Turkey - Towards an information based economy

Report No. 10759-TU Turkey Towards an Information-Based Economy July 17, 1992 Country Department I Europe and Central Asi.- Region FOR OFFICIAL USE ONLY Document of the World Bank his document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY ECUIVALENTS Currency Unit a Turkish Lira 'TL) Value of US31.90 1987* 857.2 1988* 1422.3 1989* 2121.7 1990* 2629.0 1991* 4137.0 July 15. 1992 ;944.8 O Annual average FISCAL YEAR January 1 - December 31 6LOSSARY OF ABBREVIATIONS AQAP Allied Quality Assurance Program ASIC Application Specific Integrated Circuit ATMs Automatic Teller Machines BCS British Computer Society CNN Cable News Network CRPG Compound Rate of Productivity Growth DAPRA Defense Alliance Research Project Agency FCC Federal Communications Cormission GAAP Generally Accepted Accounting Principles GIS Geographic Information System GPO Government Printing Office GSA General Service Adninistration GUI Graphical User Interface ISE Information-Based Economy ICCP Institute for Certification of Computer Professionals IET Industrial Economy in Transition IIBK Department of Labor Employment Service IPRs Intellectual Property Rights IRMs Information Resources Managers ISON Integrated Services Digital Network IT In.ormation Technology KOSGEB The Small Industry Development Organization LANs Local Area Networks METU Middle East Technical University MOA Ministry of Agriculture MPAA Motion Picture Association of America MPM National Productivity Center NCO National Computer Board NIC Newly Industrializing Countries OECD Organization for Economic Co-operation and Development ONP Open Network Provisions PID Personal Input Device PTT Post, Telegraph and Telephone R&D Research and Development RTYK Supreme Council for Radio and Television SIS State Institute of Statistics SLAs Service Level Agreements SMT Software Maintenance Training SNS Singapore Network Services SROC Software Research and Development Center TGM Telsiz Genel Mudurlugu TQM Total Quality Management TRT Turkish Radio and Television.. TSE Turkish Standards Institute TUBISAD Association of Turkish Data-Processing Companies TUBITAK Scientific & Technical Research Council of Turkey VAS Value-Added Service VSHEs Vocational Schools of High Education WANs Wide-Area Networks WIPO World Intellectual Property Organization Y4IK The Council for Higher Education  FOR OMCIL USE ONLY PREFACE AND ACKNOWLEDGMENT This Report has been structured as a collaborative program between the World Bank and the Government of Turkey. It is the product of an extended dialogue on policy issues relating to technology development anS economic modernization, and builds on the "new industrial policyw agenda of the Bank's Research Department. The World Bank team that visited Turkey (December, 1991 and May, 1992) and worked on this Report consisted of: Jeremy Oppenheim, Task Manager (ECICO) Robert Schware, Senior IT Specialist (ASTIF) Joel Brandon, Consult .nt (Computers) Josephine. Hykin, S&T Specialist Yoram Aleter, Consultant 'Telecom) Anne Branscomb, Consultant (Legal) &mer Karasapan, Consultant (Information Services) Furuzan 8atumlu, Resident Mission (Turkey) David Tonge et. al., IS Consultants The team also benefitted from support and insights of: Mieko Nishimizu, Carl Dahlman, William McCleary, Carlos Ferreira, Flavia Fonseca, Eduardo Talero and Nagy Hanna. Jocelyn Dytang provided text, graphice and logistic support. The Government team was coordinated by Treasury, and wrote eight Working Papers as input to the Reports 1. Research and Development on Information Technology (IT) ln Tu. key (TUBITAR); 2. Public Sector Use of IT (Prime Ministry); 3. Public Sector Information Dissemination (SIS); 4. Legal Framework for Database Services (SIS); 5. International and Turkish IT Standardization (TSE); 6. Radio Spectrum Administration (TGM); 7. Software Specification, Maintenance and Training Standards (SPO/TOBITAK), and 8. Market Research on Software Demand (SPO/TOBITAK). Detailed information and suggestions were also provided by: PTT, the Supreme Council for Radio and TV Broadcasting, the Ministry of Education, the Ministry of Culture, the Ministry of Justice, the National Productivity Council, YoR, the Turkish Informatice Association, the Middle East Technical University, and leading representatives from the private sa-tor. The Bank team wishes to thank all those minLiteies and organizations that have supported this effort. The views, interpretations and conclusions of the Report are strictly those of the World Bank. They should not be attributed to any individual member or institutional affiliation of the Government team. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS Page No. EXECUTIVE SUMMARY ............................................i I. VISION, STRATEGY AND CONSTRAINTS ..............1 A. Vision .1 B. Information Technology: From Paper to Informatics 3 C. Towards an Information-Based Economy. 7 D. Evolution of Turkey's Information Economy .. 11 E. Strategy. 19 II. CREATING COMPUTER ADVANTAGE .. 23 A. Introduction .23 B. Techjological Development and Best Practice Computer Use . 24 C. Computer Applications in Turkey .32 D. Competing in the International Hardware Markets 45 III. COMPETING IN SOFTWARE . . .57 A. Introduction ..57 B. Definition and Economics of Software . .58 C. The Turkish Software Market ..62 D. Policy and Institutional Framework ..72 E. Industry Prospects and Action Strategy . .78 IV. HUMAN CAPITAL FOR AN INFORMATION ECONOMY . . .86 A. Introduction ..86 B. Developing an Information Workforce: 1980s . .88 C. Systemic Response to Market Pressure . .92 D. Restructuring the Informatics Profession . .108 E. Creating an Information Workforce for 2000 . .110 V. THE COMMUNICATION NETWORK ...... .............................. 121 A. Introduction ....... ...................................... 121 B. Strategy and Structure ..... ......................... .... 122 C. Performance .............................................. 125 D. Objectives and Strategy ... 140 VI. REDUCING UNCERTAINTY - THE ROLE OF INFORMATION . . .151 A. Introduction ....................... 151 B. Global Market Trends ..153 C. Turkey - Sector Performance ..160 D. The Policy Environment ..166 VII. THE LEGAL INFRASTRUCTURE . . .179 A. Introduction .. .179 B. Intellectual Property Rights ...181 C. Data Confidentiality and Privacy . . .188 D. Computer Crime, Security and Liability ... ................ 194  Page No. VIII. ACTION PLAN AND THE ROLE OF THE GOVERt1MENT ................... 201 A. Introduction .................. ,.. ........0.. 201 B. An Information-Based Economy Action Plan ................. 201 C. Implementing the Plan ............................ . ..... . 207 Annex 1 Hardware Technology -nd Potential Growth Areas .... ....... 214 Annex 2 Overview of the World Market in Software ......... ......... 225 Annex 3 Legal Protection for Software by Country . ................. 230 Annex 4 Incentives to Promote Software Industries in Selected Countries ........... ..................................... 232 Annex 5 Occupational Structure of the Infermatics Profession ..... 234 Annex 6 Undergraduate Program, ODTO ..... ......................... 237 ATTACHMENT ............................................... 238 SELECT BIBLIOGRAPHY ...................................... 245  LIST OF TABLES Pace No. Table 1.1 Private Investment in Information Technology 5......... i Table 2.1 The Hardware Market in Turkey ($Million, End User-Prices) .................... 33 Table 2.2 Composition of Larger System Computer Park Public versus Public Sector .34 Table 2.3 Global Market for Computer Goods and Services ($ Billion) .......................................... 47 Table 2.4 PC Assembly Operations (1987-1990) . .................. 49 Table 2.5 Leading Electronics Suppliers: Turkey 1990 .... ....... 50 Table 2.6 Electronics Exports (1986-1991) ..... ................. 51 Table 2.7 Distribution of Research Personnel and Expendituret 1991 - Informatics Sector Compared with Total Research Activities .................................. 53 Table 3.1 Growth in Software Industry Revenues 1980-1995 ....... 61 Table 3.2 Ccmposition of Softwa:e Sales by End-User ........... . 64 Table 3.3 Industry Segments (1990) ................ ............. 65 Table 3.4 Incentives to Promote Software Industries in Selected Countries .......... 74 Table 4.1 Composition of Non-Agricultural Workforcet 1980-1989 . 89 Table 4.2 Demand for Informatics Specific Skills: 1985-1990 91 Table 4.3 Sectoral Composition of Demand for Informatics Professionals: 1990-1991 ............................. 92 Table 4.4 Sources of Informatics Skills: 1985-1990 ............ . 94 Table 4.5 University Role in Informatics Training ............. . 95 Table 4.6 Continuing Education at Universities .. ............... 99 Table 4.7 Informatics Salaries: (1990-1991) .................... 106 Table 4.8 Computer Park in Vocational and Secondary Schools: 1991 ................................................. 107 Table 5.1 PTT Incentives and Financing: 1983-1990 ............. . 125 Table 5.2 Network Expansion: 1983-1990 .............. ............ 126 Table 5.3 Switching and Transmission Technology: 1985-1990 ..... 128 Table 5.4 Telecom Equipment Production: Turkey 1990, $ Million . 132 Table 5.5 Business Unit Contribution to PTT Income: 1981-1990, TL Billio.;n ................ ......133 Table 5.6 Regulatory Framework for Competition and Entry Cross- Country Comparison . ........... ..138  Page No. Table 6.1 Composition and Growth and Global Information Market . 154 Table 5. Cross Media Ownsrship in Turkey .162 .able 6... TV Penetration Rates ................................. 164 lable 6.4 Use of *URDOC On-Line Databases (1985-1991) .......... 165 LIST OF FIGURES Pace No. Figure 1.1 Productiv'icy Growth in Information Technology ........ 4 Figure 1.2 Strategic Eras in Transition to Information-Based Economy .............................................. 8 Figure 1.3 Informatics Investment: 1981-1990, US$ Million ....... 12 Figure 1.4 Complementary Inputs for an Information-Based Economy 18 Figure 2.1 Decentralizing the Computer .......................... 25 Figure 2.2 Managing Computers ................................... 28 Figure 2.3 Sectoral Composition of Computer Use .... ............. 35 Figure 2.4 Cc.mparing US and Turkish Datacenter Management ....... 36 Figure 2.5 Competitive 0ynanics in Computer Market .... .......... 48 Figure 2.6 Concentration in the Computer Market: Turkey 1987-1990 49 Figure 3.1 Changes in tne Relative Costs of Hardware and Software 62 Figure 3.2 Growth Rate of the Turkish Software ..ndustry (S Million) .......................................... 63 Figure 3.3 Ratio of Software to Total IT Sales Percentage (1990-1991) .......................................... 69 Figure 3.4 Evolution of Software Market ......................... 71 Figure 3.5 Scenarios for Software Market Growth (1991-1995) ..... 79 Figure 4.1 Relative Growth Rates Within Informatics Sectors ..... 96 Figure 4.2 Supply of Informatics Professionals: Flow Design: 1991 101 Figure 4.3 Estimated Growth in Demand for Informatics Specialists 108 Figure 5.1 Cross-Country Comparison (January: 90) Telecom Lines per 100 .................... ........... 127 Figure 5.2 Price and Cost Declines per Unit ..................... 129 Figure 5.3 PTT Overhead Cost Ratios ............................. 134 Figure 5.4 PTT Prices Cost Margins .............................. 135 Figure 5.5 Network Externalities ................................ 140 Figure 5.6 Telecom versus Mail: 1990 ............................ 148  - ~~~~~~~Pace No. Figure 6.1 Information Industry Dynamics 15S Figure 6.2 Structure of International Music Market 157 Figure 6.3 Advertising Expenditures Per Capita Cross Country Comparison: 1990 .. 161 Figure 6.4 SIS Proposed Data-:.ub. 169 Figure 7.1 Illegally Copied Software in Use Cross Country Comparison ........... 182 Figure 8.1 Action Plan for an Information-Based Economy 202 Figure 8.2 National Informatics Policies .209 Figure 8.3 Major Benchmarks in IBE Action Plan .210 Figure 8.4 Responsibility Matrix for IBE Action Plan 211 LIST OF BOXES Page No. Box 1.1 Social Barriers to New Information Technology 6 Box 1.2 Information Efficiency in the Financial Sector 10 Box 2.1 Computers in Banking ..26 Box 2.2 Computers for Comnetitive Advantage. 29 Box 2.3 Key Success Factors in Datacenter Management. 30 Box 2.4 US Government Procurement Practice ..32 Box 2.5 Computerization of International Trade ... ........... 41 Box 2.6 Singapore's National Computer Board. 42 Box 2.7 Informatice Development Projects. 55 Box 3.1 The Strategic Importance of Software . . 60 Box 3.2 International Software Industry-Strategic Eras 71 Bzx 4.1 Singapore - Building an Informatice Workforce. 93 Box 4.2 Computer Requirements of Undergraduates Middle Income and Upper Income Country Examplee 103 Box 4.3 Creating an Information Workforce in the UK. 114 Box 4.4 French Minitel Experience..... 118 Box 5.1 Technological Change in Communications Sector 123 Box 5.2 International Pricing Models . 144 Box 5.3 Latest Developments in the Radio Spectrtm ............ 146  Paae No. Box 6.1 Proposed TV and Radio Broadcast Legislation .... ...... 163 Box 6.2 Pricing Policy of the US Government Printing Office .. 172 Box 6.3 Accounting Practices in Turkey ..... .................. 176 Box 7.1 Software Copyright: Pro-Innovation or Anti-Competition 184 Box 7.2 Intellectual Protection for Databases ............... . 186 Box 7.3 US Markets for Data .................................. 189 Box 7.4 General Principles of Databases Management . ..... 190 Box 7.5 Data Protection at the General Directorate for Judicial Records ........... .......................... 192 Box 7.6 The Cost of Computer Security Breaches in the UK ..... 195 Box 7.7 Economic Vulnerability in the Information Age ........ 199  EXECUTIVE SUMM&RY Introduction 1. Informatics is a techn:,logy set for information processing, storage, retrieval and transmission. Over the past 25 years, sustained technological change in the informatice sector has had an economy-wide '!.Mpact on productivity growth, raising the information-intensity of private sector and government activities. In advanced economies, inforfatics now accounts for 5 - 6% of GNP, and by 1995 will be the single largest industrial sector. Policies that foster the supply, diffusion and efficient application of informatics have therefore become central to long run growth potential and to international competitiveness. However, not all consequences of informatics are guaranteed to be welfare-enhancing. Rather, informatics also poses new threats to civil liberties, creates significant costs of social and institutional adjustment, and is lik-ly to have far-reaching implications for systems of governance. Hence, the interest of governments around the world in understanding the implications of informatics for social and economic progress, and in harnessing its benefits for national development. 2. During the 1980s, Turkey laid the foundation for her transition to an information-based economy (IBE). A strategy for economic modernization predicated on open competitive markets forced the private sector to become more information-intensive. Growth in foreign trade and investment (direct and portfolio) increased the two-way flow of information between Turkey and the world economy. Massive public investment in an advanced communications network increased the economic return on informatics applications and, together with import liberalization, supported diffusion of this technology throughout the economy. Although the Government had no explicit informatics policy, a combination of market forces, technological change and infrastructure development provided the necessary climate for rapid expansion in the supply and demand for information goods, services and skills. 3. Nevertheless, when compared to peer-group countries that targeted informatics as a catalyst for economic modernization, Turkey has not yet adequately developed the resource endowment for an IBE. Cross-country indicators suggest that Turkey is behind in: * the markets for computer hardware and especially software; * modernizing the framewor.; for the communications sector; * creating the human resources essential for an IBE; and * developing a vigorous private information industry. Longer term growth and international competitiveness will depend on measures that the Government takes to correct these deficits, and to mobilize private sector resourc3s for productive use and supply of informatics.  - ii - Existina Situation in Turkey: Diaanostic 4. Computer Hardware and Software. Despite rapid growth in hardware investmer.t, Turkey is lagging behind comparator countries. First, allowiig for relative income levels, the market for computer hardware and software in Turkey appearE very small ($12 per capita) in comparison to countries such as Korea ($46 pc) or Spain ($110 pc), leaving aside the US or Japan ($400 pc). There is no local supply (except for a few PCs) of computex. or informatics components. Second, the software industry is at an infant stage, compared to major competitors. The software-hardware invest-'ent ratio (14%) is significantly lower than in other countries (average 35%.; exports are negligible; and there is no or little foreign investment. Third, massive investment by Government in computerization (over $500 million iuring the 1980s) does not appear to have achieved required productivity ga.ns in public administration. In addition, informatics procurement has not been used effectively as an inst:-ument for local technology capacity. Fourth, private sectox development in informatics markets has been constrained by inadequate standards, a lauk of copyright protection for the software industry, tax and regulatory constraints on financial instruments (e.g., venture capital), import barriers (tariff and non-tariff), and overall distortions in incentive policy. 5. Communications. Since 1985, Turkey (through PTT) has invested almost 1% of GNP per annum to develop an advanced communications network that could support a competitive market-based economy. The network has expanded to the point where there is now universal geographic service. Ove; 50% of the network is digital, exceeding ratios achieved in most OECD countries. The terminal market has been substantially liberalized (though burdensome type approval and conformance testing regulations are still in p'ace); and local industry supplies almost 90% of the public network's investment requirements. Perhaps the most striking aspect of this achievement is that over 85% of the investment program was financed from internally generated cash-flow. Nevertheless, it is not clear whether the formula for succesa in 1980s will prove adequate for the 1990s. First, the price of key telecom services for the business community is significantly above that of major trading partners, reducing international competitiveness and also Turkey's attractiveness as a location for direct foreign investment. Second, the sharp increase in the telecom profits has enabled PTT to mask a corresponding deterioration in its other businesses - especially the postal service. Third, the lack of competitive pressure on PTT has reduced operational and investment efficiency. Fourth, barriers to private sector intry into the communications sector have: (a) stifled an important source ;. innovation and consumer choice; and (b) left Turkey progressively out-of-line with regulatory and institutional modernization in other OECD/EC countries. 6. Human Capital. Perhaps the most severe deficit that Turkey faces is in the area of human capital for an IBE. The formal education system has not been able to respond acidquately to broad shifts in occupational structure; nor to the need for a specialized informatics profession. Compared to more a.dvanced countries, Turkey appears to be significantly behind in:  - iii - * the diffueion oi' computer literacy throughotut the workforce; * the supply of specializad informatics professionals - people to nianage computerization, teams of skilled software engineers, and end-user support specialists for large organizationsi * the quality of these professionals in an international market that is demanding increasingly specialized skills; and ; 9 the system for skills upgrading and retrt4ning in the face of rapidly changing technology. Despite growth of computer engineering departments, the universities graduate less students per million with degrees in computer-related subjects (160) than Mexico (230), Spain (550) or Korea (1100). Although universities attract the brightest 1% of students to their computer engineering departments, it is not clear whether graduates have the multi-disciplinary skills needed in the market. Nor has there been adequate (or efficient) investment in the diffusion of more genoral informatice skills throughout the workforce. Computer/student ratios (1:218) in tAe schoolj are significantly behind those in peer-group countries; and the regulatory framework for private computer schools reduces competition, and creates inadequate incentives for improved training performance. The challer.ge facing Turkey is therefore to turn her young population into a competitive resource in the international market, and to educate a new generation of informatics entrepreneurs. 7. Information Services. Compared to more advanced economies, the private information industry in Turkey needs to attract resources and increase efficiency over the next decade. In other OECD economies, the private information industry (media, consulting, specialist information services) expanded rapidly during the 1980s, driven by both technological change and market liberalization. In Turkey, the industry remains highly fragmented; advertizing revenue (which drives the economics of private media) at S10 per capita is significantly below that of e.g., Spain ($151); there is little horizontal integration across the information industry; and growth has been only marginail, greater than that of GNP. The main policy problems appear to be: (a) the existence of a de jure state monopoly in television and radio broadcasting; (b) poor dissemination of public sector data; (c) the inadequacy of standards related to information reliability (e.g., accounting principles) in the financial and consumet product markets; and (d) deficiencies in the legal framework for data-confidentiality. Action Plan 8. Turkey's strategy for an information-based economy (IBE) should be based on poli"y action in four main areas:  - iv - * private sect.r develooment: to foster an internationally competitive supply of informatics technology, goods and services (especially in communications); * human caRital formation: to align human resource strategy and education delivery mechanisms with the needs cf an IBE; * public seccor management: to increase productivity and innovation in public sector services through better use of informatics; and * information regulation: to safeguard civil liberties and consumer rights against risks created by informatics. A public-private sector partnership that tacklee this agenda can make informatice a catalyst for Turkey's economic modernization and a potent source of international #.ompetitiveness. 9. Private Sector Develonment. A competitive business climate is essential if Turkv,y is to accumulate infcrmatics technology, attract foreign direct investment. and develop innovative information and communications services (more rapidly than competitors). Three main sets of policy action are required. First, the Government should reduce and progressively eliminate state monopolies in telecom, and television/radio broadcasting. While the latter reform is already underway, immediate action in the communications sector is needed to: (a) separate mail from telecom; (b) establish an independent regulatory body; and (c) increase private sector participation and competition. Second, policy and institutional barriers still constrain development of competitive informatics markets. In particular, tariff and non-tariff barriers to trade should be reduced, copyright protection for software introduced, international standards (especially for quality assurance) strengthened, and tax distortions on venture capital eliminated. Third, greater effort is required to stimulate technology development. The first best instrument to achieve this goal is improved public sector procurement of informatics, including unbundled specification of agency requirements for software and computer services. In addition, research and development support should be intensified especially for the software sector. 10. Human Capital Formation. Building an information workforce is the most important challenge confronting the Government. Turkey's young population is potentially the nation's greatest competitive asset, but only if the education system works and can be properly funded. To create the talent and skill-base centr3l to an information-based economy, action is needed in three areas. First, the university supply of informatics professionals should be strengthened through: (a) creation of separate Informatics Faculties; (b) actions to reinforce university-business linkages; (c) improved incentives for teaching staff and graduates in informatics disciplines; (d) establishment of a private fee-based Informatics Institute; and (e) integration of in