Turkey - Policies and prospects for growth (Vol. 1 of 2) : Main report

Report No. 2657a-TU Turkey: Policies and Prospects for Growth (In Two Volumes) F:gt C Volume 1: The Main Report December 12, 1979 Country Programs Department II Europe, Middle East and North Africa Region 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 Turkish Liras Turkish Liras per US$ per US$ 1976 - average 16.053 1978 - January - March 19.443 1977 - January - March 16.053 - March - December 25.250 - March - September 17.500 1979 - January - April 25.250 - September - December 19.443 - April - June 26.332 /1 - June to date 47.100 /2 /1 A premium of 40 percent was paid on workers' remittances and tourism receipts, raising the rate of TL37.1 per $1.00, with an additional TL10 paid for exchanges made during April 10 - May 9. /2 For most agricultural exports, and imports of petroleum and fertilizer, the rate is TL35 per US$1.00. GLOSSARY OF ABBREVIATIONS BIS - Bank of International Settlements CTLD - Convertible Turkish Lira Deposit CPI - Consumer Price Index DRC - Domestic Resource Costs DRS - Debt Reporting System GATT - General Agreement on Trade and Tariffs IGEME - Export Development Center ILO - International Labor Office ITC - International Trade Center LIBOR - London Interbank Offer Rate LFPR - Labor Force Participation Rate MB - Monetary Base M&LT - Medium and Long-term MI - Annual Survey of Manufacturing Industries MIC - Middle Income Countries OECD - Organization for Economic Cooperation and Development SDR - Special Drawing Rights SEE - State Economic Enterprise SII - Social Insurance Institute SIS - State Institute of Statistics SPO - State Planning Organization TCEA - The Turkish Confederation of Employer Associations TEK - Turkish Electricity Authority TL - Turkish Lira TPAO - Turkish Petroleum Company TSKB - Industrial Development Bank of Turkey VAT - Value Added Tax FISCAL YEAR March 1 - February 28  FOR OFFICIAL USE ONLY This Report is based on the findings of a Special Economic Mission that visited Turkey in April 1979. The mission consisted of the following: Messrs. Vinod Dubey (Mission Chief), Shakil Faruqi (Deputy Mission Chief), Eduardo Aninat (Consultant), Bela Balassa (Adviser), Surjit Bhalla, Sawai Boonma, Ray Christensen (Consultant), Thomas Klein, Sherman Robinson, Saul Rothman, Jivat Thadani, Wouter Tims (Consultant), Herman van Wersch, Adrian Wood and Mesdames Cynthia Angeles and Fan-Fan Walker. The Report also draws upon research and studies undertaken by the Bank Staff on related areas. In Two Volumes: Volume I : The Main Report Volume II : Statistical Annex This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   TABLE OF CONTENTS VOLUME ONE Page No. Map ............................................................. Basic Data ..................................................... Summary and Conclusions ......................................... i-xxxi PART I THE MAIN REPORT CHAPTER ONE: PATTERNS OF DEVELOPMENT: 1962-1978 .... ........ I A. Growth and Fluctuations ..... ............... 1 B. Modernization and Structural Change ........ 3 C. Savings and Investment Patterns .... ........ 8 D. Income Inequality and the Standard of Living ........ ............................. 11 E. Recent Developments and the Current Economic Situation ..... .................... 16 F. Stabilization Program, 1979, and Short- term Prospects ...... ....................... 21 G. Money, Inflation, and Monetary Policy ...... 24 H. External Debt ...... ........................ 30 CHAPTER TWO: THE FOURTH FIVE-YEAR PLAN IN PERSPECTIVE ....... 36 A. Economic Planning Objectives and Results ... 36 B. Recent Developments and the Fourth Plan .... 38 C. Priorities of the Fourth Plan .... .......... 40 D. The Growth Targets ..... .................... 41 E. The Financing of Planned Investment .... .... 43 F. External Trade and Payments .... ............ 45 G. General Objectives and Policies of the Fourth Plan ....... ......................... 48 CHAPTER THREE: RESOURCE MOBILIZATION .53 A. Resource Mobilization Targets of the Fourth Plan .53 B. Public Sector Revenues and Expenditures 55 C. Revenues and Expenditures of the Central Government .57 D. The Performance and Problems of State Economic Enterprises (SEEs) .64 E. Resource Mobilization in the Private Sector .70  Table of Contents (Continued) Page No. CHAPTER FOUR: FOREIGN TRADE POLICY: GENERAL ISSUES .... ....... 82 A. Foreign Trade Strategy and Targets of the Fourth Plan ....... .......................... 82 B. Foreign Trade Policy in a Mixed Economy ..... 88 C. Conclusion ........ .......................... 100 CHAPTER FIVE: FOREIGN TRADE POLICY: MAJOR SECTORS .... ........ 101 A. Agriculture .................................. 101 B. Manufacturing ................ 108 C. Energy ................ 116 D. The Service Sectors ...... ................... 119 E. Conclusion ......... ......................... 122 CHAPTER SIX: POPULATION, EMPLOYMENT AND WAGES .... ............ 124 A. Population Policies and Employment .... ...... 124 B. Trends in Labor Force and Employment .... .... 126 C. Employment Policy ...... ..................... 131 D. Fourth Plan Employment Targets and Prospects ......... .......................... 134 E. Institutional Factors Affecting the Labor Market ........... ........................... 138 F. Analysis of Wage Behavior ..... .............. 144 CHAPTER SEVEN: MEDIUM-TERM DEVELOPMENT PERSPECTIVES . 150 A. Alternative Medium-term Scenarios . 150 B. Macro-economic Outlook . 153 C. Sectoral Outlook . 156 D. Balance of Payments, Gross Capital Flows and External Debt . 160 PART II APPENDICES APPENDIX 1: AN ANALYSIS OF THE INFLATIONARY DYNAMICS OF TURKEY ....................................... 164 APPENDIX 2: EXCERPTS FROM THE FOURTH PLAN .................... 177 APPENDIX 3: THE FOURTH FIVE-YEAR PLAN (1979-1983) .... ....... 185 APPENDIX 4: NOTE ON CAPITAL - OUTPUT RATIOS ................. 197  Table of Contents (Continued) Page No. APPENDIX 5: FORECASTING OF TAX REVENUES OVER THE FOURTH PLAN . ........................................... 200 APPENDIX 6: THE EQUATIONS OF THE COMPUTABLE GENERAL EQUILIBRIUM (CGE) MODEL FOR TURKEY ..... ......... 202 LIST OF TABLES TEXT TABLES CHAPTER ONE: PATTERNS OF DEVELOPMENT: 1962-1978 Table 1. Growth and Composition of Output .... ............ 1 2. Comparative Data: Basic Indicators, 1960-1977 3 3. Comparison of Economic Structure with International Average. 5 4. Comparative Data on Export, Savings and Employment Growth ...... ..................... 6 5. Components of Total Output Growth, 1962-1977 .... 7 6. Sources of Growth of Total Gross Production ...... 8 7. Consumption, Investment and Savings .... ......... 9 8. Fixed Investment by Sectors ..... ................ 10 9. Distribution of Investment ..... ................ 11 10. Regional Household Income Distribution Patterns .13 11. Comparative Data on Social Indicators, 1960-1977. 16 12. Selected Economic Indicators, 1970-1977. 17 13. Public Sector Finances .22 14. Balance of Payments: Short-term Prospects .23 15. Monetary Survey, 1973-1978 .28 16. External Debt .31 17. Debt Relief Arrangements .34 CHAPTER TWO: THE FOURTH FIVE-YEAR PLAN IN PERSPECTIVE Table 18. Trade Volumes, Terms of Trade and GDP-Growth (1960-1977) ................ 46 CHAPTER THREE: RESOURCE MOBILIZATION Table 19. Resource Requirements for the Fourth Plan ....... 54 20. Public Sector Expenditure and Revenue Targets over the Plan Period ...... ...................... 56 21. Structure of Tax Revenues ..... .................. 58 22. Central Government Expenditures .... ............. 62 23. Profit and Loss Account of SEEs .... ............. 65  Table of Contents (Continued) Page No. 24. Private Sector Savings Targets of the Fourth Plan . ............................................ 71 25. Private and Public Savings: Past Performance ... 72 26. Composition of Private Savings through Financial Assets ........... ............................... 73 27. Saving in the Form of Bank Deposits .... ......... 75 28. Inflation and Real Interest Rates (1969-1971 to 1976-1978) .77 CHAPTER FOUR: FOREIGN TRADE POLICY: GENERAL ISSUES Table 29. Estimated Sectoral Domestic Resource Costs: 1978. 86 CHAPTER FIVE: FOREIGN TRADE POLICY: MAJOR SECTORS Table 30. Agriculture: Fourth Plan Targets .... ........... 103 31. Manufacturing Industry: Fourth Plan Targets .... 110 CHAPTER SIX: POPULATION, EMPLOYMENT AND WAGES Table 32. Population, Manpower, and Employment Levels ..... 127 33. Labor Force Participation Rates: Age Group 15-64 years . 128 34. Historical Trend in LFPR for Turkey: Prime Age Group (25-54 years) ...... ....................... 129 35. Sectoral Distribution and Growth of Employment .. 129 36. Sectoral Incremental Capital Labor Ratio ........ 130 37. Migration and Domestic Employment ....... ........ 131 38. Employment and Investment in Manufacturing Industry ...... .. ...... 132 39. Wage Structure ...... .. ...... 140 40. Composition of Non-Agricultural Labor Force, 1962-1977 . .141 41. Workdays Lost Due to Strikes in Selected Countries ....................................... 143 42. Trends in Daily Wages in Turkey ................. 145 43. Changes in Real Gross and Net Wages ............. 147 44. Cost of Hiring a Worker, 1973-1977 .............. 148 CHAPTER SEVEN: MEDIUM-TERM DEVELOPMENT PERSPECTIVES Table 45. Macro-economic Aggregates: Medium-term Growth Rates . 153 46. Exports: Volume Growth Rates (1978-1985) ....... 156 47. Imports: Volume Growth Rates (1978-1985) ....... 156 48. Production: Volume Growth Rates (1978-1985) .... 157 49. Growth of Output, Exports and Imports, 1978-1985 ........... ............................ 159 50. Balance of Payments Projections 1979-1985 .... .... 161  Table of Contents (Continued) Page No. APPENDIX TABLES APPENDIX 1. Table 1. Estimates of Equations (1) and (2) .... .......... 170 2. Test Results ......... ........................... 171 3. The Impact of All Percent Rise in Money Supply 173 APPENDIX 3. Table 1. Actual and Target Output Growth Rates .... ....... 185 2. Agricultural Production ...... ................... 187 3. Industrial Output Growth ...... .................. 188 4. Fixed Investment Allocation ..... ................ 190 5. Availability and Use of Resources and Macro Balance . .................................. 192 6. Sectoral Demand for Labor, 1978 and 1983 .... .... 194 7. Agricultural and Non-Agricultural Labor Productivity . ................................... 195 8. Targets for School Enrollment ..... .............. 195 APPENDIX 5. Table 1. Tax Revenue Projection for 1983 ..... ............ 201 APPENDIX 6. Table 1. Endogenous Variables ............................. 205 2. Dynamic Model: Variables to be Updated .......... 217 LIST OF CHARTS TEXT CHARTS CHAPTER ONE: PATTERNS OF DEVELOPMENT: 1962-1978 Chart 1. Growth Rates, GDP, Agriculture and Industry, (Two-year Moving Averages) ............ 2 2. Balance of Payments .............. ............... 19 3. Wholesale Price Index (1963 = 100) .... .......... 25 CHAPTER THREE: RESOURCE MOBILIZATION Chart 4. Consolidated Budget Operations .63 5. Financing of Investment of SEEs .68 6. Selected Deposit Interest Rates, 1973-1979 ...... 76  Table of Contents (Continued) Page No. APPENDIX CHARTS APPENDIX 1. Chart 1. Wholesale Price Index and Components .... ........ 165 2. Wholesale Prices, Istanbul and Ankara Cost of Living Series ............. ................... 166 3. Prices: Deviation Around Trend .................. 168 4. Money Supply: Deviation Around Trend ............ 168 APPENDIX 3. Chart 1. Sectoral Allocation of Fixed Investment, Gross Domestic Product, and Employment ................. 186 VOLUME TWO STATISTICAL ANNEX Notes on Data Sources and Problems .............................. List of Statistical Tables ...................................... Symbols Used in Statistical Tables .............................. St'atistical Tables .............................................. Section 1. Population and Employment. 2. National Income Accounts. 3. Foreign Trade and Balance of Payments . 4. External Debt . 5. Public Finance . 6. Money and Banking ............................... 7. Prices and Wages . 8. Agriculture. 9. Industry. 10. Others ..... 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