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.
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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
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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
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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
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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.
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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
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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
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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.
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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.
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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.
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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
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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
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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.
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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
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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
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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.
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133. Efforts made to increase research and training would benefit, in
particular, the electrical and non-electrical machinery, mach�ne-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.
_____________________________ - _._. _-.
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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
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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
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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.
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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.
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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.
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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
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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
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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."
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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
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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
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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:
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- 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.
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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.
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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.
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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%.
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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/
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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
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