Report No. 34783 Turkey The World Bank in Turkey, 1993–2004 Country Assistance Evaluation December 20, 2005 Independent Evaluation Group Document of the World Bank Contents Evaluation Managers e + : Vinod Thomas Director.Genera1. PREFACE ................................................................................................................... V Evaluation R. Kyle Peters ................................................................................................................. + : e SUMMARY IX Senior Manager. IEGCR Basil Kavalsky ............................................................................................ + +: 1. BACKGROUND 1 Task Manager *Note: Since Aiav Chhibber-the 2 . THE BANK IN TURKEY: FISCAL 1994-2004 ............................................. 5 Director. IEG-WB-was World Bank Country Director for Turkey during part of the period covered by the The Policy Dialogue ................................................................................................. 5 CAE. he recused himself from all review and supervisory functions The Bank's Country Assistance Objectives .......................................................... 7 related to it. The Lending Program ............................................................................................ 10 The Quality of Bank Lending................................................................................. 12 Knowledge Senrices............................................................................................... 13 Partnerships............................................................................................................ 15 Assessing Program Outcomes ............................................................................. 17 3 . FIRST PILLAR: MACROECONOMIC STABILITY .................. 19 improve Public Sector Financial Management .................................................... 19 Support Structural Reforms.................................................................................. 21 Reduce the Deficit of the State-OwnedEnterprises....................................................... 21 Reduce Agricultural Subsidies........................................................................................ 22 Lower the Deficit of the Pension System........................................................................ 22 Improve the Functioningand Financial Viability of the State Banks .............................. 23 Assessing First Pillar Outcomes .......................................................................... 24 The Bank's Contribution to First Pillar Outcomes .............................................. 26 4 .SECOND PILLAR: GROWTH. COMPETITIVENESS. AND PRODUCTIVITY........................................................................................................ 27 Strengthen the Banking System and Deepen Financial Intermediation ...........28 Improve the Management of Infrastructure ......................................................... 30 Enhance Productivity............................................................................................. 34 Help Transform Agriculture............................................................................................. 34 Develop Institutional Support for Technology ................................................................. 35 Better Governance to Improve the Investment Climate ................................................. 36 Assessing Second Pillar Outcomes ..................................................................... 37 The Bank's Contributionto Second Pillar Outcomes ......................................... 40 5. THIRD PILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT ........................................................................................................ 41 Equity. Employment and Social Protection ......................................................... 41 Improving the Health of the People...................................................................... 45 Improving Education Access and Quality ........................................................... 48 Assessing Third Pillar Outcomes......................................................................... 51 The Bank’s Contribution to Third Pillar Outcomes ............................................ 54 6 . THE FOURTH PILLAR: ENVIRONMENT AND NATURAL RESOURCE MANAGEMENT......................................................................................................... 55 Meeting Environmental Challenges ..................................................................... 55 Disaster Management............................................................................................ 56 Assessing Fourth Pillar Outcomes & the Bank‘s Contribution............. 57 7. OVERALL ASSESSMENT. LESSONS. AND RECOMMENDATIONS .......59 ................................................................................ Rating the Overall Outcomes 59 Lessons and Recommendations.......................................................................... 61 Box 1. Perceptions of Bank Impact Differ between Bank Staff and Turkish Authorities ..................................................................................................... 13 Box 2. Pillar Two Outcomes: Mixed Results ............................................................. 39 Box 3. Changes in Turkey’s Social Indicators............................................................ 53 Box 4 . Summaty of Recommendations...................................................................... 64 Table 1. Key Macroeconomic Indicators 1993-2003.................................................... 2 Table 2 . Country Performance Can be Measured Against 10 Objectives.................... 8 Table 3. Summaty of Bank Lending to Turkey by Major CAS Objectives (in US$m).lI Table 4. IEG Ratings of Operations Closed from FY94-04 ........................................ 12 Table 5. Turkey Has a Lower Percentage of Projects at Risk than Comparators ...... 13 Table 6 . First Pillar: Macroeconomic Stability Outcomes........................................... 25 Table 7. Regulatoty Frameworks Created or Enhanced During 1993-2004 .............. 31 Table 8. Second Pillar: Growth, Competitiveness and Productivity Outcomes .......... 38 Table 9. Slow GDP and Job Growth Meant a Declining Employment Rate ............... 42 Table 10. Regional Differences in Health Outcomes ................................................. 46 Table 11. Third Pillar: Poverty Reduction and Social Development Outcomes ......... 52 ii Table 12. Fourth Pillar: Environment and Natural Resource Management Outcomes ................................................................................................................. 58 Table 13. Rating the Overall Outcomes..................................................................... 59 Figures Figure 1. Bank Lending to Turkey FY94-04............................................................... 10 Figure 2. Three Times Turkey Slipped into Financial Crisis (annual percent GDP growth, 1990-2003).................................................................................................... 20 Annexes ANNEX A: THE RELATION BETWEEN THE BANK STRATEGY AND PROGRAM ................................................................................................................ 65 ANNEX B: STATISTICAL TABLES ......................................................................... 75 ANNEX C: LIST OF PEOPLE MET ......................................................................... 93 . ANNEX D MANAGEMENT ACTION RECORD ....................................................... 97 ANNEX E. SUMMARY OVERVIEW OF IEG-MIGA’S ACTIVITIES IN TURKEY ......99 ANNEX F. GUIDE TO IEG’S COUNTRY ASSISTANCE EVALUATION METHODOLOGY .................................................................................................... 103 ATTACHMENT 1: COMMENTS FROM THE GOVERNMENT .............................. 107 ATTACHMENT 2: CHAIRMAN’S SUMMARY ....................................................... 111 iii Preface This Country Assistance Evaluation (CAE) assesses the out- comes of the W o r l d Banks assistance to Turkey during the period July 1,1993, to June 30,2004. I t focuses o n the objectives of that assis- tance and the extent to which outcomes were consistent with those objectives. I t looks at the Bank’s contribution to the achievement of those outcomes and the lessons for the Banks future activities both i n Turkey and more broadly. The evaluation has included a review of relevant documents, complemented by interviews with the staff of the Bank and other key donors, as w e l l as representatives of the Govern- ment, NGOs, and civil society. A contribution by the World Banks Independent Evaluation Group of the Multilateral Investment Guarantee Agency (IEG-MICA), prepared by Stephan Wegner is included as Annex E. The Independ- ent Evaluation Group of the International Finance Corporation (IEG- IFC) prepared a country review inparallel with this CAE. The draft report was sent to the Government for comments. Government comments have received full consideration. A brief note o n Government views o n Bank assistance is attached as Attachment 1. The evaluation was prepared by Basil Kavalsky (Task Man- ager, Consultant, Country Evaluation and Regional Relations, IEG), with sections o n the social sectors prepared by Jim Harrison (Consult- ant, IEG); and sections o n infrastructure and portfolio management by I a n H u m e (Consultant, IEG). Gulmira Karaguishiyeva provided in- puts o n the financial sector and also statistical and research assistance. Indermit Gil and Gene Tidrick were the peer reviewers. H.Joan Mongal provided administrative support. V Turkey CAE Ratings Summary PILLARS/OBJ€CTIV€S I OUTCOME RATINGS 1. Macroeconomic stability Moderately Improve public financial Substantial growth with declining inflation and rising primary surplus after 2001, following Satisfactory management years of volatility and three financial crises. Most extra-budgetaryfunds eliminated and fiscal controls streamlined (paras. 3.2-3.4 and Table 6). Large SOE losses converted to modest surpluses; agricultural subsidies substantially reforms reduced and made less distorting; and scope for financing of off-budget subsidies by state owned banks sharply curtailed, all contributing to sustainable fiscal improvement. But pension system deficits have risen rapidly, offsetting much of this gain (paras. 3.5- 3.13 and Table 6). I Productivity Moderately Independent Banking Regulation and Supelvision Authority created and regulatory and Satisfactory and deepen financial supervisory framework implementedto align more closely to EU standards. intermediation Banking system finances much stronger at end of period, but credit to private sector as a percent of GDP is low compared to OECD average, and little progress towards privatiza- tion of state owned banks (paras. 4.3-4.10 and Table 8). I Improve management of infrastructure Regulatory frameworks and institutions established or enhanced in energy, telecom, and railways. Growing private investment in power. Utilities are being run on increasingly commercial basis, but quantifiable efficiency gains have not yet emerged (paras. 4.1 1- 4.24 and Table 8). Enhance productivity Agricultural reforms have reduced and rationalized subsidies and price supports, replaced state marketing agencies with private commodity exchanges, privatized agricultural SOEs, and reduced food costs to consumers. The institutional framework for research and development, Intellectual Property Rights and technological standards has been strengthened and made more self-sufficient finan- cially. Governance improvements, including in public procurement, budget transparency and energy and banking regulation have reduced scope for corruption, but have not yet trans- lated into improved governance indicators or greater FDI (paras. 4.26-4.33 and Table 8). Development Moderately Poverty rate declined in line with growth in per capita GDP and consumption; poverty Satisfactory & social protection monitoring improved. Employment growth has been very slow, with a decline in employment rates, especially for women. A new, targeted social assistance program helps keep about 1.7 million poor children healthy and in school, with over 60 percent of benefits going to the two poorest regions. The pension system remains financially unsustainable. Regional income distribution does not appear to have deteriorated. Social sector spending - .post 2001 fiscal contraction (paras. 5.3-5.12 and - .protected during Table 11). Sharp (45 percent) drop in infant mortality brings Turkey's mortality rate below the middle- income average. The much slower infant mortality rate declines in the eastern regions, along with lower immunization coverage and less focus on disease prevention remain serious concerns (paras. 5.13-5.20 and Table 11). Primary school enrollment rate rose rapidly after 1998 [from 84 percent to 98 percent in and quality gross terms], and faster for girls; substantial increase in secondary enrollments. Quality, though low, did not deteriorate during expansion. Female literacv improved relative to male: literacv, in,poorest reaion " rose faster than na- tional average'(pa;as. 5.21-5.27 and Tabie 11). w c e Management Moderately Reduce environmental Improved institutional framework, but no significant impact on pollution or natural re- Unsatisfactq source management so far (paras. 6.1-6.4 and Table 12). Response to 1999 Earthquake disaster rapid and effective and institutions and systems to deal with disasters are developing, though slowly (paras. 6.5-6.6 and Table 12). Summary 1 . Private investment and a surge of exports following trade lib- eralization helped Turkey grow rapidly during the 1980s. Yet a m i x of public investments i n infrastructure and populist policies, such as generous pensions for civil servants and large agricultural subsidies, gradually l e d to an imbalance i n the public accounts and high infla- tion. Between 1993 a n d 2004 economic growth was highly volatile. A series of weak coalition governments failed to achieve the consensus to undertake the measures needed for growth and stability. Succes- sive financial crises in 1994,1999 and 2001 could only be stabilized with n e w taxes or expenditure cuts equivalent to 5 percent of GNP. In 1999 a n effort was made to tackle some of the underlying structural issues and while this was insufficient, additional reforms i n2001 tilted the balance and, together with the election in 2002 of the first majority Government i n over a decade, appear to have set Turkey o n track for greater economic stability. 2. The Bank program during the period encompassed four broad strategic pillars: macroeconomic management; growth, competitive- ness and productivity, which included the financial sector and infra- structure; poverty reduction and social development; and natural re- source management. Major aspects of the Bank's program were as follows: a. Between 1993 and 2004 the Bank's main focus was t o help Turkey undertake the structural reforms needed for macro- economic sustainability, w h i c h were seen as essential for re- storing sustained growth and reducing poverty. The reforms covered four areas: first, reducing the large deficits of state- owned enterprises (SOEs); second, reducing or eliminating ag- ricultural input subsidies and price supports; third, containing the rising pension system deficit; and fourth, ensuring the sol- vency of the State Banks, which were used during most of the period to provide off-budget funding for Government expen- ditures. b. During the first half of the period the Bank was unable t o sustain a dialogue o n these issues with successive coalition Governments. Following the 1994 financial crisis adjustment lending was discussed briefly, but with r a p i d recovery the Government decided n o t to pursue this. The Bank continued to look for lending opportunities, but with very weak ix SUMMARY performance o n the ongoing portfolio, lending declined sharply until 1998. Very l i t t l e formal economic and sector analysis was carried out given the lack of interest o n the part of the authorities and their hesitation about Bank analysis of topics which were viewed as politically sensitive, such as poverty and regional development. c. The dialogue was m u c h closer i n the latter half of the period, with increased management focus o n Turkey, including the decentralization of Bank decision-making to Ankara, and the increased role of the Country Office i nprogram monitoring and implementation. There was a sharp increase i n Bank sup- port in response to the financial crisis and earthquake of 1999 and especially in supporting the program of measures intro- duced following the crisis of 2001. The expansion of Bank support was associated with measures to address the struc- tural imbalances t h r o u g h first, bringing the off-budget expen- ditures back onto the budget; second, giving a new impetus to the privatization program and hardening the budget con- straint o n the SOEs; third, a sharp reduction i n agricultural price supports and input subsidies; and finally recapitalization of the State Banks. On pensions, while some measures were taken in 1999 to contain the deficit, these were insufficient and the pension deficit has g r o w n substantially since. This remains a central issue in the Bank's dialogue with the Government o n structural reforms. d. In addition to the support for macroeconomic stabilization, the Bank also helped Turkey address broader issues of growth, productivity and competitiveness. The focus was o n deepen- ing the financial sector; improving the efficiency of infrastruc- ture in general and the energy sector inparticular; and, espe- n the period with the growing prospect of entering cially later i into negotiations for EU accession, helping Turkey b o t h to de- velop the technological basis needed to compete effectively and to put i n place governance and anti-corruption programs to improve the climate for b o t h domestic and foreign direct investment . e. The Bank also supported poverty reduction and social devel- opment i n the latter part of the CAE period, through both the design of adjustment operations and specific projects and sector work. While Turkey h a d little extreme poverty, there was a sizeable category of broader poverty concentrated mainly i nthe east and among new migrants to the large cities. Bank- supported programs tried to improve the health standards, ex- pand the educational opportunities of the poor, and provide cash assistance to the neediest families. In 1997 the Turkish X SUMMARY Government took a major initiative in expanding compulsory education from five to eight years and the Bank geared its pro- gram to supporting this change. f. The Bank h a d only limited engagement with Turkey o n some o f its serious environmental issues, though it has helped strengthen the capacity to provide early warnings and manage the aftermath of the natural disasters to which Turkey is prone. Program Outcomes 3. The Bretton Woods Institutions together played a key role i n supporting the turnaround i n Turkey’s economy. Turkey’s success in stabilizing the economy and attending to some long-standing struc- tural problems was the major achievement during the CAE period. Inflation reached single digit levels towards the end of 2004 and growth averaged about 7-8 percent between 2002 and 2004. When the will to reform was finally there, in many cases the Government built its programs around proposals the Bank h a d put o n the table during earlier years-in SOEs, i n agriculture, i n energy n the financial sector, i and even i n pensions (despite limited progress in that area). 4. The Bank’s effort to support growth, productivity and com- petitiveness has h a d more mixed results. After many years of urging by the Bank, the Government’s eventual agreement to fully inde- pendent banking regulation, the establishment of a regulatory frame- w o r k for energy, and improvements in the infrastructure for technol- ogy development were important conditions for future growth. I t is too soon for these to be reflected fully i n major gains in efficiency, though there are positive trends in most areas. However, Turkey has n o t yet created the investment climate needed to attract the levels of foreign direct investment typical of comparator countries. With the agreement o n negotiation for EU accession, a sharp rise i n FDI is pro- jected for 2005, but i t remains to be seen whether this can be sustained in the absence of supporting measures. In addition, m u c h of the econ- o m y continues to be in the informal sector where it is unable to bene- fit f r o m the financial flows needed for growth. The Bank could have done more to keep a focus o n the business climate over the period. 5. Social achievements have also been mixed. Poverty declined only slightly up to 2002, but substantial consumption growth since then has probably translated into additional poverty reduction. While the benefits of expanding compulsory primary education coverage starting in 1997 are substantial, quality needs t o be improved. The m a i n achievement in the health area was a halving of the infant mortality rate over the period. Other health indicators moved more slowly, though generally i n the right direction, with the notable xi SUMMARY exception of slippage i n the child immunization programs. Employment remains an important problem-only half of the w o r k i n g age population is employed and women’s participation i n the labor force is among the lowest i n the OECD. T h e Bank‘s contribution to Turkey’s social programs has been modest. Some projects i n these areas have been poorly implemented and, until the late 1990s, the Bank h a d under-invested i n the analytic w o r k needed to have an impact o n social development. More recently, sector w o r k has played an effective role i nsupporting dialogue and operations. 6. n air quality i Except for improvements i n Ankara and Istan- bul, and the development of communal watershed management pro- grams, these have been ”lost years” for environmental management n Turkey. Neither the authorities nor the Bank focused o n these is- i sues. For example, the National Environmental Action Plan that was developed i n the middle of the period has h a d little impact. The Bank placed increasing emphasis o n disaster risk mitigation i n its program after 1999, but the program has been slow to get off the ground. 7. The outcomes of the overall Bank program are rated moder- ately satisfactory, with substantial institutional development impact a n d likely sustainability. 8. Inthe coming years the Bank should continue a high level of support to Turkey, but some rethinking of its approach is needed. With the improvements i npublic sector management, the program should be re-balanced with greater support for private sector devel- opment (including its role i n generating employment and reducing poverty) and environmental management, but without relinquishing the efforts to improve infrastructure management and support social development. Within these areas, greater attention needs t o be given t o developing the capacity of key agencies responsible for program implementation. Support for private sector development w o u l d bene- fit f r o m a coordinated approach f r o m the Bank, IFC and IEG-MIGA w h i c h has been lacking until now. Finally, improved environmental management will be an important area of Bank support to Turkey as it seeks to negotiate accession t o the European Union. V i n o d Thomas by N i l s Fostvedt xii .:. Evaluation Essentials For most of the CAE period Turkey’s economy was volatile and its 1 Background I government changed frequently : . . Fiscal deficits, largely off- 1.1 Before fiscal 1994: Inthe early 1980s, Prime Minister Turgut budget, destabilized the Ozal sought to dismantle state controls and liberalize the Turkish econ- economy omy. For the first time in modern Turkey, Government was perceived as strongly supportive of private sector development. The private sec- .:. These deficits were driven by structural tor responded with alacrity, and gross domestic product (GDP), ex- problems in state ports, and employment grew rapidly. Public investment for infrastruc- enterprises, pensions, ture also increased quickly. To circumvent the rigidities of the public and the banking, energy, expenditure system, m u c h of this investment was channeled through and agriculture sectors hundreds of new extra-budgetary funds. The consequence was a loss of fiscal discipline and a pattern of inflation runningat 50-60 percent a .:. Stabilization and structural reforms in year. I nthe late 1980s the economy began to slow. I t proved difficult to these areas set the put in place the fiscal discipline and the second-generation reforms economy back on a needed to sustain growth, given that the public sector was a major stable growth path, but source of rents and political patronage. The Government failed to fol- only after crises in 1994, l o w through o n state enterprise privatization and was unable to reduce 1999, and early 2001 the overall deficit. Economic 1.2 Fiscal 1994-98: After Ozal’s death in 1993, Prime Minister liberalization Demirel became President and Tansu Ciller took over as Turkey’s first accelerated woman Prime Minister. This was a period of unstable coalition gov- growth in the ernments with frequent changes in ministers and senior officials. I n 1980s, but fiscal 1994 the long-predicted financial crisis finally struck. During the heat indiscipline of the crisis the Government requested support f r o m b o t h the Interna- generated high tional Monetary Fund and the W o r l d Bank. The economy proved inflation more resilient than h a d been expected, however; the flexible exchange rate allowed for a sizeable real devaluation, and with l o w levels of domestic debt the Government was able to spend its w a y out of the crisis. Once the economy recovered, the Government lost interest in The 1994 taking politically sensitive measures and did n o t proceed with either a financial crisis Fund program or a Bank adjustment loan. proved 1.3 Between 1995 and 1997 growth averaged over 7 percent. The temporary, so buoyancy of growth was a consequence of r a p i d g r o w t h of private in- needed vestment and output. Such vibrancy in the private sector m a y seem structural strange in a country with a weak coalition government, major internal reforms were security issues, widely acknowledged structural imbalances, and in- not pursued flation approaching three-digit levels, but for several reasons i t was not. First, relatively high growth rates in the richer economies spurred rapid growth of exports, demand for Turkish workers a n d the supply of remittances. Second, the ”suitcase trade” with the former Soviet U n i o n is estimated to have yielded as m u c h as $6 t o $8 b i l l i o n a year 1 1 CHAPTER BACKGROUND of informal exports. Third, the investments in tourism in the 1980s Favorable n the 1990s with a very large increase in earnings i p a i d off i n that sec- external tor. Finally, the Customs U n i o n with the European U n i o n in early conditions 1996, which was controversial i n Turkey at the time, provided an op- produced more portunity for exporters and a n incentive for investors. growth after 1995 1.4 At the same time, little progress was made in some areas where restructuring was needed-banking, energy, agricultural sub- sidies, and the pension system. Problems were building up i n the banking sector where the commercial banks-both state and private- But the were borrowing abroad to purchase government securities and to underlying lend locally. Inthe power sector, lucrative build-operate-transfer structural (BOT) contracts were awarded without open bidding. Electricity tar- problems still iffs for many of these contracts were set at more than double compa- had not been rable rates in other countries. I nagriculture, crop, input and credit corrected subsidies, which went disproportionately to larger and wealthier farmers, remained a n important instrument of political patronage. Al- though the pension deficit was small in 1994, the projections sug- gested that this w o u l d be a serious problem by the late-1990s. Table 1. Key Macroeconomic Indicators 1993-2003 7993 7994 7995 7996 7997 7998 7999 2000 2007 2002 2003 2004 GDP Growth (YO) 8.0 -5.6 7.2 7.0 7.5 3.1 -4.7 7.4 -7.5 7.8 5.8 8.9 Exports Yo Of GDP 13.7 21.4 19.9 21.5 24.6 24.3 23.2 24.1 33.7 29.2 27.7 28.9 C/A balance Yo GDP -3.6 2.0 -1.4 -1.4 -1.4 1.0 -0.7 -4.9 2.3 -0.8 -3.3 -5.1 Public Sector Borrowing Requirement (“hof GDP)* 12.1 7.9 5 13.1 13.1 15.8 24.7 11.8 16.4 12.8 8.7 5.8 Primaw balance YOof GNP (0.9) 3.8 3.3 1.7 0.1 4.6 2.1 2.3 6.0 7.1 6.0 6.9 Inflation, CPI (“10) 66.1 106.3 88.1 80.4 85.7 84.6 64.9 54.9 54.4 45.0 25.3 10.6 Interest Rate, Interbank Overnight (Yo) 69.9 92.1 106.3 74.3 77.9 79.0 69.9 199.0 59.0 44.0 26.0 19.1 Exchange rate, thousand Iird$ 11 30 46 81 152 261 419 625 1,226 1,507 1,501 1,422 Sources: IMF, SPO, WDI and Country Office database. *Combines IMF and SPO data. Financial crisis 1.5 Fiscal 1999-2004 I n1998, f o l l o w k g the Asian and Russian crises, in 1999 led to the Turkish economy began to slow d o w n and there were again predic- IMF-sponsored tions of crisis. An International Monetary Fund (IMF) staff-monitored structural program was put i nplace as a precautionary measure. I nspring 1999, a reforms and a newly elected Government approached the Fund to begin discussions o n stabilization a stabilization program. The program, which took effect from January 1 , program 2000, had as its m a i n feature a pre-announced crawling peg and a match- ing fiscal deficit. This was designed to reduce inflationary expectations, and thus lower real interest rates and make i t easier for Government to meet the interest burden o n its debt. The program included a number of structural measures aimed at sustainable deficit reduction. I nparticular, major reductions in agricultural subsidies were initiated. The short-term effects were positive and there was another rapid recovery i n2000. 2 CHAPTER 1 BACKGROUND 1.6 The economic recovery of 2000 proved short-lived. Initially it In 2000 the was a v i c t i m of its success. Nominal interest rates fell to levels n o t economy seen in Turkey for years and the real exchange rate appreciated. The overheated- result was a consumer boom and rapid import growth. The consensus financial crisis among the coalition partners was difficult to sustain during a period recurred in 2001 of apparent b o o m and the Government delayed too long o n the fur- ther fiscal tightening that might have given the markets confidence i n the sustainability of the program. Late i n2000 a private commercial bank h a d serious liquidity problems and its foreign lenders decided to call their outstanding loans. Then i n February 2001 a public argu- ment between the President and Prime Minister sent the markets into free fall and the crawling peg became untenable. 1.7 InMarch 2001 a major stabilization and structural reform pro- A new reform gram was put i nplace, including the floating of the exchange rate, a re- package with a capitalization of the banking system and a resumption of privatization. floating This was supported by a $16.2 billion IMF program, the largest ever at exchange rate that time. This package steadied the economy and recovery and rapid has lowered growth followed in the 2002-2004period, combined with declining infla- inflation and tion, which reached single-digit levels by the end of 2004. The new Gov- sustained ernment, which was elected i nthe fall of 2002, has kept the key elements growth of the reform package inplace and i nDecember 2004 the critical mile- stone of agreement to commence negotiations o n EU membership was achieved. 3 : .. Evaluation Essentials Bank lending mirrored the volatility of Turkey’s economy 2. The Bank in Turkey: .:. Concern about structural Fiscal 1994=2004 problems led the Bank to withdrawal from adjustment lending in the late 1980s; dialogue deteriorated in the 1990s The Policy Dialogue 2.1 Before fiscal 1994: The W o r l d Bank engagement in Turkey ex- . : . The economic crises of 1999 and 2001 forced tends back to 1950, when it made its first loan to the then-new mem- structural reforms and the ber. Through 1980 the Bank made investment loans to most of the key Bank re-engaged economic sectors. Despite this consistent support there was a sense of increasing disappointment in the 1970s at the sluggish growth rate .:. The Bank under-invested in analytic work, though in and the persistence of an etatist model of economic management. part because of Turkish sensitivities, which still 2.2 The Bank responded to Ozal’s reforms of the 1980s with a sharp limit distribution of Bank increase in the level of lending. Turkey received one of the Bank‘s first work Structural Adjustment Loans (SALs) in 1981 and there were four addi- tional SALs during the following years. Total commitments exceeded a .:. The Bank has not done enough to help enhance billion dollars a year in fiscal 1986-88. With the acceleration of growth the capacities of Turkey’s Turkey was n o w being viewed as a success story-in the words of one small but growing NGO staff member from that period, ”the darling ofthe Bank.” By 1988 the community Turkish portfolio was the fifth largest in the Bank. 2.3 During the mid-1980s, the Bank became increasingly con- From the late cerned that the failure t o get the macroeconomy under control, and to 1980s Bank build o n the earlier policy changes, was likely t o lead to a crisis. Infis- concern about cal 1989 the Bank decided n o t to provide additional adjustment loans the failure to until Turkey could demonstrate progress o n the structural problems undertake destabilizing its economy. The consequence of this was a decline in structural the aggregate level of lending to about $600 m i l l i o n a year in the early reforms grew 1990s. The Bank was looking for opportunities t o provide investment and it ceased loans to try to meet the concerns of the Turkish Government about new adjustment negative net transfers. Between 1988 and 1993 the Bank made a total Iending of 22 loans to Turkey, covering a w i d e range of sectors-water, health, education, social protection, energy, transport, the financial sector, the agriculture sector, r u r a l development, and others. But, with limited ownership by the counterpart agencies, by 1993 the Turkey Discussions on portfolio was considered one of the weakest in the Bank. new adjustment lending in 2.4 Fiscal 1994-98: At the beginning of this period, the Bank saw a response to the n e w opportunity to rebuild the relationship with Turkey f r o m the 1994 crisis steady decline since 1988. Inpractice however, the Government re- proved abortive mained highly constrained by the difficulties of securing a consensus o n policy measures among coalition partners. W h e n crisis struck in 5 2 CHAPTER THEBANK FISCAL IN TURKEY: 1994-2004 1994 the Bank prepared a long list of conditions for an adjustment loan which was intended as a test of Government commitment. Later, with the rapid rebound of the economy, the ’window of opportunity’ closed rather firmly. With no 2.5 Although Turkey continued to be interested inborrowing f r o m adjustment the Bank i nthe subsequent years, both sides were aware that the weak lending and goveming coalition was unable to meet the policy conditionality that poor adjustment lending required. While investment lending continued, performance on poor portfolio performance made it difficult to fund new projects. the investment Rapid growth in the mid-l990s, the buoyant private sector, sharply de- portfolio, the clining Bank lending, and limited analytic work due to sensitivities Bank-Turkey conceming poverty and regional issues, all pointed to a diminishing relationship was role for the Bank in Turkey. at low ebb by 2.6 Fiscal 1999-2004: Towards the end of the 1990s, the dialogue was gradually rebuilt. In fiscal 1997 and 1998 a major portfolio re- n some sectors. The structuring h a d created space for n e w lending i The Bank’s decentralization of the Bank‘s decision-making and an expanded ana- decentralization lytic capacity of the Country Office made i t easier to build relation- and a rapid ships at the senior level. In fiscal 1998, when the Government passed response to the legislation to expand the coverage o f compulsory primary education 1999 earthquake f r o m five to eight years, the Bank responded quickly t o the Govern- helped re- ment’s request for support. A turning point i n the relationship came establish with the Marmara earthquake i n the summer of 1999, when the Bank dialogue moved rapidly to provide emergency relief and also to propose work- ing with the Government o n measures to mitigate the impact of future disasters. This quick and effective response helped to re-establish the Bank’s credentials with the Turkish government and public. The Bank 2.7 During the economic crisis o f fiscal 1999, the Bank worked collaborated closely with the Fund, helping to define the structural elements of the with the Fund stabilization program and supporting i t with a $760 m i l l i o n Economic on structural Reform Loan. The economy responded to the stabilization with a reforms after the rapid resumption of growth and declining inflation and interest rates. 1999 financial The 2000 Country Assistance Strategy (CAS) reported o n the arrival of crisis the long-awaited second-generation reforms and indicated that Tur- key was being put into a high case lending program with $5 billion planned for the three-year period. A new package 2.8 Though the Fund-supported program collapsed i n early 2001, of reforms after the Bank continued t o help define the further steps needed on the the 2001 crisis structural reform agenda. Following the additional reform measures led to the implemented i n March 2001, the Bank supported the Turkish pro- Bank’s largest gram with $3.5 billion of n e w commitments i n fiscal 2002-an in- year of lending crease of $2 billion over the high case and the largest lending for any to Turkey country i n that year. The large lending levels confirmed n the Bank i b o t h the Bank’s commitment t o support a sustainable change i n the 6 CHAPTER 2 THEBANK FISCAL1994-2004 IN TURKEY: situation a n d the value that the Turkish authorities placed o n that support. 2.9 The elections of November 2002 produced Turkey’s first majority Government since 1991. The new Government and senior administration focused its attention initially o n sorting out the priorities for the program to be supported by the Fund. For more than a year the Bank had n o lend- ing other than the second tranche of the education adaptable program Turkey’s current loan (APL) which had been agreed with the previous Government. The government has Government had at that time not fully complied with the conditionality welcomed of the second tranche of the 2000 economic reform loan (ERL). There continued Bank seemed little interest inmoving forward with the privatization of tele- support for its communications and the energy sector. With the stabilization program in programs place, however, the Government focused its attention o n the structural areas covered by the program for Bank support. Privatization received a new boost, and agreement was reached that allowed the Bank to release the second tranche of the ERL and proceed with approval of a third pro- grammatic financial and public sector adjustment loan (PFPSAL I I I)and a number of other lending operations. The Bank’s Country Assistance Objectives 2.10 In the 1990s two country assistance strategies were prepared followed by two others i n2000 and 2003 and a CAS progress report in The need for 2001, since the 2000 CAS was overtaken by the crisis. The Bank‘s strat- sustainable egy in Turkey throughout the period was dominated by the view that fiscal Turkey needed to achieve macroeconomic stability as a necessary con- adjustment dition for growth and poverty reduction. Sustainable fiscal adjustment dominated Bank was key, which meant resolving such structural issues as the SOE defi- strategy over cits, including the State Banks, agricultural subsidies, and the growing the past decade deficit of the pension system. Over the period, the Bank‘s strategy broadened to reflect the enhanced dialogue. In the mid-l990s, the Bank affirmed its corporate mission as sustainable poverty reduction. Ac- cordingly, the strategy prepared in the late 1990s proposed a strategic shift towards greater emphasis o n poverty reduction, and noted agreement with the Government o n conducting a poverty assessment. 2.11 Four support pillars are relatively constant features of the The strategy in Bank‘s assistance strategy in Turkey: Turkey had four major pillars... Macroeconomic Stability. Growth, Competitiveness and Productivity. Poverty Reduction and Social Development. Environment and Natural Resource Management. Within these four pillars, 10 objectives of the Bank’s strategy can be And within discerned. These objectives represent outcomes that the Bank program these pillars, 10 was designed to support and against which i t can b e evaluated. Table 2 objectives below identifies each objective and its rationale. 7 CHAPTER 2 THEBANKIN TURKEY: FISCAL 1994-2004 Table 2. Country Performance Can be Measured Against 10 Objectives Strategy Element Rationale FIRST PILLAR: MACROECONOMICSTABILITY 1. Improve public financial The lack of transparency of the budget and particularly the handling of subsidies and duty losses management through off-budget funding was a major constraint on better fiscal management. 2. Support key structural Tax collections were commensuratewith countries at its income level. The problem was overspending on reforms: subsidy and entitlement programs,which led to stluctural imbalance. a) Reduce the budgetary SOE losses were a direct fiscal drain, but in addition, their monopolies in some important sectors drain from State-Owned limited investment in new infrastructure. Enterprises (SOEs) b) Reduce agricultural Large subsidies were being channeled through the state banks via the agricultural SOEs. The benefits subsidies went disproportionately to larger farmers. Input subsidies and price supports reduced economic efficiency and imposed burdens on the poor. Coalition governments used the system as an instrument of patronage. c) Reduce the deficit in the While the deficit was still small at the beginning of the period, it was projected to increase rapidly given pension system the generous benefits awarded by the Government in 1992. The pension system mainly covered civil servants and formal sector employees, and did not reach the poorest groups. d) Ensure the solvency of the The Government was using the state banks as a funding mechanism for unbudgeted subsidy state banks programs. The "duty losses'' incurred by these banks represented a major contingent liability for the Government. SECOND PILLAR: GROWTH, COMPETITIVENESSAND PRODUCTIVITY 3. Strengthen the banking The banking system was engaged in high-risk activities-borrowing abroad to purchase government system and deepen financial paper. The regulatory framework and banking supelvision were inadequate for the risks this intermediation represented. Banks had no incentive to lend to the private sector except via connected lending to the large industrial groups associated with them. Small- and medium-scaleenterprises (SMEs) in particular had limited access to term funds. 4. Improve management of Public infrastructuremanagement was on a fiscally unsustainable path. State-run utilities were not infrastructure - generating the resources needed for investment, nor did they have the managerial capacity for efficiency. Utility prices and system losses were high, collections were low. 5. Enhance productivity The private sector was well developed but hindered by structural deficiencies such as dominance by large family-ownedgroups, and a large informal sector estimated at 30-50 percent of the economy. The competitive base needed adjustments to integrate it into the knowledge economy but this was being impeded by lack of institutional support for technology upgrades. Foreign direct investment was much lower than in comparable countries due in part to perceptions of serious problems of governance and corruption. THIRD PILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT 6. Promote equity, While extreme poverty was low, nearly 30 percent of the populationfell into the categoly of broad poverly- employment and social defined to include both food and non-food items. Employment rates overall, and female participation rates in protection the labor force in particular, were the lowest for the OECD. Social protection was not oriented to the poorest groups. 7. Improve health standards Health indicators were below those of comparator countries, and particularly low in the poorer eastern areas. Primary health services needed expansion and maternal and child health care needed attention in the underserved parts of the country. 8. Improve education Coverage and quality of basic and secondary education were low relative to Turkey's income level, coverage and quality especially for girls, and especially in the poorer regions. Policymakers had focused on the need for vocational education to produce trained manpower, at the expense of the coverage and quality of general education. FOURTH PILLAR: ENVIRONMENTAND NATURAL RESOURCE MANAGEMENT 9. Reduce environmental Turkey's resources were at high risk of degradation (soil erosion; water and wastewater quality; air and degradation industrial pollution). At the beginning of the period, the Ministry of Environment had been newly created and tracking systems were not yet in place. In addition capacity needed strengthening to meet Turkey's obligations to international and regional agreements. . . better disaster I O . Support Turkey - . prone to earthquakes and floods. Following the disasters of 1999 it became clear that . is highly management relief alone was not enough, early warning and disaster response systems needed to be improved. 8 CHAPTER 2 THEBANK FISCAL IN TURKEY: 1994-2004 2.12 The Bank strategy appears broadly relevant to Turkey’s needs The Bank over the period. The consistent assignment of the largest weight i n consistently and the program to Macroeconomic Stability was appropriate since i t was appropriately a necessary condition for progress i n other areas. emphasized Macroeconomic 2.13 Considerable weight was also attached to a range of activities Stability that have been brought together under the rubric of Growth, Com- petitiveness and Productivity. This assumed increased importance towards the end of the 1990s with the prospect of starting negotia- The emphasis on tions o n European U n i o n (EU) accession and Turkey’s need to ensure Growth, that it raised productivity levels and h a d access to the technology and Competitiveness markets needed for competitiveness. The programs i n this area were and Productivity, often opportunistic reflecting i n part investment lending potentials also appropriate, and w o u l d have benefited f r o m a better job of thinking through their would have conceptual underpinnings. Inparticular this w o u l d have helped to benefited from a center the strategic approach more clearly o n private sector develop- clearer strategic ment instead of treating i t as a peripheral topic-an externality of the focus on the focus o n improved public sector institutional development, banking private sector and infrastructure. 2.14 Poverty Reduction and Social Development received a n in- creased weight i n the Bank program starting i n 1997. This shift was appropriate given the Government’s agreement, after protracted dis- cussions with the Bank, to cooperate o n a poverty assessment, its re- quest for assistance i n implementing its 1998 education reform, a n d the need for emergency relief following the earthquake i n 1999 and The Bank n 1999 and 2000. Inpractice it took time to implement the fiscal crises i increased its n emphasis due to the need to build the analytic base for in- this shift i focus on terventions, the security issues limiting operations in the eastern re- Poverty gion of the country where m u c h of the poverty was concentrated, and Reduction from the need to resolve macro-structural issues that threatened g r o w t h 1997 and the fiscal sustainability of social programs. B y the end of the pe- riod, however, there h a d been substantial progress i n the dialogue i n this area and a marked shift i n investment lending (see Table 3). 2.15 Finally the area of Environment and Natural Resources was consistently cited in each CAS though clearly assigned a lower weight than the other pillars. The two country assistance strategies prepared The strategy in the 1990s reflected the emphasis in that period on international con- gave relatively ventions for various aspects of environmental management and the less emphasis weight attached to the preparation of National Environmental Action to Environment Plans (NEAPS).The earthquakes and floods of 1999 produced a n e w and Natural emphasis i n the 2000 and 2003 assistance strategy documents o n Disas- Resources ter Relief and Management within this pillar. As discussed i nChapter 6, however, the follow-up in implementing this pillar was uneven and the impact limited. 9 2 CHAPTER THEBANK FISCAL IN TURKEY: 1994-2004 The Lending Program 2.16 From fiscal 1994 to fiscal 1997 the Bank made only one or two Bank lending loans a year to Turkey. The portfolio remained large as some projects has mirrored the f r o m the previous period were being implemented very slowly and volatility of were carried over. From fiscal 1998 on, lending levels increased sub- Turkey’s stantially. The Bank supported the expansion of the education system, economy- and the floods i n 1998 and the earthquake in the summer of 1999 l e d counter-cyclical to large Bank loans for emergency relief projects. Most importantly peaks the conclusion of an agreement with the Fund permitted the resump- responded to tion of adjustment lending and a $760 million Economic Reform Loan the crises of (ERL) was the centerpiece of the Bank’s support for structural reform. 1999 and 2001 With the rapid deterioration of events in the beginning of 2001 and the n e w stabilization package in M a y that year, the Bank committed the PFPSAL I at the beginning of fiscal 2002 and PFPSAL I1late i n the same year. I naddition, the approval of the Agricultural Reform Im- plementation Program (ARIP) and the Social Risk Mitigation Project (SRMP) resulted in total lending of $3.55 billion that year-by far the largest level of lending ever for Turkey in one year and the largest for any country in the Bank i n that year. After the second installment of the education APL i nJuly 2002, there was n o Bank lending for almost 18 months during the elections a n d change of government. Only in 2004 did lending resume with $1.6 billion in the remaining months of the fiscal year. Infiscal 2005 $1.8 billion was lent, all for investment projects. Figure 1. Bank Lending to Turkey FY94-04 4000 7 ._. ~ ~ 3500 3000 2500 2000 1500 1000 500 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Adjustment 0 Investment d Emergency Recovery E Source: World Bank internal database as of end-2004. 2.17 During the period under review, the Bank‘s lending consisted of 34 loans for $10.6 billion, of which 27 were investment or technical assistance loans, five were adjustment loans, and two were hybrids. 10 CHAPTER 2 THEBANK FISCAL IN TURKEY: 1994-2004 The table below summarizes the lending within each of the four pillars. Most of the adjustment loans addressed issues i nseveral sectors, but Over $10 billion were primarily directed at improving public sector and financial was lent during management, and are grouped under the first pillar. Adjustment lend- the period,,, ing, a l l of which occurred after 1999, accounted for almost half of total lending. As shown in the table below, lending was spread fairly evenly among the remaining three CAS pillars. Table 3. Summary of Bank Lending to Turkey by Major CAS Objectives (in US$m) CAS 1 CAS2 CASk4 CAS PILLARS (FY93-96) (FY97-00) (FYO1-04) TOTAL ADJUSTMENT LENDING Macro-Management 0 760 4,428 5,188 (49%) INVESTMENT LENDING Macro-Management 62 62 (1%) Growth & PSD 580 720 905 2,205 (21%) Social Sector & Poverty 217 315 1,111 1,643 (15%) Environment & Disaster Management 362 1,127 20 1,509 (14%) TOTAL 1,221 2,922 6,464 10,607(100%) Source: World Bank internal database as of end-2004. 2.18 Non-Bank Grants: Inaddition to the Bank loans, the program And the Bank also benefited from more than 40 donor-funded grants from various channeled $78 partner agencies, which together amounted to around $78 million. million of donor- These grants were administered by the Bank, and, except for t w o grants funded grants to (for over $30 million i n total) for reduction of Ozone Depleting Sub- Turkey stances (ODs), were made i n conjunction with Bank loans. These grants generally funded technical assistance or advisory services to bolster the Turkish institutions implementing or benefiting f r o m Bank lending. 2.19 The various CAS documents over the period show 59 operations Less than 60 planned, though only 34 loans were approved, equivalent to 58 percent percent of of the planned numbers. The volatility of Turkey’s economy and the operations in need for substantial unforeseen adjustment lending, combined with the the CAS major earthquake of 1999, are partly responsible for this difference be- materialized, tween the CAS lendingprograms and the actual loans. When the 2000 reflecting CAS was overtaken by events, a CAS Update was prepared which indi- Turkey’s cated that three loans were to be cut f r o m the investment program to volatility, but support the Government focus o n macroeconomic adjustment and s m c - also lack of tural reform. Other operations were victims of the slow implementation realism in Bank of the existing program, which delayed the preparation of new activities. strategies A number of projects were dropped after sizeable expenditure o n prepa- ration. Overall the large numbers of dropped projects suggest that the CAS documents were not realistic about the pace at which new invest- ment loans could be prepared and implemented. 11 2 CHAPTER THEBANK FISCAL IN TURKEY: 1994-2004 The Quality of Bank Lending In 1996 the 2.20 n the portfolio, 18 were problem projects, In 1996, of 28 projects i Turkish portfolio with disbursement ratios less than 10 percent. The Turkey portfolio was among the rated among the 10 worst i nthe Bank. Many of these projects were worst- small, with a large proportion of funding for technical assistance. To performing, but correct this problem Bank management and the senior management of an effective the Turkish Treasury put i nplace a joint remedial action program i n clean-up in 1997 1997. The measures included: a series of project cancellations to reduce brought the overall size of the portfolio to those projects which were being effec- improvement tively implemented; tightening of procurement and disbursement pro- cedures; and delegating the task management of ongoing projects largely to the field office, including sign-off authority for procurement and disbursement. This dramatically improved portfolio quality. The number of problem projects was reduced to two, procurement proce- dures were streamlined, and disbursement ratios improved to around 20 percent. By early 1998 Turkey h a d the second-highest quality portfo- l i o (based o n percentage of projects at risk) in the Europe and Central Asia (ECA) region. Since then the outcomes o n investment lending have been generally satisfactory. The heavy weight of unsatisfactory projects earlier i n the period means that overall for the CAE period the results fall somewhat below the ECA average (see Table 4). Perhaps the most striking rating, however, is for institutional development impact where only 36 percent of the projects were judged to have h a d a sub- stantial impact, reflecting the difficulty of implementing the technical assistance components of projects. Table 4. IEG Ratings of Operations Closed from FY94-04 lnstitutional Number Outcomes: Development: % Sustainability: Country-Group Closed % Satisfactory Substantial Impact %Likely Turkev 46 76 36 53 ECA 459 80 51 75 ~ Bankwide 2,805 72 41 60 Source: Annex 8, Table B5b; percentages are by number of operations. Portfolio problems 2.21 Table 5 shows that at the end of fiscal 2005, the Turkey portfo- persist for lack l i o compared w e l l to those of other middle-income countries in terms of of the percentage of projects at risk. These comparisons are volatile, implementation however, as nearly 29 percent of the operations were at risk at end- capacity in line 2004. A number of persistent issues remain. Most critically, line minis- ministries. The tries lack the capacity needed for smooth project implementation, n o t Bank has relied to mention the capacity needed t o formulate sector policies and effec- on Plus for tively prepare for E U accession. Rapid turnover i n leadership has dis- implementation rupted implementation and hindered sustained institution building efforts. The Bank has tried t o help build capacity, but usually through a tx-oiect imdementation unit (PIU) w h i c h has sometimes diverted 12 CHAPTER 2 THEBANK FISCAL 1994-2004 IN TURKEY: ~~ Box 1. Perceptions of Bank Impact Differ between Bank Staff and Turkish Authorities Until the late-1990s, the slow disbursingportfolio led many in the Bank to con- clude that the Bank was achieving very little in Turkey. By contrast, many current and former Government officials expressed the view that the Bank was having a valuable impact. In their view, while the succession of weak coalition governments in the 1990s made i t virtually impossible to get consensus o n significant structural changes, the dialogue and continuous engagement of the Bank helped lay the foun- dation for subsequent progress. Many of the Turkish officials the mission met with indicated that the Bank underestimates the impact of the project preparation and implementation process o n the attitudes and approach of development agencies and officials. They attributed many of the project implementation problems to lack of counterpart funding due to the large deficits of the period. Source: CAE team interviews. attention f r o m opportunities to build capacity within the line minis- tries. The emphasis o n PIUs reflect problems with procurement, par- ticularly with respect to consultants and information technology. Gen- erally, the Turkish Government is reluctant to hire consultants for projects-whether Turkish or foreign. The divided responsibilities for important implementation decisions in investment lending continue to be a problem, especially the lack of clarity about State Planning Or- ganization involvement inproject implementation. Table 5. Turkey Has a Lower Percentage of Projects at Risk than Comparators Net Commitment Country %At Risk No. of Projects (US$ millions) ~ Tiirkev 19 5.929.9 5.3 Algeria 9 337.0 22.2 Romania 19 1,395.9 0.0 Brazil 49 4,948.4 18.4 Colombia 18 1,151.4 11.1 Thailand 1 84.3 0.0 Source: World Bank Internal Database as of end-June 2005. Knowledge Services 2.22 From fiscal 1994 to fiscal 1997 the Bank produced few formal The Bank under- economic and sector reports for a country of Turkey’s size and portfo- invested in lio. Just before the period under review the Bank completed studies formal analytic o n state-owned enterprises (SOE) and o n women in development. At work for much the end of 1993 an analytic review of the country’s economy was of the period, in completed. The next formal analytic report o n Turkey was the Coun- part due to try Economic Memorandum (CEM) of April 1996. T w o factors ac- sensitivity of the count for this three-year lapse. First, given the political instability dur- Turkish ing the period the Turkish authorities were unable t o muster the authorities 13 2 CHAPTER THEBANKIN TURKEY: FISCAL1994-2004 internal consensus needed for a wide distribution of Bank analysis o n sensitive topics such as poverty and regional development. Second, even in those sectors where there was openness to Bank analytic work, the Bank was unwilling to spend resources o n w o r k that it judged w o u l d have little impact. The quality of 2.23 The Bank prepared several informal studies during this earlier policy dialogue period. There were studies o n the energy sector, done as part of pro- and lending ject preparation through the Policy and H u m anResources Develop- suffered as a ment (PHRD) financing, w o r k o n agricultural subsidy and trade is- consequence sues, and later in the period, papers o n the financial sector. However, the failure to carry out in-depth analyses in the social sectors, em- ployment and infrastructure was a factor i n the often unsatisfactory development outcomes of the Bank's investment portfolio at that time, as cited in subsequent chapters and i n Annex A. After 1998 2.24 From fiscal 1998 on, a more normal pattern of analytic w o r k formal evolved. Three reports, the CEM, a Living Standards Assessment and economic and the Public Expenditure and Institutional Review became the basis for sector analysis the adjustment loans between 2000 and 2002. Subsequently, sector re- became a larger ports o n Health, Agriculture, Education and Labor Markets (the latter part of the three distributed after the review period), and the Municipal and Wa- Bank's program ter Supply sectors are helping to provide the context and direction for the Bank's lending in these areas-correcting this major gap in the earlier program. 2.25 While the number of sensitive topics has narrowed over the Continuing years and the Bank n o w has a substantial program of w o r k o n pov- sensitivity erty-related issues, the Government is still at times unable to reach among Turkish closure o n the views of different ministries and agencies and therefore authorities unwilling to permit the release of formal reports. Inthe past year, for limits the example, the Bank was asked n o t to issue a report o n Gender as a distribution of Bank document, after Bank staff h a d spent considerable effort i n re- reports except n response to the Government's comments. The key seems vising it i where the Bank to be to identdy and agree o n topics w e l l i n advance and to carry has worked to these out collaboratively with Government involvement. The Public build joint Expenditure a n d Institutional Review (PEIR) i s an excellent example ownership of building ownership and consensus i n support of a difficult set of reform issues. The Health Sector report, the Poverty Assessments, and the forthcoming Education Sector Study (ESS) also reflect good prac- n collaborative preparatory work. tice i 2.26 Despite the limited public availability and dissemination of some Bank economic and sector reports, it is evident that the Bank's major con- tribution to Turkey has been as a source of knowledge. Turkish officials and academics generally assess the quality of Bank analytic work as high. Only a small number of reports have been reviewed by the Quality Assurance Group (QAG) and all were rated satisfactory. On balance, and 14 CHAPTER 2 THEBANK IN TURKEY: 1994-2004 FISCAL despite the thinness of the analytic work program i nthe early part of the Bundling the review period (see para. 2.23), the Bank‘s analytic work has been impor- Bank‘s tant both increating a knowledge base inside the Bank which informed knowledge work Bank lending, and inbuilding a consensus between the Bank and offi- with its lending cials inthe core ministries. The Bank made effective use of adjustment is likely to be lending as an instrument for supporting the key structural reforms it had indispensable helped identdy and analyze. This has helped to shape the design of Tur- for program key’s policies. A similar approach is n o w being applied more broadly to effectiveness issues in infrastructure and the social sectors. This bundling of knowl- edge and lending has been the critical operational vehicle for the Bank i n Turkey, and maintaining the right balance between the two will remain key to the Bank’s effectiveness infuture. Partnerships 2.27 The International Monetary Fund: During the fiscal 1993-97 period there was limited interaction between the Bank and the I M F o n During the Turkey. There was a broad division of labor with the IMF focusing o n crises the Fund tax issues a n d the Bank o n public expenditures. Starting with finan- assumed n 1997 a m u c h closer collaboration evolved. With the cial sector w o r k i leadership in the 1999 crisis, the Fund took the lead and negotiated a n exchange-rate- IF1 dialogue based stabilization program with the Turkish authorities. There were differences of view within the Bank about the viability of this pro- gram, despite the public statements of support and the resumption of Bank adjustment lending. The Bank has been effective in 2.28 With the n e w program adopted i n 2001 the Bank and Fund using the worked closely together and the institutions have continued working Fund’s together since. Inmany respects Turkey is an example o f highly effec- programs to tive Bank-Fundcoordination. The scale of the Fund’s financial sup- support a wider port has helped it secure movement o n structural reform. The Bank agenda of has been able to steer Fund programs towards the priority structural structural reforms and provide the technical back-up to support their design. reforms than The Banks w o r k o n public expenditure management, energy pricing, might otherwise agricultural pricing and subsidies and financial sector reform, has have been the been reflected in the structural benchmarks for the IMF program. case 2.29 The International Financial Corporation: The W o r l d Bank country office is located i n Ankara, while the International Financial Corporation (IFC) has a regional office i n Istanbul. There is little in- teraction between the t w o institutions and coordination of programs Despite joint is more by accident than design. The preparation of joint CAS docu- CAS documents ments has not resulted i nbetter coordination. IFC has maintained there has not very good relations with the business community in Turkey, but this been active does n o t feed into W o r l d Bank programs. Perhaps n o t coincidentally coordination of the Bank programs have been relatively light i n their focus o n con- the Bank and straints to private sector development, except insofar as these affected IFC programs 15 CHAPTER 2 FISCAL THEBANKIN TURKEY: 1994-2004 t h e overall macro-stability and the financial sector. With the move of t h e Country Director to the field, the Bank has stepped up its contacts with the private sector substantially and the Country Director is a regular speaker i n the various events sponsored by chambers of commerce and industry. As yet, however, n o staff member i n Ankara has been assigned to cover private sector development and n o struc- ture for coordinating with IFC has been defined. A country review for Turkey has been prepared by IFC’s Independent Evaluation Group i n parallel with this CAE. 2.30 The European Union: Throughout the period, the Bank has factored Turkey’s E U aspirations into its programs and analytic w o r k and there are specific areas of cooperation, for example, i n the recent The Bank is education and health projects, and in the implementation of the PEIR moving from a recommendations. The Bank has been careful to ensure that whenever program i t advises o n legislative or administrative changes, these are compati- consistent with ble with E U accession, and has brought experts f r o m EU countries to EU accession to Ankara to review proposals before they are sent forward. The Bank one that and the E U met recently i n Brussels t o discuss the coverage of a Bank supports C E M that w o u l d look at E U accession in the context of Turkey’s accession macro and structural adjustment needs. It is likely that EU-related w o r k will become a central feature of the strategy and the program going forward. The European Commission has expressed a n interest inhaving Bank support along these lines. Coordination 2.31 Other donors: The most substantive involvement of the Bank with other with other donors occurred as a result of the earthquake and flood donors was disasters of the 1990s, where agencies f r o m Spain, Japan, Switzerland, mainly in the Islamic Development Bank, European Investment Bank (EIB), disaster relief United Nations Development Programme (UNDP) and United Na- tions Population Fund (UNFPR) were a l l engaged with the Bank i n relief and rehabilitation efforts. The Bank has 2.32 C i v i l Society and NGOs: The Bank has worked closely with good contacts some segments of Turkish civil society. For example, the Bank has h a d with academia, good relationships with academia i nTurkey. Turkish academics have but has not served as consultants o n many Bank programs and as discussants at done enough to Bank-sponsored seminars and consultations. Contacts with the private build the sector, which were very good i n the 1980s, declined infrequency during capacities of the period before fiscal 1997,but have been stepped up i nrecent years. Turkey’s Contacts with the media increased exponentially with the Bank’s decen- fledgling NGO tralization and the coverage of the Bank i nthe local press s e e m exten- community sive by comparison with other middle-income borrowers. On the other hand, the Bank is not engaging systematically with Parliamentarians i n Turkey. The most sigruficant shortfall, however, i s with the non- governmental organization (NGO) community. The N G O sector i nTur- key is relatively underdeveloped by comparison with European coun- tries (including the new EU accession countries), although it has been 16 CHAPTER 2 FISCAL 1994-2004 THEBANKIN TURKEY: growing i nrecent years. B y comparison with other Bank borrowers, NGOs have h a d little involvement inBank-supported programs and particularly in the earlier years there was little attempt to reach out to and foster the NGO community. There are some important exceptions. Inanti-corruption work a partner NGO is conducting surveys of civil so- neducation a partner N G O is organizing contacts with civil ciety, while i society stakeholders in the ongoing education sector study. Assessing Program Outcomes 2.33 During the period under review the Bank did not always define the outcomes i t was supporting in quantitative or monitorable tenns. Chapters 3-6 The approach taken to analyze the outcomes i n the subsequent Chapters assess Program is to look at the actual outcomes in fiscal 2004 in each pillar compared outcomes in with the baseline of fiscal 1994, and make a qualitative assessment of each of the four h o w satisfactory the outcomes are, how substantial the institutional de- Pillars velopment is, whether the outcomes are sustainable, and what contribu- tion the Bank made to the achievement of the outcomes. 17 : .. Evaluation Essentials The need for structural reform that would lead to sustainable deficit 3. First Pillar: reduction was central to the Bank’s dialogue with Macroeconomic Stability Turkey during the CAE period .:. Weak coalition 3.1 The striking feature of Turkey’s economy during the period governments were unable under review is its volatility. On three separate occasions during the to address off-budget period, in 1994,1999 and 2001, the foreign exchange markets lost con- funding, financing through fidence in the capacity or willingness of the Government to take the state banks, and deficits necessary measures t o stabilize the economy. The currency was .:. Financial crises in 1999 sharply devalued and very high overnight interest rates were re- and 2001 finally led to quired to stem the outflows and meet the Government’s financing effective actions, with off- needs. The financial crises translated into declines in the real economy budget funding virtually of 5-7 percent i n each of the three crisis years (see Figure 2). The un- eliminated and steps taken to reduce deficits .:. derlying problem was the fiscal imbalance w h i c h required borrowing by the Government equivalent to an annual average of about 12 per- Inflation has come down cent of GDP throughout the period. In all three crises the Government sharply and high growth was required to introduce additional taxes or expenditure cuts equal rates have been to around 5 percent of GDP. sustained for four consecutive years, but there is still an unfinished Improve Public Sector Financial Management agenda in privatizing state enterprises and 3.2 Outcome: The fiscal problem i n Turkey during the 1990s did banks and reducing n o t lie with the formal budget deficit, but in the large number of ex- pension system deficits tra-budgetary funds (EBFs) and the use of the State Banks to finance unbudgeted public transfers. The problem deteriorated steadily till the 1999 crisis. The first task was to bring transparency into the budget process by bringing the EBFs back onto the budget and sub- From 1994 to jecting the expenditures to parliamentary scrutiny. In 2000 a first 2004 three group of EBFs were closed. In2001 the package of reforms included crises resulting legislation to bring almost all the remaining EBFs into the budget from fiscal framework. The second task was to dismantle the rigid control sys- imbalances tems which h a d l e d t o the establishment of the EBFs. This i s still i n its wiped out much early days though there was progress towards the end of the period of the gains of with the agreement t o shift the function of the Court of Accounts to economic one of ex post audit rather than approval of individual expenditures. growth of the period 19 CHAPTER 3 MACROECONOMIC FIRSTPILLAR: STABILITY Figure 2. Three Times Turkey Slipped into Financial Crisis (annual percent GDP growth, 1990-2003) 8 6 4 2 0 -2 -4 -6 -8 -10 ' I Source: Country Office database. 3.3 The Bank's Contribution: The Bank had little success inthe fiscal 1994-98 period in getting the policymakers to listen to the message o n the Until fiscal 1998 need for structural reform. The CEMs were the most important instru- the Bank had ment available and one of the few widely circulated documents to pro- little impact on vide a comprehensive picture of public sector financial operations in- the fiscal cluding the EBFs. Without the option of adjustment lending to get some problem movement o n these issues, the Bank turned to technical assistance with a wide-ranging Public Financial Management Project (PFMP) i n 1995. The PFMP made a limited contribution. The IEG assessment indicates that i t was overly ambitious and that there was insufficient ownership among the key ministries. The only component that was viewed as satisfactory was the support for Customs Administration. Bank 3.4 I t was n o t until the crises of 1999 and 2001 that the Bank began adjustment t o make progress o n these issues. The Economic Reform Loan (ERL) operations and and the PFPSALs supported the critical reform-the integration of analytic work extra-budgetary funds into the budget framework. The 2000 C E M helped re- and the Public Expenditure and Institutional Review (PEIR) which integrate the was begun in 2001 provided important underpinning of the funds into the adjustment loans by creating the basis for institutional reform and budget and sustainability of the changes. The PEIR was particularly important, addressed the setting in motion ongoing reform of budget and expenditure expenditure processes. First, a joint w o r k i n g group of the Bank and the core rigidities that ministries recognized the need for reform of the rigid budget control led to the regime that h a d l e d to the creation of extra-budgetary arrangements creation of n line ministries. The government initially launched six p i l o t cases i these funds where greater managerial discretion was allowed i n the reallocation of budget resources across a few categories of expenditure. This helped convince the Ministry of Finance that a broader reform of the 20 CHAPTER 3 PILLAR: MACROECONOMIC FIRST STABILITY control regime was required. Second, this effort helped strengthen the external audit capability of the Turkish Court of Accounts (TCA) and nbudget execution via issue of visas for eliminate its participation i expenditure in 2004. The TCA l a w has been submitted to Parliament proposing major improvements to its audit function, including more comprehensive coverage. Third, the Bank supported efforts to make progress towards a medium-term fiscal framework. This is n o w required by l a w and the Bank is providing assistance to the government together with EU technical support. Support Structural Reforms REDUCETHE DEFICIT OF THE STATE-OWNED ENTERPRISES 3.5 Outcome:At the beginning of the review period SOEs i nTurkey The deficit of accounted for about half of the total Public Sector Borrowing Require- state-owned ment. The budgetary burden of the SOE sector was around 5 percent of enterprises has GDP. Their output represented roughly 10 percent of GNP and em- been ployment was 6 percent of total non-agricultural employment. Initially substantially efforts focused o n privatization of SOEs. This had a potential double reduced, but benefit inthat expenditures could be reduced by lower transfers, and privatization has revenues w o u l d be increased by the proceeds of privatization. Inpractice been a less the privatizations were challenged i nthe Turkish courts and also met important part with parliamentary opposition, and the program proceeded slowly dur- of this than ing the 1990s. After the 1999 and 2001 crises, the budget constraint o n envisioned SOEs, including municipal enterprises, has been hardened with close monitoring of their employment levels and pricing decisions. A number of SOEs closed unprofitable plants and reduced employment with the consequence of a turn-around i naggregate SOE financial results-there is now a modest operating surplus. Inrecent years n e w impetus has also been given to the privatization program and the revenues f r o m sales of enterprise shares i n2004 were the highest ever. 3.6 The Bank's Contw'bution:Just before the period the Bank re- leased a study o n SOEs that proposed a range of options for improving the performance of the enterprises. A s part of the discussion for a possi- The Bank's ble adjustment loan i n 1994, the Bank prepared a long list of conditions, strong focus on among which privatization figured prominently. When the Turkish au- privatization thorities decided not to proceed with adjustment lending, the fallback during the position was a Privatization ImplementationSupport loan which pro- period had vided $100 million, mainly as technical assistance to help prepare public relatively little companies for privatization. The loan disbursed very slowly and large impact amounts were cancelled o n its closing at the end of the decade. It was rated unsatisfactory by IEG. The Bank resumed the push towards priva- nthe tization with specific conditionality o n infrastructure privatization i adjustment loans and with support for stronger social safety nets for re- trenched SOE employees through a privatization Social Support project infiscal 2001 (and a follow-up infiscal 2005). Banking and infrastructure 21 CHAPTER3 FIRST PILLAR: STABILITY MACROECONOMIC privatization were probably the least successful parts of the program, with very slow progress and a need to waive conditions in order to prc- ceed. REDUCE SUBSIDIES AGRICULTURAL 3.7 Outcome: Agricultural subsidies were among the most serious budgetary drain. Despite analytic w o r k which demonstrated that The reduction of these were inefficient and probably increased income inequality, the the large close links between subsidies and political patronage kept the system agricultural in place for much of the period. In 2000, input subsidies were substan- subsidy burden tially reduced and a new regime was put i nplace providing direct in- is a signal achievement. .. come support (DIS) payments to farmers. A recent Bank analysis sug- gests that the resulting net reduction i n fiscal costs was over $4 billion. The transfers to farmers were better targeted than before, since direct income support was capped at 50 hectares per farmer, so that farms above that size did n o t get more subsidy as occurred under the crop and input-related subsidy programs. The same study sug- gests that with reduced intervention purchases, food prices i n Turkey n 2001, and despite increases fell with regard to w o r l d market levels i n 2002 were still below the levels of 2000. This has h a d significant i benefits for the poor. 3.8 The Bunk’s Contribution: In 1996 the Bank started a program One to which of in-depth analytic w o r k o n agricultural subsidy issues that focused the Bank made a initially o n trade and then broadened to include a wide range of sec- significant tor issues. This was embodied i n confidential studies presented to the contribution Government. These appear t o have made a major contribution to the decision to proceed with the change of the subsidy regime. This be- came part of the agreements for the Economic Reform Loan, the Agri- cultural Reform Implementation Loan and the PFPSALs. This change has h a d a huge fiscal impact as w e l l as large efficiency and equity gains. I t is one of the central achievements of the Bank i n Turkey, and its implementation and impact should continue to be monitored to ensure its benefits are sustained. LOWER THE DEFICIT OF THE PENSION SYSTEM Populist measures 3.9 Outcome: In 1992 the government, in a populist measure resulted in a before the elections, increased c i v i l service pensions and eliminated very generous the minimum retirement age. Successive Turkish governments have pension system struggled with the fiscal consequences of these measures. With in- by international creasing concern about the growing deficit of the pension system, re- standards and f o r m measures were put inplace i n 1999. These included the reestab- reforms did not lishment and gradual increase of the minimumretirement age, do enough to reductions i nbenefits, increases i n contributions and the adoption of a correct this ”depoliticized” formula for pension adjustments. The viability of these measures depended o n an “everything goes right’’ scenario, es- pecially a n increase in the number of contributors, which did n o t 22 CHAPTER 3 FIRSTPILLAR: STABILITY MACROECONOMIC materialize. The consequence was a sizeable and increasing deficit. In addition, a Turkish court decided that some of the changes could n o t be applied to current participants in the pension system. 3.10 The 2001 reforms did n o t revisit the pension issue, perhaps be- cause of concern that this might push the civil service into a position The pension where they opposed the entire reform package. The system deficit i s deficit is rising rapidly. Contributor coverage has been stagnant, reflecting both growing and is a m u c h slower growth in formal employment than anticipated at the major risk to time of the 1999 reforms, and l o w contribution compliance. Even with fiscal stability the 1999 changes, the benefits are very generous, with high replace- ment rates (65-75 percent) and l o w minimumcontribution periods (19.4 years), which can be contrasted with an International Labor Or- ganization-recommended target replacement rate of 40 percent of gross wages after 30 years of contributions. Finally, the minimumretirement age is so l o w (43 for women and 46 for men) that the benefits stream persists over many years. On top of this, Government decisions in 2003 and 2004 to make ad hoc increases i n the benefit levels and changes in the indexing mechanism have further added to the deficit. 3.11 T h e Bank’s Contribution:Although the burgeoning deficit of While the Bank the pension system must be counted among the failures of structural was unable to reform in Turkey, the Bank made a positive contribution in ensuring influence the the inclusion of measures in the ERL which, i f n o t enacted w o u l d outcome have meant a still larger deficit today. Steps t o reduce the pension sufficiently, it deficit were n o t included as part of the PFPSALs, apparently reflect- has helped ing the view that their agenda was already large and the political bal- create capacity ance so delicate that to d o so might have put the whole package at and awareness risk. However, the Bank has continued to w o r k with the Government to deal with the t o help build analytical capacity to evaluate pension outcomes and re- issue f o r m options, including a major set of reforms being considered by the Government since early 2005. AND FINANCIAL IMPROVE THE FUNCTIONING VIABILITY OF THE STATE BANKS 3.12 Outcome: For most of the 1990s, the State Banks were used to fund off-budget subsidies and therefore were a major contingent l i- ability for the Government. In2001 the liabilities o f the State Banks were refinanced by the budget. The management of these Banks has been professionalized and substantial efforts made to lower costs. The number of employees in State Banks has been reduced by more than 30,000 since 2001 and the number of branches has been reduced by 820. However, the role of the State Banks remains unclear and the business model o n which they should operate remains elusive. In the past it was profitable simply to invest in Government paper, but with returns o n these having fallen towards levels comparable to earnings o n deposits, this is n o longer attractive. The State Banks will therefore need to compete with private banks in the market for private credit. 23 CHAPTER 3 FIRST MACROECONOMIC PILLAR: STABILITY 3.13 The Bunk’s Contuibution: The Bank has consistently pushed for the privatization of the State Banks. The Bank was rightly concerned The Bank about the huge contingent liabilities which the Government w o u l d face correctly i n2001 when nthe event of a crisis. This concern proved w e l l founded i diagnosed the the costs of recapitalizing the State Banks amounted to $22 billion or risks posed by 14.7 percent of GDP. The Bank‘s analytic w o r k through the period h a d the state banks, resulted ina number of informal studies o n the potential restructuring but its push for of the State Banks and this became part of the agreements o n the privatization has PFPSALs. As part of the reform program supported by the PFPSALs, not yet had one State Bank, Emlak, was closed through merger with Ziraat, the results main state bank; legislation was put i nplace to prevent unfunded ”duty-losses” (that is, losses incurred due to the State Banks being re- quired to fund Government social programs or subsidies); and two public banks, Ziraat and Halk went through operational restructuring by laying off half of their employees and closing branches. Yet the ul- timate goal of privatization of all State Banks is far from being achieved despite agreement i nprinciple to move i n this direction. Assessing First Pillar Outcomes First pillar 3.14 While the rating of moderately satisfactory for the full period outcome is n the early years, and shortfalls i reflects the unsatisfactory outcome i n rated pensions and state bank privatization, the steps taken towards stabili- moderately zation in Turkey in 1999 and 2001 represent one of the success stories satisfactory, of economic policy at the international level during the past decade. institutional An economist recently wrote that ”u crisis is u terrible thing to waste.” development The evidence thus far suggests that Turkey has taken advantage of the substantial, reform opportunities afforded by the 1999 and 2001 crises. sustainability likely 3.15 Institutional development has been substantial. Budget trans- parency has increased and a start has been made o n dismantling the rigid and counterproductive control systems i n the Ministry of Fi- nance that l e d to the expansion of off-budget funding i n the first place. The move to more commercial-style management of the SOEs and State Banks is also important institutional developments. 3.16 The sustainability of these outcomes is rated as likely. There are a number of positive factors i nthe short-term. First, the key macro- variables (primary surplus, public sector borrowing, public debt) have n o w been held for four years i n a range w h i c h the IMF regards as fun- damental for sustainability. Second, there is a majority government that n a much better position to take corrective action if needed. Third, is i inflation has come d o w n to single digit levels for the first time i ndec- ades and real interest rates are moving rapidly downwards. Fourth, exports remain buoyant. There are also very sigruficant longer-term factors. First, is the ’anchor’ provided by the goal of EU accession. Sec- ond, the political incentives for current and future governments appear 24 CHAPTER 3 FIRST PILLAR: MACROECONOMIC STABILITY to lie i n the direction of not putting the achievements at risk. This said i t is too soon to declare victory. The pension deficit remains a major risk factor and the real exchange rate has appreciated substantially i n the past two years. Sustainability will require a continued commitment to careful macroeconomic management. Table 6. First Pillar: Macroeconomic Stability Outcomes ~~ ~ Indicator Baseline Outcome Comments Primaty surplus as 2.3 6.9 Considerable achievement, but will need to be %of GNP (1993) (2004) sustained given high debt levels. Inflation, consumer 66.1 10.6 Inflation reached single digits at end-2004; the prices (annual %) (1993) (2004) lowest level in 35 years. PSBWGDP 12.1 6.2 Again, impressive progress, but remains high (1993) (2004) by internationalstandards. Total debt as % of 35.1 63.5 Although figure is double starting point, there GNP (1993) (2004) has been asharp reduction from nearly 100% in 2001. Extra-budgetary 5.3 1.1 Major achievement. Most extra-budgetary funds as % of GNP (1993) (2003) funds incorporated in budget. Number of 434,655 330,450 Reflects both privatizations and employees in state (2000) (2004) retrenchments. enterprises SOEs operating (5,928) 998 Substantial improvement, but given capital surpluslloss after tax (1993) (2004) intensity of many undertakings,still represents (US$ million) a low return on investment. ~ Total number of 50 40 Privatizationprogram has been steady for state enterprises (1994) (2004) non-infrastructureenterprises, but not as rapid as planned for infrastructure. Total agricultural 1.7 0.8 During the course of the period subsidies subsidies as % of (1993) (2004) reached as high as 5% of GDP. Subsidies in GDP 2004 consist mainly of Direct Income Support payments. Consumer transfers 7,751 1,871 Reduced price supports have meant to Agriculture [in (1998) (2001) substantial gains for food consumers. trillions of TL at 2001 prices] Social Security 1.o 4.5 Increasedtransfers reflect inadequacy of transfers from (1994) (2004) 1999 measures and steps in 2003 which have consolidated somewhat worsened the situation. budaet/GDP (%) Number of 76,553 32,317 Despite substantial cuts banks are still over- employees in state- (1993) (2004) staffed given nature of their business which is owned banks closer to bond trading houses than retail banking. Source: WDI and Country Office database. 25 CHAPTER 3 MACROECONOMIC FIRSTPILLAR: STABILITY The Bank’s Contribution to First Pillar Outcomes 3.17 The need for macroeconomic stabilization and structural re- The Bank f o r m was central to the policy dialogue throughout the period. The contributed timing and political economy of these reforms were a function of the significantly to crises and the capacity to assemble a temporary coalition t o support the design of the necessary changes. But the Bank did make a n important contribu- programs for tion to the design of the reforms. The CEMs, which provided an over- the first pillar arching framework, and the w o r k that the Bank supported in each of and to the the above areas, fed into the strategies and blueprints the Turkish au- eventual thorities developed to reshape the economy after the crisis. The outcomes Bank’s large financial package in support of the changes was also well-judged. I nthe view of one senior Government member “could we have managed without the money-yes, probably, but did it make a differ- ence to the acceptability o f the Bank‘s advice-definitely. I t made the Bank a f the Government and the Turkish public.” player in the eyes o 3.18 This i s a n area where the whole of the Bank‘s contribution is more than the sufn of the parts. While there is major unfinished busi- ness with regard to SOEs, the pension system and the State Banks, the Bank contributed through its dialogue, its lending, and its analytic work, to a fundamental change in the understanding of the Turkish bureaucracy and public of the relationship between structural reform and macroeconomic stability. 26 Evaluation Essentials 0 The Bank focused on establishing the institutional framework for 4. Second Pillar: Growth, efficient operation of the financial sector and Competitiveness, and Productivity infrastructure 6 The Bank‘s program was effective in creating 4.1 Despite the periodic crises as well as several natural disasters legislative frameworks that h a d serious impact o n the economy, Turkey was still able to and supporting achieve a n average real GDP growth of 3.3 percent for the period as a institutions charged with whole. G r o w t h i n Turkey has depended o n the expansion of private financial and sector production. Support for this h a d been an important part of the infrastructure regulation Bank‘s strategy in the earlier years of the program, but by the 1990s 0: . Although new private the winds shifted and the Bank decided to focus o n public sector re- investment in energy has form. The hypothesis appears to have been that Turkey’s private sec- increased private tor h a d shown i t could compete in international markets and that provision of infrastructure, there was little value-added f r o m Bank support. Indeed, the effective privatization has lagged response of Turkish exporters to the Customs U n i o n with the E U i n and better institutions have not yet translated 1996 seemed to underline this view. into efficiency and While the record of Turkey’s private sector is impressive, es- productivity gains 4.2 pecially in export growth, Bank analytic w o r k has noted a number of e + : Despite a vibrant private fundamental weaknesses over the period. Turkey’s private sector has sector significant developed few joint ventures with foreign companies that could pro- challenges remain: vide access to n e w technologies and markets. FDI i n Turkey consis- governance needs to tently has remained below the levels of comparator Eastern European improve and the financial and other middle-income countries. The Turkish private sector i s sector needs to be deepened to promote dominated by large family-based groups that are highly entrepreneu- foreign investment and r i a l and aggressive. While small and medium enterprises have g r o w n expansion of small and rapidly, there is a w i d e gulf between them and these large industrial medium enterprises groups-a “missing middle” i n the Turkish private sector. A large proportion of Turkey’s private production (estimates range from 30 percent to 50 percent) takes place i n the informal sector largely o n account of tax avoidance. This i n turn has constrained financial sector growth. The big industrial groups have access to funds through bor- The private r o w i n g from their associated banks or abroad, while the small and sector has medium enterprises can only borrow o n the basis of the part of their grown balance sheets that i s on the books. The entire Turkish commercial vigorously, but banking system is the size of a medium-sized bank in Western has important Europe. weaknesses 27 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY Strengthen the Banking System and Deepen Financial intermediation 4.3 Outcome: I nthe early and mid-1990s, Turkey’s financial sector was a crisis waiting to happen. As explained earlier, the fiscal imbal- The government ances had l e d to the use of the four state-owned banks as a conduit for used the off-budget expenditures hidden under the umbrella of illiquid Gov- financial sector ernment ”duty losses,” which accounted for 13 percent of banking to fund its system assets. The Government h a d dramatically influenced financial growing deficit markets through its high domestic borrowing requirements. Regula- tion and supervision were fragmented and ineffective. Lax regula- tions l e d to excessively large loans to insiders. Furthermore, a full guarantee of depositors’ funds introduced after the 1994 bankingcri- sis encouraged indifference by depositors to the risks the banks were taking. Many private sector banks turned to arbitrage activities to generate a large share of their profits. Earnings depended o n the spread between deposit rates and the high real interest rates o n Gov- ernment securities. H a l f of the balance sheet was in foreign exchange- denominated items. 4.4 The first sign of an impending crisis was i n November 2000 when a private bank (Demirbank) was unable to refinance its stock of After the crisis Government securities. The dispute between President and Prime of 2001 a costly Minister in February 2001 triggered a full-blown crisis. Investors liq- recapitalization uidated positions i n Turkish Lira in expectation of political disarray. of the banking This resulted in a spike of interest rates t o as high as 6,200 percent o n system was a n annual basis and the depletion of the Central Bank‘s foreign cur- required rency reserves. The authorities were forced to float the lira and aban- d o n the exchange rate peg. Banks with net foreign currency positions suffered an immediate loss. Declines in the value of government bonds depleted bank capital. The recession that followed aggravated the problem through a n increase in the non-performing loans of the corporate sector. As part of the reform package the authorities h a d to recapitalize b o t h the State Banks and some of the private banks through the issue of $23.5 b i l l i o n of government bonds. Reforms in 2000 4.5 In response to the crisis, the authorities undertook a number of and 2001 have reforms. An independent Banking Regulation and Supervision Au- brought banking thority was created in 2000. It took over the authority to supervise the regulation and banking sector f r o m the Treasury a n d Central Bank, thus eliminating supervision to the unclear division of responsibilities between these two agencies. near Reporting, auditing and transparency were upgraded and the regula- international tory and supervisory framework overhauled. Most regulations are norms n o w in line with E U standards a n d indeed, the financial sector is n o w the area where Turkey is judged by the E U t o need the least addi- tional effort to align with EU requirements. 28 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY 4.6 While this represents a quantum improvement i n the govern- But the financial ance and financial situation of the banking system i n Turkey, there is sector remains still some w a y to go. The Turkish financial sector remains shallow for shallow a n economy of its size and complexity with limited financial products available. On the liabilities side, the maturity structure of liabilities (deposits) is still short, although the share of t i m e deposits has in- creased i n recent years from a very l o w base. On the asset side, credit to the private sector has declined (as percent of GDP) is only 15-20 percent of the OECD average. The share of government securities is still high, at 37 percent of total assets. There are positive trends, how- ever: the share of loans i n the total assets of the private banks in- creased by one-third between 2002 and 2004; and banks are looking to expand their business i nprofitable areas like consumer credit and credit cards. L o w inflation and economic expansion are likely to fur- ther support the development of the sector. 4.7 The Bank’s Contribution: The Bank has been involved i n Tur- Turkey turned to key’s financial sector since the early 1980s through the series of SALS the Bank and during 1980-85 and t w o Financial Sector Adjustment Loan (FSALs) Fund for during the late 1980s. The dialogue o n financial sector issues was in- assistance with terrupted for almost five years until the Government requested help the sector after f r o m the Bank and IMF for the banking sector in the aftermath of the the Asian crisis Asian crisis. A joint Bank-IMF mission visited Turkey i n October 1997 to review selected issues i n the financial sector. The mission’s assess- ment was that the macroeconomic situation posed significant risks for the banking sector, and that serious instability could be triggered by n o stabilization or a failed stabilization program. In the following years, Bank staff produced t w o confidential banking sector notes identlfying major weaknesses i n the sector and urging the authorities to take action. 4.8 In 2000 the Government requested a large amount of financial Subsequent support for banking reforms. The sum which the Government judged Bank support to be needed was outside the parameters of the Bank program at that was too modest time. Instead the Bank offered support through a n e w $750 million to prevent the FSAL designed to reduce the vulnerability of the banking system and situation from improve its ability to withstand external shocks. Disagreements be- deteriorating tween the Government and the Bank l e d to delays, and the approval i n December 2000 of the FSAL and the I M F standby arrangement were not sufficient to reassure the markets given the relatively l o w levels of funding, the overvalued exchange rate, and the evident political disar- ray in Turkey. The Bank responded 4.9 After the crisis, the Government of Turkey accelerated and quickly to the broadened reforms. With the Bank substantially increasing its sup- 2001 crisis with port, i t was agreed to cancel the undisbursed second tranche of the policy and FSAL and to fold it into the series of programmatic loans-the financial PFPSALs. Even though the measures taken under the FSAL were n o t support 29 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY sufficient to prevent the crisis, the analytic w o r k leading up to i t laid a foundation for the post-crisis program and allowed the Bank to react quickly and help design the conditions needed for further reforms in the financial sector. Export finance 4.10 Significant contributions have also come in the export finance loans have sector. A well-designed Export Finance Loan (EFIL I )eased the credit proved a useful crunch for exporters by providing medium-term financing during the adjunct of the pre- and post-crisis period. EFIL 1 1, in addition to the credit line, in- policy support cluded leasing companies as financial intermediaries. Using leasing companies helped reach small and medium-sized exporters who, as explained, have often h a d difficulty in obtaining credit f r o m the bank- ing system. Improve the Management of Infrastructure The Bank had a 4.11 Outcome: The Bank’s strategy was to support improved in- large and varied vestment and operational efficiency of the infrastructure sectors. The program of Banks support included three elements: sector transformation support for (deregulation and competitive liberalization); disengaging the state infrastructure (reducing or removing subsidies and other financial supports, and management professionalizing management); and, where relevant, private entry (through both privatization and encouragement of green-field entry by private owners and operators). A key change 4.12 Support Sector Transformation: Major advances have taken place has been the in infrastructure management in Turkey during the period under re- introduction or view. N e w laws have been passed, n e w regulatory agencies es- revision of tablished, and competitive practices adopted. Most of these changes regulatory were made after 2000 (see Table 7). frameworks 4.13 Assist in Disengaging the State: Disengagement implies the in- troduction of more rigorous, market-based, competitive management of infrastructure. One measure of the extent of this is evident in the SOE losses trend i n actual payments made by the Treasury for its contingent l i - have declined abilities o n account of borrowings by state enterprises or municipal sharply authorities. These payments declined f r o m over $1.7 billion i n 1997 to $443 million by 2004. The declines are part of the overall effort to in- still fiscal discipline and reduce state participation in infrastructure management. While privatization has 4.14 Encourage Private Entry: The privatization program proceeded not progressed, m u c h slower than planned. A number of proposed privatizations new private were held up by successful court challenges and others by lack of par- investment in liamentary approval. I t was expected that eight enterprises w o u l d be electricity inprivate hands through privatizations by 2002. In the end, the only generation has sales by 2004 were the two gas distribution companies and one mobile taken place license-actually bought by T u r k Telecom, not yet private itself. 30 CHAPTER 4 COMPETITIVENESS,AND PRODUCTIVITY SECOND PILLAR: GROWTH, nprivate entry into the elec- There were, however, significant gains i tric power generation sector through greenfield investments. Table 7. Regulatory Frameworks Created or Enhanced During 1993-2004 ~ Date Sector and Agency Role Created INFRASTRUCTURESECTORS Energy: New Energy Law and 2001 Full regulatory authority for power, oil Regulatory Agency and gas, and LPG. Telecommunications: New Law to 2001 Regulation of fixed line, wireless and Privatize TurkTelecom value added services Regulatory Authority: TA OTHER SECTORS Banking: New Banking Law 2000 Creates fully independent regulatory Regulatory Agency: BRSA agency and takes supervision functions out of CB and Treasury. Public Procurement: New PP Law 2001 Regulates procurement in all public Regulatory Agency: PPA agencies Industry Technology: New Law 2000 Regulate, ensure standards for MSTQ Regulatory Agencies Secure IPR ~ Disaster Management: Turkey Emergency Management Agency 2000 Information and First Responders Turkish Catastrophic Insurance Pool 2000 Mandatory Private Home Insurance 4.15 I f sector regulatory frameworks have been transformed, and i f private entry, at least t o some degree, has been achieved, what out- comes can be reported o n the improvements to efficiency i n the infra- Yet efficiency of structure sectors? Inthe power sector, the growing share of private own- the power ership of power generation (41 percent i n2004), and the increase in system remains importance of the more competitive types of ownership-auto- disappointing, generation and build-own-operate contracts (39 percent of the tota1)- with high rather than the less competitive build-own-transfer contracts-has system losses meant that more competition has been introduced into the sector, and consumer which is increasingly converging towards a market-based system. tariffs However, Turkey still has among the highest power tariffs i n the OECD. Further, distribution companies have average loss rates i n the range of 18-20 percent, and collection rates n o greater than 91 percent. This implies that only about 75 percent of all power sold is effectively tariffed, so the distribution companies need higher wholesale tariffs to nprivate entry and in- maintain their viability. Despite m u c h progress i creased competition, therefore, physical inefficiencies in the system re- main unacceptably high. 4.16 The situation in the water supply a n d sanitation sector i s similar to that of the power sector. Progress has been made, but high tariffs 31 4 CHAPTER SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY In water supply, still penalize consumers and finance internal inefficiencies. The com- collections are bination of l o w collection rates and high unaccounted for water low and system (UFW) amount to a l o w rate of effective tariffs. Taking the average of losses high 40 percent UFW, and with collections running at around 70 percent, n the sector cover only 42 percent of this implies that effective tariffs i water use. In most OECD countries, effective tariffs are expected to cover around 80 percent of water. In transport, 4.17 In the transport sector, the Bank's main focus during the period project was o n road improvement and safety. Here the indicators suggest implementation some progress. The roads sector is managed by a Highway Authority efficiency has (KGM), which is executing a very large investment program. Until re- improved cently, the program h a d so many projects that the average completion modestly time per project was over 22 years. I nrecent years, more than 130 pro- jects were removed f r o m the program, bringing the completion aver- age to around 13 years. Further, i n the period since 1994, overall em- ployment i n the agency gradually has been reduced, as a large share of contracting for works was shifted f r o m force account to open bid- ding. Employment fell f r o m around 35,000 i n the early 1990s to around 24,000 i n 2004, and in that year force account represented about 30 percent of contracts, and open bidding accounted for some 70 percent. And traffic 4.18 In the area of road safety there are some data-covering acci- safety has seen dent reductions i n over 300 "black spots"- which show quite dramatic some striking improvements. Accidents i n 1994 totaled about n these black spots i improvements 7,000 with more than 900 deaths. This was reduced to less than 2,000 and 54 deaths i n2004. These are important outcomes in themselves, but they also have positive side effects, for example for tourism. Bank lending 4.19 Bank's Contribution: During the early and mid-l990s, when the was not country dialogue and the appetite for economic and sector w o r k (ESW) associated with were weak, the Bank pursued its reform agenda almost exclusively formal sector through individual investment loans, working with sector agencies. analysis The preparatory process for these loans was used to deepen the Bank's knowledge and understanding of the sector, rather than carrying out formal analytic w o r k which could have been disseminated more broadly. In power, the 4.20 This approach was w e l l demonstrated i n the power sector, Bank has had a where there h a d been a l o n g lending relationship and excellent long and close dialogue between Bank technical staff and senior officials f r o m TEK, relationshipand the national power monopoly. While the Bank itself h a d supported numerous the consolidation of TEK i n t o a single entity during the 1970s, i t was projects later able to influence the Government to unbundle TEK into several genera tion, transmission, distribution and trading companies and to prepare its various components for selective privatization. The Bank successfully assisted this process i n t w o investment loans, the TEK 32 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY Restructuring project (1991) and the National Transmission Grid project (1998). 4.21 When the proposals for BOT generating facilities were Lack of launched, the Bank was ambivalent. On the one hand, the decision to regulation and open the power sector to private investment, even for a limited time, opaque bidding was welcomed as bringing n e w financing and managerial capacity processes into the sector. On the other hand, the Bank was concerned about the marred an lack of transparency in the bidding process, the absence of proper attempt to open regulation, and the fact that the approach, which involved handing the power back the assets to the Government after 20 years, did n o t encourage sector to private proper maintenance of capital. These concerns proved to be w e l l investment founded. Later the Bank supported the alternative build-own and op- erate (BOO) approach and assisted the Government i n adopting more transparent bidding procedures for these contracts. 4.22 nthe new climate of reform after 1999, the Bank was able to I Subsequently, use the ERL to support agreements o n reforms of sector frameworks, in- Bank cluding, but going beyond, electric power: the n e w Energy L a w and adjustment the establishment of EMRA, the energy regulatory agency, the new lending and telecom regulatory b o d y (TRA), and the accelerated privatization analytic work program of energy, telecommunications and other entities. This pe- laid the basis for r i o d also saw the re-emergence of sector studies as a tool of Bank as- regulatory sistance: studies were prepared o n energy and environment, the gas reform sector, municipal finances and water supplies, and railways. 4.23 The Bank's impact i n reforming the water supply a n d trans- Bank lending for p o r t sectors was m u c h less pronounced than i n the power sector. The municipal water Bank h a d intervened in the water supply and sanitation (WSS) sector supply had with separate investment projects i n four cities: (Ankara, Bursa, Anta- limited lya, and Cesme). While all were rated Satisfactory o r Moderately Sat- institutional isfactory overall, three were rated as having a modest institutional development impact. Moreover, there has been little demonstration effect f r o m impact these projects i n other cities, which was an important objective. In ad- dition, very little institutional impact seems to have been imparted i n central agencies like the State Hydraulic Institute (DSI) o r the Iller- bank, the State Bank for financing municipal projects. The Bank did n o t succeed i n creating new mechanisms for handling WSS finances. Following completion of t w o recent analytic studies, the Bank is n o w addressing this in a Municipal Services Project. 4.24 The Bank was n o t very active i n Turkey n the transport sector i n the economy due to Turkey's despite the potential role of transport i unique location o n the major transit routes between the M i d d l e East and Europe. In the roads sector, the Bank supported modest gains i n efficiency-reductions i n the number of employees i n KGM (the Highway Agency), and an increase i n the share of open bidding as against force account contracting. The most dramatic outcome i n this 33 4 CHAPTER SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY sector-the sharp decline in "black spot" accident rates-has t o be at- The Bank's tributed to KGM, the agency that designed the strategy and action record in plan, although the Bank did finance the works. The Bank's rela- transport has tionship with K G M has been a difficult one. The Bank failed t o build been a collaborative relationship during the preparation and implementa- disappointing tion of the project and a decision by the Bank in 2002 n o t to extend the given the project to allow for completion of certain road, information and safety sector's components, produced a strong reaction f r o m KGM. The Bank's deci- potential sion was understandable in the context of Turkey's fiscal crisis and the earlier poor performance of the investment portfolio, but in prac- tice i t hindered the Bank's capacity to support a critical sector for Turkish development. This said, the project contributed to improved interdepartmental cooperation and the Traffic Information Center es- tablished under the project is a major success. Enhance Productivity 4.25 The focus of the Bank's strategy was o n three areas: raising productivity in agriculture; supporting the development of institu- tions for technology transfer; and better governance to improve the investment climate. TRANSFORM HELP AGRICULTURE 4.26 Outcome: By the end of the period under review, efforts to transform the agriculture sector and support private farming activity The framework and boost productivity h a d begun to pay off. The irrigation sub-sector of public h a d been earlier transformed by the creation of private Water User support for Associations, and a change t o a supporting role for the state water Turkish supply agency. I nrecent years private commodity exchanges have agriculture has been created, based o n a n e w l a w to legalize warehouse receipts as undergone tradable tender, and in the grains sector, the Turkish Grain Board has major changes virtually stopped buying grains, and is n o w being transformed into a payment agency for the Direct Income Support program; the state agency for providing inputs was liquidated; and privatizations have been accomplished or are underway in some other agricultural SOEs (the alcohol section of TEKEL has been privatized, the tobacco section is underway; and the Kutahya sugar factory has been privatized). These have not 4.27 Since most of these changes took place after 2000, i t is still yet improved early to measure their impact o n production and total factor produc- productivity tivity. One evident outcome was that in 2001 and 2002, Turkish prices of agricultural commodities fell relative to w o r l d market levels, partly as a result of withdrawal of price supports. A real price index for all f a r m crops (based o n 1997), showed a level of 87.3 for 2001. While studies are s t i l l under w a y t o determine the longer term impact o n prices and production patterns, i n the short term this h a d a positive social impact, particularly for the urban poor. 34 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY 4.28 The Bank’s Contribution: In the early 1990s the Bank sup- ported two projects that straddled the agriculture and environment Bank support sectors-the Privatization of Irrigation Project and the Eastern Anato- has been key to lia Watershed Project. The first of these contributed substantially to achieving these the breakthrough i nprivatizing irrigation, and supporting Water User institutional Associations, while the second developed a model for watershed changes, but it management which has been widely replicated. Both projects were has not yet rated satisfactory by IEG although questions were raised about the succeeded in sustainability and replicability of the Eastern Anatolia project as an enhancing the environment-focused project, despite its strong agricultural produc- capacity of the tion benefits, due to the high cost per hectare of the forestation com- ministry ponent. However, the Bank did n o t succeed i n supporting the reforms n the sector until 2000/01 when the ERL and the of state institutions i ARIP set i n place the reform platform built by the Bank‘s analytic work. These loans helped change the policy framework to reduce or eliminate product- and input-based subsidy programs. Inaddition, the ERL supported the needed legislation for validating the status of warehouse receipts as legal tender and the AMP helped bring about autonomy for the Agricultural Service Cooperative Unions (ASCUS). The Bank’s lack of success in helping the Ministry of Agriculture de- velop the kind of policy-making capacity which will be needed to deal with the complex issues relating to the Common Agricultural Policy of the EU, remains an important gap, despite funding technical assistance for the purpose. INSTITUTIONAL SUPPORT FOR TECHNOLOGY DEVELOP 4.29 Outcome: At the start of the period the Turkish private sector was poorly served by the institutional framework to encourage Re- search and Development, to protect International Property Rights, to certify and calibrate products and technology, and to assist local firms to introduce the most modern, competitive technologies. In an in- creasingly open economy, and with the longer-term prospect of E U accession where strict product certification will be demanded, weak- ness in these areas w o u l d have penalized Turkish products, b o t h at home and abroad. A series of 4.30 There have been significant developments over the period. A useful steps n e w l a w for national product accreditation has been passed and a have provided n e w agency has been set up w h i c h n o w certifies products for export Turkish markets, or IS9000, o r other purposes. The Turkish institute for manufacturers Metrology (UME) has been separated f r o m the national research insti- with improved tute, TUBITAK, and made financially more self-sufficient. It n o w han- technological dles 90 percent of Turkish industry’s needs for metrology, against support some 10 percent at the start of the decade. This saves Turkish compa- nies time and money as they previously h a d t o go abroad for these services. In addition, U M E is beginning to export these services to neighboring countries. The Turkish Standards Institute has been 35 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY strengthened, as has the Turkish Patents Office. Inthe early 1990s i t took more than 14 months to process a trademark application i n Tur- key; i t n o w takes n o more than 6 months. As a measure as of h o w the focus o n technology protection has grown i n the past decade, i n 2004 Turkey h a d some 900 trademark attorneys and 685 patent attorneys, compared to 430 and 267, respectively, i n 1994. The Turkish Technol- ogy Development Foundation (TTGV), a private agency, has been es- tablished as a source of funding for technology adaptation to local companies. I t has provided $140 million i n soft loans to SMEs and other companies, and has made more than 1,400 technology support service (TSS) matching grants. I t has n o w also established a Venture Capital Fund. Over time these developments should be useful i n ex- panding the base for the knowledge economy. 4.31 The Bunk’s contribution: The development of technology in- Bank projects frastructure was supported by two Bank projects. Inbuildingmo- contributed to mentum for change, and reforming the state agencies involved, the this Bank was able to draw o n the experience of w o r k i n other n this area i countries (India, Mexico) and by supporting the creation of private agencies as part of the Banks projects, i t has helped created potential champions for technology development that did n o t exist previously. BETTER GOVERNANCE TO IMPROVE THE INVESTMENT CLIMATE 4.32 Outcome: The resistance to dealing with many of Turkey’s structural problems came f r o m the corruption implicit i n the function- Turkey’s climate ing of the State Banks, the energy sector and the system of public ten- of tolerance for dering. The large industrial groups learned to live with and profit corruption has f r o m this corruption, but for small and m e d i u m enterprises and for changed and potential foreign investors, it has been a major constraint to invest- some important ment i n Turkey. A 2002 Investment Climate Survey reported that actions have while 28 percent of small enterprises regarded corruption as a major been taken on o r severe problem, only 8 percent of large enterprises expressed this public view. With the increase i nbudget transparency, and the introduction contracting of regulatory frameworks for energy and banking, Turkey took two important steps over the period t o tackle corruption at the source. A further important step was taken after the crisis i n 2001 with the n e w public procurement l a w and the reform of the state tendering system. In the previous system bids were kept l o w initially and after contracts were awarded cost escalations were approved and paid, with kick- backs to politicians. The n e w l a w introduced more transparent bid- ding procedures with the winning bids made public. This said, the W o r l d Bank Institute (WBI) governance indicators suggest deteriora- tion i nperceptions of many aspects of Turkey’s governance and anti- corruption efforts between 1996 and 2002 with a slight improvement f r o m 2002 to 2004. 36 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY 4.33 The Bank‘s contribution: The Bank provided support for efforts to improve governance, focusing specifically o n corruption. The Bank The Bank has worked closely with TESEV, a Turkish think tank that conducted a se- been an ries of surveys of corruption that were widely disseminated and important created substantial public awareness of corruption. Many of the pro- source of grams the Bank was supporting i n other areas were geared to eliminat- support for ing sources of potential patronage and rents which had often been mis- better used in the past. This included the work being done o n the State Banks, governance in o n the energy sector, and particularly the support for reforming the recent years system of state tenders which was addressed by the new public pro- curement l a w agreed under the Bank’s adjustment loans. Assessing Second Pillar Outcomes 4.34 The overall progress of outcomes for the second pillar is rated moderately satisfacto y.The rating reflects the fact that institution building was at the core of the Bank strategy and that the period saw Ratings reflect substantial efforts at building the institutional and regulatory frame- progress on works. The legal framework has been adapted to the needs of a mod- institutional ern economy; banking regulation and supervision are independent development in and the agency has continued to perform effectively i n the post-crisis addition to the years; the State Banks are being managed as commercial entities; quantitative there has been a major development i n regulatory frameworks for in- outcomes frastructure operations; the power distribution sector has been re- structured i n preparation for privatization; and the institutional bases for agricultural growth and technology transfer have been improved. As the quantitative indicators i n Table 8 and Box 2 below show, i n m a n y areas these institutional improvements have n o t yet been trans- lated into efficiency gains. It will be important to monitor progress i n these areas closely to ensure that the potential benefits are realized. 4.35 Institutional Development is rated substantial. As indicated Outcome of the above, regulatory capacity and n e w legal frameworks have been de- second pillar is veloped for managing the various sectors and for this aspect the rat- rated ing is high. The disappointing feature is that the ministries responsi- moderately ble for programs in the infrastructure sectors a n d agriculture have n o t satisfactory, developed the capacity to analyze and design the policies and pro- institutional grams needed to achieve outcomes. development substantial, 4.36 Sustainability is rated likely. The lessons of lax management sustainability of the financial sector have been learned and the privatization pro- likely gram is back o n track and seems t o have genuine political commit- ment behind it. Perhaps the worrying dimension is the structure of Turkey’s private sector, with the dominance o f large family-owned groups and substantial informal sector. Long-term success i s likely to depend o n the extent to which the country is able t o bridge this divide 37 CHAPTER 4 COMPETITIVENESS, AND PRODUCTIVITY SECOND PILLAR: GROWTH, through the development of medium-scale enterprises which draw o n small suppliers and in turn provide inputs to the larger groups. Table 8. Second Pillar: Growth, Competitiveness and Productivity Outcomes lndicafor Baseline Outcomes Comments 1993 2004 GNP growth 3.3 7.6 Although growth was high in final years, the pe- (ave. 1993- (ave. 2002- riod average was disappointing. 1995) 2004) Foreign direct investment, net 0.35 0.9 Increase is from a very low base. Stili well below inflows (% of GDP) most comparable MICs. Exports of goods and sewices 13.7 28.9 Major expansion of textiles, white consumer (% of GDP) goods, automobile parts, etc. MPlGDP 20 41 Improved significantly but still half the OECD average. Private Sector CrediffGDP 18 16 Credit is very small, one-sixth of OECD average Time DepositslGDP 8 19 Public confidence improving but still share of long-term deposits of total deposits is very low Share of Government Securities 11.3 24.3 This remains at a high level. in total assets, % State-Owned Banking As- 37 35 None of 3 State Banks has been privatized. setgotal Assets Non-performing loanflotal 3.1 12 Higher numbers are positive since they reflect Loans (2003) greater realism in loan classification and supewi- sion. Risk Weighted Capital Ratio of 8 26 This ratio is higher than required by international Private Banks (%) standards. EIU Banking Sector Risk (0 56 63 State ownership and possibility of government least risky-100 most risky) ( l a 1997) (Dec 2004) crowding out private sector viewed as imposing high risks. Treasury Payment of Guaran. 1.74 0.44 Reflects progress in commercializing state enter- tees ($b) prise operations. Infrastructure SOEs Privatized 0 3 Although privatlzations were few, a number of useful preparatory steps were taken. Employment in SOEs 440,110 320,466 A mix of privatizations and retrenchment of ex. cess labor from enterprises. Power Sector: 1994 2004 Progress is mainly in the regulatory and institu- Losses (YO) 15 19 tional framework. Implementation of changes Collections (%) n.a. 79 needed for efficiency remains slow. WSS Sector: Unaccounted for 48 40 Still very high by comparison with OECD aver- Water in four major cities (%) (1991) 1999/2000 ages. Transport (Roads): 1994 2004 Although progress is substantial it still takes far Investment Completion (yrs) 24 13 too long to complete projects. The record on road Employment in KGM 35,000 24,000 safety is very impressive. "Black Spor AccidentslDeaths 900 54 WBI Governance Indicator: 1996 2004 Turkey's rankings on this indicator have deterio- Control of Corruption (Percen- 61.3 50.7 rated relative to other countries, but the ranking tile rank-0-100) has improved from the 2002 level. Sources: WDI, Turkish Banking Association, Ministry of Energy, and World Bank sector and project reports. 38 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY 3ox 2. Pillar Two Outcomes: Mixed Results The Charts below show h o w several Pillar 2 indicators changed over the CAE period, and h o w they n o w :ompare with those of other countries, and with regional and middle-income averages. They provide a nixed picture. In the financial sector, there has been substantial financial deepening, with M 2 growing as a )ercent of GDP, but credit to the private sector declined as a percent of GDP, and both indicators are well )elow the middle-income country (MIC) average. Exports have grown substantially, indicating some :ompetitiveness gains, but foreign direct investment, while higher, is still a small fraction of the M I C aver- ige. The relatively poor and falling governance indicators may be a factor here. In the power sector, de- ipite growing private sector participation, the already relatively high losses are growing. Money and quasi money (M2) as % of GDP 2003 II 11 120.0 , Domestic Credit to Private Sector (as % of GDP) 2003 I 100.0 100.0 2 : 80.0 80.0 n 60.0 60.0 ? ! 0 O 40.0 8 40.0 8 20.0 20.0 c Exports of goods and services (%of GDP) 2003 Foreign direct investment, net inflows (%of GDP) 2003 70.0 60.0 3.5 3.0 50.0 n 2.5 40.0 n 2.0 30.0 1.5 20.0 8 1.o 10.0 0.5 WBI Governance Indicator: Control of Corruption 2004 Electric power transmission and dlstribution losses (% of output) 2002 70.0 I I 60.0 25.0 1 50.0 3 20.0 40.0 30.0 = a n 0 15.0 20.0 B 10.0 10.0 ae 5.0 jource: Table 8 a n d WDI database. Comparator country data are for year indicated in table title. Turkish data are for rears indicated by respective data labels. 39 CHAPTER 4 SECOND PILLAR: GROWTH, COMPETITIVENESS, AND PRODUCTIVITY The Bank’s Contribution to Second Pillar Outcomes 4.37 From fiscal 1994 to fiscal 1998, the Bank h a d little impact. M a n y of the achievements rested o n work the Bank h a d done before Limited analytic the period. The failure to undertake a serious program of analytic work w o r k during this phase was a major lapse and is n o t fully explained constrained by the lack of receptiveness of the Turkish authorities. In infrastruc- Bank impact ture, technology, agriculture and private sector development, the earlier in the Government was open to Bank sector work. The Bank was able to ad- period, but later vance the reform agenda through its lending activities i npower and adjustment transport, but overall i t seems simply to have ”tuned out” of the loans helped broader growth agenda during this period. From fiscal 1999 to fiscal support better 2004 the Banks contribution was more substantial. The adjustment regulatory lending operations helped to foster major institutional changes i n the frameworks financial sector and i n agriculture, and promoted some restructuring in power, telecoms and the State Banks, though short of the Bank’s goal of privatization. A broader program of analytic w o r k was also undertaken. Sector reports were prepared o n the agriculture sector and some of the energy-related sub-sectors. Analyses of the problems of the financial sector were incorporated i n the 2000 and 2003 CEMs as w e l l as a number of informal studies. 40 Evaluation Essentials .:. Overall outcomes are uneven, with good results in education and infant 5. Third Pillar: Poverty Reduction mortality, protection of expenditure levels, and and Social Development modest poverty reduction, but slow job growth, especially for women, and little progress in reducing 5.1 Turkey’s efforts to reduce poverty and improve the health and regional disparities education of its people have taken place against a complex back- ground of initial conditions and underlying trends. While extreme . : . Low levels of analytic poverty, based o n food consumption alone, was quite l o w in 1994, work on poverty and social development left a over 28 percent of households fell below what is n o w the official pov- large “analysis gap” erty line (based o n total food and non-food consumption). There were before fiscal 1999, but the also large regional disparities, with per capita incomes in the poorer gap has narrowed sharply eastern regions less than half the national average. Health and educa- since then tion indicators were l o w compared with many middle-income coun- tries, a n d lower still in the poorer eastern regions. There were also : .. Bank operations were substantial gender disparities: women were m u c h less likely to attend also uneven; some were plagued by school or find employment, and their labor force participation rates implementation problems, were below 27 percent in 1993, about one-third the level of men’s. while some more recent operations to target social 5.2 Since growth for most of the review period was slow and erratic, assistance and reform the it produced little increase inper capita consumption. I t also generated health sector are highly relatively few jobs, and with the working age population growing un- promising usually fast due to past rapid population growth, this pushed employ- ment rates down. The benefits of economic growth were not evenly . $ The recent increased focus on collaborative spread across the country, with security problems inlarge parts of the analytic work and building poorer eastern region undermining investment and growth opportuni- institutional capacities ties there until the late 1990s. Inaddition, the workforce shifted out of ag- holds promise for a more riculture and rural areas, with shares of both falling by about 13 percent- effective program age points after 1990. This large loss of rural and agricultural jobs, combined with SOE and public sector downsizing, made i t even more difficult for the rest of the economy to generate enough net new jobs to In 1994,28 absorb the growing labor force. Moreover, since female employment was percent of concentrated in agriculture and rural areas, the impact o n women’s em- households fell ployment was particularly negative. These factors combined to make below what is Turkey’s social development agenda extremely challenging. now the official poverty line, social indicators Equity, Employment and Social Protection were relatively 5.3 Outcome: Poverty declined slightly between 1994 and 2002, poor, and with ”extreme” poverty falling f r o m 2.9 percent to 1.4 percent, and ”to- regional and tal’’ poverty falling f r o m 28.3 percent to 27 percent. This modest decline gender i s consistent with the slow and erratic GDP growth up to 2002 (the year disparities were of the most recent available household survey). Turkey’s relatively high large 41 CHAPTER 5 THIRD AND SOCIAL DEVELOPMENT PILLAR: POVERTY REDUCTION Slow growth population growth (1.75 percent per annum, over twice the OECD av- meant that erage) resulted i nslow per capita GDP growth, with almost n o growth poverty fell only in real per capita consumption. There was a slight, but statistically in- slightly by 2002, sigruficant, increase inthe already relatively high inequality of con- but rapid sumption. Some observers had anticipated a more sigruficant rise i n recovery in inequality due to increases i nindirect taxes (which can affect the poor consumption adversely) and i n interest income (which accrued largely to the rich). since then has The reduction i nfood costs resulting from removal of agricultural price probably supports may have helped prevent a sigruficant worsening in con- reduced poverty sumption distribution i n2001 and 2002. The rapid growth i nGDP and further consumption since 2002 should have brought a further reduction i n poverty by 2004, assuming n o offsetting rise i ninequality. 5.4 Inemployment, Turkey’s growth has n o t been fast enough, or la- bor-intensive enough, to absorb the growing working age population, let alone make inroads into the already sigruficant backlog of unem- ployment at the beginning of the period. The unusually fast growth i n Slow, erratic the working age population, combined with the loss of jobs i n agricul- growth also ture, put large numbers of job seekers into the labor market at a time meant job when growth was slow and volatile. Moreover, the growth that did oc- growth was too cur was relatively ”jobless,” as the volatility of the economy made small to offset employers less likely to hire new workers than to extend work hours of other structural existing employees. Also, during much of this period the Government changes sought to reduce public sector employment. As a result of all these fac- tors, since 1993 the net increase i njobs was about 3.1 million (about 1.5 percent per year), while the working age population grew by over 10 million (about 2.3 percent per year). Thus the employment rate fell fairly steadily over the period, reaching 43.6 percent i n2004, the lowest in the OECD. Also alarming is the continuing drop i nwomen’s partici- pation i n the labor force, to about 25 percent, the lowest among OECD members, and more than 40 percentage points below the OECD aver- age. This is partly explained by the declines i n agricultural and rural employment, as noted above, but there is n o t yet a full explanation. Es- timates for 2004 suggest 1.1 m i l l i o n n e w jobs were created inthat year, which supports the hypothesis that sustained growth is the key for generating sigruficant employment gains. Table 9. Slow GDP and Job Growth Meant a Declining Employment Rate indicator 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Per capita GDP (1987 TL ‘000) 1,624 1,507 1,586 1,666 1,759 1,782 1,669 1,762 1,603 1,701 1,772 1,916 Employment (m.) 18.5 20.0 20.6 21.2 21.2 21.8 22.0 21.6 21.5 21.4 21.1 21.6 Employment Rate (%) 47.5 50.0 50.0 50.2 49.0 49.2 48.7 45.6 46.7 44.5 43.2 43.6 Source: State Planning Office, Government of Turkey and World Bank Country Office database. 42 CHAPTER 5 AND SOCIAL DEVELOPMENT THIRDPILLAR: POVERTY REDUCTION 5.5 N a r r o w i n g the gap between the poorer regions and the richer But migration regions continues to be a major challenge, with per capita income in may have the poorest region (Eastern Anatolia) still less than half the national prevented average. During m u c h of the review period, private investment and regional income g r o w t h has been concentrated i n the western part of the country, disparities from while major security problems undermined economic activity in the widening East. To a large extent, however, the labor shifts described above ap- pear to have prevented a worsening of the regional income distribu- tion, with significant population migration f r o m the poorest regions (where population shares declined by about 2 percentage points), into the richest. The net result between 1990 and 2001 was a marginal im- provement in the regional distribution of GDP, though the absolute gaps remain large. 5.6 The social protection system, which provides benefits to over The social 80 percent of the population, has serious problems. With most of its protection benefits going to the middle class, i t i s not well focused o n the most system has vulnerable. Moreover, the pension system, which absorbs over 90 per- broad coverage, cent of spending o n social protection, is running rapidly rising deficits, but is not well and the generosity and cost of its benefits m a y reduce the employment focused on the impact of growth. Its growing deficits drain resources that could have most vulnerable, been used to fund a larger, better-targeted social assistance program. and the pension Although i t was anticipated that the generous system of severance pay- system ments w o u l d be phased out or reduced as unemployment insurance generates large was introduced, these payments remain substantial for formal sector and growing employees, particularly those i n the public sector. Social assistance needs deficits to be more systematic, better targeted and better financed, despite the conditional cash transfer program discussed below. 5.7 On the positive side, the Government has n o w developed a m u c h more systematic capacity to analyze b o t h the broad issues of poverty reduction and social protection and the specific issues of pen- The government sion reform. One important outcome of this i s the proposal for a major has improved its reform of the pension system which has been prepared and submitted capacity to to Parliament for approval. Although the coverage of unemployment analyze social insurance is still limited, its introduction provides a relatively cost ef- issues and a fective and non-distorting tool for assisting workers t o cope with job new component loss, easing the w a y for future labor market reforms. The direct income of its social support program for farmers replaced expensive, non-transparent sub- assistance sidies with better-targeted, lower cost ones. Finally, and most promis- program is well- ing, the social assistance system has been strengthened by a system of targeted conditional cash transfers to support schooling a n d health services for the poorest 6 percent of the population, and by a system of small grants targeted to raise incomes for the poor. The conditional cash transfers are reaching some 1.7 m i l l i o n beneficiaries, with 60 percent of the beneficiaries in the t w o poorest regions (East a n d Southeast Anatolia) which contain 20 percent of the population. 43 CHAPTER5 PILLAR: POVERTY REDUCTION THIRD AND SOCIAL DEVELOPMENT 5.8 The Bunk’s Contribution: The Bank‘s main contributions to equitable growth with poverty reduction came after 1999, through the Bank activities series of adjustment loans, the ARIP, and three poverty assessments. made important These helped restore the economy to a sustainable growth path and contributions to identify and support policies that could make that growth p a t h more poverty equitable. The most important of these policies was the removal of ag- reduction by ricultural price supports under the ERL and the ARIP, thereby reduc- supporting ing distortions and lowering food costs to consumers in the short run, growth and and the protection of social spending under the PFPSALs. The Pov- more equitable erty Assessments were particularly important in establishing a policies framework and building Government capacities to analyze the impact of Turkey’s growth strategy and associated policies and programs o n the poor and in identifying ways to reduce poverty more effectively, such as the conditional cash transfer program mentioned above. 5.9 In employment, including labor market reforms, the Bank h a d less impact, though the l o w level of employment generation was a Analytic work matter of serious concern, reflected in analyses in CEMs and Poverty and lending for Assessments f r o m 2000 on. A labor market study was underway dur- employment and ing the review period, but its interim findings have n o t yet l e d t o a labor market consensus o n an approach t o Turkey’s labor market issues and priori- reform have not ties. These issues include the slow pace of employment growth, ex- yet had much ceptionally l o w employment rates for women, the impact of pensions, impact payroll taxes and severance pay o n incentives to hire, and the implica- tions for private sector job growth and Turkey’s large informal sector. 5.10 Most of the project interventions in this area involved active labor market policies. These h a d some success but did n o t measurably increase employment opportunities or reduce labor market rigidities. While the Employment and Training Project trained and found jobs for more people than originally expected, it is n o t clear that this caused a net increase in employment, and in any case the numbers trained were a small fraction of the increase in unemployment during the period. The Privatization Social Support Project seems t o have succeeded in making the SOE privatization process smoother, by funding legally mandated severance payments and additional bene- fits to laid-off workers. But it is less clear that i t moves these workers permanently off the government payroll into productive, private- sector jobs: reports suggest that the generosity of the benefits and the continuing, though uncertain, prospect of rehiring by the public sec- tor cause large numbers of these workers to reject job offers f r o m the n e w private owners. One element missing f r o m the Bank‘s assistance program was micro-credit, which has worked in some economies t o generate substantial additional jobs in a sustainable way. The Local Initiatives component of the SRMP, w h i c h provides ”repayable grants” for small local projects, has some similarities to a micro-credit operation and m a y have a significant employment impact, but i t 44 CHAPTER 5 THIRDPILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT reached full scale operations only in 2004, and its impact and sustain- ability will have to be evaluated carefully. 5.11 Bank support for social protection included both social insur- The Bank has ance (unemployment insurance and pensions) and social assistance. helped the The establishment of unemployment insurance (agreed under the government ERL), was a potentially important step, but so far its coverage is very build capacity to limited and further reforms i n its benefit structure and contribution deal with rates are needed for i t to fulfill its potential. In pensions, the Bank as- pension issues, sisted the Government i n the design of the 1999 reforms and sup- but pensions ported them under the ERL, generating initial reductions i n the fiscal still need major deficit. However, as explained above, these reforms were n o t deep reforms enough, and the deficits again began to rise. Since 2002, pension re- f o r m has been a consistent component of the dialogue of the Bank and Fund with the Government, helping to build an awareness of the seri- ousness of the problem and a capacity to analyze the options. The government’s n e w round of parametric reforms to correct the under- lying imbalances is currently with the Parliament. 5.12 Insocial assistance, through the Emergency Earthquake Recov- Bank operations ery Loan, the Bank played a major role, together with the Social Soli- assisted darity Fund (SSF), i n getting emergency cash assistance t o earthquake earthquake victims quickly.’ The Social Risk Mitigation Project (SRMP), including victims, its innovative program of conditional cash transfers, built o n this suc- protected cessful experience with the SSF, and o n the analytical w o r k of the Pov- spending levels, erty and Coping after Crises report. These transfers target assistance to and are helping the poorest 6 percent of families i nways that b o t h provide immediate poor families assistance and help lift the next generation out of poverty i n a sus- keep their tainable way: the transfers, made to the mothers, are conditional o n children healthy children attending school and visiting health clinics to receive inocu- and in school lations and other basic health care. They thus also reinforce the health and education operations outlined below. Initial reports of the pro- gram’s impact are promising. I naddition, through the PFPSALs, the Bank has helped to protect funding for social assistance programs during the post-2001 fiscal adjustment. Improving the Health of the People 5.13 Outcome: Over the past decade, Turkey’s health indicators Infant mortality have improved i n some areas, notably in infant mortality w h i c h fell by has fallen to over 45 percent (see Table 10). Though still high by OECD standards, levels similar to Turkey’s infant mortality rate is at the ECA average a n d slightly be- other middle- l o w the average for middle-income countries. Life expectancy has also income shown some gains, bringingTurkey slightly above the E C A average countries, and of 68 years. Life expectancy improved for males and females at about other health the same rate, with females living about 7 percent longer than males. indicators have Contraceptive use and the percentage of births assisted by trained health improved 45 CHAPTER 5 AND SOCIAL DEVELOPMENT THIRDPILLAR: POVERTY REDUCTION personnel have both grown. Public expenditures o n health have g r o w n to levels similar to those of the Central and Eastern European coun- n the latter part of the 1990s, and expenditures were protected tries i throughout the post-2001 fiscal adjustment. 5.14 However, these good results are undermined by their uneven distribution across regions (see Table 10) and income groups and by But infant a n inadequate focus o n prevention of disease and sickness. Urban ar- mortality fell eas and much of the western part of Turkey have substantially greater much less in the numbers of health care professionals and facilities, as w e l l as higher east, and gaps incomes and m u c h better health outcomes, than the rest of the coun- in some other try. Part of the improvement i nnational averages reflects net migra- health tion to these better-off and better-served areas. In addition, the poor- indicators est 20 percent of the population are about half as likely as the richest remain large 20 percent to have any kind of insurance coverage, and are thus far n life-threatening situations. The less likely to seek health care, even i impact of these factors can be seen i n the slower decline in infant mor- tality i n the east (33 percent) than in the nation as a whole (45 per- cent), even though one might have expected a more rapid decline i n the East, where the initial infant mortality rate was m u c h higher (hence offering more scope for rapid gains). The infant mortality gains in the east came only after 1998, as security improved (thus making i t more feasible to implement effective health programs). For some indi- cators the East improved more rapidly than the national average, but even i n these areas large gaps remain. Table 10. Regional Differences in Health Outcomes indicator 7993 7998 2003 % births with skilled delivery assistance National Average: 75.90 80.6 84.0 Eastern Region: 50.30 52.3 59.7 EasternlNational ratio: 0.66 0.65 0.71 infant mortality (per 1,000 live births) National Average: 53 43 29 Eastern Region: 60 61 41 EasternlNational ratio: 1.14 1.42 1.41 / fully vaccinated Child Immunization, OO National Average: 64.70 45.7 54.2 Eastern Region: 40.60 22.9 34.8 EasternlNational ratio: 0.63 0.50 0.64 Contraceptive use, all methods,% National Average: 62.60 63.9 71.O Eastern Region: 42.30 42.0 57.9 EasternlNational ratio: 0.68 0.66 0.82 Source: Turkish Demographic and Health Survey, 1993, 1998 and 2003. 5.15 The other weakness shown in the indicators i s the declining share of public suending: on preventive cure, despite the substantial rise 46 CHAPTER 5 THIRDPILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT in total public spending o n health. This indicates that most of the in- Despite crease inhealth spending has gone towards curative care, a shift i n improvement the expenditure m i x towards less cost-effective interventions. This is after 1998, the nchild immunization. The percentage of chil- reflected in the decline i drop in child dren fully immunized fell by about 20 percentage points by 1998. immunization is While half the lost ground was recovered by 2003, DPT coverage, at a serious 68 percent in2003, is more than 20 percentage points below the ECA concern, as is average (90 percent) and even below the w o r l d average (74 percent). the declining emphasis on 5.16 T h e Bank’s contribution: The Bank‘s two Basic Health projects preventive care sought to improve access to health services by providing additional facilities, training service delivery staff, and improving management a n d policy-making capacities of the Ministry of Health (MoH) through technical assistance and training. The first project covered eight under-served provinces spread over the country, while the sec- o n d focused o n 23 provinces i n the east and south east, where health Bank-assisted indicators were the worst. The assumption was that improved access health projects in these areas w o u l d result i n improved health outcomes. IEG’s re- do not appear to view of the first project (closed i n 1999) rated outcomes as marginally have made a satisfactory, noting that although baseline access and utilization data major were n o t available, i t was reasonable to assume that access increased contribution to where n e w facilities were operating. I t also found that the project con- health outcomes tributed to improvements in MoH’s capacity by training large n um - so far bers of staff and installing a management information system, though i t noted that policy reform objectives were n o t achieved due to the unstable political situation. The second project, closed in December, 2004, is more problematic. The facilities i t constructed were n o t yet be- ing used due to lack of staff (and a few were n o t complete) at the time the project closed, and the project was given unsatisfactory ratings i n its final project status report. 5.17 Both projects experienced major implementation problems, with long delays and large cost overruns. This reflects the political and economic turmoil that prevailed during m u c h of the period: the Implementation first project was implemented under nine Ministers of Health, and six problems Undersecretaries; austerity programs at times delayed counterpart reflected funding; and serious security problems i n m u c h of the eastern part of institutional the country also delayed implementation. The Bank sought to estab- weaknesses and lish a strong Project Coordination Unit (PCU), backed by a Manage- rapid leadership ment Services Agreement with UNDP/UNOPS t o improve imple- change in the mentation, but these approaches did n o t produce the expected results. Ministry of Despite this, one constructive critic of the Bank‘s assistance i nhealth Health nevertheless argued that the Bank h a d been valuable, even i n these operations, as it “opened our eyes to international thinking and to assessing health interventions in terms o f outcomes and improvements in health indi- cators.’’ Even allowing for this, the Bank’s contribution to outcomes during the period up to 2001 was negligible, especially given the scale of the effort. 47 CHAPTER 5 AND SOCIAL DEVELOPMENT THIRDPILLAR: POVERTY REDUCTION Recent sector 5.18 In contrast, the in-depth health sector analysis begun in 2001, analysis has the subsequent dialogue with the Government and the resulting underpinned a Health Transition Project support a somewhat more positive view of more the Bank's contribution in the sector. The sector review, the first since substantive 1986, was of a high technical standard, identifying key issues in Tur- dialogue on key's system and a comprehensive, phased strategy to resolve them. health reforms The impact of the review was enhanced by being conducted i n a col- that fit closely to laborative, participatory manner that helped build ownership. government priorities 5.19 The dialogue o n the report led to the development of the Health Transition Project (HTP), which is focused entirely o n building the systems and capacities needed to implement the first phase of a comprehensive health system reform. The project is designed to re- structure the M o H so that i t can exercise its strategic policy and regu- latory roles more effectively, introduce a family medicine model for These reforms primary health care, build the capacities to implement universal are being health insurance and strengthen the school of public health, aspects supported by a that should help increase the focus o n preventive care. Unlike previ- new operation ous operations, the H T P appears to be fully owned by the Govern- ment, which adopted its m a i n components as its o w n reform program in 2002. Moreover, the Government has the solid majority needed to implement this complex and ambitious set of reforms, and parliament has already approved legislation to pilot the family medicine ap- proach and to adopt more flexible hiring and pay policies. While i t n these areas to have an impact, will take years for m u c h of the w o r k i some aspects, such as the change i n staff pay structures, can bring near-term benefits in improving incentives to engage staff at more PFPSALs and remote facilities. This said, the reform program i s ambitious and con- the conditional troversial, and will need sustained effort and monitoring to achieve cash transfers success. also support health sector 5.20 The conditional cash transfers discussed earlier should also outcomes help support better health outcomes by encouraging those least likely to use medical services-the poor-to seek prenatal care and routine child immunizations. Finally, the provisions of the PFPSALs helped prevent a decline in spending o n preventive care as a share of GDP Turkey has (even though i t declined as a share of total health spending). achieved large primary and secondary school Improving Education Access and Quality enrollment 5.21 Outcome: Over the past decade, Turkey made substantial increases, and gains i nenrollments, especially among girls in primary schools (See sharply Table 11).These gains followed the 1997 reform of basic education, narrowed the w h i c h extended compulsory p r i m a r y education f r o m 5 years to 8 gender gap at years and launched a major effort t o enforce this and to ensure ade- the primary level quate facilities and teachers t o make i t a reality. The increased enroll- ment was concentrated o n children f r o m the poorest 20 percent of 48 CHAPTER 5 THIRDPILLAR: POVERTY REDUCTIONAND SOCIAL DEVELOPMENT households. Secondary school enrollments have also grown rapidly, as the higher numbers of eighth grade graduates seek further education. Female enrollments at the secondary level kept pace with male en- rollments, but there is n o sign yet of the gender gap narrowing at this level. The proportion of the population with tertiary education, while still the lowest among OECD members, also rose significantly (by 30 percent by 2002). Adult literacy also registered modest improve- ment, along with some narrowing of the gender gap. Literacy rates should start improving more rapidly as the m u c h larger numbers of primary school graduates w o r k their w a y into the adult population. 5.22 I t was a major achievement that school quality, measured by Quality has learning assessment tests, did n o t decline during this rapid enroll- remained even ment expansion. Moreover, girls’ test scores are not significantly dif- despite the ferent f r o m boys’. Turkey’s establishment of systematic learning as- enrollment sessments and its participation in international assessments are also increases, but positive outcomes, giving Turkey tools for charting future system im- student provements. However, these assessments give n o scope for compla- achievement is cency, as they demonstrate that learning levels are w e l l below what still far below Turkey wants and needs: scores on the national tests average below the levels 50 percent, and among OECD countries, only one country scored Turkey wants lower in recent international assessments. Moreover, Turkey’s aver- and needs age scores conceal wide variations, with small numbers of high- performing students f r o m elite schools raising the average of the bulk of the students that achieved only the lowest proficiency level. 5.23 Education spending levels have risen over the decade and have Public spending been maintained at fairly high rates even during periods of fiscal con- levels appear traction. Public spending as a percent of GDP is in the range of a adequate, given number of comparator countries. A s the need for expansion at the the primary level subsides (as the enrollment rates reach 100 percent and demographic as the primary school age cohort begins to shrink), resources should transition and become available for qualitative improvements and for selective ex- potential for pansion at other levels. There is also scope for efficiency gains, with efficiency gains better completion rates and some shifts out of high unit cost forms of education (such as vocational education), and for greater reliance o n tuition (and need-based scholarships) at university level to ration de- m a n d and finance expansion. 5.24 The Bank’s Contribution:At the start of the review period, the Vocational and Bank‘s education portfolio consisted mainly of a set of operations fo- technical cused o n vocational education that began in the 1980s, with implemen- education tation continuing into the mid-to-late-1990s. These projects reflected a operations view prevalent i n Turkey (and in the Bank in the 1980s) that Turkey’s initially m a i n education priorities were vocational and technical training to dominated the produce the labor force thought necessary to enable the economy to Bank‘s grow and compete effectively in w o r l d markets. I t was not generally education understood that large numbers of children did n o t complete primary portfolio 49 CHAPTER 5 THIRDPILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT school, so that large numbers of young people entered the labor force without the basic skills to learn and adapt o n the job to meet the rapidly changing needs of the labor market. The one 5.25 The initial portfolio also included the National Education De- operation velopment Project, which reflected Bank efforts to increase focus o n focused on improving quality i n primary and secondary education and teacher general training, and strengthening the managerial capacity of the Ministry of education had National Education (MONE). Though the operation was better fo- implementation cused strategically than the previous ones, it suffered f r o m numerous problems due to implementation problems, many stemming from the continued rapid rapid leadership turnover of M O N E leadership and professional staff (despite a PIU changes and intended to overcome these problems). The efforts to improve M O N E capacity capacity were unsuccessful i n this environment, but some progress constraints in was made i n increasing the focus o n general education. the ministry 5.26 When the government extended compulsory primary educa- tion f r o m 5 years to 8 years i n 1997, the Bank supported this break- through with two Basic Education Projects which contributed to en- rollment expansion, especially i n r u r a l and slum areas. Learning materials were provided for nearly three million rural students, na- tional learning assessment tests were improved and further institu- Bank operations tionalized, and innovative nongovernmental approaches to early to help expand childhood education were funded. However, several weaknesses re- primary duced the impact of these operations. The emphasis o n Information enrollment and Communications Technology as a w a y to improve quality ap- continued to pears to have been excessive and premature, with continuing prob- suffer from lems i n procurement and efficient use. Both operations have h a d seri- implementation ous implementation issues and l o n g delays. More generally, there has problems, and been little progress i n improving MONE’s management effectiveness, dialogue was resulting f r o m both its fragmented, bureaucratic structure, and its fre- limited quent leadership turnovers (there have been eight ministers over the review period, including three since 2002). Moreover, given the lack of systematic sector w o r k until recently, with n o comprehensive sec- tor review since 1986, the Bank appears t o have missed a n opportu- nity to use the operation to underpin a substantive sector dialogue o n strategic issues of quality, equity, efficiency and finance. Instead, until recently, the dialogue has been dominated by implementation and procurement issues. J n addition to underscoring the importance of timely, high-quality sector work, this experience suggests that a dif- ferent approach, possibly along the lines of a sector wide approach (SWAP), might have been more effective. 5.27 nfiscal 2004 the Bank launched a comprehensive Education I Sector Study, which focused o n critical policy issues, and used a participatory approach designed to have a more widespread impact than a traditional sector report. Turkish a n d international specialists collaborated with the Bank team in PreDaring I I v background v DaDers o n I I 50 CHAPTER 5 THIRDPILLAR: POVERTY REDUCTIONAND SOCIAL DEVELOPMENT priority issues. The ESS was conducted with the support of the Istanbul Policy Center’s Education Reform Initiative (a consortium of Recent interested non-governmental organizations and stakeholders), which collaborative helped the Bank to engage a broader segment of civil society in sector work is discussions of the research and findings as they become available. The stimulating participation of both governmental and nongovernmental more stakeholders in these discussions appears to be helping to develop comprehensive consensus and ownership of the results of the study. As inhealth, the dialogue on PFPSALs helped protect spending levels during the fiscal crisis, and critical the SRMP is helping poor families keep their children in school. education issues Assessing Third Pillar Outcomes 5.28 T h e overall outcome f o r t h e third p i l l a r i s rated moderately satisfactory. Poverty reduction and employment growth were very modest, largely reflecting the slow and volatile growth of the econ- omy, but agricultural reforms appear to have brought benefits to the poor by cushioning the impact of the economic downturn of 2001, a n d consumption growth since 2002 has probably reduced poverty further. The rapid rise in primary school enrollments, especially for Overall girls, was a major achievement. This took place without apparent outcomes for quality loss, and is leading to increased enrollments at the secondary the third pillar level as well. Over time these changes are expected to bring wider so- were moderately cial and economic benefits for Turkey. The 45 percent decline in infant satisfactory, mortality i s another major achievement, bringing Turkey into m u c h institutional closer alignment with comparators. The implementation of a targeted development social assistance program, with 60 percent of its 1.7 m i l l i o n beneficiar- modest, ies in the two poorest regions, is bringing relief to poor families, while sustainability reinforcing education and health programs. The protection of spend- likely ing for health, education and social protection during a time of severe fiscal contraction has also been important in maintaining service de- livery, and possibly in maintaining social peace in a time of stress. The declining relative expenditure o n preventive medicine, and particu- larly o n immunizations, is a matter of concern, but even here spend- ing has n o t fallen as a percent of GDP, a n d immunization coverage has recovered somewhat since 1998. In general most social indicators, including those for gender and regional inequalities, were trending in the right direction, but at a rather slow pace. Box 3 provides a snap- shot of some of Turkey’s important indicators compared with those of other middle income countries. 51 CHAPTER 5 THIRD AND SOCIAL DEVELOPMENT PILLAR: POVERTY REDUCTION Table 11. Third Pillar: Poverty Reduction and Social Development Outcomes Indicator Baseline (93) Achievement (04) Comments Poverty rate (“YO) a) extreme 2.9 [94] 1.4 [02] Poverty now projected in 2125% range given growth b) total 28.3 [94] 27.0 [02] since 2002, provided inequality did not worsen sig. nificantly. Per capita GDP, 1987 TL ‘000 TL 1,624 TL 1,916 Modest rise over period. After narrowing, regional Regional difference .44 [92-951 .47 [99-011 differences may have widened since 2601. - a) Employment rate (“YO) 47.5 43.6 Large bulge in growth of working age population and b) Participation rate: Total (%) 52.1 48.4 shifts out of agriculture during this period, but also a Female (%) 26.8 25.3 marked deceleration in job growth. Total social protection spending levels remained well Spending on Social protection/GNP (%) 6.08 [98] 9.03 [03] above agreed floor (7% of GDP) during fiscal con- traction, but overspending on pensions indicates serious problem and urgent need for reforms. Infant mortality (per 1,000 live births): 53 29 [03] Substantial (45%) drop: brings Turkey slightly below middle income average. Decline slower in East. Life Expectancy at birth (years) Total Population 66.8 68.6 [03] Moderate gain and no change in gender differential Female population 69.1 71.0 [03] which is in line with middle inwme country and Femalenotal 103.3 103.5 [03] OECD averages. Public health spending: Success in raising and protecting expenditure levels, -Total as % of GNP: 2.15 [96] 4.85 [03] but offset by declining share of expenditures on pre- -%of total spent on preventive care: 12.1 [96] 6.3 [Ol] ventive care, which remained roughly constant as a share of GDP. Enrollment rates: primary (yrs. 1-8) Highly significant and rapid enrollment increase after a) gross (“YO) 84.27 [93] 98.17 1997 Reform. Major implications for poverty reduc- b) net (“YO) 80.1 [97] 90.0 tion and labor market preparation. secondary (yrs. 9-12) a) gross (%) 52.4 [97] 84.0 Rapid increase at secondary level as primary com- b) net (“YO) 45.1 [97] 78.7 pletions grew. Female to Male gross enrullment ratios: Significant rise in female primary enrollment relative a) Drimary (%) 85.8 1971 95.2 to male does not vet show UD at secondalv level. b) s e w n d a i &j 74.2 i97j 74.2 Tertiary attainment: as % of 25-64 age group 7.0 [94] 9.0 [OZ] Increase brings Turkey to lower end of OECD range. Learning assessments: Establishment of regular national assessments a key Grade 5: Combined subject scores: institutional step. While the absolute scores are quite Male: 1.75 (95-7) 1.87 (02) low, and changes in scores not all statistically signifi- Female: 1.79 (95-7) 1.92 (02) cant, it appears that the large enrollment expansion took dace without loss in aualitv. Scores do not sua- gest gender differences in iearing. Literacy Rates Adult Total (Yo) 84.7 87.9 [03] Small relative gain for females should improve over Ratio: Female to Male Lit .82 .85 time given primary enrollment expansion. Literacy in Regional Difference: .84 [go] .89 [OO] poorest region rose relative to national average. Public spending on education as % of GDP 3.10 [96] 4.47 [04Pr] Protection of spending levels during severe fiscal contraction. Sources: See notes to Annex 6, Table 62. 5.29 Institutional development during the period i s rated as mod- est. There were gains i n the capacity to carry out poverty analyses, design pension reforms, implement a n e w targeted social assistance program, and carry out systematic learning assessments. Primary education was restructured as a n 8-year system, and an unemploy- ment insurance system established. However, there was a disappoint- ing lack of progress i n developing the structure a n d capacity that the line ministries need t o design and implement reforms i nhealth and education policies and programs, including engaging the local levels where many social programs will need to be based in the future. The development of the SSF during earthquake relief and more recently i n 52 CHAPTER 5 THIRDPILLAR: POVERTY REDUCTIONAND SOCIAL DEVELOPMENT * implementing conditional cash transfers is a n important exception, as is the recent reform effort underway in the Ministry of Health. T he Charts below show h o w some of Turkey's important social indicators have changed over time and h o w they n o w compare with those of other countries and with regional and middle-income country averages. The charts suggest that most of Turkey's indicators are n o w in line with the comparators, though there re- mains substantial r o o m for improvement. The improvements in infant mortality and primary school en- rollments are particularly large. The female employment rate is a n important exception, with Turkey having the lowest rate by a w i d e margin. Female hployment Rae 2003 GNVCAP (Atlas) 2003 P Source: OECD FacmOok, 2ws moo q, 55 56 5000 'g I 4000 2 3000 2000 2 1000 0 infant Mortality Rates 2003 Life Expectancy 2003 v) 76 50 74 .- -! ? 40 72 30 2 70 B * 20 % € 6 3 0 10 €6 64 0 62 Primary Enrollment Rate (net) 2001 I , Public Spending on Education as % GDP 2001 I 1100, "7 98 7.0 b.U I 1 60 50 40 2 30 20 10 00 I I Note/Sources: T u r k i s h data sources as f o r Table 11. Comparator data are for year indicated in chart title a n d are from WDI/GDF database, except for employment rates, w h i c h are f r o m OECDs 2005 Factbook. The comparators v a r y across charts because data w e r e not available for a l l countries. 5.30 Sustainability of third pillar outcomes i s likely. The expansion of primary education inparticular has set in motion a process which should lead to further gains at other levels. Inmost areas the question i s not whether current trends can be sustained but whether they can be 53 CHAPTER 5 THIRDPILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT accelerated to bring Turkey’s indicators into closer alignment with those of Europe. I t will be important to focus efforts to ensure that re- cent promising developments, particularly the new conditional cash transfer scheme, the reforms of the MoH, and the dialogue around the education sector study, are sustained. The Bank’s Contribution to Third Pillar Outcomes Bank 5.31 Especially for the first part of the review period, the Bank‘s contribution in contribution to the outcomes was small: little investment was made i n the early part of analytic w o r k needed to build understanding and consensus; projects the period was were n o t always well-focused o n strategic goals, and several were small poorly implemented. Efforts were made o n the institutional side, but usually through PIUs which often proved to be counterproductive. 5.32 However, starting around 1999, as the first poverty report was being completed, the Bank began to reduce the ”analysis gap” with high-quality work o n poverty, o n health, and with two studies com- High-quality pleted i nJune 2005: a participatory, collaborative analysis of education analytical work sector issues; and a labor market study. The response to the 1999 earth- since 1999 quake reached needy victims quickly and effectively. Policy-based helped improve lending helped to protect social spending during fiscal contraction. In- outcomes novative operations have been launched (notably the Social Risk Miti- gation Project, which is already reaching 1.7 million poor beneficiaries, and the Health Transition Project). However, implementation problems have persisted i nhealth and education projects, despite reliance o n PIUs designed specifically to avoid such problems. Institutional weak- nesses continue i n these key line ministries (though i nhealth these weaknesses are beginning to be addressed through the HTP).The re- cent initiatives have the potential for making major sustainable contri- butions to Turkey’s efforts to improve the lives of its people and nar- r o w the gaps with Europe. It will take time to realize that potential. I t will also take continued strengthening i nline ministries, to ensure sound policy and program design and implementation. NOTES 1 . PPAR-Turkey: Erzincan Earthquake Rehabilitation and Reconstruction Project (L3511-TR); Turkey Emergency Flood and Earthquake Recovey Project (L4388- TR); and Emergency Earthquake Recovey Project (L4518-TR). Report No. 32676- TR, OED, World Bank, June 2005. 54 Evaluation Essentials Turkey faces significant environmental challenges, but the Bank 6. The Fourth Pillar: program has not addressed these Environment and Natural systematically The Bank did not follow Resource Management up on its support for the National Environmental Action Plan and Turkey still has no Meeting Environmental Challenges comprehensive national 6.1 Outcomes: While some progress has been made over the period strategy to address in addressing Turkey’s major environmental challenges, a large agenda environmental problems remains (Table 12). M u c h of the progress made so far relates to institu- Since the 1999 tional development: the Ministry of Environment and Natural Re- earthquake, the Bank has sources (MOENR), newly established in the early 1990s, and then initiated a program of merged with the Ministry of Forestry i n2003, is gaining i ncapability support for disaster and has n o w started working to build the technical systems and stan- management, which is dards that will be required for conformity to the E U Acquis. Part of this proceeding slowly but has potential to deliver work has involved the spread in knowledge to all government agen- important benefits cies, as well as to the private sector, of the requirements of an Environ- mental Impact Assessment (EIA) for all investment projects. In air and atmospheric pollution, the phase-out of ozone-depleting substances (ODs) mandated by the Montreal Protocol has been almost fully ac- Turkey has yet complished. Sigruficant progress has also been made in reducing ambi- to develop a ent concentration of total suspended particulates (TSP) and sulfur diox- comprehensive ide (SO2) from energy emissions i n Turkish cities, mainly from the national conversion from lignite to gas i nheating systems. Some, but not strategy for its enough, progress has also been made in reducing industrial and mu- wide range of nicipal air and water pollution (some forms of industrial pollution ap- environmental pear to have worsened during the period). On marine pollution under challenges the coastal programs (Mediterranean Environmental Technical Assis- tance Program - METAP and the Black Sea Convention - BSC), aimed at reducing the effluents into the seas, and under the Nitrates Directive of the EU, progress has been made inbuilding an awareness of these problems i nTurkey, but more is needed and a national strategy needs to be developed. A National Environmental Action Plan was prepared during the period, but it does n o t appear to have been used as a frame- work for policy. 6.2 Improved natural resource management is needed in areas of the Wastewater country where land degradation, soil erosion and deforestation treatment is a threaten the livelihood of local communities. Programs have been significant gap mounted to involve local communities in community-based natural resource management programs. While the number is n o t large rela- tive to the number of micro-catchments in the country (more than 55 CHAPTER6 FOURTH AND NATURAL PILLAR: ENVIRONMENT MANAGEMENT RESOURCE n total), by 2004 there were some 80 such community-based 2,000 i programs operating. Progress has also been made in expanding access to clean water supplies, in improved solid waste management i n cities and towns, and i n the collection of wastewater, which n o w amounts to about 81 percent of all wastewater i n municipalities. What has n o t n the portion of the col- yet been achieved, however, is m u c h increase i lected wastewater that is actually treated-currently only around 51 percent of the total. Bank support 6.3 The Bank’s contribution: The Bank has provided Turkey with has been limited little assistance to reduce environmental degradation. The Bank and not helped address pollution issues through its support for the comple- systematic tion of ODS phase-out under the Montreal Protocol, and an ongoing renewable energy project shows some promise, but these were iso- lated activities. Inother major areas, such as nutrient run-offs f r o m agriculture (a major threat to Black Sea ecology), managing industrial and municipal solid waste, air pollution, treatment of municipal waste water, the Bank has h a d a negligible impact. Largely missing (even as the regional programs like METAP and the BSC are pressing for this) is the commitment by the Government to a national envi- ronmental strategy. The National Environmental Action Plan has n o t been followed up systematically by either the ministry or the Bank. Agreement is 6.4 The Bank h a d some success in supporting better Natural Re- needed on the source Management. The new models for local resource management overall and new methods of inter-ministerial cooperation for rural develop- approach and ment which the Bank supported as part of the East Anatolia Watershed the potential for project, look likely to be lasting (if expensive) approaches. A follow-on Bank support project is about to be launched using community-driven models for management of National Parklands. By contrast, there seems to have been little impact o n the Ministry of Environment and Forestry (MEF) as the central body charged with environmental management. Disaster Management 6.5 Outcome: In a period marked by a series of major natural disas- Disaster relief ters, considerable attention has been focused o n improving disaster has been a management. Following the relief efforts carried out by the Turkish success story, authorities, with widespread international support, homes, health fa- but improved cilities, schools and other buildings have been rebuilt to higher earth- disaster quake-resistant standards than before. The objectives are to build sys- management is tems that w o u l d help to minimize losses and economic and social still in progress disruption, and to cushion the economy and the population from the effects of disasters. A new national Emergency Management Agency (TEMAD) has been established, for monitoring, reporting and respond- ing to disasters. N e w laws have been passed on building codes and a n e w national disaster insurance institution-the Turkish Catastrophic 56 6 CHAPTER FOURTH PILLAR: ENVIRONMENT AND NATURAL MANAGEMENT RESOURCE Insurance Pool (TC1P)-has been established, under a new law that makes it mandatory for all homeowners (not just new buyers as before) to insure their properties each year against earthquake damage. Actual insurance enrollments fluctuate from year to year but are generally be- tween 15 percent and 25 percent (between 1.8 and 2.4 million enroll- ments). Several factors affect this: ignorance (the system is still quite new); reluctance to declare home ownership, where houses are built without permits, or o n un-owned land, etc.; and the fact that the Gov- ernment continues to assert that i t will give coverage to quake victims, and this works as a disincentive to pay the relatively high insurance premium (of around $15-$20 a month). 6.6 The Bank’s Contribution: Through four operations, the Bank contributed to Disaster Management in t w o ways: emergency relief and The Bank is programs to mitigate the impact of possible future disasters. The Bank increasingly was the lead agency in designing and dispensing reliefi and under the focusing on Emergency Earthquake Recovery Loan broke both new ground and disaster new records in disbursing large amounts of relief through the Social management Solidarity Fund. The Bank‘s efforts to support mitigation measures and institutions took time to get started, but with each successive disaster relief project, unfinished w o r k was rolled into the new project, thereby raising the share of mitigation in the overall project. By the time of the Marmara Emergency Earthquake Reconstruction (MEER) project in 1999, the share of mitigation was 64 percent of the total loan amount. The Bank‘s Board recently approved the €310 million Istanbul Seismic Risk Mitigation and Emergency Preparedness (ISMEP) project, which is 100 percent focused o n risk mitigation. Assessing Fourth Pillar Outcomes & the Bank’s Contribution 6.7 Overall progress o n the fourth pillar is judged moderately unsatisfactory. This rating is a composite of quite different ratings for Fourth pillar environment, which was given a relatively higher weight i n the strat- outcome was egy, and disaster management. For the former, while there was some moderately progress over the period, it is n o t commensurate with the scale of unsatisfactory, Turkey’s environmental challenges o r the challenge that EU accession with modest will present i n this area, and is rated moderately unsatisfactory for the institutional period. For the latter, n o rating is given for the first p a r t of the period, development, but the overall speed and effectiveness of the disaster relief effort and likely the progress, albeit slow, in developing institutions and systems t o sustainability handle disaster risks, warrants a moderately satisfactory rating for the more recent years. This contributes to the rating of modest f o r institutional development, offsetting the failure t o develop a frame- w o r k for environmental management. Sustainability i s l i k e l y with regard to environment. The E U accession context creates an impera- tive for the Government to step up its efforts in this area. The decision to borrow $400 m i l l i o n f r o m the Bank in fiscal 2005 for disaster 57 CHAPTER 6 RESOURCE PILLAR: ENVIRONMENT AND NATURAL FOURTH MANAGEMENT prevention and management suggests that the commitment i n this area will likely be sustained even as the experience of the 1999 earth- quakes recedes in time. 6.8 The Bank's contribution to the fourth pillar is also a composite of the two separate areas. In the context of limited outcomes in envi- ronmental management the Bank has had little impact, with the lack of follow up o n the NEAP as an important shortcoming. For disaster management the Bank has had a more substantial impact with valu- able contributions to the management of the relief efforts as w e l l as the focus o n disaster mitigation going forward. Table 12. Fourth Pillar: Environment and Natural Resource Management Outcomes lndicator Baseline Outcome Comments Organic water pollutant (BOD) emissions 166.2 159.2 Very marginal improvement over the decade. (000 kg per day) (1994) (2004) Water pollution, textile industry (Yo of total BOD 20 12 Substantial improvements, reflecting technology emissions) (1994) (2004) upgrades. Water pollution, food industry (Yo of total BOD 46 49 Pollution has worsened. emissions) (1994) (2000) Water Pollution. chemical industrv~.(% of total 7 9 Pollution has worsened. BOD emissions) (1994) (2000) Ambient Concentrations of TSP (Total Substantial improvements, reflecting fuel Suspended Particulates) (uglm3) substitution from coal to gas in city heating Ankara 107 62 systems. (1994) (2000) Istanbul 151 68 (1994) (2000) Emissions of NOx per unit of GDP (1994=1.OO) 1.o 0.95 Some modest improvement, partly reflecting (1994) (2004) switch from coal to gas. No. of Community-Based Resource 0 80 Modest progress relative to number of micro- Management Programs, in micro-catchment (1 994) (2004) catchments areas Sources: WDI, World Bank estimates from Ministry of Energy data, and project documents for East Anatolia watershed project. 58 .:. Overall outcome is Evaluation Essentials moderately satisfactory 7. Overall Assessment, Lessons, .:. Institutional development is substantial, particularly and Recommendations in financial sector and infrastructure .:. Sustainability is likely as the four pillars are on the Rating the Overall Outcomes critical path for EU accession .:. 7.1 The overall outcome in the four pillars supported by the Bank's strategy is rated as moderately satisfactory. The rating is a composite The Bank had little impact of the unsatisfactory outcomes from the fiscal 1994-98 period and the in the early period and m u c h improved outcomes from fiscal 1999-2004. The unsatisfactory rat- failed to find the right ing for the earlier period reflects the higher weight of the first two pil- balance between analytic work and lending .:. lars where there was a worsening of some of the key structural indica- tors. The satisfactory rating for fiscal 1999-2004 reflects good outcomes 1997 portfolio clean-up in achieving macro-stability and a major turnaround i n the fiscal bal- and decentralization ances, combined with positive though less striking developments i n the followed by support for institutional basis for the financial sector and infrastructure, and i n education reforms and some of the social indicators. Insome respects the weaker outcomes i n quick response to the the environment area reflect both Turkey's and the Bank's strategic fo- 1999 earthquake set the cus towards the macro and financial areas. Institutional development is stage for enhanced rated substantial. M u c h of the enabling framework of legislation and dialogue, lending, and Bank impact regulatory institutions were put i nplace over the period. The important gaps are the failure to strengthen the policy and implementation capac- .:. The Bank worked ity of the line ministries, and to strengthen the framework for govern- effectively with the Fund ance and anti-corruption. Sustainability is rated likely given the institu- after 1999 and 2001 tional development and the impetus provided by the negotiations for crises to support critical structural reforms EU membership. .:. The overall Bank Table 13. Rating the Overall Outcomes contribution to Turkey has been significant and is Institutional Sustainability more than the sum of the Pillars Outcomes ~ Development Impact operational parts 1. Macroeconomic Moderately Satisfactory Substantial Likely stability 2, Growth, productivity Moderately Satisfactory Substantial Likely and competitiveness 3. Poverty reduction and Moderately Satisfactory Modest Likely social development 4, Environment and Moderately Modest Likely natural resource Unsatisfactory management All Pillars ModeratelySatisfactory Substantial Likely 59 CHAPTER 7 LESSONS, OVERALL ASSESSMENT, AND RECOMMENDATIONS 7.2 In evaluating the Bank’s contribution to outcomes in the areas of its strategic objectives, the period divides up somewhat differently from the evaluation of outcomes. In fiscal 1994-96 the Bank‘s con- The Bank’s tribution was negligible. A large part of this is attributable to a politi- contribution cal environment that was resistant to the policy changes and program was negligible design needed for growth and efficiency. In that situation the relevant in the fiscal question is not whether the Bank could have done anything that 1994-96 period w o u l d have made a difference, but whether the Bank program repre- sented an appropriate response to this environment. I nan important respect-the balance between analytic work and lending-the pro- gram was poorly judged. The large number of small, yet complex pro- jects with limited ownership by the implementing ministries and agencies meant that substantial resources were diverted into supervi- sion. The failure to carry out formal analytic w o r k during the period reflects Government resistance to, or lack of interest in, such analysis. Insome areas, though, the authorities w o u l d have been open to Bank analysis and the argument could and should have been made that it was inappropriate to embark o n lending without such analysis. A m u c h richer program of w o r k o n public expenditure, agriculture, education, health, transport, energy and environment could have be- come the basis for improvements in the dialogue and greater awareness of the policy and program needs. 7.3 From fiscal 1997- 99 the Bank demonstrated a m u c h sharper The strategic n managing strategic focus o n Turkey-in b o t h its analytic w o r k and i focus the lending-that produced significant improvements in b o t h its dia- sharpened from logue with the authorities and its effectiveness. The portfolio clean-up fiscal 1997-99 in fiscal 1997 and fiscal 1998 created space for more carefully selected programs. The Bank’s decision to support expanded primary educa- tion and the quick and effective response to the 1999 earthquake cre- ated the basis for the expanded support for policy change in the fi- nancial crises of 1999 and 2001. An expanded program of economic and sector w o r k provided the essential underpinnings for Bank policy advice and assisted in building consensus to take the necessary meas- ures and implement programs more effectively. Decentralization of the Bank was a n important part of this improvement. The capacity and responsibilities of the Country Office were substantially en- hanced during this period. While the impact o n outcomes during this transitional period remained modest, the Bank‘s efforts demonstrate that even in a politically difficult environment i t is possible to define strategies which enhance the Bank’s impact. The impact on outcomes 7.4 F r o m fiscal 2000-04 the Bank‘s impact o n outcomes was sub- became stantial. The environment was m u c h more favorable to Bank policy substantialfrom advice and interventions a n d in many (though n o t all) sectors, the fiscal200044 Bank h a d absorbed the lessons of the need for collaborative w o r k in order to enhance capacity a n d build ownership of the programs it supported. 60 CHAPTER 7 OVERALL ASSESSMENT,LESSONS, AND RECOMMENDATIONS Lessons and Recommendations 7.5 The Bank‘s Strategy: From the early 1990s until the end of Turkey’s drive 2003 the Turkish Government’s interest i nwhat the Bank has to say or for EU to finance has correlated closely with financial crises. Inthe future the accession offers Bank will need to find areas of engagement and modes of operating an opportunity that the Turkish Government will perceive as of value to creating a for consistent more stable macro-economy and a positive outlook for growth. The Bank agreement at end 2004 to begin negotiations for EU accession consti- engagement tutes a major change i n the environment i nwhich the Bank operates during a period i n Turkey. The drive for E U accession will likely define economic pol- of macro- n the years ahead-t also should provide a firm foundation for icy i economic collaborative support between the Bank and Turkish authorities. stability 7.6 The evaluation finds that the Bank‘s strategy during the pe- r i o d under review was broadly appropriate. The constraint w h i c h The Bank macro-instability represented for sustainable growth and poverty re- should duction required a focus o n fiscal restructuring and increasing the ef- rebalance its ficiency of the public sector. While i t remains essential that the Bank program to program covers these areas, including particularly capacities in line provide greater ministries to deliver services more effectively, a move to a more bal- support for anced approach is n o w appropriate. Looking forward the Bank needs private sector to strengthen its analysis and support for (a) improvements i n the in- development vestment climate, including governance and labor markets, a n d and (b) improved environmental management. environmental management 7.7 For m u c h of the period the Bank operated as if the private sec- tor did n o t need support. Yet the environment for private sector in- vestment i n Turkey is n o t commensurate with its potential competi- In the EU tors in the EU. The failure to attract foreign direct investment is context, related both to the political and economic instability of the past and Turkey’s private more specific concerns about governance. The large share of produc- sector needs to tion which takes place i n the informal sector is a further indication of become more the governance problems arising f r o m the current framework of in- competitive and centives, regulations and payroll taxes. While Turkey’s large indus- more trial groups have learned to operate effectively within these con- technologically straints, the situation facing foreign investors and domestic small and sophisticated, medium enterprises is more difficult. In the future the Bank needs to both of which give m u c h greater prominence t o this set of issues in its program, in- require an cluding the linkages between private sector development, job growth increase in and poverty reduction. foreign direct investment 7.8 Effective support of the private sector will require m u c h closer coordination between the Bank, IFC and IEG-MIGA. Joint teams of IFC and World Bank staff should follow up o n the Investment Climate is- sues identified by the recent study carried out by the joint Bank/IFC Private Sector Development Vice-Presidency. 61 CHAPTER 7 AND RECOMMENDATIONS OVERALL ASSESSMENT, LESSONS, The Bank can 7.9 The Bank paid l i t t l e attention to environmental issues during provide valuable the CAE period. These were crowded out by other issues including support for the efforts to respond to the earthquake disaster of 1999. The Bank‘s environment support for mitigating the effects of the earthquakes and helping put management, a n place measures that can provide early warning and reduce the po- i key for EU tential impact of future disasters remains important, but needs to be accession placed in a broader context of Turkey’s mixed record of environ- mental management. Environmental management, and its potential cost, is a high priority topic for EU accession. 7.10 The Bank’s Mode of Operation: The Turkish experience Past Bank between 1993 and 1998 raises an important issue concerning the w a y projects have the Bank operates i n middle-income countries when adjustment lend- not been well- ing i s n o t appropriate because of lack of progress inpolicy reform. designed to The Turkish experience suggests that i t is useful to maintain a lending reflect Turkish relationship with a country at such times, to maintain the currency of capacities the Bank‘s country and sector knowledge and to provide some focus for the dialogue. .The EFILs are good examples of interventions that keep the lines of communication open, provide useful funding, and avoid unrealistic complexity and policy conditionality. The projects supported by the Bank i n the early 1990s were often too small and cumbersome, overloaded with technical assistance and barely w o r t h the efforts required to implement them; or overly ambitious-with multiple components, dependence o n politically sensitive legislation, and with limited ownership i n the line ministries. 7.11 The Turkish experience underlines the importance and value of well-designed analytic w o r k i npositioning the Bank to respond quickly and effectively i nmiddle-income countries when there is a cyclical shift and the demand for Bank lending increases. T h e Banks analytic w o r k appears to have been necessary for success n o t only for adjustment operations but also for effective investment lending. Bank management needs to ensure that a reasonable program of analytic w o r k is safeguarded f r o m the inevitable downward pressures o n the budget that occur when the lending program declines. Bank analytic 7.12 The analytical w o r k undertaken by the Bank in Turkey looks work has not n most other Bank bor- very different f r o m the w o r k carried out i had a wider r o w i n g countries. Until2000 the output of formal economic and sector public impact in w o r k was extremely thin, too thin for a country of Turkey’s size and Turkey since complexity, and few Bank documents were sent to the Board or made few reports are publicly available. Throughout the period Bank analytic w o r k was publicly made available to the Government confidentially. This is useful and available important w o r k which even n o w could help to inform the under- standing of the B a n k s role. Some effort should be made t o systema- tize these informal products a n d provide easy access to t h e m for Bank staff. 62 CHAPTER7 AND RECOMMENDATIONS OVERALL ASSESSMENT, LESSONS, 7.13 There i s another important issue however. The large investment The Turkish made i nBank analytic work should not be confined to a select group of authorities need government officials. As indicated, the Bank's analyses have influenced to identify better policy, but, except for the CEMs, they have not done much to promote ways to handle discussion in the academic community or the public at large. This is an Bank analytic area where the Turkish Government needs to revisit the "rules of the work to broaden game." There needs to be serious discussion of better ways of handling its impact Bank analytic work i n the future. The task of final review could be delegated to an advisory panel that includes academics and civil soci- ety representatives. Similarly, for lending, the Bank should work col- laboratively with stakeholders outside of government, such as NGOs. 7.14 The overall impact of the Bank's decentralization i n Turkey The Bank's has been positive. Starting in 1996, the Country Office has been decentralization strengthened through increasing the number and seniority of has played a positions for both international and locally recruited staff, and its ef- positive role in fectiveness has been enhanced through the delegation of responsibil- improved Bank ity. The increased responsibility for portfolio improvement contrib- dialogue and uted t o the turnaround i n 1997/98, and the decentralization of impact in Turkey management of 80 percent of the ongoing portfolio has been impor- tant to maintaining the improvement. Without exception, the Turkish officials with w h o m the mission met, judged decentralization t o be a key factor in the Bank's enhanced dialogue with the Government and increased access to policymakers since 1997. In their view, i t has also permitted a quicker identification of options for positioning the Bank effectively in the public eye and a more rapid response to policy pri- orities such as the education reform, natural disasters and the eco- nomic crises. The speed and quality of the response (based o n the ex- panded program of analytic work) was a n important element in the Bank's contribution to outcomes i n Turkey during the latter part of the period. 7.15 The Bank's impact in Turkey was greatly improved when i t A collaborative worked collaboratively with the Government. In almost all the cases operating mode inwhich studies or projects were identified as being particularly suc- has been a key cessful, there was a strong collaborative element i n the approach. to success in These collaborative activities were rated high in their institutional de- creating velopment impact. The PEIR and the health sector w o r k should be the ownership, and model for most Bank activities i n Turkey, combined where appropri- needs to be ate with participatory approaches that include nongovernmental extended stakeholders, as in the ongoing Education Sector Study. Collaborative w o r k should be extended to a l l aspects of the program, including su- pervision and evaluation work, and collaboration needs to go beyond the Government. The role of NGOs i nTurkey i s evolving rapidly from a relatively weak base and the Bank needs to adapt its programs to support this evolution. 63 CHAPTER 7 LESSONS, OVERALL ASSESSMENT, AND RECOMMENDATIONS 7.16 IEG's CAE retrospective* indicated that, i n a third of all CAEs, The whole of the most Bank operations are rated satisfactory, yet the overall impact is Bank's activities less than the s u m of the parts. In Turkey, the operations present a in Turkey has mixed picture, yet the overall impact of Bank support has been posi- been more than tive, especially i n the period since 1999. Why was the Bank able to the sum of the have this impact i n Turkey? Decentralization and a broad program of parts, and the analytic w o r k were important i n setting the stage, so that when there success of the was finally a consensus i n Turkish political circles of the need for de- program since cisive action o n structural reforms, the Bank was able t o respond 1997 positions quickly. The authorities turned for guidance to the w o r k that the Bank the Bank well to h a d done over the years i n agriculture, public expenditure manage- contribute to ment, banking, energy, pensions, and other areas, which became the Turkey's guideposts for needed action. The challenge for the Bank i n the com- aspirations for ing years will be the extent to w h i c h i t can w o r k its w a y out of this job EU accession and promote the development of institutional capacities i n Turkey, w h i c h can define the policy framework and supporting measures needed for growth, poverty reduction and EU accession. Box 4. Summary of Recommendations 1) The Bank should increase the assistance program's strategic focus on private sector development and environment and natural resource management issues by: Defining a strategic approach to Private Sector Development in collaboration with IFC and IEG- MIGA, drawing on the recent Joint Investment Climate Assessment and leading to a new program of Bank support for PSD, including expanded coverage of issues of governance, anti-corruption, the regulatoty framework and employment impact; and Expanding the Bank's analytic work on environmental and natural resource management issues and agreeing with the Turkish government on a program of support for Turkey's environmental priorities. 2) The assistance program should maintain an adequate level of well-focused, high-quality analytic work, as it did in the latter part of the review period. The Bank should proceed with lending activities in Turkey only when it is confident that the analytic work-not necessarily the Bank's own-is in place to support the design of programs. This analytic work should be carried out collaboratively, building systematically on the models developed for the public expenditure and education studies, so that it can generate genuine ownership both within the Government and the society at large. This collaboration needs to go beyond the Government and encompass a more active role for the Bank in ensuring the participation of nongovernmental stakeholders, as well as more systematic dissemination. 3) The Bank should also build collaborative approaches more systematically into its lending, including implementation and monitoring. At the government level, the Bank should seek to work more effectively with the line ministries, with projects implemented through their normal structures, and focus on building sustainable capacities in the ministries when needed. There should be a clear burden of proof for sector staff to demonstrate the justification for organizing an 'enclave' activity through a PIU. The Bank should also systematically develop activities to extend the collaborative approach beyond the Government, to include NGOs and other civil society stakeholders, again to develop a greater sense of ownership of Bank supported activities in Turkey. 4) The Bank should assist the Turkish authorities to put in place frameworks for monitoring the key development programs and outcomes, including, for example, the efficiency of Turkish infrastructure; the social impact of pension expenditures; women's labor force participation; progress in health sector reforms; and the range of programs of assistance to the poor such as direct income support for farmers and conditional cash transfers. Non-governmental stakeholders could play a useful role in this monitoring. NOTES 1. County Assistance Evaluation Retrospective, OED, World Bank, May, 2005. 64 Annex A: The Relation Between the Bank Strategy and Program FIRST PILLAR: MACRO-ECONOMIC STAB1LlTY Table A l . Public Financial Management Table A2. Structural Reforms SECOND PILLAR: GROWTH, COMPETITIVENESS AND PRODUCTIVITY Table A3. Strengthen the Banking System and Deepen Financial Intermediation Table A4. Improve Management of Infrastructure Table A5. Enhance Productivity THIRD PILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT Table A6. Promote Equity, Employment and Social Protection Table A7. Improve Health Standards Table A8. Improve Education Coverage and Quality FOURTH PILLAR: IMPROVED ENVIRONMENT AND DISASTER MANAGEMENT Table A9. Reduce Environment degradation Table A10. Support Better Disaster Management 65 ANNEXA BETWEEN THERELATION BANKSTRATEGY AND PROGRAM FIRST PILLAR: MACRO-ECONOMIC STABILITY Table Al. Public Financial Management ~ Ri 1gs a Amounl Bank Program Comments US$ mn Outcome/ Overall Sustainabilitv Assessment c I Lending: Public Financial Management (FY95) L Only the customs component rated satisfactoly but the project helped to build a constituency for change in the bureaucracy. 62 MS ERL (FY 00) 760 S L Helped tie down the commitment to transparency and to provide back-up for IMF PFPSAL I (FY02)’ 1,100 S NE programs for deficit reduction in key structural areas. PFPSAL II (FY02) 1,350 MS L PFPSAL 111 (FY04) - 1,000 Analytic Work CEMs (4) Viewed as solid reports which provided a useful context for the Bank’s dialogue and operations. PElR (FY02) Vely effective in building constituency for reform and securing good collaboration. Dialogue and Partnerships: A central feature of the dialogue throughout the period. Close collaboration with IMF. Division of labor with Bank handling Public Expenditures and IMF covering tax policy. Table A2. Structural Reforms - Ratings a Amount Bank Program )utcorne/ Overall Comments US$ mn - Assessment’ Sustainability Lending: ERL (FY 00) 760 S L Adjustment lending played an imporlant role in keeping a focus on privatization PFPSAL I, 11, 111 in the period from 1999 to 2004. Privatization Implementation 100 U NE Provided resources for severance payments and enhanced capacity of Assistance Project (94) privatization agency. ARlP (FY02) 600 Provided resources for severance payments for agricultural parastatals and helped Govt. reduce their role in provision of inputs and marketing. TEK Restructuring (FYO1) 300 MS L Led to the separation of generation, transmission and distribution to provide a basis for possible later privatization. ~~ ~ Analytic Work CEMs (4) In absence of a systematic review of the SOE sector, the CEMs provided useful background information and reviewed progress on privatization. 1was disbursed in August 2002. The remaining balance of PFPSAL II was cancelled in June 2003 and was ’ $450 million of PFPSAL I folded into PFPSAL 111. 67 ANNEXA BETWEEN THERELATIONS BANKSTRATEGY AND PROGRAM SECOND PILLAR: GROWTH, COMPETITIVENESS AND PRODUCTIVITY Table A3. Strengthen the Banking System and Deepen Financial Intermediation R rgs a Amount Comments Bank Program mn OutcomdOveral Sustainability Assessment 0 Lending: FSAL (FYO1) 778 MS L Aimed to strengthen regulation and supervision of the banking sector. After ma- jor crisis second tranche was cancelled. Many of the components of FSAL were incorporated into PFPSAL I and PFPSAL II PFPSAL I ( FY02) 1,100 MS NE PFPSALs series aimed at strengthening BRSA, bringing banking regulations to PFPSAL Ii (FY02) 1,350 MS L international standards, restructuring problem banks, privatization of state-owned PFPSAL 111 (FY04) 1,000 banks. EFlL I (FY00) 253 S L Primary objective was to provide medium term loans to exporting enterprises hurt by global financial crisis. Secondary objective was to start dialogue with major banks through setting up strict eligibility criteria. EFlL II (FY04) 303 Followed on EFlL I, added leasing companies, aimed to also reach small and medium-sized exporters not selviced by banking sector. End-2004 Implementa- tion review ratings HSlHS for DOIIP. Analytic Work: Banking Sector Policy Note 1997-1999 Identified major weaknesses in the banking sector and laid out a foundation for post crisis program Banking System Crisis Impact Assessment, Assessed the cumulative impact of two banking crises and outlined the critical FYOl actions necessary to recover from the damage suffered in the banking sector. Non-bank financial institutions and capital The objective was to make an assessment of non-banking sector for future markets, 2003 Bank's involvement through lending operations. But no follow-up has been men- tioned yet in the Bank's program. Dialogue and Partnerships: IMF The Bank's assistance to the banking sector has been closely coordinated with IMF. 68 ANNEXA BANK THERELATIONBETWEEN STRATEGY AND PROGRAM - Table A4. Improve Management of Infrastructure imouni Ri JS' - Bank Program ?utcorne/ Overall Comments JS$ mn :usfainability Assessment c Lending: TEK Restructuring (1991) 300 MS Restored financial viability to TEK, began first stages of un-bundling, continued iongstanding sector dialogue National Transmission Grid (1998) 270 Financed strategic links to neighboring countries, and implemented second and third stages of un-bundlingof generation, transmission, distribution and trading entities. Latest implementation review ratings are SIS; The major institutional changes supported by the project appear sustainable. WSS Projects: Ankara Sewerage (1990) 73 S Satisfactory progress with physical facilities, less certain progress with instilling improved governance Bursa WSS (1993) 130 S Satisfactory progress with physical facilities; one case where private operator experience was positive, quite positive efficiency gains; some problems with pri- vate contractors Cesme WSS (1995) 13 Most successful case of private operator; latest implementation review ratings are SIS. Antaiya WSS (1995) 100 MS Satisfactory progress with project facilities, but major conflict between private operator and contractor now in court, interfered with outcomes and put sustain- ability in question. Roads Improvement and Safety Project 250 MS Satisfactory progress with program of road improvements, some modest gains in (1996) efficiency; dramatic improvement in road safety in "Black Spots," thanks to highly responsive program devised by KGM. Closure of project and cancellation of un- used funds seen by some as premature. ERL (2000) (Telecom; power sector frame- 760 S Significant progress with regulatory reform, little (or slow) progress with privatiza- works) tion. ICR subratings were MS for telecom, MU for energy. Berke Hydro Plant (1992) 270 HU Bank financed private independent power producers (IPP); project started with promise, but was seriously impeded by a hostile private buy out of the operator Analytic Work - ownership; Bank was prudent to cancel the loan. Efficiency of Gas Distribution (1999) Underlay the restructuring and privatization strategy for the gas distribution sec- tor, introducing increased competition Caspian Oil and Gas (2003) Follow on to Baku-CeyhanTA project. - Gas Sector Note (2004) Explored options for moving away from the Turkish National Gas Company (BO- TAS) as sole-source gas buyer. Dialogue and Partnerships: Energy Workshop (1999) Initiated by the Country Director, in response to request from Ministry of Energy for reform strategy assistance. Led to a series of studies, and fed into ERL action - ESMAP plans, for power, gas and petroleum. Table A 5 Enhance Productivity I I Ratings a Amount Bank Program Comments US$ mn o ~ ~ /Dl Sustainability ~ ~ ~ ~ ~ " Lending: Technology Development Project, TDP I 100 Began process of building public infrastructure, protection systems and financing (1991) for technology; created new institutions (Technology Development Foundation of Turkey-TTGV); failed to get legislative basis for national accreditation agency. TDP II (1999) 155 Continued work in building institutions, extended funding to increasing circle of companies, succeeded in securing needed National Accreditation Council (NAC) law. Sustainability seems assured, and institutional impact has been substantial. implementation review ratings HS/HS. Analytic Work CEM 2000 S Laid out macro-economic basis for expansion of the export sector, and under- pinned the EFlL loans. Data as provided by an internal quality assurance group that monitors the Bank's project quality. Dialogue and Partnerships: None 69 ANNEXA BETWEEN THERELATIONS BANKSTRATEGY AND PROGRAM THIRD PILLAR: POVERTY REDUCTION AND SOCIAL DEVELOPMENT - Table A6. Promote Equity, Employment and Social Protection Ratings a Amoun Bank Program 3utcornd Overall Sustainability Comments - (US$ mi Assessmento Employment and Training [93-011 67 S L Supported active labor market policies (ALMP); see para 5.10. privatization Impl. Asst. and SOC.Safety 100 U NE Lack of substantial privatization meant little impact of safety net and ALMP provi- Net [94-991 sions. Project TA contracted the International Labour Organisation (iL0) to carry out detailed analyses of pension system problems. Emrg. Earthquake Recovery Ln [00-011 253 S L Counterpartfunds used to provide social support payments to earthquake victims through Social Solidarity Fund. PPAR ratings. Privatization Social Support [01-05] 250 Mainly funds severance payments and special additional payments to laid-off SOE employees; also supports relatively small AMLP program. Designed more to ease privatization than reduce poverty. Workers have little incentive to accept private sector job offers. See para 5.10. Implementation review ratings SIHS. Social Risk Mitigation (SRMP) [02-04 500 Highly innovative hybrid operation funding conditional cash transfers to poorest 6% and locally driven small projects. Implementation review ratings SIS. Econ Ref Ln [00-04] 760 S L Supported initial reforms of pensions and start of unemployment insurance. Ag Ref lmpl Project (02-04 600 Hybrid operation led to lower consumer food costs and less distorting, more equi- table income support to farmers. Likely significant poverty-reducing impact. Im- plementation review ratings SIMS. PFPSAL I [02-021 1,100 S NE Programmatic Financial and Public Sector SALS: series of PDLs sought to protect social spending levels in time of large fiscal contraction; also supports public PFPSAL Ii [02-031 1,350 MS L expenditure management (PEM) reforms that should build line ministries' capaci- ties for strategic budgeting. PFPSAL Ill Implementation review rating SIS. PFPSAL 111 [04-05] 1,000 PPDPL [pending] Proposed Programmatic PDL would, interalia, support reforms in social insur- ance (pensions and health), social assistance and labor markets, as well as pub- lic selvice delivery. Analytic Work: WID Report [93] Report on gender issues; published on May 1993. CEM [96,00, and 031 Contained analyses of Social Security issues Living Standards [OO] Initial path-breaking poverty report. Stressed links between growth, employment and poverty reduction; developed poverty profile; analyzed impact of public spending; and discussed regional and gender Issues. Marmara Earthquake Assmt [99] Quick, informal assessment to guide response to '99 disaster. Poverty [04] Poverty assessment (PA) that provided analytical base for SRMP. Gender [04] To inform CAS preparation. Joint Poverty Assessment [05] Recently completed PA done as joint study with Turkish Statistical Agency (SIS). Labor Market Long under preparation. CEMs of 2000 and 2003, and PASof 2000 and 2005 contained interim analyses Dialog and Partnerships: Social Security Reform Dialog Dialog based on initial analysis by ILO funded by project TA; main findings sum- marized in 1996 and 2000 CEMs; led to 1999 reforms in ERL; underpins compo- nents of Health Transition Project and future reforms to be supported by PPDPL. UNDP and the US Agency for Interna- UNDP partnership in mobilizing community participation for local initiatives com- tional Development (USAID) partnership ponent; USAID grant funding ($9 mn.) of Conditional Cash Transfer component. in implementing SRMP. SIS Partnership in Joint PA Poverty analysis now has become a regular part of State Institute of Statistics' work program. 70 ANNEXA BETWEEN THERELATION BANKSTRATEGY AND PROGRAM ible A7. Improve Heath Stand rds I Ratinas a Bank Program Comments Lending: Basic Health 1 Aimed to improve health in underserved areas of 10 of Turkey's 67 provinces [89-991 through improved service deliveiy and greater financial sustainability and to strengthen management capacity of MoH. Civil works and equipment over 85% of initial project costs. 'Bankand Borrower performance rated unsat. by IEG. Nearly 10-year imp1 pe- riod. Major issue with size and effectiveness of PiU. Persistent staffing issues. Basic Health 2 Aimed to improve equity of access to health services by construction and staffing [95-051 of clinics in 23 lowincome, underserved eastern and south eastern provinces; and to improve MoH management. Implementation delayed by civil unrest in area [early 90s to late 9Os] and frequent changes in GovernmentlMoH ieader- ship. Financed vaccination campaign in late 03. '$22.5mn reallocated to meet post-earthquake needs. 'Closed in December 2004; Over looyear impl. period; At closing, 5 of 23 clinics not yet finished, and no clinic operational. PIU issue continued, but reduced. quality of supervision assessment 2 in 2000 and 3 in 2003. Final implementa- tion review ratings UIU. Primary Health Care Services Intended to pilot family medicine approach but implementing legislation never (97-011 passed. Subsequently restructured to reestablish health services in areas affected by Marmara earthquake in 1999. Disbursed only about $0.3mn, even after restruc- turing to meet emergency needs. Unclear why Unsat. rating in project completion note changed to NR. Marmara Emergency Earthquake Project Two small health components in this large [$505 mn.] emergency operation: ** [00-051 [Health component only] $6.9mn for adult trauma post- earthquake; and $21.6 for facility reconstruction. Utilization slow: mental health policy and emergency equipment for health can. ters still pending in late 2004. Implementation review ratings SIS. Health Transition [04-08] Supports preparation and first phase of fundamental, comprehensive reform of health system, including reorganizationof MoH; hospital autonomy; family medi- cine approach; universal health insurance with related reforms of Social Insur- ance Institutions; and collaborative approach between MoH and Ministiy of Labor and Social Security (MoLSS). Based on comprehensive sector study in 2003 and Government's Urgent Action Program. QER. Implementation review ratings S/S. Analytic Work: Public Expenditure and Institutional Re- Contained substantive chapter on health expenditure issues view [02] Poverty Assessments [00 & 051 Chapters on health issues in 2000 and 2005 poverty assessments National Health Accounts and Burden of These key building blocks for health sector analysis carried out and funded by Disease Basic HealthB project. Health Sector Study (031 First comprehensive sector review since Sept. 1986; included major collaboration and dissemination efforl; provided analytical base for Health Transition Project [04] Dialog and Partnerships: UNDP/UNOPS Management services agreement to act as procurement agent and management service provider for Basic Health 1 and 2. UNICEF, WHO, Centers for Disease BH2 focus on maternal and child health interventions emphasized by UNICEF. Control (CDC), MoH Collaboration on Measles Eradication Program in 2003 and 2004, using funds from BH2. EU and WHO Under Health Transition Project, coordination with EU on its grant to MoLSS for social security information platform and network, and with WHO on TA for M&E. MoH Frequent leadership changes and key staff turnovers limited policy dialog; MoH institutional reform became possible only recently. 71 ANNEXA BANKSTRATEGY AND PROGRAM THERELATIONS BETWEEN Table A8. Improve Education Coverage and Quality Ratings a Amount Bank Program Comments (US$ mn) outcome/overa" Sustainability ID/ Assessment 0 I I 1 I Lendina: Industrial Schools Aimed to improve quality and quantity of trained manpower by upgrading equlp- [85-951 ment, curricula and materials in 39 of 316 existing industrial schools; assisted schools reportedly still functioning better than others, but demand for this type of 58 MS Uric' education reoortedlv declined. I 'Bank perfoimancerated unsat; borrower sat. (Nearly) 10 year impl. period. Non-Formal Vocational Training I 59 I S I Unc. I N I Bank and borrower performance rated sat. impact on employment likely negligi- 187-951 ble. Industrial Training-2 [88-981 116 MS U M 10 year impl. period. Impact on employment negligible. National Education Develooment 90 MS U M First operation aimed at general education system; initial focus on raising quality [go-991 of primary and secondaly education and teacher training and on improvingman- agement of MONE. Restructured in 1996. Established national assessment test system; piloted expansion of primary coverage; and new early education-training of mothers program in partnership with NGO. 'Bank performance rated unsat; borrower sat. Closed 2 years and 3 extensions after original closing date. Quality of supelvision 3. Basic Ed-1 300 U L N Focused on capacity expansion and teaching materials in low income rural and [98-031 slum areas on introducing IT equipment and programs in selected schools. Serb ous implementation problems despite PIU. Quality at entry =3. Basic Ed-2 [03-06] .~ 300 implementation problems persist. QER; Quality at entry =3,3. Implementation review ratings UIU. Analytic Work Education and Training Sector [87] Accepted view that primary enrollment rates were nearly 100%; focused on need to meet perceived skill gaps in the economy; highlighted need for better sector data and for deconcentration of MONE. Primary and Secondary Education [91] Highlighted the substantial coverage gaps in primary and secondary levels (with enrollment rates estimated at 80% for 5-year primary schools and 35% for sec- ondary schools), as well as the need for higher quality. Public Expenditure and Institutional Contained substantive chapter on education expenditure issues Review [02] Poverty Assessments Substantive chapter on education issues in 2005 poverty assessment; discussion of impact of spending in 2000 PA. Education Sector Study [05] First comprehensive sector review since Sept. 1986; includes major collaboration and dissemination efforl with civil societv stakeholders: Still underwav. but 'DrP vided input for recently approved Seconbary Education Project. QER.' Dialog and Partnerships: Mother and Child Education Foundation This NGOs innovative program of mothers' training and early childhood educa- (ACEV) tion supported thru several projects [lnd Schools, NFVT, NEDP, and BE21 Education Reform Initiative (ERI) Partnership with ERI, supported by Sabnaci University, ACEV, and Open Society Institute, to engage civil society stakeholders in dialogue with WB and GOTon education sector issues and the studies being prepared for the Education Sector Study. European Union Close collaboration to ensure that EU's parallel grant assistance to secondary education and recently-approved Secondary Education Project are consistent 72 ANNEX A BETWEEN THERELATION BANKSTRATEGY AND PROGRAM FOURTH PILLAR: IMPROVED ENVIRONMENT AND DISASTER MANAGEMENT Table A9. Reduce Environment Degradation Lending: ODs Phase out Grants ( 9 4 4 30 NA NA NA Bankadministered grants made under the Montreal Protocol. ODS phase out now almost complete. No formal ratings available, but appears to have had satis- factory results. Renewable Energy Project (04) 202 Bank financed iPPs in four medium hydro projects, as part of clean energy pro- gram. Shows promise, but take up is somewhat slow. Implementation review ratings SIS. Analytic Work: Energy and Environment (00) ESW Comprehensive survey of major environmental issues facing Turkey as it faces expansion of energy needs with growth in GDP, and in terms of higher standards demanded by EU membership. The NEAP (01) ESWRA Bank initiated action plan, designed to offer assistance to the MEF in addressing environmental issues in a prioritized strategy. The Clean Air Initiative (03) NLTA Part of the overall Energy and Environment follow on program. EIA Policy Work for MEF (04) NLTA Bank listing of areas in which compliance to EU norms is deficient, and sugges- tions as to how compliance can be attained over time. TA to MEF, likely impact is modest. Energy and Environment (04) ESW Summarized results of 10 studies, into energy and environment issues arising out of the Energy Workshop of 1999. Contains comprehensive assessment of relevant issues to be addressed as Turkey approaches EU accession. Dialogue and Partnerships: Energy Workshop (02) Culmination of the Energy and Environment project (10 studies), contained in a ESMAP tJSTCF Synthesis Report which summarized main findings and issues. Main audience 73 ANNEXA THERELATIONSBETWEEN BANKSTRATEGY AND PROGRAM Table A10. Support Better Disaster Management Ratings I Amount Comments Bank Program (us$ mn) oufcome/o"era'' Susfainabi/ity ID/ Assessment Lending: Earthquake Rehab and Reconstruc- 285 S L M Mainly dealt with relief and reconstruction,with first attempts at building mitiga. focused on relief and rehab, in which progresswas satisfactory, but ID1 was stantial increase in mitigation capacity (establishedTEMAD and TPIC), but both institutions moving forward somewhat slowly. Implementationreview rating NOTES (a) For completed operations, ratings for outcome, institutional development and sustainability are from the most recent implementation completion reports, IEG implementation completion report review or project performance assessment reports. Scales are: HS (Highly Satisfactory), S (Satisfactory), MS (Moderately Satisfactory), MU (Moderately Unsatisfactory), U (Unsatisfactory), and HU (Highly Unsatis- factory) for Outcomes; H (High), S (Substantial), M (Modest) or N (Negligible) for institutional development impact, HL (Highly Likely), L (Likely), U (Unlikely), HU (Highly Unlikely), or Unc. (Uncertain) for sustainability. In some cases ratings of NR (not rated) andlor NE (not evaluable) are given. (b) For ongoing operations (or those completed too recently to have an implementation completion review) ratings are from last available project status reportslimplementationstatus reports, and rate Development Objectivesllmplementation using a scale of HS (highly satis- factory), S (satisfactory). U (unsatisfactory), HU (highly unsatisfactory), NA (not applicable) and NR (not rated). Where available, the quality assurance group quality at entry and quality of supervision ratings are presented. The quality assurance group uses a 1-4 scale (for highly satisfactory, satisfactory, marginal, and unsatisfactory, respectively). (c) For A M work, the quality assurance group quality of ESW ratings are used where available. The scales are the same as for quality at entry and quality of supervision. (d) Dates are fiscal year of approval and of closing; closing year of ongoing projectslstudies in bold italics; (e) Amounts are original loan amounts in US$mn. 74 Annex B: Statistical Tables Annex Table B1: Turkey at a Glance Annex Table B2: Key Economic and Social Indicators, 1990-2003 Annex Table B3: External Assistance to Turkey, Total N e t ODA Disbursements, 1990-2003, in US$M Annex Table B4a: Turkey - Economic and Sector Work, 1990-2003 Annex Table B4b: Turkey - List of IBRD/IDA Approved Projects, 1990-2004 Annex Table B5a: World Bank Commitment by Sector Board for FY99-04, US$ million Annex Table B5b: Project Ratings by Sector Board, Exit FY94-04, Turkey and Comparisons Annex Table B5c: Portfolio Status Indicators, Turkey and Comparisons Annex Table B6: Cost of Bank Programs for Turkey and Comparison Countries, US$ thousands, FY94-04 Annex Table B 7 Turkey - Bank's Senior Management, 1995-2005 Annex Table B8: Turkey - Millennium Development Goals Annex Table B9: Turkey - PREM DEC Indicators 75 ANNEXB TABLES STATISTICAL Table BI: Turkey at a Glance 9/19/05 Europe B Upper- Central middle- TU&q Asia incane 74.3 4?2 ne 3.770 3.30 4.m 2m-0 1.553 2.748 9 8 4.1 Q.8 22 6.5 -Q.8 67 &a 33 64 68 2e 72 5R 24 1 P, Access to improvedwater a3 01 w 33 a7 R9 Ol 101 tDB 05 103 la8 as 101 1DB 1534 2003 2o[Lb 13.7 24a 4 3026 21.5 22.8 25.7 2q.4 21.4 28.8 Trade 22.5 ra.5 19.8 254 28.1 1PQ -19 2.0 -3.3 -5.1 bmesnc Capital 3.1 3.; 2.9 2.4 s=W fcsntabcn 36.1 51.1 w.5 53.4 33.0 34.1 384 3Z% 83.6 582 2fl.t 181.8 1 W - 9 4 W34-04 21003 2004 200508 {average arnualpwihj GDP 4.5 3.1 5.8 Pa 5.0 GDP per capita 2.3 1.4 4.3 75 3.7 Expwb dp d s and 5e~vxes 8.8 11.1 lea f2.5 5.7 STRUCTURE afthe ECONOMY 1984 1994 2003 2ooJ 21.8 180 53.4 128 25.0 31 4 22 a 22.4 16.4 20.2 13.3 13.0 534 526 pA.7 647 79.5 E.@ @‘.e 66.8 8.3 11.6 13.6 132 10.7 20.4 3.7 34.7 19M-$4 199444 2003 2004 f a w e amual pyawfh,l AQflapltUE 14 1-0 -2 4 20 lndusby 57 24 50 a .5 Manufacturing 0.1 34 1U.l Senmces 3R 33 a3 Hcusehw h a 1 ccrasumphon expenditme 3D 2.3 7.1 1a.1 &men1 gcv’t final mnnsurn@an expenditure 3.5 35 -2.4 05 Gross C J ~formztlm i 50 30 3.4 274 Imports of goods and Earvices a2 Qt 3.1 24.7 77 ANNEX B TABLES STATISTICAL Ed?* . 1984 la 20113 2006 . ioa.3 . 25.3 10.8 48.2 ioa.5 225 g.9 .. 21.4 38.5 3.9 .. -12 -5.5 -2.0. I. -7.5 -8.1 s.a 1984 199d 2003 2004 7,389 1 a . m 5‘1,2m 67.001 a m i,cm 2.20f 2.845 23h 183 Jea 849 6.254 7 0 m . 44,378 59,533 k0,75? 23,270 esp,340 87,540 35h 658 4w 528 3.w 3.m t 1.5ea 14.400 2,875 5,323 1t ,326 17,397 TO? 114 105 122 118 105 I 120 91 106 @a 101 W L A N C E cf PAYMEMTS 1984 1894 2Q03 200d (US5 d a n s l Exports nf @ 5 and =races 6,548 29.1B2 73.23% 91,029 !mp& of goods and sewics 11,340 20.37 73.7.3 1 02,l80 Rewurce balance -1.794 2,a5 -3,505 -lt.151 Met i n m e -1.44 - 3 3 4 -55% -5.519 Wet current Iransfers 2,082 3.010 t ,02? 1,127 C u m m aeeoun’I balance -8.152 2.Ul -B.OX -15,543 Financing items (net) 1.088 -2.066 12,094 ia,387 Ghanw5 in net resep1’15 BE -540 -4.047 -924 Memo: R e s e w s including gold tUSE mVhs) 3,898 75,539 53.849 Conwersm rate (DEC, iocaWSS) 307 “&1B EXTERNAL DEBT and RESOURCE FLOWS 1984 1494 p s dhnsj Total debt outsiandingano disbursed ~ a e o 88,250 16RD 2.358 5.tQ5 A 6,153 IDA tat 7% 3.37 Total ceDt senrce 3,123 10,25L IBRD 325 1,216 IDA 4 7 CnrnDcsltwn d n e t rewurce flnws 3cG 1.588 278 1.499 502 5a0 L - Td 913 224 199 4% 724 The Worfd 6ant Gmrp This =le was prepared by wmby un I staff Fgwres may differ from other Wodd Bank puhlishod dam W905 78 q 9 9 t O O O d 9 9 c q - 0 0 0 1 0 c q c q q r ! O O O d wrocucq 0 - - * ANNEXB TABLES STATISTICAL Table B4a: Turkey - Selected Key Economic and Sector Work, 1990-2005 Document Title Date Report No Document Type Gas sector strategy note 09/01/2004 30030 Sector Report Rapid coverage for compulsory education: the 1997 basic education program 05/01/2004 30801 Working Paper Explaining and forecasting inflation in Tukey 04/01/2004 WPS3287 Policy Research Working Paper Is there room for foreign exchange interventions under an inflation targeting framework? Evidence 04/0112004 WPS3288 Policy Research Working Paper from Mexico and Turkey Customs modernization initiatives: case studies 0 110112004 301 12 Publication - Energy and environment review synthesis report 1213012003 ESM273 ESMAP Paper Greater prosperity with social justice policy notes 11/21/2003 27379 Sector Report Marmara earthquake assessment 09/14/2003 27380 Working Paper Country economic memorandum : towards macroeconomicstability and sustained growth Vol. 1-3 07/28/2003 26301 Economic Report Poverty and coping after crises Vol. 1.2 07/28/2003 24185 Sector Report Non-bank financial institutions and capital markets in Turkey 0413012003 25954 Publication Corporate Sector Impact Assessment Report V 03/3112003 23153 Sector Report Reforming the health sector for improved access and efficiency Vol. 1-2 03/3112003 24358 Sector Report Non-Bank financial institutions and capital markets report 02/28/2003 25467 Economic Report The World Bank research observer 17 (2) 09/01/2002 30412 Publication Secondary education and training 08/31/2001 22858 Departmental Working Paper Public expenditure and institutional review - reforming budgetary institutions for effective 08/20/2001 22530 Economic Report government Social services delivery through community-basedprojects 07/31/2001 23307 Working Paper (Numbered Series) Forestry Sector Review 06/27/2001 22458 Sector Report The challenge of urban government policies and practices 01/31/2001 21642 Publication Measuring banking efficiency in the pre- and post-liberalization environment : evidence from the 11/30/2000 WPS2476 Policy Research Working Paper Turkish banking system Foreign entry in Turkey's banking sector, 1980-97 10/31/2000 WPS2462 Policy Research Working Paper Country economic memorandum - structural reforms for sustainable growth Vol. 1-2 0911512000 20657 Economic Report Financing of private hydropower projects 07/31/2000 WDP420 Publication The private sector and development : five case studies 0710112000 26641 Working Paper (Numbered Series) Socio-economic differences In health, nutrition, and population in Turkey 05/0112000 30550 Working Paper Energy and the environment : issues and options paper 04/30/2000 ESM229 ESMAP Paper Case studies in participatory irrigation management 02/29/2000 20247 Publication Social assessment and agricultural reform in Central Asia and Turkey 02/29/2000 WTP461 Publication Economic reforms, living standards and social welfare study 0 1/27/2000 20029 Economic Report Social assessment for the Turkey forest sector review 11/30/1999 22373 Working Paper (Numbered Series) Partners for development : new roles for government and private sector in the Middle East and 09/30/1999 19807 Publication North Africa - Increasing the efficiency of gas distribution Phase 1 : case studies and thematic data sheets 07131/1999 ESM218 ESMAP Paper - Capital flows, macroeconomic management, and the financial system Turkey, 1989-97 0713111999 WPS2141 Policy Research Working Paper Evaluating the impact of active labor programs : results of cross country studies in Europe and 0613011999 20131 Working Paper (Numbered Series) Central Asia Deregulating technology transfer in agriculture : reform's impact on turkey in the 1980s 03/31/1999 WPS2086 Policy Research Working Paper The private sector and development : five case studies 09/30/1998 23471 Publication The 1994 currency crisis in Turkey 0413011998 WPS1913 Policy Research Working Paper Tax reform in developing countries 1213111997 17284 Publication The effects of financial liberalization and new bank entry on market structure and competition in 1113011997 w PS1839 Policy Research Working Paper Turkey The effects of hyper-inflationon accounting ratios - financing corporate growth in industrial 08/31/1997 17077 Publication economies Easing barriers to movement of plant varieties for agricultural development 07/31/1997 WDP367 Publication Intensified systems of farming in the tropics and subtropics 06/01/1997 WDP364 Publication Industrial evolution in developing countries : micro patterns of turnover, productivity, and market 12/31/1996 16196 Publication structure 0513111996 WPS1599 Policy Research Working Paper Economic implications for Turkey of a customs union with the European Union 04/01/1996 15076 Economic Report Challenges for adjustment Vol. 1-3 Governance, leadership,and communication - building constituencies for economic reform 01/01/1996 30615 Working Paper 09/30/1995 15258 Working Paper (Numbered Series) Uneven governance and fiscal failure :the adjustment experience in Turkey f l 07/31/1995 15141 Working Pa er (Numbered Series) 81 ANNEXB TABLES STATISTICAL Document Title Date Report No Document Type Trade reform, efficiency, and growth 03/31/1995 WPS1438 Policy Research Working Paper Informal settlements, environmental degradation, and disaster vulnerability : the Turkey case study 01/01/1995 14955 Publication An introduction to the microstructure of emerging markets 11/30/1994 IFD24 Publication Voting for reform : democracy, political liberalization, and economic adjustment 0613011994 13349 Publication The World Bank economic review 7(2) 05/31/1993 17646 Publication Women in development 0513111993 11922 Publication informatics and ewnomic modernization 0313111993 11839 Publication Economic crises and long-term growth in Turkey 01/31/1993 11744 Publication The impact of financial reform : the Turkish experience 12/31/1992 11688 Departmental Working Paper Political economy of policy reform in Turkey in the 1980s 12/31/1992 WPS1059 Policy Research Working Paper Los Angeles, Mexico City, Cubatao, and Ankara - Efficient environmental regulation :case studies 08/31/1992 WPS942 Policy Research Working Paper of urban air pollution Piecemeal trade reform in partially liberalized ewnomies : an evaluation for Turkey 08/31/1992 WPS951 Policy Research Working Paper Tax incentives, market power, and corporate investment : a rational expectations model applied to 05/3l/l 992 WPS908 Policy Research Working Paper Pakistani and Turkish industries External debt, fiscal policy, and sustainable growth in Turkey 03/31/1992 10556 Publication inflation stabilization in Turkey : an application of the RMSM-X model 01/31/1992 WPS845 Policy Research Working Paper Public sector debt, fiscal deficits, and economic adjustment : a comparative study of six EMENA 01/31/1992 WPS840 Policy Research Working Paper countries The political economy of poverty, equity, and growth in Egypt and Turkey 12/31/1991 10368 Publication Foreign trade and its relation to competition and productivity in Turkish industry 02/28/1991 WPS604 Policy Research Working Paper Lessons from tax reform : an overview 01/31/1991 WPS576 Policy Research Working Paper Privatization in Turkey 11/30/1990 WPS532 Policy Research Working Paper A RMSM-X model for Turkey 08/31/1990 WPS486 Policy Research Working Paper A strategy for managing debt, borrowings, and transfers under macroeconomicadjustment 0613011990 8777 Publication Turkey : export miracle or accounting trick? 0413011990 WPS370 Policy Research Working Paper Debt management and borrowing strategy under macroeconomic adjustment 02/21/1990 7732 Economic Report inflation, external debt, and financial sector reform : a quantitative approach to consistent fiscal 08/31/1989 WPS261 Policy Research Working Paper The internal transfer problem : Turkey 07/31/1989 IDP46 internal Discussion Paper Unemployment, migration, and wages in Turkey 1962-85 07/31/1989 WPS230 Policy Research Working Paper Economic adjustment in Algeria, Egypt, Jordan, Morocco, Pakistan, Tunisia, and Turkey 07/31/1989 ED115 Publication CAS Documents Country Assistance Strategy Vol. 1 8/6/97 16992 Country Assistance Strategy Country assistance strategy Vol. 1 11/28/00 2 1408 Country Assistance Strategy Country assistance strategy progress report (CASP) Vol. 1 7/10/01 22282 CAS Progress Report Country Assistance Strategy Vol. 1 of 1 1012103 26756 Country Assistance Strategy Source: Imagebank, data as of 01/10/05. Note: Excluded from this list are 11 various reports which have not been disclosed at the present time. 82 m 8 m 8 8 w v ) 0 cu v) v) 0 v) 0) m W 0 0 cu 0 T 3 R $1 n I U? f 0 cu v) s s 0 2 l- -r 3 43 m ANNEXB TABLES STATISTICAL Table B5c: Portfolio Status Indicators: Turkey and Comparisons Country # Proj Net Comm' # Proj. At Risk % At Risk Commm Risk At % Commit at Risk Amt Algeria 9 337.0 2 22.2 112.2 33.3 Brazil 49 4,948.4 9 18.4 626.7 12.7 Colombia 18 1,351.4 2 11.1 48.0 3.6 Romania 9 1,395.9 0 0.0 0.0 0.0 Thailand 1 84.3 0 0.0 0.0 0.0 Turkey 9 5,929.9 1 5.3 300.0 5.1 Source: World Bank internal database as of July 6, 2005 (for FY 05). Table B6: Cost of Bank programs for Turkey and Comparison Countries, US$ Thousands FY94-04 Total Supervision Lending ESW Other Bank 15,374,823 1,479,828 1,380,052 1,086,542 11,428,401 ECA 1,111,215 278,100 330,709 207,198 295,209 Algeria 29,284 10,924 10,036 5,850 2,475 Brazil 126,881 44,907 36,272 24,165 21,536 Colombia 44,377 15,403 15,783 7,665 5,526 Romania 47,402 17,377 19,576 7,610 2,839 Thailand 39,980 10,073 11,687 11,704 6,515 Turkey 59,475 24,860 21,658 9,323 3,634 Cost Structure by Percentage Total Supervision Lending ESW Other Bank 100 10 9 7 74 ECA 100 25 30 19 27 Algeria 100 37 34 20 8 Brazil 100 35 29 19 17 Colombia 100 35 36 17 12 Romania 100 37 41 16 6 Thailand 100 25 29 29 16 Turkey 100 42 36 16 6 89 ANNEXB STATISTICAL TABLES Table B7: Turkey: Bank's Senior Management, 1995-2005 Year Vice President Country Director ChieWResident Representative Economist 1991 Willi A. Wapenhans Michael Wiehen Luis de Azcarate 1992 Wilfried Thalwitz Michael Wiehen Luis de Azcarate R. Coutinho 1993 Wilfried Thalwitz Michael Wiehen Luis de Azcarate R. Coutinho 1994 Wilfried Thalwitz Michael Wiehen Frederick Thomas Temple S.Otoo 1995 Wilfried Thalwitz Rachel Lomax Frederick Thomas Temple S.Otoo/Jacob Kolster 1996 Johannes F. Linn Kenneth Lay Frederick Thomas Temple S.Otoo/Jacob Kolster 1997 Johannes F. Linn Kenneth Lay Frederick Thomas Temple sotoo 1998 Johannes F. Linn Ajay Chhibber sotoo 1999 Johannes F. Linn Ajay Chhibber S.Oto0 2000 Johannes F. Linn Ajay Chhibber* S.Otoo 2001 Johannes F. Linn Ajay Chhibber* James Parks* 2002 Johannes F. Linn Ajay Chhibber* James Parks* 2003 Johannes F. Linn Ajay Chhibber* James Parks* 2004 Shigeo Katsu Andrew N. Vorkink* James Parks' 2005 Shigeo Katsu Andrew N. Vorkink' Rodrigo A. Chaves* Source: The World Bank Group Directory 1995-2005. Note: *staff located at the Country Office at Ankara, Turkey. 90 ANNEXB TABLES STATISTICAL Table B8: Turkey - Millennium Development Goals 1990 I 1995 2001 2002 1. Eradicate extreme poverty and hunger 2015 fargef = halve 1990 $1 a daypovertyandmalnufriflon rates Population below $1 a day (%) 2 Poverty gap at $1 a day (%) 0.5 Percentage share of income or consumption heid by poorest 20% 6.1 Prevalence of child malnutrition (% of children under 5) 10.3 Population below minimum level of dietary energy consumption(%) 2.5 2.5 3 2. Achieve universal prlmary educatlon 2015 fargef = net enrollment to 100 Net primary enrollment ratio (% of relevant age group) 89.4 96.2 87.9 Percentage of cohort reaching grade 5 (%) 97.6 94.9 Youth literacy rate (% ages 15-24) 92.7 94.9 95.5 3. Promote gender equallty 2005 target = education raflo lo 100 Ratio of girls to boys in primary and secondary education (“A) 82.2 82.7 85.4 Ratio of young literate females to males (% ages 15-24) 90.9 93.3 95.2 Share of women employed in the nonagricultural sector (%) 16.7 18.7 18.9 Propwtion of seats held by women in national parliament (%) 2 4. Reduce child mortallly 2015 targef = reduce 1990 under5 mortality by fwefhlrds Under 5 mortality rate (per 1,000) 78 60 45 41 infant mortality rate (per 1,000 live births) 64 50 38 35 immunization, measles (%of children under 12 months) 70 65 90 82 5. Improve maternal health 2015 fargef = reduce 1990 mafernalmorhlity by fhree-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 70 Births attended by skilled health staff (“A of total) 75.9 6. Combat HIVIAIDS, malarla and other dlseases 2015 fargef = half, and begin to reverse, AIDS, efc. Prevalence of HiV, female (% ages 15-24) Contraceptive prevalence rate (%of women ages 15-49) 63 Number of children orphaned by HlViAlDS incidenceof tuberculosis (per 100,000 people) 34 32.1 Tuberculosis cases detected under DOTS (%) 7. Ensure envlronmental sustalnabillty 2015 target = varlous (see notes) Forest area (% of total land area) 13 13.3 Nationally protectedareas (% of total land area) 1.4 1.3 1.6 GDP per unit of energy use (PPP $ per kg oil equivalent) 4.5 5.1 5.6 c02 emissions (metric tons per capita) 2.6 2.8 3.3 Access to an improved water source (% of population) 79 82 Access to improved sanitation (% of pOpUlatiOn) 87 90 Access to secure tenure (% of population) 8. Develop a Global Partnership for Development 2015 fargef = varlous (see nofes) Youth unemployment rate (% of total labor force ages 15-24) 16 15.6 16.7 19.5 Fixed line and mobile telephones (per 1,000 people) 122.1 221.5 580.6 628.6 Personal computers (per 1,000 people) 5.3 14.9 40.7 44.6 General indlcators Population 56.2 million 61.7 million 68.5 miiiion 69.6 million Gross national income ($) 127.3 billion 170.0 billion 166.1 billion 173.3 billion GNI per capita ($) 2,270.00 2,750.00 2,420.00 2,490.00 Adult literacy rate (% of people ages 15 and over) 77.9 81.8 86.5 Total fertility rate (births per woman) 3 2.7 2.4 2.2 Life expectanq at birth (years) 66.1 68.3 69.6 69.9 Aid (% of GNI) 0.8 0.2 0.1 0.4 External debt (“A of GNi) 32.5 43.1 79 72.7 investment (?A of GDP) 24.3 25.5 16.8 16.3 Trade (%of GDP) 30.9 44.2 65 59.7 Source: World Development indicators database, April 2004. Nota’ In some oaeas the data am lor earlier of later years vlan thcse stated Goalztagev EnsuretbaI,by2015, childrenever,whera,bwlsandgidsalike, will beabletommpletealullmurseofpnmaryschmli~. Goal 3 target: Eliminate gender disparity in pimary and semndery education preferably by 2 w 5 and to all level801 eduoalion m later than 2015 Goal 41arget: Reduca bytwaUlIrd8,between 1980and2015, !he under-five monality rate Goal 5 larget Reduca by threequartepl, between 1990 and 2015, G ?e maternal mohllty ratio GoBIBlargetti’Havehelled by2015,andbeguntoreverse, thespmadolH1VINOS. Have h a l t e d b y 2 0 1 5 , e n d ~ u n l o raverse,thsincidencaolmalanaandotherma~ordieaaeas Goal 7 targets. Integrate h e principlesof susfainable d e v e l w n t into muntry @lues and PmJrams and R V E h ~e loso d enwronmntal ramrces Halve, by 2015, the proponon of people without wslainabie a m 8 8 tosafe drinkingwater 6y 2020 to have achieved a 81qnificanl impmvement in the live8 d at least 1W millionslum duellem. Goal0 targets Develop funher an open. Nle-based, predictable, mndiscnminalory trading and finamid system Addre88 the Specid Needs of lhe Least Dsvsloped Countnea. Address !he Spdal Needs of landlmkedmuntnes end small island developing states. Deal mpmhensively with !he deb4 pr0Mms d developing muntnes through n a m d and i n t e m a l i d meaauras in order Io make deb4 Sustainable in Ihe loog term. In mcpralon win developng muntriss,devilop and ~m~lement slrateoi$slordecant and oroducbve wah forvwlh In ~ a ~ ~ mwith f i hharmacauncal m mmcmes omvide ams9 10 abidable. essential dmos in develwim munlriis In -manwith the m a t e 8ector make avsilablethe benefits 91 Annex C: List of People Met PRIMEMINISTRY Mr. Birol Aydemir Deputy Undersecretary, State Planning Organization Mr. Kemal Madenoglu Director General, Social Sectors and Coordination Directorate, State Planning Organization M. Cuneyd D u z y o l General Director, Economic Sectors and Coordination, State Planning Organization Mr. M e t i n K i l c i President of Privatization Administration Mr. Sema Alpan Former National Environment Action Coordinator at State Planning Organization Ms. Yadigar Gokalp Executive Director, Social Risk Mitigation Project, Social Soli- darity Fund Ilhan Kesici Former Undersecretary of SPO TREASURY Mr. Aydin Karaoz Former Deputy Undersecretary of Treasury Mr. Aysen Kulakoglu Former Department Head of W B projects, Treasury 2000-2004 Mr. Faik Oztrak Former Undersecretary of Treasury Mr. Ferhat Emil Former Undersecretary of Treasury Mr. Ibrahim Canakci Undersecretary of Treasury Mr. Levent Yener Head of Department, Treasury (ARIP Project) Mr. Selcuk Demirel Former Undersecretary of Treasury 1999-2001 Mr. Sen Akman Former Assistant GD in Treasury OF FINANCE MINISTRY Mr. Abdulkadir Goktas Head of Department, Budget and Fiscal Control Dept. Mr. Ahmet Kesik Deputy General Director, Budget a n d Fiscal Control Dept. OF AGRICULTURE MINISTRY Mr. Ali Tunaboylu AMP Project Coordinator Mr. Hasim Ogut Deputy Undersecretary, Ministry of Agriculture OF ENERGY MINISTRY Mr. Budak Dilli General Manager, Ministry of Energy 93 ANNEXC LISTOF PEOPLE MET MINISTRY OF PUBLIC WORKS Mucait A r m a n General Directorate Highways Yasar Yilmaz General Directorate Highways CENTRAL BANK Mr. Sureyya Serdengecti Governor of Central Bank Mr. Ercan K u m c u Deputy Governor of Central Bank Mr. H a k k i Arslan General Director, Central Bank, Banking & Financial Institutions Dept Mr. Rustu Saracoglu Former Central Bank Governor 1987-1993, President of Finance of Koc Group Mr. Yavuz Canevi Former Central Bank Governor, Board of Member of Turk EconomicBank OF HEALTH MINISTRY Mr. Ulvi Saran Deputy Undersecretary Mr. Mehmet Ugurlu Director General of Primary Health Care Services Mr. Fehmi Aydinli M.D., Vice General Director, General Directorate of Primary Health Care Mr. Haydar Mezarci Project Coordinator EDUCATION OF NATIONAL MINISTRY Mr. Hikmet Ulubay Former Education Minister Mr. Salih Celik Deputy Undersecretary, Ministry of National Education AFFAIRS OF ECONOMIC MINISTRY Mr. Kemal Dervis Former Minister for Economic Affairs OF LABOR MINISTRY AND SOCIAL SECURITY Mr. Tuncay Teksoz Acting President of Social Security Institution Other Institutions COURT TURKISH ACCOUNTS Mr. Erol Akbulut General Secretary REGULATION BANKING AND SUPERVISION Mr. Engin Akcakoca Former Chairman, BRSA Mr. Tevfik Bilgin President of BRSA Mr. Ferruh Tunc Deputy President, Savings Deposits Insurance Fund (SDIF) 94 ANNEXC LISTOF PEOPLE MET EXIMBANK Mr. Gulcin Coklu Department Head Mr.Neslihan Dogan Funding Manager BANK ILLER Mr. Bahattin Kaptan Deputy General Director Mr. Melike Alpaslan Banks Association of Turkey DEVELOPMENT INDUSTRIAL OF TURKEY BANK (TSKB) Mr. Ahmet Demirel Deputy General Director Mr. Orhan Beskok Deputy General Director ISBANK Mr. Ersin Ozince General Director BANK ZIRAAT Mr. Can Akin Caglar General Director ELECTRICITY TURKISH CORPORATION TRANSMISSION Mr. Ayse Cansiz Project Coordinator RESEARCH MARMARA CENTER Mr. Sedat I n a n Director METEOROLOGY NATIONAL INSTITUTE Mr. Sermet Suer Director o f U M E UNIVERSITY SABANCI Prof. Tosun Terzioglu President, Sabanci University Prof. Ustun Ergudur Head, Education Reform Initiative, Istanbul Policy Institute Ms. Neyyir Berktay Project Coordinator, Education Reform Initiative, Istanbul Policy Institute Mr. Batuhan Aydagul Project Specialist, Istanbul Policy Institute Prof. Izak Atias Sabanci University UNIVERSITY ISTANBUL Prof. Asaf Savas Akad 95 ANNEX c LISTOF PEOPLE MET MIDDLE TECHNICAL EAST UNIVERSITY Prof. Dr. Ahmet Acar Prof. Dr. Giray Berberoglu Faculty of Education UNIVERSITY ANKARA Professor Dr. Ercan Uyguy Head of Economy Department, Faculty of Politics NGOs Mr. Emine Cagan Secretary, General Ari Movement Mr. Enis Bagdadioglu Turkish Trade Unions Confederation Mr. Ferdi Miskbay Director, Technology Development Foundation Dr. Fusun Sayek President of Turkish Medical Association Mr. Bulent Pirler Secretary General, Turkish Confederation of Employer Asso- ciation ASSOCIATION TURKISH OF ECONOMICS Rifat Hisarciklioglu Chairman of U n i o n of Chambers and Exchange PRESS Osman Ulagay Milliyet Newspaper UNION EUROPEAN OFFICE Dr. Holger Schroder Mr. Melek Erman European U n i o n Office Mr. Mustafa Balci Education and Training Specialist UNDP Mr. Jakob Simonsen Resident Representative at U N D P Ms. Yesim Oruc UNDP 96 Annex D. Management Action Record IEG Recommendations Requiring a Response Management Response 1)The Bank should increase the assistance program's strategic focus o n 3ecause of the necessary attention to the bank- private sector development and environment and natural resource ng system after the 2001 banking crisis, we management issues by: .ecognize that substantial attention had to be Defining a strategic approach to Private Sector Development i n 'ocused i n the Bank's program o n the financial collaboration with IFC and IEG-MIGA, drawing o n the recent ;ector and less upon the private sector. As the Joint Investment Climate Assessment and leading to a n e w pro- xonomy and sector have n o w stabilized the gram of Bank support for PSD, including expanded coverage of is- x o g r a m has launched a new series of adjust- sues of governance, anti-corruption, the regulatory framework nent operations dealing w i t h the public- and employment impact; and xivate interface under the umbrella of em- Expanding the Bank's analytic w o r k o n environmental and natural 3loyment generation. A key pillar of that pro- resource management issues and agreeing with the Turkish gov- y a m will be improvements in the business ernment o n a program of support for Turkey's environmental pri- mvironment and support to the private sector. orities. f i e investment climate review under way will m d e r p i n i t along w i t h the joint Bank-IFC work done o n the annual Investors Advisory Council hosted by the government. 3n the environment, the CAS progress report will include additional activities in this area. 2) The assistance program should maintain an adequate level of well- We agree that a high level of well-focused focused, high-quality analytic work, as i t did in the latter part of the analytical needs to support not only lending review period. The Bank should proceed with lending activities in but the quality of the dialogue under the pro- Turkey only w h e n i t is confident that the analytic work-not necessar- gram. We also agree, as we have been doing ily the Banks own-is in place to support the design of programs. This w i t h the Education Sector Study and the In- analytic w o r k should be carried out collaboratively, building system- vestment Climate Assessment, that more in- atically o n the models developed for the public expenditure and edu- volvement w i t h non-government stake- cation studies, so that i t can generate genuine ownership b o t h within holders is needed. We believe the EU the Government and the society at large. This collaboration needs to accession process, which included substantial go beyond the Government and encompass a more active role for the financial support for NGOs, will help present Bank i nensuring the participation of nongovernmental stakeholders, more opportunities in the future. as w e l l as more systematic dissemination. 3) The Bank should also build collaborative approaches more system- We agree. atically into i t s lending, includingimplementation and monitoring. At the government level, the Bank should seek to w o r k more effectively with the line ministries, with projects implemented through their nor- m a l structures, and focus o n buildingsustainable capacities i nthe min- istries when needed. There should be a clear burden of proof for sector staff to demonstrate the justification for organizing an 'enclave' activity through a PIU. The Bank should also systematically develop activities to extend the collaborative approach beyond the Government, to in- clude NGOs and other civil society stakeholders, again to develop a greater sense of ownership of Bank supported activities i nTurkey. 4) The Bank should assist the Turkish authorities to put i n place We are striving to d o this and have built i n frameworks for monitoring the k e y development programs a n d out- monitoring and evaluation components in re- comes, including, for example, the efficiency of Turkishinfrastructure; cent projects and as capacity building in ana- the social impact of pension expenditures; women's labor force par- lytical work, such as under the joint poverty n health sector reforms; and the range of pro- ticipation; progress i assessment. grams of assistance to the poor such as direct income support for farmers and conditional cash transfers. Non-governmental stake- holders could play a useful role in this monitoring. 97 Annex E. Summary Overview of IEG-MIGA's Activities in Turkey Turkey Country Assistance Evaluation IEG-MIGA ACTIVITIES (FY91-04) IEG-MIGA WBG and IEG-MIGA Strategy The WBG Country Assistance Strategies (CASs) for Turkey emphasized the need t o restore mac- roeconomic stability and enhance competitiveness to foster employment growth in the private sector as priorities. The CASs also recognized infrastructure as a bottleneck for economic growth and the role private sector should play in this sector. The CASs (for 1997,2000,2001 Update, and 2003) briefly noted that IEG-MIGA's role was to play a complementary role to the Bank and the IFC in this regard, by facilitating foreign direct investment (FDI) through political risk guarantees, particularly in the infrastructure sector. IEG-MIGA expected to expand its guarantees in Turkey during the 1997-2000 CAS period. While IEG-MIGA guarantees indeed increased in this period mainly covering financial sector projects, the 2000 CAS noted that IEG-MIGA w o u l d a i m to further expand and diversify its portfolio by fo- cusing o n infrastructure investments. However, with the onset of a severe financial crisis in 2001, this did n o t materialize which h a d a predictably negative impact o n the investment environment. There were n o n e w IEG-MIGA guarantee projects in FYO1, and only three n e w guarantees were issued in FY02; since then IEG-MIGA did n o t guarantee any new projects in Turkey. IEG-MIGA's 2000 strategy defined a "multi-niche" approach for the agencyl. One of the priorities was supporting "south-south investments. Turkish companies investing abroad have been a sig- nificant beneficiary of this focus. Thus far, IEG-MIGA has issued fourteen guarantees2 to Turkish investors for eleven projects i n Eastern Europe and Central Asia in the beverages, telecommunica- tions, and banking sectors. At present, Turkey has been one of the t w o most important "south- s o u t h investors in IEG-MIGA's portfolio. IEG-MIGA Porffolio Overview Turkey has been a IEG-MIGA member since 1988. Between FY91 and FY04 IEG-MIGA issued a to- tal of twenty guarantees in support of sixteen projects for a total cumulative gross exposure of US$577 million. The majority of these projects have been in the financial sector with a few others in the services, manufacturing and infrastructure sectors. 3 Out of these twenty guarantee con- tracts, 1 MIGA Review 2000. MIGAR2000-30. June 30,2000. 2 Gross exposure of US$116 million. 3 T h e financial sector accounted for eleven of a total of sixteen projects, the remaining five were in the manu- facturing (2), services (2), and infrastructure (1)sectors. 99 ANNEXE SUMMARYOVERVIEW INTURKEY OF IEG-MIGA's ACTIVITIES Figure 1: IEG-MIGA Guarantee Activity in Turkey Fiscal Years 7997-2004 MIGA Guarantee Projects IMIGA Guarantee Contracts 1 6 5 4 3 2 1 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: IEG-MIGA Annual Reports, various years Figure 2: IEG-MIGA Guarantees Issued in Turkey (Gross Exposure) Fiscal Years 1991-2004 160 140 120 100 80 60 40 20 0 I1 ~~ 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: IEG-MIGA Annual Reports, various years. 100 ANNEX E OVERVIEW SUMMARY IN TURKEY OF IEG-MIGA’SACTIVITIES eighteen have been cancelled to date by clients, leaving one active guarantee project (with two n IEG-MIGA’s portfolio i contracts) i n Turkey.4 The majority of IEG-MICA’S guarantee activity i nTurkey occurred during the FY98-FY00 pe- riod. N e w guarantees issued went up to US$161million i ngross exposure in1999 (Figures l-2), but began t o decline again in2000 following the o n set of economic recession at the end of 1999. There were n o new IEG-MIGA guarantees i n2001, when the investment climate suffered from a severe financial crisis. Since 2002, IEG-MIGA has guaranteed only two new projects, consisting of one large infrastruc- ture and one manufacturing sector projects. Cumulatively, the financial sector accounted for 46 percent of all IEG-MICA guarantees issued for investments i nTurkey during 1991-2004. Guarantees inthe services and manufacturing sec- tors account for 19 and 12 percent, respectively. Although there i s only one infrastructure pro- ject, due to its relatively large size its share of the total exposure is significant (23 percent). As of June 30,2005 IEG-MIGA h a d only two active contracts (associated with one infrastructure project) with a total gross exposure of US$135 million, representing 2.65 percent of IEG-MIGA’s total gross exposure. IEG-MIGA has n o t provided any technical assistance to Turkey for F D I promotion. 5 Effectiveness of GuaranteeActivities To date, IEG-MIGA carried out ex-post evaluations of two financial sector projects in Turkey, guaranteed during the FY98-9 period, and assessed the environmental impact of a more recent non-financial sector project. Most of the financial sector projects insured by IEG-MIGA have been to facilitate the investments of foreign banks operating i n Turkey. Foreign banks constitute a relatively small share of the bankingsector whichhas been dominated by state-owned banks. Duringthe nineties, the private banking sector grew rapidly i n terms of assets, profits and sophistication. However, financial deepening did n o t materialize i n the high inflation environment. From the mid-l990s, a large number of private banks have been created, many of which lacked critical size. They served the na wide range of business interests of their parent company, typically large conglomerates active i sectors. A number of foreign banks have also invested i ndomestic banks as shareholders, inad- dition a small number of foreign banks operate as a branch of their parent. The 1997 CAS h a d noted the almost complete absence of medium-term debt financing i n Turkey, in a high infla- tion/high real interest rate environment. The banksbecame heavily dependent o n interest earn- 4 Clients cited ’change in corporate strategy’, ’early repayment of loans’, or ’switching to self insur- ance’ as reasons for canceling the guarantees prior to their expiration. 5 However, MIGA offered technical assistance (TA) to the Center for Private Sector Development in Istanbul, a joint undertaking of the OECD and the Turkish Development Agency TICA, which was created to support the transfer of experience for private sector development to countries in the neighboring countries. This collaborative activity lasted for about two years, until the Center was dissolved by OECD. 101 ANNEXE SUMMARY OF IEG-MIGA’s ACTIVITIES OVERVIEW INTURKEY ings from government securities. Most foreign banks worked under strict country exposure ceil- nparticular, as the financial sector i ings, i nTurkey came under strain. Both evaluated projects involved shareholder loans to expand their lending operations for me- dium term credit. IEG-MIGA guarantees helped them expand country credit limits and pro- vided an additional safety net. Both banks h a d been very selective and conservative i n their lending decisions and favored public sector projects. While b o t hbanks remained active i nTur- key during and after the financial crisis of 2001, they curtailed their lending volumes during this period; one offered only short term lending while the other used its m e d i u m term lending for public works projects, when solid investment projects f r o m the private sector became scarce. In the former case, during the crisis, the bank compared w e l l with its peers inTurkey i n terms of business performance. Inthe latter case, this bank did better than its peers i nt e r n of profitabil- ity but its efficiency and productivity suffered. While supporting public sector projects helped preserve its profitability, it was a departure f r o m the original expectation that i t w o u l d use the IEG-MICA-guaranteed facility to provide lending to a more diverse group of private sector cli- ents. Both banks h a d positive, albeit small impacts o n improving financial intermediation, but remained small players operating in a niche market, limiting their overall impact. Both projects were rated satisfactory for their contribution to providing medium term lending n a difficult economic environment, at least prior to the crisis. i IEG-MIGA also assessed the environmental impact of a IEG-MIGA-guaranteed infrastructure project. The review concluded that the project was w e l l designed and constructed, and the op- eration met high envirorimental and safety standards at the time of the IEG-MIGA review. The project fits w e l l with country’s strategic priority of expanding its energy supply ina n environ- mentally sustainable manner. From an environmental perspective the plant design, with its state of the art technology with high thermal efficiency using natural gas, represents the least polluting option for a thermal power plant. 102 Annex F. Guide to IEG’s Country Assistance Evaluation Methodology 1. This methodological note describes the key elements of IEG’s country assistance evaluation (CAE) methodology.1 CAEs rate the outcomes of Bank assistance programs, not the Clients’ overall development progress 2. A Bank assistance program needs to be assessed o n h o w w e l l it met its particular ob- jectives, w h i c h are typically a sub-set of the Client’s development objectives. I f a Bank assis- tance program is large i n relation to the Client’s total development effort, the program out- come will b e similar to the Client’s overall development progress. However, most Bank assistance programs provide only a fraction of the total resources devoted to a Client’s de- velopment by donors, stakeholders, and the government itself. InCAEs, IEG rates only the outcome of the Bank’s program, n o t the Client’s overall development outcome, although the latter is clearly relevant for judging the program’s outcome. 3. The experience gained i n CAEs confirms that Bank program outcomes sometimes diverge significantly from the Client’s overall development progress. CAEs have identified Bank assistance programs which had: 0 satisfactory outcomes matched by good Client development; unsatisfactory outcomes in Clients which achieved good overall development re- sults, notwithstanding the weak Bank program; and, satisfactory outcomes in Clients which did n o t achieve satisfactory overall results during the period of program implementation. Assessments of assistance program outcome and Bank performance are not the same 4. B y the same token, a n unsatisfactory Bank assistance program outcome does n o t al- ways mean that Bank performance was also unsatisfactory, and vice-versa. This becomes clearer once w e consider that the Bank’s contribution t o the outcome of its assistance pro- gram is only part of the story. The assistance program’s outcome is determined by the joint impact of four agents: (a) the Client; (b) the Bank; (c) partners and other stakeholders; and (d) exogenous forces (e.g., events of nature, international economic shocks, etc.). Under the right circumstances, a negative contribution f r o m any one agent might overwhelm the posi- tive contributions f r o m the other three, and lead to a n unsatisfactory outcome. 5. IEG measures Bank performance primarily o n the basis of contributory actions the Bank directly controlled. Judgments regarding Bank performance typically consider the relevance and implementation of the strategy, the design and supervision of the Bank‘s 1 In this note, assistance program refers to products and services generated in support of the economic development of a Client country over a specified period of time, and client refers to the country that receives the benefits of that program. 103 ANNEX F GUIDETo IEG’s COUNTRY EVALUATION ASSISTANCE METHODOLOGY lending interventions, the scope, quality and follow-up of diagnostic w o r k and other AAA activities, the consistency of the Bank‘s lending with its non-lending w o r k and with its safe- guard policies, and the Bank‘s partnership activities. Rating Assistance Program Outcome 6. In rating the outcome (expected development impact) of an assistance program, IEG gauges the extent to which major strategic objectives were relevant and achieved, without any shortcomings. I nother words, did the Bank d o the right thing, and did it d o it right. Programs typically express their goals i n terms of higher-order objectives, such as poverty reduction. The country assistance strategy (CAS) m a y also establish intermediate goals, such as improved targeting of social services o r promotion of integrated rural development, and specify h o w they are expected to contribute toward achieving the higher-order objective. IEG’s task is then to validate whether the intermediate objectives were the right ones and whether they produced satisfactory net benefits, and whether the results chain specified in the CAS was valid. Where causal linkages were n o t fully specified i n the CAS, it is the evaluator’s task to reconstruct this causal chain f r o m the available evidence, and assess rele- vance, efficacy, and outcome with reference to the intermediate and higher-order objectives. 7. For each of the main objectives, the CAE evaluates the relevance of the objective, the relevance of the Bank‘s strategy towards meeting the objective, including the balance be- tween lending and non-lending instruments, the efficacy with which the strategy was im- plemented and the results achieved. This is done i n t w o steps. The first is a top-down re- view of whether the Bank’s program achieved a particular Bank objective or planned outcome and h a d a substantive impact o n the country’s development. The second step is a bottom-up review of the Banks products a n d services (lending, analytical and advisory ser- vices, and aid coordination) used to achieve the objective. Together these t w o steps test the consistency of findings f r o m the products and services and the development impact dimen- sions. Subsequently, an assessment is made of the relative contribution to the results achieved by the Bank, other donors, the Government and exogenous factors. 8. Evaluators also assess the degree of Client ownership of international development priorities, such as the Millennium Development Goals, and Bank corporate advocacy priori- ties, such as safeguards. Ideally, any differences on dealing with these issues w o u l d be identified and resolved by the CAS, enabling the evaluator to focus o n whether the trade- offs adopted were appropriate. However, i n other instances, the strategy m a y be found to have glossed over certain conflicts, or avoided addressing key Client development con- straints. In either case, the consequences could include a diminution of program relevance, a loss of Client ownership, and/or unwelcome side-effects, such as safeguard violations, all of which must be taken into account i njudging program outcome. 104 ANNEXF GUIDETo IEG’s COUNTRY EVALUATION ASSISTANCE METHODOLOGY Ratings Scale 9. IEG utilizes six rating categories for outcome, ranging f r o m highly satisfactory to highly unsatisfactory: Highly Satisfacto y: The assistance program achieved at least acceptable progress toward all major relevant objectives, @ h a d best practice development impact o n one or more of them. N o major shortcomings were identified. Satisfacto y: The assistance program achieved acceptable progress toward all major relevant objectives. N o best practice achievements or major shortcomings were identified. Moderately Satisfacto y: The assistance program achieved acceptable progress toward most of its major relevant objectives. N o major shortcomings were identified. Moderately Unsatisfacto y: The assistance program did n o t make acceptable pro- gress toward most of i t s major relevant objectives, or made acceptable progress o n a l l of them, but either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. Unsatisfacto y: T h e assistance program did not make acceptable pro- gress toward most of its major relevant objectives, and either (a) did n o t take into adequate account a key de- velopment constraint or (b) produced a major short- coming, such as a safeguard violation. Highly Unsatisfacto y: The assistance program did not make acceptable pro- gress toward any of its major relevant objectives and did not take into adequate account a key development constraint, while also producing at least one major shortcoming, such as a safeguard violation. 10. The institutional development impact (ID11can be rated as: high, substantial, modest, or negligible. ID1measures the extent to which the program bolstered the Client’s ability to make more efficient, equitable and sustainable use of its human, financial, and natural re- sources. Examples of areas included injudging the institutional development impact of the program are: 0 the soundness of economic management; 0 nparticular, the c i v i l service; the structure of the public sector, and, i 0 the institutional soundness of the financial sector; 0 the soundness of legal, regulatory, and judicial systems; 0 the extent of monitoring a n d evaluation systems; 0 the effectiveness of aid coordination; 0 the degree of financial accountability; 0 the extent of building NGO capacity; and, 0 the level of social and environmental capital. 105 ANNEXF TO IEG’S COUNTRY GUIDE EVALUATION ASSISTANCE METHODOLOGY 11 . Sustainability can be rated as highly likely, likely, unlikely, highly unlikely, or, i f avail- able information is insufficient, nowevaluable. Sustainability measures the resilience to risk of the development benefits of the country assistance program over time, taking into ac- count eight factors: technical resilience; financial resilience (including policies o n cost recovery); economic resilience; social support (including conditions subject to safeguard policies); environmental resilience; ownership by governments and other key stakeholders; institutional support (including a supportive legal/regulatory framework, and or- ganizational and management effectiveness); and, n resilience to exogenous effects, such as international economic shocks or changes i the political and security environments. 106 Attachment 1: Comments from the Government Ref: B.02.1.HM. Mr. R Kyle Pete Senior Manager Country Evaluat Operations Evalr World Bank Washington DC Re: Turk r- Country Assistance Evaluation . Dear Mr, 'eters, I w e wou~ like to refer to the dmft Operations Evaluation Department (OED) r*ort entitled "Turke~ !Country Assistance Evaluation" which assesses World Bank assistanct to Turkey during the pcnod-1993-2OO4. I Please tind :attached the comments of the Undersecretariat o f State Planping Organization and other govermnent institutions. A brief note on Government Views o? the Bank assistance is also attachedhereto. I We would appreciate if the Bank would revise the drafl report taking consideration the comments mentioned above and provide us back with a copy of the repon. , . . . ! ' . , . I Best regards,! . , . . . I . , . i : . . .. 0 , : a . , I 1 : a , . I , End. Cc: Andrew Vorki . . . I I . i:; . . . . . . . 1.: -....,.,............._.. .............".: . . L...!......" ............... I ' 5 . . *...._... : . ..-... I : . i t--:.- ' , ' , A'mbhbil@ idn'lrdbar.Zcyncp UIq,.Uqnrra h '6e.eav.E f .+?y=- ' f / . ! ' . 107 ATTACHMENT 1 THEGOVERNMENT COMMENTS FROM II, OVERA L GOVERNMENT VIEW ON WORLD BANK ASSISTANCE I I j. . I 8 I. , With the World Bank assistance for about six decades, Turkey took concrete steps towards economic development. World Bank assistance on education, health, infrastructure, financial and public sector reforms yielded positive tangible results. Our dialogue with the Bank is built on mutual understanding on the priorities of each other. Lessons tqken from the past contributed much ta our strong dialogue. The political stability during the last three years consolidated our beneffi from the Bank assistance. The central mandate of the Bank is to fight poverty on a multidimensional scale ranging from human development to security, voice and participation. However, the Bank's understanding of the poverty impact of programs and polides is sometimes narrow, and to this end, the Bank tends to focus mainly on the social sectors while neglecting productive sectors. Furthermore, the Bank tries to reduce poverty through increased expenditures on the social sectors. For example, in health and education, the Bank focuses on the inputs and the outputs and Its interventions are for securing increased expenditures on these sectors. Even though the targets are outperformed, sometimes converting these measurable inputsloutcomes Into sustainable qual'w results such as better student achievement or improved health status is difficult. Actually, any Bank assisted poverty reduction adivity is proved to have the most success when it is supported by the existing local Initiatives and ownership. Particularly, long average implementatlon life of health and education projects, implemented in Turkey during the last decade, reflects this issue. The complex procedures for disbursement and procurement used to be one of the important barriers to reach our eventual goal of development. Bank's recent efforts to streamline and simplify its lending procedures enabled the implementing agencies to utilize the funding.sources more effectively. Ownership is the key factor for successful Implementation. The contribution of the related parties in designing the components of the loan is key for reaching the targets of the loan. Our experience so far, reveals that this is valid both for investment and policy lending. The conditionalities reflecting the Government's program will further enhance the ownership. The policy matrix for the development lending should focus on actual needs df the country and support the priority pdlicies of the Government's pragram. 1 Our past weak pdrforrnance regarding adjustment lending was the consequence of coinciding internal and external factors. Political' instability did not allow for sound policy environment. Banks policies were not helpful, either, in that respect. Bank's insfstenceon usirig large and complex policy matrix in prqgrammatic operations led to departure from the main objectives of the operation. Additionally, too many components and hdicators bring forth too many agencies:which hampers ownership and flexibility. We experienced such cases that any conditions unmet, despite the fulfilment of other bommitments, blocked the disbursement of whole loan. We would 108 bI like to encourage the Bank to shift its policies towards ex post conditionality from preconditionality nd follow the policy of concentrating on one sector in each ATTACHMENT 1 FROM COMMENTS THEGOVERNMENT operation. the actions which is already W e n rather than taken in the future is considered as a good step to of programmatic operations. i of Bretton Woods institutions to our economic p a major issue in our program Bank to eliminate cross-conditionality with the One should unddline that Bank support on our way to EU is invaluable. that recent CEM Ireport will be an important guide for our efforts with respect to Acquis. Last but not the I ast; we appreciate the Bank's non-lending assistance. Th expertise on issues is non-arguable;. Bank's technical its expertise in the world of development is an im and address development challenges. Howev with the home-grown ideas to serve for the experiences with the Bank for so many p Bank cites a good model for other middle income countries. partnership with t I 109 Attachment 2: Chairman’s Summary CHAIRMAN’S S U M M A R Y C O M M I T T E E O N DEVELOPMENT EFFECTIVENESS Informal Subcommittee’s Report o n t h e Turkey Country Assistance Evaluation (CAE) (Meeting of October 24,2005) 1. The Informal Subcommittee (SC) of the Committee o n Development Effectiveness (CODE) met o n October 24,2005 to discuss the report entitled The World Bank in Turkey, 1993-2004 Country Assistance Evaluation, prepared by the Independent Evaluation Group (IEG). Written statement was issued by Mr. Hermann. 2. Background. The Turkey CAE provided an assessment of the Bank‘s assistance during the period of 1993-2004. The report noted that the Bank’s experience i n Turkey clearly divided into two phases and the key lessons were associated with each phase. Prior to 1997, the Bank empha- sized investment lending in a situation of major structural distortions and under-invested i n ana- lytic work. In the subsequent period, a greater strategic focus combined with decentralization to the field and an expanded program of analytic work, rebuilt the Bank‘s relationship and posi- n supporting structural reform. Overall, IEG has rated the de- tioned i t to play a n effective role i velopment outcome of the Bank’s assistance as moderately satisfactory, with substantial institu- tional development impact and likely sustainability. Among major lessons identified was the importance of the Bank maintaining its analytical capital and senior managerial focus i n a coun- try, even when there is little response f r o m the client. The C A E made the following recommenda- tions: ( i ) o n support for Turkey’s EU accession aspirations; (ii) more emphasis to environ- focus mental management; ( ii i) resume support to the private sector; (iv) help t o improve investment climate through better governance and regulations; (v) improve coordination with IFC; (vi) sup- port efforts to build more efficient, policy-oriented line ministries. Management broadly agreed with the report’s conclusions and recommendations and will incorporate them i n its strategy. 3. The Chair representing Turkey welcomed the report a n d noted the W o r l d Bank Group’s contribution to sustainable development and macroeconomic stability i n the country. H e stressed that Turkish authorities broadly agreed with the C A E ratings, but noted that average rating for t e n years did not fully reflect the achievements of the last three years. Inthis regard, he noted that separate rating of two sub-periods w o u l d have better projected the current dynamics of the coun- try’s economic development. H e also disagreed with IEG’s rating of the sustainability of the out- comes as ”likely.” H e argued that the radical changes i n the fundamental dynamics of the econ- omy during the last three years indicated that the sustainability of the outcomes should have been rated ”highly likely,” rather than ”likely.” Turkish authorities welcomed the report’s recommen- dations i n emphasizing more private sector development and improving investment climate, but urged continuous efforts in public sector reform as well. The Turkish Chair also asked that, since 111 ATTACHMENT2 SUMMARY CHAIRMAN’S the majority of the detailed comments of the Turkish authorities h a d been taken into account in the text, only the general comments should be included in the final report. 4. M a i n Conclusions and Next Steps. The Subcommittee welcomed the CAE and broadly agreed with t h e ratings and recommendations. Among m a i n issues raised by the members were: need to improve synergies between the members of the W o r l d Bank Group and aid harmoniza- tion with other donor partners, particularly the EU; more active support for the private sector, es- pecially the small a n d medium enterprises (SMEs); and importance of maintaining close dialogue with the clients through non-lending activities (AAA, support for private sector and NGOs) in times of l o w demand for the Bank’s assistance. The following points were raised. 5. Reports’ timing and coverage. Members appreciated the submission of the IEG report, which h a d provided a broad and comprehensive view of the W o r l d Bank Group’s assistance t o the country, and encouraged the same practice for future country evaluations. Several members supported the Turkish authorities’ view o n the period covered by the CAE, noting that a n average assessment of the whole ten year period might n o t have fully captured the recent achievements and differences between the t w o sub-periods. IEG noted that while defining a period to be rated is often a challenge, outcomes of three of the four pillars of the Bank’s program during the decade w o u l d have been quite similar even if split into separate periods. 6. Country dialogue, ownership and capacity. Members broadly concurred with the reports’ emphasis o n the importance of maintaining active dialogue with the clients and highlighted the role of country ownership as a crucial component for success. In this regard, they noted the posi- tive impact of decentralizing the Bank’s decision-making to the country office in the late 1990s. Management noted that in a country like Turkey, the best w a y to promote ownership w o u l d be drawing appropriate country comparisons, especially with the n e w E U member countries. Mem- bers agreed with the CAE o n the need to better engage NGOs and civil society organizations, but also stressed the importance of keeping the government closely involved i n that process. Some members expressed interest whether Turkey could be a p i l o t for testing the use of country sys- tems. Management replied that i t w o u l d seriously consider piloting the use of country systems in Turkey, b o t h o n the fiduciary and environmental side. Another concern expressed by some mem- bers was related to the limitations of the ring-fenced approach in project implementation and the role of the PIUS. 7. Private sector development and the role of IFC. Members agreed with the CAE assess- ment that the Bank‘s assistance should have centered more clearly o n private sector development. Some members echoed the concerns of the Turkish authorities regarding l o w level of involvement of IFC with the second-tier companies and SMEs and noted the need for more active w o r k to- wards diversifying the financial sector. 8. Coordination/cooperation. Several members felt that the IEG report should have p a i d more attention to some aspects of the Bank-Fund collaboration in Turkey, particularly related to the first pillar of assistance to the country - macroeconomic stability. They noted that a more frank discussion of some disagreements between the t w o institutions w o u l d have been beneficial for in- forming the Bretton Woods Institutions in other important client countries of comparable size. IEG noted that despite some disagreements o n country stabilization program in the past, the Bank-Fund relationship in Turkey has been overall very productive - their collaboration o n the 2001 reform being an example of best practice. Some members noted the Turkish government’s 112 ATTACHMENT 2 SUMMARY CHAIRMAN’S concerns about Bank-Fund cross-conditionality issue. Management clarified that since 2001 the Bank-Fund collaboration has been very effective and beneficial for the country. IEG added that i n the case of Turkey i t was almost impossible to avoid certain overlaps o n conditionalities. Re- sponding to concerns raised by some speakers regarding coordination with other donors, man- agement noted that the Bank is working closely with the EU to make sure that the B a n k s country assistance strategy is complementary to the EU strategy and helps to build capacity for absorption of expected E U grant funds. 9. Lessons learned. Some members were interested i n the lessons that can be d r a w n f r o m the Turkey’s experience with successful agricultural liberalization and reduction of agricultural sub- sidies. IEG noted that reduction of agricultural subsidies-ne of the real successes of the Bank‘s support i n Turkey-was a result of exemplary analytical w o r k and close cooperation with the au- thorities. A member noted the importance of lessons learned f r o m the experience with adjustment lending in Turkey, which demonstrated the need for more ex-post conditionalities and sharper sectoral focus. Another member felt that the report could have been more specific about the rea- sons to clean up the portfolio in Turkey. Several members noted that Turkey’s experience pro- vides a typical case in the context of Middle Income Countries (MICs) development, and could serve as a basis for a study of the Banks experience in MICs, including crisis preparedness, estab- lishment of early monitoring systems and crisis management. IEG replied that it is planning to conduct a study of the Bank’s experience i n MICs, based o n individual CAEs, i n the near future. A member suggested that i n the future similar reports should make better use of various indicators (e.g. CPIA, WBI governance indicators, others) as guidance for further action needs. 10. Social sectors. Some members felt that the report could have put more emphasis o n pov- erty reduction and employment generation, given the overall modest achievements i n those areas throughout the period under review. IEG replied that since, i n its view, employment generation i n SME sector w o u l d be the best w a y t o overcome poverty in Turkey, the report’s focus o n private sector development and better synergies with the other members of the WBG in this area w o u l d be in line with the Banks mission to fight poverty. Management noted that the Bank has recently done substantial w o r k inhelping the government to build capacity i n the poverty monitoring area, creating an annual monitoring system. A member urged more attention to promoting gender equality in Bank projects. Some speakers noted that serious issues remaining i n the pension re- form i n Turkey necessitate having a clear message i n that area, and asked for details o n the Bank’s strategy in this regard. Management noted that it maintains an intensive dialogue with the gov- ernment to develop sigruficant changes i n the presently unsustainable and costly pension system. Pietro Veglio, Acting Chairman 113