports are defined as industrial exports less food and beverages and petroleum products. TABLE 5.6; COMMODITY COMPOSITION OF EXPORTS AND CONTRIBUTION TO EXPORT GROWTH, 1972-1980 Percent Composition Export Values ($mn) Percent Composition Industrial Exports 1972 1979 1980 1972 1979 1980 1972 1979 1980 Agriculture and livestock 607.4 1,343.6 1,671.7 68.6 59.4 57.4 Mining and quarry products 35.1 132.5 191.0 4.0 5.9 6.6 - Industrial Products 242.4 785.1 1,047.4 27.4 34.7 36.0 100.0 100.0 100.0 Food and beverages 87.3 135.0 190.2 9.9 6.0 6.5 36.0 17.2 18.2 Petroleum products 22.3 0.0 38.5 2.5 0.0 1.3 9.2 0.0 3.7 Manufactured products 132.8 650.1 818.7 15.0 28.7 28.1 54.7 82.7 78.1 Textiles 54.8 390.7 439.8 6.2 17.3 15.1 22.6 49.8 42.0 Forestry products 4.9 4.7 8.1 0.6 0.2 0.3 2.0 0.6 0.8 Hides and leather products 21.5 43.6 49.5 2.4 1.9 1.7 8.9 5.5 4.7 Chemicals 11.2 27.2 91.9 1.3 1.2 3.2 4.6 3.5 8.8 Cement 15.2 44.9 39.6 1.7 2.0 1.4 6.3 5.7 3.8 Glass and ceramics 3.7 37.1 35.9 0.4 1.6 1.2 1.5 4.7 3.4 Non-ferrous metals 5.9 14.6 18.3 0.7 0.6 0.6 2.4 1.8 1.7 Iron and steel 7.4 31.1 33.9 0.8 1.4 1.2 3.0 4.0 3.2 Metal products and machinery 4.1 18.1 29.8 0.5 0.8 1.0 1.7 2.3 2.8 Electrical appliances 0.9 4.5 11.5 0.1 0.2 0.4 0.4 0.6 1.1 Motor vehicles 0.3 26.6 50.3 -- 1.2 1.7 0.1 3.4 4.8 Others 2.9 7.0 10.1 0.3 0.3 0.3 1.2 0.9 1.0 Total Merchandise Exports 885.0 2,261.2 2,910.1 100.0 100.0 100.0 - - - Source; SPO - 214 - 1975. Subsequently, the share of manufactured exports declined as the effect of the devaluation was more than offset by faster inflation in Turkey than abroad and exports were further discouraged by the booming and more lucrative domestic market. 5.18 The January 1980 policy reform involved a large devaluation and greater exchange rate flexibility. However, manufactured exports started to rise only after the September 1980 military takeover. They reached $819 million in 1980, representing an increase of 26 percent over 1979. This upward trend accelerated in 1981; in the first seven months, manufactured exports were 106 percent above the corresponding period in 1980, with their share in the total reaching 39 percent. 5.19 Manufactured exports in 1980 accounted for 4 percent of manufacturing production, with textiles representing 54 percent of these exports, followed by chemicals (11 percent) and hides and leather products (6 percent). Although they are still at a very low level, exports of automotive industries, metal products and machinery have grown at a rapid rate since January 1980. 5.20 In earlier years, the markets of the industrialized countries, and especially EEC, absorbed a very large proportion of Turkish exports. From 1977 to 1980, the share of OECD (EEC) markets in Turkey's total merchandise exports declined from 70 percent (50 percent) to 58 percenit (43 percent) while that of Middle Eastern countries increased from 13 percent to 22 percent. In the first seven months of 1981, exports to Middle East countries constituted about 42 percent of the total merchandise exports. 5.21 On the assumption that policy measures towards export promotion conitinue to be implemented, and some of the marketing constraints removed, manufactured exports may increase between 27-30 percent in real terms during 1981-1985 (Table 5.7). 1/ This growth rate is attainiable given its present small base and considerable potential for diversification in both products and markets. 1/ In the projections two versions are used--base scenario and an optimistic scenario. The assumptions are given below; Average Annual Growth Rate (1981-85) Base Alternative GDP 4.1 4.8 Manufacturing production 6.2 6.5 Merchandise exports 19.1 21.3 Manufactured exports 26.9 29.6 Merchandise imports 4.8 6.7 The SPO assumes that manufactured exports would grow at an annual a,~erage rate of 30 percent during 1981-83. Table 5.7: PROJECTIONS OF MANUFACTURED EXPORTS & PRODUCTION (In millions 1980 TL) Projections 1980 1981 1982 1983 1984 1985 Base Alt. Base Alt. Base Alt. Base Alt. Manufacturing Exports 63 103 125 128 146 154 171 185 198 221 Manufacturing Production 1,476 1,546 1,631 1,651 1,742 1,767 1,862 1,891 1,990 2,025 Manufacturing Exports as share of Manufacturing Production (X) 4.3 6.7 7.7 7.8 8.4 8.7 9.2 9.8 9.9 10.9 Source: SPO and Mission Projections - 216 - 5.22 The share of manufactured exports in manufacturing output is projected to increase to 10-11 percent by 1985 from 4 percent in 1980. 2. Construction Contracts 5.23 The performance of Turkish contractors in the Middle East has been remarkable. During the last two years, the value of construction contracts increased from $2.5 billion to $10 billion; it may reach $15 billion in a few years. These contracts are mostly in Saudi Arabia, Libya, and Iraq, and cover the construction of buildings, roads, irrigation projects and industrial plants (cement). 5.24 Enka Holdings, the largest contracting firm has currently four contracts in Saudi Arabia; a water treatment plant in Riyadh ($50 million); two pumping stations on the Jubail-Riyadh pipeline ($20 million); the water distribution system in Riyadh ($20 million); and a water channel in Jubail ($50 million). In Iraq, Enka has subcontracted work on a sewage system and cement factory ($30 million). In Jordan, its share in the construction of a potash plant is valued at $40 million and it is exporting to Jordan and Iraq this year 7.5 million tons of steel worth $11 million. In Libya, Enka has formed a joint venture with another Turkish company for a $260 million housing project. 5.25 With a three-year average contract period, the gross receipts of Turkish contractors abroad may reach $5 billion a year by 1985. Of this total, profits may account for 10 percent, workers' remittances for 20-25 percent, exports of construction materials 10-15 percent, and various services for 5-10 percent. Profits are not fully remitted to Turkey as most firms are using them to expand their scale of operations. However, once optimum size is reached, considerable repatriation of profits is expected. In addition, overseas contracting helps to alleviate the unemployment problem and workers' remittances contribute to fareign exchange receipts. The use of Turkish labor is likely to be particularly pronounced in Middle Eastern countries and Libya as the scarcity of local labor resources necessitates importing labor. 5.26 Contractors face two major constraints in expanding their overseas operations. One is inadequate working capital financing. The second is the lack of acceptance of Turkish performance bonds by Saudi Arabia, which will not accept the Turkish Central Bank exchange guarantee on Turkish commercial bank performance bonds. 5.27 The first constraint could be relieved through the banking system, possibly with TSKB assistance for foreign wQrking capital requirements. The second constraint can be removed through creation of a guarantee fund, the establishment of-which is being negotiated by IFC. The Central Bank in recent months has not only speeded-up the process of obtaining commercial bank guarantees but also concluded direct agreement to back Turkish bank guarantees when they were not acceptable abroad. An encouraging sign is that for the first time a Turkish bank - Is Bankasi - is on the approved list of the Saudi Arabian Monetary Agency, albeit with a limit of only $13 million per contract. - 217 - C. Investments and Capacity Utilization 1. Changes in Investment over Time 5.28 Investment in manufacturing doubled between 1970 and 1975 but declined afterwards. In 1980, it was 11 percent below the level reached in 1975. In the same year, the share of public sector investments in manufacturing reached 65 percent as compared to 34 percent in 1965 and 40 percent in 1978 (Table 5.8). Table 5.8: INVESTIMENT IN MANUFACTTJRING, INDUSTRY (in millions of 1976 Turkish Liras) 1965 1970 1975 1978 1979 1980 Amount Share Amount Share Amount Share Amount Share Amount Share Amount Share Public Investment in Manufacturing 2,439 33.8 8,031 42.3 18,127 46.5 15,556 40.1 20,714 56.8 22,560 64.8 Private Investment in Manufacturing 4,775 66.2 10,977 57.7 20,828 53.5 23,182 59.8 15,728 43.2 12,263 35.2 Total Investment in Manufacturing 7,214 100.0 19,008 100.0 38,955 100.0 38,782 100.0 36,442 100.0 34,823 100.0 Source: SPO - 219 - 2. Private Sector Investment 5.29 Private manufacturing investment declined by nearly one-half between 1978 and 1980. Preliminary data indicate that only in chemicals, where domestic demand is not fully saturated and firms have also been able to find outlets in Middle Eastern countries, and non-metallic minerals, which has been little affected by declining demand, has the level of investment been maintained (Table 5.9). In turn, investment has declined the most in food processing, textiles, iron and steel, and electrical machinery. Table 5.9; PRIVATE MANUFACTURING INVESTMENT, 1980 (1978 = 100) Food processing 38 Textiles 47 Chemicals 102 Earthenware 100 Iron and Steel 39 Non-electrical machinery 55 Electrical machinery 24 Transport equipment 84 Other 71 Total 63 Source: TSKB 5.30 One of the reasons for the sharp decline in private investment in the manufacturing sector is the low extent of capacity utilization. In the aggregate, capacity utilization is estimated to have been 56 percent in 1978, 45 percent in both 1979 and 1980. At the same time, the figures tend to understate the extent of capacity utilization since they are based on single-shift working that will not generally be appropriate under conditions of capital-scarcity existing in Turkey. 5.31 As shown in Table 5.10, capacity utilization rates are especially low for copper, sulphuric acid, nitrogen fertilizers and the automotive industry (tractors, trucks, cars and buses). The principal reasons behind low capacity utilization in 1979 were shortages of industrial raw materials, oil and power. The reasons behind the low rate of capacity utilization during the first three quarters of 1980 included shortages of imported inputs caused by scarcity of foreign exchange, depressed domestic demand, labor disputes, affecting especially the textiles, glass and metal working industries, which resulted in the loss of 7.7 million man-days (about 20 percent more than the total for the preceding eight years) during the period, power shortage, and the scarcity of funds. - 220 - Table 5.10: CAPACITY UTILIZATION OF SELECTED INDUSTRIAL SUBSECTORS, 1980 Capacity 1980J Production as Utilization Compared to Rate 1980 Previous Peak (%) Coal - 72 (1969) Copper concentrate 27 56 (1974) Ferrous metals 59 92 (1979) Sulphuric acid 18 70 (1977) Cement 62 84 (1977) Tractors 19 38 (1976) Trucks 25 40 (1977) Cars 36 47 (1975) Buses 42 88 (1975) Minibus 23 37 (1975) Lignite - 100 (1980) Alumina 69 83 (1977) Ammonia 67 100 (1980) PVc 52 93 (1976) Polythelene 50 54 (1974) TV 29 42 (1976) Electric motors - 29 (1978) Aluminium 55 64 (1977) Copper blister 25 50 (1977) Fertilizer - nitrogen 27 61 (1974) Fertilizer - phosphate 40 83 (1976) Ingot 45 88 (1976) Source: TSKB 5.32 Capacity utilization rates increased in the last quarter of 1980, with an average of 57 percent, and the trend is continuing in the first quarter of 1981. 1/ Nevertheless, the extent of capacity utilization continues to remain relatively low. 5.33 The short-term outlook for private manufacturing investment is not promising. The major constraints include low domestic demand, scarcity of funds and high interest rates. However, the private sector is more optimistic today than it has been in the past several years. The threat of terrorism is practically over and investors are more confident of continuity and stability of economic policies. 1/ Istanbul Chamber of Commerce. "Findings of the ICI study on Industrial Production in 1981" in Review of Istanbul Chamber of Industry, June 15, 1981. - 221 - 5.34 Improvements in the long-term outlook are reflected by increases in both Investment Encouragement Certificates and Foreign Investment Permits. In the first eleven months of 1981, the government issued TL 908 billion worth of Investment Encouragement Certificates, xb against TL 207 billion for the entire year 1980. A similar picture emerges in the case of Foreign Investment Permits which surpassed $300 million in 1981, as against $97 million in 1980. 3. Public Sector Investment in Manufacturing 5.35 Over the years, the public sector investment program 1/ was characterized by weaknesses in project evaluation and preparation, resulting in the poor choice of projects and the underestimation of both investment costs and construction periods. Human and financial resources were spread too thin over too many projects, with an excessively large proportion of unfinished projects and large construction periods. 5.36 In the 1981 Investment Program, the government has reduced the share of manufacturing in total public investment to 21 percent, as against an actual share of 27 percent in 1979. However, the number of projects included in the program is still large. This will necessarily extend the period of completion. Thus, the total project cost of all approved projects is TL 1,877 billion, while the 1981 allocation provides only TL 87 billion (both at 1980 prices). If the projects included in the 1981 Program are to be completed on schedule, TL 632 billion would be reqquired during the 1982-1985 period (at 1980 prices), which considerably exceeds the level warranted by the availability of domestic and foreign resources. It compares with an investment allocation of TL 368 billion for the 1982-1985 period proposed in the Bank's recent report, 2/ which would roughly continue the 1981 level of allocation for the public manufacturing sector. It would thus be necessary to seriously reevaluate some projects which may have dubious and uncertain economic merits. The projects which fall into this category according to the Bank's Public Investment Review, are the Sivas Fourth Steel Mill, the rebuilding of the metallurgical facilities of the Karabuk Steel Mill, the proposed tire factory, the expansion of special steel production at Kirikkale, the construction of the special steel plant at Izmir, the Izmir refinery expansion, the Middle Anatolian project and pipeline, and the Tumosan tractor and diesel engine products. In the 1982 Program the Government has further reduced the share oi manufacturing in total investment to about 19 percent. Also the Government has dropped a number of projects including the Sivas Fourth Steel Mill, the special steel production (Kirikkale), the fourth fertilizer complex, the Tumosan integrated diesel engine plant, and several tobacco and electrical machinery plants. In addition, negotiations are underway 1/ An extensive study covering relevant aspects of Public Sector Investment Program was carried out by IBRD in a report entitled "Turkey; Public Sector Investment Review" December 7, 1981. 2/ Turkey; Public Investment Review, op. cit. Volume II, Chapter 2, page 40, Table 2.3. -222- with foreign suppliers to delay other projects in the program. Ways are also being explored to considerably lengthen the implementation of the expansion of Middle Anatolian Refinery which is at an advanced construction stage. These have resulted in better completion rates. Out of the 824 industrial projects still in the program, 56 percent are scheduled to be completed in 1982 and another 23 percent in 1983. 5.37 The intrasectoral breakdown of public investment recommended by the Bank's Public Sector Investment Review aims at adopting a strategy under which the public sector concentrate on investment in selected basic industries, and gradually reduce its commitment to various intermediate goods and light industries. Nor is public sector involvement desirable in projects such as the manufacture of tractor and truck engines, where Turkish private investors should be able to provide for domestic and, increasingly, export demand. D. Factors Affecting Productivity 5.38 Over the past several decades, a wide range of industries have been established in Turkey, first in the public sector and, subsequently in the private sector. There are, at the same time, several factors adversely affecting productivity, the quality of output and, more generally, the growth of manufacturing industries. Apart from the system of protection discussed in Chapter 2, they include; (a) insufficient research and development; (b) inadequate facilities for labor training; (c) deficient technical and management methods (product design and new product development), production planning and work methods, quality control etc.; (d) out-of-date machinery; (e) marketing problems; and (f) level of technology. 5.39 Not all of these problems necessarily apply to every enterprise. Their relative importance varies with the particular industrial activity, size of establishment, and the circumstances of each enterprise. At the same time, the pursuit of an outward oriented strategy would require faster technological progress through research and development, improvements in labor efficiency through labor training, and adequate marketing facilities and institutions. Research and development and labor traiuning aspects will be discussed in this section, while marketing will be taken up in Section F. 1. Research Activities 5.40 Prior to 1960, research and development was entrusted to the universities that carried out little applied research. Industrial research was practically non-existent. Rather, the emphasis was on the transfer of technology from industrial countries. To support such transfers, institutions such as Electrical Power Resources Survey and Development Administration, Mineral Research and Exploration Institute, Sugar Institute and Agricultural Experimental Stations were established by the Government. - 223 - 5.41 The Turkish Government's technological goals were stated in five year plans after 1960 as follows; a. In order to achieve the dual purpose of adopting contemporary technologies and creating new technologies to suit Turkey's own requirements, there would be need to establish research and development activities in close collaboration with industry and aiming at results directly related to industrial production; b. effective cooperation should be secured in the area of scientific and technological research among public institutions, educational institutions, and private establishments; and c. addition to developing technological cooperation with the advanced industrial countries, an effective and continuous cooperation is desired with countries who are endowed with economic capabilities similar to Turkey's. 5.42 While these objectives were laudable, previous government did little to implement them in practice. As shown in Table 5.11, research and development have a very low share in total GNP, and the ratio has declined over the years. Table 5.11: R&D EXPENDITURES (in million TL at current prices) R&D R&D GNP Year Expenditures GNP % 1964 247.4 66,829.3 0.37 1969 434.6 117,463.5 0.36 1970 492.0 135,610.2 0.37 1971 554.4 182,359.8 0.30 1972 662.4 214,758.6 0.3]. 1973 - 1974 - 1975 1,218.8 535,711.0 0.23 1976 1,571.5 670,037.8 0.23 1977 2,878.0 870,239.4 0.33 1978 2,761.1 1,288,662.4 0.21 1979 4,919.4 2,178,367.4 0.23 Source: TUBITAK and SPO. - 224 - 2. The Organization of Research 5.43 The principal source of technical support in Turkey is the Turkish Scientific and Technical Research Council (TUBITAK) established in 1963. TUBITAK is, however, oriented largely towards the public sector and it has not been the source of technological innovations. Also, it lacks specialization and has made little effort to adapt foreign technology to Turkish conditions. 5.44 In the first years following its establishment, research projects supported and/or guided by TUBITAK were largely academic and not directly related to industrial problems. To remedy this deficiency, Marmara Scientific and Industrial Research Institute was set up in 1966 under the auspices of TUBITAK. Over the years, the Marmara Institute has grown considerably and at present it accounts for over 50 percent of the entire TUBITAK's budget. Although the projects undertaken by the Marmara Institute are industry oriented, there is insufficient collaboration with the private sector, and the research stage has not been followed by "pilot plant" and "semi-commercial" stages. In addition, its research activities tend to concentrate on metallurgical and material problems, with practically no support available for the engineering industries. 5.45 Nor has the private sector made significant research and development efforts. There are a few of large engineering consulting firms, but these only engage in tasks related to inventory control, production planning and factory layout, and consider such work as a secondary activity. Also, out of the 25 plants visited by the mission, only one claimed to be spending close to one percent of its profits on R&D. There appears to exist managerial inertia in this area. Plant managers generally seemed unaware of the amount of work that ought to be done in applied research and development to improve products, labor productivity and the organization of work. Recommendations 5.46 On the example of Korea, the government may contribute to the promotion of technological progress through the establishment of specialized institutes of applied research. Such institutes may play an especially important role on certain engineering branches and in the chemical industry. 5.47 The establishment of applied research institutions would need to be complemented to tax incentives to research and product development by private firms. This should be part of a medium-term plan of science and .technology, which would also provide for the further development of technical universities. 3. Labor Training 5.48 Labor efficiency and the general level of training in most industrial sectors are relatively low in Turkey. At the same time, private training facilities are qualitatively and quantitatively inadequate to meet - 225 - the requirements. Most establishments visited by the mission appeared to pay little attention to ttaining needs, and few set up effective training programs. Rather, managers prefer to provide on-the-job training. The Labor Ministry also tends to concentrate its efforts on on-the-job training, rather than on general training that would provide transferable skills. 5.49 An exception is in the mining sector, where Etibank has extensive training facilities at Seydisehir, and it also provides financial support to trainees in the form of grants and/or scholarships. At the Seydisehir Practical Training Center 800 persons can be trained annually and the Center has boarding facilities for 400 trainees. Although the training center is not exclusively for Etibank employees, its full capacity has not been used. In 1980, only 124 persons received training at the Cente'. 5.50 In the traditional workshops, the system of training is often inadequate. In the leather and footwear industry, this is related to ,he use of old-fashioned and "rule of thumb" methods in tanning and to the failure to introduce modern equipment and methods in shoemaking. There is further need for upgrading in tasks requiring high precision work. For instance, in engineering, there is need to train fitters and machinists to make press tools, dies, jigs and fixtures. 5.51 A program of upgrading industrial skills, supervised by Minister of Industry, started in 1964 with USAID financing. The fields of training included welding, technical drawing, furniture making and woodworking, machinery and sheet metal work. The trainees were semi-skilled workers from the private sector. However, over the years fewer and fewer workers have been receiving such training. In 1977, no program was offered because instructors were unavailable. As USAID financing is gradually decreasing, the program is being curtailed because of inadequate funding. 5.52 Managerial and technical training is done by sending staff occasionally to attend seminars run by universities, commercial organizations and other organization like SEGEM (a joint UNIDO/government program). Such training is also provided by some Turkish consulting groups, but their production and operational skills are relatively low. The National Productivity Center set up by the Government is providing some training facilities, but is constrainied by availability of skilled manpower, especially to train personnel of engineering industries. Recommendations 5.53 Since the benefits of the training may not be full-: realized by the firm, the private sector is reluctant to engage in training activities. To encourage such activities, tax preferences may be provided to firms that are undertaking training. Also, t';ere would be need for increased technical education of various levels. 5.54 Efforts made to increase research and training would benefit, in particular, the electrical and non-electrical machinery, machine--tool, and electronics industries, which have been neglected in the past by comparison - 226 - to metals where government investment played an important role, and the automotive sector that expanded at high costs in the framework of protected domestic markets. These industries may also receive additional incentives on infant industry grounds. Rather than protection, such incentives should aim at reducing the cost of production, in order to provide low-cost inputs to other industries and encourage exports. One should also examine the feasibility of establishing specialized industrial parks whe-re ancillary activities would be available. Also, the services of foreign engineering consultants may be obtained to review plant layout and the organization of work, with a view to suggesting productivity improvements. In Korea, this is done in the framework of an investment project financed by the World Bank. E. Comparative Advantage 1. Manufacturing in General 5.55 Turkey's comparative advantage in manufactured exports rests on its natural resources, its labor and some engineering skills and its location. Natural resources yield a variety of agricultural, forestry, and mineral-based products for further transformation. Skilled manpower can be made available, both for engineering and product design and for machine operation. Turkish wages are considerably below those of its European trading partners, and the differences are even larger if account is taken of social security charges that often exceed 50 percent in the EEC countries. The Turkish social security charges are, however, higher than other middle income countries (see Chapter 4). Table 5.12; WAGES IN MANUFACTURING (U.S. $/day) Turkey Greece Korea West Germany France UK 1977 11.14 11.72 5.95 38.38 20.48 23.56 1978 12.68 14.57 8.00 46.72 25.17 29.92 1979 15.64 17.39 10.29 53.95 30.16 38.62 Sources: Turkey; MI Survey (Annual Survey of the Manufacturing Industry) Other Countries; I.L.O., Bulletin of Labor Statistics, 1981 (I) IMF, International Financial Statistics, Aug. 1980 5.56 In 1979 average daily wages in manufacturing were $15.6 in Turkey as against $54 in West Germany, $30 in France and $39 in IJ.K. However, despite rapid increases in Korea, Turkish wages remained above the Korean level. It follows that Turkey's comparative advantage does not lie in the simplest, most labor-intensive, goods, where it cannot compete with East - 227 - and South Asia, or in the most capital-intensive products, where it cannot compete with the OECD countries, but in the large range of goods between the two extremes, and increasingly in skill-intensive activities. 5.57 Turkey's location--cloze to the European, Middle East and North African markets--further gives it an advantage in goods with a relatively high weight-to-value ratio. For similar reasons, Turkey has an advantage in products that require fast delivery. Finally, Turkey benefits from close cultural ties with the Middle East. 5.58 The extent of potential gains from Turkey's comparative advantage in relatively labor-intensive industries vis-a-vis European countries is indicated by data on capital requirements per job reported in Table 5.3. At the one end of the spectrum, capital requirements per job, in million TL, are 95.2 for crude oil extraction, 36.2 for fertilizer, 30.7 for petroleum refining, 25.7 for energy, and 17.8 for iron and steel. At the other end of the spectrum, low capital-labor ratios are observed in shoes (1.2) construction materials (1.5), stone quarrying (1.6), ready-made garments (2.2), electrical appliances (3.9), textile (4.8) and furniture (4.9), beverages (5.1), agricultural machinery (6.1), and processed fruits and vegetables (8.1). 5.59 From Table 5.13, it appears that capital-intensive industries also create relatively few jobs - 203 jobs per TL billion output in petroleum, 398 jobs per TL billion output in chemicals and 480 jobs per TL billion output in basic metals. On the other hand, low capital-intensive industries, such as furniture and fixtures, garments, non-metallic minerals and textiles have high labor-output ratios (1,803 jobs per TL billion for furniture and fixtures, 1,468 jobs per TL billion for garments, 1,247 jobs per TL billion for non-metallic minerals and 1,063 jobs per TL billion for textiles). 5.60 The results lead to the conclusion that significant gains may be obtained in specializing in relatively labor-intensive industries which also create more jobs per unit of output. These are typically non-process industries that do not require very large-scale plants. At the same time, within individual industries, Turkey has advantages in particular products that suit the conditions existing in the country as well as in separable manufacturing operations such as precision work, simple operations of assembly, mixing, or finishing, or the provision of parts and components. The major products for which Turkey has comparative advantages are enumerated below with consideration given to factors that may contribute to export expansion. I/ 1/ The following discussion draws heavily upon various IBRD financed project reports. - 228 - Table 5.13: EMPLOYMENT PER TL BILLION OF OUTPUT (JOBS) 1979 /1 Processed food 640 Beverages 824 Tobacz ,- 700 Tex:i Iles 1,063 Wear:-L,rn0: Apparel 1,468 Fur anid Leather Production 1,011 Wood aad Cork 894 Furniture and Fixtures 1,803 Paper and Paper Products 653 Printing and Publishing 954 Cheimicals 398 Petroleum 203 Rubber and Rubber products 676 Non-metallic minerals 1,247 Basic metals 480 Metal products 1,044 Machinery 859 Electrical Machinery 699 Transport equipment 579 Miscellaneous 1,450 Total 773 /1 Items in Table 5.4 and 5.15 are not identical since the sources of data are different. Source: State Institute of Statistics. a. Textiles 5.61 Turkey has comparative advantages in textiles, given its proximity to the EEC, Middle Eastern and African markets, substantial domestic cotton production, and established textile industry. Wage levels are only 20-40 percent of EEC levels, more than offsetting lower productivity. 5.62 For pure cotton textiles, which involve a lower level of technology and skills (particularly in dyeing and finishing), the most efficient mills are able to compete under present conditions. But Turkey should also be able to expand the exports of non-cotton textiles as exposure to foreign markets increases, productivity and efficiency improves, and technical skills to produce needed qualities are obtained. At the same time, exporters will need to have adequate access to imported non-cotton fibers. - 229 - 5.63 The Turkish spinning industry does not presently fill its EEC quotas as spinning firms find it more profitable to integrate forward into weaving to produce for the growing domestic market. Forward integration of this type should not, however, stand in the way of establishing additional spinning facilities for export. Finally, in the case of fabrics where Turkey is only a marginal supplier with less than 1 percent of cotton fabric imports into the EEC, the upgrading of product lines would permit rapid expansion. b. Garments and Other Made-Up Articles 5.64 In contrast to textiles, there have been only modest changes in production technology for clothing. Labor productivity in developed countries increased only 0.9 percent a year from 1965 to 1974--less than in any other major group of industries. 1/ Turkey's lower wages, therefore, give it considerable advantage over developed country industries. Also its overland accessibility to Europe allows transit times of two to three days--an important advantage compared to far away clothing exporting countries that have lower wages. 5.65 In view of the "sensitiveness" of clothing exports to EEC, Turkey should develop high quality products, with a high value added component. Apart from the better exploitation of the EEC quota, this is desirable so as to lessen reliance on lower quality items in which some Asian countries have a competitive advantage. 5.66 Men's and boys' shirts, trousers, knitted underwear and T-shirts have been exported by Turkey in recent years, but little has been done about more fashionable goods for ladies and girls, such as jackets, suits, blouses, sport clothes and general knitting and woven outerwear, as well as ladies' underwear. The ladies' clothing market is more demanding in terms of fashion and design, but Turkish manufacturers should be able to begin exporting medium-quality products, eventually leading to a better quality exports. Turkish producers may also cater to the market for baby clothes, where creative designs are at a premium. c. Furniture 5.67 Turkey possesses extensive forestry resources, wi.h forests occupying 20 million hectares or one-fourth of the total area of the country. 80 percent of forest area has been surveyed, so that there is adequate information about the forest potential of the country. Ample forestry resources combined with low-cost skills could generate sizeable exports of furniture, except for the problems wood-based industries encounter in Turkey. 5.68 The problems of wood-based industries extend from the present forest exploitation techniques to the deficiency of the furniture industry in design and accessories. Most of the lumber is improperly dried through 1/ IBRD - Turkey: Private Sector Textile Project Report; March 1980. - 230 - manually controlled drying kilns, and articles made thereof eventually develop chinks and cracks or tend to warp or split. In the manufacture of chipboard, difficulties have arisen in the procurement of wood adhesive (urea-formaldehyde) due the inability of the domestic production to meet demand and the existence of import limitations. There are also difficulties in the procurement of plastic materials used in conjunction with wood in the manufacture of furniture. 5.69 Besides the inferior quality of the inputs, the industry suffers from problems in furniture design and the poor quality of accessories. These factors have not impeded the growth of the industry as it has been oriented towards the domestic market, but have precluded any significant development in exports. Some of the problems of the wood-based industries can be solved by appropriate investments in infrastructure (forest roads) and improvements in production methods (modern drying kilns, machinery for producing modular furniture), others by the acquisition of techinical expertise (rational exploitation of forests), and artistic know-how (industrial and artistic designing), and still others by the importation of high quality inputs and accessories (plastic parts, varnishes, wood adhesives, melamine sheets, sand-paper, as well as handles, hinges, and locks). d. Leather and Leather Products 5.70 Despite the impressive resource base and labor-intensity, the leather processing industry has not fully realized its potential due to the poor quality of raw materials and structural and production problems. Inadequate feed and diseases as well as damage from thorns, faulty skinning and poor handling after slaughter, especially in rural areas, all contribute to off-quality hides and skins. The industry also suffers from delivery problems, arising mostly from the large number of small producing units, and weaknesses of management and technology. Finally, accessories would need to be upgraded and delivery schedules maintained, for the industry to realize its considerable export potential in footwear, leather accessories, and leather garments. e. Glass, Ceramics and Sanitary Ware 5.71 The glass, ceramics and sanitaryware industries are well established in Turkey and present further opportunities for exports. Each of these industries is dominated by a single company (Turkiye Sise ve Cam Fabrikalari in glass, Eczacibasi in sanitaryware and Cannakale in ceramics). 5.72 Turkey has been producing good quality glass household ware, glass containers and flat glass. Capacity utilization rates are generally high due to reliance on domestic rather than imported inputs, and exports have been increasing at a rapid rate. In turn, high domestic demand and relatively high profit margins have prevented large scale exports of sanitaryware, but exports could take place in the future. Similar considerations apply to ceramics. - 231 - f. Mineral Based Chemicals 5.73 In mining and mineral-based chemicals, Turkey has established comparative advantages in boron minerals (Colemanite, Tinkal and Ulexite), boron chemicals (Borax anhydride, Borax deca hydride, Borax penta hydride, Boric acid and Sodium per borate), chromite, magnesite, marble and baryte. It benefits from the size of the reserves, the quality of the mineral, proximity to consuming markets, relatively cheap labor, which provides advantageous cost/price relations to cater to the growing world markets. 5.74 Against these favorable factors, there are however certain constraints that hinder the development of the sector. To maintain her competitiveness in the international markets, Turkey would need to give more weight to the mechanization and modernization of operations and to the training of the labor force. The sector is also facing financial constraints in creating the necessary capital for modernization and expansion. 5.75 Furthermore, present legislation in general, and the Mining Law in particular, restricts the full participation of Drivate and foreign capital in developing the potential of the sector. The long-pending revision of the Mining Law, and appropriate legislative measures to back-up recent policy changes in expanding the role of private and foreign capital in the sector, are urgently needed. 5.76 Mining and mineral based chemicals industries are dependent upon the availability of a good transport network, including railroads, highways, harbors, shipping and loading facilities. Even today, despite the low capacity utilization in the sector, the existing transportation system creates bottlenecks. The growth of the sector would therefore require the concurrent development of infrastructure facilities. 5.77 The mineral-based chemicals industry is further dependent upon the availability of energy (power and coal). The availability of industrial water is also important for both mining (whenever a concentration operation is necessary) and mineral-based chemical products. Its scarcity and environmental considerations necessitate the recirculation of water. A research and development effort is required for finding appropriate solutions for each particular case. Also, investment requirements for pollution prevention could be substantial and need the careful evaluation of all relevant factors. 5.78 Turkey's potential in minerals and mineral-based chemicals is not restricted to the ores where it has already established a comparative advantage. To further develop Turkey's potential in the sector, an inventory of the known ore reserves with full chemical analysis and the determination of economical "cut-off grade" contents would need to be made, to form the foundation of feasibility studies in this area. In turn, mineral-based chemicals should be evaluated within the framework of chemical sector. TSKB's study 1/, in its present form, is not readily 1/ TSKB "Study on Chemical Sector" 1980. - 232 - applicable for such a purpose. It must be updated and kept current to form a basis for future projections. Furthermore, it should be expanded from its present domestic market orientation to an export orientation. g. Engineering Industries 5.79 The engineering sector offers good possibilities for Turkey. Export prospects are favorable in products like electrical and non-electrical machinery, machine tools, electronics, foundries, auto parts and appliances etc. The engineering sector comprises numerous intermediate and final goods which can be produced efficiently; it is relatively less capitai-intensive and highly skill-intensive, and has strong backward and forward linkages. 5.80 At the same time, the sector exhibits various deficiencies in Turkey today. Some of its common features are: (i) the technology employed is generally lower than that used in Western Europe, with a very limited application of specialized machines; (ii) little purchasing of manufacturing technology, with many companies themselves fabricating all necessary equipment; (iii) little emphasis on product support facilities, for example, quality control, testing laboratories, etc.; (iv) most firms lack any coherent product development plans which is vital for competing effectively in international markets; (v) firms have little interest in competitive product comparisons; and (vi) lack of industrial promotion abroad; and no track record of exporting reliability or capability. 5.81 Also, engineering is clearly a field in which expertise (including the necessary labor skills) is only gradually acquired. It is also one, as regards exports, in which good foreign marketing arrangements are essential. In both respects, as the experience of other countries indicates, collaboration with foreign firms, and particularly subcontracting arrangements, can play an important role. 5.82 Turkey presently exports, on a modest scale, iron and steel castings, conductors and cables and distribution devices for electrical machines, agricultural tools and machines, metal, wood and plastic processing machinery, buses, brake linings, motorcycles, bicycles, filters and valves, sewing machines, ginning machines, hydraulic equipment, twist drills, etc. In the view of the mission, in the longer term, its comparative advantage will increasingly lie in engineering products. In particular potential exists for some parts of the automotive subsector (international subcontracting of assemblies of gearboxes, transmission, instruments and metal pressing), foundry subsector and machine tools subsector which are discussed in the following paragraphs. 5.83 Automotive Subsector: Turkey's main advantage lies in its low labor cost, which could be further reduced if productivity was raised by better plant utilization and reduction in overmanning. Turkish disadvantage lies in the high cost of local material inputs. Also, in trying to break into established markets for vehicles, Turkey suffers the twin disadvantages of offering out-of-date models (except in large buses) and having no network of servicing or spares supply. Turkish tractors have - 233 - an additional disadvantage in that too much emphasis has been placed in domestic markets on low h.p. models, while the international market increasingly demands larger models. Turkey's comparative advantage in the longer term, when applied to the automotive subsector, will lie in international subcontracting of assemblies and finished products on behalf of licensors and, in particular, in the production of gearboxes, transmissions, instruments and metal pressings. 5.84 There is need to devise a long-term strategy for the automotive industry in order to avoid further duplication of production facilities and to ensure vertical specialization in efficient plants. In view of the difficulties of consolidating producers that manufacture different cars and belong to different business groups, this may be sought in the direction of specialization agreements, involving the exportation of some parts and components and the importation of others. At the same time, the implementation of public investments in the production of tractors, diesel engines, and commercial vehicles, creating duplication with private facilities, would not be desirable. 5.85 Foundry Subsector; Over the last 15-20 years the foundry industry in Turkey has achieved considerable progress and now produces castings of greater pre^ision, complexity and quality for a variety of end-users. Ferrous-based grey iron castings constitute the bulk of castings produced in Turkey, followed by steel castings and malleable iron castings. Most foundries and certainly all small ones are of the jobbing type, i.e., supplying castings to other firms on the basis of contractual arrangements. Medium size foundries, all in the private sector, account for 75 percent of the grey iron casting capacity and almost all of steel capacity. The average size of large grey iron foundries is slightly over 5,000 tpy which compares favorable with grey iron foundries in the U.K. (4,250 tpy) and Germany (5,800 tpy). 5.86 The foundry industry in Turkey has developed in response to past Government policies which encouraged import substitution in engineering industries. The industry thus caters principally to the needs of the domestic market. Direct casting exports are small, though there has been some indirect export of castings in the form of machinery. Major markets for castings so far have been the Middle East, although EEC holds considerable potential as a market for Turkish castings. There is considerable potential for exports of both rough and machined castings, with the motor vehicle, machine tools, construction machinery, material handling equipment and heavy electrical machinery industries providing the potential sources of demand. Foreign markets could be penetrated through development of international subcontracting linkages with European firms. 5.87 Machine Tools; Turkey's comparative advantage, in possessing a reasonably skilled labor force, ought to be high in thip subsector. However the lack of innovative design capability and the -mall size of the domestic market has so far inhibited the manufacture of machine tools, which find ready markets abroad. Since tools can be sold as part of engineering projects, Turkey's opportunity will be in international subcontracting, whereby machine tools are included with other work 234 - (supplying a maintenance workshop as part of a sugar mill, for example). To be more effective in this area, Turkey would have to broaden its technological base, primarily through licensing agreements while making industrial capacity more adaptable in the design area. F. Markets and Institutions 1. Marketing Constraints 5.88 The past policy of import substitution has resulted in inadequate private marketing facilities for exports since there was a captive home market. Also, the government has organized only a small number of trade fairs in Turkey and visits to foreign trade fairs. And while it has established an Export Promotion Research Center (IGEME), this mainly engages in documentation on a limited scale (mostly for agricultural exports), and has neither the staff nor the budget for mounting an effective export promotion effort. 2. Export Development and Promotion Center 5.89 To overcome the limitations of IGEME, in 1978 the Government (with assistance from the UN International Trade Center - ITC), proposed to establish a new export promotion center. 1/ While the preparation and implementation of this scheme have been delayed, regulations are being prepared on the establishment of an Export Development and Promotion Center. The adoption of an outward-oriented strategy lends special urgency to the establishment of the Center. In particular, there is need to sponsor or to undertake research to identify promising products and markets; to introduce improvements and standardization of product quality, possibly with the participation of the existing standards institute; and to provide advice and assistance to exporters in regard to the marketing of non-traditional agricultural and manufactured commodities. 5.90 It is recommended that the Center be constituted on a product/industry basis. In other words, it should be based on units with sufficient capability to understand and to appreciate the problems that exporters face, and to provide them with the-services they need. It is not necessary for the individual units to develop in-depth expertise of a highly technical nature. What is needed, rather, is a broad marketing orientation with enough practical background to grasp the special nature of problems varying from sector to sector. 5.91 For the Center to be effective, it should have branches abroad, both to identify markets and to solicit orders, on the example of KOTRA in Korea and CACEX in Brazil. Its effective functioning would further require that the private sector is strongly represented on its board of directors. 1/ "Report on Establishment of an Export Promotion Organization in Turkey." May 1979 (Preparatory Assistance TUR/78/026). A - 235 - 3. Export Trading Companies 5.92 A public institution of export promotion can only play a supporting role, however, to private firms. While Turkey's large business groups are capable of mounting an export promotion effort, small and medium size firms can rarely export directly. Correspondingly, trading firms have an important role to play as they do in countries such as Japan and Korea. 5.93 At present, there are twelve trading companies exporting more than $15 million a year. The two largest export trading companies are Enka and Ram. Enka, established in 1974, is the largest company. It serves a number of firms in the private sector, with only 5 percent of its exports coming from the parent company (Enka). In 1981, Enka is expected to have exports of about $100 million as against $30 million exported in 1980. So far, they have been exporting solely industrial products, such as construction materials, processed food, automotive products, textiles and "white goods" (refrigerators, etc.), and only to the Middle East (40 percent to Iraq, 30 percent to Libya). They have three offices in Turkey and five foreign branches, in Iran, Saudi Arabia, Syria, Jordan and Algeria. 5.94 The second largest company is Ram. Its exports in 1981 are expected to reach at least $50 million, two-thirds of which are products of the Koc group. In addition, Ram provides advisory services to smaller exporters and acts as their export agent. Exports have included; industrial and automotive goods (30 percent) and textiles (40 percent). 5.95 In recognizing the need for setting up trading companies in the pursuit of the outward oriented policies adopted in January 1980, the Turkish Government passed a decree in July 1980, which provided the following incentives; (i) Trading companies are provided with credit from the Export Promotion Fund for one year, up to 90 percent of their export commitment. The 'collateral requirement is 18 percent of the credit for a first-time exporter; it declines to 15 percent and 10 percent, respectively, for exporters who have realized one, or two, previous export commitments; (ii) Trading companies are given priority access to foreign exchange for imported inputs (raw, intermediate and packaging materials) used in the production for export as well as for domestic markets, provided the total amount of foreign exchange does not exceed 60 percent of the export commitment; (iii) Trading companies have full access to the incentives provided under the temporary import regime: duty drawbacks on exports and availability of foreign exchange required to purchase imported inputs. To qualify for these incentives, however, these companies must have a paid-in capital of - 236 - TL 50 million, exports in excess of $15 million (50 percent of which has to be manufactured goods) and must increase their exports by 10 percent a year; and (iv) Since April 1981, export trading companies are provided with export tax rebate in the following manner. If they export less than $4 million, they are subject to general tax rebate. If they export between $4 million and $15 million, they receive an additional 5 percent. If they export more than $15 million, they get a further 5 percent (Chapter 2). 5.96 The export trading companies are potentially a very important part of the Turkish export promotion effort, especially in providing services to small and newly established exporters. At the same time, the government should not confine its encouragement and incentives to large trading companies. In fact, it appears from (iv) above, that large trading companies may be receiving too much incentives. 4. Market Prospects in the Middle East 1/ 5.97 In 1963, Turkey exported only $6 million worth of exports to Middle Eastern countries. By 1978, exports to the Middle East reached $322 million, accounting for 14 percent of total exports. This ratio has continuously increased since, reaching 22 percent in 1980 and 45 percent in the first nine months of 1981. The major export markets are Iraq, Libya, Iran and Syria, while the principal export commodities include processed food, textiles and clothing, automotive products, cement and glass. (Table 5.14) 5.98 While the markets of the Middle Eastern oil exporting countries are becoming increasingly important to Turkish firms, exports from Turkey form a negligible proportion of the total imports of these countries. Thus, in 1979, Turkish manufactured exports to the capital-surplus oil-exporting countries (Iraq, Libya, Saudi Arabia and Kuwait) amounted to about $80 million out of their total import bill of manufactured goods of $38 billion. 2/ With the total import demand of oil-exporting countries projected to grow by about 14 percent a year in real terms during the 1980s, 3/ there are considerable possibilities for expansion of Turkish manufactured exports to them. 5.99 The commodities which have considerable potential in the Middle Eastern markets, apart from processed food, fresh fruits and 'vegetables, include: unsophisticated engineering goods (simple machinery, small 1/ Includes North African countries. 2/ World Development Report, 1981, Washington, D.C., World Bank, 1981. 3/ Ibid.- - 237 - rolling mills, reinforcing bars, and manufacturing and assembling of refrigerators) and chemical.s. However, one should cautiously interpret the recent upsurge in these exports in light of Iran-Iraq war and the fact that some exports result primarily from depressed domestic demand. Table 5.14: INDUSTRIAL EXPORTS TO MIDDLE EAST COUNTRIES BY MAJOR PRODUCTS (In $ millions) 1978 1979 1980 Actual Share Actual Share Actual Share Processed Food 39.8 25.7 47.3 25.0 59.1 19.1 Chemicals 8.8 5.7 25.2 13.3 15.8 5.1 Textiles & Clothing 20.7 13.3 23.4 12.3 49.7 16.1 Iron & Steel & Non- Ferrous Metal Prods. 16.6 10.7 19.9 10.5 28.0 9.0 Appliances & Machinery 9.7 6.2 8.1 4.3 15.5 5.0 Vehicles & Parts 5.9 3.8 19.1 10.1 33.6 10.8 Others /1 53.4 34.5 46.4 24.5 107.8 34.8 1. Total Industrial Exports to Middle East 154.8 100.0 189.4 100.0 309.4 100.0 2. Total Exports to Middle Eastern Countries 322.2 387.2 630.6 3. Total Merchandise Exports 2,288.2 2,261.2 2,910.1 4. 1 as percent of 2 48.1 48.9 49.1 5. 2 as Percent of 3 14.1 17.1 21.6 /1 Others = fuel, cement, rubber & plastic products, forestry, glass & ceramics, etc. Source; Calculated from data supplied by SPO. - 238 - 5. Market Prospects of Industrial Exports to EEC 1/ 5.100 A large part of Turkey's industrial export is directed to EEC countries, with West Germany being the largest trading partner. It is observed, however, that the share of the EEC market in Turkey's industrial exports declined from 50 percent in 1977 to 43 percent in 1980. There are two main reasons for this decline; the rapid growth of exports to Middle Eastern markets described above, and the relative stagnation of textile exports, Turkey's major export item to the EEC. EEC countries provide markets for 90 percent of Turkish exports of cotton yarn, 80 percent of cotton fabrics, 98 percent of T-shirts, and practically all its exports of blouses. 5.101 The Turkey-EEC association 2/ resulted in the signing of the Ankara Agreement in 1963, which gave Turkey Associate Status. An additional protocol and supplementary protocol were signed in 1970 and 1973, respectively. As regards textiles, in 1978 the quotas for the countries which export textiles to EEC were determined under the Multi Fibre Agreement and Turkey was accepted in the status of a preferential country. Quotas were set for the EEC as a whole, but each country could determine its own quota in the framework of bilateral agreements with each exporting country. 5.102 The preferential countries were requested to practice voluntary restraint. The following quantities were proposed for Turkey: cotton yarn 74,230 tons, cotton fabric 3,600 tons, T-shirts 8,400,000 pieces and blouses 2,300,000 pieces 3/; the other items as unrestricted. As Tables 5.15 and 5.16 show, the quota was binding only in 1979 for cotton yarn and in 1976 and 1977 for cotton fabrics. In the case of T-shirts and blouses the quota is far from binding. 5.103 In some individual countries, however, Turkey's exports have reached informal quota limits. In 1979, Turkey's exports of cotton yarn to the United Kingdom surpassed the limit and, upon the proposal submitted by the UK Government, the European Commission established individual quotas on Turkey's exports to the UK for the second half of 1980. Although all countries importing Turkish textile goods are not yet implementing individual quotas, every country, depending on the types of products, require import licenses and are trying to set up limits. Turkey's exports of knitted textiles (T-shirts in particular) to W. Germany had reached two times such limit in 1980. 5.104 The outlook for 1981 is not promising. Turkey no longer faces the same supply constraiiTts as in previous years. At the same time, EEC countries continue to be sensitive to textile and garment imports 1/ The discussion w-ill concentrate on cotton textiles and engineering goods. Processed food expo)vts will featuire in the agriculture chapter. 2/ See Annex 5.1. 3/ Individual country details ini Ann\ex 5.1, page 5., - 239 - regardless of origin. These restraints may be mitigated by reascn of the fact that Turkey has a "preferential entry" status. The EEC parliament considers adopting the principle of giving a greater than average increase of quotas to countries which have special relationships with the EEC. This would particularly help Turkey, provided that it cooperates witha the EEC in encouraging industry to observe the informal quotas. Table 5.15; COTTON YARN PRODUCTION, CONSUMPTION AND EXPORTS (000 Tons) Quota 74.2 1976 1977 1979 1980 Production 288.7 290.0 250.0 235 Consumption 210.1 231.9 167.7 177 Exports 78.6 58.1 82.3 58 Exports to EEC 70 52 74.0 50 Source; TSKB Table 5.16; COTTON FABRICS PRODUCTION, CONSUMPTION AND.EXPORTS ('000 tons) Quota; 3.6 1976 1977 1979 1980 Production 186.0 211.8 156.1 161.0 Consumption 180.0 207.2 148.1 158.0 Exports 6.0 4.6 2.0 3.0 Exports to EEC 4.7 3.6 1.6 1.7 Source; TSKB - 240 - 5.105 With the expansion of domestic supply, the quota may become binding. As mentioned in Section E, Turkey should, therefore, concentrate its efforts towards upgrading the quality of products under the quota system and to shift to higher value products (ready made garments, etc.) not in the quota list. If appropriate measures are taken to upgrade quality and ensure timely delivery, there is every possibility that Turkish textile exports to EEC grow about 10 percent a year in real terms since Turkey's lower wages and its overland accessibility to Europe gives it a decided advantage over other exporting countries that have lower wages. 5.106 W4hile the exports of garments still account for only 5 percent of total production, a nucleus of exporters has established links to European marketing channels. In its Government-sanctioned exporter's union, the industry has a potentially effective institution to take actions for upgrading and expanding exports, including quality control, education and training, and the monitoring of export quotas. Export expansion would be also be facilitated by the greater availability and wider selection of fabrics (especially linings) and of accessory inputs (zips, buttons, sewing thread, etc.) of satisfactory quality and price; as well as by technical assistance in production and export marketing. 5.107 In addition to exports of cotton textiles, subcontracting opportunities exist in the EEC in certain branches of engineering industry such as electrical machinery, non-electrical machinery, machine tools, electronics and automotive industry, Turkey may participate in the international division of labor in the EEC area through the production of parts, components and accessories on a subcontracting basis. In footwear, leather goods and, to some extent, in leather clothing as well, joint ventures with European manufacturers could also be explored. In this way, Turkish manufacturers would obtain speedy intelligence on fashion changes, assistance on design and production methods, and access to retail outlets. - 241 - ANNEX 5.1 Page 1 of 5 TURKEY - EEC RELATIONS 5.108 September 12, 1963: The Turkey - EEC Relations Agreement was signed in Ankara. The Agreement, which entered into force on December 1, 1964 was based on Article 238 of the Treaty of Rome. It laid down different stages for the development of the association; - A preparatory stage (1964-1973), during which the Community helped Turkey to strengthen its economy by means of financial aid and tariff quotas opened for tobacco, dried grapes, dried figs and hazelnuts which re-resent 40% of Turkish agricultural exports to the Community; - A transitional stage enabling a customs union to be established in 12-22 years according to the products; - A final stage providing the possibility for Turkey to accede to the Community once the economic policies of both partners have been coordinated. The first financial protocol was signed at the 'same time as the Ankara agreement. It provided Turkey with aid and loans under special terms totalling 175 million Units of Account (between 1964 and 1969). 5.109 November 23, 1970; The additional protocol-, proclaiming the opening of the transitional stage, which would eventually enable the two partners to make progress along the road to a full customs union was signed in Brussels. (It came into force on January 1, 1973). The Second Financial Protocol was also signed the same day, enabling an amount of 210 million Units Account to be commited to Turkey until May 23, 1976. (This amount was raised to 257 million Units of Account following the Community's enlargement). 5.110 January 1, 1973; As called for under the Additional Protocol, Turkey started to carry out reductions in the customs duties for gocds of EEC origin. Duties were decreased by 20% for products which must be completely liberalized in 12 years and by 10% for products to be liberalized in 22 years. 5.111 January 1, 1976; Turkey applied the second reduction in duties, as called for under the Additional Protocol. 5.112 Late 1976; Relations between Turkey and the Community were strained because of special problems. While the Association Agreement and the Additional Protocol provided for the gradual introduction of the free movement of workers between December 1, 1976 and December 1, 1986, some Community members refused to go along because of their unemployment - 242 - ANNEX 5.1 Page 2 of 5 problems. The Community furthermore, was not in a position to satisfy all Turkish requests relating to financial cooperation and the re-examination of agricultural concessions. 5.113 December 20, 1976: At the Association Council meeting, Turkey and the EEC reached a series of partial agreements, to sign the third financial protocol and to adopt preliminary measures in the field of free movement. The Community also showed its willingness to develop its cooperation with Turkey, while accepting that there could be a certain amount of flexibility in the timetable of customs union, in keeping with the specific problems of Turkey. 5.114 January 1, 1977: Turkey postponed the tariff adaptions. Under the Additional Protocol, the first planned alignment of Turkey's external tariff with that of the Community in relation to non-Member States was scheduled to be put into operation on this date. 5.115 February 3, 1977; The Third financial protocol was initialled. It represented a commitment of 310 million Units of Account until December 31, 1981; 90 million were in the form of loans from the European Bank, granted on its own resources, 220 million in the form of loans on special terms granted by the EIB on a mandate from the cornnunity. 5.116 March 15, 1977; The Association Committee met to discuss the issue of Turkish cotton yarn exports to the Community. It argued that the rapid volume increase at low-selling prices of these exports was creating difficulties for undertakings in the Nine. 5.117 January 1, 1978: Turkey postponed the application of the third reduction of 10%. (The Turkey - EEC Association Committee agreed in February to this postponement.) 5.118 May 25, 1978; Ecevit paid an official visit to Brussels for talks with senior EEC officials. There, he offered a three-point package; Firstly, the EEC should give Turkey more considerably rights than she allows non-member States, and should stand firm on this principle. Secondly, the EEC should not prevent Turkey from developing into an exporter of industrial products. There will have to be a guarantee that Turkish industrial exports to be Community will not be restricted. Thirdly, Turkish workers' premiums in EEC countries should be transferred to Turkey and the Turkish workers in the Community area should enjoy the same rights as workers from Community countries. Ecevit also proposed new scheme to help develop the Turkish industries; joint investments in Turkey--with Turkish manpower, EEC technology and primarily the petrodollars of oil--rich countries. - 243 - ANNEX 5.1 Page 3 of 5 5.119 October 29, 1979. Turkey's rnew premier Demirel announced his government's intention to revitalize Turkey's relations with the community. 5.120 February 6, 1980: The Turkey-EEC Association Council met in Brussels after a break of nearly four years. Turkish foreign minister Hayrettin Erkmen told a press conference that Turkey would apply for memnbership in the Community before the end of 1980. - 244 - ANNEX 5.1 Page 4 of 5 EEC Quotas for Turkish Exports of Textile Sector 55.05 Cotton yarn 74,229 tons 55.09 Cotton fabrics 3,618 tons 60.04 T-shirts 8,424 thousand pieces 60.04.20 + 61.04.20 Blouses 2,306 thousand pieces Breakdown of Quotas According to Countries 55.05 Cotton yarn Total 74,229 tons Germany 25,412 tons France 2.454 tons Italy 29,949 tons Benelux 13,314 tons England 2,940 tons Ireland 147 tons Denmark 13 tons 55.09 Cotton fabrics Total 3,618 tons Germany 1,149 tons France 740 tons Italy 870 tons Benelux 644 tons England 159 tons Irelantd 4 tons Denmark 43 tons 60.04 T-shirts Total 8,424 thousand pieces Germany 3,344 thousand pieces France 1,362 thousand pieces Italy 292 thousand pieces Benelux 2,220 thousand pieces England 1,072 thousand pieces Ireland 32 thousand pieces Denmark 102 thousand pieces 60.04.20 + 61.04.20 Blouses Total 2,306 thousand pieces Germany 860 thousand pieces France 565 thousand pieces Italy 226 thousand pieces Benelux 478 thousand pieces England 150 thousand pieces Ireland 10 thousand pieces Denmark 17 thousand pieces - 245 - ANNEX 5.1 Page 5 of 5 Exports of Cotton Textiles Tons Cotton Yarn 1979 1980 55.05 Total 82,259 57,929 90% EEC 74,023 49,685 55.06 Total 565 536 EEC 550 506 55.09 Total 2,000 2,958 79% EEC 1,569 1,660 60.04 Total 138 260 98% EEC 135 107 60.05 Total 591 710 98% EEC 578 663 61.01- Total 405 642 EEC 358 464 61.02 Total 2,745 3,160 EEC 2,520 2,617 61.02 Total 2,833 2,596 EEC .1,546 1,364 - 246 - CHAPTER 6 STATE ECONOMIC ENTERPRISES IN MANUFACTURING 6.1 State economic enterprises in Turkey have been analyzed in the past from two somewhat distinct points of view. Those concerned with macroeconomic issues stress their large losses and consequent financing requirements, which directly contributed to public sector deficits and the growing resort to inflationary finance. Those interested in the development of particular sectors focus on the microeconomic efficiency of the state economic enterprises and their contribution -- or lack thereof -- to economic growth. The two concerns are, of course, related, since microeconomic inefficiency is one cause of the losses that have created macroeconomic problems. 6.2 This chapter is concerned with the microeconomic efficiency of the state economic enterprises in the manufacturing sector. The consequences of the performance of the state economic enterprises as a whole for public finance and inflation were discussed in Chapter 3. The present focus does not mean, however, that central gos/ernment financial control over state economic enterprises is ignored, but rather that the perspective is the consequence of that control for their efficiency. 6.3 The chapter is divided into four sections. The first discusses the role of state economic enterprises in manufacturing and provides some evidence on their performance; the second examines the extent to which performance is explained by the policy environment that existed until the end of 1979; the third reviews the effects of policy changes since the beginning of 1980; and the fourth considers the agenda for medium term reform. A. Role and Performance of the State Economic Enterprises in Manufacturing 6.4 According to a recent study, "It is a virtually unanimously-held view in Turkey that SEEs are inefficient." 1/ The evidence on the 1970s presented below, patchy and incomplete though it is, bears out this assessment. First, however, the role of state economic enterprises in Turkey will be considered. 1. The Role of State Economic Enterprises 6.5 Etatism has been defined "as the intervention of the state as a pioneer and director of industrial activity, in the interest of national development and security, in a country in which private enterprise is either suspect or ineffective." 2/ This philosophy has led since 1933, when SUerbank was founded, to the creation of a number of state enterprises. It was a much debated, and remains an unresolved, question whether the entrepreneurial role of the state was to lapse with the growth of the private sector, either in 1/ Anne 0. Krueger and Baran Tuncer, "Estimating Total Factor Productivity Growth in a Developing Country" World Bank Staff Working Paper No. 422, (Washington, D.C.: World Bank, October 1980) p. 14. 2/ Bernard Lewis, Turkey Toda (London: Hutchinson and Company, 1952) p. 49. - 247 - particular mature industries or in industrial development as a whole. 1/ In practice, however, while state enterprise has declined in relative importance in some manufacturing industries - textiles and cement, for example - closure of public sector plants or transfer to the private sector has rarely occurred. More important, the state has continued to play an important role in developing new industries such as petrochemicals and fertilizers. 6.6 The fact that the state's role has been in the establishment of new, rather than the absorption of old and worn-out enterprises, as has frequently been the case in the industrialized market economies, has important implications. In the first place, there is no inherent reason why the advance of state enterprise should be seen by the private sector as necessarily threatening - some suggest the contrary. 2/ In the second place, problems of state economic enterprises are not inherited from elsewhere but generated within the state enterprise system itself. 2. Characteristics of Public and State Economic Enterprises and their Place in the Economy 6.7 The enterprises, with which the present report is largely concerned, which shall be referred to as state economic enterprises, are only a subset of the public enterprises in manufacturing as a wholc. The state economic enterprises are those established under a special law, 440 of 1964, (which will be further discussed below). Public enterprises further include state monopolies, manufacturing operations conducted by government agencies or by provincial and local government and finally the business undertakings in which the state or state economic enterprises hold a majority of shares but which fall under the corporation laws." The aggregate statistics that are published on public enterprise in Turkey include the state economic enterprises as well as all other kinds of public enterprise, except for those predominantly publicly owned firms that were established under the principal corporate law. Examples in the latter category are Erdemir Steel and Igsas Fertilizer. 1/ "The original authors of etatism could be broadly divided into two ideological categories. On the one hand, a circle of younger intellectuals associated with the magazine Kadro, who acted as a radical ginger group within the ruling RPP during 1932-4, appear to have seen etatism as a permanent and preferable alternative to capitalism.... On the other hand, a more conservative group...appears to have seen etatism as the nursemaid rather than replacement for capitalist development,..." William Hale, The Political and Economic Development of Modern Turkey, (London: Croom Helm, 1981) pp. 55-6. 2/ "The cynics claim that the KIT's (SEEs) are such high cost enterprises that once they are established in a certain line of activity, domestic firms are ensured against price reductions..." (See Anne 0. Krueger and Baran Tuncer, "Industrial Priorities in Turkey" in United Nations Industrial Development Organization, Industrial Priorities in Developing Countries: the Selection Process in Brazil, India, Mexico, Republic of Korea and Turkey, (New York: United Nations, 1979) p. 155. Evidence given to the mission on cement pricing bears out the cynics' view. - 248 - 6.8 Consistent series of data on employment, value added and investment in the private and public manufacturing sectors in Turkey are not available. The partial information that does exist, however, indicates some marked trends. Thus, the share of the public sector in manufacturing employment in the 1970s remained virtually constant at about 36 percent. Meanwhile, its share in value added declined, from 51 percent in 1970 to 41 percent in 1975 and 30 percent in 1979. At the same time, the share of the public sector in fixed investment in manufacturing rose, from 39 percent in 1972 through 1974, to 47 percent in 1976 through 1977, 50 percent in 1978 through 1979, and 60 percent in 1981. 1/ These trends give an indication of the rising relative capital intensity of public sector activity in manufacturing as well as of growing relative inefficiency, as rising capital intensity was not offset by declining labor intensity; in fact, the contrary is true, since the labor intensity of the public sector relative to that of the private sector has been rising in the 1970s. 6.9 Table 6.1 shows the relative shares of the public sector in production, value added and employment in individual industries in 1979. The public sector accounted for more than half of output in tobacco (91 percent), petroleum (87 percent), paper and paper products (60 percent), and printing and publishing (57 percent). Their share is also high in basic metals (46 percent) and beverages (40 percent). (With Erdemir included, the share in basic metals would much exceed one half). At a more disaggregated level, the public sector controls almost all production of steel and alcoholic beverages and more than half of cement, fertilizers and sugar. In turn, there is competition with private enterprises in textiles, apparel, leather products, and machinery and transport equipment. 6.10 Eight enterprises established under Law 440 account for almost all economic activity of state enterprises in manufacturing. These are the Turkish Sugar Corporation (TSF), Sfimerbank (which produces largely textiles), the Pulp and Paper Corporation (SEKA), the Petrochemical Corporation (Petkim), the Nitrogen Industry Corporation (Azot), the Turkish Cement Corporation (TCS), the Turkish Iron and Steel Corporation and the Machinery and Chemicals Corporation (MKEK). Most of these enterprises come under surveillance of the Ministry of Industry and Technology. Reference will also be made, where 1/ These data exclude establishments with fewer than ten employees. Data on employees for 1970 and 1975 are from K. Ebiri, Z. Bozkurt, and A. Culfaz, Capital and Labour in the Turkish Manufacturing Industry, (Ankara: State Planning Organization, 1977) and for 1979 are from unpublished data of the State Institute of Statistics. Data on value added are from K. Ebiri and others, Op. Cit., for 1970 and 1975 and from unpublished data of the State Institute of Statistics for 1979. The data for 1970 and 1975 were in 1965 constant prices which could induce an increasing downward bias in the share of the public sector over time due to the differential effect of price controls. The price controls obtained their greatest effect in 1979, which may partly explain the further rapid decline in the share of the public sector by that date. Data on investment are for all government investment in manufacturing and are in 1976 constant prices. Because of the instability in the share of investment in the public sector from year-to year, the figures are for successive three year periods. - 249 - appropriate, to Erdemir and Igsas. While other state enterprises exist, for example Tumosan, which aspires to become a giant manufacturer of trucks and tractors, none are of any major importance in manufacturing as yet. Table 6.1: PUBLIC SECTOR SHARES IN MANUFACTURING INDUSTRY, 1979 (percent) Industry Production Value Added Employment Processed Food 37 39 50 Beverages 40 43 46 Tobacco 91 93 94 Textiles 12 13 20 Wearing Apparel 15 22 15 Fur and Leather Products 20 n.a. 24 Wood and Cork 31 34 41 Furnitures and Fixtures 12 17 16 Paper and Paper Products 60 43 69 Printing and Publishing 10 17 23 Chemicals 23 25 29 Petroleum 87 75 76 Rubber and Rubber Products 1 1 0 Non-metallic Minerals 18 15 20 Basic Metals 46 46 67 Metal Products 11 16 7 Machinery 21 26 28 Electrical Machinery 2 3 7 Transport Equipment 14 29 41 Miscellaneous 8 10 12 TOTAL 32 30 36 Source: State Institute of Statistics 3. Some Measures of Performance of State Economic Enterprises in Manufacturing 6.11 The efficiency of an activity from an economic point of view is essentially an amalgam of the technical efficiency with which it is designed, built and operated, and its appropriateness to the conditions, especially factor supplies of the country. At the same time, financial performance can deviate from economic performance to the extent that market prices deviate from shadow prices. With some knowledge of these price deviations, inferences on economic efficiency can be drawn. Financial performance also has importance in its own terms, since it has implications for public finance. Technical, economic, and financial performance are all considered below. Factor Use in Public Manufacturing Enterprises 6.12 The use of capital and labor per unit of output is a direct indicator of technical and economic efficiency. A recent study provides data on the - 250 - relative productivity of capital, labor, and the two combined, reflecting efficiency in factor use in public and private enterprises in 1963 and 1976 (Table 6.2). 1/ In 1963, the public sector's efficiency was below that of the private sector in eight out of fourteen industries. By 1976 this number had risen to eleven, the only exceptions being beverages; textiles, wearing apparel and footwear; and metal machinery. 6.13 In the same period, relative output-capital ratios of public to private enterprises fell in nine industries, relative output-labor ratios decreased in ten, and relative output per unit of total factor input declined in nine. By 1976, the relative use of labor in the public sector per unit of output was higher than in the private sector in twelve of the fourteen industries, the only exceptions being beverages and petroleum and coal. (The latter means little since private production is negligible.) The evidence does, therefore, support the widely held view that there is significant overmanning in public enterprises and that the problem has become worse over time. 6.14 More detailed information on the output-labor ratio in public, mixed and private sector plants in 1978 could be obtained for one sector in which a homogeneous commodity is produced, namely, cement. The average ratio of output to labor in public sector plants is 48 percent below that in private sector plants. A major reason for this result is the relatively small size of the public sector plants. If we control for differences in plant size, output per man seems to have been about 16 percent lower in public than private 1/ These estimates come frcon Krueger and Tuncer, "Estimating Total Factor Productivity Growth," pp. 40-45 and especially Table 6. The estimates of the capital stock are of the constant-price value of machinery. equipment, buildings and so on. The unit of measure of labor was the number of workers. The estimates of the relative productivity of capital and labor were derived by assuming that raw material input per unit of output was the same in both public and private plants in any given industry. The estimates of relative output per unit of total factor input employed private sector factor shares. Since output mix and degree of vertical integration can differ between public and private firms in any industry and the assumption of equal raw material inputs can be questioned, the estimates must be treated with great caution. - 251 - Table 6.2: RATIO OF PUBLIC TO PRIVATE OUTPUT PER UNIT OF INPUT 1963 1976 Output Output Output per Output Output Output per per per weighted per per weighted Sector capital labor inputs a/ capital labor inputs a/ Food 0.212 0.642 0.264 0.825 0.592 0.729 Beverages 3.509 1.577 2.762 3.030 1.876 2.525 Tobacco 1.709 0.684 1.221 0.842 0.923 0.857 Textiles, wearing apparel and footwear b/ 0.741 0.805 0.762 1.712 0.641 1.080 Wood and cork products 1.199 0.893 1.068 0.815 0.536 0.700 Paper and products 0.500 1.005 0.597 0.495 0.759 0.550 Chemicals 0.315 0.715 0.369 0.426 0.773 0.446 Nonmetallic minerals 0.978 1.550 1.129 0.812 0.909 0.848 Petroleum and coal -- -- -- 0.630 8.00 0.781 Basic metals 0.605 1.284 0.710 0.220 0.359 0.251 Metal products 0.218 0.818 0.300 0.122 0.733 0.182 Machinery 1.887 1.170 1.631 1.616 0.711 1.063 Electrical machinery 0.670 0.428 0.587 0.318 0.181 0.248 -Transport equipment 0.372 0.227 0.313 0.394 0.205 0.313 a/ Weights are facrtor shares in the private sector as of the years in question. b/ Because capital stock data were available jointly for textiles and wearing apparel and footwear, any separate estimation of efficiency were biased by the split used, and it was deemed preferable to aggregate the two sectors. Source: Anne 0. Krueger and Baran Tuncer, "Estimating Total Factor Productivity Growth in a Developing Country", World Bank Staff Working Paper No. 422 (Washington D.C.: World Bank, October 1980) Table 6, p. 43. --252- plants with only a one in eight chance that the difference :Ls statistically insignificant. 1/ Economic Efficiency of Existing St-ate Economic Enterprises in Manufacturing 6.15 After a lengthy analysis of the issue, based on data up to 1972, Walstedt concludes "Industrial growth andt employment in Turkey have been much less than could have been realized from t:he same investments under an alternative strategy. The economic r(esults for many important projects - steel, pulp and paper, fertilizers and atrochemicals, for example -- are below...an acceptable economic return. 6.16 An equally comprehensive evaluation of economic perforrnance after 1972 is not available. In 1980, however, the Operations Evaluation Department of the World Bankrc estimated ex post economic rates of returii for five subprojects of t:he State Investment Bank (DYB). (See Table 6.3.) In interpreting these results, it should be emphasized that the evaluation covers a small number of projects that are not representative of public sector investment in manufacturing as a whole. Thus, large new investments in capital intensive sectors are not financed by DYB. Indeed, of the five projects, the two SUmerbank investments were for expansion and modernization and the two SEKA projects involved expansion or balancing investments in existing plants. At the same time, investment usually has very high returns where there are already substantial sunk costs. Nevertheless, only SEKA projects have high economic returns and these depend on its being able to resolve major technical problems still in existence at the time of the evaluation. The evaluations also note that ex post returns were substantially below those estimated ex anite. This indicates both poor techrnical performance and over-optimistic evaluations by the DYB. 1/ The data on employment and capacity are from the Turkish Cement Corporation. Data on capacity utilization are from Yapi ve Kredi Bankasi, Cement Industry in Turkey, 1980, Table 8. There are thirty-five cement plants in Turkey, fifteen public, six mixed and fourteen private. In the twenty- eight plants for which all the required data were available were thirteen public, four mixed and eleven private. The fitted equation is: Ln(O/E) = -1.381 + 0.654LnO - 0.173Dp + 0.074Dm t ratio (-1.43) (9.46) (-1.62) (0.54) adj.R2 = 0.8037 where 0 = plant output E = plant employment Dp - public sector dummy Dm = mixed sector dummy 2/ Bertil Walstedt, SJate Manufacturing Enterprise in a Mixed Economy: The Turkish Case (Baltimore and London: The Johns Hopkins University Press for the World Bank, 1980) p. 129. The entire issue is discussed in Ibid., pp. 116-27. - 253 - Table 6.3: RATES OF RETURN ON SOME DYB SUB-PROJECTS (percent a year) Financial Rate Economic Rate Borrower Establishment Sector of Return of Return a/ SUmerbank Malatya Cotton (Erdincan) Textile -3 9 SUmerbank Kayseri Cotton (K. Maras) Textile 5 9 SEKA Dalaman Chemicals 15 14 SEKA Caycuma Pulp and Paper 23 17 Azot Sanayii Kutahya Plastic Products 2 8 a. With shadow pricing of labor and non-tradable inputs and border pricing of outputs. Economic returns were higher than financial returns largely because of the relatively low domestic prices of the products involved. Source: Estimates of the Operations Evaluation Department of the World Bank. 6.17 Since ex post economic returns were not calculated for more than a small sample, some-more general information is needed. A proxy for economic efficiency is provided by comparisons between domestic and world milarket (border) prices of output. 6.18 Table 6.4 shows that, in 1981, prices of state enterprise products were above border prices in most cases, especially for intermediate inputs, and that the ratio of domestic to border prices was highly variable. The same variability existed in the early 1970s according to Walstedt, but there were some major changes in specific price relationships between that period and 1981. Coal, fertilizers, and newsprint appear to have become more competitive, but this is probably illusory, since stringent price controls were in effect on all these products in 1981. Omitting these controlled commodities, cotton fabrics, iron ore concentrate, ferrochrome, and calcium carbide seem to have become competitive. Against this, copper, steel products, cement, PVC, and paper have become less competitive over time. Financial Performance of State Economic Enterprises in Manufacturing 6.19 The overall financial performance of state economic enterprises, their growing deficits and rising investment requirements, have been discussed in Chapter 3. State manufaccuring enterprises showed similar performance; information for eight of them being shown in Table 6.5 for 1979. These enterprises accounted for almost all investment and production by state economic enterprises in manufacturing, as has been mentioned in Para. 6.10 above. They also accounted in 1979 for 35 percent of fixed investment by all state economic enterprises and 12 percent of the losses. 6.20 The situation of individual enterprises varied as regards profitability, with Turkish Sugar and SEKA making particularly large losses. Table 6.4: RATIOS OF DOMESTIC TO BORDER PRICES OF SELECTED STATE ENTERPRISE PRODUCTS, 1970-76 AND 1981 Commodity Ratio Commodity Ratio 1970-6 1981 1970-6 1981 Coking Coal 1.23/1.38 0.81 a/b/c/ PVC 2.37 2.53 b/ Iron Ore Concentrate 1.24/1.59 0.94 b/ Newsprint 1.37 0.97 d/e/ Copper Blister 1.55/1.63 2.35 b/ Unbleached Kraft Paper 1.37 1.47 e/ Pig Iron 1.31 1.13 b/ Printing and W7riting Paper 1.43 1.53 e! Steel Rounds 1.18 1.79 bI Cotton Yarn 1.09 0.95 f/ Steel Profiles 1.27 1.57 b/ Cotton Fabric: Hot Rolled Steel Sheets 1.17 1.69 b/ type 249 Emprime n.a. / 1.04 f/ Cold Rolled Steel Sheets 1.36 1.58 bI type 151 Raw Cloth n.a. g/ 1.53 f/ Tinplate 1.15 2.67 I/ type 3043 White Sheet n.a. / 1.02 f/ Ferrochrome nta. 0M66 b/ type 3043 Colored Sheet n.a. 1.00 f/ Calcium Carbide 1.47 0.73 bI Raw Jute Yarn: Cement 0.83 1.04 d/e/ 1/4 raw jute yarn n.a. / 1.66 f/ Ammonium Sulphate 1.33 0.48 f/ 2/10 raw jute yarn n.a. g/ 1.43 f/ Calcium Ammonium Nit-ate 0.97 0.45 f/ 150x150x6 mm. Tile n.a. 1.42 f/ Polyethylene 2.38 2.34 b/ Granulated Sugar 2.18 1.55 c/h/ Note: Except where noted, the 1981 comparisons are for the first quarter of 1981. The 1981 Turkish prices include production taxes and have been converted to border prices using an exchange rate of T.L. 103 US$1. For details of the 1970-6 comparisons see Bertil Walstedt 2p._cit., table SA.14a. His comparisons were generally for 1972 but dates vary from June 1970 to July 1976. - Source: State Planning Organization and Bertil Walstedt, State Manufacturing Enterprises in a Mixed Economy: the Turkish Case, (Baltimore and London- Johns Hopkins Univctsity Press for the World Bank, 1980), table SA.14a. a. The comparison is for December, 1980. b. The world price was estimated by the State Planning Organization. c. The item is subject to official price control. d. The item is subject to price control. e. The international price is Turkey's c.i.f. import price. f. The international price is Turkey's f.o.b. export price. g. For Walstedt's comparisons, different textile products were used. These were, (with the price ratios in parentheses,) 100 percent cotton 140-centimeter heavy denim (1.63); 100 percent cotton 90-centimeter print (gray) (1.3); 100 percent cotton 130-centimeter print (gray) (1.43), 65/33 polyester and cotton shirting (gray) (1.36), woolen and worsted fabrics (1.2). h. The source of the international price is unknown. it is estimated for May, 1981. Table 6.5: GROSS PROFIT (LOSS) AND FINANCING REQUIREMENTS OF STATE MANUFACTURING ENTERPRISES, 1979 (T.L. million) Gross Fixed Total Financial Corporation Profit Depreciation Investme'.t Requirement c/ MKEK -327 (-) 141 -1,083 -1,269 SUmerbank 1,862 (70) 253 -2,708 -593 Turkish Cement -979 (360) 144 -776 -1,611 Turkish Iron and Steel 1,654 (-) 721 -13,854 -11,479 SEKA -4,600 (3 096) 591 -8,755 -12,764 PETKIM 3,935 (-) 879 -13,553 -8,739 Fertilizer (AZOT) -1,480 (830) 152 -1,666 -2,994 Turkish Sugar -7,845 (8,339) 314 -3,002 -10,533 Total -7,780 (12,695) 3,195 -45097 -49,982 Total for all SEEs -66,832 (69,962) 16,271 -128,002 -178,563 Note: A source of finance is positive and a use of finance is negative. Tax liabilities, the bulk of which are, in any case not paid, are not included in financial requirements because of lack of information on tax liabilities for the year. a. The gross profit excludes the liability of government to pay duty losses, which is normally included in state enterprise profits. A positive sign means a profit and vice versa. b. Duty losses are in parentheses. These represent the liability of government to pay offsetting subsidies for price controls in effect in 1979. Thus profits without price controls are obtained by summing actual profits and duty losses. c. Excludes financing of stocks. Source: Ministry of Finance. - 256 - The largest investment programs were those of the Iron and Steel Corporation, SEKA and Petkim, which account for 80 percent of the fixed investments of the eight enterprises. No enterprise was self-financing: SUmerbank was closest, with profits plus depreciation paying for eighty percent of fixed investment. The other profitable companies, Petkim and Turkish Iron and Steel, paid for 36 and 21 percent of their investment, respectively, out of profits plus depreciation. The remaining five required financing to pay for collective losses (less depreciation allowances) of T.L. 13.9 billion, plus fixed investments of T.L. 15.3 billion, for a total of T.L. 29.2 billion. 6.21 The allowarce for so-called duty losses is supposed to reflect the effects of the price controls that existed in 1979. (Thus, for example, of SEKA's loss of T.L. 43600 million, T.L. 3,096 is said to be the consequence of price controls.) If the effect of price controls is allowed for, the eight enterprises together made a small profit of T.L. 4.9 billion in 1979, a modest return of 5 percent on equity. 6.22 The financial performance was, in fact, worse than the data indicate because of a number of price distortions, to be discussed further below, that benefit state economic enterprises. In the first place, inflation adjustments were not made in the accounts, with the result that depreciation allowances greatly underestimate current replacement cost and profits on inventories are overstated. In the second place, interest rates paid were strongly negative in real terms, in part because of the prevailing low interest rates and in part because of the interest preferences state economic enterprises enjoyed. Finally, as shown in Table 6.4 for 1981, when most price controls had been lifted, the "uncontrolled" prices, with reference to which duty losses were computed, were in miiany cases well above international levels. Yet, these uncontrolled prices were equated to production costs. In sum, at international prices, without subsidies and with inflation adjusted accounts, most of the enterprises would have shown much worse financial and economic performance than indicated by the data of Table 6,5. Export Performance of State Enterprises 6.23 One aspect of economic performance of importance to Turkey is the trade position of the state economic enterprises. Table 6.6 shows the direct imports for operations and investment of eight major state manufacturing enterprises as well as their direct exports in 1980. The cement company was the only one to earn a surplus and accounts for 70 percent of the total exports: SUmerbank and the Sugar Corporation also had exports of some significance. Overall, however, the group ran a deficit of $104 million on operations and $422 million in total. Thus, the foreign exchange losses of these enterprises demanded offsetting surpluses elsewhere in the economy. It should be remembered in this context that these eight corporations, whose combined exports were only $148 million, had absorbed about a third of all investment in manufacturing. - 257 - Table 6.6: EXPORTS AND IMPORTS OF MAJOR STATE MANUFACTURING ENTERPRISES, 1980 (US$ millions) Imports Corporation Production Goods Investment Goods a/ Total Exports Balance MKEK 4.8 6.0 10.8 4.1 -6.7 SUmerbank 10.3 42.9 53.2 19.8 -33.4 Turkish Cement --- 18.0 18.0 103.1 85.1 Turkish Iron and Steel 66.8 40.7 107.5 2.3 -105.2 SEKA 26.5 44.9 71.4 --- -71.4 PETKIM 65.0 137.5 202.5 7.7 -194.8 Fertilizer (Azot) 77.6 14.8 92.4 --- -92.4 Turkish Sugar 1.1 13.3 14.4 11.1 -3.3 Total 252.1 318.1 570.2 148.1 -422.1 a. Includes goods obtained under project loans. Source: State Planning Organization. Conclusion 6.24 The state enterprises play an important role in the development ideology of Turkey and in the actual development of the country. This is true both overall and in the manufacturing sector, in particular. There is clear evidence that the manufacturing enterprises have been wasteful in use of resources. Similarly, financial performance has been poor despite many covert and overt subsidies. Price.controls might have been a partial explanation for poor financial performance in some enterprises but economic inefficiency is the main reason. B. Causes of Poor Economic and Technical Performance 6.25 Why has economic and financial performance been so poor? The discussion below deals wLth this issue for the period ending January, 1980. It will cover general economic policy, the legal framework, procedures for government control and public accountability, the price signals faced by state economic enterprises, their management and organization, and the investment and operating decisions which resulted. 1. General Economic Policy 6.26 One reason for the economic inefficiency of many state economic enterprises is the trade regime discussed in Chapter 2. This is more than just a general point, however. In attempting to integrate backwards into the production of the basic, capital-intensive intermediate goods like steel, chemicals, petrochemicals, paper, and non-ferrous metals, the planners have relied almost exclusively on state enterprises, new and old. While state enterprises opecate in other industries as well, they are strongly concentrated in the activities in which Turkey does not have a comparative advantage (see Chapter 5). - 258 - 2. The Legal Framework for State Enterprises 6.27 The most important law governing the enterprises with which this discussion is concerned is 440 of 1964. It is both interesting and important to note that the passage of this law was designed to solve the very same problems that still concern the Turkish authorities: the uncontrolled expansion of investment combined with constant intervention by the government in the day-to-day operations of the enterprises, that had had serious consequences in the 1950s. 6.28 Much of Law 440 preserved the institutions and modus operandi already in existence. The High Control Board that had responsibility for the audit-of state economic enterprises continued in operation, for example. The Reorganization Committee established under Law 440 seems to have failed. Also, the most important change of the 1960s, the establishment of a planning framework to control investment, in general, and of the DYB (under Law 441) to finance and appraise state enterprise investment, in particular, failed to achieve the desired rational control over investment, particularly in the late 1970s. 6.29 Apart from Laws 440 and 441, three other laws are important. The first, Law 657, governs the employment of civil servants. While there are some publicly owned or dominated enterprises to which this law does not apply, it covers the managers and many of the staff members of most enterprises established under Law 440. In essence, it guarantees the managers and other staff members of state enterprises security as civil servants, (though not security in their specific jobs). At the same time, it limits pay to Civil Service levels. The other two laws, 274 and 275 govern labor relations and gave workers the right to strike. 1/ The latter right was only used significantly by workers in state enterprises in the 1970s, but with a strong effect. 3. Procedures for Government Control and Public Accountability 6.30 The issue to be dealt with is the procedures under which state economic enterprises operate, namely, the fraraework for operating, investment and financial control and the system of audit and public accountability. The Framework for Operating Control 6.31 In the day-to-day operations of the state enterprises the most important immediate influence appears to be the directly responsible Ministry. (For manufacturing enterprises this is usually the Ministry of Industry and Technology.) The Ministry co-ordinates the relationshIp of the enterprise with other branches of the Government, inter alia advising on the appropriateness of investments proposed to the State Planning Organization and on proposed price changes. The Ministry also reviews the annual program of the state enterprises, receives a monthly report on progress as well -as the 1/ Both laws were passed in 1963. See William Hale, The Political and Economic Development of Modern Turkey, pp. 216-8. - 259 - half-yearly reports that go to the Ministry of Finance and the State Planning Organization. More recently, the Ministry of Industry has been giving export targets to the individual enterprises. The Ministry responsible also plays a dominant role in the selection of the Director General and two Assistant Director Generals that make up half the Board of most state enterprises. Of the other three members, one is a representative of the Ministry, one a representative of the Ministry of Finance and one a representative of the Labor Unions. In sum, the Ministry has very great direct and indirect leverage over the enterprises. 6.32 On pricing another body had importance until January 1980, the Price Control Committee. Under the law any commodity judged a "basic commodity" would have its price controlled, a provision that was extended to a very high proportion of state enterprise output. 6.33 The formal system of control was also a vehicle for informal pressures from the party (or parties) in power, from the responsible Minister, from the Prime Minister or Deputy Prime Minister, or from elsewhere in Government. Given the dependence of state enterprises on government for finance and of their managers on support, if they were to maintain their jobs, informal pressures could clearly be of great importance. The Framework for Investment Planning 6.34 The State Planning Organization (SPO) which comes under a High Planning Council composed of four ministers, the undersecretary of SPO and the heads of three SPO departments, has the main responsibility for formulation of investment programs for industrialization. It has been noted that "These do not always rest on a solid foundation of technical and economic studies, and the projects are often politically or technocratically inspired. Yet once corporated into an annual program the investments become mandatory. In this respect Turkey may be more dirigiste than some countries with centrally planned economies." 1/ 6.35 The Five Year Plans do not contain project detail, but the input- output analysis underlying them was used to identify likely opportunities and help appraise projects. These are proposed and agreed in the context of annual programs, for which state enterprises prepare five year rolling investment plans. The ideas for individual projects may originate with the enterprises themselves, but this need not be so. The SPO may have its own notion of what is needed, or the Ministry responsible, or - in the past - powerful politicians. The political process was particularly important in the creation of new enterprises. As mentioned by Walstedt, once accepted, a project becomes mandatory for the enterprise, with the availability of finance merely determining how long it takes to complete the investment. Projects are also not evaluated ex post. 6.36 Project evaluation by the SPO involved six criteria according to Krueger and Tuncer "(a) value added per unit of capital; (b) the labor-capital 1/ Bertil Walstedt, State Manufacturing Enterprises in a Mixed Economy, pp. 222-3. -260 - ratio; (c) the foreign exchange implications of the investment; (d) the nature of the technology used and the extent to which the proposed investment is of economic size; (e) the marketing aspects; and (f) the location of the project." 1/ The entire process was dominated by the import-substitution point of view. Indeed, Krueger and Tuncer emphasize that the specific appraisal criteria mattered only when there was excess demand for investment funds in relation to plan levels. If there was an inadequate number of proposals, SPO hunted for projects. It is also clear that the criteria diverged from the economically rational. Furthermore, the SPO suffered increasingly from shortages of skilled manpower, in part because of inadequate pay for civil servants. (At the time of writing the SPO had only five people in the project evaluation group of the Sectoral Division. Of its sectoral experts, many were young and inexperienced.) 6.37 It had been hoped that the evaluation of the feasibility and profitability of state enterprise investment by the State Investment Bank would check the uncontrolled expansion that had characterized the period before 1964. In practice, the ability of the State Investment Bank to carry out this task successfully was very limited. One reason is that it was restricted to the finance of a subset of the investments already approved by the SPO in the context of annual programs. In addition, the enterprises concerned knew that funds would be provided from elsewhere, if necessary. An important point in this context is that the Bank became much less important than expected as a source of finance. While it was originally assumed to finance one-third of state enterprise investment, by the early 1970s "about 60 percent of SEE investments [were] self financed, with 20 percent coming from DYB (State Investment Bank) funds and 20 percent from the general budget." 2/ By the late 1970s the DYB share was down to ten percent or so. 3/ Meanwhile, as the profitability of the enterprises deteriorated, the budget and the Central Bank became increasingly important - in 1979, for example, these two sources provided T.L. 137.5 billion, the State Investment Bank T.L. 14.4 billion and own resources of state enterprises T.L.-58.8 billion. 6.38 Apart from the external constraints on the State Investment Bank, its own performance may be queried. The World Bank's sector operations review judged the institution quite harshly in terms of project evaluation capacity and ability to influence subprojects at: an early stage. "A review of DYB's appraisals under the Bank's first loan.. .reveals that these were limited to a rather uncritical review of feasibility studies prepared by the borrowing SEEs. Appraisals ignored management issues and were generally based on overly optimistic price and production assumptions." In this context it should be noted that the State Investment Bank suffered from the same shortages of 1/ Anne 0. Krueger and Baran Tuncer, "Industrial Priorities in Turkey," p. 149. 2/ Ibid., p. 149. 3/. The DYB was supposed to have obtained much of its resources from Social Security Institutions, but these sources increasingly dried up in the late 1970s. 261 - skilled staff as other agencies. The State Investment Bank also did not do ex post economic evaluation of projects. In sum, the State Investment Bank's influence was very limited, affecting largely the timing and design of projects rather than whether they would go ahead, and so was its capacity to finance and to evaluate projects. The Framework for Financial Control 6.39 In the late 1970s, as state enterprise performance deteriorated, the financial control mechanism was stretched between state enterprise losses, on the one hand, and their investments, on the other, with the two moving in opposite directions. The Ministry of Finance, through its central role in the financial aspects of the Annual Program, bore the main responsibility for managing the situation. 6.40 The annual program for a state enterprise controls both current operations and the financing of desired physical investment. (There can be other physical targets, for example, for employment, output or exports, but these are not so important.) The main emphasis appears to be on the financing of investment. The investment program is, therefore, put in financi-al terms and then fitted into a program for financial resources and expenditures. A component of the latter is projected profit or loss, of which an independent projection is made, as is a projection of the balance sheet. The sum of the financial requirement of state enterprises to meet losses and investment expenditures is supposed to match overall macroeconomic and budgetary projections. 6.41 Before considering the overall programming of sources and uses of funds, a word should be said about the calculation of profits and losses. Losses due to price controls were apparently computed in relation to actual costs of production and the difference between the revenue required to cover those costs and actu6l revenue was counted as the "duty loss". The "duty loss" was included as a part of revenue in the profit and loss statement, with a corresponding entry for increased receivables from government. The result of this procedure would seem to have been almost complete absence of cost discipline, since the prices thought to be appropriate benchmarks were simply those at which enterprises could cover their costs. 6.42 In the process of preparing a program for financial requirements, the financing gap could be met from foreign project finance; from the State Investment Bank; from budgetary transfers for "duty loss" payments, "governmental aid," 1/ or capital contributions; or from Central Bank lending. Apparently, the particular forms of finance that were used depended on the financial circumstances of the enterprise rather than on any legal obligation or the purpose for which the funds were to be used. "Duty losses" could, for example, be paid over several years if some other form of finance seemed more appropriate. 1/ "Governi,iental aid" is for state railways, shipping and the Turkish electrical corporation. - 262 - 6.43 The aim throughout seems to have been to protect the investment program as far as possible, notwithstanding the consistent underestimation of operating losses due to overmanning, wage rises, price controls and general inflation. In the face of these increasing tendencies to worsened operating performance, the SPO, the enterprises and most of the government remained committed to the investment program. The Ministry of Finance in its semi- annual reviews of the programs and in program and budget preparation could meet this pressure only by increased resort to inflationary finance. One result was diminished financial discipline. Equally important was the fact that erosion of real investment occurred, as resources were absorbed in operating losses. Thus, an official of the SPO estimated that in the late 1970s, while financial investment targets were met, real investment ran at 60 percent of programmed levels. The result was project delay. In sum, the conflict between growing losses and the required finance for investment was resolved by a compromise that generated both accelerated inflation and wasted investment expenditures. The project delays must have further worsened the operating performance of state enterprises, thereby creating a vicious circle. Auditing and Accountability of State Enterprises 6.44 In order to carry out the functions discussed above - operating and financial control - adequate, timely and useable information is needed. While there is substantial agreement that the information provided by state enterprises is not adequate for these purposes, the subject is not further addressed here. Another issue, however, is that of public audit and accountability. 6.45 For over forty years the High Control Board has had responsibility for audit of state enterprises. These audits address themselves to the limited question: "is the enterprise's operation consistent with the five year plans or annual program?" The report of the HCB is reviewed formally by a parliamentary commission of twelve -- currently a committee appointed by the National Security Council -- and informally by a group consisting of representatives of the enterprise, the HCB, the SPO, the Ministry of Finance and the Ministry responsible. 6.46 The High Control Board is not considered effective. 1/ There are two major problems: the first is the lack of timeliness. Thus, in the summer of 1981 the audits for 1979 were being discussed - one and a half years.after the end of the relevant period. The second is the lack of publicity. HCB reports on individual enterprises are never released and the summary report for all state enterprises is both late and provides only partial coverage. (The same applies to the Ministry's of Finance annual report on state enterprises). Furthermore, the programs of individual enterprises, against which their performance might be evaluated, are not publicly available. Thus, the public at large has none of the information required to evaluate the performance of state economic enterprises. 1/ William Hale, The Political and Economic Development of Modern Turkey, p. 93. - 263 - 6.47 Quite apart from the availability of reports, the basic financial data are almost impossible to interpret, and there is no explicit economic audit. As will be further discussed below, in addition to the failure .to adjust for inflation, state enterprises generally faced different prices for output, a different structure and level of employees' remuneration, a different (and generally much lower) cost of capital, and a different corporate tax rate from those facing private entexprises. Conclusion 6.48 The attitude of government to the state enterprises was indulgent but at the same time interventionist. Financial control was lax; the desire to expand investment over-rode questions about the use of existing assets; investment apraisal was unsatisfactory; and the audit was without great force and involved minimal public scrutiny. There were, in addition, no clear goals for management. It can be stated not too unfairly that the objectives of the enterprises were to carry out the mandated investment program while also attempting to minimize losses, subject to such constraints such as price controls, regional dispersion of activity and mandated over-employment. At the same time, managers operated in an environment of constant interference and were required to carry out approved investments regardless of the circumstances. In consequence, enterprises and their management neither were, nor could reasonably be, held responsible for performance. 4. Price Signals Facing State Economic Enterprises 6.49 The important signals facing the state economic enterprises are prices of output, cost of factors, taxes and subsidies. Distorted price signals can both induce inefficiency and make it difficult to judge economic, on the basis of financial, performance. Output Prices 6.50 The prices of a number of products were shown in Table 6.4 above for 1970-6 and 1981. Price controls were in effect on most products up to January, 1980; they continued on some products thereafter. Their effect became increasingly severe in the late 1970s, and they were at least a proximate cause of poor financial performance. Wages 6.51 Allowed to strike and increasingly militant, employees under trade union contracts were successful in raising real wages especially of their less skilled members. Thus, while highly skilled people were underpaid, the reverse became true for unskilled employees. Skill differentials eroded, both among workers subject to collective bargaining agreements and between them and employees under the Civil Service Law 657. For example, in 1980, the average pay for SUmerbank's 7,932 managerial staff, at T.L. 308,000 (US$4,100) a year, was actually below that for the 39,000 workers at T.L. 386,000 (US$5,100). At the same time, pay levels of unskilled workers were above those in the private sector. This latter observation appears to have been true of public sector manufacturing more generally, as is shown in Table 6.7. Given overmanning as well, these relatively high wage levels were certainly a factor behind poor financial performance. - 264 - Table 6.7: REAL WAGE LEVEL IN PUBLIC AND PRIVATE MANUFACTURING INDUSTRIES, 1975 (T.L. in 1965 prices) Industries Public Private Public/Private Food and Beverages 13,035 9,449 1.38 Tobacco Processing 12,205 6,683 1.83 Textiles and Apparel (including shoes) 13,113 10,544 1.24 Wood Products, Furniture and Fixtures 14,108 12,103 1.17 Paper and Paper Products 18,850 11,683 1.61 Printing and Publishing 14,362 14,570 0.99 Leather and Fur Products n.a. 7,867 - Rubber Products n.a. 14,614 - Chemicals 18,314 16,813 1.09 Petroleum Refining and Petrol and Coal Products 31,905 20,885 1.53 Non-metallic Mineral Products 15,110 11,729 1.29 Basic Metals 21,340 13,604 1.57 Metal Products 18,287 10,869 1.68 Machinery 17,578 13,430 1.31 Electrical Machinery 14,160 13,819 1.02 Transport Equipment 1 13,843 1.14 Total 15,780 11,880 1.33 Source: K. Ebri, Z. Bozkurt, and A. Culfaz, Capital and Labor in the Turkish Manufacturing Industr, (Ankara: State Planning Organization, 1977). - 265 - Cost of Capital 6.52 Among the most important subsidies was the low cost of capital. Dividends seem not to be paid on government equity. Loans from the State Investment Bank cost 14 percent a year until recently and budgetary loans still less. 1/ Apparently, no interest was paid on arrears. To give an indication of what low interest rates meant, Stimerbank paid an average nomninal rate of 5.5 percent on short and long term borrowing in 1978, a real rate of interest of about -35 percent. Also, as noted in Para. 6.22, depreciation charges were underestimated. Taxes and Operating Subsidies 6.53 State economic enterprises pay a 35 percent corporate tax rate, against a normal rate of 50 percent. And while they are not able to take advantage of a number of allowances and deductions a-ilable to private firms, this fact does not make their situation fully equivalent. This is a moot point, however, since taxes are rarely paid. 6.54 Historically, the most important operating subsidy was that against "duty losses". Its salient characteristic was of its being open-ended, as has been mentioned. At the same time, the enterprises did not always receive what is owed them with any rapidity. Implications of Distorted Price Signals 6.55 The prices and incentives that faced state eco-nomic enterprises diverged sharply from shadow prices. Wages were too high; capital too cheap; and output prices varied in relation to the level of efficiency. In addition, the prices and incentives often deviated from those facing private enterprises. What were the implications? In the first place, it was practically impossible, in any particular case, to judge economic from financial performance. At the same time, more often than not, poor financial performance masked worse economic performance. Secondly, it is difficult to use the data on financial performance to compare private with public sector firms. Thirdly, public sector plants usually had various advantages in competition with private plants, but one that inefficiency of various kinds frequently negated. Fourthly, the ready access to cheap capital probably affected adversely the effort made to finance investment internally. Finally, the open-ended subsidies for "duty losses" and lack of effective firancial control and audit rendered prices largely irrelevant as guides to resource allocation. 5. Management and Organization of State Economic Enterprises 6.56 Management selection and motivation became major problems. As inflation proceeded, the salaries of managers and other staff members subject to Law 657 declined in real terms and fell even further behind pay in the 1/ The Central Bank lent directly at very low rates of interest, recently 10 percent a year, but almost exclusively to enterprises involved in the purchase of agricultural commodities. - 266 - private sector. Indeed, the net pay of the Director General of a state economic enterprise might have not been more than $400 a month in early 1981, excluding fringe benefits (20 percent more than an Under-Secretary in the Government). By that time, pay in the private sector for managers and highly skilled technicians exceeded that in the public sector by at least two to as much as five times, and all government agencies, including, for example, the State Planning Organization, the High Control Board, and the State Investment Bank experienced high turn-over of skilled people and unfilled posts. 6.57 Low pay was one reason for high turn-over of managers. Additional factors were the practice of changing most managers with a change of government and demoralization, exacerbated by the extent of day-to-day political interference. Hale quotes the following remark to an American visitor by an employee of one enterprise: "What's the use of an engineer working for a politician? If the answer matters, he tells you what it is. If it doesn't matter, he doesn't want to know it." 1/ The problem of managerial turn-over affected major World Bank projects as well. Thus, the Erdemir steel project experienced five distinct changes in management during the period of implemenf:ation, involving not only the Board of Directors but also the project manager. There were changes of management at the Igsas fertilizer project, too. 6.58 An additional problem was lack of incentives, which applied both to managers and workers. For managerial incentives the problem was the contradiction betweeni a vision of state enterprises as independent concerns and the reality that, in many respects, they were no more than departments of state, with their managers commanded, paid, and motivated as if they were civil servants. For managers, moreover, the combination of civil service security with the low salaries meant that there were no real penalties for poor performance. 6.59 A striking feature of the internal organization of st-ate enterprises, even those with many plants, was a high degree of centralization. One reason may have been the need to appear responsive to the host of interventions from above. The day-to-day involvement of the politically appointed and motivated Board of Directors might have exacerbated this tendency. A World Bank report on SUmerbank, for example, remarks that "...although on paper the production tLnits are supposed to be quasi-autonomous profit centers, they have to refer even minor issues to headquarters for decision, with resulting delays. Therefore, individual plant managements have come to concern themselves almost exclusively with day-to-day operations and hesitate to take responsibilities or initiatives for medium or long-term improvements of operations." The mission found a similarly centralized structure in the Turkish Cement Company and SEKA. In the latter, for example, the rules governing the terms of all purchases set low discretionary limits and common prices for sales across plants. The manager of a mill may make purchases on his own up to T.L. 2 million (about US$20,000) only and -With hIs board's permission up to T.L. 8 million (US$80,000). The Director General of SEKA may approve purchases of T.L. 16 millicn (US$160,000) and above that the decision goes to the Board. Common employment contracts are agreed for all mi lls and manning norms are 1/ William Hale, The Political Economy of Modern Turkey, p. 58. - 267 - given to each of them. There is no competition among plants. 6.60 A major issue was the quality and timeliness of the information flows required to execute these centralized functions effectively or to monitor performance. 1/ In certain cases the internal informiation flows were no better than those going outside the enterprise to the government. 6. Investment and Operating Inefficiencies of State Economic Enterprises in Manufacturing 6.61 The environment within which state enterprises operated and their own management and organization have been considered above. It is now necessary to consider the resulting decisions in the areas of investment and operations. Investment Decisions Affecting State Economic Enterprises 6.62 How did the system of investment selection and financial control work out in practice? One important point is that for the SPO, with its ambitious growth targets, and for management, to whom least cost production was a source neither of reward nor of penalty, there was a powerful incentive to expand, to build empires, rather than to lower costs on existing output through modernization and rehabilitation. In general, the economic efficiency of projects was not a high priority. Furthermore, these ambitious growth targets, combined with inadequate budgetary resources led to the initiation of many more projects than could expeditiously be completed, with serious consequences for project delay. Inadequate project preparation combined with constant management turnover also contributed to delays and cost overruns. Because of such problerns, of four major World Bank industrial projects, two, Igsas and Erdemir, had cost overruns exceeding 25 percent, that for Erdemir being 80 percent. The time overrun for Igsas was thirteen inonths and for Erdemir three years. Similar problems arose with the Akdeniz and Balikesir pulp and paper projects. The Turkish Cement Corporation is currently building seven new cement plants, most of which are experiencing delays. In this context, it may be important that the performance of an enterprise in executing projects had little or no bearing on whether it would get yet more projects. The latter depended rather on sectoral priorities. 6.63 In the selection of the major projects, the bias toward capital intensity in industrialization policy is apparent. Wals.edt provides data on the capital intensity of four major projects of the 1970s, the Igsas fertilizer plant, Erdemir steel, and the Antalya and Balikesir pulp and paper projects. He concludes "The capital-output ratios in these new and representative projects are between 1.9 and 2.6 times the average incremental ratio for the decade 1962-72 and the fixed investment per worker is...perhaps I/ In the case of SEKA it appeared that while large losses were expected for 1981, nobody was too sure of the full reason. One factor, however, seems to be the failure to allow for inflation in accounts. Thus, in 1979 and 1980 SEKA'S financial accounts were helped by the fact that wood was being priced at 1976 and 1977 prices (on first in-first Gut principles). In 1981 all wood is being priced at a level three times higher. - 268 - ten times as high if allowance is made for inflation." 1/ The consequence of weak project evaluation can also be observed. As will be noted in Section C below, even after some attempt was made to improve project selection for the 1981 investment program, many very questionable projects remained. 6.64 Of specific failures in project design and selection inappropriate scale was particularly significant. Walstedt argues that in pulp and paper "...between 1960 and 1976 technical development was rapid [abroad] and the development program of [SEKA], encompassing two new generations of integrated mills, was out of step with evolving economies of scale in new plants." 2/ In one project, diseconomies of scale alone are said to add ten percent to investment costs. In the case of cement a number of plants were constructed by the Turkish Cement Corporation (TCS) between 1957 and 1965 with capacities of only 85,000 tons a year. Other plants constructed were also small by modern standards, with the result that the average capacity of Turkish state sector cenment plants is now 368,000 tons, only fifty percent of the private sector level. 3/ A reason for this policy of small scale plants was regional industrialization, yet Walstedt shows that it would have been more efficient to build larger plants and ship cement to longer distances. 4/ Similar problems of inadequate initial scale seem to have been important in iron and steel and petrochemicals. And while the State Planning Organization put increased emphasis on establishing efficient scale plants in the early 1970s, 5/ the problems re-emerged subsequently in concentrating on capital- intensive intermediate products that have a limited domestic market. 6.65 An issue closely related to that of optimal scale is inappropriate project location and excessive regional dispersion. These are not new problems. Mention might be made of the Karabuk steel mill, which was poorly located in the 1930s for alleged security reasons; of the cement plants referred to above; and also, according to a World Bank appraisal, of textile plants constructed by SUnilerbank more recently. Hale argues that "examples of badly...located plants abounded in the 1950s." 6/ It is clear that the objective of regional dispersion of industry militates against that of 1/ Bertil Walstedt, State Manufacturing Enterprise, p. 106. 2/ Ibid., p. 324. A thorough discussion of the evidence for this proposition is contained in Ibid., Appendix H "Economies of Scale and other Factors Affecting the Competitiveness of the Turkish Pulp and Paper Industry," pp. 324-32. 3/ For sources of data on cement capacity see Para. 6.14. 4/ Bertil Walstedt, State Manufacturing Enterprise, pp. 144-51. 5/ Anne 0. Kruieger and Baran Tuncer, "Industrial Priorities in Turkey, " pp. 149-50. 6/ William Hale, The Political and Economic Development of Modern Turkey, p. 92. - 269 - exploitation of economies of scale. Yet, the former objective became still more important in the 1970s. 1/ 6.66 Apart from inappropriate scale and location, there were other problems of project design. Lack of satisfactory plant balance is mentioned in recent World Bank reviews of the industrial sector: the Caycuma unbleached kraft pulp and paper mill, for example, has a chemical recovery boiler too small for the plant, while the Afyon bleached straw pulp mill is able to produce only a third of the pulp it needs, because of limitations in the pulp dryer. Operating Inefficiencies of State Economic Enterprises 6.67 An important indication of operating inefficiencies was the almost universal failure to reach rated capacity utilization. SEKA, the pulp and paper company, provides a good example. As a World Bank report states, "The existing Aksu plant...was designed to produce 85,000 tons per year of newsprint.. .However, actual production has never reached much over 70,000 tons per year, and declined in 1979 to 61,000 tons...An analysis of the 24,000 tons of lost production in 1979 indicates that only 20 percent thereof was wholly outside SEKA's control." According to a World Bank evaluation of the public investment program in 1980, the same problem existed in other industries: in steel, for example, capacity utilization in rolling mills in 1979 averaged from 90 percent in Karabuk to 50 percent in Isdemir and as low as 45 percent in Erdemir. In 1980, capacity utilization in the production of nutrient tons of nitrogen by the fertilizer industry was 48 percent and for phosphate 38 percent. In aluminum, capacity utilization is currently only 50 percent. The reasons for these failures are many: poor management, inappropriate project design, weak planning, lack of raw materials or other inputs and so forth. 6.68 Operating inefficiency appeared in other guises as well. Excessive energy use has been an important defect: a recent World Bank report stated that the average use of coke per ton of iron in Turkey was 75 percent higher in 1977 than the average for a dozen major steel producing countries and that unit consumption of fuel oil in 1974 was 33 to 39 percent higher than in Italy, West Germany and the United States. Overmanning was a further problem. In steel, for example, output per man year in most industrialized countries would be at least 200 tons. In Erdemir the figure was 86 tons in 1979 and in Isdemir only 24 tons. It is worth noting that, given the performance of Turkish workers in Germany, it is not any inherent lack of productivity in the work force that is at fault. 7. Conclusion 6.69 It may be concluded that the poor performance of the state economic enterprises had three root causes that, separately and together, appear to explain many of the problems: the adoption of a traditional Eastern European model of central decision-making, with autarky as a goal and mandated investments as a tool; the existence of an open, democratic, (even populist), style of party politics; a pervasive view of state economic enterprises simply 1/ Anne Krueger and Baran Tuncer, "Industrial Priorities in Turkey," p. 150. - 270 - as departments of state rather than independent commercial operations. 6.70 It was the inward-oriented strategy that was responsible for the adoption of an economically inefficient pattern of import substituting investments. The imposition of a mandatory investment program also reduced flexibility in meeting new economic conditions, such as the oil price rises of 1973-4 and 1979-80, or the lack of adequate finance for the investment program. 6.71 It was the political process, combined with the suppressed financial system, that produced inadequate resources for investment. It was also the political process that exacerbated the problems of day-to-day interference, inappropriate investment choice, job insecurity for managers, and unreasonable concessiy7s to the unions on wages and price controls during an inflationary period. 6.72 Finally, it was because the state enterprises were never seen as really independent, but rather as departments of state, that day-to-day intervention was very easy. The prevalence of this view explained the low salaries of managers and lack of incentives and rewards for them (just as if they were civil servants), the absence of an adequate audit, and a desire for secrecy about state economic enterprise performance that led to almost complete lack of effective public accountability. 6.73 It is not surprising, therefore, that investment and operating mistakes occurred and that these, in turn, led to poor economic performance. At the same time, the distorted prices, which included many subsidies, were not sufficient to turn poor economic intq_ satisfactory financial performance. C. Changes in the Environment of State Economic Enterprises since January, 1980 6.74 Since the beginning of 1980 a series of change.s in policy towards state enterprise have occurred and more fundamental change is now under discussion. The significance and effect of the changes that have occurred are discussed in this section. In the next, what is still to be done is weighed against proposals under discussion. 6.75 Changes have occurred in control over prices, investment allocation and finance, capital structure, personnel policy, and in the style of relations between government and individual enterprises. These changes, while not without importance, reveal clearly how far there is still to go. 1. Reform of State Enterprise Pricing 6.76 In January 1980 the Price Control ComTmittee was abolished and almost all state enterprises were formally free to set their own prices. The exceptions were for coal and lignite, electricity for aluminum and ferro- 1/ Hale cites a leader in the Milliyet newspaper of 27th SeptemDer, 1980 as saying "the question is, how to reconcile the hard technocratic realities with the virtues and demands of multi-party democracy." (See William Hale, The Political and Economic Development of Modern Turkey, p. 261.) - 271 - chrome production, fertilizers, sugar and railway and maritime shipment of goods. The revenue effects of these changes were discussed in Chapter 3 for all the state economic enterprises. Another important impact was on the wholesale price index, which rose by 40 percent in February, 1980 alone, giving an indication of the extent of suppressed inflation in the late 1970s. 1/ 6.77 The pricing autonomy of state economic enterprises did not turn out quite as it was assumed. In reality, the enterprises continued to ask for permission, usually via the Ministry responsible, to raise prices and such permission was not always granted. The Ministry of Industry and Technology informed the mission that it operates with an informal price ceiling of tariff inclusive c.i.f. price plus thirty percent and warns the state enterprises that imports may be permitted if their prices exceed that level. Less carefully rationalized price controls also exist. Thus, cement prices are still controlled, partly in order to ensure uniform ex factory prices throughout the country (for reasons of regional development), partly in order to minimize the ability of the private sector to make large profits under the umbrella of the inefficiency of Turkish Cement Company. 2/ Newsprint is another commodity that is controlled de facto if not de jure. According to SEKA, this control accounts for half of its prospective loss for 1981. Informal limits of this kind are particularly troublesome, since the price curbs no longer have the legal status that would normally permit the enterprise to qualify for duty loss subsidies. 1/ See Mustafa Aysan, "State Economic Enterprises and Inflation in Turkey," Isletme Fakultesi Dergisi, volume 9, number 2, 1980, p. 41. A table on that page shows price rises of 400 percent for fertilizers, 300 percent for paper, 100 percent for textiles, 80 percent for sugar, 75 percent for steel and 55 percent for cement. 2/ The cement pricing system in Turkey, jointly enforced by the Government and a producers' cartel, is extremely complex. Ex factory prices are uniform and a flat levy is imposed on all plants (at two rates depending on the age of the plant and its location). Proceeds of the levy are used to equalize clinker costs across Turkey, to provide subsidized finance of bulk cement handling facilities and to subsidize the difference between export and domestic prices. The provincial governors impose price ceilings on cement at construction sites or distribution points. Export prices are also controlled (by the Turkish Cement Producers Association) while export volumes are allocated by the Ministry of Industry and Technology. The system does allow individual producers to benefit from their efficiency, indeed to make excess profits in good times. - 272 - Table 6.8: PROGRAM AND ACTUAL FINANCIAL PERFORMANCE OF FIVE STATE MANUFACTURING ENTERPRISES IN 1980 (T.L. million) Gross Profit a/ Fixed Investment Financial Requirements b/ Program Actual Program Actual Program Actual MKEK 121 1,026 2,849 2,193 2,584 1,004 SUmerbank -1,909 2,239 3,222 6,247 4,731 3,363 Turkish Cement -2,365 921 2,077 4,546 4,275 3,480 Iron and Steel -7,166 2,074 11,540 19,217 16,663 16,390 SEKA -42 -325 4,829 13,868 4,046 13,080 Total -11,361 5,935 24,517 32,299 37,317 a. Gross profit includes duty losses. A positive sign is a profit and vice versa. b. Financial requirement is investment less gross profits less depreciation. Source: State Planning Organization. 6.78 While the price rises that were permitted were no panacea for the ills of the state enterprises, they did make a difference to the financial picture. Table 6.8 reveals that for five important manufacturing enterprises profitability in 1980 far exceeded what had been initially expected, largely because of price rises. Indeed, the Ministry of Industry and Technology announced that all enterprises under its responsibility made operating profits in 1980, except for SEKA. The swing from expected loss to profit of these five enterprises was T.L. 17.3 billion (US$227 million) and only SEKA did worse than expected. It should be noted, however, that financial requirements for investment also soared, partly because of inflation, with the result that the need for outside resources in nominal terms exceeded that programmed. (SEKA's investment cost overrun was the main reason. Without SEKA the financial requirement at T.L. 24.2 billion was T.L. 4.0 billion less than programmed.) 6.79 Price increases have been the main explanation for improved financial performance and can, therefore, be regarded as a successful public finance measure. At the same time, complete price freedom is an undesirable way of solving the financial problems of monopolists and quasi-monopolists. The consequence can easily be reduced pressure to control costs, including investment costs, and a mere shifting of the burden of state enterprise inefficiency from the citizenry as a whole via the treasury to users via high prices. Taxation of viable industries downstream through higher prices could be still worse than subsidization from general taxation. - 273 - 2. Reform of the Allocation of Investment 6.80 There has been an attempt to rationalize the allocation of investment expenditures towards high priority projects that will bear fruit within a reasonable period of time. The aim of the 1981 program was to allocate funds to projects in infrastructure, especially energy; to projects that improve capacity utilization; and to projects that do not overlap with the private sector. Investment by state economic enterprises is also expected to fall by 4 percent in real terms in 1981 vis-a-vis 1980. 6.81 Nevertheless, the World Bank's "Public Sector Investment Review" raised doubts about the size and allocation of this revised investment program, especially in the light of current priorities. The review indicated that a large number of projects have negligible ex ante returns, including the planned rehabilitation and expansion of the Karabuk steel mill; the Aliaga petrochemical project as a whole; the Izmir special steel factory, the fourth Fertilizer Complex; the Middle Anatolia refinery; the Tumosan tractor project; and the Seydeshir aluminum plant. The combined investment cost of these projects is T.L. 548 billion (US$5.3 billion), or 35 percent of the total proposed investments in public sector manufacturing. Nor can it be assumed that the remaining 65 percent consists of fully satisfactory projects since many projects were not examined in detail. In sum, much inefficiency in the selection of public investments remains. 3. Reform of State Enterprise Financing 6.82 While far from water-tight, the limits on Central Bank finance agreed with the IMF have worked through into a less permissive environment, as has been discussed in Chapter 3. One of the solutions for state economic enterprises as a whole in 1980 was, unfortunately, that of a substantial increase - T.L. 105 billion (US$140 million) - in the balance of net payables and receivables with the private sector, especially contractors. A further large increase is expected in 1981. No interest is apparently paid on these arrears and they have shifted the burden of financing state enterprises' losses and investments onto an already tightly squeezed private sector, thus adding to the burden of higher prices. 6.83 Methods of financing investment have also changed. In 1981 loans for investment were made from the budget to profitable state enterprises via the State Investment Bank (DYB). The latter received T.L. 40 billion from the Treasury over and above T.L. 25 billion available from its traditional sources for this purpose. These funds are lent at an interest rate of 21J5 percent a *year, still very low under present circumstances, although higher than the previous rate of 14 percent. Loss-making enterprises continue to receive loans directly from the budget, which avoids damaging DYB's financial position, but from 1981 this occurs only after scrutiny of the project by DYB and under DYB's supervision during implementation. Foreign exchange loans for operational state economic enterprises are also being made available only through the State Investment Bank. Furthermore, in order to permit state economic enterprises to borrow commercially on an increasing scale in future, the Government is studying ways to strengthen their capital structure. Paid- up capital of the operational state economic enterprises increased from T.L. 92 billion in 1979 to T.L. 300 billion in 1980, and is programmed to reach T.L. 460-470 billion in 1981, and the debt/equity ratios of these enterprises have also improved. - 274 - 6.84 Overall, the cost of capital has remained strongly subsidized. Inter alia, the state economic enterprises receive an interest rate subsidy of 5 percent a year on their loans from deposit money banks from the Differential Interest Rate Rebate Fund. It is an indication both of the ready access that state economic enterprises have had to still cheaper finance as well as of their poor financial position that loans by deposit money banks to state economic enterprises have remained at modest levels. Loans from the State Investment Bank are provided at interest rates 10 percent lower than commercial borrowing. At the same time, given the past low rates of interest on such loans, and the availability of still cheaper sources of finance, such as equity subscriptions and budgetary transfers, the average real cost of funds to state economic enterprises in 1981 was lower still than the cost of their new borrowings. A very rough estimate of the value of the interest rate subsidy to all state economic enterprises in 1981 is T.L. 120 billion, or double their expected gross profits (excluding duty losses). 6.85 The significance of the changes effected so far is still to be seen. What will happen to enterprises that continue to fail to live within their means? Large transfers, for example, in the form of equity infusions to offset the decapitalization created by losses, will negate the effects of these changes. It is also apparent that state enterprises continue to enjoy highly subsidized finance. Moreover, some of the burden of financial stringency is being shifted to the private sector. 4. Reform of Personnel Policy 6.86 Overstaffing has become a major problem for state economic enterprises. For this reason, the 1981 Program decree froze the number and structure of positions for existing operations in each state economic enterprise at their level as of November 30, 1980. New factories opened by a state economic enterprise must first draw on existing staff of that state economic enterprise, and in any case new hiring may not exceed 50 percent of the workforce for the plant. Furthermore, state economic enterprises may not apply to the Ministry of Finance for new positions as in previous years, while vacant posts can only be filled with the permission of the Ministry. Indeed, in ten state economic enterprises accounting for 44 percent of total state economic enterprise employment in 1980, 50 percent of the positions becoming vacant through resignations, retirements or deaths are being automatically cancelled. These steps are expected to cut total employment in operational state economic enterprises by 5 to 6 percent in 1981, following a 1 percent fall in 1980. Finally, early retirement has been facilitated by a decree setting rates of severance pay. Since some 40 percent of the present labor force of state economic enterprises is apparently eligible for retirement in the next five years, consistent impleinentation of the policy begun this year could lead to a significant reduction in overstaffing in the medium term. 5. The Response of State Economic Enterprises to Changes in the Environment 6.87 Apart from changes in pricing, investment allocation, financial control and personnel policy, state enterprises have been affected by changes in the trade regime, the exchange rate, monetary policy, and the political climate. One effect of these changes has been to take the enterprises somewhat closer to the realities of the market place. Another has been to - 275 - release them from the negative effects of politically-motivated interference. So long as the political environment remains as it now is, operating improvements in state enterprises are likely to occur. Much of this is likely to be for the intangible reason that such improvements are what the present government cipects and the recently appointed managers of state enterprises know this fact. 6.88 Despite these policy, changes, little further improvement can be expected in the state economic enterprises' accounts or in their overall performance in 1981. Two fundamental problems remain in the short term. The first is that, for the managers, the only obvious way out of immediate financial pressures is either to raise prices or to borrow. The freeze on employment levels gives little immediate room for reductions in costs, although in the medium term cost reductions of various kinds are possible. If such reductions are to occur, not only will investment have to be oriented towards that end but management will have to be given grdater freedom to control major cost items. The second question is whether managers have any incentive to make the decisions that will lead to cost reductions. The issue of pay structure and reward for managers remains outstanding. 6. Conclusion 6.89 The two most important changes thus far have been higher prices for state enterprise products and, closely related, tighter limits on their access to cheap official finance. One consequence has been improved profitability. Another has, however, been the shifting of the burden of state enterprise inefficiency from the Treasury onto the private sector via both high prices and increased arrears. 6.90 The most important change that has not yet happened is any major reduction in inefficiency. With prices in 1980 generally above world levels and many forns of covert and overt subsidization, including depreciation at historic cost, state enterprises make either small, profits or losses. Furthermore, they continue to make a very modest contribution, in general, to the financing of their investment. Yet, much of this "new" investment is really the replacement of existing equipment, for which depreciation provisions have been inadequate. 6.91 In sum, with the removal of previously depressed prices, the performance of state enterprises stands more clearly revealed. While the raising of any prices that were previously below international levels is unquestionably desirable, beyond that the burden of economic and technical inefficiency is merely being reallocated from the Treasury to customers and suppliers. 6.92 What is needed now are changes that will lead to increased efficiency. The achievement of this goal would be helped by greater competition. Increased efficiency, autonomy and reform of market and internal state enterprise structure must go together. In this sense what has happened so far is only a step towards a reform of the state economic enterprises. - 276 - D. An Agenda for Reform 6.93 The last major effort at reform occurred in the early 1960s and culminated in the passing of the laws 440 and 441 that still regulate state economic enterprises. In explaining the rationale for these reforms, a World Bank report of 1965 remarked that under the previous law, 3460 of 1938 "the detailed administration of the SEE's was made liable to very considerable control. Responsibility for the appointmert of all top managers was given the Council of Ministers; a High Control Board was established to report annually on each SEE's operations and price policy; each SEE was made responsible to a Ministry...; Committees of the Grand National Assembly were to review and criticize their reports. As a result of all this, policy direction and responsibility gradually became diffused between the SEE managers and many branches of the Government." 6.94 "Successful managers were those who became adept at pleasing the variety of agencies which reviewed their operations. The strict control over SEE administration meant that it was not possible to discharge surplus labor; indeed an SEE manager would gain more credit for retaining unnecessary workers...The SEE manager also was subject to political pressure to build plants in particular districts...He, for his part, was anxious to enlarge his empire...So unnecessary capacity was created...Even with high costs, the SEE;s with their monopolistic position had been earning profits to finance their expansions." 6.95 "In the 1950s the profits of the SEE's (as a whole) began to disappear as the Government tried to hold back the cost of living. Then the SEE's began financing both operating losses and their still uncontrolled investment program by borrowing from the Central Bank and from comrnercial banks and by not paying their taxes due to the Government. Thus the SEE's became the major channel through which Government policy created the rapid inflation of the 1950s." 6.96 It is clear that the problems, from which state economic enterprises suffered in the 1970s, are virtually identical to those which the reforms of almost two decades ago were supposed to solve. This experience shows that the problems of the state economic enterprises are both deep-seated and unlikely to be resolved by modifying the legal framework and organizational structures alone. 6.97 The need is to define the problems to be solved by a reform without going into details, which must be specific to each industry, and without restricting the discussion to questions of reorganization. The starting point has to be how the state economic enterprises will fit into the new outward- looking, market-oriented policy. A successful policy transition for Turkey will be very difficult if state enterprises remain inefficient and tax the rest of the economy via high prices or large deficits financed by government. 6.98 The following discussion starts with the rationale for, and the characteristics of, a thorough-going market-oriented reform. It then proceeds to ask how a transition to such a structure might be managed and also what some of the second best options might be. Finally, proposals now under discussion in Turkey will be evaluated. - 277 - 1. Market Discipline for State Economic Enterprises in Manufacturing 6.99 In the discussion below the advantages and characteristics of a market-oriented system for state economic enterprises in manufacturing are considered. Framework and Goals 6.100 Many of the problems of state economic enterprises could be resolved if they were maAe subject to the competitive pressures of the market and the prices they faced were undLstorted by subsidies and protection. There are several reasons for taking this approach: firstly, in the context of such a competitive market, profits can be the goal. Without such a single clear goal, the inevitable need to select among conflicting objectives tends to force decisions to rise to the highest political level. At the same time, without an efficient pricing environment, profit maximization will lead to economic inefficiency. Secondly, unless prices are at international levels,. downstream industries with a comparative advantage will be penalized. Thirdly, only in such a context is it easy to evaluate managerial performance by the criterion that will also be the goal of the enterprise. Fourthly, the discipline imposed by the profit benchmark provides the best incentive to the enterprise to improve efficiency. Finally, the need to remain competitive will be the strongest possible constraint on excessive wages, excess employment, and featherbedding. 6.101 Changing both the structure of incentives and the goals of state economic enterprises in manufacturing will be very difficult. It would be unsatisfactory, however, to go only part of the way by changing the goal to profits but continuing high protection from imports, subsidization of capital and so forth. Furthermore, it is essential that failure to achieve profitability be penalized not merely by removal of managers but by bankruptcy, if necessary. Control over Investment 6.102 There is an inconsistency between mandated investment goals and market operation by state enterprises. Nor can an investment, once agreed upon, remain inviolate as economic conditions change. 6.103 At the same time, it is only possible to allow enterprises to expand freely if they (and the suppliers of funds) know that they face market penalties for errors. If all parties believe that government bears the risks, there is a substantial danger of excessive investment (in order to build industrial empires), and inefficient operations. As The Econiomist wrote recently of British nationalized industry, "Allowed to invest and borrow freely, they would construct yet more state white elephants, for which the markets would put up the money in the certain knowledge that monstrous - 278 - misinvestment would never cause them to go bust." 1/ In such a context, project "bankability" has a distorted mea2ing and meticulous and independent ex ante appraisal of projects is needed. Finance 6.104 If state economic enterprises were fully autonomous and subject to market discipline, their initial equity capital could be provided by the Government and all further borrowing could come from the capital market without a government guarantee and on exactly the same terms as those facing major private borrowers. In this context there would be no need for any special investment institution like the State Investment Bank. 6.105 As long as the investment decision is not delegated to the enterprises, it would be simplest to combine the roles of project appraisal and finance in one institution. The State Investment Bank and perhaps other public investment banks as well, could carry out these tasks. (Merger of the banking subsidiaries of SUmerbank and Etibank, which are already largely oriented towards finance of their parents, could create one such institution.) In order to carry out these functions, such institutions should charge market rates of interest, which would help them to borrow commercially, and should have the flexibility of form of finance needed by any investment bank, including holding of equity. The intermediaries should also have to compete for the social security and pension funds on which the State Investment Bank now largely relies. There is also the important question of how to approach international capital markets, especially whether to allow state economic enterprises to borrow directly or rather to encourage the intermediaries to borrow as well or instead. Management and Technical Personnel 6.106 There are four issues: selection of Tnanagers; security for managers; accountability of managers; and pay and incentives for managers. With respect to the first three, many of the existing problems of state economic enterprises could be reduced if they had boards that were largely independent of the government and that did not see day-to-day management as their prerogative. The government may select boards whose members have security of tenure and the majority of whom are independent and have wide experience of business problems. These boards could then select the managers and have the sole power of dismissal. If there were also an independent General Assembly for the enterprises, such a body could select auditors as well as some board members. 6.107 Apart from procedures to increase indeperidence, it is certainly important to pay managers a competitive salary and also reward them for successful performance. If this were to be done, the flow of able professionals would not all be one way from state to private enterprise. It 1/ The Economist, 20-26 June, 1981, p. 12. 2/ One of the arguments for having relatively small individual enterprises is that they are more likely to be allowed to fail than larger ones. - 279 - is important in this context to recognize that the problem is not limited to top managers. Adequate pay and a professional environment are equally important, perhaps more so, for middle managers and technicians. Structure of Enterprises 6.108 A great deal of attention has been paid to the problem of the optimal structure for the enterprises. The relevant issues are: how large should the enterprises be? How many layers of management are needed? How decentralized are they to be? 6.109 An a priori answer to these questions cannot readily be given, especially since the technical characteristics of individual industries, including the potential for economies of scale obviously vary. It would be appropriate to undertake studies of each industry in order to make a plan for enterprise structure. Without prejudging the conclusions of 'such studies, one would venture that, taking the case of steel as an example, it would be advantageous to retain Erdemir and Isdemir as separate and independent corporate entities, while it would probably be appropriate to separate Karabuk from Isdemir. In turn, the paper mills, cement mills and textile mills could develop more efficiently under separate administrations than under the present monolithic leadership. Lightening the corporate structure would provide an added impetus to competition, facilitate new initiatives, and make possible new combined ventures of public and private enterprise as well as disposal of certain elements of the state holding to the private sector. At the same time, the decentralization of administration would be compatible with joint action in certain areas, research and development or export promotion, for example. Audit and Public Accountability 6.110 As has been indicated above, the High Control Board has not proved an effective auditor and the Grand National Assembly's (TBBM) Joint Committee on state economic enterprises has not proved an effective general assembly. 1/ It is necessary to arrange the audit of state enterprises so that reports appear more expeditiously than at present, are freely available to the public and are debated by a disinterested group of people that has the power to act. 6.111 The auditing of accounts cannot be done usefully until the prices faced by state enterprises reflect economic reality. The same objective is, of course, important if profit-oriented activities are to be efficient. Apart from the rational pricing of output and inputs, this would necessitate 1/ See on this issue Mustafa Aysan, "Public Economic Enterprises and International Markets," Istanbul University Publication Number 2801, Faculty of Business Administration Publication Number 119. The translation reads "The control of KITs through the High Control Council attached to the Prime Ministry, which submits its annual report on KITs to the TBMM's Joint Committee, on KITs has not worked well. The main reason for this is that the Prime Ministry has more important responsibilities than the control of state enterprises and the Joint Committee on KITs is subject to political pressures." - 280 - adjusting accounts for inflation and making the cost of capital comparable to that facing private enterprises. Sc2pe 6.112 The purpose of state enterprise and the changes to be made when industries mature are much debated issues in Turkey. The rationale for state enterprise, as the pioneer of new industries, implies that older industries should be passed over to the private sector. In practice, however, empires once established are rarely dismembered. 6.113 Public manufacturing may contirnue to play a useful role in basic industries, such as fully integrated steel, fully integrated fertilizers, and basic petrochemicals, whose capital requirements are very large. This is not likely to be the case in the engineering industries where private initiative is needed to ensure the flexibility necessary to respond to world'market conditions. Finally, there is no particular economic rationale for state enterprise in textiles, leather, shoes, sugar, or cement. The Role of Government 6.114 While reform on the lines discussed above would reduce the direct role of central government, there would still remain important functions to perform. The government would have to decide how much public finance to provide the enterprises, especially in the form of equity; also, the government should play a role in the selection of the Boards of Directors of the enterprises, including those of the state investment banks; finally, t~he government would have to be involved in choosing new accounting procedures. 6.115 As firms become more independent financially, formal central control declines and boards of directors become more independent, direct political interference should diminish. Ultimately, however, this is a question of attitude. As long as government officials and politicians see state economic enterprises as their ward, independence will be difficult to achieve. 2. Transition Problems 6.116 The reform of public enterprises will require time. There is also the question of the transitional arrangements required. Furthermore, if the reform cannot be carried out in full, a second best structure needs to be created. These can be discussed together, since many of the transitional arrangements are appropriate second best policies. Unprofitable State Economic Enterprises 6.117 The question arises what is to be done with existing enterprises that cannot be profitable at world market prices? A division into two categories is needed: those that are profitable in the short run but cannot recover capital costs and those that would make losses even in the short run. 6.118 The problems of firms that cannot recover their capital costs may be resolved through financial restructuring. -This might be handled, in mild cases, through the conversion of debt to equity or by debt subordination but more often would also be reflected in the actual writing down of both debt and - 281 - equity to make the capital structure reflect the presumptive earning power of assets. If the majority of the state-owned enterprises are organized as public corporations, it .aay be assumed that the Turkish Government, that is ultimately the Turkish tax-payer, will have to bear the losses resulting from financial restructuring. Yet, the tax-payer, as consumer, will benefit in a similar degree from the price reductions, which are the other side of the same operation. 6.119 Though some ailing enterprises could be cured through financial restructuring, it is clear that there are quite a few state enterprises (or plants or lines of production) that are no longer economically viable. It would not make sense to operate these firms with permanent subsidies. Rather, they should be closed. The resulting social shock, particularly when they are of great importance to a given locality or region, might be absorbed through the attraction of new economic activities to the affected area and through compensation, retraining and relocation of displaced workers. 6.120 In both instances, what is involved is a standard bankruptcy oper4tion with viable operations restructured financially and non-viable operations closed. There is need for establishment of an organizational framework to handle the bankruptcy of state economic enterprises in a disinterested and impartial manner. Price of Output 6.121 In the case of state economic enterprises where competition cannot be assured, prices should be set periodically at an estimated world market price, allowing for acceptable levels of protection. Price control of this kind' is needed during the transitional period of reforming the structure of protection, described in Chapter 2. Cost of Factors of Production 6.122 The costs of inputs are now very distorted. It would be harmful if an attempt were made to maximize profits with respect to current factor costs, especially since there would be a strong bias towards capital intensity. Wages need to be lower and costs of capital higher. 6.123 The problem with wages could be permanent if both managers and workers are not convinced that the market test will have effect. At the same time, experiments with different sorts of pay systems and incentives for workers are desirable. 6.124 There is a particularly important reason for wage control in the period of transition that Turkey is now undergoing. This is that public sector employees under union contracts are well paid and that, unless they accept reductions in real wages, the state economic enterprises will either have to forego expansion or contract employment because of overall limits on finance available to offset losses and pay for investment. The case of Chrysler Corporation in the United States is an example of an enterprise helped by employee's wage restraint. 6.125 As far as the cost of capital is concerned, it is relatively easy to require the lending institutions to charge market rates. The State Investment - 282 - Bank and commercial banks should be expected to do this without delay. Failure to operate profitably at rates facing the private sector is again an indicator of lack of viability. Control over Investment and Finance 6.126 In the transitional period, careful economic appraisal will be required to the extent that the enterprises continue to operate in a distorted price environment. This applies to investments to be financed by public investment banks as well as to projects included in the investment program of the State Planning Organization. Audit 6.127 In the transitional period, or for at least as long as financial and efficiency prices diverge, it is also necessary to have ex post economic as well as financial audits. At the same time, there should be an immediate reform in the auditing of state economic enterprises, along with inflation accounting. Subsidies 6.128 There are three reasons for subsidization. The first is to encourage profit oriented businesses -- public as well as private -- to achieve particular social objectives, like regional development. Specific ex ante incentives are the way to achieve these goals. The Fecond is to subsidize "white elephants" which cannot be closed for political reasons. In the transitional period this may be necessary, but as far as possible such subsidies should also be constrained ex ante. Finally, so long as prices are distorted and economic evaluation is done at shadow prices, subsidies may be required to offset the losses that operations profitable at shadow prices can entail. Scope 6.129 Even if social and political considerations make it possible to proceed with the privatization of public firms in industries where the private sector can better provide for domestic consumption and exports, it will be a slow process. This is in part because it requires favorable business conditions and in part because the private sector may have little inclination to take-over high-cost, inefficient establishments. At the same time, little purpose will be served if only the most 'efficient establishments were sold to the private sector. 3. Assessment of Current Proposals for Reform 6.130 The above discussion, cursory though it has had to be, provides some criteria for evaluating the scope and content of current proposals for reform under discussion in Turkey. The government has been giving the issue of state enterprise reform considerable attention. It has established the guiding' principles for the reform, has prepared draft reform proposals, and has taken interim measures in regard to personnel. The guiding principles of the reform are unexceptionable. They include: - 283 - - minimization of political interference; - decentralization of decision making, so that enterprises can operate like private firms; - rationalization of the structure of individual state economic enterprises; - clarification and concentration of responsibility for control of state economic enterprises; and - rewards for success, especially for managers of state enterprises. In the following the practical implementation of these principles in the draft reform proposal will be considered. 1/ Proposals for Structural Reorganization 6.131 The draft reform proposals divide the SEEs into two categories. The first comprise public-utility type SEEs, such as the PTT and railways; they would continue to function under Law 440. The second comprise those SEEs that are to produce goods and services competitively; they would be removed from under Law 440 and function under private enterprise laws. The following discussion deals with the second group of productive enterprises. 6.132 The productive SEEs would be organized into holdings, each of which would have a number of subsidiary companies. In manufacturing, there would be nine holding companies covering the following areas: textiles and clothing, paper, sugar, cement, minerals, fertilizer, iron and steel, machinery and equipment, and bank for workers abroad. Each holding would have a full-time chairman, five part-time board members, and a general manger, all elected for five-year terms by the shareholders meeting or general assembly to be held annually. The assembly would be concerned with general policy issues; it would appoint the managers of the subsidiary companies; and it would provide overall directives to the subsidiaries. 6.133 The general assembly, to meet annually, would consist of the representatives of the Prime Minister's office, the Ministries of Finance, Commerce, Industry, Agriculture, Customs, and Tourism, the State Planning Organization, the High Control Board, the State Investment Bank, and the subsidiary companies, as well as seven members to be chosen among experienced public and private sector managers and elected for five year terms. Holdings with private shareholders would also have private representatives; SEEs would be encouraged to sell up to 49 percent of their shares of the subsidiary companies to private investors in the form of preferred shares. 6.134 Overall policy guidance for holdings would be provided by a high level governmental Coordination Committee. Furthermore, the performance of the 1/ Since the mission has not seen these proposals in writing, only a tentative discussion of the main features is possible. - 284 - manufacturing SEEs would be monitored by the Ministry of Industry on the basis of preference indicators on a quarterly basis with semiannual reports to be prepared for the use of the government. 6.135 The managers would have responsibility to increase output productivity and profits. Under a recent decree, they and other skilled employees will no longer be subject to Law 657, their compensation has been increased several- fold, and they will receive incentive payments for performance. Finally, the holdings would be self-financing, with budgetary transfers limited to equity infusions for new investments. 6.136 The abolition of the civil service status of managers and skilled personnel and the freeing of their compensation represent important steps in reforming the SEEs. The proposals for increasing the decision-making power of the managers and making them responsible to a general assembly also have considerable merit and are consistent with the requirements considered in Para. 6.93-129. The reform proposals do not clarify, however, the process of decision-making on investment and, by providing several performance criteria, they do not ensure that profitability would be the sole guiding principle for the SEEs. At the same time, the effective responsibilities of the high-level Coordinating Committee and the role of the ministries monitoring the performance are not entirely clear. 6.137 Questions arise further about the proposed management structure, the size of the holdings, and their single-industry coverage. There may be conflict between the chairman and the general manager of the holdings as well as between the management of the holding and that of the subsidiary companies. Also, unless much greater freedom to import competitive products is given, the creation or preservation of single-industry monoliths will not exert competitive pressure on state economic enterprises. Yet, the need for greater competition is a paramount issue in Turkey. 6.138 Finally, having holdings limited to, and monopolizing, public sector production in any one industry is not consistent with the success of more diversified organizations in such developed countries as Japan. Such a structure may make the dynamic process of the birth and decay of firms more difficult and holding company managers may see themselves as controlling the steel or fertilizer business in Turkey rather than as stimulating others to success in the business of making profits. It would, therefore,. be better to have more state economic enterprises competing with one another. In this connection, reference may be made to the experience of Hungary where large trusts and horizontal enterprises have been broken up to ensure competi- tion. 1/ 6.139 In sum, the changes proposed represent an important step in decentralizing decision-making and integrating the SEEs in the market economy. Further steps would need to be taken, however, to attain these objectives. In particular, there is need to ensure competition in individual industries. 1/ Bela Balassa, "The Economic Reform in Hungary, 1968-81,' Washington, D.C. World Bank, January 1982, mimeo. - 285 - Proposals for Transferring State Enterprise Units to the Private Sector 6.140 A proposal exists for transferring five profitable Sumerbank enterprises to private ownership via the issue of preferred shares. Since there is a desire to avoid transfer to the larger private holding companies, the shares will be made attractive to smaller savers. They will not carry voting powers, however, and operating control will apparently remain with the state enterprise. In all, given the insignificance of the plants involved and the failure to transfer control of management, this does not seem to be a significant step towards privatization. 4. Concluding Remarks 6.141 Any thorough and successful reform requires change as much in attitudes as in formal structure. As a World Bank report remarked fifteen years ago when reform was last debated: "...Senior SEE managers cannot be expected to assume, overnight, new attitudes to cost and efficiency..." and "...in the main improvement must depend on Turkish efforts and Turkish attitudes. It would be naive not to expect these to be constrained to some extent by past and present positions of the SEE's and deep-seated feelings regarding the social role of the SEE's and their accountability for Parliament." The failure of those reforms gives greater force to these words now, when the issue is again under consideration. 6.142 Note finally that as the above report remarked, "Quite apart from the need for the SEE's to improve their efficiency so as to provide savings, their transformation is a vital aspect of Turkey's modernization. It may be useful, therefore, to repeat the main requirements: that the SEE's be concerned mainly with efficiency and competitiveness and not with providing employment or a subsidized service; that SEE managers be given as much autonomy as possible to achieve this aim but be required to justify their investment proposals under intense scrutiny; that the pay and tenure of managers be adequate to attract the right people and that their selection be based on their qualifications and not on political considerations; that SEE accounting, control and financial reporting should be such as to provide management with adequate and prompt information and to enable outside reviewing agencies to see how efficiently each SEE is performing (whether its costs are low and its prices competitive, whether its capital and labor utilization is improving, whether it holds too many stocks, etc.) The reviewing agencies and the public should learn to ask these efficiency questions about the SEE's and to appreciate that this kind of criteria should be used when judging whether an expansion should best take place by private enterprise or by an SEE.' These remarks made fifteen years ago remain relevant for the reform of the SEEs today. - 286 - CHAPTER 7 AGRICULTURAL DEVELOPMENT AND EXPORTS Introduction 7.1 While the support price system, credit subsidies and subsidies to major inputs maintained a flow of resources into agriculture, the inward-oriented development strategy followed by Turkey discriminated against agriculture in favor of industry. Within agriculture, import substituting crops were benefited at the expense of export crops, the bulk of government investment was for capital-intensive projects, and input subsidies to credit, machinery, fertilizer, and water encouraged the expansion of capital-intensive activities and inefficient resource use. 7.2 The fact that agricultural production nevertheless grew at an average annual rate of nearly 3% indicates the advantages Turkey possesses in agriculture. Its considerable land and labor resources, favorable climate, and proximity to expanding markets would permit rapid expansion of production and exports into the future, provided that appropriate policies are followed. 7.3 This chapter will describe the main charac-eristics of agricultural development and exports in Turkey, analyze the market intervention policies applied, and examine the effects of incentives on market performance. The chapter will further consider the market prospects for agricultural exports and indicate Turkey's comparative advantages in agriculture by using a sector model. A. General Characteristics of Agricultural Development and Exports 1. Changes in Cultivated Area and Production 7.4 Turkey's agriculture has the potential to produce a rich array of continental products (i.e., cereals, cotton, tobacco and livestock) and Mediterranean crops (fruits and vegetables). This fact reflects the variety of soils and agroclimatic zones in the country, and the threefold role of agriculture as (i) domestic supplier of final consumption goods, (ii) domestic supplier of raw materials for industrial transformation, and (iii) foreign exchange earner. 7.5 Despite the variety of its agroclimatic conditions, Turkey's agricultural sector is greatly specialized (Table 7.1). In 1980, 71% of the cultivated area was devoted to cereals, of which wheat and barley accounted for 85%. None of the other crops account for a substantial part of the total cultivated area, the main categories being industrial crops, including sugar beet, oil seeds, cotton and tobacco, 9% of the cultivated area; olives and grapes, 8%; fruits and nuts, 7%; vegetables, 4%; pulses, 3%; and tea 1%. - 287 - 7.6 Turkey has, in addition, 21 million ha of natural pastures, which support one of the largest animal population in Europe and the Middle East. This includes 64 million sheep and goats and 16 million cattle and buffalo, as well as 2.5 million horses, donkeys and mules, and 55 million poultry. Table 7.1: CULTIVATED AREA BY MAJOR CROPS Percentage Crops Area of Area ('000 ha) Cereals and Pulses 14054 71 Wheat 9350 47 Barley 2700 14 Corn 563 3 Rice 69 - Pulses 585 3 Others 787 4 Industrial Crops 1856 9 Sunflower 406 2 Sugarbeet 275 1 Cotton 675 3 Tobacco 299 2 Tea 53 - Others 148 1 Fruits 2870 14 Hazelnuts 430 2 Citrus 73 - Grapes 760 4 Olives 800 4 Others 807 4 Vegetables 786 4 Fodder 300 2 Total Cultivated Area 19866 100 7.7 Agricultural products in Turkey may be classified into four. categories: (i) import substitution crops: wheat, sugarbeet, sunflower and tea. These products have received considerable encouragement in the last twenty years in the form of price support, the allocation of subsidized inputs, and the provision of extension services, the aim being to increase self-sufficiency; - 288 - (ii) traditional export crops: nuts, dried fruits, and tobacco. Turkish exports of these products constitute a sizeable share in world trade. (70% for hazelnuts, about 25% for dry figs, 20% for raisins and 20% for oriental tobacco); (iii) major export crops: cotton, pulses, roots, and olive oil. This group includes staple exports which are widely traded on the world market; (iv) fruits and vegetables including root crops (potatoes and onions); and livestock and livestock products. 7.8 Import substitution crops registered the largest increases in terms of cultivated area, production and yield over the 1960-79 period. Area under wheat increased by 22%, compared to a total increase in area under cereals by 6%. Area under sugarbeet increased by some 80%, compared to a total increase of 6% in the area under all industrial crops. Sunflower area increased by over 200% as did the area under tea. The increases in area under these crops were accompanied by large increases in yields (83% in wheat, 57% in sugar beet, 45% in sunflower and nearly 300% in tea during the period under consideration). 7.9 Production increases in traditional export crops were modest, with the exception of hazelnuts, whose production rose by more than 400%. Among major export crops, the production of cotton and roots increased by more than 100%, the production of pulses and olives changed little, and the yields of olive trees decreased by 11%. 7.10 Over the same period, citrus fruit production increased by over 200%, production of non-citrus fruits by 17%, and vegetable production by some 50%. Since the domestic prices of fruits and vegetables are not supported, and government intervention in their production is minimal, the substantial increase in production and in product-specialization within the sector must be attributed to market forces. In this connection, note that the area devoted to fruits, nuts and vegetables (excluding grapes and olives) increased from 4.2% of cultivated area in 1960 to 9.5% in 1979. 7.11 The number of sheep and goats increased by only 10% during the 1960-79 period, while cattle and buffalo increased by 22%. As a result, the production of sheep and goat products (milk and meats) stagnated whereas meat and milk derived from cattle and buffalo increased by 82% and 17%, respectively. The number of horses, donkeys and mules, traditional work animals, declined by 27% during this period. In turn, in the poultry sector a remarkable increase in the number of hens occurred, leading to a rise in egg production of over 200%. 2. Export Performance 7.12 Turkey has become self-sufficient in cereals and pulses. Exports of pulses have assumed importance over time while wheat exports were sporadic and peaked at nearly 2 million tons in 1978, declining 289 - afterwards. This decline is attributable to inappropriate export policies rather than to insufficient domestic supplies. The country remains a Table 7.2: EXPORTS OF AGRICULTURAL COMMODITIES 1979 Growth Rate ('000 Tons) 1970-79 (%) Cereals & Pulses Pulses 686.0 14.5 Wheat 0.5 13.7 1/ Barley 60.8 -25.1 Rye & Other Cereals Industrial Crops Sunflower - - Cotton 150.6 -7.7 Sugarbeet - Dry Fruits Edible nuts 138.6 7.6 Dry figs 34.9 2.1 Raisins 75.9 0.8 Others Tea 5.7 -3.5 Tobacco 69.6 -0.7 Roots Onion & Garlic 78.7 57.4 Potato 129.5 9.4 Olive Oil 29.6 41.4 Citrus Fruits 131.5 10.8 2/ Oranges 16.2 -5.6 Lemons 79.0 12.1 Grapefruit 0.4 7.9 Mandarins 29.6 198.0 Other Fruits Apple .30.0 57.6 Fresh grapes 8.1 -8.7 Stone fruits 1.6 4.8 Pears & quinces 0.4 65.4 Other fresh fruits 23.7 43.3 Vegetables 40.2 62.9 Tomato 25.6 93.9 1/ Eggplant 1.2 40.5 2/ - 290 - Bellpepper 1.7 88.6 2/ Leeks 4.9 + Fresh beans 0.4 57.5 2/ Cabbage 0.8 + Other vegetables 5.1 65.2 2/ marginal importer of edible oil and sugar. Tea exports have declined as a result of low quality production. In order to offset the reduced export possibilities for tea, coffee imports were banned in 1979. 7.13 Except for hazelnuts, traditional exports have stagnated or declined, as have exports of cotton. The exports of most of the other crops have increased to a considerable extent, in particular fruits, other than citrus, and vegetables, while the exports of citrus have increased relatively little. The exports of processed fruits and vegetables form a mixed pattern. Except for tomato paste exports, other exports are small, totalling about 20,000 tons in 1979. Among them, exports of fruit concentrates have increased substantially over time. 7.14 The reported exports of live animals have not increased. However, this is probably due to poor recording of smuggled animals, whose numbers are reputed to have increased in recent years. Exports of meat remain very small, as do exports of fresh and canned fish. 3. Input Use in Agriculture Regional Patterns of Land Use 7.15 Turkey may be divided into 9 agricultural regions. Tables 7.3 and 7.4 show that the variety of climate and geographical location offer the opportunity for a very diversified set of agricultural activities in these regions. However, Table 7.4 also shows the climatic limitations affecting the largest part of the agricultural area that is dependent on low rainfall and average humidity. These dry areas, comprising all the central plateau and Eastern Anatolia, produce the bulk of cereals, pulses and livestock. Table 7.3: REGIONAL CROPPING PATTERNS Region No. Region Name Activities I Central North Cereals, Rice, Vegetables, Pulses, Fruits, Tubers II Agean Olives, Grapes, Cotton, Tobacco, Pulses, Tubers, Vegetables III Marmara Sunflower, Rice, Roots, Sugarbeets IV Mediterranean Cotton, Cereals, Citrus, Rice, Vegetables, Pulses - 291 - V North East Fodder, wheat, Tubers, Pulses, Livestock VI South East Fodder, Cereals, Tubers, Pulses, Vegeta- bles, Grapes, Livestock VII Black Sea Hazelnuts, Tea, Rice, Tobacco VIII Central East Fodder, Cereals, Fruits, Tobacco, Sugar- beets IX Central South Cereals, Sugar beets, Grapes, Pulses, Tubers, Vegetables, Livestock Table 7.4: CLIMATE (Co) Average Average Number of Region Average Precipitation Relative Days with No. Name Temperature mmHumidi Snow I Central North 11 375 60 22 II Agean 16 800 65 III Marmara 14 700 70 10 IV Mediterranean 18 700 62 V North East 7 400 60 100 VI South East 8-9 450 50 1-80 VII Black Sea 14 1500 75 10 VIII Central East 12 400 55 30 IX Central South 11 350 60 22 Machinery and Irrigation 7.16 An important characteristic of Turkey's agricultural development has been the high capital intensity associated with the use of heavy farm machinery and large irrigation projects, both of which have received generous government incentives in the form of direct subsidies to tractors, negative real interest rates on credit, and very low water charges. The growth of farm machinery has been rapid as the total number of tractors increased from little more than 40 thousand in 1960 to 441 thousand in 1979. Over the same period, the importance of equipment associated with labor intensive techniques of farming like wooden plows, threshing sleds, fanning mills and seed cleaners declined at a rate of 10%-15% a year. In - 292 - terms of the capital-labor ratio, the effects of mechanization have been substantial, as the ratio of equipment to labor in the cereal producing areas has increased from $3 to more than $100 per man year in the last two decades. 7.17 Large irrigation projects have also had the effect of increasing capital intensity for selected crops. Average costs per ha of irrigated projects in the past has been about $3,000, but the choice of the cropping pattern and the fact that only about 50% of the area equipped for irrigation is actually irrigated have resulted in capital-output ratios of about 4. 7.18 Table 7.5 documents some of the changes in capital intensity due to the concentration of declining public investment in large irrigation projects and the increasing private investment in mechanization. Incremental capital output ratios appear to be steadily increasing over the years and a substantial rise was registered in the 1973-78 period, reflect- ing the spurt in mechanization. The orders of miagnitude of these sectoral estimates of the ICORs are confirmed by estimates based on project data, which indicate values between 4 and 5 for most irrigation and mechanization projects 1/. Table 7.5: AGRICULTURE: ESTIMATES OF INCREMENTAL CAPITAL OUTPUT RATIOS Time Period ICOR a/ ICOR b/ 1966-68 1.89 1.88 1968-72 2.27 2.69 1973-78 4.02 4.83 a/ Estimated on the basis of three-year moving averages and one year lag. b/ Estimated using a three-year lag for public investment (irriga- tion) and no lag for private (mechanization). 7.19 From a macro-economic point of view, the capital intensity bias of Turkish agricultural growth has had three main consequences: (i) high costs of generating output increases through the use of scarce foreign exchange and domestic savings, (ii) under-utilization of labor, with ensuing inefficiencies, and (iii) implicit discrimination against relatively labor-intensive subsectors like fruits and vegetables, where the country has comparative advantage in light of the availability of cheap labor and favorable climatic conditions. 1/ For example, project completion reports suggest that costs of irriga- tion projects have averaged in excess of $3,000 per ha. Increases in value added, with a cropping pattern based mainly on cotton and wheat and 50% utilization of equipped area, have averaged $700 per ha. -293 - Labor 7.20 For a middle income country, Turkey has an unusually high proportion of its work force still employed in agriculture (62% compared to 42% in Yugoslavia). Landlessness is a significant factor in rural areas, particularly in the South and Southeastern part of the country where the number of landless families is reported at 20%-30% of total families; it is less in the Northern and Northwestern part (5%-10%) where smaller holdings predominate. 7.21 A high rate of unemployment characterizes both the industrial and the agricultural sectors. Between 1967 and 1977, the total number of unemployed, excluding surplus or undexemployed labor in agriculture, has increased both absolutely and relative to the size of the labor force, from 0.6 million in 1967 (4%) to 1.5 million in 1977 (9%). In agriculture, surplus labor during the peak season is estimated at 0.7 million people. These figures indicate the magnitude of the unemployment problem. At the same time labor productivity in agriculture increased at an average annual rate of 8% compared to 11% for the industrial sector. Thus, while the drive for mechanization had a positive impact on labor productivity and production increases, this policy had major although unquantified implica- tions for the displacement of labor in agricultural occupations l/. For years, an offsetting factor was the migration abroad of rural workers,which quadrupled over the ten year period under consideration from 0.2 million to 0.8 million. But, with the slow-down of the economy in European countries, this safety valve is now largely closed. Fertilizer and Plant Protection Chemicals 7.22 Since the early 1960s, growth in the application of chemical fertilizer has been rapid and its use is now widespread. Fertilizer applications per hectare increased from 7 kilograms in 1960 to 23 kilograms in 1970 and 90 kilograms in 1980. In terms of nutrients, total consumption amounts to 1.4 million tons. Table 7.6: FERTILIZER SUPPLY AND CONSUMPTION 1978 ('000 tons nutrients) Beginning Total Nutrient Stock Production Imports Supply Consumption N 207 271 474 952 776 P 0 100 213 401 714 635 2 5 K 0 8 2 14 24 21 2 Total 315 486 889 1,690 1,432 1/ The census results for 1980 when available should permit to ascertain the validity of this statement. -294- Table 7.7: COMPARISON OF OPTIMUM- AND ACTUAL FERTILIZER USE, 1978 thousand tons of nutrients Nitrogen Phpqnhpte CropOptimum Actual Optimum Actual Wheat 281 340 255 315 Corn 32 33 20 22 Rye,etc. 12 13 11 12 Rice 43 11 4 6 Barley 44 53 44 54 Sunflower 40. 39 35 36 Sugarbeet 44 38 37 33 Tea 15- 13 0.1 0.8 Tobacco 15 13 . 9 10 Cotton 20 56 12 36 Roots 26 16 17 11 Pulses 12 9 21 16 Grapes 17 16 11. 14 Olives 15 15 9 9 Vegetables 45. 46 25 28 Citrus 10 13 6 8 Hazelnuts 16 28 5 11 Fruits 8 4 5 5 Other 80 13 87 11 775 773 613 638 1/ As determined by a simulation of the agricultural sector model for 1978, assuming that the fertilizer prices were set at world level. - 295 - 7.23 Table 7.6 indicates the basic elements of the consumption/supply picture for the various types of fertilizer. Despite increases in domestic production, imports still account for nearly one-half of fertilizer supplies. Imports of raw materials have been increased in recent years, in an effort to reduce foreign exchange costs and to increase the efficiency of the domestic industry which appears to be heavily underutilized. 7.24 Fertilizer consumption has increased very rapidly in part because farmers have purchased it much below cost. At this low price, excess demand conditions have prevailed, and therefore a non-price allocation mechanism has been used to distribute fertilizer to farmers and specific crops. There has been an uneven distribution of available supplies. The Mediterranean and Aegean and Marmara regions, with 37% of the country's rural population, accounted for 52% of total fertilizer consumption in 1978 while the Northern and Southern Regions with 17% of rural population received 8% of fertilizers. This distribution of supplies reflects partly the uneven distribution of the land and partly the political strength of various groups of producers. 7.25 A simulation based on the agricultural sector model presented in Section E shows that the distribution of fertilizer was sub-optimal. In fact, with all other prices held constant, an increase in fertilizer prices to the world level would not substantially reduce total demand for fertili- zer nutrients but would redistribute its use from wheat, citrus, nuts and cotton to other crops, such as roots, pulses, and non-citrus fruits (Table 7.7). 7.26 The use of plant protection chemicals increased at an average annual rate of 5.5% between 1960 and 1978. Today's estimated consumption is about 85,000 tons. Plant protection is relatively widespread for cash crops, such as hazelnuts, grapes and cotton in the more developed coastal regions. Apart from these crops, the area covered by plant protection activities represents only a small percentage of the area planted. The consumption of plant protection chemicals has been constrained by limited supplies, which depend on imports for about half of the value of the finished product. Furthermore, although retail prices of plant protection chemicals were controlled by government until January 1980, and often subsidized as well, they received less generous government incentives than fertilizers. B. Government Intervention in Output Markets 1. Price Support Policy 7.27 Notwithstanding the liberalization measures taken in January 1980, the Government continues to set farmer support prices for 23 major agricultural products, except for fresh fruits and vegetables (Table 7.8). Table 7.8: AGRICULTURAIJ SUPPORT PRICES (in Turkish Lira per kilogram) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1 So Hard wheat 1.03 1.03 1.23 2.15 2.50 2.75 3.50 4.00 5.80 12.Q0 So.,t wheat 1.03 1.00 1.20 2.05 2.40 2.65 . 2.82 3.15 5.CO 10.53 Barley 0.78 0.78 0.92 1.62 1.72 1.72 1.92 2.55 4.72 9.03 ?ye 0.75 0.75, 0.90 1.58 1.70 1.80 1.90 2.50 4.70 S.50 ?addy (long grain) 2.25 2.50 3.60 4.50 5.00 5.50 6.25 12.00 21.03 35.C0 entlls - - - - - - - - 15.00 2S.CO 17.00 T-c,bzco 11.70 13.20 23.10 31.30 39.15 39.13 44.39 50.60 60.91 112.23 Sugarl)eets 0.20 0.20 0.30 0.X40 0.50 0.58 0.63 0.80 1.42 3.03 Seed cotton 3.40 3.75 6.00 8.00 8.00 10.25 10.75 13.75 23.00 50.00 (15.50) Tea 4.00 4.00 4.50 6.25 7.50 C.50 10.00 12.00 14.50 26.05 Sv:nflower seeds 2.00 2.20 2.50 3.75 5.50 5.75 6.50 S.50 (16.00) 33.03 '.-azeln--ts 8.50 8.50 9.70 13.50 14.C0 14.50 16.50 21.50 37.50 110.03 (45.03) Dried rfigs 2.35 2.60 4.20 5.50 6.00 7.00 8.00 10.50 22.00 530.0 Clive cil 7.80 8.70 17.50 17.50 17.50 18.00 20.00 20.00 - 125.50 RaisTns (seed lees) 2.92 2.92 .7.G0 10.00 10.00 10.50 12.00 17.50 40.00 85.03 23.53 (45.03) Pistachio nets 11.00 13.00 18.00 25.00 26.50 . . 55.C3 125.03 300.20 Fresh conoons - - - 60.00 70.00 80.00 100.00 125.00 185.G0 S0C.C3 - 297 - It intervenes in the marketing of these crops through state economic enterprises: the Soils Product Office or TMO, for cereals and pulses, and the Sugar Factories Corporation, or TSF, for sugar beet, state monopolies (tea and tobacco), and by authorizing sales cooperatives to purchase on behalf of Government at support prices (cotton, dried fruits, nuts, oil, mohair and silk cocoons). Other SEEs which pay farm product support prices are the Meat and Fish Organization (EBK) and the Milk Industry Organization (TSEK),but their price support activities are limited to the relativ-ely small quantities they buy and process (about 10% of the total meat and dairy products marketed). 7.28 The government exercises varying degrees of control over different crops and at different levels in the marketing chain. The State has procurement monopoly for sugar beets, and a quasi-monopoly for tobacco and tea; it purchases 70 to 80% of these crops. It has a complete monopoly over the manufacture and distribution of sugar, tea, tobacco and their products. Until recently, the State was the sole exporter of wheat. More generally, however, government control takes the form of partial market intervention by the state trading agencies. At the same time, apart from purchases from farmers, the tasks of these agencies also include the storage, sale and export of commodities subject to government control. 7.29 The share of the public and private sectors in purchases varies from year to year, depending on official price levels compared to free mar- ket prices. In 1980, public sector agencies purchased approximately 20% of marketed wheat, 40% of cotton, 20% of pulses, 40% of dried figs and 50% of raisins and hazelnuts. Purchases are made at the support prices, which are set by the Council of Ministers at the beginning of the marketing season for each commodity. Support prices were intended to serve as guaranteed floor prices to the farmer. 7.30 Traditionally, the principal agricultural commodities have been marketed by the SEEs at officially determined prices that were often fixed below cost, with the government absorbing the losses in order to limit in- creases in consumer prices. This was the case for wheat sales by TMO to domestic millers, of meat sales from EBK's slaughterhouses, and sugar sales from TSF's factories, in particular. Since January 1980, however, author- ity has been granted to most SEEs to set sale prices according to actual costs. Thus, subsidies on meat sales have been abolished; subsidies on wheat sales have been reduced; and for the first time in mid--1980 produc- tion costs were taken into account in fixing the retail price of sugar, which increased from TL 20/kg to TL 50/kg. 7.31 The losses sustained by state trading agencies hav Kbeen financed by subsidies from budgetary sources and from Central Bank credit. An addi- tional source of subsidies has been the negative real interest rate charged on Central Bank credit to agriculture (See Chapter 3). 7.32 In the past, the price support policy has provided an effective floor to producer prices in the case of commodities for which the govern- ment purchased all that is offered by the farmers, such as wheat, or in which state trading agencies had a large share of the market, such as - 298 - cotton. This was not the case for livestock products, in which SEEs cont- rolled less than 10% of the market. In recent years of high inflation the price support system has been much less effective. State agencies did not meet their procurement target, not so much because of high domestic prices as a result of local shortages, but because of high inflation rates which quickly eroded the real value of the support prices, thus rendering ineffective the income support objective of government intervention. 7.33 As inflation rates reached 60% in 1979 and 100% in 1980, support prices which were announced shortly before the harvest season, soon fell below market prices. Because of the rigidity of the official price setting systems the Govenment did not respond rapidly enough by increasing support prices. As a result, the state marketing agencies' procurement fell short of the target. The situation became especially problematic in the case of TMO's 1980 wheat purchases, making it impossible to fulfill procurement and export targets. Instead of the planned 3 million tons, TMO eventually pro- cured only 1.7 million, of which 1.4 million were needed to supply the dom- estic market in order to try to keep bread prices under control. While plans had been made to export 1.5 million tons of wheat, the country expor- ted only about half a million ton. 2. External Trade Policy 7.34 Prior to the January 1980 reforms, the external trade of most agricultural commodities was strictly controlled. Imports of staple commo- dities were made on behalf of the government by state trading agencies with the ostensible purpose to guarantee the regular supply of those commodities on the domestic market and to establish a reserve stock for preventing abnormal price fluctuations. Exports were limited through licencing where, in the judgment of the Ministry of Commerce, domestic supply was insufficient to meet domestic demand. 7.35 At the same time, due to often excessive support prices in rela- tion to world market prices, which was aggravated by an overvalued exchange rate, exports had to be periodically subsidized. For example, in 1976 olive oil, raisins and cotton, and in 1978 barley could be exported only with the help of export subsidies. Also, in the case of commodities, for which state trading agencies were the sole exporters, producer support prices often had to be maintained above world market prices in order to ensure sufficient procurement, with the result that subsidies were needed to export (e.g. wheat in 1978 and 1979). 7.36 Since January 1980, measures have been taken to liberalize exports, but imports have remained strictly controlled. The multiple exchange rate system which discriminated against agricultural exports has been abolished and a unified exchange rate has been adopted. The export licensing system has also been abolished, except for exports to Eastern Bloc countries. Finally, minimum export prices (i.e. below which exports - 299 - were not previously authorized) have been abolished for a large number of commodities, and the exportation of wheat and hazelnuts by the private sector has been authorized for the first time. 1/ 7.37 To control domestic price increases and also to generate revenues, however, a system of flexible levies on the exports of major agricultural commodities has been established. The so-called Export Funding System, which existed in 1979 for only raisins, figs and tobacco, has been extended to 12 commodities including some key products such as wheat and wheat flour, cotton as well as cotton yarn. In taxing wheat and wheat flour, as well as raw cotton and cotton yarn, at roughly the same level per kg, the Government intended to use the Export Funding System to encourage the exports of processed products. At the same time, the export levies are deposited into a Price Support and Stabilization Fund managed by the Treasury for reallocation in the form of subsidies to agriculture (e.g. to subsidize government procurement of crops and the production and distribution of fertilizers). 7.38 In 1980, the Export Funding System did not operate satisfacto- rily. For several commodities (e.g. olive oil and wheat), the export fund- ing system combined with high domestic prices actually hindered exports. For example, while domestic prices of wheat were above world prices for most of 1980, a levy of TL 3 per kg was charged on wheat exports (Table 7.9). Consequently, although for the first time private exporters were allowed to enter the wheat trade, no wheat was exported by the private sector in 1980. On the other hand, world market prices for barley exceeded domestic prices by a substantial margin, but no export tax was levied on that commodity. Furthermore, while f.o.b. prices for cotton exceeded domestic prir es throughout 1980, a high export levy (TL 41/kg) was imposed in early 1980, thereby curtailing exports. Subsequently, the reduction of the levy to TL 26/kg led to increases in exports. 7.39 The Export Funding System did not work satisfactorily for the traditional export crops either. The intention had been to use the export tax to limit exports in order to avoid losses in foreign exchange earnings from declining marginal revenues. In practice, the export tax was set too low. Consequently, Turkish exporters started competing among themselves and sold at prices sometimes much below those of previous years. 7.40 All in all, despite the Government's intention to promote exports, agricultural exports were disappointing in 1980. The value of exports reached only US$1.5 billion in that year, compared with US$1.4 billion in 1979, and US$1.6 billion in 1978 (Table 7.10). With increased political stability, improvement was shown, however, at the end of 1980 as well as in the first half of 1981. 1/ In late 1980 the exclusive authority to export wheat was returned to TMO. Given the unsatisfactory performance of TMO in 1980, the Government intends to permit wheat exports by the private sector again in 1981. Table 7-9: COMPARISON OF DOMESTIC AND B-ORDER PRICES OF MAJOR AGRICULTUPAL CO!M3DITIES, 1980 "TL/kg) ------.------------------------------ -----------1980 ----------------------------------- Jan. Feb. Ma Apr. May June J uly Aug. Sept. Oct. Nov. Dec. Avg. Hajor Exports Lemons Wholesale 40.0 40.0 45.0 - - - - 40.0 40.0 40.0 40.0 40.7 FOB export 31.9 30.9 31.3 36.9 39.9 47.0 50.4 52.3 48.4 - 44.5 41.6 41.4 Barley Wholesale 6.3 7i.2 7.7 7.4 7.7. 9.3 8.4 9.3 11.8 12.5 14.2 16.5 9.9 FOB export - - - 12.5 10.2 10.5 10.4 13.3 12.0 13.2 13.1 13.0 12.0 Wleat Wholesale 7.1 12.0 10.2 10.5 11.0 12.7 11.2 12.0 14.0 15.5 15.4 19.0 12.6 FOB export 9.0 9.8 10.8 12.5 12.2 10.4 12.8 17.0 14.6 - 13.6 13.9 12.4 g Cotton Wlholesale 110.0 - 87.0 89.2 97.0 - 115.0 - 115.5 117.0 121.0 124.2 108.4 FOB export 115.0 118.3 116.5 127.5 141.5 145.9 142.7 144.0 141.8 135.2 140.3 147.2 134.6 Tobacco Uholesale n.a. n.a. n.a. n.a. n.a. n.s. n.a. n.a. n.a. n.s. n.a. n.a. - FOB export 141.8 224.2 203.0 165.1 189.4 191.6 205.9 193.4 230.4 168.3 262.4 271.2 203.9 Hazelnut Wholesale 162.5 165.0 165.0 165.0 165.0 175.0 175.0 175.0 182.5 182.5 187.5 195.0 174.6 FOB export 249.6 225.4 284.2 335.3 325.7 336.1 345.5 327.6 323.2 324.8 320.0 322.4 310.0 Major Imports Sugar (crystal) Whlolesale 20.0 20.0 20.0 20.0 20.0 20.0 20.0 50.0 50.0 50.0 50.0 - 30.9 CIF import - - - - 65.0 65.0 65.0 72.0 72.0 72.0 72.0 - 69.0 Source: SPO. Central Bank. April 28. 1981 - 301 - Table 7.10: MAJOR AGRICULTURAL EXPORTS, CALENDAR YEARS 1976-1980 (in million dollars) Commodity 1976 1977 1978 1979 1980 Hazelnut? 203.2 251.0. 330.9 353.0 370 Cotton 438.1 213.6 352.9 231.8 290 Tobacco . 251.3 175.8 225.3 177.9 230 Raisins 52.6 74.9 99.7 114.8 130 Wheat 8.0 59.6 208.3 86.2 40 Citrus 47.8 42.2 43.8 53.4 80 Figs, dry 20.6 25.2 300.9 41.5 50 Olive oil 2.8 35.2 8.7 38.8 5 Barley 36.9 18.6 1.8 0.1 30 Oil seed cakes 19.3 13.7 5.5 - - Others 21 247.4 249.1 294.7 303.5 325 Total 1,320.0 1,159.0 1,602.5 1,400.0 1,550 Total Exports 1,960.8 1,753.0 2,288.2 2,261.2 2,800 Agr. percent of total exports 67 66 70 62 55 1/ Preliminary 2/ Does not include forest and sea products Sources: State Institute of Statistics Monthly economic indicators, Minis try of Finance - 302 - 3. Input Pricing Policy Fertilizer and Plant Protection Chemicals: 7.41 The government has a virtual monopoly on the production, import and sale of chemical fertilizers, except for raw materials which can be imported under license for domestic manufacture. The Agricultural Supplies Organization (TZDK) is the principal SEE involved in the distribution of fertilizers to farmers. S.iccessive governments have given priority to fertilizer imports in the allocation of foreign exchange and fertilizer is the second largest import after fuel. At the same time, fertilizers benefited from generous government subsidies, which have resulted in inefficient allocation to crops (cf. Para. 7.24-7.25). 7.42 Fertilizer prices have been subsidized in three ways. First, by distributing the commercial product at below cost directly to individual farmers and farmers cooperatives; second, by providing credit at subsidized rates for the purchase of agricultural inputs including fertilizer; and third, by subsidizing domestic manufacturers. An a result, fertilizer prices were kept low and declining in real terms. For example, the official price of ammonium nitrate (26% N) was fixed from 1975 to 1979 at TL 1400 per ton, in spite of a rapidly devaluing currency. By 1979 subsidies to fertilizers amounted to between 60% to 80% of product cost. Table 7.11: FERTILIZER SUBSIDIES AS A PERCENTAGE OF RETAIL PRICE* 1979 1980 Locally Locally Manfactured Imported Manufactured Imported Ammonium Sulphate 84 75 59 46 Ammonium Nitrate (2.05) 83 - 67 - Ammonium Nitrate (26) 68 74 59 45 Normal Superphosphate 85 - 66 - Triple Superphosphate 78 82 53 42 Diammonium Phosphate 69 66 37 18 Urea 52 59 51 21 Composite (20-20-0) - 61 49 26 * The subsidies are underestimates since they do not account for distri- bution costs. Table 7.12: OFFICIAL RETAIL PRICES OF FERTILIZER IN 1979 and 1980 (TL/ton) 1st Semester 2nd Semester % Increase 1979 1980 1980 over 1979 Ammonium Sulphate 1100 5500 6000 545 Ammonium Nitrate (2.05) 1100 5500 6000 545 Ammonium Nitrate (26) 1400 6800 7500 536 45Normal Superphosphate 600 4500 5000 833 Triple Superphosphate 1300 10000 12500 961 Diammonium Phosphate 2450 12000 20000 527 Urea 2750 10000 14500 527 Composite (20-20-0) 2450 10000 14000 571 - 303 - 7.43 In 1980, retail prices of fertilizer were raised five to ten times and subsidies to fertilizers were reduced to 20% to 45% of the product cost. Nevertheless subsidies to fertilizers remain substantial, equalling about TL 35 billion (US$460 million) in 1980. The government indicated its intention to phase out the remaining subsidies on fertilizers over the next five years, concomitant with the introduction of cost reducing innovations in TZDK's fertilizer handling and distribution network. 7.44 Unlike fertilizers, the distribution of plant protection materials is largely in private hands, except for copper sulphate and sulphure powder which are distributed by TZDK. Imports of finished products and raw materials, as well as pricing by the private sector, are controlled by the Ministry of Agriculture that plans annual plant protection activities and requirements for materials. The Ministry regulates imports through certification for licensing. Prices are also regulated to allow a fixed margin for importers and exporters. In 1980, the Government eliminated all subsidies on plant protection chemicals. Water Pricing 7.45 Turkish law explicitly acknowledges the obligation of the users of irrigated water to pay full capital costs (over 50 years, with no interest) and operation and maintenance costs of irrigation projects built by the government. The former are computed after project completion and the beneficiaries are billed annually; the latter are estimated each year by the state hydraulic works (DSI) and submitted for Cabinet approval. However, for various reasons, the Government does not fully recover these costs: (i) inflation erodes capital amortizations, which are fixed in nominal terms and have never been adjusted to compensate for inflation; (ii) except for 1978, water charges have not been set at levels that would cover operation and maintenance costs in full; (iii) collection rates average less than two-thirds of assessments; and (iv) there is no legislation permitting the recovery of on-farm development works. 7 46 In 1980 water charges in the South were as low as TL50 per decare, or US$6 per hectare, and the collection rate only 35%. The large subsidy thus enjoyed by project beneficiaries is detrimental from the point of view of the efficient use of irrigated land and water and is fiscally regressive since their incomes are well above the national average. For 1981, the Government has decided to levy the full cost of operating and maintaining DSI irrigation schemes. Also, TOPRAKSU's on farm-development works will be charged; and private contractors will now be permitted to carry out similar development works under TOPRAKSU's supervision. While this recent set of measures represents a considerable improvement, the resulting water charge may not be sufficiently geared to the efficient allocation of water resources (see para 7.136). - 304 - C. Incentives and Export Performance 1. Nominal and Effective Protection 7.47 The complex and continued interventions in output and input markets of most agricultural commodities have led to a substantially distorted structure of costs and prices, compared to international costs and prices. Table 7.13 reports nominal protection coefficients (NPC) equalling the ratio of domestic to border prices, for varicus commodities for the year 1978 that may be considered illustrative of the situation existing before the January 1980 reforms. The Table also shows effective protection (EPC) coefficients, calculated as the ratio of value added at domestic prices to value added at border prices. Preliminary estimates of NPCs and EPCs for selected crops in 1980 are also presented. 7.48 Government interventions led to the protection of some crops and the taxation of others. Making adjustments for the difference between the shadow exchange rate and the official exchange rate, it appears that most cereals, industrial crops, non-citrus fruits and processed fruits and vegetables were protected while barley, cotton, citrus, fresh vegetables and livestock suffered discrimination. Also, the prices of traditional exports were probably too low, in view of the accumulation of stocks and declining marginal revenues. 2. Effects of Incentives in Exports Import-Substitution Crops 7.49 The effect of interventions on export performance is difficult to assess in the case of wheat, tea and sugar where the government was a monopoly purchaser and trader. In these cases the government drove a wedge between domestic and world prices, with the producers responding to the former rather than the latter. 7.50 At official exchange rates, the nominal protection coefficient for wheat averaged 1.17 during the seventies (Table 7.14); it exceeded one in years when Turkey was a net exporter of wheat; and it was less than one in years when Turkey was a net importer. This may be explained by the fact that in times of high domestic prices a larger quantity was available for export and the trading agency exported with a loss. At the same time, the consumer price of wheat flour was maintained 13% below the world market price by the use of subsidies. 7.51 Perhaps the most striking examples of the adverse effects of overextended price support policies and monopoly over production and trade are those of tea and sugarbeet. Turkey's exports of tea averaged 9,000 tons over the years 1970-79, declining from over 15,000 tons in the- - 305 - Table 7.13: NOMINAL AND EFFECTIVE PROTECTION COEFFICENTS IN AGRICULTURE, 1978* 1980** NPC* EPC NPC EPC Cereals 1.203 1.52 - - Wheat 1.182 1.49 1.008 1.055 Corn 1.500 2.51 - - Rye, etc. 1.117 1.45 .844 .529 Rice 1.880 1.77 2.653 3.731 Barley 1.120 1.24 .856 .802 Other Crops Sunflower 1.227 1.87 1.457 2.572 Sugarbeet 2.878 3.15 2.549 5.967 Tea 1.640 1.77 .782 .753 Traditional Exports Tobacco .677 0.66 1.151 1.170 Hazelnuts .427 0.37 .739 .675 Figs * .429 Raisins .888 2.03 Other Staple Exports Cotton 1.000 1.06 0.805 Pulses 2.049 2.31 Roots 1.888 2.08 Olives 2.992 3.89 1.322 1.487 Citrus Fruits 1.380 0.79 Oranges & Mandarin 1.593 Lemons & Grapefruit 1.029 0.983 Non-citrus Fruits 2.50 1.80 Fresh Grapes 2.90 2.22 Apples 1.01 Stone Fruits 2.34 Vegetables 2.24 1.23 Tomato 1.07 Processed Fruits & Vegetables 1/ Canning and Preserving 1.67 2.14 Slaughtering and Meat Preservation 1.67 2.03 Other Food Processing 1.63 2.03 Livestock Beef 1.96 0.97 Cow milk 1.59 1.38 Mutton 1.04 1.23 Ewe milk 1.42 1.23 Wool 1.38 1.23 Total 1.26 1.40 * at the official exchange rate using the support price of TL 10500 per ton for figs, and n 17,500 for dry, seedless raisins. ** at the official exchange rate using support prices and/or estimates. 1/ For the year 1979. Source: M. Noel, Porduction Incentives in Turkey, July 1981. - 306 - Table 7.14: NOMINAL PROTECTION COEFFICIENTS: WHEAT AND COTTON Year Exchange Rate Wheat Cotton TL/kg CIF FOB FOB 1971 14.9 1.03 0.88 1972 14.1 1.50 0.81 1973 14.1 1.39 1.14 1974 13.9 0.86 0.85 1975 14.4 0.83 1.07 1976 1.05 1.31 1977 1.48 0.94 1978 1.21 1.04 -1979 1.29 1.20 1980 1.08 0.80 Mean (M) 1.17 1.04 beginning of the period to as low as 25 tons in 1975. In all years during 1971-79, the support price was above the export price. Monopoly procure- ment at attractive prices, with no restrictions on the number of leaves picked, induced producers to harvest twice the optimal number of leaves, resulting in large stocks (140,000 tons in 1979) of poor quality leaves. 7.52 Price support to sugar beet production led to increases in the output of a product in which Turkey is at a comparative disadvantage. This disadvantage is reflected in the fact that sugar yields per hectare are very low at 3.7 tons per hectare. In addition, 70% of the area under sugar beet is irrigated land which would be suitable for more intensive cultivation. At the same time, while sugar beet prices were supported, sugar market prices were maintained at a fraction of world market prices and much below production costs. 7.53 Under the 1980-81 economic program, various measures were taken in regard to these conditions. In the case of wheat, private exports were permitted for the first time and subsidies to wheat flour were reduced. Also ceilings on acreage under tea and on the delivery of the product have been implemented. Finally, wheat production costs were taken into account in raising the retail price of sugar from TL 20/kg to TL 50 kg in 1980, sugar beet prices were increased by 50% for the 1981 crop and the price was, for the first time, announced prior to the planting season, thereby providing incentives to further increase acreage under the crop. Traditional Export Crops 7.54 Despite a policy of price support, on balance, the production and exports of the traditional export crops 1/ (tobacco, hazelnuts, raisins and figs) were taxed throughout the seventies. As a consequence, except for hazelnuts, production and export growth rates were relatively modest. Nevertheless, production was higher than required for optimal exports. As the government was the residual buyer, all excess production beyond what could be exported profitably entered into the stocks. This was the case in particular for hazelnuts and tobacco. / The export revenues from these four crops were 47.4% of total revenue from agricultural exports in 1972 and increased to 51.1% by 1979. - 307 - 7.55 In tobacco, less than one third of the production is used for domestic cigarette production, and the rest is exported. There is not enough cigarette manufacturing capacity in the country to meet domestic demand for cigarettes. Even though the private sector has expressed interest in such a venture, it remains the privilege of the governmental monopoly. The United States is the single largest importer of tobacco, with a share of 50% in Turkey's exports. Stocks with the Turkish Monopoly Administration were 157,000 tons in 1978 and increased to 175,000 tons in 1979, compared to exports of 77,000 tons in 1978 and 70,000 in 1979 1/. 7.56 The expaLnsion of the cultivation of hazelnuts in the non-hill land areas of the Black Sea Coast, which is suitable for the cultivation of field crops, has contributed to accumulation of surpluses in the hands of the sales cooperatives. As in the case of tobacco and tea, where the Government's price support policy does not discriminate sufficiently between varieties and qualities, much of the government stocks consist of poor quality product which are even more difficult to export. 7.57 The government had to dispose of the stocks often at considerable losses. Surplus tobacco, for example, was exchanged in barter trade for fertilizer, machine parts, cigarette filters and raw materials for drugs, which implied discounts up to 30%. Also arrangements were made with Yugoslavia and Bulgaria to manufacture 18,000 tons of filter cigarettes which were re-imported and the costs of which were paid in tobacco at a loss. In turn, surplus hazelnuts were diverted to other uses, for example, the extraction of oil. 7.58 While Turkey has a large share in the world trade of its traditional export commodities, it also faces a small number of large importers. World trade in tobacco is becoming increasingly concentrated in the hands of a comparatively small number of international leaf merchants and large tobacco manufacturers (for example, big tobacco companies like R. J. Reynolds and Ligget Myers, Inc. have subsidiaries in Turkey.) A similar situation exists in the hazelnut market. Although Turkey enjoys a monopoly situation on the producers' side, it is faced with a monopsonistic consumer market, with Germany taking 55% of its exports and the USSR and France accounting for 15% and 7%, respectively. 7.59 In order to limit exports, in the face of the monopsonistic consumer market of the products, it is necessary for the government to intervene in their production and trade. In the case of tobacco, the government has in fact reduced area allotments and imposed ceilings on deliveries. However, increases in support prices in February 1980 at an average rate of 86% were not overly large. But no attempt to reduce acreage under hazelnuts has been made. Finally, as stated inPara. 7.39, l/ In fact, Turkey's tobacco exports have not exceeded 77,000 in any of the last five years. - 308 - export levies on these commodities were set overly low. Cotton 7.60 The government intervenes in the cotton market through the activities of the sales cooperatives which purchase raw cotton from the farmers at the official support price. A comparison of domestic and border prices does not show any clear pattern of protection during the seventies (Table 7.14). At the official exchange rate, in four years out of ten, cotton was taxed, in three years it was protected and in three years is was neither taxed nor protected. Over the entire period, average domestic prices approximately equalled average border prices. Nevertheless, because of an increasingly overvalued exchange rate in the later years, cotton was implicitly taxed. 7.61 A comparison of nominal protection coefficients with the volume of expQrts does not show any clear correlation. Thus, although world market prices were 11% and 31% above domestic prices in 1973 and 1976, respectively, export volumes reached a record of over 300,000 tons in both years. On the ocher hand, export volumes were modest in years of relatively low domestic prices, such as 1974. These results were due to government interventions in cotton exports, offsetting the penalty resulting from the overvalued lira by means of export subsidies, and discouraging exports in times of domestic shortages. Livestock 7.62 Government intervention in the meat market is limited to the activities of the EBK, a state economic enterprise. EBK operates 20 large slaughter houses throughout the country, and controls about 10% of the meat market. Until recently, EBK was subsidizing its meat sales in order to control consumer price increases. It was also the sole exporter of meat. Specific restrictions still exist on the exports of live animals, including an export ban from October 15 to May 15 and a limit of 100 tons for each export licence. 7.63 In 1978, both beef and mutton were discriminated against by the system of incentives. Domestic prices were depressed not so much because of the price support policy but because of the overvalued exchange rate (Table 7.13). The result of these policies have been to limit the official exports of beef and mutton, while encouraging the smuggling of sheep and cattle. In 1978, 463 thousand sheep and no cattle were officially exported, while unofficial exports were estimated at some 2 million sheep and 200 thousand cattle. 7.64 Although the smuggling of animals can be seen as a form of resilience of the free market that tends to alleviate the effect of export restrictions, it has had some adverse consequences. Foreign exchange earnings were reportedly used to smuggle luxury goods and weapons into the country. Moreover, smuggling is a high profit but risky enterprise and reduces the price received by farmers. - 309 - 7.65 Recent measures taken by the government, including the devalua- tion of the exchange rate, the abolition of official producer prices for cattle and sheep, and the removal of consumer subsidies to beef and mutton, have improved the situation. Nevertheless, they alone will not suffice to ensure a xiajor expansion of livestock exports. In fact, demand and supply projections indicate that the growth of production will be barely suffi- cient to meet increases in domestic demand for these products. Yet, the potential for rapid increases in livestock products, especially in cattle, exist as the large herd of low productivity could be rapidly upgraded through a program of cross-breeding by artificial insemination. The limit- ing factor to such e'xpansion appears to be the availability of feed, as recent estimates show that total available feed at 34 million tons TDN falls short of total requirements of 36 million tons TDN. Therefore any program to upgrade the existing herd must be accompanied by increases in the fodder base, through improvements in pasture and introduction of fodder on the fallow area. Moreover, any major expansion in livestock will depend upon the implementation of an effective animal health program. Other Export Crops: Horticultr're 7.66 Unlike other agricultural sectors, Government intervention in the production and exports of fresh horticultural crops has been minimal 1/. This is reflected by the fact that domestic prices were, on average, equal to FOB prices in this sector (Table 7.15). However, oranges, tangerines and fresh grapes, which are two major fruit exports of Turkey, show nominal protection coefficients greater than one in practically all years. The fact that these, fruits continued to be exported may be attributed to export incentives in the form of tax rebates and the availability of subsidized credit. Nevertheless, even with these subsidies, orange and grape exports declined, while the exports of satsumas - a special variety of tangerines that has more favorable prices - increased. 7.67 Among fresh fruits, there has been a trend towards product specialization according to comparative advantage. Production has increased significantly in crops whose exports have risen (lemons, grape- fruit, tangerines, apples), while the production of grapes and oranges has stagnated or declined as have their exports. In the vegetable sector, substantial increases have occurred in the production and exports of tomatoes, onions, potatoes as well as in a few other vegetables, albeit from a lower base. In general, therefore, the horticultural sector appears to have responded to price incentives through product specialization. 7.68 Although the question of seasonality is discussed at length in a later section on EEC markets, it may be noted that Turkey appears to have an early season advantage in citrus production that is comparable to that of Spain (but not to Israel, Morocco and South Africa). However, 91% of / The only major intervention in this sector has been the imposition of restrictions on imports. While this may seem unnecessary and unusual, it may be noted that other exporting countries including, Greece, Spain and Portugal have had import restrictions of various degrees. Table 7.15: NOMINAL PROTECTION COEFFICIENTS FOR FRUITS Lemon and Oranges and All Citrus Fresh Fresh Stone Other All Year Grapefruit Tangerines Fruits Grapes Apples Fruits Fruits Fruits 1973 0.92 1.85 1.08 1.74 1.05 1.25 1.05 1.02 1974 1.27 1.53 1.32 1.75 0.95 0.98 0.43 1.17 1975 0.96 1.44 1.06 1.33 0.84 1.41 0.92 0.99 1976 0.96 0.98 0.96 1.33 0.77 1.15 0.67 0.92 1977 1.03 1.15 1.00 1.81 0.92 0.88 0.90 1.12 1978 1.02 1.58 1.16 2.16 1.01 2.32 1.58 1.16 1979 0.86 1.36 1.00 2.31 1.08 1.58 1.30 1.03 1980 0.70 0.78 0.72 0.77 0.60 0.69 n.a. 0.68 Mean 1973-80 0.97 1.33 1.04 1.65 0.90 1.29 1.01 1973-79 1.01 1.41 1.09 1.78 0.94 0.38 0.98 1.06 - 311 - orange exports, 89% of mandarin exports and about 65% of lemon exports occur in the main season. The share of the EEC in total citrus exports of Turkey which was nearly 40% in 1965 dropped to 27.6% in 1973 and to 8.5% in 1979. These shifts away from West European markets in general and toward the East European and more recently, the Middle Eastern markets, have been attributed to the high degree of protectionism in the EEC, which is accentuated by the reference price system during the main season. In non-citrus fruits, Turkey does not appear to have an early season advantage, and therefore its exports to the EEC have been minimal. Exports of grapes to the EEC, as with citrus, declined from a share of 70% in 1970 to about 34% in 1979, not only because of EEC restrictions, but also because, as Table 7.15 indicates, grapes have remained non-competitive in the last 8 years. 7.69 Turkey clearly has a comparative advantage in the growing of early season vegetables in the southern regions bordering on the Mediterranean. This advantage has been exploited most remarkably in the production and exports of tomatoes, and demonstrates the benefits to be gained from an export oriented strategy. Total production increased from 2.1 million tons in 1974 to more than 3.5 million tons. While average yields remain low (less than 30 tons per hectare) yields of early season and high quality tomatoes for export have increased to over 40 tons per hectare. 7.70 While government intervention in the price formation process in the horticultural sector has been minimal, the sector has been adversely affected by government support, both in terms of prices and supply of inputs, to other competing crops. The allocation of subsidized fertilizer and chemicals has favored other crops, as well as large farms. Furthermore, the availability of cheap water appears to have led farmers, particularly large farmers (whose major constraint is labor) to divert irrigated land to crops such as wheat, which are assisted by the governmei.t's price support system. At the same time, the lack of quality seed and the high prices of certified seed have disadvantaged horticulture. 7.71 The transport sector presents a major bottleneck to increases in the production and exports of fresh fruits and vegetables particularly in the early season when the availability of adequate and timely transportation becomes crucial. Fifty-five percent of fruit and vegetable exports is transported by road to the Middle East, Western Europe and Eastern Europe, and 80% of this is carried by Turkish trucks. Road transportation is protected by legislation and Government regulations that pose an effective barrier to entry. Also, while the use of foreign transport companies is not prohibited, prior approval must be obtained from the Ministry of transport. A near monopoly situation exists and it appears that Turkish companies are able to charge rates up to 90% higher than foreign trucks. Thus, although the cost of transport to the Middle East on Turkish trucks is raised by reason of the fact that the trucks have to return empty, profits are made in the industry. At the same time, Turkish exporters report inefficiency and unreliability as characteristics of the transport system. - 312 - 7.72 As a consequence, larger exporters own fleet of trucks for opera- tion to the Middle Eest, and charter sea-vessels directly for sea-transport to these countries. Small exporters, however, find such arrangements difficult to make and they are forced to rely on Turkish transporters. 7.73 Fruits and vegetables exporters enjoyed an indirect tax rebate until 1979 when these incentives were removed. (There are however no export taxes unlike in other sub-sectors of agriculture). At the same time, (a) the erport credit system continues (b) the foreign exchange retention scheme has been extended to cover exports of fruits and vegetables; and (c) the foreign exchange allocation scheme has been introduced. These schemes may remove some of the problems exporters have with respect to the poor quality and high price of packing materials (it has been estimated that the price of corrugated cartons was double that of imported cartons). However, the removal of the tax rebate appears objectionable since it is a compensation to exporters for the indirect taxes they have paid. Fruit and Vegetable Processing Sector 7.74 Table 7.16 indicates the capacity of Turkey's fruit and vegetable processing sector. Except for tomato paste, the industry is small. The raw material handling capacity of tomato products industry is about 700,000 tons of tomatoes, compared to the fruit juice concentrate industry which - has a capacity of 220,000 tons, and that of the canning industry which can handle only about 40,000 tons of produce. 7.75 There is underutilization of capacity in all these industries, the problem being most severe in the fruit juice concentrate industry. A number of factors have lead to this situation, including: (a) over-investment in relation to markets and raw material supplies, (b) shortage of raw material supplies arising out of domestic and foreign demand for fresh produce, (c) shortage of working capital and imported tin plate, (d) inadequacies of the incentives for export and exploitation of foreign markets. 7.76 Between 1973 and 1980, production of tomato paste has increased at a rate of 17% per year. On the other hand, exports increased from about 9 thousand tons in 1972 to a peak of 28 thousand tons in 1977 and have since declined to 19 thousand tons in 1980. Capacity utilization reached a peak of 68% in 1974 and has since declined to around 58% in 1980. In 1977, the tomato paste industry supplied 18 thousand tons of paste to Western Europe, 6 thousand tons to the Middle East, and nearly 3 thousand tons to Japan, and Canada. A substantial part of the exports to Western Europe were to the EEC, including 4.6 thousand tons to Italy which experienced a bad crop in 1977. This growth declined to a considerable extent after 1977, however, as indicated in paras. 7.86 and 7.105. 7.77 Data on the fruit juice extraction and fruit puree (paste) industries are extremely sketchy. As pointed out earlier, this industry suffers from an extremely low level of capacity utilization (about 36%). Table 7.16: Fruits and Vegetable Processing Sector: Capacity Utilization and Performance 1980 1980 Raw Material Exports Value in Capacity Utilization used in 1980 in 1980 1980 (tons/year) (percent) (tons) (tons) ($ 000) TOMOTO PASTE .110,500 57.8 383,214 18610 11,806.0 Other Tomato Products (1) Peeled tomato 10,000 1.0 (2) Tomato juice 160 100.0 (3) Ketchup 800 75.0 5340 (4) Dehydroted tomato 30 90.0 FRUIT JUICE CONCENTRATES a/ 220,000 36.0 79,500 (1) Citrus concentrates 42,000 15,000 290.7 989.2 (2) Apple concentrates 60,000 21,600 (3) Others (including pulp) 118,000 42,500 762.8 of which: sour cherry concentrate 80,000 L CANNING 40,000 57.5 23,100 (1) Fruits 10,000 30.0 3,000 2,550 1,580 (2) Vegetables 30,000 67.0 20,100 974 689 FREEZING (1) Frozen storage 45,551 1,753 b/ 1,652 (fruit) (2) Freezing tunnels 23,775 cubic meters 680 326 (vegetables) a/ Capacity is in terms of raw-materials that can be handled. b! The data is for 1979. Note: Raw material used is estimated by using capacity utilization data and average conversion ratios for the extracts. - 314 - Exports of fruit juice concentrates have increased quite substantially between 1975 and 1980. Citrus fruit concentrates have increased from only 21 tons in 1975 to nearly 300 tons in 1980, a growth rate of 70% per year, while other concentrates' (and puree) exports (mostly sour cherry and peach) have grown from 30 tons in 1975 to about 1,000 tons in 1980. Yet, total quantities produced and exports remain small; in 1980, it is estimated that altogether about 8,000 tons of concentrate was produced. 7.78 Even in 1980, the bulk of citrus concentrate export went to Western Europe, in particular, Austria, Germany and the United Kingdom, while exports of non-citrus concentrates and fruit pulp were to Germany, Canada, and Italy. The Arab market remains unexploited. Most of the concentrates are exported in large refrigerated steel tanks, and are retailed in foreign markets by the importer. 7.79 Data compiled (see Table 7.17) shows that with domestic inflation and severe currency over-valuation, after 1977 Turkish tomato paste exports as well as the exports of other concentrates have become non-competitive. Details of costs of production are available only for the tomato paste industry. According to a TSKB study, the cost of raw material, i.e. industrial tomato is about 44% and 28% of the cost to processors in Greece and Italy. However, in the latter two countries, tomato prices are supported by the Government, and the processors receive a compensation in the form of an export subsidy (48 cents per kilogram in Italy and 27 cents in Greece). 7.80 The price of tin cans in Turkey is about 50% higher than in Italy, Greece and Morocco. About two-thirds of tin plate consumed is locally produced and the rest is imported. (The cif price in 1979 of imported tin plate was $778 ton compared to the price of tin plate sold by the government at $1,020 per ton). The foreign exchange allocation scheme in operation since June 1980 allows for duty-free imports of tin plate, and will reduce the unit cost of tin plate to processors, although processors can import only a part of their total requirements, i.e. the part that can be financed out of their foreign exchange allocation. For the rest, they will continue to rely on domestic supplies. 7.81 Finally, although labor costs as a proportion of total costs in Turkish tomato paste industry (i.e. 22%) is comparable to that of Morocco, it appears that the processing plants use highly automated technologies. The less than full capacity utilization of these machines and the relatively limited use of labor have led to large per unit overheads, generally 50% higher than in Italy and Greece, representing 50% of processing costs, i.e. double that of labor costs. It appears therefore that while the industry has suffered in recent years from a decline in competitiveness associated with inflation and currency overvaluation, structural problems, i.e. costly packaging materials and low labor intensity have hindered its development. Exports of processed fruits and vegetables are therefore crucially dependent on export incentives, such as the tax rebate, subsidized export credit, and the subsidies implicit under the foreign exchange allocation and retention schemes. It has been Table 7.17: ESTIMATED COSTS OF PRODUCTION OF FRUIT JUICE CONCENTRATE AND PULP, 1980 ($ per ton of output) Cost of Ex-Factory Cost of Processing Processing F.O.B. Fruit Price Packaging Cost Cost Price NPC Materials a/ Per Kilogram (cents) (1) (2) (2-1-3) (4) (3-4=5) (6) (7) (2)/(7) Apple Juice 397.8 1,017.1 619 160 459 45.9 540.9 1.88 Sour Cherry Juice 1,428.7 1,885.3 456 160 296 29.6 2,846.7 0.66 U, Apricot Pulp 170.1 595.1 425 160 265 26.5 489.6 1.22 Peach Pulp 136.1 581.4 445.3 160 285.3 28.5 546.5 1.06 Citrus Concentrate n,a, 1,000 n,a. n,a, n.a. n,a, 900.0 b/ 1.11 TomAto P4ate 206, - 701 497 173 324 32,4 550,0 1,27 -a/ The cost of packing in 5 kg tins and wooden cartons containing 6 tins, b/ Brazilian (Santos) juice concentrate. c/ Includes a discount of 16X on bulk orders. d/ 29% of the processing cost is attributable to fuel, 22% to labor, and the rest to depreciation, amortization and other overheads. Sources: TSKB, Sector Report on Tomato Processing Industry, 1981. TSKB, Preliminary data, part of an evaluation report of a proposed fruit juice plant, provided by TSKB. Mission Estimates. - 316 - estimated that for the food processing sector, the combined export subsidy rate (incentives of the duty-exemption on imports of raw materials) was 11.7% in 1979; it declined to 9.8% in 1980 largely because of the elimination of the tax rebate. - 317 - D. Market Prospects for Agricultural Exports 1. Agricultural Exports to the EEC and the Middle East 7.82 Turkey's geographical proximity to the large EEC markets has made the EEC its major trade partner. As Table 7.18 indicates, the EEC's share in Turkey's exports was substantial in the beginning of the 1960s, partic- ularly for raw cotton, cotton linter, woven cotton fabric, olive oil, edi- ble nuts, raisins, figs, citrus and other fruit, and frozen fish. Over the 1963-79 period the share of the EEC in Turkey's agricultural exports declined in the case of most export crops, including tobacco, cotton and fresh fruits and vegetables, except for dry fruits, and some other staple exports such as pulses and olive oil. 7.83 Tobacco exports to the EEC declined at a rate of about 4% a year during the 1970-79 period, while total exports remained approximately un- changed. Exports of raw cotton to the EEC fell at a rate of nearly 15% a year, double the rate at which its total exports declined. Also, the growth rates of exports to the EEC of most fruit crops have been substant- ially lower than the growth rates of total exports of these crops, and have in fact been negative for several fruit crops, compared to respectable rates of growth for their total exports. Finally, the growth rate of the exports of tomato paste to the EEC declined at a rate of 22% a year, com- pared to a growth rate of 14% for total exports. A similar picture obtains for other paste exports. 7.84 The changing pattern of Turkey-EEC trade in agricultural products reflects a number of factors. First, trade agreements between Turkey and the EEC have changed over the last two decades through various amendments to the original Agreement of Association signed in 1963. Thus tariff quotas were established in 1973 for tobacco, raisins, dried figs and hazelnuts, and subsequently for oil-cake, pulses, olive oil, various textiles and, most recently, for tomato and apricot paste. At the same time, by 1978, 37% of Turkey's agricultural exports under quota, including tobacco, raisins, figs and pulses, had zero tariffs, while hazelnuts, olive oil and apricot paste received varying degrees of tariff concessions. Raw cotton stands out as an exception since it is imported duty free into the EEC, while cotton manufactures are subject to tariff-quotasl/. 7.85 The EEC's import regulations have been most stringent with respect to fresh fruits and vegetables. These products are subject to a common tariff which may vary seasonally. For all fruits (except grapefruit) of relevance to Turkey and for a few vegetables (tomatoes, potatoes, cucumbers) in. addition a variable levy may be imposed in the main season'to prevent prices from falling below EEC "reference" prices. For all other vL--etables no variable levies can be imposed and seasonal ! A tariff quota restricts imports to a quota within which tariff concessions are permitted. - 318 - Table 7.18: THE SHARE OF EEC IN AGRICULTURAL EXPORTS OF TURKEY EEC Growth Growth Rate of Rate Total 1963 1970 1979 1970-79 Exports Wheat 0 0 28.7 - 13.7 5/ Wheat flour 0 44.7 12.0 71.9 93.6 Tea 0 0 4.9 - -3.5 Tobacco 15.9 32.5 24.0 - 3.91 -0.7 Cotton (Raw) 77.0 55.8 29.3 -14.6 -7.7 Cotton (linter) 3/ 83.2 82.7 76.0 Bleached Cotton Yarn 3/ 0 73.3 97.6 Woven Cotton Fabric 37 88.7 41.0 85.3 Pulses 27.7 21.4 29.6 19.2 1/ 14.5 Olive Oil 95.7 24.5 67.1 85.6 41.1 Roots (i) Potato 0 0 4.0 - 9.4 (ii) Onion & Garlic 12.0 32.9 1.0 6.2 57.4 Edible nuts 57.4 64.3 63.3 7.4 7.6 Raisins 80.3 73.0 72.7 0.8 0.8 Dry figs 63.3 62.3 50.6 -0.2 2.1 Oranges & Tangerines 75.6 35.1 3.8 -17.6 5.6 Lemons & Grapefruits 91.0 62.4 11.1 -5.0 15.6 Apples 0 2.2 0.6 37.1 57.6 Fresh Grapes 72.2 69.5 33.8 -15.7 -8.7 Stone Fruits 83.0 87.9 2.7 -28.7 4.8 Pears - 100.0 22.0 50.1 65.4 Other Fresh Fruits 70.1 45.8 4.8 39.8 43.3 Tomato 38.0 87.9 0.2 -1.0 93.9 Other Vegetables n.a. 64.5 2/ 31.1 56.6 76.7 Fruit Juice and Conc. 0 0 23.3 - Jam and Jelly 39.5 49.8 63.9 2.60 Frozen Vegetables 100.0 100.0 82.8 8.28 Tomato paste - 58.0 2/ 12.8 -21.5 14.3 Other paste - 46.6 76.4 -14.6 3.7 Fresh Fish 3/ 10.1 11.4 20.1 -3.2 -9.1 Frozen Shell Fish 3/ 96.0 65.3 95.8 6.8 2.4 Tinned Fish 3/ - 88.3 20.3 4/ 13.6 1/ 35.9 1/ 1/ Growth Rate refers to the period 1970-78. 2/ 1973 3/ Value shares. 4/ 1978. 5/ 1972-79. - 319 - regulation of imports takes the form of seasonal changes in the tariff rate. The EEC tariffs on non-tropical processed fruits and vegetables, including tomato paste, have been quite high at 15% to 30%. 7.86 Second, a shift away from Western Europe has occurred in the horticulture exports of Turkey. In recent years, the Middle Eastern markets have assumed importance, absorbing in 1979 45% of Turkey's exports of oranges, practically all of its exports of apples, 55% of the exports of grapes, 78% of stone fruit exports, and nearly 100% of the exports of early-season tomatoes, potatoes, onions and a few other vegetables. In 1980, 75% of Turkey's tomato paste exports went to the Middle East although processed fruit exports were negligible. Further increase in exports of fresh fruit to these countries will depend on (a) the rate at which demand for these products can be expected to grow and (b) whether Turkey can expand its market share. 7.87 Compared to the EEC markets, the size of the market in the Middle East is small. The capital surplus oil exporting countries, i.e., Iraq, Libya, Saudi Arabia, and Kuwait) have a population of about 30 million in 1980. However, these countries have some of the highest levels of per capita income in the world (over $6,000 in 1980). It is also possible that the import elasticity for fruits and vegetables is higher than for the EEC, particularly since the countries lack a strong agricultural base. Finally, Turkey's share in total imports of horticultural products by the capital-surplus Middle Eastern countries amounts to only about 8% of total tonnage. 7.88 Most Middle Eastern markets appear to be adequately organized, with import trade concentrated in the hands of few buyers. These importers are the area's exclusive traders, own cold storage facilities, refrigerated trucks and subsidiaries that handle the distribution of their goods. Purchases are typically made at fixed prices and payment is on delivery. 7.89 It appears therefore that there is considerable scope for improving Turkey's market share in the Middle Eastern countries in spite of their small population base. In addition, Turkey should be able to export directly to consuming markets instead of allowing third countries to re-export. 2. Prospective Developments 7.90 Two developments will affect Turkey's trade in agricultural products with the EEC. First is the recent entry of Greece into the Common Market and the imminent expansion of the Community to include Spain and Portugal. The effects of the enlargement will be detrimental to EEC imports from third countries in virtually all primary non-tropical agricultural products. Turkey is especially vulnerable because its agro-climatic characteristics are similar to those of the three new EEC countries. Second, the Common Market has signed an agreement to eliminate in stages 1/ all tariffs on agricultural imports from Turkey by 1987, -/ The first reduction of 30% occurred in 1981. - 320 - although the advantages to Turkey will be less than it appears at first sight. This is because: (i) the tariff concessions apply only during the off-season for horticultural produce, (ii) a number of products are subject to various levies and (iii) wherever quotas exist the concessions are applicable only to imports within the quotas. The prospective impact of EEC enlargement and tariff concessions are discussed in the following, with further attention given to market prospects in the Middle East. Cotton: 7.91 Since raw cotton is imported into the EEC free of duty, market prospects are not altered by either enlargement or tariff concessions. Thus, in view of the favorable prospects for cotton on the world market in general, and the EEC in particular, Turkish exports of raw cotton and also yarn could grow rapidly if Turkey did not discourage exports of raw cotton through the imposition of levies. Tobacco: 7.92 EEC imports of tobacco from Turkey are subject to a quota; there are no tariffs on amounts imported within the quota. Greece, however,is also a sizeable exporter of oriental leaf; it is the third largest, after Turkey and Bulgaria. Within the Community, Greece can be assumed to increasingly displace other suppliers of oriental leaf, and FAO even hypothesized that the enlarged EEC may become a net exporter. Livestock: 7.93 The bulk of EEC imports of live cattle, and beef enter under quotas. The global quota is shared by major exporting countries and some developing countries. Since Turkey does not have a quota, and also because trade in animal products in the EEC is carefully controlled for, quality and diseases, there exists no scope in the short or medium term for any significant increase in Turkish exports of live cattle or beef to the EEC. However, in view of less severe restrictions on sheep and sheep-meat, there is some scope for future exports of Turkish sheep meat to the community. Nevertheless the major market for Turkish products will continue to be the Middle East, where Turkey has a sizeable comparative advantage first because of its geographic proximity, and second because, of all major livestock producing countries, it is one of the few that can supply meat slaughtered in accordance with Moslem rituals. Raisins, Figs, Hazelnuts: 7.94 Turkish exports of raisins, figs and hazelnuts have enjoyed duty free entry into the EEC within a fixed quota. The size of the quota for hazelnuts will remain at 25,000 tons while quotas for raisins and figs will be removed in 1981. 7.95 The enlargement of the Community will have little impact on the export prospects for these crops from Turkey. The main concern for the - 321 - Turkish government thus remains the achievement of an optimal level of exports, and the progressive diversion of land from these crops to either other nuts (including pistachio) that enter duty free or other crops altogether. Tea: 7.96 Imports of tea in the EEC account for over one third of world imports, while Greece, Spain and Portugal are small importers and do not grow tea. Turkey does not pay a duty on tea packed in bulk or in packets and on extracts of tea but its exports to the EEC are negligible. The possibilities for tea exports to the EEC therefore further reinforce the need for a price policy that leads to improvements in the quality of tea produced and in the efficiency of its production. Pulses: 7.97 Pulses enjoy duty-free access to EEC markets. The quotas which were in effect earlier on imports from Turkey have been removed in 1981e Therefore, there appears to be no tariff or quota constraints to increasing Turkey's exports of these commodities to the EEC. Olive Oil: 7.98 The' EEC produces about one-third of world output (almost all in Italy) of olive oil and is about 80% self-sufficient. Imports vary widely to compensate for cyclical fluctuations in output, with Spain as major supplier. Imports are subject to a variable levy, equal to the difference between the import price and the internal EEC price. Special concessions on the variable levy have been granted to Spain, Turkey, Tunisia, Morocco and Greece. 7.99 The application of the higher EEC support levels to olive oil purchased in Spain will create some additional output. And while aids to producers of olive oil are restricted to areas planted prior to October 1978, yields can be expected to increase, particularly in the more fertile olive-growing regions of Spain. Overall, the new Community is likely to be self-sufficient, or even a net exporter with variable levies continuing to be in force. The recent reduction of duties to zero is unlikely therefore to enhance Turkey's export prospects in the Common Market. Citrus Fruits: 7.100 Table 7.19 shows the the structure of the common external tariff and the special concessions granted to Turkey, inclusive of the 1981 reduction in duties by 30%. Except for grapefruit, which are admitted freely throughout the year, citrus fruits are subject to import tariffs as well as to the reference price system. The structure of protection is designed to protect Italian producers during the main growing season, even though the EEC has a deficit in citrus production. - 322 - Table 7.19: EEC COMMON TARIFFS ON CITRUS FRUIT IMPORTS AND CONCESSIONS TO TURKEY Common Ex- Special Concessions to ternal Tariff Turkey (inclusive of agree- (%) 1980-81 ment of June 1980) (%) Oranges April 1 - April 30 13 3.6 May 1 - May 15 6 free May 16 -Oct 15 4 free Oct. 16 - March 31 20 5.6 Lemons Throughout the year 8 2.8 Tangerines Throughout the year 20 5.6 Grapefruit Throughout the year free free Note: The reference price system is in effect during the months of December to May for oranges, June to May for lemons and November to February for mandarins. 7.101 Turkey has an early season advantage in citrus production that is comparable to that of Spain (which supplies 40% of EEC imports, including practically all of the EEC's early season imports), but it is not comparable to that of Israel, Morocco and South Africa. Over time the share of the EEC in Turkish exports has declined and only in lemons are there significant amounts of off-season exports. 7.102 As shown in Table 7.20, Turkish exports have increasingly shifted to nearby markets in.Eastern Europe and the Middle East. This tendency will be accentuated by the enlargement of the Community and in particular, the inclusion of Spain. Although EEC tariffs will be removed by 1987, imports in the main season will be subject to variable levies which will override the tariff concessions. In the off-seasons, Turkey is unlikely to be able to compete with Spain or with the North and South African countries. Table 7.20: DISTRIBUTION OF CITRUS EXPORTS FROM TURKEY, 1973 AND 1979 (percent) Oranges Lemons Satsuma Grapefruit W. Europe 1973 3.2 34.4 75.4 a/ 40.1 1979 3.0 17.1 64.4 a! 14.8 E. Europe 1973 80.0 70.0 24.5 58.8 1979 52.6 71.6 26.8 79.4 Middle East 1973 16.4 0.2 0.1 1.1 1979 44.3 11.3 8.8 5.8 Total 100 100 100 100 a! Mostly to Austria - 323 - Other Fruits: 7.103 Turkey does not appear to have an early season advantage in the production of non-citrus fruits since these are grown largely in the Western and Central areas of the country. The only non-citrus fresh fruit exports to the EEC in the sixties and early seventies were table grapes. However, grape exports declined from 11 thousand tons in 1971 to 3 thousand tons in 1979 as Turkey was unable to compete with Spain even though both faced full Common Market tariff, and were subject to the variable levies in the main season. With the inclusion of Spain in the EEC, the prospects for grape exports have become even less favorable. Vegetables: 7.104 Just like fruits, vegetables are subject to a higher import tar- iff during the main EEC production season. However, unlike fruits, mr-st vegetable imports (with the exception of tomatoes and cucumbers) are not subject to variable levies and are only regulated through variations in tariffs (See Table 7.21). Even prior to the latest tariff reductions, some TIrkish vegetable exports, including bell peppers, eggplants and green beans, had enjoyed a reduction of about 50% on the common tariff, contributing to the growth of exports of leeks, bell peppers and eggplants to West Europe. (See Table 7.22). 7.105 In 1973, Turkey exported 16 thousand tons of tomato paste to Western Europe, and only about 600 tons to the Middle East. In 1977, when exports peaked, Turkey had exported 18 thousand tons to Europe, and 6 thousand tons to the Middle East. By 1980, Turkey's exports to Europe had fallen to 3.9 thousand tons, of which only 2,500 tons went to the EEC, while the share of the Middle East was nearly 75%. The dramatic decline in the share of Western Europe, which has not been fully compensated by the increase in exports to the Middle East, has been attributed to increasingly difficult access to the EEC. 7.106 Since the new agreement of June 1980, an import quota of 16,500 tons per year has been agreed upon for Turkey within which a gradual (30% in the first year), reduction in tariffs will take place as that, by 1987, all duties will be removed. The replacement of the tariff-reference price system by the quota-tariff system is clearly an advantage. An FAO study 'I shows that while at present 49% of EEC imports of processed tomatoes are from third-countries (including Morocco, Turkey and Israel), the inclusion of Spain, Greece and Portugal in the EEC will reduce imports from third countries immediately to about 10% of total imports, i.e., about 25-30 thousand tons. Turkey's quota for tomato paste 1/ FAO, Commodity Review and Outlook, 1979-80. - 324 - Table'7.21: EEC TARIFFS AND CONCESSIONS TO TURKEY (inclusive of the June 1980 agreements) CCT Turkey Tomatoes May 15 - October 31 18 12.6 a/ November 1 - May 14 11 7.7 -/ New Potatoes January 1 - May 15 15 10.5 (Jan. - March) May 16 - June 30 21 21 Onions February 15 - May 15 3.3 Other times CCT Bell Peppers All the year 9.0 3.1 Eggplant All the year 16.0 CCT January 15 - April 30 4.4 Leek All the year 9.1 Cabbage April 1 - November 30 15 10.5 December 1 - March 31 13 9.1 Cucumbers May 16 - October 31 20 14.0 a/ November 1 - May 15 16 11.2 a! Green Beans October 1 - June 30 13 13.0-3.6 July 1 - September 30 17 17.0 November 1 - April 30 13 3.5 (from Nov.-April) Green Peas June 1 - August 31 17 7 September 1 - May 31 12 11.9 Asparagus All the year 16 11.2 a/ These imports are subject to the reference price system. - 325 - of 16.5 thousand tons (compared to Turkey's exports of about 2,500 tons in 1980) therefore offers to Turkey a substantial share of the residual imports in a market that is highly protected, and where excess supply conditions prevail. The gradual reduction in tariffs should make Turkish exports mor competitive. With the growing Middle Eastern markets in which Turkey already has a share, the prospects for tomato paste exports from Turkey are not bleak, provided the cost structure of the industry is rationalized and competitiveness improved. 7.107 The EEC presently imports 80% of its citrus fruit concentrates and it is projected to continue importing 63% of its requirements from third countries after enlargement. The major suppliers are Israel and Brazil. As Turkish exports of citrus products will not be restricted by quotas and will have the advantage of progressive reduction and eventual elimination of the tariff, they may expand in the future. 7.108 A The Middle Eastern market for fruit extracts in general and citrus products in particular is largely unexploited. At the same time, the prospects for sustained growth may be greater in citrus products than in tomato paste or tomato concentrates because of their low levels of consumption at present. Tabld,7.22: EXPORTS OF FRESH VEGETABLES FROM TURKEY (metric tons) W. Europe E. Europe Middle East 1973 1979 1973 1979 1973 1979 Tomatoes nil 97 nil 660 24 31,546 Potatoes 1,280 40 0 nil 17,473 10,338 Leeks 0 4,913 0 0 0 3 Carrots 0 0 0 0 0 81 Fresh Beans 27 0 0 0 0 412 Bell Peppers 34 1,280 0 0 3 386 Cabbage 0 0 0 0 0 805 Eggplant 16 139 0 0 140 1,059 Other Vegetables 243 183 0 0 9 4,924 Onions 1,014 1,436 0 2,000 1,209 80,826 Total 2,615 8,388 0 2,660 18,859 130,380 - 326 - E. Agricultural Sector Model 1. Static Simulations 7.109 Because of Turkey's complex agricultural product structure, it is not possible to analyze the question of comparative advantage and appropriate production patterns for each agricultural product in isolation from the others. In order to take into account possible alternatives, we have used a simulation model of the agricultural sector. The model permits examining Turkey's comparative advantage in agriculture and the pattern of production and trade under alternative trade regimes as well as over time. 7.110 The model has been validated by comparing its solution to the base year (1978) statistics for production, consumption, trade, factor use and prices. As shown in Annex 7.2, despite the high level of aggregation, the model solution closely approximates the base year data for the majority of products under consideration. The model, however, predicts a much lower cotton production than the actual level, while the opposite conclusion applies to vegetables. This discrepancy may be related to the fact that the production of cotton is more attractive than that of vegetables to large farmers since cotton is less labor intensive and does not require the close supervision fruits and vegetables need. 7.111 The first experiment to explore the extent of comparative advantage for each product is generated by the hypothesis that world market prices and the equilibrium exchange rate would become fully effective in the base year, 1978. In order to take into account the inevitable rigidities that would limit specialization, the assunrption is made that the production of any crop or animal product could not fall to less than 75% of the base year level. The marketing limitations discussed in section D have also been taken into account by assuming less than perfectly elastic foreign demand for traditional exports, roots, pulses and vegetables. 7.112 The results reported in Table 7.23 indicate that a movement to free trade would lead to a 39% increase in agricultural production and a four fold increase in the sector balance of trade. Production increases would be concentrated in feed grains, industrial crops (tobacco and cotton), pulses, vegetables, fruits and ovine products. Except for the minor grains (rye, oats and millets), the production of cereals would decline as would that of other import-substituting crops, such as sunflower, and sugar beet. There would also be a decline in beef and dairy products. 7.113 A comparison of the predicted magnitudes of growth with the domestic resource cost (DRC) ratios shows that a DRC of less than one is a necessary but not a sufficient condition for the expansion of production and there appears to be no connection between the magnitude of the DRC and the predicted amount of expansion or contraction of production. This result underlines the fact that, due to the existence of surplus labor and the under-utilization of mechanical equipment and irrigated land, the shadow prices of most domestic rosources in the base year are very low. -327- Table 7.23: FREE TRADE SOLUTION- EQUILIBRIUM EXCHANGE RATE (thousand metric tons) Production Consumption Export Import DRC Coefficients Before After Wheat 13,650 7,786 3,918 .58 1.53 (11.27) (-26.79) Corn 974 1,020 146 1.59 4.04 (-10.15) (-5.90) Rye, oats 4,432 870 3,563 .32 .99 and millets (+31.6) (-13.60) Rice 226 208 71 .51 1.59 (-34.7) (-14.40) Barley 3,568 2,344 17 .42 1.04 (-19.24) (-1.9.34) Sunflower 364 444 80 .75 1.47 (-30.40) (-15.11) Sugar beet 7,107 8,800 1,693 1.17 4.13 (-27.40) (-10.11) .38 .73 Tea 96 87 9 (-14.04) (-22.32)) Tobacco 656 159 497 .18 .38 (+100.61) (-36.40) Cotton 358 1.59 199 .65 2.04 (+87.43) (-16.75) Roots 4,050 3,950 100 .22 .48 (-1.46) (-3.21) Pulses, 1,290 790 500 .25 .54 (+36.8) (-4.82) Grapes 3,499 3,151 348 .42 .79 (0.0) (-4.43) Olives 827 1,188 361 .81 .42 (-25.02) (+7.71) - 328 - Table 7.23: FREE TRADE SOLUTION - EQUILIBRIUM EXCHANGE RATE (continued) (thousand metric tons) Production Consumption Export Import DRC Coefficients Before After Vegetables 17,044 12,787 4,258 .81 .79 (+29.14) (-3.04) Citrus * 922 922 .66 1.58 (-20.72) (-9.87) Hazelnuts 233 86 147 .37 1.04 (-'20.48) (-34.4) Fruits 3,069 2,353 716 .84 1.09 (+24.25) (+4.97) Beef 340 172 168 1.54 1.09 (-12.82) (-51.41) Cow milk 3,450 3,460 1.43 1.09 (-12.00) (-12.01) Mutton 767 338 429 (+45.82) (-32.13) Wool 125 60 64 .39 (+47.06) (-15.5) Ewe Milk 2,995 2,120 .17 .39 (+45.81) (+3.21) - - Total (at world (+39.34) (+412)* .48 .83 prices) Note: Numbers in parenthesis are % variations with respect to the base solution. * percentage increase in trade balance. - 329 - Table 7.24: FREE TRADE SOLUTION - WITH MINIMUM CONSUMPTION CONSTRAINTS (thousand metric tons) Production Consumption Export Import Wheat 14,679 11,743 (-4.58) Corn 974 1,183 326 (-18.15) Rye, oats 1,686 957 730 and millets (+57.87 Rice 226 239 A (-34.68) Barley 4,735 3,125 115 (+7.17) 1 S'unflower 364 485 121 (-30.4) Sugar beet 7,107 9,075 1,968 (-27.40) Tea 96 92 4 (-14.04) Tobacco 656 211 446 (+100.0) Cotton 358 197 161 (+87.4) Roots 4,006 3,906 100 (-2.53) Pulses 1,290 791 500 (+36.33) Grapes 3,500 3,151 348 (0.00) Olives 827 1,188 361 (-25.02) Vegetables 17,044 12,787 4,258 (+29.14) Citrus 941 941 (-19.09) - 330 - Table 7.24: FREE TRADE SOLUTION - WITH MINIMUM CONSUMPTION CONSTRAINTS (continued) (thousand metric tons) Production Consumption Export Import Hazelnuts 233 143 90 (-20.48) Fruits 3,069 2,353 707 (+23.9) Beef 342 239 103 (-12.30) Cow milk 3,480 3,460 (-11.50) Mutton 767 356 411 (+45.82) Wool 125 61 61. (+46.08) Ewe Milk 2,995 2,120 (+45.81) Total (at world (+19.95) (+265)* prices) Note: Numbers in parenthesis are % variations with respect tc t.,3e base solution. * percentage increase in trade balance. - 331 - Changes in these shadow prices, associated with the expansion of production under free trade, are indicated by comparing DRCs before and after the trade induced expansion (at the last two columns of Table 7.23). 7.114 Because the decreases in the consumption of several crops implied by the free trade solution appear excessive, a second set of results is presented in Table 7.24, where the movement of world market prices is limited to the production sector while consumption is assumed to be kept at the base year level by the use of taxes and subsidies. Such a constrained solution would imply a lower, but still substantial expansion of agricultural production (20%) and trade balance (+265%). The ranking of products by predicted changes in production would, however, be very similar to the free trade solution without a consumption constraint. 2. Dynamic Simulations 7.115 Further indications of the impact of alternative trade policies may be obtained by solving the model for a future year. For these simulations, we have selected 1990 as a long term horizon sufficiently far from the base year to permit making the assumption that the adjustments to the free trade pattern would be fully carried out. The calculations assume that GNP increases at 3% per year for the first three years and 4% thereafter and other variables, such as yields and investment, increase at the rates realized in the past decade (for more detail, see Annex 7.1). 7.116 The results shown in Table 7.25 are generally consistent with the static solution results presented above. They imply that a policy of trade liberalization and realistic exchange rates would cause production and exports of tobacco, cotton, fruits, vegetables, and livestock to grow in excess of historical rates. In turn, the production of wheat, barley and roots would not grow or grow at rates below historical rates. Finally, corn, rye, rice, sunflower, sugarbeet, and olive oil would experience a decline. All in all, the growth rate of the agricultural sector could average a yearly rate of 5.7% between the base year (1978) and the projection year (1990), a substantial improvement over the historical record of 3%. 7.117 An examination of the shadow prices of the resource constraints shows that irrigated land is the most tightly binding constraint for the development of Turkish agriculture, while other types of land, as well as labor and machinery, have relatively low marginal productivity. Efficient use of irrigated land is thus crucial to improve agriculture's development performance and should be favored by appropriate price incentives and water charge policies. Table 7.25: VALUE ADDED: PROJECTED COMPOUND RATE OF ANNUAL INCREASE (%) UNDER FREE TRADE (1990) Area Value added Total Historical Rates Pro- (or no. of per ha Value of increase in Product duction (animals) (or per animal) added Production (1975-1980) (1960-1979) Wheat -0.01 -0.82 +3.81 +2.99 +3.59 +4.23 Corn -0.43 -1.66 +2.21 +0.55 -0.83 +1.80 Rye, oats -0.92 -2.14 +5.87 +3.73 -4.53 -1.28 and millet Rice -2.29 -3.47 +1.53 -1.94 +13.33 +2.11 Barley +2.34 1.09 +2.91 +1.82 + 4.67 +1.75 Sunflower -1.79 -2.98 +1.65 -1.33 - 0.24 * +10.99 Sugar Beet -1.43 -2.65 +1.78 -0.87 +5.33 +5.87 Tea +0.43 -0.74 +4.00 +3.26 +18.79 * +13.53 Tobacco +7.29 +5.97 +0.49 +6.46 +3.33 +4,22 Cotton +6.68 +5.36 +2.90 +8.26 -0.87 +4.80 Roots +0.94 -0.29 +2.49 +2.20 +3.28 +3.98 Pulses I4.85 +3.56 +2.18 +5.74 +3.73 +3.11 Grapes +1.35 +0.10 +4.63 +4.73 +0.61 +0.68 Olives -1.15 +1.92 +4.41 +6.33 +2.38 +1.59 Vegetables +5.94 +11.67 +8.00 +19.67 +5.04 + - Citrus +2.43 +1.52 +1.52 +3.03 +4.90 ** 7.86 Hazelnuts +0.52 -1.89 +2.48 +0.59 +0.00 +8.02 Fruits +6.44 +3.80 +6.81 +2.92 +3.74 ** Beef +1.89 +1.74 +0.11 +1.85 -6.41 * Cow-milk +2.35 Mutton +3.19 +3.19 +0.0 +3.19 -2.25* +2.13 +2.11* Total +0.43 +5.25 +5.68 * 1975-1978 ** 1975-1979 - 333 - F. Recommendations 7.118 It has been noted that agricultural growth was hampered by government policies in the past. To begin with, agricultural exports were taxed through overvalued exchange rates and/or levies and government policies that have chiefly benefited import substituting crops, such as wheat and sugar beets, to the exclusion of potential foreign exchange earners, such as horticultural products and livestock. Also, public capital formation was concentrated in large irrigation projects, neglecting investments in infrastructure while private investments were concentrated in mechanization that received direct and indirect subsidies while other types of investment were neglected. Finally, apart from favoring capital-intensive activities, subsidies to credit, machinery, fertilizer and water encouraged inefficient resource use and often benefited large farmers. 7.119 The 1980-81 policy reforms have brought improvements in several respects. The large devaluation of the exchange rate has provided incentives to exports; reductions in consumption subsidies have led to the more rational pricing of foodstuffs and to lower budget deficits; and increases in the prices of fertilizer and plant-protection materials have encouraged their more efficient 'use. 7.120 The following recommendations aim at further improvements in the context of Turkey's outward-oriented development strategy. Because in the past excessive emphasis has been placed on income support objectives at the expense of comparative advantage considerations, these recommendations are limited to measures necessary for Turkey to tap the large efficiency gains that are possible from better exploiting the country's agricultural potential. Clearly numerous infrastructural and institutional constraints will need to be addressed to exploit the country's full comparative advantage. These include measures to improve agricultural research, extension, and veterinary services, infrastructure, and marketing information and promotion systems. However, because these are beyond the scope of this report, the following considerations concentrate on market incentive measures pertaining to individual products and major inputs. 1. Product Policies Wheat, Barley, and Cotton, etc. .7.121 For traded crops such as wheat, barley, and cotton, for which Turkey holds a small share of the world market, there is need for taking additional steps in the direction of freer trade and less government intervention. This would mean further encouraging private sector involvement in foreign trade; letting domestic prices adjust to the trend prices on the world market, with interventions limited to setting guaranteed floor prices that would assure farmers the recovery of costs in years of low world prices. In years of high world prices, on the other hand, an export tax would be levied to keep domestic prices at desired levels, and to generate revenue for the funding of government intervention measures. - 334 - 7.122 Floor prices should be announced in advance of the planting season and would function as a quasi-insurance to farmers, thereby avoiding income losses and providing inducement to engage in potentially remunera- tive but risky activities. Floor prices should be fixed at a level much below expected prices so that they would come into play only in years of exceptionally low world market prices. 7.123 Price policies should be complemented with a credit policy capable of providing the farmers with the funds needed to finance input purchases and the holding of stocks at realistic interest rates. In order to further contribute to income stability, a crop insurance system could be introduced to provide a compensation for crop failures and reduce this risk of default. Finally, in order to achieve internal consumer price stability at reasonable prices, sufficient stocks of basic grains should be kept in the country. This may be achieved by the government holding stocks in wheat, while for other crops a system of flexible export levies and reliance on private stocks would be preferable. Hazelnuts, Raisins, Dry Figs, Tobacco and Tea 7.124 At the producer level the price of traditional exports that face inelastic demand should be maintained at sufficiently low levels, so as to discourage undesirable expansion. At the export level, the price should be maintained at a level sufficiently high to avoid foreign exchange losses from decreasing marginal revenues. 7.125 The government could achieve the desired reduction in producer prices through a sizeable export tax. However, this would be too drastic a measure as a substantial share of Turkey's farming population depends on these crops for their livelihood (10% are reported to depend on hazelnut production). In particular, the perennial crops represent a large investment for the small producers. In the case of these crops, especially hazelnuts and tea, support prices should be reduced in real terms step-by-step over, say, five years to levels consistent with feasible export revenues through gradual changes in export taxes. 7.126 Producers of tobacco can respond to price signals within one year. However, the complete elimination of the tobacco support prices, is not an immediate option and adjustments in prices over time should be complemented by the control of tobacco acreage. In the case of hazelnuts, quality standards should be set and marketing improved. Sugar beet 7.127 Sugar beet is a special case since the procurement and processing of that crop, as well as the distribution of sugar is under state monopoly. Official government policy on sugar has been and continues to be self-sufficiency through import substitution. 7.128 Since our analysis indicates that Turkey has no comparative advantage in sugar production, the appropriateness of this policy should be questioned. While the disadvantages associated with inefficiencies could be corrected by introducing more modern production, storage and processing - 335 - techniques, others, such as climatic factors, will persist and hence consideration should be given to alternatives to sugarbeet, such as sugar, corn, groundnuts, and alfalfa. 7.129 Nevertheless, in making policy recommendations one must take into account the existence of the Sugar Factories Corporation that is in charge of processing and marketing of sugar. The Corporation has several large factories which must be treated as a sunk cost. Correspondingly, the Government should continue to procure sugar beets at a price which ensures sufficient domestic production to operate the factories at adequate capacity utilization, with the balance being imported. At the same time no further investment in sugar factories should be contemplated. Finally in order to reduce the costs to the Treasury, sugar should be priced at a level high enough to cover production and distribution costs. This will require further adjustments following recent increases in prices. Subsequent adjustments should be made to reflect increases in production costs. Livestock 7.130 The remaining restrictions on the exports of live animals should be removed since Turkey holds a comparative advantage for exports to the Middle East markets which prefer to import live sheep. Also, meat exports should be encouraged by the establishment of an adequate cold chain and improvements in transportation. While health regulations limit beef exports to the EEC, frozen lamb is subject to less severe restrictions. Fruits and Vegetables 7.131 In order to remove the transport bottlenecks, regulations limiting competition within the domestic transport industries should be discontinued and incentives should be provided for them. Also, foreign companies should be encouraged to expand their transport operations in Turkey either directly or via joint ventures with domestic firms. Finally, increases in public investment in roads and ports would be necessary to improve the quality and capacity of the road network, to upgrade port capacity, and to increase port handling equipment, storage capacity and other quay facilities. 7.132 In view of the infant industry nature of fruit and vegetable exports, the recent extension of the foreign exchange retention scheme to these exports and the introduction of the foreign exchange allocation scheme should be complemented by the removal of import restrictions on inputs such as packing material and by the inclusion of fruits and vegetables among products that are eligible for the additional indirect tax rebates. 2. Input Policies Mechanization 7.133 Further expansion of the use of heavy mechanical equipment may be discouraged by a sales tax related in a progressive way to the horsepower capacity of the machine. Measures should also be devised to encourage and - 336 - increase the utilization of tractors and combines through rental and sharing arrangements as well as their replacement with smaller machines. At the same time, the subsidies implicit in the special lines of credit and subsidized loans for tractor purchases-should be discontinued. Fertilizer and Plant Protection Chemicals 7.134 We welcome the intention of the government to remove subsidies in the production and distribution of fertilizers over a five year period. Also, the private sector should be allowed to participate in the trade of theVe products. Water Charges 7.135 Government has accepted the principle of raising water charges to more appropriate levels. This would involve, as a first step, recovering the cost of the irrigation schemes. Further steps would need to be taken to link water charges to the more efficient use of irrigated land. The water charges should be made of two parts: (a) .a per hectare charge, independent of water use, increasing with the site of the irrigated area owned by the farmer, and (b) a volumetric charge, proportional to the amount of water used by the farmer and calculated as a percentage of value added per hectare of a moderately intensive cropping pattern. - 337 - CHAPTER 8 TOURISM Introduction 8.1 Tourism accounts for more than one-tenth of merchandize exports of goods and services in Turkey. Although arrivals declined from a peak of 1.6 million in the late 1970s to 1.3 million in 1980 due to political and social uncertainties, Turkey should be able to reverse this trend and to increase its share of the Mediterranean tourism market which in total is expected to rise by about 6 percent a year during the 1980s. 8.2 Turkey's tourism assets include competitive prices (notwithstanding the higher cost of the air transport component), an attractive physical environment, with varied scenery, first-class beaches, an excellent climate, and outstanding sightseeing, including very extensive and diverse antiquities, Hittite, Greek, Roman, Byzantine and Ottoman. These are opportunities for touring the country and for "stay-put" beach resort vacations or a combination of both. The beach resort opportunities stretch along Turkey's 7,000 km of coastline, and particularly along the Aegean and Mediterranean coasts where the climate permits a 7-month season and where many of the outstanding antiquities are located. 8.3 These impressive assets have only just begun to be exploited. A measure of the untapped potential contribution of tourism to the Turkish economy is the relatively low ratio of international tourist receipts to merchandise exports and to GNP; 10.1 percent and 0.4 percent, respectively, in 19-78. This compares with 21.6 percent and 4.2 percent, respectively, for Greece; 38.4 percent and 3.7 percent for Spain; 26.9 percent and 5.9 percent for Morocco; 35.6 percent and 6.6 percent for Tunisia; and 29.4 percent and 2.3 percent for Egypt. 8.4 This chapter analyses recent trends in international tourist traffic, tourist accommodations, employment, and foreign exchange receipts from tourism in Turkey. Then, on the basis of an examination of Turkey's competitiveness and the domestic resource cost of earning foreign exchange in tourism, the prospects until 1990 are evaluated. Finally, future policies required to achieve such prospects are considered. A. Recent Trends 1. International Tourist Traffic 8.5 During the 1960s and early 1970s international tourist traffic to Turkey grew rapidly from small beginnings (Table 8.1). From less than 200,000 arrivals in 1963, the number of visitors exceeded one million for - 338 - the first time in 1972. After a small setback in 1974 following the first oil crisis, traffic.rebounded to 1.5 million in 1975, a somewhat more rapid recovery than in most competing destinations. Arrivals stabilized at 1.6-1.7 million in 1976-1978, but declined to 1.5 million in 1979 and to 1.3 million in 1980, as a result of political and social uncertainties. Table 8.1; ARRIVALS OF VISITORS, 1963-1980 /a Year Arrivals ('000) Annual Change (%) 1963 198.8 1964 229.3 15.3 1965 361.8 57.8 1966 440.4 21.7 1967 574.1 30.4 1968 603.0 5.0 1969 694.2 15.1 1970 724.8 4.4 1971 926.0 27.8 1972 1,035.0 11.6 1973 1,341.5 29.6 1974 1,110.3 -17.2 1975 1,540.9 38.8 1976 1,675.8 8.8 1977 1,661.4 -0.9 1978 1,664.2 0.2 1979 1,523.7 -8.4 1980 1,288.0 -15.5 /a Data from State Institute of Statistic until 1971 and from the General Directorate of Security - Section IV thereafter. 8.6 In the late 1970s about one-half of all visitors came from Western European countries (Table 8.2). However, the number of visitors from these countries declined proportionately more than from elsewhere in 1980 and accounted for only 43 percent of the total in that year. This trend is a cause for concern, since the Western European mark,it has been targetted for more rapid growth as it included visitors who are among the higher spenders. The other substantial group of arrivals are from neighboring countries in Eastern Europe and the Middle East. The number of visitors from Eastern European countries has fluctuated considerably in the last ten years, probablj reflecting changes in group travel arrangements in the originating countries. Arrivals from individual Middle Eastern countries have also fluctuated considerably, particularly from Iran, although traffic has averaged more than double that in the early 1970s. - 339 - Table 8.2: DISTRIBUTION OF FOREIGNERS ARRIVING IN TURKEY, BY NATIONALITY, 1972-80 Y E A R S Nationality 1972 1973 1974 1975 1976 1977 1978 1979 1980 Germany 100,672 171,828 139,153 205,766 197,168 202,703 218,122 108,430 155,440 Austria 1-5,833 16,673 16,477 24,203 23,333 60,786 51,298 40,441 35,508 Belgium 11,141 11,690 7,291 9,567 9,914 23,174 21,581 20,636 12,324 Denmark 9,104 9,836 7,345 6,733 4,936 10,108 6,399 11,389 7,807 Finland 12,474 10,165 6,761 1,575 1,480 4,199 2,978 6,676 5,467 France 72,474 93,253 64,586 113,319 124,209 150,343 140,580 120.406 87,342 Holland 19,497 21,891 13,130 16,042 13,212 34,126 30,107 24,888 19,051 Britain 67,495 100,308 65,975 99,025 90,413 107,821 92,365 70,032 62,192 Spain 2,292 3,128 4,783 4,482 6,543 14,969 23,817 32,358 21,671 Sweden 25,793 22,969 13,751 4,581 7,409 16,183 12,357 16,235 8,452 Switzerland 16,388 16,058 11,127 13,498 13,908 51,010 37,799 30,902 18,024 Italy 54,641 82,828 44,994 85,155 74,357 85,434 88,494 80,957 63,215 Norway 54,641 82,828 2,457 1,143 1,216 4,419 1,760 3,743 2,628 Greece 28,502 41,778 30,578 29,787 38,161 43,870 53,984 59,560 59,106 EUROPE, OECD 436,306 602,185 428,608 614,876 606,257 809,151 789,601 716,451 558,027 U.S.A. 150,329 182,843 91,799 79,970 114,822 165,029 158,689 160,767 118,669 Australia 7,566 10,624 8,297 8,804 10,281 20,490 12,703 9,937 7,617 Japan 1,839 2,588 2,064 3,468 2,464 6,943 4,615 7,392 6,865 Canada 9,481 q,680 6,531 5,015 6,735 19,234 17,982 20,916 11,501 ALL OECD 605,521 807,920 537,099 711,533 740,559 1,020,847 975,590 915,463 702,739 OTHER EUROPE Bulgaria 18,491 19,488 25,150 37,017 35,738 42,445 42,043 37,773 59,822 Czechoslavakia .. .. 1,105 2,912 3,271 4,904 4,076 4,894 4,656 Hungary .. .. 6,738 11,652 11,012 14,501 18,763 32,726 36,579 Poland 2,706 6,380 11,757 25,627 39,021 66,751 29,635 30,324 32,549 Romania 3,661 3,812 7,018 15,461 9,284 19,129 18,643 14,387 £6,748 U.S.S.R. 1,254 1,285 2,173 1,849 2,243 16,944 16,534 13,013 14,026 Yugoslavia 69,282 76,262 69,487 92,264 84,766 76,417 85,529 102,616 56,561 TOTAL 95,974 107,227 123,428 186,782 185,335 241,095 215,223 2n5,409 220,941 MIDDLE EAST Iraq 4,062 13,394 16,904 26,493 25,997 28,669 16,511 45,985 22,920 Iran 23,190 28,731 46,868 188,576 50,021 94,170 137,401 66,704 109,076 Lebanon 18,432 12,257 19,297 22,712 22,(17 25,330 19,447 24,728 15,274 Syria 12,287 18,113 29,349 42,272 34,624 41,296 52,417 44,714 37,909 Jordatl 9,663 11,930 16,665 26,502 28,567 30,941 26,802 34,288 28,234 TOTAL 67,634 80,425 129,083 286,348 161,226 220,406 252,570 215,969 213,413 LATIN AMERICA 9,663 11,930 3,254 3,199 4,444 8,069 8,133 19,084 24,964 OTHER 266,406 341,955 317,434 332,745 584,282 170,999 192,653 136,959 125,349 GRAND TOTAL 1,034,955 1,341,527 1,110,298 1,540,904 1,675,840 1,661,416 1,661,177 1,523,658 1,288,060 - 340 - 8.7 No distinction is made in the Turkish arrival statistics as between "tourists" (staying more than 24 hours), "excursionists" (staying less than 24 hours) and "transits" (connecting with onward passage).1/ About one-third of all arrivals are listed as coming by sea (Table 8.3). These are generally passengers on cruise ships who do not constitute a demand for accommodations and usually stay in port less than 24 hours-. Furthermore, a considerable number of border crossings by land, particularly from the Micldle East (Iran, Iraq, Syria), are either by day excursionists (primarily for shopping) or transit travellers. Even some of the air arrivals in Istanbul, and possibly Ankara, are thought to be transit passengers. Therefore, less than two-thirds of arrivals would be categorized as "tourists" under the widely-accepted international definition. Table 8.3: DISTRIBUTION OF FOREIGNERS ARRIVING IN TURKEY BY MONTHS AND MEANS OF TRANSPORT, 1980 Means of Transport Months Air Land Train Sea Total % January 21,480 27,708 7,233 2,563 59,590 4.6 February 20,661 23,361 4,186 2,762 51,550 4.0 March 24,055 27,694 6,690 8,750 67,229 5.2 April 22,513 32,335 7,640 29,214 91,702 7.1 May 25,660 33,465 7,161 52,712 118,998 9.2 June 26,956 37,197 7,015 47,270 118,438 9.2 July 38,500 53,824 9,830 75,029 177,183 13.8 August 42,792 74,624 13,295 76,352 207,063 .16.4 September 32,004 41,649 10,033 67,854 151,540 11.8 October 23,011 46,803 13,691 43,577 127,082 9.9 November 17,584 29,630 5,875 10,371 63,460 4.9 December 16,830 25,446 5,262 6,087 54,225 4.2 TOTAL 312,046 454,316 38,511 423,187 1,288,060 100.0 % 24.2 35.3 7.6 32.9 100.0 Source: General Directorate of Security - Section IV. 1/ Definitions adopted in 1967 by the World Tourism Organization and the United Nations. - 341 - 8.8 Of such stopover visitors, more than half arrive by road. This proportion is slightly greater than the average for arrivals from neighboring countries, but it is about 40 percent also for arrivals from Western European countries (Table 8.4). Air arrivals--thought to have The most dynamic demand growth potential--account for 24 percent of all arrivals and 31 percent of arrivals from Western Europe. Table 8.4: DISTRIBUTION OF FOREIGNERS ARRIVING IN TURKEY BY COUNTRY OF NATIONALITY AND MEANS OF TRANSPORT 1980 Means of Transport Nationality Air Land Train Sea Total Europe OECD 171,044 121,405 11,386 254,192 558,027 Total OECD 208,866 132,233 12,904 348,736 702,739 Other Europe 18,472 144,454 34,946 23,061 220,933 Middle East 17,439 156,254 37,996 1,774 213,463 Latin America 9,818 307 138 14,701 24,964 Other 57,447 21,068 12,527 34,901 125,943 Grand Total 312,042 423,173 98,511 423,187 1,288,042 Source: General Directorate of Security - Section IV. 8.9 A large number of visitors are known to be businessmen, particularly to the major cities, although no precise figures are available. Furthermore, many other arrivals are for the purpose of visiting fr4.ends and relatives. It may be assumed that only about one-half of visitors staying more than 24 hours are on vacation. Information on the purpose of visits, and important planning tool, will be developed as a result of a continuing travel survey which the State Institute of Statistics will initiate in late 1981. 8.10 Information on the average lehgth of stay is fragmentary. The Ministry of Tourism estimates the average length of stay in registered accommodations in 1980 at 8.1 days, down from 9.0 days reported to the World Tourism Organization in 1978. Hlowever, the latter figure was a substantial increase over the 5.6 days reported in 1970. At the same time, the average length of stay of Western Europeans in regi-;t3red accommodations at beach areas is known to be longer as most such visitors travel on inclusive air packages lasting two weeks. 342- 8.11 International tourist traffic to Turkey is highly seasonal. The six summer months account for 70 percent of annual arrivals (Table 8.3). In 1980, arrivals in the peak month (August) were 190 percen.t of average monthly arrivals while in the lowest month (February) they were 40 percent of the avierage. Since business travel is substantial and is known to be less seasonal than vacation travel, holiday traffic is even more seasonal than the general monthly arrival figures would indicate. 2. Tourist Accommodations 8.12 There were 511 registered accommodation establishments on December 31, 1980, comprising 28,992 rooms with 56,044 beds (Table 8.5). Not all of these are suitable for international visitors, however, by reason of standards, type and/or location. Many of the lower category accommodations do not provide the'facilities and services normally expected by most international visitors. They are often geared specifically to the expectations of domestic travellers, either on business or on vacation. Furthermore, about one-third of total capacity is located in parts of the country rarely visited by foreigners. Finally, with a nationwide average size of accommodation establishments of 56 rooms, many are too small to cater to the relatively large groups that constitute a growing element in international vacation travel. 8.13 In any event, only about 30 percent of total occupancy is by international visitors. And the dominance of domestic tourism is even greater than the 70 percent of total registered accommodation occupancy would imply, since there has also been a rapid development of secondary homes in vacation areas, now estimated at 600,000 beds, almost exclusively occupied by nationals. 8 14 The national average bed occupancy in 1980 was 43.5 percent, down from 47.1 percent in 1979 (Table 8.7). The 1980 occupancy rate was the lowest since 1975, reflecting both the down-swing in international visitor traffic and reduced domestic travel. Large hotels in major cities, where business traffic is substantial, achieved annual occupancies just above 70 percent in 1980, compared with occupancies in excess of 80 percent in the. late 1970s. Because of such business traffic (and, to some extent, the lesser concentration of domestic traffic), the seasonality in bed occupancy (Table 8.6) is less than in international arrivals (Table 8.3). Accommodation establishments in seasonal resort areas achieved an annual occupancy of 40-45 percent which implies a 70-75 percent average occupancy during the seven-month season and a virtually full occupancy during *the peak months of July and August. It may be added that many hotels in resort areas do not operate during the off-season. - 343 - Table 8.5: REGISTERED ACCOMMODATION CAPACITY, DECEMBER 31, 1980 Type and Class Establishments Rooms Beds Hotels; 322 19,680 36,384 Deluxe 11 2,791 5,136 1st 14 1,758 3,385 2nd 36 3,306 6,358 3rd 76 4,515 8,198 4th 185 7,313 13,307 Motels: 99 4,883 9,969 1st /a 51 3,155 6,397 2nd 44 1,614 3,346 Unclassified 4 114 226 Guesthouse; 46 796 1,628 1st 14 278 536 2nd 25 428 890 3rd 7 90 202 Holiday Villages 8 2,659 5,560 A. 5 2,185 4,330 B. 3 474 1,230 Inns 8 441 1,286 Campsites; 22 169 /b 3 /b 1st 3 16 37 2nd 7 n/a n/a 3rd 12 153 366 Other 6 364 814 TOTAL: 511 28,992 56,044 /a Many of these would be classified as "hotels" in other countries. /b Does not include 2nd class campsites. Source; Ministry of Tourism and Information. - 344 - Table 8.6: BED OCCUPANCY RATES IN A SAMPLE OF ESTABLISHMENTS, 1975-80 /a Y E A R Month 1975 1976 1977 1978 1979 1980 January 42.7 39.4 42.5 35.3 38.3 40.2 February 41.8 45.7 48.2 44.5 45.8 41.9 March 43.3 49.4 46.1 46.1 43.4 40.9 April 42.6 57.1 51.3 38.1 42.3 41.8 May 49.5 61.9 55.3 43.9 41.1 39.4 June 49.7 61.0 51.8 35.6 44.0 40.1 July 66.5 69.1 57.1 60.1 56.2 48.1 August 74.2 75.8 70.6 63.1 61.3 58.9 September 56.3 67.2 62.1 53.7 50.8 42.9 October 52.7 67.7 53.3 42.7 43.3 40.5 November 49.8 56.2 52.4 48.1 47.7 42.5 December 47.6 53.2 42.0 40.8 47.3 40.4 52.3 57.6 53.3 46.3 47.1 43.5 /a Sample includes: 296 establishment, 31.513 beds in 1975 139 " 16.623 " 1976 157 " 19.034 " 1977 135 " 31.141 " 1978 247 " 31.241 " 1979 239 " 27.977 " 1980 8.15 The only financial results available to the mission are those for six hotels owned by the State Pension Fund and five by the Tourism Bank (Table 8.7). While results for these hotels are not necessarily indicative of the results for the private sector, and the mix of hotel type, location, and size is not fully reflective of the hotel industry as a whole, their financial results demonstrate some general tr.ends in 1980. The weighted average gross operating profit (income before taxes and fixed charges for depreciation and debt service) for the eleven hotels was 15.6 percent of total revenues, as compared with a worldwide average of 26.7 percent 1/. After the payment of fixed charges, relatively li.ttle would be left for return on investment. 1/ According to Worldwide Lodging Industry, Horwath and Horwath Internationa 1 (a reputable hotel accounting firm). - 345 - Table 8.7; WAGES AND GROSS OPERATING PROFITS AS A PROPORTION OF REVENUES FOR SELECTED HOTELS, 1980 Gross (%) Hotel Operating Profit Wage Bill State Pension Fund Buyuk Ankara 35.7 30.2 Macka 5.0 42.5 Tarabya 10.7 42.8 Celik Palas 14.6 38.9 Efes 16.1 45.6 Stad 8.9 40.6 Tourism Bank Akcay 8.4 65.2 Carlton 4.4 54.5 Cesme 3.5 64.4 Marmaris 32.2 39.6 Yalova 15.5 55.0 8.16 The ratio of gross operating profit to revenues is generally used as an indicator of operating efficiency. In the case of Turkey, it is also a reflection of the profits squeeze brought about by rising operational costs in the face of restricted revenues. The latter was the result both of lower occupancies and the failure to allow hotel prices to rise with costs. In turn, apart from large increases in energy costs, the most substantial cost increase was in the wage bill. 8.17 There does not appear to be any substantial overmanning in the Turkish accommodations industry as the average ratio of workers per room, 0.85 is consistent witlh international experience. However, substantial increases in wages and fringe benefits agreed upon during 1980 in the face of slow increases in revenues resulted in an average ratio of wage bill to total revenues for the eleven hotels of 45.8 percent, as compared with the worldwide average of 31.2 percent.l/ In the face of this heavy cost burden, it is small wonder that gross operating profits were modest and returns on investment even more so. It can be seen from Table 8.7 that the 1/ Op. cit. - 346 - two hotels with acceptable gross operating profits, Buyuk Ankara and Marmaris, are the two hotels with wage bills approaching international norms. 8.18 Hotel profitability can only be increased to attractive levels if operating costs, particularly wages, are contained while revenues expand as a result of increased occupancy rates or prices or a combination of both. This would require a careful matching of increases in accommodation capacity to traffic flows and an upward adjustment of prices, taking into account demand elasticity and Turkey's competitive position. 3. Employment 8.19 Employment in tourism in 1980 is estimated at 40,320 at the peak season, of which 22,400 was in accommodation establishments and 17,920 in other tourism enterprises. In addition, there was a considerable number working in activities directly supplying the tourism sector, not the least of which was the construction industry. In all, perhaps 75,000 owed their jobs to the tourism sector. 4. Foreign Exchange Receipts 8.20 Reported foreign exchange receipts from tourism have grown steadily during the last ten years, amounting to US$327 million in 1980, or 11.2 percent of the value of merchandise exports. The series on annual receipts, shown in Table 8.8, must be viewed with caution, however. First, the series is discontinuous because the system, whereby authorized foreign exchange dealers report encashments, was modified in 1975 when the data collecting agency was changed from the Ministry of Finance to the Central Bank. Furthermore, the unofficial, or parallel, market in foreign exchange has greatly declined in importance since January 1980. Thus, while tourist traffic declined by 15.5 percent in 1980, reported foreign exchange receipts increased by 16.3 percent. Increases in average tourist expenditures are unlikely to account for all of this large swing. 8.21 Average daily expenditures per visitor, calculated on the basis of total reported receipts, total visitors (including cruise passengers and other excursionists), and average length of stay, amounted to US$31.3 in 1980 (Table 8.9). In 1979, average daily expenditures, calculated on the same basis, were US$22.6; this compares with similar calculations from Greece, Spain, Morocco and Tunisia of US$21.0, US$21.5, US$18.2 and US$37.6 respectively. 1/ 1/ The substantially higher figure for Tunisia reflects a lesser "dilution"' of cruise passengers and other one-day excursionists. - 347 - Table 8.8: TOURISM RECEIPTS /a AND MERCHANDISE EXPORTS, 1963-1980 Tourist Merchandise Tourist Receipts Year Receipts Exports as % of Export 1963 7.7 368.0 2.1 1964 8.3 411.0 2.0 1965 13.8 464.0 3.0 1966 12.1 490.0 2.5 1967 13.2 523.0 2.5 1968 24.1 496.0 4.9 1969 36.6 537.0 6.8 1970 51.6 588.0 8.8 1971 62.9 677.0 9.3 1972 103.7 835.0 12.4 1973 171.5 1,317.1 13.0 1974 193.7 1,532.2 12.6 1975 /b 200.9 1,400.1 14.4 1976 180.5 1,960.0 9.2 1977 204.9 1,753.9 11.7 1978 230.4 2,288.2 10.1 1979 280.7 2,261.2 12.4 1980 326.7 2,910.1 11.2 /a Excludes international fare payments. /b New reporting system in 1975 and thereafter. Source: Ministry of Tourism and Information. - 348 - Table 8.9; AVERAGE EXPENDITURES BY TOURISTS, 1963-1980 (U.S.$) Year Average Per Visit /b Average Per Day 1963 38.5 1964 36.3 1965 38.0 1966 27.5 1967 23.0 1968 39.9 1969 52.7 1970 71.2 12.7 /c 1971 67.9 1972 100.2 1973 127.8 1974 174.4 1975 /a 130.0 1976 107.7 1977 123.3 1978 140.1 15.6 /c 1979 184.2 22.7 /c 1980 253.6 31.3 /c /a New reporting system in 1975 and thereafter. /b As reported by Ministry of Tourism and Information. /c Mission calculation based on sample survey reports by Mirnistry of Tourism on average length of stay. - 349 - 8.22 Because there are relatively few imports required either in hotel investment or operations, virtually no foreign capital repayments, very few foreign employees, and a limited number of foreign management contracts, foreign exchange leakage from gross receipts from tourists is very low by international standards. It is estimated at 8 percent, so that added value retained in the economy is relatively high. 8.23 Expenditures by tourists accrue not only to the accommodation industry, but also to a number of other economic activities. Little data has so far been collected on the pattern of tourists' expenditures, but the State Institute of Statistics is planning to initiate a periodic and continuing sample traffic survey which will include data collection for this purpose. A 1977 sample survey in and around Izmir indicated that, for tourists staying in registered accommodations, 25 percent of expenditures were on accommodations, 32 percent on food and beverages, 25 percent on shopping, 10 percent on entertainment, 5 percent on internal transport and 3 percent on other items. 5. Domestic Resource Costs of Earning Foreign Exchange from Tourism 8.24 The domestic resource cost of earning foreign exchange from international tourism in 1980 is estimated to amount to TL 65.6 per US dollar compared to an average exchange rate of TL 76.04 to the US$ (the calculation and a detailed explanation is set down in Annex 8.1). The results demonstrate that this cost is markedly lower than for many other foreign-exchange earning activities and that therefore the tourism sector should receive attention in the future development of the economy. 8.25 Since *there was a setback in international tourism in Turkey in 1980, occupancy rates and foreign exchange receipts were untypically low, while capital and land costs were fixed and labor costs were not completely variable (because of employment tenure). Accordingly, in years when capacity utilization is greater, the domestic resource cost of earning foreign exchange would be correspondingly lower. B. Prospects Until 1990 1. Competitiveness 8.26 While air transport costs are higher, accommodation prices in Turkey tend to be lower than alternative Mediterranean de!tinations, and the resulting incluisive package prices are broadly comparable With those for such destinations. Table 8.10 provides information on inclusive prices for a two-week stay, comprising accommodations, half-board in 3- or 4-star hotels and return flight for July-August 1981 as listed in German, French .and UK tour operators' brochures for Cesme, Kusadasi and Marmaris in Turkey, and for similar resorts in Greece, Cyprus, Yugoslavia, Tunisia, Morocco, Spain, Canaries and Portugal. From Germany, Turkey is fully competitive with Greece, Cyprus, Spain, Canaries and Portugal and the more expensive vacations to Tunisia and Morocco (offering higher category - 350 - hotels) are within the price range for vacations in Turkey; only Yugoslavia is cheaper. While the French agency is not operating to Turkey this year, all the vacations offered elsewhere thle Mediterranean are priced equal to, or more than, the German price to Turkey. In the case of the UK, most minimum prices for vacations elsewhere are below that for Turkey (except for Cyprus and Portugal), but maximum prices (offering higher category hotels) approach, or exceed, the price range for Turkey. Table 8.10 PACKAGE PRICES TO COMPETING MEDITERRANEAN DESTINATIONS, JULY-AUGUST 1981 (Two weeks, half board in 3- or 4-star hotels and return flight) Country TUI Jet Tours Thompson Cosmos (Germany) (France) (U.K.) (U.K.) Turkey 659-814 /f -- 662-779 /g -- Greece /a 607-1025 950-1180 632-920 662-701 Cyprus 636-978 -- -- 837-940 Yugoslavia /b 489-648 702-736 443-598 /h 561-595 Tunisia 488-916 672-1121 545-699 506-653 /i Morocco 535-875 727-879 595-664 621-747 Spain /c 683-1103 - 483-690 508-687 Canaries /d 654-873 849-898 568-839 588-754 Portugal /e 755-1030 -- 554-1058 823-834 /a Crete/Rhodes /b Dalmatia /c Coksta del Sol /d Teneiife /e Algarve /f Cesme or Kusadasi /g Cesme or Mamaris /h 11 nights only /i full board 8.27 Thus, vacations in the higher category hotels in Turkey are already cheaper than vacations at such hotels at competing destinations. Since the prices of most vacations in Turkey include scheduled flight arrangements while those elsewhere are by less expensive charter flights, once traffic volumes justify charter operations to Turkey, inclusive vacation prices to Turkey will be fully competitive for vacations in all categories of hotels. It is estimated that the use of air charters would reduce inclusive vacation prices by about US$5o and US$80 from Germany and the UK, respectively, expressed in terms of 1981 prices. - 351 - 2. Increasing Turkey's Market Share 8.28 Turkey's share of the Mediterranean stopover tourism traffic 1! was about 1.2 percent in 1979. 2/ If total such traffic increases, as forecast, at an average annual rate of 6 percent for the next ten years, total regional arrivals would amount to 138.9 million in 1990. If by then Turkey were able to increase its market share from 1.2 percent to 1.6 percent, stopover arrivals in Turkey would total about 2.2 million, requiring an average annual increase of about 9 percent. An increase of this magnitude is modest by the standards of other Mediterranean countries at a similar stage of tourism development and can be attained, and even surpassed, if appropriate policies are followed. Nor would it create cujltural dislocations, given the large size of the country and the importance of domestic tourism. 3. Required Investments 8.29 In order to achieve this result, additional accommodation capacity, together with other tourism facilities and related infrastructure, would be required, supported by a vigorous and successful marketing campaign. 8.30 By 1990, about 60 percent of thie 2.2 million stopover visitors, or 1.3 million, may be expected to stay in registered accommodations. 3/ Assuming that the average length of stay in registered accommodations remains unchanged at 8.1 nights (the 1980 figure), the 1.3 million arrivals in registered accommodations would occupy 10.7 million bednights. If international traffic in 1990 represented 50 percent of total occupancy, foreign and domestic occupancy together would amount to 21.4 million bednights. Further assuming that the average annual bed occupany of 57.6 percent achieved in the 1976 (the highest bed occupancy to date) is the maximum occupancy that can be achieved, given the seasonal nature of much of Turkey's tourist traffic, then a capacity of 37.1 million 1/ Excluding cruise passengers, other excursionists and transits. 2/ "The Mediterranean" includes all countries with a coastline on the Mediterranean Sea plus Portugal and the Atlantic islands of Spain and Portugal. However, only half of France's traffic is assumed to be Mediterranean. Accordingly, there were 77.6 million stopover arrivals in the Mediterranean in 1979, of which 950,000 were in Turkey. 3/ In 1980, about 50 percent stopover visitors stayed in registered accommodation. However, the intensive marketing program is likely to have a greater impact on organized travel, thereby increasing the proportion staying in registered accommodation. 4/ International occupancy represented 30 percent of total occupancy in 1980, but the proportion is likely to rise as the marketing program increasingly emphasizes this market segment. In any event, the most dynamic growth in domestic tourism is in non-registered secondary residences. - 352 - annual bednights would be necessary to accommodate the expected 21.4 million annuLal bednights actually occupied. Thus, about 102,000 bed capacity l/ would need to be available in 1990, or nearly double the present capacity of 56,000e 8.31 Of the 46,000 additional beds needed to boost Turkey's share of the Mediterranean tourist trade from 1.2 percent to 1.6 percent in ten years, 14,152 are currently under consCruction. Thus, additional accommodation projects, comprising some 32,000 beds, would need to be implemented during the decade. Projects comprising 12,126 beds have already been approved but not yet started so that new projects comprising about 20,000 beds need to be identified, prepared, financed and implemented. 8.32 Such an expansion program for the next ten years would entail investment expcnditures in additional accommodation capacity of about TL 55,000 million in 1981 prices. Investment costs for other tourism enterprises would amount to some TL 18,000 million. Investment in related public infrastructure would cost about TL 22,000 million. Thus, the total investment program, both public and private, would cost about TL 95,000 million, or an annual average TI 9,500 million. 4. Prospective Foreign Exchange Receipts and Employment 8.33 Assuming no change in real average daily expenditures by irternational visitors, gross foreign exchange receipts from tourism in 1990 would amount to more than US$700 million in 1980 prices. Since the foreign exchange costs in the tourism sector are already low at 8 percent, there is little opportunity to reduce them further, 2/ and thus net foreign exchange receipts in 1990 would be in the order of US$645 million in 1980 prices. 8.34 Employment at the peak season of 1990 would amount to 83,000 with 46,000 in accommodation eotablishments and 37,000 in other tourism establishments. In addi::ion, perhaps another 44,000 would be working in activities directly supplying the tourisrmt sector, including construction. 1/ 37.1 million divided by the 365 days in the year. 2/ Although any foreign investment would constitute an immediate inflow of foreign exchange it would be followed by a subsequent continuing outflow for profit repatriation and perhiaps some debt service. - 353 - C. Policies for Tourism Development 1. A Ten-Year Plan 8.35 To achieve the optimal exploitation of Turlcey's tourism potential, an indicative plan for the mobilization of pu,1ic and private resources over the next ten years would need to be prepared. Such a plan would include; a. matching targets for capacity increases with prospective traffic flows; b. scheduling public sector investments in infrastructure; c. indicating needs and poliL.es for encouraging private investment. both domestic and foreign, including; i. investment incentives, ii. availability of credit on suitable terms; d. identifying the "product mix" by type and location of tourism facilities; e. investigating construction methods and standards in order to minimize unit investment costs; f. adopting civil aviation policies aimed at optimizing returns to the economy as a whole; and g. establishing an effective market promotion program based on continuing market research. Such a plan would require a greatly improved data base, so that the proposed continuing tourist surveys by the State Institute of Statistics should be augmented by detailed studies of hotel profitability not only of public enterprises but also of private establishments. It would be helpful if the tourism planning procedures of other Mediterranean countries were studied, particularly those of Tunisia and Morocco. 2f Expansion of Accommodation Capacity 8.36 Even though additional supporting infrastructure--roads, water supply, sewerage, electricity and telecommunications--would be required for the longer term tourism development of the country, and these should be planned and implemented in accordance with the proposed tourism development program, there are immediate possibilities to augment accommodation capacity in areas where infrastructure is already in place or only minor network extensions are neeced. In the next few years, efforts should be concentrated on promoting superstructure investments where such immediate possibilities exist, either in planned integrated resorts or in already existing tourist destinations. In this way, tourist traffic could be rapidly increased with immediate returns to the economy. - 354 - 8.37 Over the last ten or fifteen years, the Turkish authorities have devoted considerable attention to physical planning for tourism development. By 1980, there were no less than 106 project areas for which land-use plans at varying scales had been prepared and in many of which at least some infrastructure works had been carried out. In most of these project areas, very little accommodation capacity has been installed. 8.38 The Ministry of Tourism and Information has now rightly decided to concentrate immediate development efforts in 5 of these 106 project areas: Side and South Antalya on the Mediterranean coast, Koycegiz on the South Aegean coast, Istanbul and "appadocia in central Anatolia. However, even in these areas, priority should be given to situations where investments in additional accommodation capacity can be undertaken forthwith, so that returns on the long process of physical planning and infrastructure investinent can be rapidly obtained. 8.39 A prime example of such a possibility is at the Side tourism development area at Acisu-Sorgun. All necessary lands have been acquired on an extensive site with a first-rate sandy beach. Public infrastructure has already been instal ;d and only network connections to individual establishments would be required. The nearby historic site makes it an important tourist destination which, for climate reasons, has a season longer than elsewhere. The proposed tourism development authority for the area should be appointed with delay to undertake investment promotion with a view to establishing a capacity of 3,200 beds. 8.40 At South Antalya (Kemer), the main infrastructure is well advanced, but connecting infrastructure and superstructure investment have so far been inhibited by the failure to resolve land tenure problems. In the immediate future, clear title is expected on 32 of 39 hotel sites and the possibilities of installing 5,750 beds would be open. Investor interest has been expressed in some of these sites, but specific projects may have to await the establishment of a local touris,t development authority. 8.41 On the south Aegean coast, a new major international airport is under construction at Dolaman. The airport is expected to cater primarily to international charter flights. Airport construction was due to be completed in 1980, but has been delayed until July 1981. (As a result, several European tour operators have cancelled their entire 1981 summer program destined to use the airport, with considerable loss to the country.) A 20 km. link road to Koycegiz has been completed, but other infrastructure within this tourism development area is only in an initial construction stage. However, the airport will also serve already established tourist resorts such as Marmaris, Datca and Bodrum. Accordingly, the expansion of tourist traffic need not await the planned physical developments at Koycegiz, but can initially take place on the basis of an expansion of bed capacity at the already established resorts. - 355 - 8.42 Both in the Istanbul area and in Cappadocia major infrastructure is already in place and the priority need is additional accommodation capacity together with minor connecting infrastructure. 3. Hotel Finance 8.43 If high priority is to be accorded, as recommended, to investment in additional accommodations, the availability of suitable finance will be of crucial importance. While economic returns are high on non-hotel tourism activities, such as shopping, entertainment and internal transport, the profitability of hotels in Turkey, as elsewhere, is modest. Accordingly, capturing the potential benefits of tourism as a whole necessitates providing adequate loan finance on suitable terms to complement equity funds that are available from the private sector, primarily domestic, but possibly also foreign. 8.44 The majority of accommodation enterprises are privately owned. Of the 56,044 beds at the end of 1980, establishments comprising 51,187 beds were so owned, the remaining 4,857 beds being in establishments belonging to the public sector (the Tourism Bank and the State Pension Fund). The latter included many of the larger units. To date, there has been very little foreign investment in accommodation establishments, although several large hotels and holiday villages are operated by foreign management companies. Foreign investors are frequently reluctant to invest in hotels in developing countries since it locks in fixed capital with relatively long pay-back periods. Several foreign companies are currently considering minority participation in new hotel enterprises in Turkey, primarily in order to obtain lucrative management contracts. Such contracts could be advantageous to Turkey since they provide expertise and marketing experience. 8.45 Due to the long economic life of hotel investments, and the relatively long pay-back periods, particularly on seasonal operations, extended amortization schedules are required which may not be available commercially. Furthermore, because of relatively long gestation periods (hotel construction often takes three years in Turkey), grace periods before scheduling principal repayments need to provided. 8.46 Recognizing the special financing needs of the sector, the Tourism Bank was established in 1962 to provide credit to the tourism industry and to own and operate tourism establishments. In the past, however, the Bank gave emphasis to financing its own operations. 8.47 The Tourism Bank's authorized capital in May 1981 was TL 2,500 million (about USt24 million at the current rate of exchange), of which TL 2,128 million (about US$20 million) was paid in. The Government (the source of 90 percent of the Tourism Bank's funds) has agreed to raise the authorized capital to TL 15,000 million (about US$140 million). Although the schedule has not been definitely established, the intention is to provide this in'cease within two or three years. - 356 - 8.48 At the end of 1980, the Tourism Bank owned and operated six hotels and two vacation villages, with a total capacity of 2,493 beds, a camping site and two marinas. The net profit was TL 26 million, or a return of under 1.0 percent on the estimated. capital employed (1980 replacement value) of nearly TL 3,000 million. In 1981, two new hotels will be added with a capacity of 620 beds. 8.49 In 1980, the Tourism Bank buLdgeted TL 1,022 million (about US$13 million) for credit operations but, in the event, signed loan agreements for only TL 712.8 million (about US$9.4 million) and disbursed TL 438.2 million (about US$5.8 million). Given the augmentation in its capital, the Tourism Bank should be able to increase substantially its lending operations in the next two or three years. The demand for its loan funds would be considerable in view of the highly favorable loan conditions. For accommodation establishment.s, the Tourism Bank will lend up to 60 percent of total investment costs at a 15 percent interest rate. With respect to construction, loans may be extended over a 20-year repayment period including up to six years' grace on principal repayments; for equipment, loans are extended over 11 years including four years' grace; and for working capital over six years, including three years' grace. For non-accommodation tourism enterprises, the Tourism Bank will lend up to 50 percent of total investment costs at 15 percent interest for four years, including two years' grace. 8.50 Since most of the Tourism Bank's hotels were assumed to be pioneer enterprises designed to demonstrate the feasibility of hotel operations in previously undeveloped tourist areas and to encourage hotel investment by others, such hotels cannot be judged by commercial criteria alone. But there can be little justification for further direct hotel investment by the Tourism Bank. First, the private sector is new cognizant of the commercial possibilities of the tourism sector and can be attracted to the priority zones by the availability of land at non-speculative prices and well equipped with infrastructure. Second, the Tourism Bank's funds would be more effective as a credit source which can attract other (equity) funds. 8.51 If all the additional resources of the Tourism Bank were concentrated on its loan activities, the amount of available loan funds would provide financing for about 4,000 beds annually, representing a yearly increase of 6 percent. However, the Tourism Bank's resources would have to be replenished in a few years because of the lack of effective cost recovery in its lending operations, given its current interest charges of 15 percent, well below the inflation rate. 8.52 The Government should reconsider whether the present subsidy of the Tourism Bank's interest rate is suitable. While there are arguments in favor of long-term loan finance with generous grace periods, it is not clear whether the very large negative real interest rate represented by a nominal rate of 15 percent is justified. It is recommended that a detailed study be undertaken to determine the impact of different interest rates at - 357. - different occupancy and revenue levels on financial and economic profitability. This would necessitate a major effort to improve data collection, particularly to obtain detailed occupancy rates for a wide range of hotels, together with their financial results. There would also be a need for a continuing sample survey of tourists' expenditure patterns, both within and outside accommodation establishments. 8.53 Consideration should also be given to using public sector funds to establish a special tourism rediscount facility through the commercial banking system. Such funds could act as a catalyst for generating additional loan finance commercially. Such a rediscount facility could either be located in the Tourism Bank or elsewhere in the financial system. 4. Civil Aviation 8.54 While at present only 36 percent of international visitors, exclusive of cruise passengers, arrive by air (Table 8.3), this mode of access is thought to lhave the most dynamic traffic growth potential, particularly from the high-spending Western European markets. For this reason, a liberal aviation policy is crucial to the future tourism development of the country. 8.55 Turkish Airlines (THY) maintains an extensive international network of scheduled routes together with a comprehensive domestic network. Most THY international services arrive in Istanbul, where traffic densities are the highest, and there are onward connections, either by flight continuations or by connecting flights, to the other Turkish cities. Except for a few flights directly to Ankara, foreign scheduled airlines fly to Istanbul. There are no foreign scheduled flights directly to other Turkish cities; nor are foreign airlines permitted to continue to such cities after landing in Istanbul, even to carry passengers boarding before Istanbul. This limitation severely hampers traffic growth. 8.56 Air charter operations, which could reduce per passenger costs and thus stimulate demand, and which offer the flexibility that seasonal vacation demand requires, are in their infancy. While some 360,000 visiting Turkish overseas workers are carried each year on air charters, primarily by THY, only 15,000-20,000 foreign visitors are so carried, or less than 6 percent of all foreign air arrivals. This insignificant role of air charters in Turkish international tourism is partly explained by the relatively low traffic volume from any one overseas originating point to any one destination within Turkey. An important reason for such low traffic volumes is the low total accommodation capacity at individual destinations and the small average size of establishments in relation to the passenger-carrying capacity of charter airplanes. But, a protectionist attitude toward the commercial interest of the national carrier has also been an inhibiting factor. The fact that Dolaman airport, when completed will be entirely devoted to charter operations is perhaps an indication of a more liberal air charter policy. Now that services from the West are permitted to overfly the Greek Aegean islands (forbidden from 1974 until September 1980), flight distances will be reduced, thereby also reducing air charter costs. - 358 - 8.57 Turkey is well endowed with airports serving the main points of international tourist interest. However, air terminal buildings are already congested and will become more so as traffic increases. Istanbul's new terminal facility is under construction and augmenting terminal capacity elsewhere should also be urgently considered. Izmir airport, which serves an extensive tourism zone, is used for military, as well as civilian, purposes and there has been a history of military operations delaying civil flights. The authorities should consider, without delay, making arrangements which could eliminate, or reduce, this conflict. 8.58 In general, civil aviation policy should be reviewed with a view to ensuring convenient and least-cost access. This would necessitate weighi.ng the financial interests of THY against economic returns in the tourism sector and the economy as a whole. Air charter operations, by both domestic and foreign airlines, should be encouraged and foreign airlines should be granted continuation rights on the basis of recipients. 5. Market Promotion 8.59 Concurrent with the development of the "product" within Turkey-- the augmentation of suitable accommodation capacity and other tourism facilities, supported by adequate infrastructure, and improved, convenient, least-cost transport--a more intensive effort to market that "product" abroad will neec- to be made. Such an effort would entail informing the travelling public abroad of the available attractions in various areas in order to generate a widespread interest to visit the country, namely to develop latent demand. It would also entail inducing the travel trade in the market countries to promote specific sales for travel to Turkey, so as to maximize the conversion of latent demand into consummated demand. 8.60 The Ministry of Tourism and Information maintains bureaus in fifteen foreign countries. The budget for overseas tourism promotion amounts to about US$3 million annually. This budget can be seen to be wholly inadequate when compared with the overseas promotional expenditures of Greece which amounted to about US$20 million in 1980 and produced 4 1/2 times Turkey's number of visitors. A rule of thumb often used internationally is to allocate $5 per visitor the previous year for next year's overseas market promotion. On this basis, the Turkish 1981 budget should amount to at least US$6 million, or double the present allocation, and rise in subsequent years.pari passu with traffic growth. 8.61 Furthermore, the operational style of the overseas bureaus should be changed in order to emphasize commercial aspects. At present, the bureaus are headed by officials from the Ministry who rotate service at the Ministry with tours of duty abroad. Many of them have little experience in the comnercial practices of the travel trade and tend to concentrate on the passive dissemination of generalized information rather than working with the local trade on consummating actual sales. Consideration should therefore be given to establishing a semi-autonomous overseas tourist promotion agency, appointed by the Minister of Tourism, which would draw - 359 - its staff from the travel'trade and be suitably remunerated outside civil service regulations. Such an agency would work closely with the local and foreign private sectors, with the special tourist authorities to be established in priority tourist zones, and with government officials both within the Ministry of Tourism and within other relevant Ministries. Such an agency would also enter into contracts with professional marketing firms in major market countries. k. - 360 - Annex 8.1 Page 1 of 5 DOMESTIC RESOURCE COSTS OF EARNING FOREIGN EXCHANGE FROM TOURISM A 8.1 A calculation of the domestic resource costs incurred Ly the tourism sector in Turkey in earning foreign exchange demonstrates that such costs are markedly lower than those for many other foreign exchange earning activities. This would suggest that the tourism sector should be accorded priority in the future development of the economy. A 8.2 The calculation reported in Table A 8.1 is based on 1980 data when the foreign exclhange receipts from tourism were reported to total US$326e7 million (exclusive of international fare payments). Of this amount, 89 percent are estimated to have been spent by visitors staying in accommodations (stopover visitors) and 11 percent by those who did not (cruise passengers, other one-day excursionists and transits), A 8.3 Surveys have shown that about 57 percent of stopover tourists' expenditures take place within accommodation establishments. The weighted average share of wages in total revenues for eleven hotels owned by the State Pension Fund has been shown to be 45.8 percent (see Table 8.10). Accordingly, using the average 1980 rate of exchange of TL 6.038 to US$1.00, the total direct labor costs are calculated at TL 5,771.8 million (see Table A 8.1). A 8.4 Supplies used by international visitors within hotel accommodations amounted to a weighted average of 38.6 percent of total revenues, according to the 1980 accounts of the eleven hotels. However, 7 percent of such supplies were imported, so that 35.9 percent of total revenues was spent on local purchases. Furthermore, an estimated 15 percent of costs of such purchases went for taxes. Thus, using the 1980 average rate of exchange, the total cost of local supplies, net of taxes, is calculated at TL 3,845.5 million (see Table A 8.1). A 8.5 In order to calculate the value of the 1980 amortization of capital, the total capital value of the existing 56,000 beds in accommodation establishments was estimated, using 1980 replacement costs (see Table A 8.2). Since only 30 percent of the total occupancy was by international visitors, only that proportion of capital costs is ascribed to earning foreign exchange from them. Finally, an average 25-year life is assumed for eachi establishment. Thus, the 1980 amortization of capital is calculated at TL 557.2 million (see Table A 8.1). In addition, the opportunity cost of capital is assumed to be 12 percent so that a further TL 1,671.2 million is accordingly included (see Table A 8.1). - 361 - Annex 8.1 Page 2 of 5 A 8.6 Land values are assumed to average 10 percent of capital costs and to have an opportunity cost of 12 percent. Accordingly, the 1980 cost of the land occupied by accommodation establishments used by international visitors is calculated at TL 167.2 million (see Table A 8.1). A 8.7 The revenue derived from providing goods and services to international tourists outside accommodation establishments (e.g. other food and beverages, shopping, entertainment, sports and internal transport), equals the remaining 43 percent of receipts from tourists in accommodations (see para A 8.3). Direct labor costs of providing these goods and services are estimated at 25 percent of such revenues. At the average 1980 exchange rate, these amount to TL 3,059.5 million. A 8.8 Local supplies in non-accommodation activities are estimated at 35 percent of total revenues from such activities so that, exclusive of an average 15 percent for taxes, costs of such supplies are estimated at TL 3,640.8 million. A 8.9 The 1980 capital value of non-accommodation tourism enterprises is assumed to amount to one-third of the capital value of accommodation establishments. With an average asset life of ten years, the 1980 amortization cost of capital is calculated at TL 448.2 million. At 12 percent, the opportunity cost of such capital totals TL 537.8 million. Finally, with an estimated land value of 5 percent of capital costs, the opportunity cost of land at 12 percent totals TL 26.9 million. A 8.10 On the basis of the foregoing, the total 1980 domestic resource costs in earning foreign exchange from international tourists amnounted to TL 19,726.1 million. A 8.11 Gross foreign exchange receipts were, as stated, US$326.7 million. The foreign exchange costs of obtaining these receipts (imports of goods and services used in the international visitor trade both on current and capital account) are estimated at 8 percent. Thus, the net foreign exchange receipts accruing to the economy in 1980 amounted to US$300.6 million, and the domestic resource cost of earning a US dollar from international tourism in 1980 amounted to TL 65.6 (see Table A 8.1). A 8.12 Domestic resource costs may be understated -i,r ,.smuch as infrastructure costs related to tourism development have not been included. However, the costs of public utilities have been at least - 362 - ANNEX 8.1 Page 3 of 5 partially included in the operating costs of the respective tourism enterprises. Also, by using data on costs incurred by state-owned enterprises for the entire sector, these costs are probably overstated. Finally, since there was a setback in international tourism in 1980 (arrivals down to 1.3 million from a level of more than 1.6 million in the previous few years), occupancy rates, and therefore foreign exchange receipts, were untypically low in 1980, while capital and land costs were of course fixed and labor costs were not completely variable (because of employment tenure). Accordingly, in years when capacity utilization is greater, the domestic resource cost of earning foreign exchange would be correspondingly lower. - 363 - ANNEX 8.1 Page 4 of 5 Table A 8.1: CALCULATION OF DOMESTIC RESOURCE COSTS OF EARNING FOREIGN EXCHANGE FROM TOURISM COSTS Accommodations TL million Direct Labor 5,771.8 (326.7 x 0.89 x 0.57 x 0.458 x 76.038) Local Supplies (exclusive of taxes) 3,845.5 (326.7 x 0.89 x 0.57 x 0.359 x 76.038 x 0.85) Amortization of Capital 557.2 (13,930 x 0.04) Opportunity Cost of Capital 1,671.2 (13,930 x 0.12) Land 167.2 Non-Accommodation Activities Direct Labor 3,059.5 ((326.7 x 0.89 x 0.43) + (326.7 x 0.11)) x 0.25 x 76.038 Local Supplies (exclusive of taxes) 3,640.8 ((326.7 x 0.89 x 0.43) + (326.7 x 0.11)) x 0.35 x 76.038 x 0.85 Amortization of Capital 448.2 (4,482 x 0.10) Opportunity Cost of Capital 537.8 (4,482 x 0.12) Land 26.9 (4,482 x 0.05 x 0.12) Total: 19,726.1 RECEIPTS IN FOREIGN EXCHANGE US$ million Gross Receipts 326.7 Inputs (8%) 26.1 Net Receipts 300.6 DOMESTIC RESOURCE COST 19,726.1 TL 65.6 per US$ 300.6 - 364 - ANNEX 8.1 Page 5 of 5 Table A 8.2: ESTIMATED 1980 REPLACEMENT COST OF ACCOMMODATION ESTABLISHMENTS Type and Class Cost per Bed Number Total Cost (TL million) ('000) (TL million) Hotels; Deluxe 1.87 5.1 9,537 1st 1.43 3.4 4,862 2nd 1.04 6.4 6,656 3wd 0.74 8.2 6,068 4th. 0.50 13.3 6,650 Motels: 1st 0.74 6.4 4,736 2nd 0.50 3.5 1,750 Holiday Villages; 0.96 5.6 5,376 Guest Houses; 0.50 1.6 800 Total 46,930 P A R T I I I METHODOLOGICAL AND STATISTICAL ANNEX - 365 - ANNEX I A SECTOR MODEL OF TURKEY'S AGRICULTURE A. Introduction A 1.1 Turkey's agriculture has the potential for producing a rich array of continental products (i.e., cereals, cotton, tobacco and livestock) and Mediterranean crops (fruits and vegetables). This fact reflects the variety of soils and agro-climatic zones in the country, and the three-fold role of agriculture as: (i) domestic supplier of final consumption goods, (ii) domestic supplier of raw materials for industrial transformation, and (iii) foreign exchange earner. A 1.2 Because of such a complex product structure and the use of common resources, it would be misleading to analyze the question of comparative advantage by making calculations for each agricultural product respectively. Rather, there is a need for a simultaneous consideration of all products taking account of the trade-offs among them. A 1.3 This Annex presents the results of an analysis of comparative advantage and alternative agricultural policies based on an agricultural sector model. The model has been developed as a tool for hypothesis testingi based on secondary data and field observations during a short visit to Turkey. 1/ It is used to address the following four questions: (a) does Turkey have a -'omparative advantage in agriculture and in which products? (b) how would the answer to (a) vary under alternative trade regimes? (c) what would be the equilibrium pattern of production under alternative trade regimes? (d) what would be the gains and the losses under alternative trade and agricultural policies? B. The Model A 1.4 The model adopted is of the partial equilibrium static variety (Duloy and Norton, 1975), but includes three further features that improve its realism and bring its performance closer to a general equilibrium mode: (i) risk aversion (Hazell and Scandizzo, 1974 and 1977); (ii) price-responsive input supply (Hazell, 1979); and (iii) income effects (Norton and Scandizzo, 1981). / See Appendix I for the documentation of the data used in the formula- tion of the model. - 366 - A 1.5 The objective function utilized in the model is a reformulation of the consumers' plus producers' surplus function used by Samuelson (1959) in his spatial equilibrium model. Given the structure of consumer demands, production activities, and trade possibilities, optimality entails equating supply to domestic plus foreign demand and prices to marginal costs for all commodities, making provisions for risk and allowing for the reservation cost of labor. The techniques used also take account of changes in incomes that any reallocation of resources implies and its effects on consumers' demand schedules. The latter are price responsive on the basis of elasti- cities estimated using Frisch's (1952) method. A 1.6 The model contains a feasibility set of 83 activities (listed in Appendix I), constituted by 26 production activities (rotations, indivi- dual crop and various livestock activities), 54 demand, export and import activities for final commodities plus a number of factor use activities. Even though the model is not formally regionalized, a set of region- specific constraints de facto separates the activities into an "Anatolia sub-model" for Central and Eastern Turkey and a "waterfront" submodel for the Thrace, Aegean, Black Sea and Mediterranean regions. The land classes used (see below) also partly correspond to regional boundaries. A 1.7 The model makes allowance for processing. In livestock raising, processing activities involve transforming feedgrains into concentrates. For other types of processing for final consumption, commodity prices reflect the percentage share of the commodity (assumed fixed at the 1978 level) that is consumed or exported in processing form. A 1.8 Fixed resources include labor, tractors, six land classes (undif- ferentiated land, grape land) and five types of livestock (mules, bullocks, beef bovine, milk bovine, and ovine). Risk is introduced in the model using a risk cost proportional to the mean absolute deviation of the gross revenue from the trend in each activity 1/ based on a five-year (1974-78) time series of prices and yields. Finally, purchasable inputs are labor (at endogenous prices), fertilizer (nitrogen, phosphate, and potassium at exogenous prices), tractor services, and investment activities (tractor purchases, or expansion of irrigated land). C. Base Year Solution and Validation of the Model A 1.9 The model constructed has been validated by comparing its solution to the base year (1978) data for production, consumption, trade, factor use and prices. In order to reflect the trade constraints imposed by import quotas, export licensing and foreign exchange management, imports and the exports of wheat and barley have been assumed to be limited by the actual amounts traded. Furthermore, the low foreign demand elasticities for hazelnuts, tobacco and tea have been taken into account by using marginal revenues rather than prices for all exports above base year levels. For all other commodities, marketing costs have been assumed to rise with exports. 1/ See Hazell and Scandizzo (1974 and 1977) for details of the programming technique. - 367 - A 1.10 Table A 1.1 shows the results of the validation test for production levels. In turn, comparisons of: (i) the prices estimated on the model, (ii) the support prices, (iii) the CIF prices, and (iv) the FOB prices are presented in Table A 1.2. A 1.11 As Table A 1.1 shows, the model solution tends to closely approximate the base year data for the majority of products considered. The model, however, tends to "overshoot" actual production levels for livestock products, while it underpredicts the production of cotton, wheat, corn, and barley. This is related to the fact that these crops are more attractive to large farmers than other irrigated crops (such as citrus and vegetables) due to supervision costs and the low opportunity cost of land. D. Comparative Advantage and Effective Protection A 1.12 The base solution of the model reported in Table A 1.3 permits investigating the question of protection and comparative advantage. The first two columns of the table show the cost per ha of traded and non-traded inputs. Traded input costs include most cash inputs such as fertilizer, the import component of tractor costs, and, in the case of livestock, fodder and concentrates. All these inputs are evaluated at CIF prices. Domestic resource (non-traded input) costs include labor (atreservation and shadow costs), the domestic component of tractor costs, land costs (at the shadow prices of various types and land), and risk costs. Domestic prices have been converted into US dollars at the official exchange rate (OER = 25TL/US$). A 1.13 The third and fourth columns of the table show the value of production at domestic prices, converted at the OER and at border prices, respectively, while the fifth and sixth columns show the corresponding value added figures obtained substracting the values of the inputs traded in column 1. The seventh column presents the DRC measure, obtained by dividing domestic resource costs by value added at border prices and multiplying the result by the ratio between the official and a lower bound estimate of the shadow exchange rate (SER = 35TL/US$) 1/. The eighth column shows the effective rate of protection, the ratio of value added at domestic prices to value added at border prices, and the ninth column the nominal rate of protection (the corresponding ratios between prices). A 1.14 While more precise indications of comparative advantage will be offered by model solutions under alternative trade scenarios (in Section E),-a few general observations may be derived from the summary measures presented in Table A 1.3. First, the cost of traded inputs per ha is low for four major crops: wheat, barley, rye and pulses. These crops use relatively little fertilizer per ha and utilize less machinery than competing crops, such as corn and rice. Even though the latter have higher value added per ha, the cost of traded inputs may make their production 1/ Because the overall effective protection coefficient for agriculture is 1.4, 35TL/US$ (equal to 1.4 x OER) can be considered a lower Lound for the shadow exchange rate, i.e., the shadow exchange rate that would prevail if the coefficient of effective protection oA the rest of the economy were also 1.4. - 368 - Table A 1.1 COMPARISON OF PRODUCTION LEVELS BETWEEN ACTUAL 1978 DATA AND MODEL SOLUTION (000 tons) 1978 1978 Base Crop Actual Solution B/A Wheat 16,769 15,384 0.92 Corn 1,300 1,191 0.92 Rye, etc. 1,019 1,069 1.05 Rice 305 347 1.14 Barley 4,750 4,418 0.93 Sunflower 485 523 1.08 Sugarbeet 9,075 9,790 1.08 Tea 94 114 1.21 Tobacco 288 327 1.14 Cotton 475 191 0.40 Roots 3,660 4,110 1.12 Pulses 814 948 1.16 Grapes 3,496 3,500 1.00 Olives 1,100 1,103 1.00 Vegetables 11,815 13,198 1.12 Citrus 1,081 1,163 1.08 Hazelnuts 305 293 0.96 Fruits 2,505 2,470 0.99 Beef 239 390 1.63 Cow Milk 3,480 3,932 1.13 Mutton'& Goat 384 526 1.37 Wool 56 86 1.54 Ewe Milk 1,710 2,054 1.20 -369 - Table A 1.2 COMPARISON OF BASE YEAR, IMPORT, EXPORT AND ENDOGENOUS PRICES Endogeneousl/ Import Export (model Crop 19781/ CIF FOB generated) Wheat 127.20 108.11 95.73 Corn 174.40 165.60 Rye,etc. 118.00 106.40 83.61 Rice 557.20 353,700 301.87 Barley 134.00 120.53 86.87 Sunflower 328.40 255.32 Sugarbeet 29.60 21.44 Tea 2,502.40 1,537.50 1,487.91 Tobacco 1,959.20 2,912.73 679.34 Cottdn 1,241.20 1,253.75 1,311.82 Roots 265.60 141.71 91.51 Pulses 788.00 387.40 276.46 Grapes 504.80 268.50 268.80 Olives 494.80 166.56 410.68 Vegetables 266.40 119.67 101.40 Citrus 267.60 193.79 126.30 Hazelnuts 818.40 1,928.03 973.87 Fruits 446.00 179.71 212.74 Beef 1,618.00 Cow Milk 401.60 274.83 Mutton 1,750.00 1,666.70 Wool 3,056.80 3,237.59 104.40 Ewe Milk 360.00 Sheep & Goat 1/ In dollars per ton from domestic currency at the average official exchange rate (25TL/US$). Table A 1.3: TURKEY: ANALYSIS OF COMPARATIVE ADVANTAGE IN AGRICULTURE IN 1978 (1) (2) (3) (4) (5) (6) (7) (8) (9) Production Production Value Value Value, at Value, at Added, at Added, at NET VALUES Traded Non-Traded Domestic Border Domestic Border (Exchange rate = 35TL/$) Inputs Inputs Prices Prices Prices Prices DRC EPC NPC (ER=25/TL/$ (ER=25TL/$) Wheat 102.302 95.793 262.735 223.924 180.085 121.621 .563 1.056 .838 Corn 161.806 224.482 390.656 262.304 250.194 100.498 1.596 1.788 1.064 Rye, etc. 94.382 25.034 167.560 151.088 81.421 57.706 .315 1.026 .792 Rice 507.425 776.041 2,379.244 1,579.815 1,898.769 1,072.390 .517 1.265 1.076 Barley 69.992 87.988 245.220 220.570 185.257 150.578 .417 .879 .794/ Sunflower 172.550 150.000 384.228 315.385 265.177 142.835 .750 1.326 .870 Sugar-Beet 287.217 417.394 1,011.432 542.278 798.625 255.061 1.169 2.237 1.332 Tea 359.841 1,133.414 4,078.912 2,506.125 3,785.493 2,146.285 .377 1.260 1.163 Tobacco 193.303 318.285 1,920.016 2,854.475 1,741.406 2,661.285 .085 .467 .480 Cotton 309.616 549.149 906.076 915.237 634.615 605.622 .648 .748 .707 Roots 324.038 508.380 3,739.648 1,995.277 3,455.913 1,671.239 .217 1.477 1.339 Pulses 88.689 138.102 985.000 484.250 908.696 395.561 .249 1.641 1.453 Grapes 315.329 513.377 2,236.264 1,190.784 1,931.131 875.455 .419 1.576 1.341 Olives 67.502 180.998 672.928 226.522 614.610 159.020 .813 2.761 2.122 Vegetables 3,391.074 4,260.790 7,952.040 7,154.150 4,596.790 3,763.075 .809 .873 1.590 Citrus 2,399.779 3,674.844 5,459.040 6,401.316 3,142.945 4,001.537 .656 .561 .986 Hazelnuts 146.677 974.234 818.400 2,048.030 695.612 1,901.353 .366 .261 .303 Fruits 1,093.058 2,140.220 4,348.500 -2,922.173 2,267.440 1,829.115 .836 1.276 1.773 Beef .681 Cow Milk 1.127 Mutton .750 Wool .982 Ewe Milk 1.010 Mule 8.162 41.497 Bullocks 15.315 73.912 38.832 40.757 24.807 25.442 2.075 .696 Beef Bovine 25.295 132.508 82.842 86.948 59.677 61.652 1.535 .691 Milk Bovine 21.379 139.232 333.082 250.385 313.504 229.006 .434 .978 Ovine 1.087 8.388 44.919 37.165 4.923 36.078 .166 .870 TOTAL 156.875 257.551 698.273 555.498 554.691 398.623 .462 .994 .898 - 371 - unattractive to the farmers. A similar conclusion holds for fruits and olives as against vegetables and grapes. A 1.15 Second, domestic resource cost is relatively high for: (i) labor intensive crops, such as citrus and vegetables, (ii) crops using irrigated land, and (iii) crops whose growth is limited by the availability of a specific land type or climate (tea, vegetables, fruits and hazelnuts). The production and price risk that farmers have to accept for some of these crops is also an important elements of costs, particularly for fruits, vegetables and citrus. A 1.16 Third, the crops with relatively high domestic resource costs tend to have the highest value added per ha, both in terms of domestic and foreign prices, although the actual figures in the two cases may show larger differences. As a consequence, the degree of comparative advantage is not easily predictable since both costs and benefits tend to increase simultaneously as one proceeds from land intensive crops; such as cereals,- to water and labor intensive ones, such as roots, citrus, fruits and vege- tables. A 1.17 Except for beef (hampered by the present low yields), and sugar- beets (affected by the domestic high cost of refining sugar), in terms of the DRCs, the actual measures of comparative advantage, (and to a lesser extent NPCs and EPCs), it would seem that a socially profitable expansionof agriculture could occur in virtually all the crops considered. At the same time, while the question of the optimal degree of such an expansion will be investigated in Section E, the results of the DRC analysis suggests that the most profitable direction of expansion would be in irrigated crops and lamb. A 1.18 It further appears that even if one considers the over valuation of the currency, the protective measures did raise the value added of a few privileged crops, such as cereals, ;ugarbeets, and tea, while value added in cotton, roots, fruits and vegetables were allowed to fall below their border price values. Thus a realignment of producers' incentives is clearly called for and may go a long way to foster the expansion of the sector along comparative advantage lines. E. Gains and Losses from Protection and Free Trade Scenarios A 1.19 A basic experiment to explore the extent of comparative advantage for each product is generated by the hypothesis that border prices and an exchange rate of $35$/TL would become fully effective, with adjustment made for optimal taxes on traditional exports. Assuming that this can occur instantly (that is in the base year 1978), or gradually over time, provides alternative scenarios. A. 1.20 Table A 1.4 shows the effects that free trade would have on pro- duction, consumption and trade patterns. First, while rye, oats and millet production would increase, the production of competing cereals, such as wheat, barley, corn and rice would decrease. Second the production of import-substitutina crops such as sugarbeets would drastically decline. Table A 1.4 PATTERNS OF PRODUCTION, CONSUMPTION AND TRADE UNDER PRESENT AND FREE TRADE SCENARIOS (000 tons) (1978) Base Solution (Exchange Rate = 25TL/US$) Free Trade Solution (Exchange Rate = 35TL/US$) 1/ Crop Import Export Consumption Production Import Export Consumption Production Wheat 2,090.000 10,634.931 15,383.663 3,917.989 7,785.609 13,650.000 Corn 1,083.628 14190.799 146.199 1,019.746 974.400 Rye, etc. 62.000 1,006.628 1,068.764 3,563.066 868.956 4,432.022 Rice 242.824 346.891 71.415 208.408 226.310 BarTey 15.000 2,906.250 4,418.405 17.367 2,343.750 3,568.500 Sunflower 523.082 523.082 80.118 443.988 363.870 Sugarbeet 9,789.929 9,789.929 1,692.668 8,800.027 7,107.360 Tea 2.000 112.240 114.240 43.000 87.400 130.400 Tobacco 77.000 250.246 327.246 198.524 159.094 656.600 Cotton 191.090 191.090 100.000 159.176 357.700 Roots 29.000 4,081.244 4,110.244 500.000 3,950.528 4,050.528 Pulses 118.000 829.771 947.771 348.262 790.934 1,290.934 Grapes 202.293 3,297.407 3,499.700 3,151.438 3,499.700 Olives 1,102.960 1,102.960 360.627 1,187.507 826.880 Vegetables 10.000 13,188.310 13,198.310 4,257.646 12,786.704 17,044.350 Citrus 140.000 1,022.607 1,162.607 922.453 922.453 Hazelnuts 162.000 130.555 292.555 147.716 85.800 233.000 Fruits 2,470.343 2,470.343 716.059 2,353.062 3,069.122 Beef 389.532 389.532 167.631 172.486 340.118 Cow Milk 3,932.400- 3,932.400 3,459.977 3,459.977 Mutton 28.000 498.400 526.400 429.185 338.200 767.385 Wool 85.593 85.593 64.998 59.780 124.778 Ewe Milk 2,054.244 2,054.244 2,994.672 2,994.672 1/ Wheat, corn, rice and barley consumption is expressed in milled terms. Conversion factors are 0.8 for wheat, 0.91 for corn, 0.7 for rice and 0.66 for barley. - 373 - Third, a large expansion of most export crops, including vegetables, fruits, and lamb would occur. Although these effects would need time to materialize, the numerical values of the model solution can be interpreted A 1.21 A further indication of the potential for trade expansion is shown in Table A 1.5, where actual trade balances for the present and the free trade scenario are compared for broad product and input groups. As the table shows, the free trade solut!on implies a much larger amount of trade with exports rising five times and imports (including imported inputs) increasing by one-half. Correspondingly, there would be a sizable net gain in foreign exchange as the expansion of exports would more than compensate for the increased purchases of imported inputs, such as fertilizer and fuel. A 1.22 Although the model results should be interpreted in terms of directions rather than magnitudes of change, they suggest that a movement toward freer trade would release a very large export potential in Turkish agriculture. WIhile resources would be shifted from some products (such as sugarbeets or dairy production) to others, most sectors would expand as a resiult. A 1.23 In order to disentangle the effects of exchange policy from the effects of the market interventions, Table A 1.6 presents two solutions of the model under the alternative hypotheses that: (i) the exchange rate is devalued from 25 to 35 TL per US dollar, with no other changes in market interventions, and (ii) market intervention is discontinued but the exchange rate remains at the same value. It is apparent that the two policies, taken individually, create only a fraction of the gains achievable under a full free trade solution, and both would create distortions and over expansions in sectors that happen to be particularly favored by the devaluation or the removal of the market intervention policies. A 1.24 In the free trade solution a substantial part of export growth is achieved at the expense of consumption. A further possibility that can be investigated is that while trade is free, domestic consumption is kept at 1978 levels by appropriate subsidies. Table A 1.7, which reports production, consumption and trade patterns under the latter assumption, shows that production levels would be basically unaltered from the free trade solution, except for a fall in the production of pulses to compensate for an increase in production of barley and increases in the production of fruits and citrus. At the same time this solution would imply a somewhat larger amount of imports and a smaller amount of exports. Table A 1.8 shows, however, that exports would quadruple as compared to the base solution while imports would rise only marginally. A. 1.25 Table A 1.9 reports estimates of welfare gains and losses from free trade. The overall effect of the trade regime prevailing in 1978 was to generate a loss of welfare of about $2.0 billion, in terms of the welfare measure of consumer's plus producers' surplus plus labor income. - 374 - Table A 1. 5 COMPARISON OF TRADE BALANCE UNDER PRESENT AND FREE TRADE SCENARIO (Million US$) Base Year Free Trade Product Import Export Net Import Export Net Fruits 339.5 339.5 497.6 497.6 Grains 235.0 235.0 46.8 984.7 937.9 Others 277.2 277.2 64.6 1,910.8 1,846.2- Grapes & Olives 54.4 54.4 82.3 123.8 41.5 Vegetables 1.2 1.2 541.6 541.6 Livestock 46.7 46.7 1,019.4 1,019.4 Iniputs 1/ 1,009.1 -1,009.1 1,311.0 - -1,311.0 TOTAL 1,009.1 953.9 -55.2 1,504.7 5,077.9 3,573.2 1/ It includes fertilizers, pesticides, machinery and fuel. Table A 1.6 COMPARISON OF RESTRICTED TRADE/DEVALUATION SCENARIO (SCENARIO 1) WITH FREE TRADE/OVERVALUED EXCHANGE RATE SCENARIO (SCENARIO 2) Crop Export Consumption Production Import Export Consumption Production Wheat 2,090.000 8,497.939 12,712.424 2,137.163 9,210.270 13,650.000 Corn 891.982 980.199 286.599 1,147.510 974.400 Rye, etc. 62.000 972.312 1,034.312 3,093.736 937.060 4,031.596 Rice 225.616 322.300 108.290 234.220 .226.310 Barley 15.000 2,484.375 3,779.201 2,355.212 3,560.500 Ln Sunflower 470.353 470.353 132.848 496.718 363.870 Tea 2.000 103.960 105.960 8.169 103.960 112.129 Tobacco 77.000 250.246 327.246 463.324 193.276 656.600 Cotton 76.346 169.814 246.160 166.610 191.090 357.700 Roots 29.000 4,081.244 4,110.244 100.000 3,950.528 4,050.528 Pulses 118.000 829.771 947.771 500.000 13,188.310 13,688.310 Grapes 275.278 3,224.422 3,499.700 275.278 3,224.422 3,499.700 Olives 1,102.310 1,102.960 418.108 1,244.988 826.880 Vegetables 10.000 13,188.310 13,190.310 500.000 13,188.310 13,688.310 Citrus 140.000 1,022.607 1,162.607 955.838 955.838 Hazelnuts 162.000 117.378 279.378 244.200 85.800 310.000 Fruits 178.000 2,470.343 2,648.343 147.755 224.541 372.295 Beef 356.527 356.527 3,787.337 3,787.337 Cow-Milk 3,619.200 3,619.200 365.105 402.280 767.385 Mutton 28.000 491.690 519.690 60.606 64.172 124.778 Wool 84.502 84.502 60.606 64.172 124.788 Ewe-Milk 2,028.060 2,028.060 2,994.672 2,994.672 - 376 - Table A 1.7 FREE TRADE SOLUTION WITH MINIMUM CONSUMPTION LEVELS (000 tons) Crop Import Export Consumption Production Wheat 11,743.000 14,678.750 Corn 325.599 1,183.000 974.400 Rye,etc. 729.640 957.000 1,686.640 Rice 115.118 239.000 226.310 Barley 3,125.000 4,734.844 Sunflower 121.130 485.000 363.870 Sugarbeets 1,967.640 9,075.000 7,107.360 Tea 38.400 92.000 130.400 Tobacco 445.600 211.000 656.600 Cotton 160.700 197.000 357.700 Roots 100.000 3,905.908 4,005.908 Pulses 500.000 790.934 1,290.934 Grapes 348.262 3,151.438 3,499.700 Olives 360.627 1,187.507 826.880 Vegetables 4,257.646 12,786.704 17,044.350 Citrus 941.000 941.000 Hazelnuts 90.000 143.000 233.000 Fruits 707.195 2,353.062 3,060.257 Beef 103.084 239.000 342.084 Cow Milk 3,480.000 3,480.000 Mutton 411.385 356.000 767.385 Wool 63.778 61.000 124.778 Ewe Milk 2,994.672 2,994.672 - 377 - Table A 1.8 IMPORT-EXPORT BALANCE IN THE FREE TRADE MINIMUM CONSUMPTION SOLUTION (Million US$) Product Import Export Balance Fruits 384.6 384.6 Grains 86.7 94.9 8.2 Others 83.5 1,710.9 1,627.4 Grapes & Olives 82.3 123.8 41.5 Vegetables 541.6 541.6 Livestock 882.3 882.3 Inputs 1,264.0 -1,264.0 TOTAL 1,516.5 3,738.1 2,221.6 Table A 1.9. GAINS AND LOSSES FROM FREE TRADE (Million US$) Total Total Value of Welfare Labor Non-Labor Production Consumers' Producers' Consumption Measure 1/ Income Costs Value Surplus Surplus Subsidies Base @25 31,286 2,367 3,703 12,707 22,282 6,637 1,300 Free Trade 33,300 3,630 2,509 14,842 20,967 8,703 - FT with Cons. 32,809 3,692 2,422 14,815 20,416 8,701 551 Subsidies Gains From Free Trade +2,014 +1,263 -1194 +2,135 -1,315 +2,066 -1,300 Gains from FT +1,523 +1,325 -1,281 +2,108 -1,866 +2,064 -749 with Cons. Sub- sidies 1/ Net social pay-off defined as the sum of consumers-, producers' surplus and labor income. * As the table shows, most of the gains from free trade would be maintained under the free trade-minimum consumption solution. Sizeable subsidies (551 million $) would be needed, however, to support the consumption of necessities whose prices would otherwise be dramatically raised by the trade regime. - 379 - F. Projections to 1990 A 1.26 Further indications of the impact of alternative trade policies can be obtained by solving the model for a projected year. For these simulations, 1990 was selected as a long-term horizon sufficiently far from the base year to enable us to make the assumption that adjustments to the free trade pattern would be carried out. Briefly, it is assumed that GDP rises at a rate of 3% a year for the first three years and 4% thereafter and that other variables such as yields or investment priorities increase at the rates realized in the past 5 to 10 years. A 1.27 The version of the model used in the projection incorporates income effects as outlined in Norton and Scandizzo (1981) such that at endogenous increase in agricultural income have the two-fold consequence (i) increasing country's GDP through a sector multiplier,' and (ii) shifting the demand functions according to the income increase and the appropriate Engel elasticitye A 1.28 Table A 1.10 presents the basic results of the projection runs for two alternative scenarios: one in which the exchange rate remains overvalued (Scenario 1) and one (Scenario 2) characterized by a closer to equilibrium exchange rate (35TL/$) and free trade except for minimum consumption constraints (at the base year level). A 1.29 As the table demonstrates, while the two alternatives are rather similar for the predicted growth rates of most field crops, and sheep production, they show substantial differences for tea, pulses, citrus, fruits and beef. This table further makes comparisons with historical growth rates and provides DRC estimates. A 1.30 Further insights on the reallocation of resources suggested by the model can be obtained by comparing the shadow prices of the land con- straints. These are the values of the marg4nal productivities of the six land classes considered and can be interpreted as the capital cost per ha that one should be prepared to pay to expand any of the particular land improved type. As Table A 1.11 shows, a movement toward freer trade and an equilibrium exchange rate would considerably increase land productivity and create sizable incentives to investments in land improvements. These might include: (i) replacement of the older vineyards, (ii) reconstitution of the olive trees, (iii) land clearing (e.g., destoning in Southeast Anatolia), and (iv) completion of irrigation works and fuller utilization of irrigated land. A 1.31 As for the other constraints, neither labor nor tractors have shadow prices significantly different from zero in either of the solutions, thus confirming the hypothesis that they are available in abundant supply and are not being fully utilized. Shadow prices also indicate that the maintenance of minimum consumption levels would require subsidies of the order of $60 per ton (of processed products) for grains and pulses and about $40 per ton for citrus. - 380 - Table A 1.10 AVERAGE ANNUAL PERCENTAGE INCREASE IN PRODUCTION BY PRODUCT UNDER ALTERNATIVE TRADE SCENARIOS: PROJECTIONS TO 1990 Scenario A Scenario B [Overvalued [Equilibrium Historical Rates Crop Exchange Rate] Exchange Rate] [Average 1975-80] DRC (ER=35TL/$) Wheat 0 0 3.59 1.026 Corn -0.44 -0.44 -0.83 2.542 Rye,etc. -0.92 -0.92 -4.53 0.581 Rice -2.30 -2.30 13.33 1.0i3 Barley -2.18 2.34 4.67 0.173 Sunflower -1.78 -1.78 -0.24* 1.078 Sugarbeets -1.43 -1.43 5.33 2.476 Tea 3.38 0.46 18.79* 0.811 Tobacco 7.29 7.29 3.33 0.143 Cotton 6.67 6.67 -0.87 1.224 Roots 1.10 0.95 3.28* 0.380 Pulses 5.43 4.24 3.73 0.380 Grapes 0.32 0.05 0.61 0.155 Olives -1.16 -1.16 2.38* 0.350 Vegetables 4.01 5.94 5.04 0.692 Citrus 3.94 2.44 4.90** 1.384 Hazelnuts 1.33 0.53 0.00 1.046 Fruits 6.21 6.44 3.74** 1.053 Beef 1.83 1.83 -6.41* 0.885 Cow Milk 1.89 1.89 2.35 0.885 Mutton 3.49 3.19 -6.25* 0.357 Wool 3.19 3.19 2.13 0.357 Ewe Milk 3.19 3.19 2.11* 0.357 TOTAL 0.679 *1975-1978 - 381 - Table A 1.11 SHADOW PRICES OF LAND CONSTRAINTS ($/ha) Land Type Base Scenario A Scenario B Grape Land 338 Olive Land 88 Irrigated Land Vegetable 896 Tree 774 2,227 2,429 Other 97 661 575 TOTAL 0 12 38 - 382 - G. Some Conclusions A 1.32 The results are based on a limited and preliminary set of runs of an aggregate sector model based on secondary data and field observations assembled in the course of a brief visit to Turkey. Even though it has to be considered a rather rudimentary if integrated picture of Turkish agri- culture, it permits drawing some conclusions on comparative advantage, alternative trade policies and development options. A 1.33 First, Turkish agriculture as a whole and most of its sub- sectors appear to hold a considerable degree of comparative advantage over the other sectors of the economy. Despite of the trade-offs created by competition for fixed resources (chiefly irrigated land, and the present stock of trees and animals) a reallocation and more intensive use of land,. labor, tractors and fertilizers could be achieved with considerable social gains. A 1.34 Second, the results suggest that a policy of free trade and equilibrium exchange rates would be optimal as it would permit the largest release of the production and trade potential of the agricultural sector. Such a policy would have the consequence of expanding export crops such as citrus, vegetables and livestock at the expense of import substituting crops such as sugarbeets, sunflower, some cereals and milk. A 1.35 Third, alternative policies which would fall short of correcting for the devaluation of the currency or of eliminating existing, distortions, would fail to create most of the gains available with full free trade and would themselves create distortions. A 1.36 Fourth, a policy of trade liberalization cum consumption subsi- dies, having as a target the maintenance of per capita food consumption levels realized in 1978, would slightly fall short of the free trade achievements. The resulting increases in trade would still be very large and beneficial, and the expansion of the various subsectors would be in line with the full free trade solution. A 1.37 Once cast in a projection framework, the above conclusions imply that a policy of trade liberalization and realistic exchange rates would cause production and exports of a number of agricultural crops to grow in excess of historical rates. These products, which correspond to Turkey's comparative advantage in terms of the highest potential for fast growth are: tobacco, cotton, fruits, vegetables and livestock. Several agricultural products of importance in the present cropping patterns (wheat, barley roots and beef) would grow at less than historical rates, while productlon of some others would decrease. According to these projections the growth rate for the agricultural sector could average 5.7% over the 12 years between the base (1978) and the projection year (1990), a substantial improvement over the historical achievement of 3.5%. - 383 - A 1.38 Finally, the results suggest that irrigated land is the most tightly binding constraint for the development of Turkish agriculture, while other types of land, labor and machinery either have sharply lower shadow prices or are available in more than sufficient quantity. Efficient use of irrigated land is thus crucial to improve agriculture's development performance and should be favored by appropriate price incentives and water charge policies. - 384 - Appendix I AGRICULTURAL SECTOR MODEL FOR TURKEY: THE DATA The preliminary version of the agricultural sector model for Tur- key, is based on 24 single crop and livestock activities. On the input side, land, labor, animal power, tractor power and fertilizers are employed in addition to converted producers of the crop activities for livestock activities. The crop production activities are: wheat, corn, rye-oats- millet, rice, barley, sunflower, sugarbeets, tea, tobacco, cotton, roots, pulses, grapes, olives, vegetables, citrus, hazelnuts, fruits and feed. The livestock production activities are: mules, bull, beef-bovine, milk- bovine and ovine. Six classes of land, namely other land, irrigated land, tree land, olive land, grape land and vegetable land, and three classes of fer- tilizers, namely, N, P205, and K20 are used. The data employed are gathered mainly from SIS, SPO, FAO and other Turkish government or private agency publications. The results at this stage are preliminary and tentative, not only due to the simplifica- tions introduced in the model structure for lack of data, but also due to problems that remain with the existing data. It has not been possible to gather the time-series data required from a single source and hence it has been necessary to piece together the data from various publications and , sources. This on the other hand resulted in many places in inconsistencies and need for adjustments by the researchers in a fairly arbitrary way. While it is unlikely that the results will change significantly due to these data adjustments, they should nevertheless be taken with care. A. Crop. Production Activities Turkish statistics unfortunately do not permit the construction of an input-output table from a single source, since the detailed and representative technology coefficients needed for this study have not been the subject of a systematic study. Hence, the technological coefficients for the crop production activities as given in Table I.1 are obtained from four sources: (1) SIS, The Summary of Agricultural Statistics (1979); (ii) SPO, Unpublished documents; (iii) FAO Data from Agriculture AT2000 (1978); and (iv) SIS, Agricultural Structure and Production (1978). B. Livestock Production Activities The technological coefficients for livestock production activi- ties as presented in Table I.2 are taken partially from the Portugal Case Study (from RPO 672-11 "Agricultural Sector Framework Study")and partially from Turkish statistics. The "mule" activity includes the production of camels, horses, donkeys and mules. The bullock activity includes bullocks Table I.1. CROP PRODUCTION ACTIVITIES Rye Oats Notes Source Activity Unit Wheat Corn Millet Rice Barley Sunflower Sugarbeet Tea Tobacco Cotton 1 a Other land ha 1.6 1.0 1.0 1.0 1.6 1.0 1.0 1.0 1.0 2 b Irrigated land ha 0.14 1.0 0.68 0.1 0.96 3 c Tree land ha 1.0 4 d Grape land ha 5 e Olive land ha 6 f Vegetable land ha 7 g Labor hrs 414.0 988.9 87.4 3,000.0 384.8 750.0 1,757.0 1,795.9 1,542.9 2,269.8 8 h Animal power hrs 48.2 115.4 81.3 350.0 44.5 87.5 179.4 204.1 180.0 264.3 9 i Tractor power hrs 7.4 17.4 12.2 53.6 6.9 14.4 28.0 40.8 28.6 41.7 10 j Fertilizer N kg 36.4 59.2 16.6 157.0 19.4 96.4 136.9 248.0 28.4 82.8 11 k Fertilizer P kg 33.7 39.5 15.4 83.2 19.0 85.5 121.3 1.5 22.1 52.9 12 1 Fertilizer K kg 0.037 0.476 0.006 0.181 0.005 6.245 7.524 2.569 0.852 13 m Yield MT/ha 1.8 2.24 1.42 42.7 1.83 1.17 34.17 1.63 0.98 0.73 Notes Source Activity Unit Roots Pulses Grapes Olives Vegetables Citrus Hazelnuts Fruits Feed Irrigated Wheat 1 a Other land ha 1.0 1.0 1.0 1.0 2 b Irrigated land ha 0.4 0.04 0.12 0.4 1.0 0.12 0.2 3 c Tree land ha 1.0 1.0 1.0 4 d Grape land ha 1.0 5 e Olive land ha 1.0 6 f Vegetable land ha 1.0 7 g Labor hrs 2,347.8 671.1 819.2 467.2 3,200.0 1,777.8 400.0 921.7 852.4 99.4 8 h Animal power hrs 271.7 77.9 64.5 54.0 3,731.3 207.4 2.0 107.2 101.6 9 i Tractor power hrs 43.5 11.7 50.5 8.8 58.6 37.0 1.0 16.6 6.6 27.5 10 j Fertilizer N kg 81.4 15.3 21.1 19.4 78.5 176.0 64.2 24.5 7.9 50 11 k Fertilizer P kg 57.2 27.2 14.6 11.4 47.0 104.6 21.4 16.8 5.5 50 12 1 Fertilizer K kg 7.604 0.557 0.962 3.208 4.141 29.164 1.93 2.247 .301 5 13 m Yield MT/ha 14.08 1.25 4.43 1.36 29.85 20.4 1.0 9.75 3.8 14 n Feed yield MT/ha 1.5 15 o Forage yield MT/ha 8.1 - 386 - Table I.1 (continued) Notes 1 The technological coefficients are given for 1 ha of land for wheat, corn, rye-oats-millet, rice, barley, sunflower, sugarbeet, tobacco, cotton, roots, pulses and feed. 2 Percentage of the area cultivated. A weight of 0.5 is assigned for partially irrigated land. 3 The technological coefficients for tea, citrus, hazelnuts and fruits are given for 1 ha of tree land. 4,5 The technological coefficients for olive and grapes are given for 1 ha of olive and grape tree lands respectively. 6 The technological coefficients for vegetables are given for 1 ha of vegetable land. 7 Man-hour equivalents. It is assumed that 1 man-day = 8 man-hours. 8 Animal power = number of animals x 400. 9 Tractor power = number of tractors x 1,000. 10 Nutrient equivalent = amount of fertilizer N x 0.21. 11 Nutrient equivalent = amount of fertilizer P x 0.17. 12 Nutrient equivalent = amount of fertilizer K x 0.50. 13 Yi Qil978 x 1000 = Output in kg per ha in 1978. Ail978 14 Alfalfa grain + dried alfalfa + sainfoin grain + dried sainfoin + dried maize + dried cow vetch + dried wild vetch. 15 Green maize + green cow vetch + green wild vetch + green alfalfa + green sainfoin. Sources a, c, d, e, f = see notes 1, 3-6. b, g, h, i = FAO, AT2000 (1978). j, k, e = SPO, Chemical Fertilizer Consumption by Crops (unpublished). m, n, o = SIS, The Summary of Agricultural Statistics 1978 Also see notes and sources to Table 3 for fruits, nuts, citrus and tea. - 387 - Table I.2. LIVESTOCK, PRODUCTION ACTIVITIES Beef Milk Notes Source Activity Unit Mule Bullocks Bovine Bovine Ovine 1 a Labor hrs 36.48 48.68 132.56 246.24 19.16 2 b Animal power hrs 1372.00 1680.00 94.20 41.16 3 c Feed MT 0.81212 0.25163 0.8781 4 d Forage MT 1.45888 2.7375 4.5214 3.82132 0.19436 5 e Concentrate MT 0.02672 0.14413 6 f Beef MT 0.024 0.0512 0.0584 7 g Cow milk MT 0.5941 8 h Mutton MT 0.0123 9 i Wool Mt 0.002 10 j Ewe milk MT 0.048 Notes 1 Man-hours required to take care of the livestock 2 Animal power resulting from the livestock activities. 3,4 Feed and forage consumption by the livestock. 6, Covers the livestock slaughtered in municipal slaughterhouses and estimates of "private" slaughters. 5 - 0.128 wheat + 0.087 corn + 0.154 rye + 0.258 rice + 0.119 barley. Sources a-f Portugal case study. g-j SIS (1978) The Summary of Agricultural Statistics. - 388 - only. The beef bovine activity includes the production of cattle, young cattle and buffaloes. The milk bovine activity includes milk cows and buf- falo cows. Ovine activity only includes sheep and goat production. These activities cover over 80% of the total Turkish livestock activities. It should be pointed out that the yields for these activities, especially those related to beef and mutton production are likely to be underestimate, as they only reflect the livestock slaughtered or processed in municipal slaughterhouses and by the government fish, meat and milk organizations and estimates of "private" slaughters. C. Resource Availability The resource constraints employed to validate the 1978 base year solution and projected for 1990 projections are given in Table I.3. Turkish statistics on the distribution of cultivated area and forest area contain the following categories: area sown, fallow land, vegetable area, vineyards, area of fruit trees, olive groves and forests. The area of fruit trees including all fruit trees, citrus trees, nut trees and tea area, is reported to be 1,321,000 ha in SIS publications for 1978. When the tea, hazelnut and citrus tree areas known to be (53,000 + 310,000 + 53,000) = 416,000 ha subtracted from this total, one obtains 905,000 ha for fruit tree area which is very high. Therefore an estimate is used (257,000 ha) for fruit tree area, and hence a total of 673,000 ha for the tree-land area (see notes to Table I.3). Similarly, the fertilizer consumption figures in Table I.3 appeared to be understated for Fertilizer K and thus not employed in the validation of the base year solutions. It should be noted that the fertilizer consumption statistic by crop are not directly collected by SIS. Therefore the use of fertilizers by different crops are estimated and vary according to the estimation technique employed. The total labor and tractor inputs available are estimated from the number of agricultural labor force and number of tractors (see notes to Table I.3). D. Conversion Factors and Costs The conversion factors to convert 1 kg of raw produce of wheat, corn, rye, rice and barley to processed form and the costs associated with these, as well as the concentrates derived from the conversions are given in Table I.4. E. Input Costs The input cost employed are assumed to be $0.20 per hour of labor, $5.91 per hour of tractors, $0.210, $0.141 and $0.196 per kg of fertilizers N, P and K respectively. Also a fixed capital cost of $50 has been assigned for each hectare of cotton production activity. - 389 - Table I.3. RESOURCE AVAILABILITY Notes Sources Resource Unit Amount 1 a Total land 1,000 ha 24,552 2 b Grape land 1,000 ha 790 3 c Olive land 1,000 ha 811 4 d Vegetable land 1,000 ha 571 5 e Tree land 1,000 ha 673 6 f Irrigated land 1,000 ha 3,000 7 g Labor 1,000 hrs 29,475,000 8 h Tractor 1,000 hrs 370,259 9 i Fertilizer N MT 776,412 10 j Fertilizer P MT 634,982 11 k Fertilizer K MT 20,809 12 1 Mule 1,000 hd 2,495 13 i Bull 1,000 hd 2,176 14 n Beef-bovine 1,000 hd 4,441 15 o Milk-bovine 1,000 hd 8,289 16 p Ovine 1,000 hd 62,389 Notes 1 Area sown plus fallow land. 2,3,4 - 5 (Tea land 53,000 ha) + (Hazelnut land = 310,000 ha) + +((Fruit land = (number of fruit trees = 102,837,000)/(Area covered by 1 fruit tree = 50 m2)/(conversion to hectares = 10,000) = 514,000)). 6 Projected from the irrigated land of 2,333,000 ha. 7 ((Total civilians employed in agriculture = 9,085) + (Agricultural labor surplus and peak season = 740)) *3,000. 8 (Number of tractors in 1978) x 1,000. 9,10,11 Fertilizer consumption converted to nutrient terms using conver- sion factors 0.21, 0.17 12-16 See section B on livestock activities. Sources a-e SIS (1979) The Summary of Agricultural Statistics. f TUSIAD (1981) Tarim Raporu. g World Bank (1979) Turkey: Policies and Prospects for Growth. h,l-p SIS (1979) The Summary of Agricultural Statistics. i-k SIS (1979) Statistical Yearbook of Turkey. - 390 - Table I.4. CONVERSION FACTORS Raw Processed Product Product Cost Concentrate (1 kg) (kg) ($/M7T) (kg) Wheat 0.80 47.95 0.128 Corn 0.91 44.55 0.087 Rye 1/ 0.76 43.18 0.154 Rice 0.70 89.77 0.258 Barley 0.66 43.18 0.119 / The conversion factor for rye has not been employed and thus assumed to be 1, since the rye activity contains oats and millet in addition to rye. Source: Portugal Case Study. - 391 - F. Output Prices The TL/kg output prices are given in Table I.5 for years 1974- 1978. The prices given and used in this study .are the producers' prices. For activities which contain more than a single crop, such as rye-oats- millet, roots, pulses, vegetables, citrus and fruits weighted averages (weighted with share in output). In the cases of beef and mutton prices, there seemed to be important inconsistencies in SIS figures which gave pro- ducers- prices higher than the retail prices for these products. There- fore, the prices for beef and mutton are estimated by taking two-thirds of the retail price of the these products in Erzurum. G. Activity Yields The yields of the activities employed in this study are given in Table I.6. As in the case of activity output prices for multi-product activities a weighted average is estimated. The main difficulty in esti- mating the yields has been with the two of the tree-crops: fruits and cit- rus for which statistics are only available as to the number of trees and not the area of cultivation. Therefore, the yields on these two crops are based on their estimated areas. Similarly the yields for vegetables are based on the estimated vegetable area (see Section C). H. The Demand Elasticities The demand elasticities are basically obtained from the income elasticities given in world Bank Agricultural Sector Report using the Frisch method. There has been however some modifications, as required by the validation trials of the model for the base year. The demand elasti- cities used are given in Table I.7. I. Domestic Production, Exports, Imports and Prices The levels of domestic production, quantities and values of im- port and export for the activities both of the domestic and world export and import prices are given in Table I.8. The export and import prices for multi-product activities are obtained by dividing the total value by total quantity and thus reflect average prices for the products in the related activities. - 392 - Table I.5 OUTPUT PRICES (TL/kg) Commodity 1974 1975 1977 1977 1978 Wheat 2.30 2.66 2.61 2.89 2.18 Corn 2.29 2.61 2.66 3.30 4.36 Rye,etc. 1.68 1.91 1.93 2.18 2.95 Rice 5.18 5.27 5.40 9.35 13.93 Barley 1.88 2.07 2.10 2.41 3.35 Sunflower 4.62 5.22 5.77 7.07 8.21 Sugarbeets 0.36 0.45 0.57 0.63 0.74 Tea 29.51 35.33 42.96 51.07 62.56 Tobacco 19.94 29.91 36.05 45.19 48.98 Cotton 21.21 18.16 24.18 28.49 31.03 Roots 2.26 2.36 3.26 3.69 6.64 Pulses 6.37 7.10 7.71 11.41 19.70 Grapes 3.93 3.97 4.94 8.35 12.62 Olives 5.97 5.82 5.38 8.63 12.37 Vegetables 1.92 1.99 2.21 3.74 6.66 Citrus 2.36 2.46 2.61 3.44 6.69 Hazelnuts 12.28 12.88 14.50 15.71 20.416 Fruits 3.41 3.96 4.58 6.59 11.15 Beef l/ 14.39 15.78 19.14 27.00 40.45 Cow Milk 3.45 4.70 5.48 6.34 10.04 Mutton 1/ 15.67 17.11 21.63 28.67 47.75 Goods Wool 22.02 33.12 44.42 58.52 76.42 Ewe Milk 3.37 4.79 5.59 6.73 9.00 1/ Beef and mutton prices are estimated from the Erzurum retail prices by multiplying these prices with a ratio of two-thirds. Source: SIS Statistical Yearbook of Turkey (1979). SIS Prices Received by Farmers (1973-76). SIS Prices Received by Farmers (1977-78). - 393 - Table I.6 Yields (kg/ha) Commodity 1974 1975 1976 1977 1978 Wheat 1,257 1,595 1,789 1,785 1,805 Corn 1,935 2,000 2,192 2,181 2,241 Rye,etc. 1,083 1,371 1,473 1,414 1,424 Rice 4,052 4,384 4,648 4,659 4,289 Barley 1,291 1,731 1,860 1,813 1,884 Sunflower 998 1,167 1,236 1,217 1,169 Sugarbeet 30,570 32,389 37,564 36,042 31,905 Tea 1,055 1,105 1,145 1,479 1,631 Tobacco 884 828 1,027 881 885 Cotton 714 716 817 740 727 Roots. 11,396 12,866 14,034 14,141 14,084 Pulses 1,205 1,314 1,285 1,271 1,252 Grapes 4,210 4,110 4,010 4,184 4,425 Olives 1,070 700 1,354 490 1,356 Vegetables 29,166 31,129 24,675 25,997 29,853 Citrus 15,545 16,788 16,946 20,209 20,396 Hazelnuts 1,000 1,060 900 950 1,000 Fruits 6,823 6,823 7,798 7,603 9,747 Beef 165 155 169 176 163 Cow Milk 1,771 1,658 1,810 1,884 1,750 Mutton Goods 7.38 7.24 7.73 7.73 7.24 Wool 2.72 2.67 2.85 2.85 2.67 Ewe Milk 11.47 11.25 12.01 12.01 11.25 Source: SIS The Summary of Agricultural Statistics (1979). - 394 - Table I.7 THE DEMAND ELASTICITIES USED IN THE MODEL Activity Price Elasticity Income Elasticity Wheat -0.337 1/ Q 2/ Corn -0.3 0 2/ Rye-Oats-Millet -0.2 0 2/ Rice -0.2 0.38 Barley -0.25 0 2/ Sunflower -0.302 0.6 Sugarbeet -0.303 0.6 Tea -0.5 0.5 Tobacco -0.3 0.5 Cotton -0.3 0.5 Roots -0.2 0.3 Pulses -0.31 0.6 Grapes -0.13 0.1 Olives -0.305 0.6 Vegetables -0.189 0.6 Citrus -0.1971 2/ 0.75 Hazelnuts -0.4 0.50 Fruits -0.14 0.80 Beef -0.605 0.45 Cow-milk -0.5 1.75 Mutton -0.2 1.20 Ewe-milk -0.3 .0.95 Source: 1/ From World Bank (1978) by the Frisch Method. 2/ Modified or assumed. Table 1.8 FOREIGN TRADE STATISTICS Domestic Quantity Value Quantity Value Turkish Turkish World World Activity Production of Exports of Exports of Imports of Imports Export Price Import Price Export Price Import Price (000 MT) (000 MT) (000 MT) (000 MT) (000 $) ($/MT) (S/MT) ($/1T) ($/MT) Wheat 16,769 2,090 226,553 108.41 132.44 156.47 Corn 1,300 117.10 125.73 Rye,etc. 1,019 62 6,549 106.40 130.05 149.17 Rice 305 37 13,087 350.66 369.98 397.73 Barley 4,750 15 1,808 120.53 136.85 152.27 Sunflower 485 269.56 298.29 Sugarbeet 9,075 15.87 24.07 Tea 94 2 3,321 1,537.50 2,027.86 2,319.58 Tobacco 288 77 225,256 2,913.73 2,659.03 3,002.32 Cotton 475 278 348.398 1,253.75 1,390.68 1,445.09 Roots 3,660 29 4,055 141.71 158.23 195.66 Pulses 814 118 45,718 387.40 418.08 464.47 Grapes 3,496 377 101,313 268.80 355.51 401.55 Olives 1,100 53 8,745 166.56 214.22 228.18 Vegetables 11,815 10 2,496 239.47 347.69 442.27 Citrus 1,081 140 43,919 313.79 289.96 379.23 Hazelnuts 305 162 330,901 2,048.03 2,048.03 Fruits 2,505 1/8 53,379 299.71 418.54 498.16 Beef 239 1,698.20 1,879.67 C- 4-?Ik o48 254/52 268.21 Mutton 384 28 47,331 1,666.70 1,375.16 1,782.48 Wool 56 5 17,551 3,237.59 2,224.00 2,759.86 Ewe-Milk 1,710 254.52 254.52 Source: FAO Trade Yearbook (1978). - 396 - J. Projections for 1990 For projections, the following assumptions and values are employed: a.. Income increases at a rate of 3% per year for the first 3 years and at a rate of 4% thereafter. b. Yields of activities increase by 1.5% per year, with the ex- ception of the yields for vegetables and fruits which in- crease by 3% per year. c. Fertilizer use increases by 2% per year. d. Additional tractor investment possibility of 10% per year. e. Additional irrigated investment possibility of 4% per year. f. Labor availability. g. Total consumption in 1978 = 40,899 million US$; total income in 1978 = 49,276 million US$; savings rate in 1978 = 17% and 15% in 1990; multiplier = 1.87. K. Agricultural Zones Turkey is divided into 9 agricultural regions. The dominating cropping patterns or agricultural activities in these regions and climatic characte!ristics of these regions are given in the table below: Region No. Region Name Activities I Central North Cereals, Rice, Vegetables, Pulses, Fruits, Tubers II Agean Olives, Grapes, Cotton, Tobacco, Pulses, Tubers, Vegetables III Marmara Sunflower, Rice, Roots, Sugarbeets IV Mediterranean Cotton, Cereals, Citrus, Rice, Vegetables, Pulses V North East Fodder, Wheat, Tubers, Pulses, Livestock VI South East Fodder, Cereals, Tubers, Pulses, Vegetables, Grapes, Livestock VII Black Sea Hazelnuts, Tea, Rice, Tobacco VIII Central East Fodder, Cereals, Fruits, Tobacco, Sugarbeets IX Central South Cereals, Sugarbeets,. Grapes, Pulses, Tubers, Vegetables, Livestock -397- Region No. Region Name Identifying Activity I Central North Cereals - Fruits II Agean Grapes - Olive - Tobacco III Marmara Sunflower IV Mediterranean Citrus - Cotton - Cereals V North East Livestock - Fodder VI South East Livestock - Cereals Vt Black Sea Hazelnuts - Rice VIII Central East Cereals - Fruits - Fodder IX Central South Cereals - Sugarbeets - Livestock - 398 - CLIMATE (C°) Average Average Number of Region Average Precipitation Relative Days with No. Name Temperature mm Humidity % Snow I Central North 11 375 60 22 II Agean 16 800 65 - III Marmara 14 700 70 10 IV Mediterranean 18 700 62 V North East 7 400 60 100 VI South East 8-9 450 50 2-80 VII Black Sea 14 1500 75 10 VIII Central East 12 400 55 30 IX Central South 11 350 60 22 TARIM BOLGELERI - AGRICULTURAL REGIONS- ' K A R A D N ZN I Z *,B.- L A C K 5 E AJ . . ) 5 n - -- -~~~e & Z Ten Til:e ~.. t AS F . C f>~k~i I V ivA Z * ,:S C RC - ie. K S '. ow( '4 lv -ikJ } ;> - 4 ,1'.:,. - 400 - BIBLIOBRAPHY Duloy, J.H. and R.D. Norton, "Prices and Income in Linear Programming Models", Amer. J. Agr. Econ. 57 (1975): 591-600. Frisch, R., "A Complete Scheme for Computing all Direct and Cross Demand Elasticities in a Model with Many Sectors", Econometrica. vol. 27, 1959, pp. 177-196. Hazell, P.B.R., and P.L. Scandizzo, "Competitive Demand Structures Under Risk in Agricultural Linear Programming Models", Amer. J. Agr. Econ. 56 (1974): 235-44. Hazell, P.B.R., and P.L. Scandizzo, "Farmers Expectations, Risk Aversion, and Market Equilibrium Under Risk", Amer. J. Agr. Econ. 59 (1977) 204-209. Hazell, P.B.R., "Endogenous Input Prices in Linear Programming Models", Amer. J. Agr. Econ., 61 (1979) 476-481. Norton, R.D. and P.L. Scandizzo, "Market Equilibrium Computations in Activity Analysis Models", Operations Research, April-May 1981. Samuelson, P.A., "Spatial Price Equilibrium and Linear Programming", American Economic Rev.lew, Vol. 42, 1952, pp. 283-303. - 401 - ANNEX II STATISTICAL TABLES Table 1.l: DEMOGRAPHIC CHARACTERISTICS (In thousands) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Population (mid-year estimates) /1 37132 38072 39036 40025 40938 41871 42825 43801 44578 45529 Rural-urban distribution Rural 22205 22462 22602 22870 23134 23389 23644 23889 24213 24374 Urban 14927 15610 16434 17155 17804 18482 19181 19912 20365 21155 Age structure distribution Ages 0-14 years 15984 15876 16278 16106 16347 16518 16659 16793 16852 17054 Ages 15-64 years 19514 20521 21001 22109 22762 23477 242352 25015 25672 26414 Ages 65 and over 1634 1675 1757 1810 1829 1876 1931 1993 2054 2061 Ca 1960-65 1965-70 1970-75 1975-80 1980-85 Crude birth rate /2 41.5 40.8 35.0 32.2 31.6 Crude death rate /2 15.3 13.5 10.8 10.0 8.9 Infant mortality rate /3 180.0 133.0 120.0 110.0 84.3 Life expectancy at birth: Male 50.3 52.8 58.3 58.3 60.6 Female 53.2 56.1 59.4 62.8 65.5 Gross reproduction rate 2.9 2.7 2.5 2.2 2.0 /1 Derived from census data of 1960, 1970, 1975 and 1980 (As of July 1) /2 Per thousand of population 7T The number of infants who die before 1 year of age, per thousand live births in a give year Source: State Institute of Statistics; SPO, Annual Program (various issues); SPO, Third Plan and Fourth Plan; World Development Report, 1978, 1979. - 403 - Table 1.2; LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT (In thousands) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total civilian labor force 14951 15236 15462 15811 15925 16387 16640 16905 17183 Total civilian employment 14037 14213 14452 14668 14678 15121 15249 15256 1531C Agriculture 9589 9390 9426 9463 9280 9546 9537 9529 9520 Industry 1507 1574 1650 1691 1747 1801 1826 1794 1802 Mining and quarrying 96 97 109 108 l J 117 120 123 118 Manufacturing 1354 1417 1461 1507 1561 1592 1610 1571 1585 Electricity, water and gas 58 60 80 76 77 93 97 100 100 Construction 436 469 483 501 534 547 562 578 583 Transportation, storage and communications 384 416 434 451 474 495 501 508 501 Wholesale and retail trade 515 560 579 600 611 637 646 637 641 Banking, insurance and real estate 138 164 170 176 186 198 204 208 214 Services 1324 1361 1434 1513 1576 1641 1700 1730 1776 Unspecified 144 279 276 273 270 256 273 273 273 Urban and rural unemployment excluding; agricultural labor surplus 914 1023 1010 1143 1247 1266 1391 1649 1873 Agricultural labor surplus at peak season /1 900 950 920 900 900 740 720 700 700 Domestic labor surplus 1814 1973 1930 2043 2147 2006 2111 2349 2573 Domestic labor surplus ratio 12.1 12.9 12.5 12.9 13.5 12.2 12.7 13.9 15.0 Labor stock abroad 660 767 758 711 708 728 748 768 788 Total labor surplus 2474 2740 2688 2754 2855 2734 2859 3117 3361 Total labor surplus ratio 16.5 17.2 16.6 16.6 14.2 16.7 17.2 18.4 19.6 /1 Appears also as part of employment in agriculture. Source: State Planning Organization Table 1.3: EMPLOYMENT IN MANUFACTURING INDUSTRY (In thousand) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Food and beverage 87.8 93.1 103.2 104.3 109.4 111.2 116.0 122.0 129.6 124.5 126.4 Tobacco processing 34.8 32.3 38.7 40.9 37.1 38.5 38.6 50.0 47.0 41.7 52.7 Textiles and apparels 136.0 134.3 144.5 151.7 159.2 165.7 177.7 172.8 183.3 183.5 175.8 Wood products 11.8 12.3 15.4 14.3 14.5 16.9 15.8 15.8 17.2 16.0 16.7. Paper and paper products 12.2 15.2 15.2 14.6 15.5 15.9 16.4 16.4 17.6 15.8 16.6 Printing 9.8 9.9 10.0 10.4 10.6 10.0 10.5 9.7 10.5 10.6 9.8 Leather and fur 2.7 3.8 2.8 3.0 3.7 5.3 4.2 4.1 4.4 4.1 4.2 Rubber products 8.8 8.8 9.9 11.5 10.7 11.2 10.9 13.6 11.6 11.0 10.3 Chemicals 30.6 28.8 32.2 35.4 37.1 40.6 42.8 42.4 43.4 43.5 43A6 Petroleum I 2.2 5.4 3.9 4.7 4.9 5.1 5.3 10.4 10.0 9.7 10.0 Non-metallic minerals 36.8 37.6 41.3 43.7 48.8 50.8 55.2 55.1 59.6 61.2 57.2 Basic metals 31.1 34.3 37.3 47.0 54.0 64.8 69.7 76.5 82.2 81.3 74.9 Metal products 33.7 30.0 33.7 33.6 34.0 34.9 29.4 32.1 37.8 38.4 36.4 Machinery 20.7 21.9 28.6 38.0 37.9 41.8 41.1 41.0 47.2 47.4 45.1 Electrical machinery 10.0 14.1 15.7 '20.1 23.3 25.8 27.2 28.1 34.3 31.7 28.4 Transport equipment 33.0 34.0 37.4 49.1 50.1 52.2 54.7 53.8 57.6 53.3 49.0 Other manufacturing 8.5 10.1 12.7 15.3 15.1 16.0 17.3 16.8 19.6 18.4 16.9 Total 510.4 525.8 582.5 637.6 666.1 706.9 732.9 760.4 812.9 792.1 774.0 of which. Public sector 185.4 198.2 212.4 225.6 228.9 247.7 259.9 287.3 288.7 283.5 285.9 Private sector 325.0 327.6 370.1 412.0 437.2 459.2 473.0 473.1 524.2 508.6 488.1 Source: Turkiye Imalat Sanayiinde Sermaye Ve Isgucu. Kutlay Ebiri, 1977. Table 1.4: ANNUAL EMIGRATION AND WORKERS EMPLOYED ABROAD Jan. -Oct 1961-6911 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 EEC 340874 111809 80106 77424 123712 13976 756 2304 2582 1435 1011 852 292 Germany 315741 96936 65684 65875 103793 1228 640 2101 2413 1333 933 764 248 Belgium 13917 431 583 113 265 555 59 72 45 41 27 35 12 France 279 9036 7697 10610 17544 10577 25 6 15 13 11 21 6 Netherlands 10925 4843 4853 744 1994 1503 32 98 89 48 40 32 26 United Kingdom 12 563 1289 82 116 113 - 27 20 - - - - EFTA 8661 12220 5962 5784 8192 3271 455 953 829 380 429 1493 442 Austria 7662 10622 4620 4472 7083 2501 226 672 583 54 23 944 175 Switzerland 999 1598 1342 1312 1109 770 229 281 246 326 406 549 267 Others 1686 5546 2174 2021 3916 2964 3208 7301 156.-3 17037 22190 26158 45956 Australia 1077 1186 879 640 886 1138 401 339 542 549 407 409 270 Libya - - - - - - 1128 4098 8582 7726 9825 15090 23422 Others 609 4360 1295 1381 3030 1826 1679 2864 6549 8762 11958 10659 22264 TOTAL 351221 129575 88242 85229 135820 20211 4419 10558 19084 18852 23630 28503 46690 Total workers employed abroad/2 . 479320 567762 652991 788811 809022 813441 823999 848038 861935 868542 - - /1 Total for the period. X2 Estimate including illegal workers. Source: General Directorate of Employment Exchange, Ministry of Labor - 406 - Table 1.5: EMPLOYMENT BY SEEs (thousands) Year Administrative Personnel, Labor Total 1970 165,738 196,562 362,300 1971 170,601 204,020 374,621 1972 179,921 212,462 392,383 1973 192,360 233,502 425,862 1974 179,291 324,543 503,834 1975 195,979 348,399 544,378 1976 216,624 368,964 585,588 1977 225,441 410,758 636,199 1978 233,612. 405,203 638,815 1979 242,113 409,761 651,874 1980 244,049 401,882 645,931 Source: SPO - 407 - Table 2.1: 'GROSS DOMESTIC PRODUCT AT CURRENT PRICES BY SECTORAL ORIGIN (In millions of Turkish Liras) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Agriculture 59243 73154 105512 136114 177350 219773 301311 465792 925353 Crops and livestock 57515 70697 102628 132412 172222 211091 289926 448667 891277 Forestry 1336 1920 2136 2756 3930 6945 8779 11843 23064 Fishing 392 537 747 947 1198 1737 2606 5282 11013 Industry 40683 53372 76710 93531 114978 158007 273391 479855 1033627 Mining and quarrying 3310 3679 5209 5937 7475 14299 1.9832 30968 70963 Manufacturing 34687 46159 66070 79846 97925 129707 232071 416695 877819 Electricity, gas and water 2686 3534 5432 7748 9578 14001 21488 32192 84845 Construction 12291 14783 18829 24621 31027 42096 63992 103873 213130 Wholesale and retail trade 26571 35057 52265 64752 81643 107004 165931 301823 638977 Transport, storage and communications 18002 25336 35538 43281 54831 72236 110062 223785 408565 Banking, insurance and other financial institutions 4506 6580 10092 12602 16825 20238 25931 36404 80392 Ownership of dwelling 8896 10934 13279 17887 24636 34136 53722 85956 191888 Private services 10768 14149 19344 25048 31872 41155 62633 108639 222852 Government services 25560 32296 38203 50547 66476 101478 133100 235230 377627 Gross domestic product at factor cost 206520 265661 369772 468382 599639 796123 1190073 2041357 4092412 Indirect taxes less subsidies 25595 29840 39974 50791 64298 66844 84708 140589 233058 Gross domestic product at currpat market prices 232115 295501 409746 519173 663937 862967 1274781 2181946 4325470 Net factor income from abroad 8694 14328 17351 16598 11049 9926 15943 43626 107189 GROSS NATIONAL PRODUCT AT CURRENT MARKET PRICES 240809 309829 427097 535771 674986 872894 1290723 2225572 4432659 Source: State Institute of Statistics; State Planning Organization - 408 - Table 2.2: GROSS DOMESTIC PRODUCT AT 1968 PRICES BY SECTORAL ORIGIN (In millions of Turkish liras) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Agriculture 36065 32411 35762 39675 42732 42180 43302 44518 45268 Crops and livestock 35089 31394 34658 38352 41483 41000 41874 42985 43622 Forestry 721 735 794 981 874 805 988 994 1015 Fishing 256 282 310 341 374 375 440 539 631 Industry 27118 30194 32688 35615 39165 43145 45991. 43429 41038 Mining and quarrying 2123 2224 2700 3017 3169 4411 5590 4678 4236 Manufacturing 23292 26112 27912 30165 33115 35547 36818 34881 33058 Electricity, gas and water. 1703 1857 2077 2433 2881 3187 3583 3869 3744 Construction 8348 8956 9504 10310 11164 11783 12271 12786 12885 Wholesale and retail trade 16951 18904 20966 22963 25170 26413 27448 26813 25634 Transport, storage and communications 12401 13914 15064 16281 17836 19023 19502 18642 17965 Banking, insurance and other financial institutions 3036 3312 3614 3852 4158 4566 4785 4929 5018 Ownership of dwellings 6191 6616 7048 7485 8492 8818 9174 9528 9921 Private services 6705 7008 7600 8288 8856 9241 9536 9449 9350 Government services 12868 13734 14625 15471 16558 17546 18629 19416 20546 Gross domestic product at factor cost 129683 135049 146869 159938 174130 182716 190639 189509 187624 Indirect taxes less subsidies 14380 15380 16369 17823 19077 18861 16675 15977 16272 Gross domestic product at 1968 market prices 144063 150429 1.63238 177761 193207, 201577 207314 205486 203896 Net factor income from abroad 4414 6029 4776 3623 2543 1781 1869 2857 2165 GROSS NATIONAL PRODUCT AT 1968 MARKET PRICES 148477 156458 168013 181383 195751 203358 209183 208343 206061 Source: State Institute of Statistics; State Planning Organization - 409 - Table 2.3: EXPENDITURE ON GROSS NATIONAL PRODUCT AT CURRENT PRICES (In millions of Turkish Liras) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 Consumption 196748 247314 352607 442096 559692 719507 1012348 1730219 3508272 Government 31062 38349 47000 63885 84615 116000 172700 292000 544100 Private 165686 208965 305607 376211 475077 603507 839648 1412167 2964172 Fixed investment 40573 53416 72965 104688 142199 194585 286844 475777 861279 Government 20200 25078 35309 53788 75227 107739 134961 237626 482194 Private 20373 28338 37926 50900 66972 86846 151883 238151 379005 Stock changes 3600 2505 11592 16134 10026 19900 26301 63350 294550 Exports of goods and non-factor services 17005 25188 31199 31689 44150 45648 72030 108375 305371 Imports of goods and non-factor services 25811 32922 58616 75434 92130 116673 122742 195775 644002 Gross domestic product at current market prices 232115 295501 409746 519173 663937 862967 1274781 2181946 4325470 Net factor income from abraod 8694 14328 17351 16598 11049 9926 15943 43626 107189 GROSS NATIONAL PRODUCT AT CURRENT MARKET PRICES 240809 309829 427097 535771 674986 872894 1290723 2225572 4432659 Source: State Institute of Statistics; State Planning Organization - 410 - Table 2.4: EXPENDITURE ON GROSS NATIONAL PRODUCT AT 1968 PRICES (In millions of Turkish Liras) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 Consumption 120376 122399 130506 138951 152991 157956 156975 155169 157083 Government 16416 17072 18326 20482 22377 23384 25863 26636 28871 Private 103960 105327 112180 118469 130614 134572 131112 128533 128212 Fixed investment 25500 29970 33907 41265 46456 49745 49302 47823 42787 Government 12675 14172 16148 20939 24215 27408 23452 24652 24075 Private 12825 15798 17759 21021 22241 22337 25850 23171 18712 Stock changes 2263 1409 5354 6313 3241 5064 4545 6251 9261 Exports of goods and non-factor services 9326 11711 9969 9931 11926 10081 10962 9225 10397 Imports of goods and non-factor services 13402 15060 16499 18699 21407 21269 14470 12982 15632 Gross domestic product at 1968 market prices 144063 150429 163238 177761 193207 201577 207314 205486 203896 Net factor income from abroad 4414 6029 4776 3623 2544 1781 1869 2857 2165 GROSS NATIONAL PRODUCT AT 1968 MARKET PRICES 148477 156458 168013 181383 195751 203358 209183 208343 206061 Source: State Institute of Statistics; State Planning Organization - 411 - Table 2.5: SECTORAL FIXED INVESTMENT AT CURRENT PRICES BY GOVERNMENT AND PRIVATE SECTOR, 1972-1980 (In millions of Turkish Liras) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Agriculture 4236 6385 7992 10945 19955 25351 29071 32411 64625 Government 1958 2328 3452 4936 7849 12370 13971 17911 33579 Private 2278 4057 4540 6009 12106 12981 15100 14500 31046 Mining and quarrying 1344 1780 2483 3495 5849 7682 11425 19666 38379 Government 1081 1580 2231 3195 5531 7312 10860 18701 36359 Private 263 200 252 300 318 370 565 1965 2020 Manufacturing 12657 15566 22098 32265 38138 49504 67352 109051 233089 Government 5929 5966 7651 15030 17421 24034 27900 61986 139664 Private 6728 9600 14447 17235 20717 25470 39452 470Q65 93425 Electricity, gas and water 2885 3470 4939 6932 11471 16057 25403 58512 119741 Government 2685 3290 4739 6682 11296 15807 25163 57912 117921 Private 200 180 200 250 175 250 240 600 1820 Transportation, storage and communications 7382 10176 14399 20107 27455 41466 55900 76664 133612 Government 4797 6615 9332 12922 17903 26616 32232 46414 87860 Private 2586 3561 5067 7185 9552 14850 23668 30250 45752 Tourism 636 877 881 919 1164 1528 2431 3154 4655 Government 193 347 324 374 554 903 1171 1794 2320 Private * 443 530 557 545 610 625 1260 1360 2335 Housing 7597 9765 12174 19187 23040 31922 71540 141280 196700 Government 472 405 552 1387 1688 2522 3792 . 6789 9928 Private 7125 9360 11622 17800 21352 29400 67748 134491 186772 Education 1315 1850 2608 3552 4917 5591 6776 8538 17927 Government 1280 1810 2508 3472 4737 5371 6526 8038 17202 Private 35 40 100 80 180 220 250 500 725 Health 548 564 857 1145 1727 2016 3046 4482 8122 Government 498 504 807 1071 1637 1936 2946 3812 7322 Private 50 60 50 74 90 80 100 670 800 Others 1972 2983 4534 6141 8483 13468 13900 22019 44687 Government 1307 2233 3443 4719 6611 10868 10400 14269 30297 Private 665 750 1091 1422 1872 2600 3500 7750 14390 TOTAL FIXED INVESTMENT 40573 53416 72965 104688 142199 194585 286844 475777 861536 GOVERNMENT 20201 25078 35039 53788 75227 107739 134961 237626 482451 PRIVATE 20372 28338 37926 50900 66972 86846 151883 238151 379085 Source: State Planning Organization - 412 - Table 2.6: SECTORAL FIXED INVESTMENT AT i976 PRICES BY GOVE 1T. D '?RIVATL SECTO .197 J 1980 mii ons of rurKisR tirasj 1972 1973 1974 1975 1976 1977 1978 1979 1980 Agriculture 7683 10181 11015 13050 19955 19837 14892 9831 9656 Government 3842 4055 4910 5977 7849 9532 7304 5552 5413 Private 3841 6126 6105 7073 12106 10305 7588 4279 4243 Mining and quarrying 2714 3255 3549 4137 5849 6247 6369 6634 6226 Government 2183 2889 3189 3782 5531 5946 6054 6309 5898 Private 531 366 360 355 318 301 315 325 328 Manufacturing 25043 27347 31915 38955 38138 40421 38738 36442 .37602 Government 11731 10481 11050 18127 17421 19625 15556 20714 22531 Private 13312 16866 20865 20828 20717 20796 23182 15728 15071 Electricity, gas and water 5737 6411 7296 8177 11471 12862 13975 18842 18484 Government 5339 6078 7001 7882 11296 12662 13843 18649 18203 Private 398 333 295 295 175 200 132 193 281 Transportation, storage and communications 13008 16189 19701 23723 27455 31986 28545 22998 18623 Government 8985 11339 13019 15838 17903 21251 17560 15176 13125 Private 4023 4850 6682 7885 9552 10735 10985 7822 5498 Tourism 1288 1583 '1273 1167 1164 1088 1187 882 716 Government 391 626 468 475 554 643 572 502 357 Private 897 957 805 692 610 445 615 380 359 Housing 15240 17487 17532 23963 23040 24096 36436 41642 30738 Government 947 725 795 1732 1688 1904 1931 2001 1551 Private 14293 16762 16737 22231 21352 22192 34505 39641 29187 Education 2591 3263 3790 4333 4917 4230 3472 2565 2615 Government 2522 3192 3645 4235 4737 4064 3344 2415 2510 Private 69 71 145 98 180 166 128 150 105 Health 1058 977 1254 1363 1727 1530 1571 1373 1054 Government 961 873 1181 1275 1637 1469 1519 1168 946 Private 97 104 73 88 90 61 52 205 108 Others 3739 5036 6463 7437 8483 9974 6911 6324 6282 Government 2478 3770 4908 5723 6611 8049 5171 4098 4256 Private 1261 1266 1555 1714 1872 1925 1740 2226 2026 TOTAL FIXED INVESTMENT 78101 91729 103788 126305 142199 152271 152096 147533 131996 GOVERNMENT 39379 44028 50166 65046 75227 85145 72854 76584 74790 PRIVATE 38722 47701 53622 61259 66972 67126 79242 70949 57206 Source: SPO - 413 - Table 3.1: BALANCE OF PAYMENTS (In mi1lions of US dollars) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Exports of goods and non- factor services 1153 1799 2123 2152 2742 2556 3106 3257 4102 of which: Goods 885 1317 1532 1401 1960 1753 2288 2261 2910 Imports of goods and non- factor services -1827 -2391 -4183 -5219 -5735 -6436 -5059 -5699 -8396 of which: Goods -1563 -2086 -3778 -4739 -5129 -5796 -4599 -5069 -7667 Resource balance -674 -592 -2060 -3067 -2993 -3880 -1953 -2442 -4293 Interest (net)/l -62 -59 -102 -124 -217 -570 -680 -900 -974 Profits -35 -35 -71 -36 -83 -116 -60 -123 Workers' remittances 740 1183 1426 1312 983 982 983 1694 2071 Net factor service income 643 1089 1253 1152 683 296 243 671 1097 Transfers 46 18 27 23 15 12 - - - Current account balance 15 515 -780 -1892 -2295 -3572 -1710 -1771 -3196 Direct foreign investment 43 27 88 153 27 67 47 100 100 Imports with waiver 39 50 58 98 136 102 100 100 - Public medium- and long-term (MLT) borrowing/2 294 376 330 334 720 997 1017 4321 2489 Amortization of public MLT borrowing/l/2 -117 -72 -126 -175 -203 -234 -336 -414 -100 Public MLT borrowing (net) 177 304 204 159 517 763 681 3907 2389 Capital not included elsewhere 21 67 79 -94 -451 267 -67 -2745 -274 Overall balance 295 963 -351 -1576 -2066 -2373 -949 -409 -981 IMF(net) -61 -11 - 243 148 - 253 35 423 Short term (net)/3 332 -224 -80 916 1806 1807 844 300 950 Change in reserves (- increase) -566 -728 431 417 112 566 -148 74 -392 /1 Net of debt relief prior to 1980. 72 Government estimates, not consistent with Bank DRS data. /3 Mainly Convertible Turkish Lira Deposits, Acceptance Credits, Commercial and Oil arrears, Bankers' Credits, Reimbursement Credits, and Dresdner Bank Scheme deposits. Source: Ministry of Finance, IMF, IBRD estimates. - 414 - Table 3.2: COMHODITY COHPOSITION OF EXPORTS (In millions of US dollars) Jan. -Oct. 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Agriculture and livestock 607.4 832.0 851.9 792.6 1,254.5 1,041.4 1,542.8 1,343.6 1,671.7 1,664.1 Cereals and pulses 36.2 64.2 22.4 28.1 70.6 120.4 262.2 164.2 181.0 262.5 Nuts, fruits and vegetables 197.4 259.0 295.2 275.4 375.3 440.0 560.5 647.7 753.9 595.1 Hazelnuts 116.5 121.7 173.2 154.1 203.2 251.0 330.9 353.0 394.8 252.6 Raisins 30.5 56.7 53.9 45.5 52.6 75.0 99.7 114.8 130.3 101.4 Others 50.4 80.6 68.1 75.8 119.5 114.0 129.9 179.9 228.7 241.1 Industrial crops 337.6 456.8 463.0 435.1 733.6 432.0 617.9 448.0 605.9 614.4 Tobacco 130.9 132.9 204.5 183.2 251.3 175.8 225.3 177.0 233.7 273.8 Cotton 191.3 305.8 235.3 225.2 434.2 214.1 352.9 227.8 322.6 293.6 Others 15.4 18.1 23.2 26.7 48.1 42.1 39.7 43.2 49.6 47.0 Livestock products 27.0 41.0 56.5 41.1 62.7 37.2 77.8 62.0 108.2 172.3 Fishery products 9.2 11.1 14.8 12.9 12.3 11.6 24.4 21.7 22.7 19.7 Mining and quarry products 35.1 41.7 79.8 105.6 110.0 125.9 124.1 132.5 191.0 159.0 Industrial products 242.4 443.4 600.4 502.9 595.8 585.8 621.3 785.1 1,047.4 1,672.3 Food and beverages 87.3 149.1 130.4 116.7 86.8 127.4 95.0 135.0 190.2 261.3 Textiles 54.8 105.6 147.8 135.5 272.7 265.9 321.6 390.7 439.8 625.6 Foreatry products 4.9 8.0 21.2 9.1 5.6 3.0 3.3 4.7 8.1 20.1 Hides and leather products 21.5 45.3 74.0 64.9 59.9 52.0 40.1 43.6 49.5 67.8 Chemicals 11.2 19.6 36.3 37.7 46.7 36.4 26.0 27.2 91.9 127.9 Petroleum products 22.3 48.9 85.9 36.1 16.1 0.0 0.0 0.0 38.5 62.5 Cement 15.2 14.8 8.0 24.2 16.3 9.2 40.5 44.9 39.6 143.7 Glass and ceramics 3.7 6.6 12.5 17.9 20.9 27.4 30.1 37.1 35.9 76.6 Non-ferrous metal 5.9 17.3 34.0 12.7 16.9 20.1 11.5 14.6 18.3 24.2 Iron and steel 7.4 13.4 19.3 20.3 22.1 14.4 21.2 31.1 33.9 68.4 Metal prod-cts and 4.1 8.6 16.1 13.9 16.5 14.0 18.0 18.1 29.8 59.7 machinery Electrical appliances 0.9 1.5 1.0 0.8 1.1 3.1 3.7 4.5 11.5 16.6 Motor vehicles 0.3 0.9 6.0 8.1 9.3 9.2 6.7 26.6 50.3 89.7 Others 2.9 3.8 7.9 5.0 4.9 3.7 3.6 7.0 10.1 28.2 TOTAL EXPORTS 885.0 1,317.1 1,532.2 1,401.1 1,960.2 1,753.0 2,288.2 2,261.2 2,910.1 3,495.4 Source: State Planning Organization - 415 - Table 3.3: COMMODITY COMPOSITION OF IMPORTS (In millions of US dollars) Jan. -Oct. 1972 1973 1974 1975 1976 1977 i§78 1979 1980 1981 Agriculture and Livestock 34.0 64.0 307.4 202.5 78.7 112.6 50.7 36.5 51.1 67.3 Cereals and pulses 6.8 26.7 254.6 141.2 5.4 8.5 13.1 7.7 3.6 Fruits and vegetables 0.2 0.3 0.2 0.5 0.2 0.4 0.1 0.4 0.5 Industrial crops 8.3 16.5 26.7 21.0 39.C 50.0 11.7 3.6 11.3 Livestock products 18.7 20.5 25.9 39.8 34.1 53.7 25.8 24.8 35.7 Mining and quarry products 143.1 222.0 748.0 795.2 1,090.3 1,262.4 1,133.9 1,067.6 2,853.8 2,760.1 Fuels 124.5 200.7 704.9 719.8 1,020.7 1,183.5 1,085.7 1,008.3 2,710.1 2,591.2 Others 18.6 21.3 43.1 75.4 69.6 78.9 48.2 59.3 143.7 168.9 Industrial products 1,385.4 1,800.2 2,722.1 3,740.9 3,959.6 4,421.3 3,414.4 3,965.3 4,762.4 4,320.9 Food and beverages 32.4 8.9 92.2 191.3 106.9 27.2 38.4 77.5 257.1 158.3 Textiles 39.1 39.7 86.2 91.7 79.8 63.7 53.0 65.2 108.7 89.4 Forestry products 8.2 10.5 22.6 15.2 20.9 21.5 11.9 20.8 19.3 1.9 Hides and leather products 0.2 0.2 1.3 0.6 0.5 0.2 0.2 0.3 0.3 0.5 Chemicals 307.2 425.6 575.0 733.5 837.3 1,035.7 916.6 1,028.5 1,305.8 1,205.5 Petroleum products 30.3 20.7 57.6 88.1 104.1 284.5 351.7 750.4 909.8 506.0 Cement 0.1 0.1 0.1 0.3 0.1 0.2 0.1 0.1 0.3 0.4 Glass and ceramics 20.2 20.7 21.1 26.1 25.2 25.5 17.8 27.9 35.2 33.3 Non-ferrous metal 41.8 66.5 131.1 101.9 89.5 97.0 42.6 54.8 87.2 118.4 Iron and steel 147.7 247.5 530.0 665.8 545.7 689.7 409.8 347.3 471.4 491.8 Metal Rroducts and 401.5 516.1 658.0 1,013.9 1,118.4 1,098.4 812.6 958.4 894.2 1,010.8 mad inery Electrical appliances 122.8 146.1 183.6 278.3 278.4 295.8 223.6 259.5 279.9 253.6 Motor vehicles 178.8 233.9 286.6 395.9 517.7 572.7 377.7 283.6 261.0 261.0 Others 55.1 63.7 76.7 138.3 235.1 209.2 158.2 91.0 132.1 190.1 TOTAL IMPORTS 1,562.5 2,086.2 3,777.5 4,738.6 5,128.6 5,796.3 4,599.0 5,069.4 7,667.3 7,148.3 Source: SPO - 416 - Table 3.4; INVISIBLE RECEIPTS AND PAYMENTS /1 (In millions of US dollars) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Invisible receipts 268.1 482.1 591.0 750.9 782.3 803.1 786.6 986.1 1192.1 Freight 28.5 55.1 85.4 101.2 110.3 111.0 25.0 20.3 25.7 Transportation 30.0 31.0 47.4 85.5 125.7 161.7 156.5 198.3 226.0 Government services 15.2 50.9 47.2 100.2 64.8 64.6 77.4 112.6 124.3 Private services 47.8 115.8 158.7 198.6 221.3 201.8 - - - Insurance and commissions 30.0 35.5 34.9 45.7 59.5 45.9 48.8 36.9 62.9 Tourism 103.7 171.4 193.6 200.8 180.4 204.9 233.1 280.7 326.1 Others 12.9 22.4 23.8 18.9 20.3 13.2 245.8 337.3 427.1 Invisible payments 263.9 304.9 405.2 480.8 606.6 639.5 499.8 619.7 850.2 Freight 21.9 19.4 30.3 29.5 31.0 32.6 65.2 70.3 124.2 Transportation 16.4 28.1 36.0 42.1 50.0 55.3 24.9 59.8 29.6 Government services -31.3 37.1 41.5 51.3 67.1 63.6 97.5 106.2 115.1 Private services 44.2 66.6 85.2 140.9 161.1 156.9 46.1 29.2 32.6 Insurance and commissions 61.7 37.1 45.3 52.0 58.5 57.2 39.8 43.7 35.6 Tourism 59.3 93.0 152.0 155.0 207.9 268.5 67.9 102.1 114.1 Others 29.1 23.6 14.9 10.0 31.0 5.4 158.4 208.4 399.0 Balance 4.2 177.2 185.8 270.1 175.7 163.6 286.8 366.4 341.9 /I Non-factor services only. Source; SPO Table 3.5: GEOGRAPHICAL DISTRIBUTION OF EXPORTS (In millions of US Dollars) Jan.-Oct. 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 OECD Countries 650.1 949.0 1,081.0 985.1 1,483.2 1,234.7 1,506.8 1,446.4 1,679.7 1,719.6 EEC 347.0 611.5 717.3 615.1 958.0 868.0 1,090.1 1,097.5 1,251.0 1,166.4 USA 103.5 130.8 144.2 147.1 191.4 121.8 153.2 104.5 127.4 178.2 Japan 15.1 16.6 18.1 28.7 36.0 36.5 36.0 22.4 36.7 22.2 Other OECD countries 184.5 190.1 201.4 194.2 297.8 208.4 227.5 222.0 264.7 352.8 Bilateral agreement countries 41.8 50.8 78.2 73.2 81.1 80.4 108.3 127.1 178.6 144.8 Other countries 193.1 317.3 373.0 342.8 395.7 437.9 673.1 687.7 1,051.8 1,630.9 TOTAL EXPORTS 885.0 1,317.1 1,532.2 1,401.1 1,960.0 1,753.0 2,288.2 2,261.2 2,910.1 3,495.4 Source: State Planning Organization and Ministry of Finance. Table 3.6; GEOGRAPHICAL DISTRIBUTION OF IMPORTS (In millions of US Dollars) Jan.-Oct. 1972 1973 1974 1975 1976 1977 1978 1978 1980 1981 OECD countries 1,228.6 1,625.0 2,683.5 3,501.4 3,565.4 3,966.5 2,791.2 3,063.7 3,583.4 3,416.2 EEC 652.6 1,139.6 1,708.2 2,338.2 2,342.0 2,470.1 1,872.6 1,827.5 2,203.1 2,028.7 USA 191.8 185.4 350.4 425.8 437.9 502.8 280.8 377.7 442.4 440.5 Japan 32.8 59.1 199.2 211.4 227.8 311.2 115.0 226.5 112.9 167.4 Other OECD countries 351.4 240.9 425.7 526.0 557.7 682.4 522.8 632.0 825.0 779.6 Bilateral agreement countries 120.1 126.5 97.7 74.2 89.0 85.0 68.9 111.4 185.5 117.2 Other countries 213.9 335.1 996.4 1,163.0 1,474.6 1,744.8 1,739.0 1,894.3 3,898.4 3,614.9 TOTAL IMPORTS 1,562.6 2,086.6 3,777.6 4,738.6 5,129.0 5,796.3 4,599.0 5,U69.4 7,667.3 7,148.3 Sz Source: State Planning Organization and Ministry.of Finance - 419 - Table 4.1: LONG-TERM DEBT OUTSTANDING (In millions of US dollars) Incl. Percentage Disbursed only (Year - end) Undisb. Distribution 1967 1972 1973 1974 1975 1976 1977 1978 1979 1979 1967 1972 1977 1978 1979 Public sector, official sources A. Multilateral organizations IBRD 29 92 141 208 288 391 512 648 890 1727 2.2 2.7 10.7 9.7 7.7 IDA 51 99 113 127 144 163 181 188 190 191 3.9 3.9 3.8 2.8 1.6 Other 141 181 240 282 315 426 508 626 716 788 10.9 7.2 10.6 9.5 6.1 Total,mult.org. 221 372 494 617 747 980 1201 1462 1796 2706 17.0 14.8 25.0 22.0 15.4 B. Loans from governments 1. DAC countries Concessional 837 1658 1815 1901 1832 1861 1971 2176 2544 3015 64.5 65.8 41.0 32.7 21.9 Germany F.R. 237 381 472 516 464 511 595 734 1180 1559 18.3 15.1 12.4 11.0 10.1 Japan - 19 24 36 39 40 60 64 52 53 - 0.8 1.2 1.0 0.4 USA 470 963 996 1019 1037 1039 1033 1029 977 977 36.2 38.2 21.5 15.5 8.4 Other 130 295 323 330 292 271 283 349 335 426 10.0 11.7 5.9 5.2 2.9 Non-concessional 40 50 91 116 148 188 216 1332 2288 2623 3.1 2.0 4.5 20.0 19.8 Germany, F.R. I I 1 1 1 1 - 270 589 589 0.1 - - 4.1 5.1 Japan - - 14 14 18 19 18 136 177 306 - - 0.4 2.0 1.6 USA 2 16 43 58 79 95 115 146 426 454 0.1 0.6 2.4 2.2 3.7 Other 37 33 33 43 50 73 83 780 1096 1274 2.9 1.3 1.7 11.7 9.4 Total, DAC countries 877 1708 1906 2016 1980 2049 2187 3508 4832 5638 67.6 67.8 45.5 52.7 41.7 2. CPE countries . Concessional - 193 274 278 262 245 255 280 325 359 - 7.7 5.3 4.3 - USSR - 193 274 278 259 242 253 280 325 359 - 7.7 5.3 4.3 2.8 Other - - - - 3 3 2 - - - - - - - - Non-concessional 1 - - - - 3 3 3 5 339 0.1 - - - Total, CPE countries 1 193 274 278 262 248 258 283 330 698 0.1 7.7 5.4 4.3 2.8 3. OPEC countries - - - - - 9 12 11 213 459 - - 0.2 0.2 1.8 4. Other countries - - - - 2 18 26 34 27 29 - - 0.5 0.5 0.2 Total, loans from governments 878 1901 2181 2295 2243 2324 2482 3836 5402 6824 67.7 75.5 51.7 57.7 46.5 Total, official 1099 2273 2675 2912 2990 3304 3683 5298 7198 9530 84.7 90.2 76.6 79.6 61.9 Public sector, commercial sources C. Suppliers credits 120 117 124 130 108 137 149 176 271 769 9.3 4.6 3.1 2.6 2.3 D. Financial i,lstitutions 7 41 51 75 63 142 460 591 3440 4260 0.5 1.6 9.6 8.9 29.6 E. Bonds 21 20 19 18 15 36 34 35 49 49 1.6 0.8 0.7 0.5 0.4 Total, cml.sources 148 178 194 223 186 315 643 802 3760 5078 11.4 7.1 13.4 12.0 32.3 Total, public sector 1248 2450 2869 3134 3176 3619 4326 6100 10958 14608 96.2 97.3 90.0 91.6 94.2 Private sector A. Multilateral org. (IFC) 1 18 30 29 43 118 116 109 - - 0.1 0.7 2.4 1.6 - B. Loans from governments 34 34 45 56 57 78 137 113 - - 2.6 1.3 2.9 1.7 - C. Private sources 14 17 40 61 60 57 226 335 - - 1.1 0.7 4.7 5.1 - Total, private sector 49 69 115 146 160 253 479 557 673 673 3.8 2.7 10.0 8.4 5.8 TOTAL EXTERNAL DEBT 1297 2519 2984 3280 3336 3872 4805 6657 11631 - 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance, World Bank. - 420 - Table 4.2; DISBURSEMENTS RECEIVED FROM LONG-TERM LOANS (In millions of US dollars) 1967 1972 1973 1974 1975 1976 1977 1978 1979 Public Sector, official sources A. Multilateral organizations IBRD 4 25 57 75 91 117 146 165 277 IDA 16 4 3 14 18 21 19 8 3 Other 48 44 40 34 60 119 48 49 89 Total, multi. org. 68 73 100 123 169 257 213 222 369 B. Loans from governments 1. DAC countries Concessional 146 139 143 77 58 60 95 138 341 Germany, F.R. 18 42 52 14 17 23 51 98 328 Japan - 4 6 14 5 1 15 1 - USA 97 49 41 32 31 15 10 4 - Other 31 44 44 17 5 21 19 35 13 Non-concessional 15 1 51 32 48 53 44 79 185 Germany, F.R. - - - - - - - - Japan - - 14 2 5 4 - - - USA 1 1 30 17 28 22 27 2 155 Other 14 - 7 13 15 27 17 77 30 Total, DAC countries 162 140 195 110 105 114 139 217 526 2. CPE countries Concessional - 101 96 29 11 12 37 52 46 USSR - 101 96 29 8 12 37 52 46 Other - - - - 3 - - - - Non-concessional - - - - - 3 - - - Total, CPE count.ies - 101 96 29 11 14 37 52 46 3. OPEC countries - - - - - 9 3 - 30 4. Other countries - - - - 2 17 10 11 - Total, loans from governments 162 241 290 138 118 154 189 280 602 Total, official sources 230 314 390 261 287 411 402 502 971 Public sector, commercial sources C. Suppliers credits 2 52 21 36 1 65 36 62 185 D. Financial institutions - 4 19 27 5 91 324 248 278 E. Bonds - - - - - 24 - - - Total, commercial sources 2 56 40 63 6 180 360 310 463 Total, public sector 231 369 430 325 293 590 762 812 1434 Private sector A. Multilateral organizations (IFC) - 7 13 1 17 80 - 10 15 B. Loans from governments 2 3 11 12 6 20 66 22 18 C. Loans from commercial sources - 13 23 23 10 50 191 159 123 Total, private sector 2 23 47 36 33 150 257 191 156 Total, disbursements received 233 392 477 361 326 740 1019 1003 1590 Source: Ministry of Finance, World Bank. - 421 - Table 4.3: LtA'G-TERM LOAN COMMITMENTS RECEIVED (In millions of US dollars) 1967 1972 1973 1974 1975 1976 1977 1978 1979 Public sector, official sources A. Multilateral organizations IBRD - 177 105 228 158 237 144 358 306 IDA - 36 30 - - - - - - Other 75 29 100 140 40 54 6 54 123 Total, multi. org. 75 242 235 368 198 291 150 412 429 B. Loans from governments 1. DAC countries Concessional 197 135 135 103 60 65 25 152 444 Germany, F.R. 16 33 60 48 50 55 14 147 370 Japan 14 11 - 12 5 - - I - USA. 107 69 28 0 0 0 0 - - Other 60 22 47 43 5 10 11 4 74 Non-con3essional 7 19 83 37 77 115 243 133 96 Germany, F.R. - - - - - - - - - Japan - 16 - - 4 49 61 - - USA 7 3 58 24 25 64 18 51 60 Other - - 25 13 48 2 164 82 36 Total, DAC countries 204 154 218 140 136 180 268 285 540 2. CPE countries Concessional 92 158 3 - - 97 14 - - USSR 92 158 - - - 97 14 - - Other - - 3 - - - - - Non-concessional - - - - 3 - 136 204 35 Total, CPE countries 92 158 3 - 3 97 150 204 35 3. OPEC countries - - - - 42 - - - 265 4. Other countries - - - - 19 10 14 3 - Total, loans from governments 296 312 221 140 200 287 432 492 840 Total, official sources 371 554 456 508 398 578 582 904 1269 Public sector, commercial sources C. Suppliers credits 19 34 4 - 79 326 260 123 52 D. Financial institutions - 4 32 19 172 412 263 281 475 E. Bonds - - - - - 24 - - - Total, commercial sources 19 38 36 19 251 762 523 404 527 Total, public sector 390 592 491 527 649 1340 1105 1307 1796 Private sector A. Multilateral organizations (IFC) - - 10 30 45 37 - - B. Loans from governments 26 3 4 25 - C. Loans from commercial sources - 44 43 16 36 50 - Total, private sector - 70 56 50 106 87 100 100 100 TOTAL COMMITMENTS 390 662 547 577 755 1427 1205 1407 1896 Source: Minis.ry of Finance, World Bank - 422 - Table 4.4: AVERAGE TERMS OF LONG-TERM PUBLIC SECTOR EXTERNAL COMMITMEN TS RECEIVED 1963-67 1968-72 1973 1974 1975 1976 1977 1978 1979 Loans from Multilateral Organizations Interest (Z) 3.1 5.0 4.9 6.1 7.9 8.3 8.3 7.2 7.1 Maturity (Yrs) 21.8 18.3 30.4 23.2 19.4 16.1 15.9 16.0 18.5 Grace Period (Yrs) 5.5 4.4 7.7 5.7 4.4 4.7 3.6 4.5 4.5 Grant Element (Z) 40.8 25.,9 40.4 27.9 13.1 9.0 8.4 15.5 18.4 Loans from Governments Interest (Z) 2.7 2.8 4.2 4.5 5.1 4.3 7.4 5.6 2.9 Maturity (Yrs) 30.8 26.7 23.0 24.0 16.7 16.3 13.6 15.2 26.2 Grace Period (Yrs) 8.0 6.4 7.4 6.1 5.1 4.4 5.0 4.8 7.4 Grace Element (Z) 57.1 52.8 42.1 39.9 30.8 33.2 14.7 27.5 53.9 Suppliers Credits Interest (Z) 5.4 6.0 6.0 - 8.5 7.6 7.4 7.5 7.7 Maturity (Yrs) 13.4 10.6 10.9 - 5.4 13.1 9.2 7.3 8.5 Grace Period (Yrs) 2.7 2.4 1.3 - 2.0 3.9 3.1 2.9 2.2 Grant Element (X) 21.6 17.5 16.8 - 4.1 12.4 10.0 8.1 8.6 Financial Institutions Interest (X) - 5.9 6.9 12.6 8.8 7.9 7.9 8.4 13.7 Maturity (Yrs) - 9.1 11.0 10.3 5.1 8.0 8.5 7.7 7.1 Grace Period (Yrs) - 2.4 1.5 0.8 2.2 2.8 4.3 2.4 3.2 Grant Element tX) - 15.8 12.6 11.3 3.0 7.6 9.0 5.7 16.0 All Sources Interest (X) 2.9 3.9 4.7 5.9 7.3 7.2 7.6 6.9 11.0 Maturity (Yrs) 28.0 22.1 25.7 22.9 13.1 12.7 11.7 13.2 11.7 Grace Period (Yrs) 7.2 5.3 7.1 5.6 3.7 3.9 4.2 4.0 4.1 Grant Element (X) 51.9 40.1 39.2 29.7 14.8 14.5 11.4 17.2 G.3 Loans from Governments: Additional Detail 1. DAC countries a. Concessional Trterest (X) 2.5 2.7 2.9 3.8 2.3 2.1 2.5 2.0 2.4 Maturity (Yrs) 32.7 30.8 30.3 28.9 29.2 29.1 27.7 30.1 30.4 Grace Period (Yrs) 8.9 7.9 9.8 6.8 9.7 S,6 9.7 10.6 9.4 Grant Element (X) 60.9 57.4 57.5 48.5 62.9 64.5 60.5 66.1 62.9 b. Non-Concessional Interest (X) 7.2 6.1 6.3 6.5 8.1 8.3 8.5 7.5 5.1 Maturity (Yrs) 15.9 9.9 11.6 10.5 9.3 9.8 11.7 9.4 10.0 Grace Period (Yrs) 4.5 1.9 3.6 4.1 3.6 2.5 4.8 2.5 4.7 Grant Element (X) 13.5 15.5 17.5 16.0 7.7 6.5 6.9 9^9 23.1 2. CPE countries a. Concessional Interest (X) 2.5 2.5 2.5 - 2.5 1.0 2.5 - - Maturity (Yrs) 22.6 21.0 7.0 - 7.0 14.9 24.0 - - Grace Period (Yrs) 2.6 4.3 3.0 - 3.0 3.6 6.0 - - Grant Element (%) 48.4 49.3 27.8 - 27.8 45.3 54.5 - - b. Non-Concessional Interest (%) 5.0 5.7 - - 7.0 - 6.9 7.0 7.5 Maturity (Yrs) 3.9 3.7 - - 8.5 - 14.0 8.0 8.0 Grace Period (Yrs) 0.9 0.7 - - 3.0 - 4.7 2.0 2.5 Grant Element (X) 10.2 8.5 - - 11.7 - 16.7 10.4 11.0 Source: World Bank - 423 - Table 5.1; CONSOLIDATED BUDGET SUMMARY (in billions of Turkish Liras) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Revenues 48.2 59.9 71.7 107.8 143.8 187.6 311.6 524.2 860.1 1.485.0 Direct taxes/I 15.1 22.0 30.1 44.4 60.3 89.5 141.6 234.6 468.8 849.9 Indirect taxes/2 23i9 29.9 35.0 50.6 66.7 78.8 104.8 169.2 280.1 477.1 Nontax revenues/3 9.2 8.0 6.6 12.8 16.8 19.3 65.2 120.4 111.2 158.0 Expenditure 52.6 65.0 79.1 116.2 157.3 240.6 351.3 608.2 1,062.6 1,525.0 Personnel 18.2 24.8 30.9 42.2 55.3 77.0 112.9 190.0 335.0 435.0 Othex current 6.0 8.0 11.3 15.9 22.6 28.0 43.1 70.0 162.1 320.0 Investment 8.3 10.2 15.8 22.0 33.6 52.7 64.6 95.6 167.0 320.0 Transfers 20.1 22.0 21.1 36.1 45.8 82.9 130.7 252.6 398.5 450.0 Budget deficit -4.4 -5.1 -7.4 -8.4 -13.5 -53.0 -39.7 -84.0 -202.5 -40.0 Advance payments -1.4 -2.8 -4.4 -6.0 -8.1 -4.4 -15.0 -1.2 -22.7 -30.0 Deferred paymnents 0.4 3.4 1.2 0.5 3.6 15.1 6.5 43.2 38.3 -10.0 Cash defiGit -5.4 -4.5 -10.6 -13.9 -18.0 -42.3 -4+8.2 -42.0 -186.9 -80.0 Financing 3.7 2.9 8.8 9.7 14.5 39.9 26.9 52.9 147.5 112.9 Central bank 0.7 0.4 4.1 4.7 6.7 23.6 15.6 29.5 109.3 85.0 Domestic borrowing (Bond issue) 4.0 2.9 3.6 7.4 10.0 12.5 16.9 31.0 17.4 15.0 Treasury bills -0.7 -0.8 0.7 -0.5 0.2 5.9 -3.0 3.5 42.7 45.0 Change in holding of deposite and currency (increase-) -0.3 0.4 0.4 -1.9 -2.4 -2.1 -2.6 -11.1 -21.9 -32.2 Errors and omissions -1.7 -1.6 -1.8 -4.2 -3.5 -2.4 -21.3 10.9 -39.4 -32.8 /I Taxes on personal income, corporate income, and wealth. /2 Taxes on goods, services, and imports. 73 Includes special revenues and funds, and annexed budget revenues. Source: Ministry of Finance; IMF, SPO - 424 - Table 5.2: CONSOLIDATED GOVERNMENT REVENUE (In millions of Turkish liras; fiscal year) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Taxes on Incoane 14,568 21,471 294.01 43,516 59,288 87,685 139,392 231,719 461,727 825,900 Personal Income Tax 11,663 16,071 22,432 33,626 46,589 69,674 108,378 190,525 385,719 646,900 Corporate Income Tax 2,090 3,083 3,819 5,247 6,341 8,109 16,886 19,061 37,126 126,000 Capital Gains Tax on Real Property 271 328 358 493 702 1,186 1,528 2,546 4,017 4,200 Fiscal Balance Tax 544 1,989 2,793 4,150 5,656 8,716 12,600 19,587 34,865 49,000 Taxes on Wealth 509 570 727 876 1,061 1,783 2,228 2,896 7,118 24,000 Real Property Tax 246 253 281 344 347 800 910 1,067 2,027 12,000 Motor Vehicle Tax 112 127 187 194 246 327 393 476 3,040 8,000 Inheritance and Gift Tax 151 190 259 338 469 656 925 1,353 2,051 4,000 Taxes on Goods 9,984 12,460 13,114 20,733 26,660 29,742 37,964 63,490 105,696 196,700 Domestic Production Ta:- 4,175 4,425 5,575 7,344 10,614 13,001 18,498 30,038 54,242 82,900 Domestic Petroleum Production Tax 1,381 1,416 1,304 2,294 1,179 1,227 1,063 1,701 1,749 2,000 Production Tax on Monopoly Products 1,982 3,517 2,708 6,797 9,083 7,250 8,367 18,915 29,141 84,000 Retail Sales Tax 452 554 658 854 1,104 1,567 2,277 3,328 5,221 . 6,000 Sugar Consumption Tax 636 729 672 644 739 726 844 928 673 900 Motor Vehicle Purchase Tax 432 612 805 983 1,485 1,608 1,721 1,799 3,004 7,500 Real Property Purchase Tax 880 1,164 1,357 1,798 2,442 4,345 5,160 6,772 11,646 13,400 Revenues from Abolished Taxes 47 43 35 18 14 18 34 9 20 Taxea on Services 4,668 5,843 7,343 9,976 13,595 17,691 24,095 35,882 80,575 145,100 Banking and Insurance Transactions Tax 1,976 2,485 3,416 4,570 6,257 8,734 11,847 18,351 42,867 75,000 Transportation Tax 229 217 240 386 342 403 463 873 1,323 1,900 PTT Service Charge 146 173 163 257 260 168 592 985 2,268 3,900 Building Construction Tax 82 115 121 184 249 241 378 324 576 1,200 Stamp Tax 1,553 2,069 2,521 3,525 5,112 6,460 8,824 12,881 27,271 47,500 Other Taxes and Fees 684 784 882 1,053 1,375 1,685 1,992 2,468 6,270 15,600 Taxes on Foreign Trade 9,283 11,614 14,572 19,907 26,450 31,348 42,740 69,849 93,800 135,300 Customs Duty 2,285 2,771 3,757 4,927 6,250 6,076 6,929 13,763 23,624 40,000 Customs Duty on Petroleum 222 307 329 758 503 915 916 1,404 3,961 3,800 Production Tax on Imports 2,411 2,976 4,363 5,548 9,069 9,501 10,109 15,144 35,104 56,000 Production Tax on Petroleum Imports 2,517 3,084 3,016 4,275 4,298 5,889 5,581 7,089 7,819 7,500 Stamp Duty on Imports 1,350 1,625 2,500 3,505 5,277 7,373 16,583 26,832 6,107 7,000 Wharf Duty 90 163 316 768 971, 1,475 1,248 3,072 9,455 13,200 Other Taxes and Fees 408 689 292 126 81 119 1,374 2,545 7,'i0 7,800 Total Tax Revenue 39,012 51,958 65,156 95,009 127,055 168,249 246,420 403,836 74'3,916 1,327,000 Non-tax Revenue/I 5,439 3,541 3,827 9,772 10,669 14,136 55,471 91,614 82,900 104,000 Special Revenues and Funds, and Others 956 2,413 989 618 3,021 1,258 4,828 18,696 14,400 30,000 Annexed budget Revenue 1,511 1,278 1,962 3,695 3,011 3,952 4,872 10,041 14,000 24,000 TOTAL CONSOLIDATED BUDGET REVENUE 46,919 59,190 71,935 109,094 143,756 187,595 311,592 524,187 860,216 1,485,000 /1 Includes property income, Anterest, fines, surpluses of government enterprises, etc. Source: Ministry of Finance; Budget Reveneues Yearbook (various years) and others; IMF, SPO - 425 - Table 5.3: INTERNAL PUBLIC DEBT (In millions of Turkish liras; end of period) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 General Budget 23852 26730 28107 48013 70639 88259 118455 193451 244323 Long-term Government Bonds/I 6287 9914 11595 18041 32585 47476 67159 100331 119339 Domestic Consolidated Debti72 7380 7180 7506 21647 30478 13840 25310 68246 102475 Consolidated Municipalities Debts /3 2488 2247 1995 1749 1507 21483/8 21268 21059 19442 Savings Bonds 7592 7287 6911 6479 5975 5368 4629 3729 3003 Other Debts / 105 102 100 97 94 92 89 86 84 Annexed Budget /5 State Waterworks Bonds 5 3 - - -- - - - State Investment Enterprises/6 8590 11174 14474 17915 25821 45049 58903 57499 55804 State Economic Enterprises/7 467 429 393 558 520 882 1340 1645 2396 Municipal Bonds 180 180 21 7 11 6 - 1213 1389 TOTAL 33094 38516 42995 66503 96991 134196 178698 253808 303912 /1 Treasury /2 Consolidated debts under Law 154 and 250, 1312, and 1492. /3 Consolidated debts under Law 691 and 1376. /4 Exchange losses paid to the Central Bank under Law 65 and excludes Turkish debt bond 1935 which are included in the external debt repayable in foreign exchange. /5 Treasury guaranteed bond of State Highways and Monopoly Administration are excluded since they have a maturity of not more than a year. /6 Including amortization and credit funds bonds. /7 Agricultural Bank, Real Estate and Credit Bank and People's Bank. 7X Transfers from 1976 domestic consolidated Debts to Consolidated Municipalities Debts. Source: Ministry of Finance, SPO - 426 - Table 5.4: PROFIT AND LOSS ACCOUNT OF SEES 1/ (In billions of Turkish liras) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Expenditure 35.0 46.7 88.5 109.3 164.8 208.9 328.4 545.1 1,347.2 1,912.9 Wages and salaries 29.7 41.1 75.3 28.3 42.1 61.3 92.2 143.1 238.0 321.3 Other inputs 0.0 0.0 0.0 75.0 115.0 133.8 212.3 379.8 1,086.0 1,557.7 Depreciation and other provisions 5.3 5.6 13.2 6.0 7.7 13.8 23.9 22.2 23.2 33.9 Income 36.5 47.1 89.3 104.9 147.9 172.7 276.4 473.6 1,324.1 1,906.3 Sales revenue 34.4 45.4 79.2 92.9 132.8 155.9 256.2 429.9 1,146.0 1,780.0 Increases in stocks 2.1 1.7 10.1 12.0 15.1 16.8 20.2 43.7 178.1 126.3 Gross Profit(+)/Loss(-) 1.5 0.4 0.8 -4.4 -16.9 -36.2 -52.0 -71.5 -23.1 -6.6 1/ Operational State Economic Enterprises. Source: Ministry of Finance; IMF, SPO - 427 - Table 5.5; FINANCING OF INVESTHENT BY SEEs (In billions of Turkish liras) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Investment 12.1 14.3 27.0 38.2 50.6 62.9 80.6 171.7 459.2 534.1 Fixed investment 10.0 12.6 16.9 26.2 35.5 46.1 60.4 128.0 281.1 407.8 Stock changes 2.1 1.7 10.1 12.0 15.1 16.8 20.2 43.7 178.1 126.3 Own resources, subsidies and transfers 7.3 9.4 11.2 25.4 11.4 25.5 26.9 41.0 138.4 253.5 Gross profit/loss 1.5 0.4 0.8 -4.4 -16.9 -36.2 -52.0 -71.5 -23.1 -6.6 Taxes -0.6 -0.7 -0.6 -1.1 -1.3 -1.6 -1.8 -3.6 -14.6 -36.8 Depreciation 2.5 4.7 4.2 4.6 6.2 12.1 20.1 16.3 23.2 33.9 Transfers from petroleum fund 0.0 0.0 1.3 2.6 1.1 1.9 3.7 7.0 Budgetary transfers (net) 6.7 6.1 7.2 10.5 18.4 31.7 40.0 83.4 152.9 263.0 Changes in accounts receivable (net) ) -2.8 -9.5 -8.6 -21.9 -28.7 -32.6 -77.6 Changes inmaccounts payable (net) ) 2.9 3.5 11.4 9.2 3.4 35.1 78.5 Price subsidies ) -2.8 ) ) 1.0 7.0 21.7 ) ) ) ) ) ) ) Other subsidies ) ) -1.2 ) 4.3 1.1 3.1 5.6 ) 14.4 ) 8.5 ) ) ) ) ) ) ) Other items (net) ) ) ) 8.3 6.4 15.7 ) Financing 4.8 4.9 15.8 12.8 39.2 37.4 53.7 130.7 320.8 280.6 Central Bank -0.7 6.0 5.9 21.5 23.2 19.0 54.1 49.8 22.2 State Investment Bank (net) 2.2 3.1 ) 9.8 ) 6.9 11.7 10.3 9.1 14.4 16.2 26.7 ) ) Other sources including ) ) net foreign borrowing 2.6 2.5 ) ) 5.9 3.9 25.6 62.2 254.8 231.7 Source: Ministry of Finance; IMF, SPO - 428 - Table 5.6: FIXED INVESTMENT BY SEEs (In millions of Turkish liras) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Agricultural Sector 151 218 476 1092 1684 2918 4543 4411 6030 12274 Turkish Sugar Company 82 92 200 . 533 985 1721 2049 2264 3000 8093 Soil Products Office 7 23 14 21 37 57 659 805 1253 1575 Meat and fish 36 47 119 212 286 337 437 500 509 726 Agricultural Supply Office 9 11 20 67 97 310 574 327 336 477 Milk industry 7 33 58 81 99 224 415 79 284 273 Wool and mohair - 1 - - - - 45 63 10 52 Feed industry 10 11 5 101 64 105 106 135 138 243 Tea Corporation - - 70 77 116 164 258 238 500 835 Mining and power 2143 2693 3207 4756 4786 9350 11090 18101 43549 96017 Etibank 979 1386 1577 1531 1350 1796 1557 1766 2796 7676 TEK 1164 1307 1630 3225 3269 7359 9444 16167 40468 88027 Karadeniz Bakir - - - - 167 195 89 168 285 314 Coal, petroleum and steel 2257 4210 3932 4745 11479 11411 14322 19736 46562 106714 Coal Corporation 277 392 407 704 1072 1273 2004 3242 6096 12724 Iron and steel 902 2468 2195 1773 3157 3330 3375 6601 12967 19216 Petroleum Company 669 665 624 1594 6644 5677 6374 5716 14242 30852 Petroleum Office 29 55 88 110 75 135 148 173 401 877 Petrochem::al 380 630 618 564 531 996 2421 4004 12856 43045 Manufacturing 677 713 821 1345 2632 358 6577 8088 17616 35278 Sumerbank 124 215 271 353 730 695 1162 1786 2715 6247 Turkish Cement 77 88 108 331 290 332 1317 574 2393 4550 Nitrogen 59 136 184 237 415 396 787 744 1666 2815 Machinery and chemical 165 163 126 139 210 349 712 742 1083 2193 Pulp and paper 250 109 128 278 964 1774 2545 3991 7172 13915 State Supply Office 2 2 4 7 23 34 39 83 88 298 TUSAS (aircraft) - - - - - 9 15 8 269 53 Others /1 - - - - - - - 160 2230 5207 Transport and communication 1432 2147 4125 3385 5343 8001 9264 9524 14345 30923 Turkish Airlines 305 657 625 632 350 158 281 211 232 249 Maritime Bank 90 91 170 326 670 832 542 536 701 2103 Maritime Bank Cargo Lines 316 318 873 282 419 1117 1113 270 505 1987 State Railways 403 513 1594 843 1967 2455 3209 3790 6166 13101 Post, telephone, telegram 283 454 757 1019 1743 3063 3872 4532 6516 13150 Turkish Radio and Television 28 111 96 271 179 354 201 144 136 265 Tourism Bank 7 3 10 12 15 22 46 41 89 68 Total operational SEEs 6659 9981 12571 15323 25924 35269 45796 59860 128102 281206 Financial SEEs 586 690 1055 1570 246 224 352 447 556 1316 Province Bank 447 501 815 1412 - - - - - - Social Security Institution 102 97 85 28 126 77 57 113 239 696 Pension fund 19 27 46 40 54 72 139 131 123 256 Bank of Pious Foundations - - 6 12 7 2 9 5 13 8 People's Bank - 8 6 9 1 3 25 61 63 214 Agricultural Bank 11 47 86 66 60 53 109 87 118 142 State Investment Bank 2 4 11 - - - - - - - Guven Insurance 5 6 - 3 5 19 13 50 - - TOTAL 7245 10671 13626 16893 26177 35493 46148 60307 128658 282552 /1 Includes: TUMOSAN, TAKSAN, TEMSAN, T'ESTAS, GERKONSAN, PETLAS Source: Ministry of Finance, State Planning Organization, 1981 Annual Program Table 6.1: MONEY AND BANKING End of period TL millions 1971 1.972 1973 1974 1975 1976 1977 1978 1979 1980 Money Supply of money, total 43622 52891 69803 88699 117639 150382 209119 283595 444507 704004 Notes and coins 13918 15980 20703 26154 32909 42471 62961 93829 143695 217501 Commercial sight deposits 8673 11838 15998 22609 32077 44931 62953 86033 154480 286019 Saving sight deposits 20877 24865 32938 39654 52249 62709 82399 103268 143681 197432 Deposits with Central Bank 154 208 164 282 404 271 806 465 2651 3052 Supply of quasi money, total 17763 24527 29536 34092 42515 46528 55568 74104 128646 253359 Public sight deposits 4743 6519 8994 9515 13513 15752 21165 29690 45338 75420 Commercial time deposits 746 941 124 143 188 291 339 338 698 935 deposits 12274 17067 20418 24434 28814 30485 34064 44076 32610 177014 Central Bank Deposits, total 11016 16663 20955 26120 36927 44738 62937 99485 144061 266873 Public administrations 789 1150 1279 972 1460 2072 2571 2460 5270 48978 Public enterprises 124 184 146 239 378 215 747 266 2366 2721 Deposit money banks 8687 14679 18525 23165 34131 39060 56300 78970 110675 157928 Investment and development banks 1 22 27 61 110 170 83 716 191 200 IMF and counterpart of-aid 1233 32 30 28 27 2387 2387 12559 12919 39493 1 Other 182 596 948 1655 821 834 849 4514 12640 17803 > Lending total 17279 20466 28780 52592 66198 110621 189899 241886 382138 655183 ' Treasury 7469 7844 12434 16761 21739 45178 56639 91740 188734 Public enterprises- 5809 5688 9946 9551 25412 46457 67610 122716 178243 Deposit money banks 5732 7174 15170 24126 26653 41676 62810 77285 121058 239944 Investment and development banks - 14 78 6036 13233 21794 35254 40352 46624 48262 Deposit money banks Deposits, total 48350 62619 79971 98447 130428 158448 205803 269058 432386 745493 Public 4757 6720 8312 9019 11107 13947 18104 25053 40374 61151 Private 43593 55899 71659 89428 119321 144501 187699 244005 392012 684342 Lending, total 43651 57793 77306 100521 144135 191249 238288 296634 446188 789515 Public 7500 9841 14037 18510 25828 33529 37584 43394 76054 148704 Private 36151 47952 63269 82011 118307 157720 200704 252946 370134 640811 Investment and development banks Lending, total 12632 12892 16079 26060 37981 60634 84268 105448 135444 169849 Public 10184 10013 12203 21585 32494 53934 75164 90812 109342 121390 Private 2448 2879 3876 4475 5487 6700 9104 14636 26102 48459 Total bank lending (net of Central Bank advances to the banks) 67830 83963 106917 149011 208428 299034 414191 526037 796088 1326341 Public administrations 8813 10588 11412 16469 21830 27521 52869 66351 102731 199484 Public enterprises 20418 22544 28360 46056 62754 107093 151514 192104 297121 437646 Private sector 38599 50831 67145 86486 123794 164420 209808 267582 396236 689211 Source: Central Bank of Turkey OECD Economic Surveys - 430 - Table 6.2: DISTRIBUTION OF CENTRAL BANK CREDITS (In millions of Turkish liras, end of year) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Public sector 13705 14227 23524 32426 62673 120304 156682 252583 414492 Government 9219 10103 14754 18941 28739 60328 77989 119796 224438 Treasury 7469 7844 12484 16761 21739 45178 56639 91740 188734 Short-term advance 7469 7844 12484 16761 21739 45178 56639 91740 188734 Treasury bills - - - - - - - - - Monopoly administration 1750 2259 2270 2180 7000 15150 21350 28056 35704 State economic enterprices 4486 4124 8770 33934 19293 59976 78693 132787 190054 Soil Products Office (TMO) 3350 2700 6700 6000 12200 18575 21495 25524 40226 Financing of internal cerial purchases 3350 2700 6700 6000 12200 18575 21495 25524 40226 Financing of import (PL 480-Title 2) - - - - - - - - - Sugar factories 709 729 976 1371 3577 5974 9421 15498 29637 Sumer Bank 427 695 1094 64 880 746 158 686 4430 State Investment Bank - - - 6050 14641 27922 32275 37941 45671 Others - - - - 2636 6758 15344 53638 69890 Private sector 5566 13424 22084 22163 34047 55050 66888 105583 240691 Agricultural credits 1966 2501 2949 790 2531 3871 7146 16589 47648 Agricultural sales 1314 3855 11155 11971 13320 21225 16777 31152 46945 Tobacco financing 339 1004 668 858 1196 730 1456 3151 4978 Commercial and industrial credits 660 1569 2594 4248 7487 14646 17965 27065 ' 38039 Artisans and small traders 399 421 341 441 1202 2351 3584 5334 7381 Others 888 4074 4377 3855 8311 12227 19960 22292 95701 Bank liquidation fund 263 235 208 168 104 19 - - - TOTAL 19534 27886 45816 54757 96824 175372 223570 358166 655183 Source: State Institute of Statistics, SPO Table 6.3; CONSOLIDATED COMMERCIAL BANK CREDITS (In millions of Turkish liras) 1972 1973 1974 1975 1976 1977 1978 1979 1980 By economic sectors Industry and mining 16971 21783 27976 35543 48518 62614 80343 156360 283108 Agriculture 10548 15219 25820 35118 39489 49135 52854 82599 145780 Foreign trade and tourism 6360 7564 7746 12419 15974 16860 21874 28108 60724 Housing and other construction 6164 7180 7262 9798 14332 18981 24302 16869 18450 Artisans and small traders 1538 1972 2533 3940 6293 9516 13707 23088 37239 Distribution and services 14407 21289 24376 42134 59155 74370 101284 139164 244214 Others 5 61 36 1 1 - 1 - - TOTAL 55993 75068 95749 138953 183762 231476 294365 446188 789515 By public and private sectors General, annexed budgets, administrations and local administrations 3059 3500 3918 5023 5619 7460 9657 ) ) SEEs and semi-public enterprises 2065 4381 5307 10030 13513 14101 17624 ) 65353 ) 138013 Private sector 50869 67187 86524 123900 164630 209915 267084 380835 651502 TOTAL 55993 75068 95749 138953 183762 231476 294365 446188 789515 Source; State Institute of Statistics Table 6.4: COMPOSITION OF BANK DEPOSITS (In millions of Turkish Liras) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Total Deposits /1 62994 80392 99068 132374 162845 213261 283371 444712 793257 Demand 43354 58085 71998 98412 124371 168097 221114 347951 554944 Time 19640 22307 27070 33962 38474 45164 62257 96755 238313 Official Deposits 7913 10498 11628 17134 20079 26080 35248 50917 84093 Demand 6524 8999 9536 13547 15799 21197 29695 45338 75420 Time 1389 1499 2092 3587 4280 4883 5653 5579 8673 Commercial Deposits 12978 16216 22836 32374 45357 63930 87280 155178 286954 Demand 11901 16030 22631 32095 44977 63027 86072 154480 286019 Time 1077 186 205 279 380 903 1208 698 935 Household Deposits 42103 53678 64604 82866 97409 123251 160243 210730 422210 Demand 24929 33056 39831 52770 63595 83873 105347 137434 193505 Time 17174 20622 24773 30096 33814 39378 55396 73296 228705 /1 Including interbank deposits. Source: Central Bank of Turkey, Monthly Bulletin, various issues. - 433 - Table 6.5s LENDING AND DEPOSIT INTEREST RATES (In percent per annum) 1970 1973 1973 1974 1978 1979 1980 1981 Mar. 1 Nov. 26 Oct. I Apr. 1 Hay 1 May 1 July I Oct. 1 Jan. I Feb. 9 July 9 Nov. 27 Central Bank rediscount rates Rediscounts and advances against bills 9.0 8.0 8.5 9.0 10.0 10.75 14.0 26.0 26.0 26.0 30.25 31.5 31.5 Agriculture, exports, small industry 7.5 6.0 7.0 8.0 8.0 12.0 12.5 12.0 15.5 15.5 15.5 16.0 17.25 Medium-term credits 9.0 9.0 9.0 10.5 11.5 14.0 I.5.0 26.0 26.0 26.0 30.25 31.5 31.5 Maximum lending rates by banks Short-term credits General - 10.5 10.5 11.5 16.0 19.0 21.0 31.0 31.0 31.0 36.0 36.0 36.0 Export credits 12.0 9.0 9.0 10.5 1/ 14.0 16.0 - 22.0 22.0 22.0 27.0 5/ 22.5 27.0 6/ Agricultural credits 10.5 9.0 9.0 10.5 10.5 14.0 16.0 16.0, 22.0 22.0 22.0 22.0 22.0 Medium-term credits General 12.0 12.0 12.0 14.0 16.0 20.0 22.0 33.0 33.0 33.0 38.0 38.0 38.0 A4,.icultural credits 10.5 9.0 9.0 10.5 10.5 16.0 18.0 18.0 24.0 24.0 24.0 24.0 24.0 Long-term credits - - - - - - - 36.0 36.0 36.0 41.0 41.0 41.0 Maximum deposit rates 2/ Savings deposits, demand deposits (0-3 months) 3.0 2.5 2.5 3.0 3.0 3.0 3.0 5.0 5.0 5.0 5.0 5.0 5.0 Savings deposits (3-6 months) 4.0 4.0 3/ 4.0 3/ 6.0 8.0 8.0 8.0 5.0 5.0 5.0 5.0 45.0 45.0 Savings deposits (6-12 months) 6.0 - - - 9.0 12.0 12.0 15.0 15.0 32.0 42.0 50.0 50.0 Savings deposits (12-24 months) 9.0 4/ 7.0 7.0 9.0 12.0 20.0 20.0 33.0 33.0 40.0 50.0 50.0 50.0 Savings deposits (2-3 years) - - - - 16.0 22.0 22.0 34.0 34.0 40,0 50.0 50.0 50.0 Savings deposits (3-4 years) - - - - 20.0 24.0 24.0 35.0 35.0 40.0 50.0 50.0 50.0 Savings deposits (4 years or more) - - - - - - - 36.0 36.0 40.0 50.0 50.0 50.0 Certificates of deposit Six mnonths - - - - - - - 15.0 15.0 32.0 42.0 50.0 50.0 One year - - - - - - - 33.0 33.0 40.0 50.0 50.0 50.0 Two years - - - - - - - 34.0 34.0 40.0 50.0 50.0 50.0 Sight savinigs - - - - 3.0 3.0 3.0 5.0 5.0 5.0 5.0 5.0 5.0 1/ Export credits refinanced fully or partly through the Central Bank and exem!pt from expenditure tax as provided for in the Decree for the Inducement and Development of Exports are subject to a maximum rate of 9.0 percent. Medium-term credits with the same features are subject to a maximum rate of 12.5 percent. 2/ Since March 1973 banks are not permitted to pay interest on commercial deposits, irrespective of maturity. Instead, a new system of differential maximzum rates for savings was set up in order to promote long-term savings. 3/ Three-twelve months. 4/ Twelve-eighteen months. 5/ 22.5 percent from May 5, 1981. 6/ From October 1, 1981. Source: Central Bank of Turkey; Ministry of Finance; IMF. Table 7.1; PRICE INDICES (1963=100, annual average) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Wholesale prices 199 240 312 343 397 492 751 1231 2551 Foodstuff and fodder 185 225 305 358 412 506 734 1093 2190 Cereals 156 200 318 337 365 430 546 774 1638 Livestock 327 348 371 442 621 891 1322 1959 3806 Livestock products 190 226 297 431 452 577 987 1473 2625 Industrial and semi-manufactured 222 265 322 319 372 470 779 1461 3152 Fuels 293 327 356 378 393 457 960 1717 4630 Minerals 194 201 301 305 319 368 645 1353 2735 Building materials 187 208 253 275 383 652 963 1676 3157 Textiles 190 276 341 300 398 490 681 1190 2135 Cost of living Ankara 208 241 278 331 386 473 725 1174 2365 Istanbul 214 244 302 366 430 541 876 1433 2784 Food 212 243 297 378 458 565 864 1333 2555 Heating and lighting 242 268 339 374 411 610 1096 2122 4404 Clothing 199 238 309 323 341 453 775 1515 2814 Others 229 245 307 352 371 495 958 1616 3386 Source; Ministry of Commerce; Ministry of Finance; State Planning Organization 435 - Table 7.2& AVERAGE DAILY WAGES OF WORKERS BY BOWONOIC ACTIVITY (In Turkiab lirea) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Agriculture Fiehing 38.7 50.3 53.9 89.1 99.6 130.2 220.5 292.5 334.4 Mining and quarrying Cool mining 33.4 48.7 53.1 96.4 104.4 138.8 207.9 340.9 490.8 Metal mining 36.9 44.3 64.9 78.0 118.0 152.6 257.4 329.8 506.8 Crude petroleum and natural gas 76.1 84.3 112.7 128.4 185.1 234.5 291.9 388.4 588.3 Stone, clay, and sand quarrying 32.8 41.1 60.0 79.9 97.6 119.1 152.1 248.5 333,1 Other non-metallic mining and quarrying 37.6 52.4 68.0 .80.6 129.9 170.7 221.8 349.0 512.3 Manufacturing Food 37.3 45.9 70.5 82.6 116.9 159.7 230.5 319e4 440.1 Beverage 47.3 59.0 77.5 92.5 137.7 183.0 260.9 333.2 516.9 Tobacco 35.8 64.3 77.6 95.4 125.2 184.1 304.4 357.6 616.5 Textiles 40.8 66.0 57.3 65.8 121.9 148.7 214.0 245.2 437.5 Footwear and apparel 30.4 38.4 52.9 61.8 86.3 111.1 164.9 232.1 329.2 Wood and cork 30.1 35.2 49.2 63.3 86.6 115.2 169.1 260.4 348.8 Furniture 29.1 35.4 50.8 64.5 86.3 112.1 147.2 236.2 291.1 Paper and paper products 53.5 76.9 77.4 123.9 168.1 226.6 263.7 351.0 546.5 Printing and publishing 50.3 55.9 73.4 87.1 113.9 137.6 198.7 275.9 405.4 Leather, 34.0 41.9 54.4 67.7 111.3 147.1 160.2 238.8 411.2 Rubber products 48.6 56.9 79.9 129.7 134.9 171.6 221.5 2Q5.0 451.3 Chemicals 59.4 63.6 83.9 103.8 132.5 183.5 254.3 345.0 487.9 Petroleum and coal products 76.8 96.6 95.1 150.9 158.8 228.5 272.0 378.4 570.9 Non-metallic mineral products 40.9 54.4 67.0 86.2 122.0 160.9 212.2 293.3 451.0 Basic metals 67.9 68.1 98.4 136.5 161.9 203.5 266.0 370.6 554.4 Metal products, except machinery 44.9 52.1 66.4 87.4 109.8 148.2 192.4 282.2 407.1 Machinery, except electrical machinery 48.9 55.5 68.5 103.9 118.8 117.4 188.9 298.3 428,2 Electrical machinery 54.9 60.2 73.7 95.2 123.2 168.4 237.7 321.0 486.4 Transport equipment 65.1 70.7 92.0 125.8 148.6 179.4 263.5 356.6 543.3 Others 36.7 40.8 55.3 71.9 100.2 127.1 173.8 256.9 35-4.1 Electricity, gas and steadi 42.7 58.3 67.7 77.5 106.0 144.1 186.8 287.7 401.0 Water and sanitary services 35.2 43.3 59.3 52.1 114.0 170.7 222.6 328.4 517.7 Construction 41.7 48.1 64.5 77.2 106.9 126.6 188.8 270.4 357.0 Wholesale and retail trade 43.4 50.4 78.6 74.8 96.8 120.2 170.4 252.0 332.4 Banks and other financial institutions 40.7 47.9 64.3 75.5 95.7 144.0 205.8 312.2 451.5 Insurance 64.9 70.6 82.3 92.5 134.6 186.6 225.7 322.2 482.3 Real estate 35.8 42.5 53.1 70.7 88.5 109.9 163.8 249.1 301.9 Transport, storage and communication Transport 52.5 62.1 74.3 124.0 117.6 165.4 202.4 310.2 453.9 Storage and warehousing 48.1 63.9 72.3 90.6 116.5 165.2 223.3 321.2 509.8 Communications 66.2 74.4 77.9 118.7 120.7 148, 6 269.8 358.8 508.0 Other services Government services 32.8 39.4 56.1 72.7 102.5 142.0 195.3 292.0 406.9 Legal, business, and technical service 56.8 74.3 73.4 95.0 122.2 141.3 222.0 323.4 496.7 Cinema and theater and similar service 37.1 45.8 56.2 65.3 94.4 114.8 171.7 249.5 349,0 Personal services 30.1 36.7 49.0 67.0 83.0 98.6 156.9 234.7 298.6 AVERAGE ALL ACTIVITIES 43.9 54.4 68.3 85.6 115.3 146.5 207.9 294.3 407.8 Sov.rie; State Institute of Statistics - 436 - Table 7.3: TRENDS IN REAL AND NOMINAL (DAILY) WAGES Nominal Wages Real Wages Year Cost of Livin SIISi 2/ MI 3/ 1970 = 100 1/ Data Survey Data Survey 1960 56.6 14.5 15.7 25.5 27.7 1962 60.3 16.5 17.6 27.4 29.1 1965 67.4 21.6 22.9 32.0 34.0 1967 83.3 25.8 28.4 31.0 34.1 1970 100.0 35.3 40.2 35.3 40.2 1972 137.3 43.9 54.5 32.0 39.7 1973 156.6 54.4 64.1 34.7 40.9 1974 194.0 68.3 82.6 35.2 42.6 1975 234.6 85.6 110.3 36.5 47.0 1976 276.1 115.3 134.1 41.8 48.6 1977 347.9 146.5 200.6 42.1 57,7 1978 563.2 207.9 307.8 36.9 54.7 1979 921.0 294.3 486.0 31.9 52.8 1980 1,789.2 427.0 876.7 23.9 49.0 1/ Based on the Istanbul consumer prices index. 2/ The SII data are the average daily wages a-s reported by the social Insurance Institute. 3/ The MI survey (Annual Survey of the Manufacturing Industry-SII) wage is calculated by dividing total payments (inclusive of bonuses, etc., but exclusive of social security and retirement funds payments) by the number of workers engaged. Source: SPO - 437 - Table 7.4; GOVERNMENT SALARIES BY GRADES, 1970-1979 Grade Daily Wage (TL per day) 1970 1972 1976 1977 1978 1979 1 222 222 285 380 467 587 2 183 183 238 320 146 501 3 156 156 204 272 338 432 4 133 113 18 240 244 384 5 114 114 157 210 262 339 6 97 97 137 182 230 304 7 84 84 120 160 205 275 8 72 72 106 142 184 253 9 61 60 93 124 164 232 10 54 54 84 112 150 216 11 48 48 76 102 139 205 12 42 42 70 94 136 195 13 36 35 64 86 120 184 14 31 30 57 76 110 173 15 25 25 49 66 99 163 Average Nominal 49.6 49.1 82.5 119.6 165.1 264.3 Average (real)l/ 49.6 35.8 39.9 34.5 29.3 28.7 1/ Average nominal wages deflated by Istanbul CPI, 1970 = 100. Source: State Planning Organization, unpublished. - 438 - Table 7.5: PUBLIC AND PRIVATE SECTOR WAGES Nominal Wages Real Wages MI Survey SII Data MI Survey $II Data Public Private Public Private Public Private Public Private Sector Sector Sector Sector Sector Sector Sector Sector 1970 46.7 36.3 38.7 33.0 46.7 36.3 38.7 33.0 1972 61.3 50.4 48.7 41.3 44.6 36.7 35.5 30.1 1973 71.4 60.1 61.6 51.0 45.6 38.4 39.3 32.6 1974 95.6 75.6 76.9 63.5 49.3 39.0 39.6 32.7 1975 130.0 99.1 98.3 78.8 55.4 42.2 41.9 33.6 1976 128.5 137.4 132.2 105.9 46.5 49.8 47.9 38.4 1977 229.0 183.1 178.1 128.7 65.8 35.9 51.3 37.1 1978 366.3 275.1 244.5 185.6 65.0 48.9 43.4 33.0 1979 572.3 442.1 348.8 260.9 62.1 48.0 37.9 28.3 1980 1077.8 758.4 525.3 367.3 60.2 42.4 29.6 20.5 Source: State Planning Organization. - 439 - Table 7.6: COLLECTIVE AGREEMENTS AND COVERAGE IN TURKEY Number of Agreements Number of Works Covered (000) Public Private Total Public Private Total Sector Sector Sector Sector 1970 478 1,038 1,516 335 215 550 1971 328 1,114 1,442 189 154 343 1972 443 1,160 1,603 278 148 426 1973 551 1,370 1,921 250 193 443 1974 594 1,130 1,724 427 174 602 1975 297 1,596 1,893 91 209 300 1976 917 1,491 2,408 221 255 476 1977 653 1,520 2,173 369 221 590 1978 785 1,440 2,225 280 204 484 1979 1,204 1,710 2,914 266 48 314 1980 445 1,368 1,813 237 93 330 Source; Ministry of. Labor. - 440 - Table 8.1; PRINCIPAL LAND USE (In thousands of hectares) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Cultivated area 25043 25014 24660 24418 24243 24472 24552 24972 24567 Area sown 16047 16062 16154 16241 16321 16531 16352 16605 16379 Fallow land 8996 8952 8506 8177 7922 7941 8200 8367 8188 Ttee crops, vineyards, vegetable area 3183 3274 3268 3244 3460 3385 3493 3585 3Q05 Fruit trees 1052 1153 1187 1163 1263 1290 1321 1352 1386 Olive groves 751 775 785 801 810 816 811 812 813 Vineyards 850 816 795 790 768 760 790 850 820 Vegetable area 530 530 501 490 619 591 571 571 786 Forest area 18273 19136 20170 20170 20170 20155 20155 20155 20199 TOTAL 46499 47424 48098 47832 47873 48012 48200 48712 48571 Source: State Institute of Statistics 441 - Table 8.2: LAND AREAS FOR CEREALS, PULSES, AND INDUSTRIAL CROPS (In thousands of hectares) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Cereals 13185 13305 13189 13609 13581 13585 13483 13689 13292 Wheat 8730 8850 8750 9250 9250 9325 9300 9400 9020 Barley 2530 2555 2580 2600 2635 2620 2600 2718 2800 Rye 625 610 600 565 530 520 470 470 443 Maize 617 625 620 600 600 580 580 585 583 Oats 295 280 275 260 243 230 225 220 197 Spelt 72 65 58 59 58 50 46 45 41 Millet 38 37 30 25 24 20 20 20 15 Rice 51 60 60 55 54 58 70 75 52 Canary seeds 3 2 1 1 1 2 2 1 1 Mixed grains 224 225 215 194 186 180 170 155 140 Pulses 604 616 606 568 630 692 643 670 725 Lentils 103 118 117 125 186 240 177 175 191 Dry beans 106 100 100 94 102 104 100 110 114 Chick peas 178 186 175 140 138 138 168 200 240 Cow vetch 100 103 105 103 103 119 114 113 114 Wild vetch 68 63 60 60 56 48 42 35 31 Broad beans 33 31 34 31 30 30 31 31 30 Kidney beans 2 2 2 2 2 2 2 2 2 Peas 3 3 3 3 3 4 4 4 3 Others 1/ 11 10 10 10 10 7 5 - - Industrial crops 1299 1186 1298 1185 1215 1408 1312 1143 1233 Cotton 760 677 837 670 581 777 653 612 672 Tobacco 352 323 230 242 315 270 304 222 230 Sugar beets 149 154 187 215 252 250 277 270 269 Flax 11 11 14 13 11 9 5 9 9 Opium 6 0 0 9. 22 72 51 18 19 Hemp 8 8 8 7 8 7 8 8 9 Aniseed 2 3 10 14 16 4 1 4 6 Others 2/ 9 9 11 17 10 13 13 - 19 TOTAL 15088 15107 15093 15362 15404 15685 15438 15502 15250 1/ Include fenugreek, mango beans and grass peas. 2/ Include dry pepper, sorghum, sugar cane, saffron, coriander, cumin, mustard and touka bean. Source: State Institute of Statistics - 442 - Table 8.3; OUTPUT OF CEREALS, PULSES AND INDUSTRIAL CROPS (In thousands of tons) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Cereals 18638 15603 16967 22111 24355 24212 24237 25556 24323 Wheat 12200 10000 11000 14750 16500 16650 16700 17500 16500 Barley 3725 2900 3330 4500 4900 4750 4750 5240 5300 Rye 755 690 560 750 740 690 620 620 525 Maize 1030 1100 1200 1200 1310 1265 1300 1350 1240 Oats 396 380 380 390 400 370 370 330 355 Spelt 75 80 80 80 78 70 64 69 54 Millet 52 33 40, 40 34 29 29 20 22 Rice 122 159 150 150 158 165 190 225 143 Canary seeds 3 2 2 1 2 3 3 2 1 Mixed grains 280 259 225 250 233 220 211 200 183 Pulses 665 589 665 675 752 813 729 762 817 Lentils 105 67 120 135 210 260 180 183 195 Dry beans 159 148 145 155 159 160 156 165 165 Chick peas 183 185 195 172 170 180 205 225 275 Cow vetch 88 85 75 85 90 100 80 86 84 Wild vetch 64 46 60 60 58 46 40 36 30 Broad beans 47 46 54 50 48 50 54 52 52 Kidney beans 2 2 2 3 2 2 2 2 2 Peas 4 4 4 4 4 6 7 8 7 Others/l 13 6 10 12 12 9 5 6' 7 Industrial crops 6642 5778 6543 7662 10246 9891 9662 10238 7552 Cotton 544 513 593 480 475 575 475 476 500 Tobacco 180 149 203 200 314 248 297 206 234 Sugar beets 5896 5095 5707 6949 9406 8995 8836 9500 6766 Flax 1 1 4 4 2 2 1 1 2 Opium . . . 6 14 36 28 25 14 Hemp 9 8 9 7 12 9 9 11 14 Aniseed 2 3 7 8 10 3 1 3 4 Others /2 11 9 16 9 13 23 14 16 18 TOTAL 25945 21970 24175 30448 35353 34906 34628 36556 32692 /1 Include fenugreek, mango beans, and grass peas. /2 Include dry pepper, sorghum, sugar cane, saffron, coriander. Source; State Institute of Statistics - 443 - Table 8.4; YIELDS OF CEREALS, PULSES, AND INDUSTRIAL CROPS (In kilograms/hectare) Estimate 1962 1967 1972 1973 1974 1975 1976 1977 1978 1979 1980 Cereals 1127 1296 1414 1173 1287 1625 1793 1782 1797 1863 1830 Wheat 1083 1250 1397 1130 1257 1595 1789 1785 1796 1867 1829 Barley 1250 1394 1472 1137 1291 1731 1860 1813 1827 1871 1893 Rye 1030 1224 1208 1131 933 1327 1399 1327 1319 1319 1207 Maize 1199 1556 1669 1760 1935 2000 2192 2181 1241 1308 2127 Oats 1098 1308 1342 1357 1382 1500 1660 1609 1642 1682 1802 Spelt 992 982 1042 1231 1379 1356 1348 1400 1391 1533 1317 -Millet 1224 1310 1368 871 1333 1600 1478 1450 1425 1250 1467 Rice 2037 2333 2392 2650 2500 2740 2926 2845 2714 3000 2750 Canary,seeds 622 870 1029 1032 1364 1313 1460 1333 1500 1333 1400 Mixed grains 1094 1111 1250 1151 1047 1289 1253 1222 1240 1290 1307 Pulses 1001 1107 1102 956 1096 1188 1193 1175 1133 1126 1117 Lentils 966 1060 1019 566 1026 1083 1129 1083 1015 1046 1021 Bry beans 1089 1311 1500 1480 1450 1649 1559 1538 1560 1500 1447 Chick peas 993 1141 1028 995 1114 1229 1241 1304 1220 1125 1146 Cow vetch 900 974 880 825 714 825 876 840 705 749 737 Wild vetch 931 1022 948 730 1000 1000 1027 958 952 1029 968 Broad beans 1325 1229 1424 1484 1588 1613 1638 1666 1726 1676 1733 Kidney beans 778 935 977 905 900 1250 949 1100 1100 1095 1100 Peas 1138 1224 1486 1467 1167 1273 1379 1558 1750 1875 2333 Others 1/ 1048 990 1145 607 1002 1103 1165 1245 1041 1012 1045 Industrial crops 3064 4814 5114 4874 5041 6442 8588 7051 7370 8100 8100 Cotton 371 551 715 757 714 716 817 740 727 785 744 Tobacco 601 637 510 461 884 828 1071 881 977 929 1018 Sugar beets 21719 35122 39447 33257 30507 32389 37564 36042 31905 26000 25119 Flax 120 217 118 130 250 269 159 189 237 135 269 Opium 8 4 12 - - 672 647 506 558 558 707 Hemp 692 748 1037 1070 1113 1000 1500 1264 1063 1375 1489 Aniseed 629 720 756 735 659 600 628 771 887 714 626 Others 2/ 6079 4200 1260 952 1406 531 1300 1840 1129 763 976 1/ Include fenugreek, mango beans and grass peas. 2/ Include dry pepper, sorghum, sugar cane, saffron, coriander, cumin, mustard and touka beans. Source: State Institute of Statistics - 444 - Table 8.5: OUTPUT OF NUTS AND FRUITS (In thousands of tons) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Nuts 406 441 458 549 463 552 517 538 451 Hazelnuts 190 250 244 317 245 290 310 300 240 Walnuts 113 110 110 117 135 150 130 145 122 Chestnuts 50 52 48 47 48 48 45 46 59 Almonds 24 22 33 37 30 24 26 27 22 Pistachios 29 7 23 31 5 40 6 20 8 Pome fruits 1093 1088 1225 1188 1307 1216 1422 1635 1790 Apples 850 850 950 900 1000 900 1100 1300 1400 Pears 196 195 230 240 255 260 270 280 330 Quince 39 35 37 40 43 46 41 45 50 Others 8 8 8 8 9 10 11 10 10 Stone fruits 515 507 546 632 663 656 699 687 731 Plums 131 124 136 130 137 153 149 135 149 Peaches 140 120 160 200 192 185 230 220 240 Apricots 63 77 69 100 96 94 96 110 100 Cherries 65 66 67 73 85 91 91 92 96 Others 116 120 114 129 153 133 133 130 146 Cultivated fruits 3816 3702 3670 3588 3451 3536 3881 3894 4010 Grapes 3434 3344 3346 3247 3080 3180 3496 3500 3600 Figs 216 190 156 175 188 175 185 200 205 Mulberries 97 90 90 90 103 90 93 93 95 Carobs 18 17 13 13 12 19 19 20 17 Others 51 61 65 63 68 72 88 81 93 Citrus 728 691 900 959 976 1147 1081 1147 1174 Oranges 467 470 500 540 545 650 656 680 695 Lemons 149 122 265 290 278 325 243 280 283 Mandarins 97 84 112 105 126 135 150 155 167 Grapefruits 6 7 13 13 13 22 i.0 20 17 Sour oranges 9 8 10 11 14 15 0 12 12 Olives 1019 333 840 561 1097 400 1100 430 1350 TOTAL 7577 6762 7639 7477 7957 7507 8700 8331 9506 Source: State Institute of Statistics Table 8.6: USE OF MAJOR AGRICULTURAL INPUTS 1972 1973 1974 1975 1976 1977 1978 1979 1980 Certified seeds 100 228 168 167 174 172 161 148 150 (thousands of tons) Cereal seeds 68 184 131 128 137 133 123 99 100 Others 32 44 37 39 37 39 38 49 50 Fertilizers 3284 3720 3136 3692 5945 6577 7474 7666 5960 (thousands of tons) Agricultural chemicals 51 66 55 48 61 71 68 81 81 (thousands of tons) Tractors (thousands) 134 171 198 241 312 377 398 400 394 Total outstanding credit from Agricultural Bank (TCZB) 14374 17683 22874 30877 50364 71823 87645 121590 173243 (millions of Turkish liras) Source: General Directorate of Planning, Research, and Coordination. General Directorate of Agricultural Affairs records. General Directorate of Agricultural Planting Protection records - 446 - Table 8.7: AGRICULTURAL SUPPORT PRICES (In Turkish lira per kilogram) Estimate 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 Wheat 1.00 1.20 2.12 2.34 2.58 2.86 3.20 5.03 10.23 18.75 Barley 0.78 0.92 1.64 1.76 1.87 1.98 2.69 4.72 8.90 14.00 Rye 0.75 0.90 1.57 1.67 1.77 1.90 2.48 4.7i 8.48 13.00 Oats 0.72 0.86 1.50 1.62 1.67 1.77 2.34 4.55 8.30 - Paddy (long grain) 2.50 3.60 4.50 5.00 5.50 6.25 12.00 31.49 75.00 - Tobacco 13.20 23.10 23.15 31.29 39.13 44.39 50.10 60.91 111.68 130.34 Sugarbeets 0.20 0.30 0.40 0.50 0.58 0.62 0.90 1.42 3.10 4.42 Seed cotton 1/ 3.75 6.00 8.00 8.00 10.25 10.50 12.50 25.00 50.00 63.00 Tea 4.00 4.50 6.25 7.50 8.50 10.00 11.00 14.50 25.00 41.00 Sunflower seeds I/ 2.20 2.50 3.75 5.50 5.75 6.50 8.50 12.00 30.00 Hazelnuts 1/ 8.50 9.70 13.50 14.00 14.50 16.50 23.50 37.50 110.00 125.00 Dried figs 1/ 2.60 4.20 5.50 6.00 7.00 8.00 10.50 22.00 50.00 65.00 Olive oil I/ 8.70 17.50 17.50 17.50 18.00 23.00 35.50 - 125.00 - Raisins 1/ 2.92 7.00 10.00 10.00 10.50 12.00 17.50 40.00 85.00 110.00 Pistachio nuts 1/ 13.00 18.00 25.00 26.50 - 27.00 55.00 150.00 300.00 - Fresh cocoons 1/ - - 60.00 70.00 80.00 100.00 125.00 185.00 800.QO 1/ Support prices to cooperative members Source: Ministry of Agriculture; Ministry of Commerce; Ministry of Customs and Monopoly - 447 - Table 8.8; OFFICIAL PRICES OF AGRICULTURAL INPUTS 1972 1973 1974 1975 1976 1977 1978 1979 1980 Tractors (TL thousands) Massey Ferguson MF 135 71.7 71.7 72.0 80.0 88.2 132.7 218.8 314.7 1245.0 Ford 5000 108.2 108.2 102.5 102.5 133.0 157.0 0.0 0.0 1370.0 Ford 3000 64.0 64.0 81.4 95.0 109.1 126.3 210.8 0.0 1150.0 Implements (TL) Bottom plow 3330 3330 4700 4994 7000 10300 12500 16500 21500 24 disk harrow 3850 3750 5700 6600 10500 175i00 19000 31000 55000 4" irrigation pump 9800 10200 12300 12900 14000 16000 20000 45000 245000 Fuel Cm/i) Kerosene' 1.38 1.38 2.47 2.47 2.47 3.50 5.00 10.00 36.0 Fuel oil 1.42 1.42 2.51 2.51 2.51 4.10 5.25 9.00 24.0 Gasoline 1.62 1.62 2.80 2.80 2.80 5.50 9.00 17.00 53.0 Certified seeds (TL/kg) Hard wheat 1.41 1.65 3.05 3.50 4.00 4.25 5b50 8.30 18.25 Barley 1.15 1.35 2.30 2.30 2.90 3.20 4.20 7.30 14.75 Cotton 1.75 1.85 3.25 3.25 3.50 3.80 4.00 8.00 17.50 Sunflower 2.70 3.20 3.75 8.25 8e25 9.35 9.75 13.00 50.00 Fertilizer (TL/kg) Ammonium nitrate (26% N) 0.75 0.75 2.55 1.40 1.40 1.40 1.40 1.40 7.50 Superphosphate (16-18% P 0 ) 0.49 0.49 1.18 0.60 0.60 0.60 0.60 0M60 5.00 Pesticides (TL/kg) Sulphur powder 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80 20.50 Copper sulphate 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 50.00 Source; Ministry of Commerce - 448 - Table 9.1: OUTPUT OF SELECTED INDUSTRIAL GOODS (In tons, except fabrics in thousand meters) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Capital goods Pig iron 1/ 1135 896 1199 1196 1516 1360 1570 1903 1809 Steel (ingots) 1/ 1442 1161 1459 1464 1455 1396 1628 1788 1702 - Rolled products 1097 1025 1198 1118 1525 1739 1565 1618 1839 3/ Cement 8421 8945 8938 10854 12343 13833 15344 13785 12888 Paper, board and 1/ newsprint 268 303 321 328 335 374 324 301 299 Glass-window, bottles 2/ 70 85 75 115 132 156 154 167 107 Superphosphate 616 479 459 772 628 625 522 952 1723 Consumption goods Sugar 794 723 757 806 982 1080 1090 973 1043 Cigarettes 43 46 53 52 54 58 56 71 59 Cotton fabrics 227 219 210 212 205 179 209 211 189 Woolen fabrics 5 4 6 7 8 6 6 6 5 Mineral products Iron ore 4/ 1959 2549 2269 2204 3342 3199 3232 1527 2314 Chrome ore 4/ 650 572 692 918 832 911 639 530 519 Copper (blister) 1/ 4/ 1116 1076 2422 2329 1957 2247 2083 2231 1589 Boron minerals 4/ 606 498 1071 968 908 1098 1317 1121 1030 Coal 4/ 7861 7841 8601 8362 8074 7670 7742 7018 6598 Lignite 4/ 10263 i0593 10981 11757 11363 14812 17065 14973 16954 Crude petroleum 3410 3703 3422 3095 2656 2713 3094 2844 2329 1/ Public sector only. 2/ Private sector only. 3/ 1980 Jan.-Nov. Estimates. 4/ Ungraded productn Source; State Institute of Statistics - 449 - Table 9.2; VALUE OF MANUFACTURING PRODUCTION (in million of Turkish liras) 1979 1980 1981 3/ Consumer goods 1,220,474 1,237,332 1,285,415 Food processing 792,232 792,518 830,181 Beverages 52,308 53,350 54,835 Tobacco processing 102,362 102,526 108,106 Textiles 273,572 288,938 292,293 Intermediate goods 1,050,597 1,113,517 1,348,888 Wood products 112,191 116,433 119,742 Paper 31,089 33,133 38,204 Printing 39,186 40,949 41,488 Hides and leather products 54,650 54,700 55,475 Rubber products 44,332 51,840 53,750 Plastic products 23,496 22,100 23,300 Chemicals 95,597 102,180 106,724 Petroleum products 347,795 392,642 430,465 Ceramics 6,670 7,154 7,758 GM.tis8 18,133 13,443 23,050 Cement and cement products 83,533 79,808 90,684 Iron and steel 135,797 137,992 147,555 Nonferrous metals 58,128 61,143 66,098 Investment goods 375,240 340,998 358,210 Metal products 85,000 81,500 84,000 Machinery 1/ 110,832 104,990 108,000 Electrical machinery 2/ 41,546 42,847 44,200 Transport equipment 137,862 111,661 118,830 TOTAL 2,646,221 2,691,847 2;992,513 1/ Include agricultural machinery. 2/ Include electronics. 3/ Programme Source: State Planning Organization. - 450 - Table 9.3: FIXED INVESTMENT IN MANUFACTURING (In millions of Turkish Liras, at 1976 prices) 1973 1974 1975 1976 1977 1978 1979 Consumer goods 7961 12800 10310 9244 9053 6907 4875 Food 2045 389P 3427 4181 4140 3510 2369 Beverages 306 146 203 194 465 292 233 Tobacco 129 454 598 498 907 833 448 Textiles and Clothing 5481 8302 6077 4371 3541 2272 1807 Intermediate goods 15519 15739 23990 22196 24239 21408 20822 Hides and leather 239 367 210 235 285 158 166 Forestry products 328 420 581 665 993 1073 867 Pulp and paper 199 441 1559 2287 2320 2645 2555 Printing 265 164 133 331 173 145 73 Chemicals 3495 2672 4628 3213 5739 5047 6872 Petroleum products 918 1385 5424 5168 3842 1805 1920 Rubber and plastics 493 525 730 1506 1901 928 557 Soil products 2121 3054 2491 2313 2961 2536 1415 Iron and steel 4940 4363 6311 5582 5310 6609 5843 Non-ferrous metals 2521 2348 1923 896 714 462 554 Investment goods 3867 3376 4655 6697 7511 6164 4483 Metal products 733 644 548 1043 1086 909 869 Machinery 679 945 1293 1875 2819 1609 1182 Electrical machi- nery 627 459 1021 846 1168 1241 704 Vehicles 833 822 1514 2127 1604 1457 1367 Others 995 506 279 806 834 947 360 TOTAL 27347 31915 36955 38137 40803 34479 30162 Source: State Planning Oroanization Table 9.4: SECTORAL DISTRIBUTION OF ESTABLISHMENT, EMPLOYMENT, OUTPUT, VALUE ADDED, AND INVESTMENT IN PUBLIC MANUFACTURING INDUSTRY, 1979 (private TL million) Number Annual Average Total Wages of Number of Persons and Investment Ouput Value-Added Establishments Employed Salaries Paid Processed Food 158 55,784 9,326.5 1,382.9 52,524.1 12,413.3 Beverages 21 5,807 1,039.0 60.5 5,467.8 3,503.1 Tobacco 28 39,276 7,232.2 27.5 35,026.9 15,805.6 Textiles 42 33,846 4,725.6 9;94.1 17,487.3 7,983.7 Wearing Apparel 3 2,275 374.3 8.6 1,592.3 759.4 Fur and Leather Products - - - - - - Wood and Cork 26 5,212 882.2 88.5 3,863.7 1,493.5 Furnitures and Mixtures 12 524 23.5 +0.0 194.-i 121.2 Paper and Paper Products 7 10,834 3,363.4 808.3 11,615.3 2,434.0 Printing and Publishing 11 2,422 549.4 37.3 906.5 705.6 Chemicals 15 12,593 4,263.1 1,213.1 23,798.8 11,091.4 Petroleum 8 7,379 3,372.0 2,522:9 76,869.7 16,307.6 Rubber and Rubber Products I 57 19.6 1.5 338.6 66.8 Non-metallic Minerals 27 11,976 2,569.0 509.2 8,639.1 3,486.7 Basic Metals 11 54,881 10,657.9 16,828.5 47,272.7 14,683.1 Metal Products 7 2,552 1,183.3 57.0 4,039.9 2,588.6 Machinery 21 13,284 4,400.2 518.2 10,697.5 4,940.7 /Electrical Machinery 4 2,114 542.6 9.4 849.2 487.9 Transport Equipment 22 21,891 4,826.8 337.6 8,922.1 6,832.4 Miscellaneous 1 666 100.8 - 300.0 166.4 TOTAL 425 283,473 59,451.4 25,405.1 310,406.2 105,871.1 Source: State Institute of Statis8tics. Table 9.5; SECTORAL DISTRIBUTION OF ESTABLISHMENT, EMPLOYMENT, OUTPUT, VALUE ADDED, AND INVESTMENT IN PRIVATE MANUFACTURING INDUSTRY, 1979 (private TL million) Number Annual Average Total Wages of Number of Persons and Investment Ouput Value-Added Establishments 1/ Employed Salaries Paid Processed Food 1,215 56,206 6,976.4 775.9 87,845.9 119,558.8 Beverages 61 6,707 1,272.6 787.2 8,136.6 4,620.8 Tobacco 18 2,416 194.9 7.9 3,450.9 1,115.4 Textiles- 1,027 134,042 16,382.7 10,489.5 126,092.9 55,388.6 Wearing Apparel 273 13,262 1,044.3 165.7 9,035.8 2,727.0 Fur and Leatber Products 129 4,060 375.2 38.0 4,015.4 1,193.2 Wood and Cork 154 7,548 1,011.4 650.0 8,442.8 2,962.3 Furnitures and Fixtures 89 2,666 201.3 162.5 1,478.8 595.3 Paper and Paper Products 108 4,979 781.7 422.0 7,626.6 3,176.7 Printing znd Publishing 192 8,227 1,213.1 220.9 8,619.8 3,433.2 Chemicals 392 31,384 7,262.2 2,959.9 78,887.3 32,791.6 Petroleum 31 2,293 506.6 343.8 11,269.3 15,456.1 Rubber and Rubber Products 523 23,777 6,853.5 1,211.0 35,171.6 1:2,815.2 Non-metallic Minerals 492 49,166 8,726.2 2,411.9 39,430.8 20,424.3 Basic Metals 473 26,443 4,754.2 7,967.0 55,061,5 17,362.0 Metal Products 747 35,826 4,599.8 1,612.9 34,302.6 13,849.3 Machinery 498 34,026 5,673.6 2,033.5 39,611.0 114,095.2 Electrical Machinery 343 29,613 6,571.5 1,040.6 42,372.3 15,782.9 Transport Equipment 380 31,446 5,663.3 3,483,0 54,343.3 116,674.3 Miscellaneous 123 4,917 578.1 172.2 3,391.1 1,525.4 TOTAL 6,795 509,004 80,642.6 50,031.9 658,586.3 245,547.6 1/ Establishments where 10 or more persons are engaged. Source: State Institute of Statistics: Unpublished data sheets. - 453 - Table 9.6: PRODUCTION FIGURES FOR THE FIRST TEN MONTHS OF 1979, 1980 and 1981 1979 1980 1981 Differ. (79-80) Differ. (80-81) Commodities -------(103 Tons) ----- Qty. % Qty. % Crude Petroleum 2,397 1,941 1,802 -456 -19.0 -139 -7.2 Petroleum Products Diesel Oil 2,040 2,735 2,821 695 34.1 86 3.1 Fuel Oil 3,397 3,948 4,031 551 16.2 83 2.1 Kerosene 1,551 1,650 1,570 99 6.4 -80 -4.8 Fertilizer Nitrogenous 1,363 1,713 2,765 350 25.7 1,052 61.4 Phosphorous 1,393 1,520 2,825 127 9.1 1,305 85.9 Potash 7 - - -7 - - - Electricity Thermic (Gwh) 10,149 9,727 10,018 -422 -4.2 291 3.0 Hydrolic (Gwh) 8,578 9,392 10,581 814 9.5 1,189 12.7 Lignite 8,582 10,582 11,633 2,000 23.3 1,051 9.9 Coal 3,435 2,968 3,285 -467 -13.6 317 10.7 Iron and Steel Rolled Bars 1,269 1,253 1,236 -16 -1.3 -17 -1.4 Rolled Products 1,618 1,620 1,800 2 0.1 180 11.1 Others 1,422 1,416 1,334 -6 -0.4 -82 -5.8 Cement 12,280 10,920 12,728 -1,360 -11.1 1,808 16.6 Sugar 599 712 1,022 113 18.9 310 4.5 Paper 255 250 304 -5 -2.0 54 21.6 Petrochemical Products (tons) Polyethylen.e 13,506 12,434 13,916 -1,072 -7.9 1,482 11.9 PVC 16,089 21,404 31,985 5,315 33.0 10,581 49.4 Carbon Black 11,641 12,461 15,099 820 7.0 2,638 21.2 Polystyrence 7,478 10,128 11,384 2,650 35.4 1,256 12.4 Caprolactam 13,868 14,887 11,885 1,019 7.3 3,002 -20.2 SBR 19,020 18,088 25,592 -932 -4.9 7,504 41.5 Cigarettes (tons) Filtered 24,747 20,340 31,000 -4,047 -17.8 10,660 52.4 Non-filtered 21,413 16,600 21,000 -4,813 -22.5 4,400 26.5 Salt (tons) 1,002 1,002 1,077 - - 75 7.5 Number of; Tractors 11,870 11,132 19,712 -738 -6.2 8,580 77.1 Diesel locomotive engine 23 31 25 8 34.8 -6 -19.4 Trucks 11,363 5,963 9,209 "5,400 -47.5 3,246 54.4 Lorries (small trucks) 7,107 5,438 5,126 -1,669 -23.5 -312 -5.7 Buses and midibuses 1,422 1,237 1,660 -185 -13.0 423 34.2 Cars 35,996 25,095 18,414 -10,901 -30.3 -6,681 -26.6 Minibuses 3,593 1,756 1,226 -1,837 -51.1 -530 -30.2 Source: SPO Table 9e7: OUTPUT OF PETROLEUM, COAL AND MAJOR MINERALS 1/ (In thousands of tons) 1972 1973 1974 1975 1976 1977 1978 1979 1980 Crude petroleum 3410 3703 3422 3095 2656 2713 3094 2844 2329 Coal 2/ 7861 7841 8601 8362 8074 7670 7742 7018 6598 Lignite 2/ 10263 10593 10981 11757 133,63 14812 17065 14973 16954 Chrome 2/ 650 572 692 918 832 911 639 530 519 Iron 2/ 1959 2549 2269 2204 3342 3199 3232 1527 2314 Boron 2/ 606 498 1071 968 908 1098 1317 1121 1030 Copper 2/ 1116 1676 2422 2329 1957 2247 2083 2231 1589 1/ Covers total production in Turkey 2/ Ungraded product Source: State Institute of Statistics Table 9.8; PRODUCTION OF ELECTRICITY (GROSS) (In millions of kilowatt-hours, 1972 1973 1974 1975 1976 1977 1978 1979 1980 Government power pt.-Dts 10496 11601 12630 14710 17236 19101 20006 20609 21135 Thermal power 7333 9025 9303 8839 8892 10545 10672 10347 9832 Hydro power 3163 2576 3327 5871 8344 8556 9334 10262 11303 Irndustrial power plants 746 824 847 913 1041 1464 1720 1912 2151 Thermal power 705 797 818 881 1014 1427 1689 1871 2105 Hydro power 41 27 29 32 27 37 31 41 48 TOTAL 11242 12425 13477 15623 18277 20565 21726 22521 23288 Thermal power 8038 9822 10121 9720 9906 11972 12361 12218 11937 Hydro poxwer 3204 2603 3356 5903 8371 8593 9365 10303 11351 Source: State Institute of Statistics 3Q0 350 | UGRA ^3 . 0 a c k 3r e C ; U\ Ka Gs Aw R I A 5 Edirn KirkareliSino tJ, j pe.Bnii Ma=raDX t Marmar is K,,s e n mu Ii, S r3 - Isablaa ~~ MeanI aErrna R Y A Mdin rOds PuLATION CENTERSlk 2 ac / +-*----l- Railways --,lso!o ~-Provincial boundaries / C- ,00000C, O 1as -B- -I nerntionl boundaries Pl. - 1500o000 O 100 200 300 .hir,000 This ap s been pta aniLsEa R U akl anssaf ohnoveine iIi 050 100{5 200 /Lcundaries showvn on O ILS.IWoi Aknkendthir/ 30n i jldgment or yte ,erol 350 0°or ecceLo aLr. rof such _________________________________ IBRD 6R S e a 40 AUGUST 1979 nsnHpoh -= Ordu - ;'' , Girendn Su z tamoya )mUhne - - - /4 Erz rzurmArlN ivas in n za ayserl im L ak Van a t arakirf T\Op d (euph(, Siverek kka r* orin Mar ne. azianitep Kils R A A bondari sson onti npC,- f,5E1' . TURKEY TRANSPORTATION AND MAJOR Ye R, CRAEPOPULATION CENTERS 3' 40 U S SH. ROMANIA, C B-.-. lack Sea o 2BULGARIA rhis 'asp has been paproiedh lb.e ( ' ~ ~ WVorld Bank'. itaff e~tIUSIveffly 'aAnkar %a K- the convrenience of the , eadg.s ToR the report Co which it s atte-ched T UnZ, U K E li,e drnw,at, usdad the R E 9 .. boundari'es shown on this map do not Imp~ly on the os3,' of the V World Bank ad,1it affli/iset any.. judgment 0.1 the legat stratus of > IA any territwyorya any endorsement CRETE 'SYRIA I RAQO or acceptance of such boun1dDries. , ~ CYPRUS~-'7 )