Turkey - Export-oriented and small-scale industries

FILE COPY Report No. 1359-TU Export-Oriented Industries and Small-Scale Industries in Turkey August 17, 1977 Industrial Projects Department FOR OFFICIAL USE ONLY Document of the World Bank 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.  CURRENCY EQUIVALENTS Prior to August 9, 1970: US$1.00 TL 9.00 TL.1.00 m US$ 0.11 August 91 1.970 to December 1971:7 US$1.00 TL 15.00 TL 1.00 - US$ 0.067 December 1971 to May 1974: US$1.00 - TL 14.00 TL 1.00 US$ 0.67 May 1974 to September 1974: US$1.00 TL 13.50 TL 1.00 - US$ 0.074 September 1974 to April 1975: US$1.00 TL 13.85 TL 1.00 US$ 0.072 April 1975 to July 1975: US$1.00 -. TL 14.75 TL 1.00 m US$ 0.07 July 1975 to August 1975: US$1.00 TL 14.50 TL 1.00 US$ 0.068 August 1975 to August 1975: US$1.00 = TL 14.75 Ti 1.00 US$ 0.068 August 1975 to October 1975: US$1.00 TL 15.00 TL 1.00 US$ 0.67 October 1975 to March 1976: US$1.00 TL 15.50 TL 1.00 = US$ 0.65 March 1976 to April 1976: US$1.00 TL 16.00 TL 1.00 US$ 0.63 ABBREVIATIONS GOT Government of Turkey SPO State Planning Organization SIS State Institute of Statistics Halk Bank Halk Bankasi (People's Bank) IGEME IHRACATI GELISTIRME ETUD MERKEZI (Study Center for Export Promotion) KUSGEM Small Industries Development Program at the Gaziantep Ind. Estate MSI Medium scale industrial establishments SSI Small scale industrial establishments  FOR OFFICIAL USE ONLY EXPORT-ORIENTED INDUSTRIES AND SMALL-SCALE INDUSTRIES IN TURKEY Table of Contents Page No. SUMMARY AND CONCLUSIONS .................................... i-xii I. INTRODUCTION ................................... 1 II. INDUSTRIAL GROWTH AND EXPORTS ..... .............. . 3 A. Industrial Growth ...................................... 3 B. Government Strategies .................................. 5 C. Some Issues of Industrial Policy ....................... 7 III. THE INCENTIVES FRAMEWORK AND INDUSTRIAL EXPORTS .... ........ 8 A. Introduction ............................................. 8 B. The Incentives Framework and the Exchange Rate .... ..... 10 C. Investment Incentives .................... ............. 11 D. Protection ............................................. 13 The System .......................................... 13 The Import Regime and Exports ....................... 14 E. Export Policy .......................................... 16 Export Rebates ...................................... 17 Export Promotion .................................... 18 Export Credit Policy ................................ 20 F. Conclusion ............................................. 20 IV. THE TEXTILES AND CLOTHING INDUSTRY ......................... 22 A. Introduction ........................................... 22 B. Present Structure of the Industry ...................... 22 C. The Export Picture ..................................... 25 D. Opportunities in the European Common Market .... ........ 26 This report, based on the findings of an industrial sector mission which visited Turkey in May-June 1976, was originally issued under green cover (March 24, 1977). Having received Turkish Government clearance, it is now made avail- able to the Board for information. The participants in the mission were Bertil Walstedt (Chief), Maurice Joyce and Pham van Thuyet (IBRD), Ronald G. Bowey and Gordon Warran-Smith (Consultants). 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.  -2- Page No. Structure of the SSI sector ..... ................... 56 The small industrial workshop . ......... ........... 58 B. Potential for Development of SSI .......... .. ............ 58 C. Problems and Constraints ...... .............. . ........... 59 Government strategy ........... .... ................ . 59 Incentives and SSI ........ . . . . . . ............... . . ................ 60 Technology and technical assistance ................ 62 Management ... . ..................................... 64 Distribution and marketing ........... .. ........... 64 Procurement of materials and equipment ...... ....... 65 Industrial estates ..... ................. ........ .... 66 Finance ...... .................................................. 67 Handicrafts ..... ................................... 69 D. Towards a Small Industries Development Program .......... 71 Elements of a Program .............................. 71 Cooperatives and Unions ............................ 72 Proposed National Center for SSI Development ....... 73 Finance ............ ......... .0. .. .................. 74 ANNEXES A. The Protection and Incentives System B. Effect of Protection on the Exchange Rate C. On the Definition of Large, Medium, and Small Establish- ments D. Medium-Scale Enterprise E. Proposal for a Research Institute for Medium-Scale In- dustries  -3- F. The Small Industrialist and His Workshop in Turkey G. Balance Sheet and Profit & Loss Statement of the Turkish People's Bank (Halk Bank) H. Growth in Manufacturing under Alternative Strategies DIAGRAMS AND TABLES Diagram I Growth in Manufacturing in Relation to Per Capita GNP (Text p. 4) Diagram II Rates of Protection before and after Hypothetical Devaluation (Text p. 12) Diagram III Structure of Manufacturing Industries, 1970; Employment Distribution by Size of Establishment (Text p. 53) Table 2.1 Per Capita GNP and Growth Rates in 'Lianufacturing Selected Developing Countries Table 2.2 Pattern of Growth in Manufacturing, 1967-72-76 Table 2.3 Imports by Commodity Groups Table 2.4 Exports by Commodities Table 4.1 Imports of Cotton and Cotton-Type Textiles into the EEC Area, 1970-1975 Table 5.1 Turkey: Leather Clothing Productlon and Export, 1969-1974 Table 5.2 Imports of Leather and Leather Products to Major European Markets, 1974 Table 6.1 Structure of Turkish Industry - Number of Establishments and Employment, 1970 Table 6.2 Data on Medium Industrial Establishments Employing 10-200 Persons, 1974 Table 6.3a Large and Small Establishments by Industry Groups in Manufacturing Industries, 1963 Table 6.3b Large and Small i,U,tablishments lb: Industry : oups in Manufacturing IiT.h>..stries, 1970 Table 6.4 Industrial Structure - Distribution of Empioysent by Industry and Size of Establishment, 1970  -4- Table 6.5 Individual Small-Scale Industries (SSI) Having Higher Volume of Employment than Large Industries Table 6.6 Distribution of SSIs by Major Regions and Employment in 1970 Table 6.7 Technical Training for Small Industries Table 6.8 Horsepower per Worker in Large and Small Establishments, 197T Table A.1* Imports by Type of Financing, 1970-1976 Table A.2* Rates of Import Duty on Selected Manufacturing Commodities Table A.3* Collections of Taxes on Imports, 1971-1975 Table A.4* Tax Rebates - Manufacturing Sector, 1973-1975 Table A.5* Tax Rebates Classified by Industry, 1975 Table A.6* Exemption from Duties and Taxes on Imports, 1972-1975 Table A.7* Deferrals of Duties and Taxes on Im=orts, All Industry, 1972-1974 Table A.8* Financial Impact of Incentives on a Project Table A.9* Investments Eligible for Investment Incentives, Classified bv Region, 1968-1974 * Tables shown at the end of Annex A.  EXPORT-ORIENTED INDUSTRIES AND SMALL-SCALE INDUSTRIES IN TURKEY Summarv and Conclusions This report focuses on the development role and policy requirements of two sectors: export-oriented, relatively labor-intensive manufacturing industries, especially textiles/clothing and leather/leather products, and small-scale industrial establishments (SSI). To place these sectors in perspective, the report starts out with a brief summary of the present structure of Turkish manufacturing industrv and Government growth targets. This is followed by a review of the present protection and incentives frame- work, the main policy instruments to direct and induce private industry. The textiles/ clothing and leather/leather products industries are then dealt with in detail. The mission has examined their export potential in Western Europe as well as measures required to capitalize on that potential. A final chapter deals with SSI (defined here as establishments engaging less than 10 persons). Their growth potential is examined as well as programs designed to improve their access to technology, management, markets, and funds. In terms of future growth, a more strategic segment is represented by some 4,000 medium-scale industrial establishments (MSI) engaging 10-100 workers. Although special study of this type of establishment was not 4ncluded in the mission's terms of reference, the mission observed an urgent need for help to this group to bring them into the mainstream of export-led industrialization. Industrial background and objectives ii. Turkey has a high industrial potential in terms of natural re- sources, manpower, and geographical location. Industrial growth during the last three five-year plans has been steady and rapid. It has also been centrallv planned. The plan is mandatory for the large public sector only, but, through a combination of import restrictions and potent investment incentives, the State also largely steers private manufacturing growth. iii. The main thrust of industrialization has been capital-intensive import substitution in basic industries, e.g. steel, aluminium, petrochemi- cals, fertilizers, reflecting a long-standing policy (in effect since the 1920's) of making the country industrially independent. From a purely econo- mic point of view, this policy has two drawbacks. First, it is very expen- sive in terms of investments (and foreign exchange for imported equipment) per job created. In 1973-76, the manufacturing sector, with 12 percent of the gainful employment, absorbed 30 percent of the total investments. Secondly, since it runs counter to Turkey's comparative advantage, it gen- erates few industrial exports. the modern capital-intensive public sector has little or ao export potential and few backward linkages. In contrast, the private sector is strategically placed in areas of comparative advantage  - ii - like textiles and clothing, leather and leather products, rubber and plastics manufactures, light metal fabricating and engineering, pharmaceuticals, etc. and also important backward linkages to the public sector. However, its units are, for the most part, too small, inefficient, and financially weak to leap into the export market and serve as the engine of growth. Manufac- turing exports though they have grown substantially in recent years thus far entail a low degree of processing, and represent only about 3 percent of the value of manufacturing production. Apart from leather garments, Turkey has yet to develop any major manufacturing activity primarily focused on exports. iv. Recent policies were at least feasible as long as Turkey could rely on worker migration to Western Europe to absorb its rising manpower surplus. With prospects for additional net migration severely curtailed, the country must now concentrate on exporting goods rather than manpower which is, of course, vastly preferable from a social and human point of view. Studies of market prospects in Western Europe specifically under- taken for this report show that both the textiles/clothing and the leather/ leather products industries offer substantial prospects. There is every indication that similar conclusions would result from studies of other light, labor-intensive industries. Thus, in connection with its study of SSI, the mission has identified an apparently important, virtually untapped export potential in Turkish handicrafts. To foster competitive export industries will not be easy; as in any other country, it will require constructive, imaginative, and whole-hearted Government support and a new policy orienta- tion. Incentives System and ExDorts v. Industry in Turkey is encouraged through a comprehensive system including: (a) protection from imports; (b) substantial investment incentives; (c) export subsidies. Initially, industrialization was heavily focused on import subsitution which was, to some extent, inevitable in the early phase. Particularly since 1969, however, tax rebates and other incentives have been used to promote exports. Although the system includes some measure of infant industry support for export production, much of this assistance is now needed to offset the higher input costs resulting from the protection system. This subject is discussed in some detail in Chapter III. Another drawback of the system is that it encourages capital intensive production as regards to the choice of equipment and tech- nology within a given industry, as illustrated in the specific case of the textile industry (see para. 4.27). vi. Some encouraging export growth has occurred, but it is relatively shallow (low value added by manufacture), and it is small in relation to the country's potential. Difficulties in developing industrial exports seem to reflect three major factors: First, as already noted, many protected indus- tries lack comparative advantage. Secondly, even industries with a good  export potential are frozen in traditional structures and technology within the confines of.narrow oligopolistic markets. They cannot change quickly without special catalytic or supportive action. Thirdly, a system which depends on incentives to compensate for built-in cost handicaps becomes very complex, costly to administer, inflexible in a rapidly changing indus- trial world, and uncertain as to its ultimate incidence on the individual industry. vii. A particularly important effect of the import restrictions on Turkey's export potential is that many Turkish products are of low quality or insufficiently related to Western European standards and fashions. Thus, exports of leather products and clothing are impeded by the low quality of Turkish made accessories, such as frames, linings, trimmings, etc. More- over, as a result of the concentration on the domestic market, the Turkish manufacturer lacks knowledge of export markets and the practical aspects of export marketing and is not subject to external competitive pressure to main- tain productivity and quality standards. viii. Turkey is at a unique historical juncture where it needs to. de- velop manufacturing exports for industrial growth and to do so quickly while it still can benefit from an inside track to the Common Mlarket. An export breakthrough will require close State-industry cooperation to deter- mine the present position and required action programs for potential export spearhead subsectors. ix. State support for an export offensive would need to encompass the following general measures: - unrestricted entry, subject only to import duty, of imported inputs for subsequent use in export processing; the duties paid on such imports would be considered in the export incentives (see x. below). - transformation of the preseut Study Center for Export Promotion (IGEME) into an active Export Promotion Agency to provice market intelligence and better marketing assis- tance. x. These general measures would need to be supplemented with sDecific actions with respect to individual industries. Ambitious, yet realistic in- vestment and export targets should be developed in concert with the indus- try. Export incentives must be revised -not only to offset disadvantages from the import-regime but also to give some measure of "infant" industry support for a suitable time period. Such incentives may be tied to State- industry'agreements on production, export, and productivity targets and ne- cessary restructuring ("concerted action"). Foreign investments and foreign partnerships should be encouraged where these may be expected decisively to improve access to markets and technology.  - iv - Textiles and Clothin. 1/ xi. The textile and clothing industries, in 1975, contributed about 15 percent of total value added in manufacturing and about 20 percent of in- dustrial employment. At present, the largest sectors are cotton spinning and weaving. Firm sizes differ widely; in cotton spinning and in dyeing and finishing, larger firms predominate, whereas in the pro- duction of woven cloth and in knitting and, particularly, in garment-making, there are many small firms. A State Enterprise Holding, Sumerbank, controls about one-fifth of spinning and weaving capacity in the cotton and wool sec- tors. xii. Production capacity of cotton yarn more than doubled between 1972 and 1975, resulting in a large exportable surplus. Economic returns from yarn exports are, however, low. Fabric exports have not increased due, in part, to profitable home markets, but also to low quality standards and pro- duction efficiencies. Exports of garments grew from a very small base to 3,850 tons in 1975, and new investments are taking place in this field. Wool product exports are insignificant, though there is excess capacity. xiii. Turkey's advantage in labor costs compared with European pro- ducers, although offset to some extent by lower labor productivity, gives Turkey a great potential for exports. Turkey's best access to the Euro- pean market is through the labor-intensive "making-up" industry. The con- sultants believe that, within that sector, Turkey's best prospects are in large-volume, standard-quality items such as: sheets and pillow slips towels dish towels domestic overalls terry cloth beachwear and underwear dressing gowns cotton dresses Jeans and trousers shirts and blouses xiv. Production of fancy or exclusive made-up articles would be more difficult. There are as yet few local fabrics and accessories of the required auality, and there would be problems in management and marketing. Nevertheless, further study of a possible development path for the fancy make-up sector would be justified. xv. An export oriented make-up industry needs a free choice in im- porting fabrics or procuring them locally. In the beginning, their main business will be contract processing of imported fabrics, using local fabrics, however, where these can be supplied at the right quality and price. Once local fabrics are incorporated in a substantial way in ex- ported garments, it will also be easier to sell the same or similar fab- rics for export. The make-up industry, therefore, will become the en- gine of growth for an export oriented textile industry. 1/ The conclusions in this section and the next section on leather and leather products draw heavily on two consultant's reports prepared for the mission. See references under Chapter IV and V.  - v - xvi. There is also a large demand in Western Europe for industrial fab- rics and a small though important market for both printed and knit highly fashioned fabrics - the latter are of particular interest to Turkey because of high labor content and possibilities for production in small units. The main constraint (and challenge) in both cases are the high requirements in terms of quality and delivery. xvii. Only a highly efficient industry can produce high quality goods, and most Turkish manufacturers are far from Western European effi- ciencies. Even abstracting from quality, the productivities of both capi- tal and labor in the Turkish textile industry are well below Western Euro- pean standatds, i.e. about 40 percent lower in the make-up trades. The weak points in the textile industry are the great number of non-integrated cotton spinning mills with inexperienced management and the SSI sector which is not yet successfully linked to the modern sector. The State textile group is strongly focused on the domestic market, and many of its plants are in urgent need of modernization. Nevertheless, the best Turkish firms are cap- able of competitive export production. xviii. The following action program could transform the textile/ clothing sector into a modern export industry over the next decade: (a) Export drive. The export drive must be led by the largest and most dynamic firms with proven management resources. Foreign investments or partnerships should be encouraged to gain access to technology and markets; leading European textile firms in recent years have established manufacturing links in e.g. Brazil, Greece, Portugal, North Africa. (b) Industry structure. In Western Europe, the small textile firms are being absorbed by large enterprises with better access to markets, management, and finance. Further concentration of production in the Turkish textiles/clothing industry is inevitable for similar reasons. For instance, increased integration between the make-up sector and the textile sector is desirable where the end product consists of relatively uniform, large-volume items. Special studies are needed to define the role of MSI and SSI in each sub-sector; this would be a task for the proposed Research and Develop- ment Center for MSI. There must be a program for aiding, expanding, and restructuring the domestic supplier industries (e.g. linings, buttons, zippers, dyes, etc.) to enable them to participate fully in the foreseen expansion and, possibly, to develop exports of their own.  - vi- (c) Technical assistance. Much of the quality and pro- ductivity gap between Turkey and advanced textiles manufacturers could be closed through technical assistance covering a range of activities; remedial action here is more urgent than any other measure. The workers need to be more closely associated with the productivity drive. Turkish lending institutions must push for expert assistance and managerial changes in those companies which are not yet well run. (d) Incentives. The general requirements with respect to incentives (concerted action, infant industry support, unrestricted access at world prices to strategic in- puts) were outlined above (paras. ix-x). The textile/ clothing industrv could serve as a pilot case for these revised policies. xix. Very preliminary estimates indicate that an initial export offensive spearheaded by some 25 new garment-making units (employing some 8,750 persons in the make-up factories alone) would involve investments of the following order: US$ Million Dyeing and finishing 100 Garment industry 75 Woollen and worsted 20 Filament weaving 7 Mohair industry 10 Professional services 10 222 Based upon this type of program, exports of garments and made-up goods could reach 30,000 tons by 1982 worth about US$200 million as compared with about 4,000 tons in 1974. The net foreizn exchange earnings, however, would deDend uDon progress in substitutine Turkish fabrics for imported fabrics in this export trade. xx. The program prepared by the consultants is intended to be realisti- cally geared, in a 6-7 year perspective, to apparent export market constraints and existing managerial and financial capabilities. It focuses on improve- ments and complementation of existing capacities rather than capacity expan- sion. Beyond this, the mission feels it is also important to study what might be the optimum long-run path for expansion, and how Turkey should phase its future textiles exports to the Common Market. One plausible target would be to use the whole of the present spinning capacity which roughly corresponds to Turkey's prospective raw cotton production. This might require the construc- tion of 25/40 new weaving plants and, if one-half of the fabrics were to be converted in Turkey, another 85 new make-up plants. The total investment would be on the order of $1.25 billion, of which the $0.25 billion invested in  - vii - make-up plants might create 30,000 new jobs. Mluch of Western Europe's textile industry, over the next decade, may migrate to developing countries, and Turkey is a logical candidate for a new regional textile center given its low wages, geographic nearness to Western Europe, Common Market link, and favorable political climate. Optimum expansion will call for close State- industry cooperation, the forging of new links with Westera Europe manufac- turers and traders, and foreign financial assistance. xxi. We have focused above on the market share to which Turkey might legitimately aspire in free and equal competition with other countries and with some element of tariff and/or quota preference within the Common Mar- ket as was foreseen when Turkey signed the Association Agreement with the Common 2Iarket. Although the Common Market, in recent years, has made sub- stantial tariff concessions to developing countries, it is realistic to expect that market access by the latter will be constrained by quotas and that Turkey would profit from its insider status. In a purely formal sense, there have been complaints that recent Turkish yarn exports have had a dis- ruptive influence in the meaning of the Multinational Fibre Agreement. The mission would not venture an opinion of the validity of this claim or the dovetailing of the Association Agreement with the Fibre Agreement. Materi- ally, the current industrial recession has hit the Western Eurcpe textile industry with particular severity, a shock superimposed upon a long-run trend of increased imports and intensified "rationalization" which reduced employment in Western Europe's textile industry by about one million be- tween 1965 and 1975. Massive imports have led certain associations of the European textiles and clothing industries to question the very principle of international division of labor as applied to their industry. Nevertheless, the prevailing opinion in Europe probably favors the access of developing countries to the European Common Market in accordance with their true com- parative advantage, subject only to an orderly transition and the preser- vation in Europe of minimum capacities justi'ied on strategic preparedness grounds. The Turkish Government would, of course, want to make it own eval- uation of these factors before drawing up (with the Turkish textile industry) a program of supported export development. Leather and Leather Products xxii. The main end products of the leather industry in Turkey are footwear (about 35 million pairs per annum) absorbing virtually the entire domestic production of suitable bovine hides, and leather coats made out of sheepskins (1.8 million garments, virtually all for export, valued at over $60 million in 1975, or roughly 12 percent of Turkey's exports of industrial products). There are also small exports of various leather products, like suitcases, briefcases, wallets, etc. Turkey has a sizeable availabilitv of goat skins but these are mainly exported in the raw state. xxiii. Most of the production comes from many small workshops working under extremely primitive conditions (bad facilities, simple equipment, child labor, low wages, and, in the case of the tanning industry in Istanbul and Izmir, very bad pollution of adjacent waters). In footwear, the ten largest fac- tories together produce only about 4 million pairs, of which the largest, the  - viii - State Sumerbank factory, makes about 1.5 million pairs at an average value of about U.S.$5 per pair. In leather clothing, there are about 1,500 small producers; 15 medium to large factories account for about 40 percent of the output. Tanneries are also small. The 150 members of the Turkish Leather Manufacturers Association produce about two-thirds of the output; the re- mainder comes from many small operators. Sumerbank is an important producer of leather, though mainly for its own shoe plants. Reorganization and mo- dernization of the industry is overdue. xxiv. The industry is important in several ways. Virtually the whole production value is generated domestically. It is highly labor-intensive; the leather coat industry alone employs about 30,000 people. Its most valuable asset, perhaps, is represented by the existing skills and traditions. To these, another element has recently been added: engineers graduated from the UNDP sponsored Leather Institute at Pendik will provide the cadres by whose help a modern tanning industry could be rapidly developed. xxv. The market for Turkish leather and leather products in Western Europe is examined in a special consultant study undertaken for the present mission (See Reference under Chapter V). Market prospects are deemed to be excellent for semi-processed leather (Italy), finished leather (West Germany, U.K., France), leather goods (particularly Britain), leather clothing (where Turkey should now aim increasingly at the higher end of the market), ard footwear. The export potential in footwear is illustrated in the afore- mentioned consultant study, by a case study of a Turkish manufacturer who has achieved success in this field. The industry possesses excellent design and making-up skills. An exporting shoe industry was born in Italy after the war from similar beginnings. Italy's example was followed bv other countries like Spain and Brazil. The shortage of domestic leather need not be con- straint to Turkey; Italy is a major importer of hides and leather in various stages of processing. Tne essential condition for success, besides skilled labor, is managerial and marketing skills. The edge of success goes to the country with the lowest wages. xxvi. Unfortunately, the existing framework raises several obstacles to the full realization of this potential. These would need to be rapidly re- moved because fortune will smile only on those who act quickly and decisively to exploit the gaps left by the decline in the competitiveness of Western Europe's leather and leather products industry. The leather and leather pro- ducts industry is one of the most disfavored by the present combination of protection with an overvalued exchange rate. In addition, it is wholly un- reasonable that a potential export industry be hamstrung by severe r_scric- tions on strategic imports like accessories, trimmings and buckles for foot- wear, dyes for leather finishing, or tanning materials and modern machinerv, where these are not yet manufactured in Turkey in the desired qualities, or at prices which are internationally competitive. xxvii. Even drastic improvements in the external environment, however, will have small impact unless paralleled by major changes in the industry's struc- ture. These would first of all involve a resettlement of the tanning industry  - ix - from its present crowded and polluting quarters, particularly in Istanbul and Izmir, to modern tanneries-nearer to the point of slaughter. Secondly, this would need to be combined with (and would indeed stimulate) drastic improvements in the present systems for the slaughter, preservation and grading of hides and skins. Grading will serve as a stimulus to quality improvement and, at the same time, guarantee that higher quality hides are reserved for uses where quality is essential and will, therefore, command a higher price for the final product. The actual location of tanneries would need to be closely coordinated with the reorganization of the meat packing industry presently underway. Thirdly, the tanning industry in Western Turkey industrial centers would need to be refocused increasingly on the final stages of processing; the necessary technical assistance would be provided by the above-mentioned Institute at Pendik. (This recommendation is contested by some Turkish experts who feel that even the first dressing should be done in close contiguity to the first tanning stage. The reasons behind the mission's recommendation are detailed in para 5.27). Fourthly, project studies should be made regarding possibilities for competitive production of supplies and machinery for the leather and leather products industries. Fifthly, targets and modalities for the necessary restructuring of, in particular, the footwear and tanning industries would need to be studied; a program along the lines of the Spanish acciones concertadas 1/ is one possible approach. Joint ventures with European manufacturers or distributors should be explored as the most raDid wav of gaining a foothold in the Common Market. Investment 1977-80 in new equipment for tanneries and finishing plants are proposed at $60 million equivalent (excluding buildings, working capital, etc). In addition, substantial investments would be required for the restructuring of the leather processing industries. Medium-Scale Industries xxviii. Medium-scale industrial establishments are bounded at the upper end by some 500 Turkish establishments employing 200 or more workers and at the lower end by the multitude of small establishments engaging less than 10 persons. MSI, at present, appear to be underrepresented in the industrial structure; some 4,000 MSI account for only 19 percent of total employment. (See Diagram II, p. 47). There are some indications that this could be due to a hiatus in investment incentives and financial support. Yet, as Turkey turns to labor-intensive production for export, there would be an important role for MSI both as direct manufacturers for export and as sub- contractors and suppliers of ancillary materials and services. Their po- tential and structure is insufficiently known, however. The mission re- commends the establishment of a Research Institute for Medium Industries which would undertake sector studies to define the opportunities and constraints on MSI in each sector and also promote the necessary project and market stu- dies, structural rationalization, etc. 1/ For definition, see para 6.3  xxvix. If such an expanding role can be identified for MSI, their potential financial needs would be substantial. These needs could be satisfied through TSKB extending their lending towards somewhat smaller borrowers than normally financed through that institution and/or SYX3 initiatesg a new lending program specifically focused on MSI to be dis- bursed through its bank shareholders and/or Halk Bank extending its range to somewhat larger borrowers than presently served. These options are not mutually exclusive, and the domains of the different institutes could be- come defined through experience and mutual adaptation. However, for SYKB, this could become a major focus rather than a subsidiary activity not organi- cally related to their present operations as would be true for the other two institutes. Small-Scale Industries xxx. Small-scale industries mostly employ 1-4 workers; the segment of 5-9 workers is less prominant. SSI account for 42 percent of the employ- ment and 17 percent of the value added in the manufacturing-sector. In foot- wear and clothing, metal products, wood processing, furniture, and leather products, they provide a much higher volume of employment than large manu- facturers, and they are more or less equal in electrical machinery and transport equipment. They are located mainly around the large cities; certain trades are concentrated in certain regions. xxxi. In many cases, SSI lack economic competitiveness, surviving only by making low quality goods for local (as distinguished from national) markets and by paying substandard wages to juvenile labor work-ng in con- fined premises under unhealthy or unsafe conditions. Many SSI will not be able to make the transition to modern industry, others can be brought into the mainstream only by industry-wide structural changes and by tech- nical assistance, including the development of suitable "intermediate" tech- nologies. The main asset of SSI is the natural skills, determination and specialized experience of those working in the industry. These productive forces must be utilized, even where SSI integration with modern industry would change their functions, organization, size, and very essence drasti- cally. xxxii. Successive five-year Plans pay little attention to SSI. The Third Plan explicitly states that increased use of capital-intensive technologies in industry may increase urban unemployment until 1987. The major State action has been in the promotion of industrial estates and low-interest loans through the Halk Bank (People's Bank). A proposal for a National Centre for SSI, included already in the First Plan, has not been implemented. Handicrafts, according to the Third Plan, have a better potential than SSI (it looks at the latter as smaller, less viable copies of the larger prototype). A credit program for handicrafts and a carpet making training program have been imple- mented. However, a comparison with e.g. Tunisia suggests that much more could be done, particularly in export marketing (including sales to tourists) and in artistic rejuvenation of the old designs. Administrative and financial organizations dealing with SS7 are highly politicized with frequent changes in personnel. The Central Confederation of SSI has been unable to promote the types of programs required.  - xi - xxxii. Since 1964, the Turkish Government has helped financing a large number of industrial- estates spread all over the country. Tneir success has been somewhat constrained -by the failure to allow for the expansion of the original workshops and the paucity of common facilities. A UNDP sup- ported pilot project at Gaziantep provides a full range of extension ser- vices; the economic returns from this type of project are still to be evaluated. xxxiv. With a guarantee from their credit cooperative, to which most SSI must belong by law, SSI can borrow limited funds at highly subsidized rates from the Halk Bank which has offices all over Turkey. The Halk Bank lend- ing program for 1976 includes TL 1 billion for SS! and a similar amount for the lower range of MSI. There are various proposals to increase financial assistance to SS!. However, the mission believes that the answer is not so much subsidized finance (some of which will tend to be diverted to non- productive purposes) as technical and project assistance, aid in restruc- turing and aid in retraining and relocation of those displaced by the on- ward surge of modern industry. XXXv. A program allowing SSI to make their maximum economic contribu- tion to industrial growth might include the following elements: (a) Sectorial studies identifying the economic poten- tial and development problems of SSI within those industries where they are most important. Incor- poration of the findings of such studies in the future national five-year development plans. (b) Reexamination of the incentives system to determine whether it might not contain an unwanted bias in favor of large industries and whether sufficient weight is given to employment creation. (c) Reinforcement of extension services (particularly in the field of technology) and research on appro- priate technologies for SSI. (d) Encouragement of restructuring of production and/or marketing etc. where such restructuring is deemed imperative. (e) Upgrading of industrial estates, particularly by providing more ample facilities for expansion of individual units and a stronger technical assis- tance and common services component. Recasting of the estates into autonomous, profit-making cor- porations; this would not necessarily rule out pre-determined State subsidies.  - xii - (f) An improved Balk Bank contribution through addi- tional sector and feasibility studies, increased aid in project preparation, and stricter control that subsidized finance is used only where needed for directly productive purposes. (g) A greatly intensified program for the development of handicrafts production and exports. xxxvi. The proposed National Center for SSI development (administration of estates, assistance packages for certain industries, technical exten- sion services) should probably be replaced by a smaller institute for SSI research and extension services with a majority of SSI representatives on its board, though with an initial State or Halk Bank contribution. Its task would be "trouble shooting" rather than administration. Its main purpose would be to find new roads for SSI, new linkages with mcdern in- dustry, new facilities, and new technologies. Some of the detailed ser- vices envisaged for the National Center could be undertaken in connection with the industrial estates or through the Balk Bank.  I. INTRODUCTION 1.1 This report focuses on development potential and policy require- ments in two sectors: export-oriented manufacturing industries and small industries. These sectors were selected for the following reasons. 1.2 Industries with an export potential. In the past, Turkish indus- trialization has been focused on import substitution with capital and technology-intensive industries in the foreground, often in the State sec- tor. The limitations of import substitution as an industrialization policy and Turkey's decision to join the European Common Market have created new opportunities for developing export industries and a new urgency in exploiting these opportunities. The present report examines two industries (textiles/ clothing and leather/leather products) deemed to have a great export potential in the Common Mfarket framework. These are industries where Turkey would have a comparative advantage, with differentially high balance-of-payments and employment benefits per unit of investment. Historically, these industries have been relatively neglected in Government planning, and they are now faced with major structural problems and loss of growth momentum. Although the mission focused particularly on those two industries (now accounting for about 38 percent of manufactured exports), it is convinced that the situation faced by other labor-intensive industries with an export potential (e.g. metal manufacturing/engineering, or, on a smaller scale, handicrafts) is very similar. 1.3 Small and medium industries. Tne main reason for singling out small and medium industries for special treatment is the notion that (a) they suffer from special constraints in their access to management, tech- nology, market or finance, (b) that these constraints are often institu- tional and remediable rather than due to genetic flaws. Furthermore, these weaknesses have become critical at a moment when Turkey's integra- tion with the Common Market calls for a radical transformation in market- ing (exports rather than local), technology (e.g. stepped-up qua'itv re- quirements) and finance (larger, better equipped units). Viewed in this perspective, most Turkish establishments are small or medium. However, the handicaps ddscribed are relative, and we shall draw a further dis- tinction between medium establishments (,IS), say those employing 10-200 workers and really small establishments (SSI) employing less than ten workers. 1/ Another reason for paying special attention to SSI (this argument does not necessarily apply to MSI) is that they tend to provide more employment per.unit of investment. 1.4 The exact borderline between SSI and MSI could easily be dis- puted. Some SSI partake of the quality of MSI and vice-versa. Never- theless, our conception of the two groups is as follows. SSI work mainly 1/ These categories are adapted to the Turkish situation. By Western European standards, the appropriate borderlines could conceivably be 50 workers for small establishments and 500 workers for medium establishments.  - 2 - for the local market, with small capital investment and little specializa- tion of functions. In this group, many barely manage to hang in by paying subnormal wages, by employing child labor, by working under unsanitary and polluting conditions and/or by subsisting in oligopolistic and in- efficient markets. The MSI, in contrast, would far more frequently be connected with the national market and have a potential for export pro- duction. At the same time, they would tend to have professional manage- ment and employ engineers, accountants, etc. specializing in their re- spective functions. 1.5 This also means that the specific needs of the two sub-groups are different. The SSI need services which would make it possible for them to perform their present functions more effectively (technical assistance, training, better organized industrial estates). The MSI need assistance to bring them into the mainstream of increasingly export-oriented modern industrial activity, where management has to be professionalized and its tools sharpened, functions like marketing and quality control exphasized, a flexible attitude taken to industrial restructuring and regrouping. 1.6 In accordance with its terms of reference, the mission devoted special attention to SSI. This was inspired by the Bank concern for in- volving the urban and rural poor in the productive growth and transition of the economy. However, the problem of MSI is of equal importance and greater economic urgency. As this report will show, the MSI have fallen between two chairs. Neglected, in part, by the planners, they do not share in the special facilities available to SSI nor fully in the generous incentives available to large industries. There seems to be a correspond- ing hiatus in the financial framework making it difficult to obtain fixed assets financing in the range of, say TL 5-25 million. 1.7 To give added depth to the exposition, our study starts out with a brief summary of the recent growth of Turkish manufacturing industry and of Government industrialization objectives and growth targets for industry. This is followed by a review of the present protection and incentives framework. More than official declarations and plans, this largely de- termines how industry will grow: which industries, inward-oriented versus export-oriented, large versus small. Apart from its possibly more general interest, there are two reasons for reviewing the protection and incen- tives framework in this context. First, as the reader will find, it is necessary to unravel the incidence of protection and incentives before an estimate can be made of the economically relevant (shadow) exchange rate, and an idea gained regarding the present competitiveness of specific in- dustries. Secondly, it is also necessary to determine whether existing incentives and the existing institutional framework as well are adequate to promote the desired development of fledgling export industries. The final three chapters deal with, respectively, the textiles/clothing, leather/leather products, and small industries (with a brief comment on medium industries).  - 3 - II. INDUSTRIAL GROWTH A.ND EXPORTS A. Industrial growth 2.1 Turkey has a high industrial potential. The country has a good climate, a strategic location (e.g. near the Middle East oil transit lanes), substantial agricultural and mineral wealth, and a vigorous population. The domestic market is large enough to support the development of many industries which, in smaller countries, would be constrained by economies of scale. 2.2 The growth of industry during the last fifteen years (coinciding with three successive Five-Year Plans), has been rapid. According to offi- cial figures, the growth in real GDP in industry (at 1968 prices) averaged slightly above 10 percent per 7ear for the Second and Third Plans. Even if allowance is made for a certain staciscical upward bias (growth was more rapid in industries where Turkish prices exceed world prices), this produc- tion growth was above average for developing countries (see Diagram I, p. 4, and Table 2.1). The share of manufacturian in GNP at constant prices increased from about 14 percent in 1963 to about 20 percent in 1975. The Growth of Manufacturing Industrv in Turkev 1962 1966 1970 1974 1975 Gross domestic product at factor cost (Million 1968 TL) 68,964 90,351 112,037 147,022 160,017 Gross domestic product in manu- facturing (Million 1968 TL) 8,732 13,636 19,684 29,954 32,379 Share of manufacturing in GDP (Percent) 12.7 15.2 17.6 20.4 20.2 Employment in Manufacturing (Thousand) large and medium est.,. 411 506 638 (1973) small est. 325 Share of industry a! in economi- cally active population (Percent) 8.3 9.2 11.1 12.7 (1967) (1972) a/ Iacludes mining and water, gas and electricity which account "or roughly 5 percent of the total for "industry". Source: State Institute of Statistics, S.P.O., Turkish Industrialists and Businessmen's Association. OECD, Labor Force Statistics, 1963-1974  SELECTED DEVELOPING COUNTRIES: Giowili u GROWTH IN MANUFACTURING, 1962-71 MJIuaIctdolUou Rolated to Per Capita Gross National Prodiacli IUt6217 1 19 _ 18 * Koiea 17 16 - * Su buapol e 15 14 12 *l Etiaudwl Iit uml,Ivia -i)GGreece 9 CubIa Cyius I MteXICI) i6 _~ lUIlISIdO *Prnii ~PouItlp j / -olaa * Syla a B0a,Ll * Aitlt-lelmua b _ i\*Colomlibi 5-_ * * Doniulu,; lcjRepublic GuuI.emalu' 4 3 _ 2. l~~~~ _ 500 1.00(1 1500 2.000 2.bOO r(tJe"U- '7t1 .......... d1SIu.X.-t."ud ,.,OWilsildul.d ............ ~PER CAIlIA GNP 1975 dI (J4 I 17 t i. ~ u,~~ t11(d tI,s ,,,,MI- 4 Vs,dJ I II.mIy (I 9I2 i' .. V', I S..,Iou  The share of manufacturing in total employment is relatively low. Small es- tablishments make an important contribution since, according to the 1970 in- dustrial census, they accounted for nearly 40 percent of total manufacturing employment. 2.3 Growth in recent decades has been heavily focused on capital- intensive production of basic industrial and agricultural inputs ("interme- diate goods"); their share of total industrial value added increased from 21 percent in 1950 to about 40 percent today. In contrast, there has been only moderate growth in lighter, labor-intensive consumer goods and engi- neering industries (Table 2.2). 2.4 One aspect of this pattern of industrialization common to many industrializing countries of a similar size and stage of development as Turkey is the thrust towards import substitution to the relative neglect of industrial exports. lianufactured imports represent only about 7 percent of the total consumption of manufactured articles, a proportion that has, more- over, declined from 16 percent in 1963, and manufacturered exports only 3 percent of manufacturing production. Curiously, though there is relatively little trade in manufacturing, manufacturing accounts for a very high propor- tion of total trade: the vast bulk of the import bill which is heavily weighted with machinery and transport equipment, steel and chemicals (Table 2.3) and about 38 percent of total exports (1973). 2.5 Encouraged by measures which will be described in Chapter III, exports of manufactures grew five-fold between 1970 and 1975, measured in US$ equivalent (probably a little more than one-half that rate measured at con- stant prices). Exports include processed foods, non-ferrous metals (copper, ferro-chrome, boron products), some lumber, and marginal quantities (i.e. marginal in relation to the industry's capacity) of refined petroleum pro- ducts, cement, glass, and sugar. In recent years, the most rapidly growing industrial exports have been from the two industries singled out for study in this report, with leather garments and cotton yarn showing prominently (Table 2.4). With the exception of boron products and leather garments, however, Turkey as yet has no true export manufacturing industry in the sense of an industry mainly dedicated to sales to the world market. 3. Government strategies 2.6 Turkey's pattern of industrialization is only, in part, an eco- nomically determined response to resource endowment and market forces. It reflects a long-standing policy (in effect since the 1920s) to make the country industrially independent. According to this concept, a nation's industrial power is closely correlated with the development of its basic industries. Interwoven with this theme is another theme, namely that the State should be responsible for the development of basic industries whereas private industry should concentrate on lighter (i.e. more labor-intensive) industrial processing industries. Up to a point, this division of labor is predetermined: the investments and risks in large metallurgical and chemical complexes are too large for private domestic entrepreneurs to undertake. A  - 6 - miajor role for the State is, therefore, accepted by all political parties. At the same time, as we shall see in Chapter III, attempts have also been made to accelerate capital formation in private industry in order to achieve balanced w-th. 2.7 The above industrialization philosophy is reflected in the Five- Year Plans which are mandatory for the public sector. To a large extent, the Plans also govern investments in the private sector since these are steered through import controls on equipment and very sizeable investment and production incentives. 1/ Notwithstanding Turkey's accession to the Common Market, the Third Five-Year Plan continued the emphasis on (for the most part capital-intensive) intermediate and investment goods industries which were planned to grow at 14-15 percent and 16-17 percent respectively, while con- sumption goods, where the best immediate export prospects lie, were schedu7ed to grow at 6.5-7.5%. Production of chemicals, iron and steel, and non-rerrcus metals, machinery and electrical equipment was to be doubled between 1972 and 1977. Though the share of industrial exports in total exports was screcuies to grow from 25 percent to 40 percent, these exports, for the most part, are only a marginal element in industrial production. 2.8 In economic terms and in a medium-run perspective, the foc_sing on capital-intensive import substitution was expensive. Adoption of alterna- tive, more excport oriented and more labor intensive industrializacion poo-- cies, at identical levels of investment, would presumably have been associatea with substantially higher growth rates in industrial production and employ- ment.2/ This is obviously a subject deserving close examination; some o: .he policy issues are briefly touched upon in the next section. I/ For the purpose of this guidance, it does not matter that the in- centives, to a large extent, only compensate for an overvalued exchange rate. The point is that, without the incentives, new investments would not be profitable. 2/ According to a study by Professor Anne Krueger (see Annex H), a postulated alternative, more labor intensive and export oriented industrial-zation pattern, would, in both the First and the Second Plans, have been associated with a roughly 115 percent increase in manufacturing output instead of the actually achieved 65 per- cent. In spite of the higher rate of growth, requirements of im- ported capital equipment and intermediate goods would actually have beeu lower under the alternative path, and over 300,000 more jobs would have been created over the ten-year period. It is true that Professor Krueger has not demonstrated the feasibility of this al- ternative path (in terms of markets, competition, etc.). Yet, our study of the textile/clothing and leather/leather products indus- tries in Chapters IV and V indicates the existence of a substantial underdeveloped potential, and the same would probably -2'd true for other light industries.  -7- C. Some issues of industrial nolicv 2.9 The farmers of Turkish industrialization are faced with certain hard choices. They are committed to achieving economic integration with the Common Market by 1995. The Market offers vast opportunities for Turkish industries in areas where they have a comparative advantage. The dif.icalty, one senses, lies partly in defining areas of comparative advantage. In fact, one of the major reasons advanced for the heavy emphasis on certain capital-intensive and technology-intensive industries is that Turkey wants to be prepared to meet competition in these industries before its trade barriers are lowered. A related problem lies in Turkey's ambivalent, historically determined attitude towards foreign investment. Foreign investors are viewed essentially as would- be providers of new technology rather than partners of development in compe- titive export industries, the only areas where foreign investors would have a really major interest and where, by the same token, thev could make a real con- tribution to the upgrading of the Turkish industrial potential and the crea- tion of new employment opportunities. 2.10 The choice between export-led industrialization and the creation of a more powerful position in basic industries is complicated by the different position, structures, and objectives of the public and private sectors. - The public sector is represented, princ4pally, by 13 major State Manufacturing and Mining Enterprises or Holdings with assets ranging between $80 and 3530 mil- lion (1972). These probably account for about one- half or more of the industrial investments but less than 20 percent of the manufacturing output. They also represent a substantial accumulation of manager- ial and technical know-how. However, by their very nature (capital-intensive and technology-intensive), these represent industries which have very little employment potential and, at Turkey's present stage of development, little export potential. Moreover, their lack of any corporate links with advanced world industries creates major problems in keeping abreast of technological and market developments. - The private sector is strategically placed in indus- tries where Turkey has a comparative advantage (tex- tile and clothing, leather and leather products, rub- ber and plastic manufactures, light metal fabricat- ing and engineering, pharmaceuticals, etc.). Yet, for the most part, these units are too small, ineffi- cient and financially weak to leap into the export market. Many of the larger units in the private sec- tor, like cement plants, glass and ceramics factories, or even the newly created motor vehicle and alLoyed steel industries are essentially focused on t;he dom- estic market with no foreseeable export potential.  - 8 - 2.11 In our view, industrial exports, in Turkey's case, are a necessary condition for balanced, self-sustained dynamic industrial growth. It is not only that development of certain light, labor-intensive industries is in line with Turkey's competitive advantage. Export growth in these areas would also tend to increase the demand for basic industrial materials (like steel, non-ferrous metals, plastics, synthetic fibres, and equipment). The reverse, however, is not necessarily true: downstream industries will be thwarted where major inputs, although produced domestically, are not made available ac the right price, in the right quality and at the right time. The main objec- tive of Chapters IV and V is to identify the export potential of two important industries, which, today for the most part, have a low production efficiency and a weak structure, and to examine what action is required to bring their potential to bear more fully. Before doing so, however, it is important to provide some background re8arding the protection and incentives framework which will guide manufacturing investments. This is the object of the next chapter. III. THE INCENTIVES FRAIIETWORK AND INDUSTRIAL EXPORTS A. Introduction 3.1 The policy of industrialization in a mixed econcmy has been pur- sued systematically through the Development Plans that direct investments in the State sector. In the private sector, the Plans are indicative, and investment is not directly controlled. However, through protection and in- centives, the Government has a decisive influence on private investment de- cisions. 3.2 A firm planning a new investment will normally be given investment incentives, including exemption from tariffs on capital equipment and a tax holiday with respect to profits. Its output will be protected against im- port competition, irrespective of its price disadvantage and, if it wishes to export, it will be assisted by preferential credit and rebate of taxes and duties on inputs. The total impact of the incentives is difficult to follow. The system, as a whole, is complex and its impact varies widely :rom project to project. 3.3 Historically, main reliance was placed on protection against imports through tariffs, quota restrictions and State Trading Monopoly in imports (in e.g. steel, fertilizers, paper). Gradually, other incentives were intro- duced (particularly exemption of duties on imported equipment) to raise pri- vate investment in manufacturing and to offset disabilities arising from the import regime. Although the combination of State industrial enterprise and State support of manufacturing induced rapid industrial growth, fully pro- tected growth was associated with certain structural weaknesses and ineffi- ciencies. In particular, Turkish industry suffered from a lack of export competitiveness which was bound to interfere with future growth.  - 9 - 3.4 In the 1960's, incentives for export production were introduced in the form of rebates of taxes and duties Daid on inputs. These rebates had little initial effect because they were insufficient to offset the combined effect of excess input costs (high domestic prices for certain basic mate- rials) and the overvaluation of the Turkish lira. In 1970, however, the lira was devalued by 67 percent. Since then, the incentives have played an important role in promoting industrial investment and exports. 3.5 In the long run, however, export incentives are of limited value unless the industry itself is suitably structured and inherently or po- tentially competitive. The experience of Western Europe before and after the creation of the European Economic Community demonstrates that most enterprises become stunted when confined to small national markets and can attain their full potential only under the stimulus of large markets where they have to measure up against the best in the field. In Turkey, highly autarchic, protective policies have led to the development of many industries which either lack comparative advantage or are frozen in an oligopolistic structure. These industries have imposed a high cost structure on much of Turkish industry, and have attracted resources at the expense of other in- dustries that are inherently more competitive and can use Turkey's resources most efficiently in the long term.l/ 3.6 Turkey's agreement to enter the EEC (according to which all customs duties and quotas on imports from, and on Turkish exports to, EEC countries would be eliminated over the next two decades) will mean that the protected industries will be forced to adjust to a competitive position, and will open new and varied opportunities for manufacturing exports. It also creates an urgent need for identifying areas of comparative advantage, and for expediting structural change. However, the transition to an open economy must be a gradual process, and, in the interim, it is essential to ensure that the system of incentives is designed to meet new needs and opportunities, parti- cularly in the development of exports. 3.7 To this end this chapter reviews the present protection and incen- tives framework. Particular attention is paid to its impact upcn the per- ceived expansion potential in textiles/clothing and leather/leather products industries. However, what is said about these industries is believed to be applicable to a range of other industries like light metal fabricating and engineering industries, plastics processing, handicrafts, etc. More gen- erally, the Report also questions whether the system is sufficiently sup- portive of medium enterprise in a way that would allow them to make their potential economic contribution to Turkey's growth and development. Before examining these specific impacts, however, it will be necessary to scrutinize the more general objectives and structure of the existing framework. Further detail is provided in Annex A. 1/ See Annex H and, for a full description of the impact of the import regime, Anne Krueger, Foreign Trade Regimes and Economic Development: Turkey, National Bureau of Economic Research, New York, 1974.  - 10 - B. The Incentives Framework and the Exchange Rate 3.8 A few words need to be said about the interrelationship between the exchange rate and the protection/incentives framework. These instruments in practice are always used together to adjust the relationship between domestic and world prices. In Turkey, there are a large number of taxes and other charges on i--ports in addition to tariffs which differ considerably between various commodities. There are also subsidies (rebates and various incentives) on exports. As a result of these taxes and subsidies, the Turkish prices for traded goods tend co be higher than world market "border" prices converted at the official exchan.-e rate. The weighted average effective exchange rate for all traded goods (the weights being the respective trade volumes) is 22 percent higher than the official exchange rate. 3.9 Diagram II (p. 12) is a partial illustration of the actual Turkish situation in the past three years. The horizontal lines refer to the situa- tion at (a) the present nominal exchange rate, (b) the effective exchange rate. The comparisons shown are between the landed cost of imports and the domestic price of the equivalent items, i.e. they refer to the actually utilized protection rather than the theoretically available protection. 3.10 The unevenness of actually utilized gross protection is quite striking. On the one hand, we have very high price differences for petro- chemicals, fertilizers, and paper which are all highly capital inten- sive. On the other hand, a number of industrial products are priced at or below the world market at the effective exchange rate. Items produced by the industries in which we are particularly interested, namely textiles/ clothing and leather/leather products, are all in the latter category, i.e. they appear to be price competitive with respect to imports at the effective exchange rate in spite of the fact that some of their inputs, notably arti- ficial and synthetic 'ibres, are very expensive. 3.11 The price relatives shown in the diagram cannot be taken as a final measure of protection or support. To measure the total impact of the exchange and trade control systems one needs to calculate the net effective protective rates which would also need to take into account the prices paid for inputs as well as any subsidies or discriminatory taxes. Although detailed calculations have not been made, it appears th.at the effective protection, if any, on cotton textile products and leather footwear is low (most cotton textiles sold at a lower premium over t>e world price than the price premium on domestic cotton; prices for dcmestic leather footwear are cheaper than the cost of equivalent duty free imports). On the other hand, we believe that the gross protection rates for items like petrochemicals, fertil- izers, and paper are broadly indicative of (and do, in fact, undere.: ate) their lack of competitiveness. These industries receive domestic materials at prices which, for the most part, sho; . rar lesser differential in relation to border prices than the prices for th inished product. This means that, in fact, the percentage protection of their conversion margin is considerably higher than the protection of tthe finished product price.  - 11 - 3.12 One additional point should be made regarding protection. If a product is imported at an ef'ective exchange rate 22 percent higher than the official exchange rate, this does not necessarily mean that the product would become competitive if the official exchange rate was adjusted accord- ingly. This would be true only where the domestic conversion cost (the sum of "factor" payments for capital and labor and taxes) remains constant which, in turn, would happen only where all charges against capital were for locally made, non-tradeable assets. Where production is highly capital intensive and most of the assets are tradeable, conversion costs could, at the limit, rise nearly pari passu with the exchange rate. A calculation for the Erdemir steel project indicates that an exchange rate adjustment by 22 percent might raise the conversion cost by 19 percent. 1/ In con- trast, the competitiveness of industries with a high labor content in their conversion costs is very sensitive to assumptions regarding the exchange rate. 3.13 Since the protection system is associated with an official exchange rate lower than the average effective rate, it discourages exports in the absence of compensatory export payments. Some agricultural and mineral industries export without assistance and are, in fact, taxed through the existing exchange and trade regime. For many industrial products, on the other hand, the Turkish export rebates offset the exchange rate dis- advantage, in some cases generously. C. Investment Incentives 3.14 Investment incentives are a key policy instrument for directing private industrial investments in accordance with the Government's Five-Year Development Plans. The incentive measures available to each industry are specified in the Annual Plans. Each project sponsor is given an investment certificate, indicating incentives for which he is eligible. It also speci- fies the commitments he has undertaken, particularly with a view to exports. Because of the over-valuation of the currency (in the technical sense defined above) and the need for infant industry support, few projects are viable without such a certificate. By far the most important investment incentive _s the exemption from customs duties and other taxes on imported equipment. Other incentives include prominently a holiday from payment of corporate profit taxes, and medium and long-term credits at concessional rates of interest. Both private and state enterprises are eligible for investment incentives. These incentives are described in detail in Annex A. 3.15 The exemptions from duty have been most useful to the chemicals, textiles and power industries, which in 1974 used 55 percent of the 'L a.3 billion duty exemptions, worth 40 percent of total fixed investment. nhe tax holidays, which are worth about TL 900 million per annum in income tax foregone, were of most value to the chemicals, textiles and cement indus- tries, which accounted for 62 percent of the TL 11.3 billion investment eligible for this incentive in 1974. 1/ We are talking about the economic cost; the financial cost would rise at the same rate only if all assets were revalued in proportion to their tradeable element, and the contractual returns of creditors and expected returns of shareholders were revised upwards in the same proportion.  - 12 - RATES OF PROTECTION BEFORE AND AFTER HYPOTHETICAL EXCHANGE RATE ADJUSTMENTS Adjusted Apparent rate of protection rate of protection 100- -140 Ijustedex- ! I _ so L 120 1co 60 0~~~~~~~~~~~~~~~~~~~~~~~ 40~~~~~~ 0~~~~~~~~~~~~~~6 0 20 <~~- 40~~~~~~~~~~~~~~~~~~~~~~~~~4 3nge rate 0 - 0 60 20~~~~~~~~~~~~~~~~~I~~~~~ aNord Bank-1 70!  - 13 - 3.16 The design of the. incentives encourages capital-intensive pro- duction, particularly that with.a high degree of import content. Such production can then be sold on the protected domestic market, and receives high effective protection, because of the duty free equipment imports. The incentives have a further, more general effect on exporting industries. The bias towards capital-intensive industries means that labor-intensive indus- tries, for example clothing or leather goods, receive less benefit; in effect, the design of the incentives acts against industries that have potential in export markets because of low labor costs. Of equal importance is the risk that a distorted relationship between capital charges and manpower charges may lead to the adoption of overly capital intensive methods of production. This observation is highly relevant to the recent and planned development of the Turkish textiles industry (para. 4.27). 3.17 The investment incentives affect extorts in several other ways. The exemption from customs duties and taxes on imports of equipment gives Turkish industry access to such goods at world prices (indeed subsidized prices, if the effect of the "overvaluation" of the currency-is considered). In addition, medium-term credits are made available for export-oriented projects (i.e.'projects with planned exports over a five-year period of at least 25 percent of output or-more than US$1 million, or 12 1/2 percent/US$1/2 i&illion in underdeveloped regions). These credits have a 4 percent interest subsidy and are exempt from the Banking Transaction Tax of 25 percent of interest and commission charges. The amount of such credit was TL 3.9 billion in 1974, and TL 5.9 billion in 1975, giving.a total subsidy and tax exemption of about TL 440 million in the latter year. Ea 1974, TL 2.5 billion, 64 percent of the credits, were supplied to the textile/clothing industry. 3.18 In spite of these incentives, most export commitments have not been met. In 1974, the only exceptions were textile and clothing projects with planned exports of $21 million and actual $35 million. For other projects, exports at $4 million were well below the target of $17 million. In 1975, no industry met its commitments; actual exports were only $41 million com- pared to the target of $112 million. Fir-ms have been optimistic in their export projections, and most of the export-oriented credit has really bene- fited production for the domestic'market. In-some cases, firms may have deliberately overstated future exports to obtain cheap medium-term credit. The tying of cheap credit to- a promise of export is not an efficient way of encouraging exports. It would seem better to give an interest rate subsidy related to the extent to which exports-do, in fact take place. D. Protection (i) The Svstem. 3.19 A restrictive import regime has been a cornerstone of Turkey's economic policy, both as a means of conserving foreign exchange and of protecting domestic industry. Imports are controlled mainly by quantita- tive restrictions, but also bv customs duties. All imports are licensed. Subject to foreign exchange availability, licenses are issued freely to  - 14 - goods on "liberalization lists", which are, however, subject to customs duties. Other goods are restricted to annual quotas by value. Finally, imports of many goods, especially consumer goods, are not permitted. Annex A describes the import regime in detail. 3.20 The liberalization lists include raw materials, chemicals, medi- cines, spare parts and some investment goods, where import is considered necessary to achieve development plan targets, and domestic capacity is unavailable or insufficient. The quota list is more protective and restric- tive, covering commodities of which there is some domestic production, or which are considered less essential to development. When domestic production of a good on the liberalization lists starts, the manufacturer can apply to have this good either transferred to the quota list if domestic capa- city is inadequate for domestic demand, or to be prohibited if capacity is sufficient to meet demand. 3.21 Examples of tariff rates are shown in Annex Table A.2. Tariffs are generally lower on raw materials than on semi-finished and finished products. Rates vary widely with very high levels on many consumption goods -- 100-150 percent on clothing and leather products - and lower rates on industrial materials and equipment -- 50 percent on PVC and 40 percent on sewing machines. As already indicated, the waiving or defer- ral of import duties on equipment reduces the cost of items presently not produced in Turkey. 3.22 In addition to tariffs, other charges on imports include guar- antee deposits, municipal taxes, stamp duties, a wharf tax and, for cer- tain products, a "production tax", levied on both domestic production and imports. These additional charges on imports have an important effect in escalating the degree of protection. For example, addition of municipal tax, stamp duty, wharf tax and guarantee deposit can increase a tariff of 35 percent to 64 percent and one of 60 percent to 94 percent. For those commodities subject to production tax, (e.g. steel, cement, rub- ber) import charges are increased further. With a production tax of 25 percent, the 35 percent duty is increased to 101 percent, and the 60 per- cent duty to 139 percent. 3.23 A major effect of the customs duties and quantitative restric- tions has been to allow the pr4ce of Turkish products often to be set above international levels. Price differences are high for products such as plas- tics, paper and aluminium; on the other hand many textile, clothing and leather products sell at prices, on average, not far above world prices for similar products (see Annex A). (ii) The Import Regime and Exports 3.24 Turkey's barriers against imports have disadvantaged exports in several ways. Since Turkish manufacturers do not have to worry about im- port competition, they have less incentive to cut costs, increase producti- vity or maintain quality standards. In many cases, manufacturers are inward-looking and produce mainly for the profitable domestic market with- out attempting to export. They often lack knowledge of exDort markets and the practical aspects of export marketing.  - 15 - 3.25 Those industries which do export or have export potential are put at a disadvantage in international markets when import restrictions raise input costs or force them to use materials which are below acceptable quality for export production. The high prices in Turkey for basic inputs such as aluminium, plastics, synthetic fibres, and pulp and paper make the development of export industries based on these materials difficult. It is true that, in several cases, special support for industrial exports have reduced, or more than offset these higher input costs. This will be examined more closely in our analysis of the textiles/clothing and leather/ leather products industries. However, the problem of inputs is a matter of quality equally, or even more than a matter of price. Mloreover, the pervasive effect of the restrictive import regime extends beyond basic materials to items which, though they form a small part of total cost, have an important impact on export capabilities. In the industries which this report considers in detail, exports of leather goods are hampered by the low quality of accessories, such as zippers, studs, frames and lining materials. Clothing manufacturers complain of the poor quality of Turkish-made accessories such as linings and buttons, and the difficulty of obtaining cloth of a type not made in Turkey. 3.26 There are currently two procedures wnich attempt to mitigate these problems. The Ministry of Commerce can arrange meetings between Turklsh suppliers and users following complaints about the price and quality of inputs. However, this ad hoc procedure has been of limited use to date. Secondly, there is provision for temporary imports of raw materials for subsequent re-export. Duties paid on such imports are refunded on export. Such temporary imports, however, are difficult to obtain when there are equivalent, domestically produced goods. 3.27 To counter the problems of poor quality inputs and inability to obtain imported materials, new procedures are necessary to allow exporters to import raw materials with a minimum of red tape. Imports of goods to be used for export production could be admitted temporarily, without limita- tion by quotas or other quantitative restriction. In many cases, it would not be difficult to ensure with legal sanctions that raw materials imported under such conditions were actually used for export processing. 3.28 While admission of goods for export processing should not be subject to quantitative restrictions, such as quotas or prohibition, domestic sup- pliers of raw materials and components for export production could still be protected by the tariff. The effect of the tariff in raising costs could then be offset by an export subsidy, so as not to penalize exporters (see next section). Thus, local suppliers of raw materials would not be at a disad- vantage on price grounds; however, if their product was not of sufficient quality to be used in export production, exporters could import suitable mate- rials free of import restriction. This would put pressure on domestic manu- facturers to increase their efficiency, leading to lower costs and better qualities on the domestic market as well as on the export market. 3.29 The minimum tariff would need to be 22 percent co compensate for the difference between the-official exchange rate and the shadow excnange rate (See Annex B). Some consideration should be given to a higher rate, i.e.  - 16 - a positive stimulus or possibly special incentives to suppliers of materials eventually used in export production. For example, provision of export subsidies to suppliers of woven cloth used in clothing for export would en- courage the maintenance of quality standards and would lead suppliers to seek customers who could export. In fact, in Korea, a country with an enormous success in exports, export incentives are extended to domestic producers of intermediate inputs. 3.30 The introduction of a broad drawback and quota-free entry scheme for imported inputs for use in export production would entail additional ad- ministrative complexity, in setting wastage allowances, refund rates, etc.; however, the Ministry of Commerce has a large staff administering the present system of import control and export incentives, and should be able to handle any administrative problems that arise. 3.31 While the mission considers that broad provision for unrestricted import for export processing is the preferred policy, another, much more limited approach, would be to establish export-processing zones. Raw mate- rials and capital equipment would be freely imported into such a zone under bond for export processing, thus cutting redtape considerably. 3.32 From a purely technical point of view, it would be necessary to consider this proposal only if a broader scheme cannot be introduced. Nev- ertheless, it seems likely that foreign investors would be more attracted by the export zone alternative. Foreign investments in export industries (preferably in participation with domestic investors and with a long-run commitment, as distinguished from so-called "foot-loose" industries) could provide much additional foreign exchange and employment, and could demonstrate new technology and management concepts to domestic entrepreneurs. It is recognized that the approach to foreign investment is partly determined by political value judgements. Here, only the economic aspects are considered. 3.33 The aim of the above suggestions is not to radically change the thrust of present policies but rather to make them more effective. Never- theless, both drawback and export processing zone arrangements intrinsically involve considerable red tape and are to that extent inimical to the develop- ment of exports. They should, therefore, be reserved for situations where the domestic supplier industries have a vital domestic market position to defend, and where it is necessary to make a distinction between imported inputs used for export production and those used in products intended for the domestic market. Where this is not true, it would be far simpler and more efficient to replace quantitative restrictions and prohibitions with up-dated import duties. Such selective shifting of protection from quantitative restrictions to tariffs could be quite flexibly integrated within the framework of the Association Agreement with the Common Market. E. Export Policy 3.34 The main incentives specifically related to exports are tax re- bates, assistance in export marketing, and export credits on preferential terms. These incentives are described in detail in Annex A, Part C.  - 17 - (i) Export Rebates Rebates are paid on exports as a percentage of the export price. Rebate rates vary between products, and range from 5 to 45 percent of the f.o.b. price. In 1975, TL 1351 million were paid in rebates, 13.6 percent of the value of manufacturing exports. The amounts paid to different in- dustries vary markedly; for example, 1975 rebates to the textile industry were worth 27 percent of export value, whereas the leather industry re- ceived rebates valued at 17 percent (see Annex Table A.5). Export Rebates - Manufacturing Sector, 1973-75 Total Exports EligibLe Share in Value of Average Manufacturing for Rebate Total Exports Rebates Rebate Exports (TL Million) (percent) (TL Million) (percent) Year (TL Million) 1973 6090 4396 72.2 889 14.6 1974 8373 5971 71.3 888 10.6 1975 7274 7099 97.6 1351 18.6 Source: Ministry of Commerce, Ministry of Finance 3.35 The official reason for the rebates is to offset (a) the domestic taxes incurred in the manufacture of the product, and (b) import duties and related charges.]/ However, the incidence of the rebates varies widely, and, in some cases, the rebates more than offset tariffs and excess taxes on in- puts (although they cannot overcome the problems of input quality described in paras. 3.22-3.25 above). Rebates that more than offset tariffs on inputs and excess taxes can be justified as (a) a means of compensating exporters for the overvaluation of the exchange rate arising from the import regime, aud (b) additional short-term assistance to industries that have export po- tential, but need time to develop export markets. 2/ 1/ A need to compensate export manufacturers for domestic taxes arises only insofar as the incidence of these taxes on export conversion is higher than their average on total domestic prodution. Where there is no discriminatory incidence, export rebating should be regarded as a subsidy. 2/ At present, for developing countries, direct export subsidies must be notified to the Contracting Parties of the GATT, and may invite retaliation through countervailing duties. In principle, direct subsidies appear justified for developing countries trying to establish industrial export markets, whereas they would seldom be justified for exports from the developed cc-ntries.  - 18 - 3.36 The export rebates have widely varying, often fortuitous, impact on different exports, and the mission considers that this impact could with advantage be reviewed by the Government to ensure consistency, i.e. that processes with similar value added are, in general, afforded the same degree of effective assistance (see Annex A), sufficient to compens-te for t"e exchange rate disadvantage, and with any desired additional infant industry assistance clearly visible. The easing and removal of import restrictions to which Turkey is committed in the long run will gradually remove any anomalies in assistance and, at the same time, allow the appropN'iate adjustment, if any, of the exchange rate. However, at this juncture, it is a matter of some urgency to adjust the incentives system in line with Turkey's lng-run com- parative advantage and to allow industrial investments to oe guided accord- ingly. 3.37 In the sDecific case of the textiles/clothing and leather products industries the level of export assistance appears to be of ro'z4ily the correct order of magnitude. Woven cotton cloth is eligible for a rebate of 40 per- cent or 45 percent if a firm's exports of all products exceed $1.8 million per year. The respective rebate figures for cotton yarn are 20 and 25 per- cent, and for iaather products, including leather clothing, 15 an,d 20 per- cent. After allowing for excess input costs and the exchange rate over- valuation, processes in these industries receive positive affective rates of assistance (see Annex A, page 8); the highest rates apply to woven cot- ton and knitted underwiear with effective rates estimated at about 33 percent. Positive assistance to weaving, garment and leather goods manufacture is reasonable, given their export potential and their underdev-eloped status in comparison to Western Europe. The current level of assistance is generous and the poor export performance of these industries (apar from laather garments) is not due to inade-uate financial assistance, but to s:ru^tural, productivity and quality problems. Policies to overcome these difficulties are described in the Textiles and Leather Chapters of this Report. At the same time increased emphasis must also be placed on ex,irt promotion, a sub- ject discussed in the next section. (ii) ExDort Promotion 3.38 Government assistance for export marketing in Turkey is limited. Commercial counsellors attached to Embassies in overseas countries (about 42) provide general information on ma_::et trends and opportunities for ex- ports. However, their remoteness from Turkish exporters limits their effec- tiveness. The Study Center for Export Promotion (IGENE) established by Law in 1960, is financed by contributions from the individual chambers and export associations and from the Gover=nent. Its functions are to advise the Govern- ment on export promotion and to provide services to exporters, suc' .1s studies of export markets and intelligence and seminars on export procedurcJ and incen- tives. IGEIE's budget for 1976 is TL 14.6 million, a relatively small amount. 3.39 In fact, IGEME's budget is not large enough to permit it to hire a suitable nunber of experts and consultants with experience in international marketing. And, while its broad desk studies can point to general oppor- tunities, they are of little help to an individual firm wishing to develop  - 19 - overseas markets. Clearly, Turkey needs to devote more of an effort to export promotion and marketing - more in line with what has been done in other countries, both industrialized and developing. This need is parti- cularly acute for two reasons. Because of past policies of import substi- tution focussing on the domestic market, Turkish businessmen lack famil- iarity with overseas markets. Secondly, a concentrated push is needed to establish quick recognition of Turkish products in Western Europe, at a moment when the Common Market has opened up new opportunities for Turkish export. 3.40 Towards this end, it might be appropriate to transform IGEME into an Export Promotion Center which would mount a co-ordinated export drive and support program along the following lines: - establish a network of trade commissioners and agents in overseas markets. These representatives should have commercial experience and would actively seek export markets; their performance would be judged on a com- mercial basis, mainly by the amount of new business created; - participate in trade fairs; as a general principle giving only broad assistance, for example through subsidized travel or rent of stands. Business firms themselves should be free to arrange the exhibits; - develop exhibition centers in Turkey and in key overseas markets; - advise exporters on marketing techniques and market opportunities; - formulate new policies to assist exporters, for exam- ple, the institution of credit insurance facilities, or the provision of improved transport links; - organize visits to Turkey by foreign importers and in- vestors. The proposed center might also be given the task of assisting would-be foreign investors, particularly in the export industries, in clearing the administrative hurdles with respect to their operations in Turkey. The evolution of the center's activities would, of course, be harmonized with the development of the various industries export potential. It would be futile to oversell export products before they could be delivered in the necessary volume and quality. 3.41 The exact organization and financing of the center would be a matter for further study. One could envisage a semi-autonomous corporation (i.e. outside the civil service), with both public and business representatives  - 20 - on its board. The board (or "council") should clearly be headed by a per- son of considerable political influence with easy assess to the Council of Kinisters.l/ In the early stages, a high proportion of the financing should be provided by the State; certain budget receipts might be earmarked for this purpose. Eventually, some of the services performed by the center should be put on a self-financing basis, or paid in part through membership fees. 3.42 The Export Promotion Center might have a special wing concerned with developing exports by MSI or SSI. IGEME has already begun to assist small ex- porters by advice on the formation of export co-operatives.. Some success has been obtained, e.g. with an export order for shotguns from a local village co- operative. (iii) Export Credit Policy 3.43 Credits for industrial exports are normally available only for short- term financing, say up to nine months. The lack of longer-term financing is of rourse a substantial hardship for would-be exporters of capital equipment. On the other hand, short-term financing of industrial exports is subsidized in several ways. First, export credit rates are lower than on normal credits. The maximum rate of interest on export credits is 10.5 percent (the commercial banks rediscount such credits at the Central Bank at 9 percent). This compares with the general maximum interest rate for short term credit of 11.5 percent. Secondly, export credits are exempted from the 25 percent Banking Transaction tax normally payable on interest and commissions. Since commissions often exceed 3 percent, the total tax saving will correspond to about 4 percentage points. Thirdly, all export credits are eligible for a Government interest subsidy of 3 percent. Altogether, the cost of credit excluding commissions will be about 7.5 percent for export credits, as contrasted with a minimum of about 14.5 percent for domestic credits. Total export credits (excluding agriculture) increased from TL 1763 million in 1971 to TL 5,199 million in the 10 months to October 1975. The supply of export credit appears reason- able. Certainly, in the textile and leather industries, access to export financing on reasonable terms raises no serious problem. F. Conclusion 3.44 An aggressive strategy of export expansion is essential. Such an effort should (a) overcome the disadvantages to export imposed by the import regime, and (b) encourage a more outward-looking and positive approach to export by Turkish businessmen. The mission believes that the following broad export policies should be considered by the Turkish Government:2/ 1/ In other developing countries, similar bodies have been headed bv the Minister of Trade, the Minister of Economics or even the Pre- sident of the Republic. 2/ Specific recommendations for projects in the textiles/clothing and leather/leather products industries are made in Chs. IV and V.  - 21 - - Revision of the system of export rebates to ensure that they cover disadvantages arising from the im- port regime, and provide some degree of infant in- dustry protection for developing export industries. - Unrestricted entry of imported inputs for subsequent use in export processing. - The formation of an Export Promotion Center to provide market intelligence and direct marketing assistance. 3.45 Most importantly, the streamlining of incentives must be co- ordinated with studies of individual industries with an export potential. Based on these studies, programs should be developed which would assist these industries to achieve an efficient structure by rapidly improving production and marketing efficiencies. The next three chapters are de- voted to this topic. 3.46 The above sugaestions do not address themselves to the major bias in the incentives system - the encouragement of capital-intensive industries and capital-intensive means of production through the waiving of import duties on imported equipment and the availability of finance at subsidized rates of interest. It could be argued that Turkey's industrial orientation .s not greatly affected since this is fixed through the Five-Year Plans. Yet, as a minimum it would seem desirable to change the system in such a manner that the implicit burden on the economy is made explicit and a matter of public awareness.  - 22 - IV. THE TEXTILES AND CLOTHING INDUSTRY 1/ A. Introduction 4.1 The textile industry, including clothing, in 1975, contributed about 15 percent of the total value added in manufacturing, about 20 percent of industrial employment, and about 25 percent of industrial exports. Turkey is virtually self-sufficient in textile manufactures though imports of textile fibres (wool and artificial and synthetic fibres or intermediates) are fairly important.2/ The industry has grown rapidly in recent years as indicated by the increase in employment from about 80,000 in 1960 to about 140,000 in 1973 (excluding establishments with less than 10 persons in both years). Employment among SSI also increased; the number engaged in SSI in footwear, other wearing apparel and make-up textile goods" rose from 29,000 in 1963 to 80,000 in 1970, Dresumably reflecting urban growth and replacement of man-made clothing by the work of small tailoring shops. Nevertheless, the share of the textile industry in manufacturing value added has been consistently declining from 22 percent in 1963 to 20 percent in 1970 and 15 percent in 1973 (again excluding establishments with less than 10 persons). Even the striking in- crease in exports from less than $10 million in 1968 to $150 million in 1974, at closer inspection, provides only modest scope for encouragement. It consists mainly of cotton yarns where the value added by manufacture is only about 15 percent higher than the value of the cotton used in its manufacture. Moreover, during the last two years, exports have had to be heavily subsidized 3/ in a fiercely competitive market, and the prognosis is not too favorable. Nevertheless, the mission believes that there is substantial unexploited potential for Turkish textile exports to the European Common market. B. Present Structure of the Industry 4.2 In Turkey's textiles and garments production, small establishments predominate. In number of establishments, the make-up sector vastly outranks the textile sector; the latter, however, employs more than twice as many work- ers. 1/ This chapter of the report draws mainly on a comprehensive study carried out for the mission. See Werner International, Survey of the Turkish Textile Industry and Its ExDort Potential, Vol. I and II, July 30, 1976 (393 pps). Valuable inputs for this report were also provided by a recent study by the Turkish Industrial Development Bank (TSKB): The Turkish Cotton Text.le Industry (June 1976). 2/ Imported artificial and synthetic fibres totalled 43,530 tons in 1975 and imported (fine) wools 9,000 tons. 3/ To avoid misunderstanding, we should add that the subsidy is intended mainly to exonerate exports from various local taxes and other charges, a procedure practiced by the Common Market countries as well and approved by GATT.  - 23 - Establishments and Employment in the Textiles and Make-up Industries 1963 1970 Establ. EmDl.(th) Establ. Empl.(th) Textiles L 711 104.7 926 130.7 S 10,197 31.5 7,856 18.6 Make-up L 25 0.7 98 a/ 6.3 a/ S 32,700 60;8 (38,000)b/ (50.5)b/ L - Establishments employing 10 or more persons S - Establishments employing less than 10 persons a/ Figures for 1973 b/ Rough estimate on the assumDtion that the share of footwear establish- ments in the combined "Footwear and Clothing" group was the same in 1970 as in 1963. 4.3 In the textile industry proper, according to the 1963 Census, the cotton sector 1/ accounted for nearly 60 percent of total employment as com- pared to 18 percent for the woolen and worsteds subsector. The remaining 22 percent were divided fairly evenly between silk and synthetic fibre textiles, knitting, carpet-making, and sundry activities (finishing, rope and cordage making). Though 1970 Census details are not vet available, it is clear that, relatively speaking, the importance of cotton (in relation to wool) has in- creased, the knitting sector has expanded, and the carpet trade is stagnating. 4.4 SSI, typically employing three persons or-less in this trade, are said to account for one-quarter of the total production in cotton weaving and in knitting and one-half of the wool fabrics produced.2/ Employmentwise, 1/ The cotton industry is defined in a-wide sense to include the spinning, weaving and finishing of cotton-type (artificial and synthetic) fibres. 2/ Consultant's report, op. cit., p. 11. According to the 1963 Census, the small establishments were important in knitting but relatively unimpor- tant in the weaving of cotton and wool fabrics. Although there may have been a far-reaching structural change during the last decade (e.g. through the sale of used looms to small manufacturers as observed by the mission, particularly in the Istanbul area), the production share attributed to SSI by the consultants could conceivably be on the high side. It should be noted that the SSI share in the total cotton and woolen sector employment is far lower than their share in weaving since SSI only seldom engage in activities like cotton ginning, wool scouring, cotton and wool spinning, or textile finishing.  - 24 - small establishments predominate in carpet-making and rival large establish- ments in knitt ng. However, in the 1963 Census, they accounted for only 18 percent of the total employment in the cotton sector (including silk and synthetic fibres) and 8 percent in woolen and worsteds; since then their share has no doubt declined. 4.5 The textile industry has first call on a vast domestic supply of cotton. Production of raw cotton grew from 200,000 tons in 1960 to 400,000 tons in 1967 and a record 600,000 tons in 1974. Most of this increase was due to improved yields; compared to a tripling or production, the cultivated area expanded by only 50 percent. Typically, about one-half of the produc- tion was exported except in 1974, when due to the world textile depression, exports were cut in half. The woolen industry is largely dependent upon do- mestic materials (coarse wool and a rapidly increasing proportion of man- made fibres). Imports of merino wools are strictly controlled, and there is a consequent shortage of better quality fabrics. The industry also uses an estimated 20,000 tons of man-made fibres. Turkish production or rayon was discontinued in 1974. Turkey has an export surplus in polyester yarn and staple. In nylon and acrylic fibres, domestic production covers only about one-half of the requirements, and prices are exceedingly high by in- ternational standards (see below, para 4.21). 4.6 The Turkish cotton spinning industry is going through a period of revolutionary change. Between 1972 and 1977, it is expected that capacities will have increased about 2.5 times, i.e. more than enough to process the present cotton crop. The number of mills would grow from 75 to 102, i.e. by 36 percent; their average size from 21,000 spindles to 34,000 spindles (60 percent). The proportion of spindles belonging to integrated mills (weaving or knitting) would fall drastically from nearly 75 percent in 1972 to only 45 percent by 1977. In fact, integrated mills in the private sector are not expected to add to their spinning capacity between 1975 and 1973. There will be great pressure on independent spinning plants (many of whom are new and relatively inefficient) to find a market for their output, either locally or for export. 4.7 In cotton weaving, there are more looms in the small industry sec- tor (23,800 looms, typically operated by small units owning a handful of looms and employing mainly family labor) than among registered firms. The latter are always integrated; all have their own spinning mills and, in many cases, also dyeing, printing, and other finishing departments. In the five-year period 1972-77, the weaving capacity of non-registered firms is expected to decline as their production becomes less competitive. In the end, total weaving capacity would grow by only about 25 percent. 4.8 Because of a large population and the climate, Turkey has a large woolen and worsteds industry. Small weavers account fcr two-thirds of the total number of looms and one-half of the total production. The capacity utilization as compared to a normal standard is about 65 percent. The consultants describe the industry as fragmented and inefficient.  - 25 - 4.9 Apart from fabrics, there is a substantial production of hand-made carpets, mainly in cottage industries. The largest plant, operated by the State Sumerbank Holding, accounts for less than one percent of the total pro- duction of carpets estimated at about 6 million sq. m., of which the rapidly increasing production of machine-made carpets now accounts for about 25 per- cent. Carpet exports are about 500 tons per year, corresponding to roughly one percent of the wool clip. Exports of other wool products are negligible. 4.10 The public sector (the textile mills administered by the Sumerbank Holding), in 1963, accounted for about 29 percent of industrial-type employ- ment in the textile sector (establishments employing 10 or more people). This proportion has lately been declining. Though the number of spindles in the public cotton sector is expected to increase from about 400,000 in 1972 to 500,000 in 1977, its share in the total number of spindles is expected to fall from 31 to 17 percent.l/ Similarly, though the public sector is also planning to replace a number of narrow looms with wide looms (with more than twice the output per loom), its share in the total cotton weaving capacity of registered firms expected to fall from 44 to 36 percent. In the woolen and worsteds sector, Sumerbank accounts for about 14 percent of the weaving capacity and 19 percent of the spinning capacity, i.e. it is a major supplier of yarn to the small independent weavers. 4.11 The Turkish knitwear industry operates about 3,000 knitting machines in 187 establishments; about one quarter of the latter are SSI. Only one com- pany is backward-integrated with spinning and finishing departments. Pro- duction in 1975 is estimated at about 21,000 tons, mainly underwear and fin- ished knitwear garments. Production is only about one third of the avail- able one-shift capacity. 4.12 The make-up sector, especially the cotton and cotton-type garments, is the fastest growing sector of the Turkish textile industry. In 1963, there were only 25 registered establishments. By 1976, there were about 500; half of these were located in the Istanbul area. The industry at present is be- lieved to be processing about 80,000 tons of fabric. Eany of the larger units are subsidiaries or departments of weaving and knitting enterprises, particu- larly the latter. C. The Export Picture 4.13 Imports of textiles into Westqrn Europe are governed by the Multi- national Fibre Agreement covering the four-year period 1973-1977. This would seem to restrict primarily imports from the Far East and Eastern Europe. Tur- key, as an associate member of EEC, and certain other developing countries in the Mediterranean basis and Africa have had free access to the Common Market (no quantitative restrictions). On the other hand, tariff duties have been payable on all imports above certain small tariff-free quotas. These tariffs are presently 3-6 percent ad valorem on cotton yarn and 9.7-11.2 percent on 1/ TSKB, op. cit. - According to the consultants (p. 46), Sumerbank now controls 20 percent of the cotton spinning capacity and 28 percent of the cotton weaving capacity.  - 26 - fabrics, but, under the terms of Turkey's agreement with the Common Market, these will be gradually eliminated, reaching zero by 1985. 'Made-up goods are completely exonerated from both duties and quotas. As far as the mission knows, there is no way in which the EEC could unilaterally abrogate these preferences. On the other hand, the textile i: ustry in Western Europe is smarting, and there is always the possibility that th Community might want to negotiate an adjustment in the textile trade as a link in some wider economic and political agreement. 4.14 The main textile exports at present are cotton yarn ($35.8 million in 1975) and fabrics ($18.5 million). Cotton products exports ..n 1975 to- talled 44,000 tons; over four-fifths by weight were in the :irm oi yarn and less than 10 percent each in fabrics and made-up goods. Wool fabrics exports were negligible, whereas carpet exports totalled 500 tons. Exports of mohair (fibre) were approximately 3,000 tons valued at $10 million. Although cotton yarn exports doubled between 1970 and 1975, production is no longer profi- table, the world market famine in cotton yarns having, zt least temporarily, changed into a surplus. Cotton fabrics exports reached a peak of about 5,400 tons in 1972 and 1973 and, inspite of substantial incentives, declined to 4,000 tons in 1974 and 1975. The proportion of grey goods has fallen while terry/chenille goods have emerged as somewhat of a specialty. The rapid in- crease in garments exports, according to the consultants, is due mainly to active enquiries by European buyers/distributors; the Turkish industr7 has shown little initiative in canvassing export markets. 4.15 It is somewhat anomalous that the main Turkish textile exports should be in cotton fibre, the coarse grades of cotton yarn, and mohair. Turkey's advantage in pushing towards a nigher degree of fabrication is evi- denced by the fact that cotton in 1975 sold at about $1,300 per ton, whereas the average export price for yarn was about $1,600 and the average export price for fabric about $4,500. Exports are mainly to Common Market coun- tries. As we shall see in the next two sections, there is an enormous mar- ket in Western Europe, and Turkey has a good chance of grabbing a substan- tial share of that market. D. ODportunities in the EuroDean Common Market 4.16 The best opportunities for Turkish exports exist in the cotton sector as distinguished from the woolen and worsted sector. The breakdown of the Western European import market for products made of cotton and cotton- type fibres, according to different stages of processing, was as fol!-ws in 1973/75:  - 27 - Net Imports 1975 1/ Imports/Consumotion Tons (th.) US $ (million) x Yarn 1,243 24 Grey fabrics Industrial fabrics 660 - 37 Finished fabrics Apparel & household textiles 57 2/ 3,302 3/ 25 4/ 1/ Excluding intra-EEC trade, except as noted. 2/ Data for 1973; cotton garments only. Total imports of made-up goods were about one-third higher in 1974 than in 1973. 3/ Total imports of made-up goods in 1974, including intra-EEC trade. Im- ports by other Western Europe countries (e.g. Sweden, Switzerland), which have generally followed less protective policies, were almost as high as imports by the EEC countries. 4/ Figure applies to West Germany only. Looking at the original six EEC members only, the apparel and knitwear market is by far the most dynamic one, with total imports growing from $0.8 billion equivalent in 1970 to S3.3 billion in 1974, i.e. they roughly quadrupled. In West Germany, where import dependence is perhaps the heaviest, imports of made-up goods in 1974 accounted for about one-quarter of the total consumption by value. In contrast, EEC fabrics imports over the same period only rose by about 65 percent. They fell between 1974 and 1975 from 362,000 tons to 319,000 tons, accounting in both years for about 35 Dercent of tocal consump- tion (Table 4.1). The consultants expect fabrics exporters in developing coun- tries to push Western Europe competitors against the wall, taking advantage of lower wage rates and more modern machine parks and gradually learning to supply quality cloth and quality market service. As Western Europe demand picks up, they even predict some increase in direct fabric imports, i.e. over and above an increase in the foreign fabrics content of imported made- up goods. Consumption of cotton and cotton-type yarn in the six EEC countries in 1970/75 oscillated within the narrow range of 1.25-1.30 million tons; be- tween 1974 and 1975, countries from outside the area increased their share in total consumption from 13 to 24 percent, and the European industry sounded an alarm requesting stricter import controls. Over the last five years, Turkey has emerged as one of the most aggressive exporters of cotton yarn, as may be seen from the following summary:  - 28 - Some Trade Data for Cotton Yarn (th. metric tons) 1971 1972 1973 1974 EEC imports 147.7 198.3 223.5 227.5 EEC exports 84.6 92.9 105.6 109.0 Net imports 63.1 105.4 117.9 118.5 Major world exporters ?akistan 109.6 160.7 163.3 77.3 Egypt 42.1 46.6 45.3 45.0 (Est) Brazil 6.5 16.0 29.3 35.0 (Est) Portugal 22.6 29.4 28.1 22.3 Turkey 20.9 23.6 32.8 33.4 4.17 The recent tendency is for the Western Europe garments industry to migrate to close-by developing or semi-industrialized countries with a de- cisive advantage in labor costs, e.g. Portugal, Tunisia, or Yugoslavia. This is being done either by creating subsidiaries or partnerships, or sometimes by concluding long-term arrangements with suppliers in those countries. In the beginning the new suppliers may be processing fabrics made in the country from which garments production was transferred, but gradually they will come under strong pressure to buy fabrics on the world market or initiate their own production of fabrics. 4.18 The decline in clothing production in industrial countries conse- quently leads to some shrinkage in 'abrics consumption. Tnis contraction of the market militates against import of fabrics. Moreover, European weavers and finishers have an advantage in the availability of cheap yarns and grey cloth on the world market and in quality, product development, and delivery. 4.19 Yarn production originally appeared as the easiest sector for quick entry by developing countries like Turkey (establishments of smaller size, less market and technical know-how, lesser importance of nearness to mar- kets). In many cases the incentives structure in developing countries may also have favored yarn exports. But it is not clear that this is their ma- jor area of medium-run comparative advantage.  - 29 - E. Turkey's Comparative Advantage 4.20 Turkey's main assets as a textile exporter to the Common Market are relatively low wages and geographical nearness. Her development strategy for the textiles sector might, therefore, be inspired by the following considera- tions: (a) Priority emphasis on an export-oriented make-up sector focused on the nine EEC countries which between them represent 40 percent of the world imports of textiles. Present Turkish exports (1974) account for only about one percent of this expanding import market. The Bank's consultants feel that a proper vehicle for such development would be make-up factories employing about 350 workers, and that 3-6 of these factories might form joint marketing organizations. They also feel that the main export offensive should be in hih volume items (household articles 1/ like bedsheets and towels are prominently mentioned although opportunities also exist in more labor-intensive items like raincoats, overalls, jeans, cotton dresses and blouses, terry- cloth beachwear, and underwear. Marketing would be done preferably by foreign agents for the Turkish firms. Though paying homage to the achievements of a-few Turkish pioneers in the production of fancv or exclusive.made-up articles (particularly with refer- ence to their stylish design), the consultants do not recommend Turkey to push this sector of the make-up trade. Apparently, their main doubts are about the quality of fabrics and accessories. They may be se- condary doubts about the-quality of management and mar- keting arrangements. The mission agrees that this type of industry will require a longer period of development. Moreover, the total volume is low in relation to the market for ordinary items. Yet, its economic potential is still very high. The designing skills and flair of the pioneers could be turned to advantage in larger markets; skilled workers are available or could be trained., the cost of making up exclusive items to in- dividual design in a limited number of copies would be a fraction of the cost in Western Europe. While costs in certain Far Eastern countries are even lower, Turkish proximity to the fashion centers and major markets could be turned to a major advantage. Turkey has already made I./ Household textiles in Western Europe are typically made up within the same concern manufacturing the fabric or are imported in made-up form. In other words, there appears to be only a relatively small market for towelling or sheeting, etc.  - 30 - a mark in leather garments (see para. 5.14) where it should now move increasingly to more highly priced and exclusive items. The leather coat fashion is not ne- cessarily a durable one, and the country as well as the entrepreneurs and workers in the leather garments industry would benefit from greater diversification. If Istanbul could be developed into a fashion capital, this would also attract a large additional volume of tourism. The State, therefore, has every reason to encourage an export-oriented fashion industry; this support should be geared to the expected employment and other benefits. (b) Exports of woven fabrics will be difficult. The con- sultants base this judgment on the following considera- tions. The most fundamental conditions for success are high quality and absolute adherence to set delivery dates. The Turkish textile manufacturers, with a few exceptions, have aot yet attained that level. It also calls for scientifically conducted market surveys and long-range planning, normally with outside professional assistance. In standard grey goods, competition is fierce and prices for good qualities closely calculated, while prices for off-qualities are severely depressed. Presumably, the same situation exists with respect to simple dyed fabrics. In principle, the production of printed and knit more highly fashioned fabrics is of particular interest to Turkey. This type of product has a very high labor content. It is suited to manufacture in small units, say 100-200 operators, and would, therefore, fit the present structure of the industry, particularly in the Istanbul area. Yet, at the same time, high and flawless quality and close continuous communication between the weaver and his industrial customer are crucial. According to the consultants (p. 335), it is an axiom that only a highly efficient industry can produce high quality goods. There is a huge market for industrial fabrics 1/ at generally favorable prices. Within that sector, The range of industrial fabrics is enormous, including a vast var- iety of constructions and end uses, such as abrasives, awnings, bags and bagging, belting, bookbinding, carpet backing, carpet un- derlay, substrates for coating, surgical cloths, electrical insula- tion, filtration, flags, hose, industrial wipes, labels, sails, saturated wovens, sleeping bags, tents, tobacco cloth, industrial tape, zipper tape, foundation auto fabric, air supported and re- lated structures, casket fabrics, backing for quilted bed-spreads, backing for tufted bed-spreads, interlinings, window shades.  - 31 - consumption of non-woven fabrics has been expanding at a geometric rate. Quality standards are extremely high. The needs for consistent high quality and con- stant product development dictate a close, long-term manufacturer-consumer relationship. Considering also the long development time, the costly marketing invest- ment, and the high quality demands, the consultants recommend against Turkish entry into this market. Nevertheless, two exceptions to this conclusion occur to us. Could not production of industrial fabrics be initiated by a foreign manufacturer already in this line who would be looking for the edge provided by low Turkish wage rates or, alternatively, by a consumer anxious to develop a rival source of supply in partner- ship with one of the premier Turkish textile manufac- turers? The latter, in turn, would be motivated by a desire to upgrade his own product line and mi8ht even- tually be willing to subcontract a portion of-his exist- ing line to some other manufacturer or possibly to cede it to him. Turkey has an export potential in articles of mo- hair; a feasibility study for this branch is recommended. (c) Opportunities for knitwear production and exnorts remain to be explored. Substantial expansion has taken place in recent years in Turkish knitwear manufacture (in- cluding some exports), and a considerable export poten- tial exists. Knitted fabrics are, for the most part, pro- duced by leading knitwear manufacturers. In 1975, knit- wear already accounted for about 10 percent by weight of Turkey's textile output. The consultants feel that the opportunities for exporting standard articles of knitwear are somewhat constrained by competition from low-wage, efficient exporters, particularly in the Far East. Tne opportunities for exporting more fashion-oriented gar- ments made from acrylics,-wool, or textured polyester are noted, but it is suggested that these markets be actively canvassed only after the Turkish textile in- dustry had established a reputation for reliable quality and reliable delivery in-other less sophisticated seg- ments of the textile trade. (d) Yarn exports should be eraduallv deemDhasized. The yarn market, for the most part, is a bulk market where yarns of standard quality are sold. The consultants expect this market to remain severely competitive and possibly depressed. Even in medium yarns (let alone fine yarns), the quality demanded is higher than the typical product of the Tur- kish spinning mills. In coarser yarns, price competi- tion is fierce. Nevertheless, some Turkish plants have  - 32 - attained a high standard, and the consultants believe Turkish yarn could be sold at a profit based on the present tax refund which apparently provides some "infant industry" support, corresponding to about 12 percent of the value added. They recommend that a continued effort be made to market medium yarns in Western Europe. This effort, however, would be geared towards the improved utilization of existing capa- cities; no capacity additions are recommended. The Mission accepts the plausibility of the consultants' argument that Turkey should not plan an export surplus in yarns. In the interim, i.e. before the domestic market can absorb the present production of the spinning mills, the position of independent spinning mills is particularly vulnerable, and business fail- ures among these in a near future are said to be inevitable. Integrated mills are in a better position because of the wide profit margins in the protected weaving sector. TSKB could play a role in an eventual financial restructuring of the most exposed mills. F. Transition to a Successful Export Industry 4.21 The problems of the industry and the ways to their solution may be diagnosed as follows: (a) Productivity and quality. The consultants repeatedly stress (e.g. p. 316) that quality and productivity go together and that low quality either rules out certain markets altogether or forces a manufacturer to dispro- portionate price concessions. The best Turkish manu- facturers have already achieved Western Europe produc- tivity, but the typical productivities are low, i.e. only about 40 percent of Western Europe productivities in the making-up sector. Much of the gap can be closed through outside technical assistance covering a wide range of activities: planning and start-up of new in- stallations, improvement of existing installations, in- tensified in-plant training (and retraining), quality improvement, installation of management controls, etc. The consultants believe that remedial action in this area is more urgent than any other measure. There may also be a need to revamp th industry structure (see below). Finally, the workers need to become closely associated with the productivity drive. They have a right to share in the benefits of increased producti- vity but the textile industry can no longer be looked upon as a protected home market industry, and textile workers should not expect their wages and living stan- dards to deviate drastically from wages in other trades for similar skills.  - 33 - (b) Marketing. In an export-oriented industry, proper in- telligence on market trends and proper organization of marketing are crucially important. Research in depth should reveal trends in demand (volume, designs, qualities) as well as strengths, weaknesses, and mar- ket strategies of major competitors. This type of in- formation will help in defining both long-term strate- gies and short-term adjustments of marketing and produc- tion. It will document (or disprove) hypotheses ad- vanced in the previous section regarding the opportu- nities and constraints with respect to Turkish textile exports to the Common Market. The main burden of de- veloping appropriate marketing and sales strategies would necessarily fall upon the larger enterprises in the industry. Much could be done as well by groups of medium-sized and small enterprises associated for this purpose and hiring expert assistance. The vast majority of medium-sized and small enterprises would, in all like- lihood, play a more passive role, processing on commission for the export leaders. The consultants' report (chapter VI) dissects the weaknesses of the present marketing methods. In yarns, where considerable quantities have been exported, Turkey is regarded as a "risky supplier": delivery dates are not regularly adhered to, quality is frequently suspect, and contracts are not universally honored. Yet, export- ing staple products like yarns or grey goods is probably easier than exporting made-up articles and certainly easier than exporting printcloth or industrial fabrics. The obvious prescription is, therefore, as follows: When exporting to the Common Market, be sure that your effort is highly professional. Begin with a careful market survey and identification of distribution chan- nels. Once contact has been established, bend every effort towards a substantial volume of business under a long-term marketing arrangement. Customer service and deliveries are strategically important; thev must be impeccable. (c) Raw Materials. Although domestic prices for cotton fibre have at times been below world prices, they are now some 20 percent higher. Similarly, prices for rayon staple, acrylic and polyester fibres, at the present exchange rate, are respectively about 45, 60, and 70 percent above the world market level.  - 34 - RAW MATERIAL PRICE C0MPARISON - T.L. PER KR. TYPE TURKEY INTERNATIONAL Cotton grade I 29 (delivered) 24 (C.I.F. Liverpool) Rayon staple 23 16 Acrylic " 35 21.60 Polyester " 36 21.0 It is true that, to some extent, these cost dis- advantages are compensated by export subsidies. But this is a very messy system. Certainly, it would be better for the Turkish textile industry to be supplied with raw materials at world prices and for the domestic sup- pliers of these materials, whether of agricultural or industrial origin, to be assisted in line with criteria appropriate for their industry. It may also be appro- priate to support the textile industry. This topic is discussed, in a general way, in Chapter 3 and more speci- fically in Section G below. (d) Domestic suDDliers of oarts and accessories. Quality, reliability, and quick response to market forces and customer special requirements are essential conditions for success in every sector of the textile industry. To ensure competitiveness, the textile manufacturer must be in a position to procure his cloth and acces- sories from as wide a supply base as possible. A well- styled and properly manufactured garment will not gain market acceptance if the material or accessories are inferior. The Turkish weaving industry has limited experience in weaving certain types of fabrics since the local market until recently was mainly supplied with very simple and cheap fabrics. This will not change until superior fabrics are used in volume by a true export industry. In accessories, the most common failing is in zip fasteners, but deficiencies in buttons, buckles, and linings are also common. The consultants recommend the installation of a modern efficient filament weaving plant specifically for lin- ings, but this industry will not develop properly un- less it has access to the right quality of yarn and the right dye-stuffs. The only way to liberate the Turkish textile and clothing industry from the bondage of inefficient sup- ply industries is to allow free imports of all inputs  - 35 - which are to be incorporated into exported articles (cf para 3.25). To protect domestic supplier indus- tries, as is now done, is to put the cart before the horse. Before there can be export supplier industries, there must be export industries. Such export industries will have a natural interest in developing their domes- tic sources of supply even to the point of providing technical assistance or financing. The Government can help by making investment incentives available for new or modernized facilities in this area. G. The Need for Restructuring 4.22 In designing a modern textile industry for export, one would need to consider at least three dimensions: approach to export marketing, size of individual production units, and degrees of vertical integration. (i) Export marketing 4.23 With respect to exports (and the reader is reminded of the master design of expanding exports of made-up goods and relying on these to pull the rest of the industry along), the consultants feel the best strategy would be to set up a garment export organization (representing some 30-50 factories) responsible for both market research and sales. This export organization would have offices in major European centers, and there would be no need for local agents. The concept of an independent, partly fashion-oriented make-up industry (including such simple articles as domestic overalls) is inspired by the thought that make-up establishments need flexibility in buying both cloth and fashion designs rather than being subject to the constraints of an intra-concern weaving department. At the same time, it is recognized (p. 348) that where the final product is relatively uniform (sheets, jeans, towels, underwear), there is a good case for the make-up unit to be integrated with the textiles concern. 4.24 In contrast, industrial fabrics should normally be marketed through established traders in the export markets; this is because of the critical importance of continuous customer contact and servicing, the need 'or a con- siderable development and marketing effort, etc. In this area, foreign in- vestments or partnerships should be considered in order to gain access to the market. In grey goods and yarns, efficient marketing would require in- dividual companies and groups to establish an export marketing division to keep constantly informed of fluctuating demands and to permit prompt response to traders and converters. It was indicated before that productionwise these are markets where it will be difficult for Turkish manufacturers to establish a permanent foothold. (ii) Structuring of domestic industry. 4.25 An expanding modern Turkish textile industry could be built on the following foundations:  - 36 - (a) A rapidly expanding make-up and knitwear industry focused on exports to Western Europe with complete freedom to buy either imported or local fabrics, yarns, and accessories. (b) An efficient domestic spinning, weaving and finishing sector supplied with basic inputs at world prices and qualities. Although, at least initially, geared pri- marily to the expanding needs of the domestic make-up industry, it should be encouraged to establish contact with the Western Europe market as a spur to competitive- ness in price and quality and to entering the European market, where good opportunities exist. This flow would be greatly facilitated by foreign partnerships in the Turkish textile industry. 4.26 A look at the international structure of the industry suggests that the attainment of these objectives would eventually call for-large integrated units in weaving and spinning operated according to the most sophisticated modern management methods. The weak points of the present Turkish structure are (a) the great number of new non-integrated cotton spinning mills with in- experienced management and of doubtful long-run viability; (b) the SSI sector which, the reader will recall, accounts for one-quarter of knitwear and of cotton weaving and 50 percent of wool weaving and is not yet successfully linked to the modern sector; and (c) the dualism between the private sector and the Sumerbank Holding with mutual mistrust and a minimum of cooperation. The most objective and realistic policy would clearly be to put one's money on the largest and most dynamic private firms with proven management resources and, for the Turkish lending institutions, to push for expert assistance and managerial changes in those companies which are not yet well run.1/ The "in- dustry leaders" have the possibility of drawing MSI and SSI into the mainstream of modern export-oriented industry as suppliers, possibly through equity participation; it is difficult to conceive of any special incentives towards this end over and above their own self-interest. With respect to action by MSI and SSI themselves, we indicate elsewhere in this report that special studies are needed to define the potential role of such establishments in each subsector, that different types of programs are needed for the MSI and the SSI, and that the MSI might be well advised to intensify and probably in- stitutionalize (the proposed Research and Development Institute) their ad- justment to the completely new situation which will be created by Turkey's economic integration with the Common Market. H. Choice of technology and equipment 4.27 One important consideration in the future development of the tex- tiles industry is the choice of technologies and equipment. We have already I/ We are referring here exclusively to private firms. The managerial problems of the State Economic Enterprise sector are well recog- nized in Turkey. They represent a vast subject outside the scope of this report.  - 37- stressed the importance of foreign technical assistance in this area (para. 4.21). Consultant's recommendations will inevitably take into account the existing incentives system which favors capital intensive methods of production. Yet creation of export oriented textiles industries in developing countries could be based on either of two rival conceptions: - Advanced methods of production using a small component of highly qualified personnel and large supplies of semi-skilled labor; - Simpler, more labor intensive methods-involving an important investment in manpower development. Not only would the choice of appropriate labor intensive technologies contribute to the absorption of Turkey's manpower surplus, it would also strengthen her export competitiveness. 1/ R. Production Targets and Investment Requirements 4.28 The consultants are strongly of the opinion that the immediate priority is not new investments but rather measures to increase the effi- ciency and quality of production and to plan new projects well. They re- commend a range of mainly complementary investments which would be spread over several (say five) years (million US $ equivalent): Technology and organization 10 Wooleu and worsted (one fully integrated unit) 20 Mohair industry (one 2,000 t cloth-making unit) 10 Linings (one man-made filament weaving unit) 7 Weaving see below Knitting Spinning " Dyeing and finishing (increase in existing facilities plus one new installation) 100 Making-up (25 new units) 75 Total 222 4.29 These investments are in addition to certain projects already approved which will presumably be implemented. Given reasonable increases in productivity, the existing cotton-type fabrics capacities should be nearly sufficient and the yarn capacities more-than sufficient to meet the expected increases in domestic consumption plus potential export growth up to 1982. 1/ On this point, see e.g. Jaques de Bandt, Les industries textiles dans le processus d'industrialization du Tiers - Monde in Mondes en Development 13/1976 aad, for some specific illustrations on the cost impact of alternative technologies, several articles in Cotton and Allied Textile Industries 16/1975 (published by the International Federation of Cotton and Allied Industries).  - 38 - The following balance is based upon an illustrative increase in the Turkish demand for fabrics by 5 percent per year cumulatively. This figure, while reasonably agreeing with recent consumption trends, is merely illustrative. There is scope for a careful survey of future demand which, to the mission's knowledge, has not yet been conducted. FABRICS Supply Present fabrics capacity (1975) 182.5 Approved capacity (1977) 204 Capacity with 30% improved productivity (1982) 265 Demand Present domestic consumption (1975) 178.5 Domestic demand (1982) 1/ 250 Proposed exports of made-up goods 30 Fabrics exports Total Demand 285 YARN SUDply Present yarn capacity (1975) 497 Approved capacity (1977) 562 Demand Fabrics, present (1975) 194 projected 2/ 302 Knitwear, present (1975) 21 projected 42 Yarn exports, present (1975) 36 projected 45 Total Demand 389 1/ Assuming 5 percent per year cumulative increase, or roughly 10,000 tons per year. 2/ Total domestic demand for fabrics plus export demand for fabrics and made-up goods, adding 6 percent for conversion losses.  - 39 - Even on optimistic assumptions with respect to productivity-, there would seem to be a shortfall in fabrics production by about 20,000 tons (about 80 million meters per year or roughly the output of 4 weaving plants of 600 looms each). The investment in such weaving plants with matching finishing facilities may be estimated at about $85 million (excluding working capital) which should apparently be added to the above total of $22 million.l/ 4.30 The consultants have presented a program realistically geared to apparent export market constraints and the financial and managerial ability of the Turkish textile/apparel industry to expand over a span of 5-6 years. It is worth pointing out, however, that, under this program, the cotton spin- ning industry, even at the end of the period, would be operating at only about 70 percent capacity and would be using a similar portion of the country's cotton crop projected at 640,000 tons per year.2/ The investments required to use the country's entire crop and to process an additional 170,000 tons of yarn into fabrics and/or made-up articles may be roughly estimated as follows: Yarn production: 170,000 tons @ 290 days = 586 toas per day Average weight of fabric: 0.234 kg per m 3/ Required weaving output: 2.5 million m/d Number of looms required 4/: 2.5 million - say 25,000 103 Investment in weaving and finishing facilities: $1.0 billion equivalent This total does not include additional investments in making-up facilities. Making up one-half of the projected availabilities of 170,000 tons of cotton cloth into garments and other articles might require an investment on the or- der of $0.25 billion. 4.31 If the expansion needed to use Turkey's cotton crop were added to the investments already proposed by the consultants, the total investment re- quirements would correspond to about ten percent of the likely total invest- ment budget for Turkish manufacturing industries 1977/81. We are not arguing in favor of such a high target which would imply the creation of 25-40 new weaving finishing plants and up to 85 new make-up units. The consultants 1/ Another alternative would be to import fabrics for the make-up trade. 2/ Based on the assumption of 850,000 hectares available from land and average attainable yields of 770 kg per hectare. 3/ Assumed cloth construction: 150 cm wide, .20/20 yarn, 24x24 density. 4/ Assuming 215 rpm, 85% efficiency, 22.5 hours working day.  - 40 - obviously feel that the next five years should be a period of consolida- tion and of the creation of capabilities which might eventually be used as a launching base for a more solid export offensive. But this is hardly in- tended as a final word; there is every reason to pose the question what would be the optimum schedule for Turkey's entry into the European textiles market. The employment implications of a more ambitious program would be highly favorable; production of 85,000 tons of made-up goods might create some 30,000 new jobs in the make-up sector alone, and expansion in weaving would save a great number of jobs that would otherwise be lost through ra- tionalization and might also create some additional jobs. Proponents of major expansion point out that high costs of labor combined with labor shor- tages are forcing Western Europe's textile industry to migrate just as New England's textile industry moved to the South of the United States at the turn of the century. Turkey, in terms of wages, geographic nearness, Common Market link, and political climate is certainly one of the most logical can- didates for a new textile center. Some of the Turkish mills have attained efficiencies which make them internationally competitive at a correct ex- change rate. Since the future is not in yarn and grey cloth, there is every reason to forge closer links with those Western Europe manufacturers who are now being slowly forced out of the market, but who possess a wealth of manu- facturing and marketing know-how. To frame realistic targets, to define the necessary instruments and to coordinate the efforts of entrepreneurs, finan- cial institutions and Government agencies clearly must exercise the highest level of industrial leadership. 4.32 We have focused above on the market share to which Turkey might le- gitimately aspire in free and equal competition with other countries and with some element of tariff and/or quota preference within the Common Market. Al- though the Common Market, in recent years, has made substantial tariff con- cessions to developing countries, it is realistic to expect that market access by the latter will be constrained by quotas and that Turkey would profit from its insider status. In a purely formal sense, there have been complaints that recent Turk$sh yarn exports have had a disruptive influence in the meaning of the Multinational Fibre Agreement. The mission would not venture an opinion of the validity of this claim or the dovetailing of the Association Agreement with the Fibre Agreement. Materially, the current industrial recession has hit the Western Europe textile industry with particular severity, a shock superimposed on a long-run trend of increased imports and intensified "ra- tionalization" which reduced employment in Western Europe's textile indus- try by about one million between 1965 and 1975. Massive imports have led certain associations of the European textiles and clothing industries to question the very principle of international division of labor as applied to their industry.l/ Nevertheless, the prevailing opinion in Europe probably favors the access of developing countries to the European Common Market in accordance with their true comparative advantage, subject only to an 1/ See Bulletin 76/4 issued by Comite de Coordination des Industries Textiles de le CEE (Comitextil), The EuroDean Textile and Clothinr Industries and the Internation Division of Labour.  orderly transition and the preservation in Europe of minimum capacities jus- tified on strategic preparedness grounds.1/ The Turkish Government would, of course, want to make its own evaluation of these factors before drawing up (with the Turkish textile industry) a program of supported export de- velopment. 1/ See Paul Wurth, Chairman, Textiles Surveillance Body (GATT), The Arrangement regardinR International Trade in Textiles, (Geneva, 1976).  - 42 - V. THE LEATHER AND LEATHER PRODUCTS INDUSTRY I/ A. Th, Industry in Turkey 5.1 Turkey is a traditional leather producer. Its animal population provides a ready source of hides and skins for footwear, leather clothing, and other leather products. The industry encompasses a wide range of struc- tures varying from primitive one or two-man establishments to large, modern factories, producing for the European and US markets. The most successful segment of the industry is the leather garments trade (based mainly on do- mestic sheepskins) where an important export trade has developed over the past five years. 5.2 The industry is small, accounting for 3 percent of employment in manufacturing industry. State participation is limited, with most State pro- duction concentrated in one large factory at Beykoz, producing both leather and footwear. SuDply of Hides and Skins 5.3 Supplies of goat and sheep skins are sufficient for present domes- tic needs. As recently as 1967, about 5 million raw sheep and goat skins were exported as compared with perhaps 15 million processed locally. Today, exports of raw skins are insignificant, the previous surplus having been absorbed by the leather garments industry. Since 1969, exports of leather garments have grown from about 140,000 to about 1.4 million pieces. The leather garments industry buys about 90 percent of some 19 million sheep and goat skins pro- cessed locally. Supplies of bovine leather, however, presently fall short of domestic needs, and 20 percent of all upper leather is made from imported hides. On the other hand, domestic PVC soles have rapidly replaced leather soles. Continuing imports of bovine hides or leather will be necessary if exports of tanned bovine leather or leather manufactures are to be developed. 5.4 The quality of Turkish leather is generally of medium to low grade. Poor rearing conditions, malnutrition and low standards of animal husbandry, and skin defects resulting from diseases or insects, all contribute to poor quality. These problems are intensified by inefficient handling and process- ing of hides and skins. Bad and careless flaying often damages the hide or skin reducing both the quantity and quality of leather yielded. The TanninR Industrv 5.5 Tanning is a traditional industry, consisting mainly of family firms. The number of tanneries in 1975 is estimated at 700 with 7,500 work- ers, mostly unskilled. Some 150 members of the Turkish Leather Manufacturers 1/ This chapter of the report draws mainly on a ccmprehensive study of the prospects for Turkish exports of leather and leather products carried out for the mission. See Economist Intelligence Unit, Prospects for the Development of the Export Potential of the Turkish Leather Industries, London, September 1976 (222 pp). Valuable support to the mission was also extended by the Research Department of the TSKB. Recently, TSKB published the English version of a study entitled The Leather and Leather Products Industry.  - 43 - Association produce about two-thirds of the leather; the rest is cont-ibuted by small tanners employing less than 10 workers. The scale of ptcduction varies widely even among the "registered" tanneries. For sole leather, the largest of these produces 2,600 tons per annum and the smallest 120 tons. For bovine upper leather, the corresponding figures are 2,000 and 300 tons per annum; and for sheep/goat skin leather, 2,800 and 300. It is estimated that, at the most, 10 tanneries are in the larger size category. 5.6 In 1975, the estimated Turkish productioa of leather was as fol lows: Sheepskin leather 70.1 million sq. ft. value TL 1,081 milliod Goatskin " 32.0 " " " 384 Bovine upper " 70.1 " " " 1,157 " Bovine sole " 5.9 " " i 236 " Eighty percent of the tanning industry is located in Istanbul and Izmir; sixty percent is concentrated in the Kazlicesme district of Istanbul alone. The industry is presently suffering from outmoded methods in every stage from raw material collection and handling to selling and marketing. Mate- rial grading and sorting and modern quality control methods are rarely used. Facilities are housed mainly in old, overcrowed factories with poor access. This prevents good production layout. Pollution control is non-existent, and the filthy conditions of the tanneries are the source of much pollution in Istanbul and-Izmir. Machinery is outmoded, and modern machinery is diffi- cult to import. Trained technologists are rare; however, new graduates of the Leather Institute at Pendik and of other leather training colleges in Western Europe will improve this situation by the end of 1977. The result of these factors is low productivity; a modernized European tannery can pro- duce twice as much per man hour as the current norm in Turkey. 5.7 According to the TSKB study, the supply of both hides (from cattle) and skins (from sheep and goats) is projected to increase by about 200,000 pieces per year from an estimated 1975 level of about 2.7 million hides and 19 million skins. However, these are gross figures. Particularly in the pro- duction of skins, it should be Possible to obtain an increase by perhaps 20 percent by value in the total supply if the inefficiencies mentioned in the previous paragraph are corrected.l/ 5.8 According to the recent TSKB study, existing plants may be divided into three broad categories: 1/ Our own guess based on estimate in the TSKB study indicates that losses due-to slaughter errors in 1971 totalled TL 175 million. See TSKB, op.cit., p. 12.  - 44 - (a) Some 350 traditional plants ("karatabak"), generally small family enterprises, typically produce semi- processed sheep and goat skins and some calf skins, using only vegetable tanning materials and manual labor. Located in four provinces of Western Turkey, they are responsible for about 4 percent of the total leather production. (b) Mechanized tanneries, using power-driven equipment according to outmoded technology (e.g. sole leather production, which takes three weeks in Western Europe, may take up to eight months in Turkey) actually in- creased in number between 1958 and 1972. Many of the smaller ones are located in the Kazlicesme district of Istanbul in old buildings. The combined capacity of these tanneries is sufficient to process the entire Turkish output of hides and skins. It may be possible to modernize some of the plants or to convert-them to finishing plants using semi-processed leather as their raw material, but for the most part relocation of pro- duction would appear to be the correct solution. In the TSKB study, it is assumed that most of the small mechanized tanneries would have disappeared by 1980. (c) Modern tanneries, housed in adequate buildings, equipped with modern machinery and located near the supply of hides have been given certificates of encouragement since 1972. In 1974/75, three such plants started pro- duction. There are another 24 projects with valid certi- ficates of encouragement which would have processing capacity for 11.4 million skins and 1 million cattle hides, i.e. 57 and 27 percent respectively of the ex- pected supply. The appropriate size for modern tan- neries in Turkey, according to the TSKB study, would generally be 400 cattle hides or 2,000 sheep and goat skins per day; the plants are expected to operate for about 250 days. Not all the above projects are likely to be implemented, however. Footwear Manufacture 5.9 Total production of leather footwear is estimated at over 35 million pairs per annum, a per capita consumption of about one pair. Most of this production comes from about 5,000 very small units, half of which are in Istan- bul. The 1973 State Institute of Statistics Industrial Survey lists 27 foot- wear firms with more than 10 employees; the ten largest firms together pro- duce about 4-5 million pairs of shoes per year. The largest plant, the State Sumerbank factory, makes about 1.5 million pairs at an average value of about US$5 per pair, i.e. shoes for the mass market. The small firms produce on  - 45 - average only 180 - 200 pairs a week, which is not enough to maintain an ade- quate export performance. The extremely fragmented pattern of artisanal work- shops - desperately badly housed, staffed to high proportion by juvenile labor, under-financed, occupied for only 8 months a year - cannot be looked to for some years for progress towards industrialization which is vital before via- bility, efficiency and good commercial performance can be achieved. However, this should not be taken in any way as adversely commenting on shoe making skills: workmanship is of the highest quality and properly coordinated, ade- quately housed and., with some modern equipment, the industry can produce shoes to compare with the best. ;.10 The three largest manufacturers do not currently produce exportable consumer footwear; they make only cheap, standard designs for domestic con- sumers, and heavier types for militar7 and industrial use. Apart from the lack of suitable export organization, there are other barriers to footwear exports. Plant is outdated, and new machines are needed. Export growth is also contingent on entry of hides free of import restriction, (see para. 5.3 above). Future export development will depend critically on assistance in improving both productivity and marketing capabilities (improved design, and an adequate distribution system). Some Turkish firms, however, have immediate potential for export in specialized lines, such as sporting shoes, where fashion is not as important. Leather Goods 5.11 Leathergoods production, like footwear, is fragmented. There are an estimated 5,000 small producing units in Turkey, about 2,000 in Istanbul. The estimated employment is about 5,000 workers. Current production is as follows: Suitcases 150,000 Document cases 150,000 Attache cases 30,000 Handbags 1,000,000 Travel holdalls 100,000 Small leathergoods 2,000,000 5.12 A high standard of skill exists in the industry, but experienced trained labor is short. Much equipment would have to be renewed if export- able volume production and product range are to be reached. Also the present range and quality of domestic accessories, such as fittings, trims and lin- ings are below export standard and have to be improved, or ready access to import granted, for any export success in leathergoods.  - 46 - 5.13 Some small export trade has been initiated by firms serving indi- vidual customers, and interest and awareness is growing on what is needed to tap export markets. The Consultants believe that, given the ability to provide required volume and customer service, Turkish made leathergoods such as wallits, purse notebooks, and certain styles of handbags will find a ready mai Let. Leather Clothin& 5.14 The leather clothing industry has grown rapidly. Production in- creased from 443,000 pieces in 1969 to 2,000,000 pieces in 1975. Consider- able new capacity is planned; five new factories will be producing 400,000 new garments by 1978. Since, on the average, it takes seven skins to produce one leather garment, this would absorb 80 percent of the expected availa- bility of skins. Hence, unless alternative exports of finished leather or other leather articles can be developed to greater advantage, there would be scope for the construction of a few more large modern plants. 'Moreover, there is a clear need for modernization of small plants presently accounting for over one-half of the industry's output. About 75 percent of production is exported (see Table 5.1). In 1975, leather clothing exports were worth US$62 million, 12 percent of Turkey's exports of industrial products. Roughly, 80 percent of 1974 exports by volume went to West Germany. The unparalleled success of this industry would appear to be due to a combination of factors: eminent suitability of Turkish sheepskins (large size) for garment manufac- ture, export embargo and low price for sheepskins, integration of tanning with garments manufacture in several cases, and, finally, vigorous entrepreneurship. In 1971, there were 5 large units, producing 50-100,000 pieces per annum, 10 medium units with a production of 20-50,000 pieces, and 1,300-1,400 small units with less than 20,000 pieces. This pattern has not greatly changed. In 1974, the large and medium units contributed 40 percent of production; these are all modern and efficient. Some of the existing and planned larger garments factories are integrated with tanning plats. Generally, this would appear advantageous both from a commercial and economic point of view. In contrast, the small plants suffer from high costs and problems of quality. 5.15 While the recent export record is outstanding, some problems are imminent. The industry's exports have concentrated an standard, popular price, high volume lines; from now on, for reasons indicated in para 5.21, the industry should turn increasingly to the higher priced quality segment of the market. In the course of this transition, problems of quality and uniformity, which are now a cause of customer complaint, will become a serious problem. A similar constraint arises from neglect in producing premium priced specialty leathers, such as the top grade aniline drum- dyed leather and more and better "double face" (lamb fur skins, sueded on the flesh side). Methods of achieving these improvements are discussed below. 5.16 A further difficulty in moving to the quality end of the market is that the linings, trimmings and accessories are generally of poor quality.  - 47 - While acceptable on popular-priced articles, this will not be the case for higher-priced articles. Domestic quality of these accessories must be im- proved or imports permitted for use on garments for export. 5.17 Finally, the move into the quality end of the market for leather clothing will require an intensified marketing e-2fort, and increased skill in cutting, designing, and styling; the resources of the Leather Institute at Pendik could be used to advantage in this respect. B. Markets in the EEC 5.18 The Economist Intelligence Unit, on behalf of the mission, carried out a study of markets in four EEC countries; Italy, West Germany, France and the UK. Detailed analysis of each market is included in the EIU's separate Report. Imports of leather and of standard lines of footwear, leather cloth- ing, and leather goods into Europe have been generally increasing, as labor costs put European manufactures at a disadvantage. In 1974, these imports were valued at over $2 billion equivalent. The Turkish share of these im- ports was negligible except in leather clothing where it was about 18 percent (Table 5.2). Tanning is a declining industry, due mainly to the decrease in footwear production and also to increasing value of land for alternative uses. Opportunities for leather and leather product exports from developing coun- tries to Europe, are, therefore, excellent. Turkey's supplies of raw mate- rial, its traditional skilled workmanship in leather, its proximity to Euro- pean markets and the absence of European tariff barriers on Turkish leather exports, give Turkey bright prospects of gaining a share of the increasing import market. Opportunities and problems in different types of products are reviewed below. Part-Processed Leather 5.19 Prospects are good for exports of part-processed sheep and goat- skins, particularly to Italy and France. Present supplies of part-processed leather, particularly from India, are considered unreliable, and tanners/ finishers in Europe are keen to develop alternative sources of supply. Once Turkish leather is available in exportable quantities, exports to Europe should present no further problem. However, such exports will be made easier by developing good relations with importers and finishers, and by strict ad- herence to contracts, in both delivery date and quality. Such a market for part-processed leather would also be a useful safety valve if export markets for leather clothing were to decline. Finished Leather 5.20 There is a large market for finished leather in UK and West Germany. The market in France is smaller, and non-existent in Italy, with the strength of its current tanning industry. The best prospects are in sheepskin clothing leather, with limited possibilities in lining and upper leather. Opportunities also exist for exports of goatskin leather, such as lining leather, industr4al glove leather, and small first-selection quantities which can be made into  - 48 - leather for fashion shoes and wallets and notecases. Marketing finished leather is better done through importers than directly to manufacturers of leather products. In the field of clothing leather, it is important that Turkish suppliers be receptive to fashion changes and, as is the case with part-finished leather, orders must be filled in time if markets are to be maintained. Leather Clothing 5.21 Leather clothing is already a successful export to Europe. Exports to Europe increased from $32.5 million in 1973 to $62.1 million in 1975. The best long-term prospects for leather clothing are in the UK and West Germany. In the short term, however, there are some problems. Until now Turkish clothing exports have concentrated mainly on standard lines of coats and jackets. Other low cost countries, such as South Korea, Hong Kong and Taiwan, have entered the European market for such lines, and exports from Turkey will be subject to increasing competition. Improvement of leather quality and design would permit a shift towards the better quality segment of the market, and would permit Turkey to maintain, or possibly to -ncrease, her export earnings in this field. Footwear 5.22 To break into consumer markets in developed countries, one must match existing supplies in quality, design and reliability of service. More importantly, new supplies should be price-competitive. Turkey cannot break into these markets in the near future; the present small-scale industry struc- ture is not suitable for exports. However, in the long term, there are some prospects for developing exports. In Europe, imported footwear is taking an increased share of the major markets, and Turkey has some potential, although larger, more efficient firms are needed before any continuing export business can be generated. In the initial stage, manufacturers would well be advised to concentrate on non-fashion leather shoes (mainly men's shoes) and on specialist footwear (for example, training shoes). Turkish suppliers in the longer term, should try to take over part of the European market presently held by countries such as Italy and Spain and by overseas imports. This will require the development of design expertise. Leather Goods 5.23 The good design and excellent workmanship of Turkish leathergoods, such as wallets, notecases, purses and handbags point to bright export pros- pects for these products. The Italian, German and French leathergoods in- dustries remain strong and fairly competitive at present, but their high manufacturing costs must eventually lead to increased imports. The British industry has experienced a decline recently and Britain is the best initial market prospect for Turkish exporters among the four countries studied. 5.24 The Export Promotion Center discussed in Chapter 3, could play an important role in helping Turkish manufacturers of all types of leather pro- ducts, footwear and clothing to break into export markets, by assisting in marketing techniques, and promotion and design.  - 49 - C. Prospective Lines of Development Quality Improvement In Leather 5.25 Much structural change is necessary for Turkey to achieve export ccmpetitiveness in leather and leather products. An important factor hin- dering export potential in both leather and leather products is the low qualitv of much of the present leather production. Several measures are recommended to improve this quality. - Official action should be taken to form a "Hide and Skin Improvement Society". This society would insti- tute educational programs, covering methods of flay, improved animal husbandry and feeding, proper drying and curing after flay, good, clean storage at collec- tion centers, and the correct use of preserving salts. Recruitment of skin and hide dealers into this program will be important. - A crucial input into quality imDrovement must be made through the sorting and grading of hides as early as possible after flay; this will enable sales to be made based on graded "selections" forming a reliable basis for quality control in tanning. - More skilled management and technicians are necessary. The program of training at the Pendik Leather Institute and at Leather Technology Schools in Europe must be continued, with additional attention to the final stages of processing. Restructuring of Leather Tanning 5.26 In addition to quality and technical improvements, the Mission also recommends a geographical restructuring program in the leather tanning industry. Animal herds and flocks are distributed throughout Turkey, and hides and skins must be transported up to 2000 Km to the tanning centars (mainly Istanbul), after being wet- or dry-salted or cured. It is desirable that hide or skin processing be carried out close to the source of skins and hides. This will avoid the serious deterioration in hide and skin quality while in transit. The program entails building adequately sized part- processing or "dirty work" tanneries, strategically located near sources of animal production, and ideally abbatoir-linked. Such dispersed, medium-size tanneries would minimize pollution. 5.27 In addition, the mission also recommends the introduction of two- stage processing, i.e. the geographical separation of the "dirty" or wet work processing from the leather finishing as is now the worldwide trend. The part-processed hides would then be carried to leather dressing plants situated, as today, close to the major leather mark8:3 and co=nercial centers.  - 50 - There, existing tanneries would change their pre-tanning and tanning sec- tions into post-tanning and finishing sections. Each of the revamped dressing plants would process partly finished hides and skins from 3 to 4 of the "Stage I" tanneries. Retraining would, to some extent, permit absorption into the finishing plants of labor displaced from tanneries in Istanbul and Izmir. Moreover, far less labor would be displaced under two-stage processing than if the finishing sections as well were relocated. The adaptation of existing finishing sections rather than the construction of new facilities elsewhere would also mean a saving in capital costs. Large, modern finishing plants would have lower costs, and concentration of production would make it easier to produce a uniform auality, particularly important in filling large export orders. Nearness to major markets and commercial centers would make it easier to react quickly to fashion changes. These considerations are further elaborated in the consultant's report (op. cit., pp. 29.1, 30.3, and 54-57). In Turkey, several recently planned tanneries include a finishing section; here implementation may already have proceeded too far to make two-stage processing a viable alternative. Though two-stage processing was dis- cussed at a general meeting with the Tanner's Association, where it found a generally appreciative response (consultant's report, p. 30), some objections have subsequently been raised. Further analysis and discussion is, therefore, in order. In this connection, the desirability of con- tinued corporate linkages between the primary wet work tanneries and the finishing plants and between finishing plants and leather processing plants would need to be carefully and objectively examined. 5.28 The exact siting and number of the tanneries and finishing plants has to be studied. The TSiO study examines the regional distribution of the cattle, sheep, and goat populations and the projected new regional slaughter- houses. The study concludes that the encouragement certificates for new tanneries do not conform to a geographically desirable distribution of the output. For this reason, their study draws up a tentative schedule indica- ting the timing, location, and capacities of additional tanneries which might be completed by 1980. This study take into account delays necessary to re- organize the supply of hides and skins and to establish new regional slaughter- houses. It projects new tanneries for the processing of about 0.9 million hides and 9 million skins by the end of 1980. This total excludes renovation of existing tanneries at Istanbul, Izmir, and Bursa. 5.29 The Bank's consultants have suggested a more ambitious program which would involve replacement of virtually all traditional and "mechanized" tanneries by 1980. This program would involve building around 16 plants to process 1,000 cattle hides per day by 1980, and either 20 plants to process 25,000 sheep and goatskins per week, or 40 plants processing 12,500 per week by 1980. Some 9 to 12 finishing plants would also be necessary. While this program has been costed in rough terms only, it is estimated that the equip- ment component alone would come to $60 million equivalent. Today, only a small portion of the equipment can be procured in Turkey, but further study may reveal additional possibilities. Whether or not the consultants' program should be implemented in its entirety would be a matter for more detailed  - 51 - study and planning along the lines already initiated by TSKB. Such planning would need to take into account both economic and social considerations, i.e. problems involved in relocation or transformation of existing small units or the retraining and absorption of their manpower into other activities. Restructuring in Footwear 5.30 Restructuring is also necessary for the footwear and leather goods trades to create export capabilities and to take advantage of the improved quality of leathdr expected to be made available. The major objec- tive of restructuring would be to create units offering a large enough output to attract European importers and which could also support certain common services of design, market research, quality control, etc. In the restruc- turing of both the tanning and leather products industries and in the or- ganization of export sales, Turkey might find considerable guidance in the success of the Spanish industry. One possible approach would be a pro- gram along the lines of Spanish acciones concertadas.1/ Joint Ventures 5.31 In footwear, leather goods and, to some extent, in leather clothing as well, joint ventures with European manufacturers should be explored as the most efficient and most rapid wav of gaining a foothold in the Common Harket. In this way, Turkish manufacturers would obtain speedy intelligence on fashion changes, assistance on design and production methods, and access to retail outlets (such as the retail chains operated by certain major shoe manufacturers). 1/ For definition, see para 6.3  - 52 - VI. SMALL SCALE INDUSTRIES I/ A. Structural Characteristics of SSI (i) Definitions; role of medium and small establishments; focus of this chapter. 6.1 The terms large, medium, and small will be applied to establishments (technical production units) as distinguished from enterprises. The actual distribution of manufacturing industry in Turkey by size of establishments is illustrated in Diagram II below which shows employment by size classes: 1/ With a brief comment on medium-scale industries.  -53 Z -- - - - -- - -7:--- --- =1 E71 TE>-7_ Sze- ojLFtab1