Turkey - Agricultural development alternatives for growth with exports (Vol. 1 of 3) : Main report

Report No. 4204-TU Turkey Agricultural Development Alternatives for Growth with Exports (In Three Volumes) Volume 1: Main Report June 30, 1983 Europe, Middle East and North Africa Projects Department FOR OFFICIAL USE ONLY U Document of the Wo4rld Bank This document has a restncted distributton and may be used by recipients only in the performance of their official duties Rts contents may not otherwise be disclosed without World Bank authonzation.  CURRENCY EQUIVALENTS US$1 - ~Tbrk-tsh lira (TL) 2141/ TL 1 = US$0.005 TL 1,000,000 = US$4,673 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1 metric ton = 1,000 kilograms 1 metric ton = 0.98 long ton 1 meter (m) = 1.09 yards 1 kilometer (km) = 0.62 mile I hectare (na) 10,000 m2 = 2.47 acres I decare = 0.1 ha = 0.25 acre I square kilometer (km2) = 0.386 square mile I liter (1) = 0.264 gallon ABBREVIATIONS AI - Artificial Insemination CBT - Central Bank of Turkey CGE - Computable General Equilibrium Model DSI - State Hydraulic Works agency within the Ministry of Energy EBK - Meat and Fish Organization, an SEE GDAA - General Directorate of Agricultural Affairs of MAF GDPPQ - General Directorate of Plant Protection and Quarantine of MAF GDSF - General Directorate of State Farms of MAF GDVA - General Directorate of Veterinary Affairs of MAF Hara - Animal Breeding State Farm, under the GDVA MAF - Ministry of Agriculture and Forestry ORKOY - Directorate of Forest Villages of MAF SEE - State Economic Enterprise SEKER - Turkish Sugar Factories, an SEE SIS - State Institute of Statistics SPO - State Planning Organization TASM - Turkey Agricultural Sector Model T&V - Training and Visit System of Agricultural Extension TCZB - Agricultural Bank of Turkey TEKEL - Tea & Tobacco Monopoly, a Parastatal TMO - Soil Products Office, an SEE TOPRAKSU - Land and Water Development agency of the Ministry of Village Affairs TSEK - Milk Industries Organization, an SEE TUBITAK - Turkish Scientific Research Council TYT - Wool and Mohair Corporation, an SEE TZ - The Provincial Extension Services of GDAA TZDK - Agricultural Supply Organization, an SEE YEM - Turkish Feed Industries, an SEE YSE - General Directorate of Rural Infrastructure of the Ministry of Village Affairs FISCAL YEAR Government of Turkey - January 1 to December 31 SEEs and TCZB - January 1 to December 31 1/ Exchange rate as of June 1, 1983.  FOR OFFICIAL USE ONLY TURKEY AGRICULTURAL DEVELOPMENT ALTERNATIVES FOR GROWTH WITH EXPORTS Table of Contents Page No. Volume I: Main Report PREFACE SUMMARY I. INTRODUCTION I II. THE AGRICULTURAL SECTOR - A RETROSPECTIVE VIEW 2 III. PERFORMANCE POSSIBILITIES FOR THE AGRICULTURAL SECTOR 22 IV. MEDIUM TERM REQUISITES - AGRICULTURAL TECHNOLOGY AND INFORMATION SYSTEMS 37 V. MEDIUM TERM REQUISITES - AGRICULTURAL INVESTMENT AND CREDIT POLICIES 61 VI. MEDIUM TERM REQUISITES - AGRICULTURAL TRADE AND PRICE POLICIES, SECTOR PLANNING CAPABILITY 82 VII. AGROPROCESSING INDUSTRIES - AN OVERVIEW 91 APPENDIX - Elements of the Proposed Strategy 102 MAP - Agricultural Regions of Turkey Volume II: Annexes 1-4 l. Patterns of Resource Use, Physical Performance, and Constraints (1968/70-1978/80) 2. Agricultural Exports and Marketing 3. Food Consumption and Nutrition 4. Agri-related Manufacturing Industries: An Overview Volume III: Annexes 5-11 5. Agricultural Production, Consumption and Trade Possibilities 6. Macroeconomic Consequences of Sectoral Performance 7. Resource Potential and Technological Possibilities in the Medium Term 8. Supporting Services to Farmers 9. Agricultural Credit and Agroindustries Financing 10. Price Stabilization and Food Security Policies in Grains 11. Agricultural Incentives Policies 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.   TURKEY AGRICULTURAL DEVELOPMENT ALTERNATIVES FOR GROWTH WITH EXPORTS Volume I: Main Report Table of Contents Page No. PREFACE SUMMARY i-ix I. INTRODUCTION I II. THE AGRICULTURAL SECTOR - A RETROSPECTIVE VIEW 2 A. The Policy Environment and Past Performance B. Resource Use and Physical Performance C. Exports and Marketing D. Nutrition III. PERFORMANCE POSSIBILITIES FOR THE AGRICULTURAL SECTOR 22 A. Perceived Opportunities B. Modelling Turkish Agriculture C. Sources of Growth D. Interpretation of TASM Results E. From Modelling to Strategy IV. MEDIUM TERM REQUISITES - AGRICULTURAL TECHNOLOGY 37 AND INFORMATION SYSTEMS A. Technology Generation B. Diffusion of Improved Technologies C. Elements of Strategy V. MEDIUM TERM REQUISITES - AGRICULTURAL INVESTMENT 61 AND CREDIT POLICIES A. Public and Private Investment Requirements and Strategy B. Agricultural Credit Policies and Strategy VI. MEDIUM TERM REQUISITES - AGRICULTURAL TRADE AND PRICE 82 POLICIES, SECTOR PLANNING CAPABILITY A. Foreign Trade Regime B. Price Policies and Production Incentives C. Price Stabilization, Food Security and Nutrition D. Plans and Policy Formation E. Elements of Strategy VII. AGROPROCESSING INDUSTRIES - AN OVERVIEW 91 A. Performance Potential B. History and Performance C. Marketing D. Capital Structure and Finance E. Institutional Strategy F. State Economic Enterprises G. Elements of Strategy APPENDIX - Elements of the Proposed Strategy 102 MAP - Agricultural Regions of Turkey  Table of Contents (cont'd) Text Tables Page No. 2.1 General Land Use in Turkey 6 2.2 The Changes in the Destination of Turkish Exports 14 by Commodities and Major Markets 3.1 TASM: Projections of Output, Consumption and 26 International Trade in 1990 3.2 Main Stability and Food Security Indicators 35  TURKEY AGRICULTURAL DEVELOPMENT ALTERNATIVES FOR GROWTH WITH EXPORTS PREFACE This report originated in the findings of a mission!/ to Turkey in May-June 1982 to examine developments in the agricultural sector following the adoption of the Government's 1980 economic policy package, and identify policy requirements for a reattainment of sectoral growth under a more liberalized trade regime. The mission also examined possible trade-offs within agriculture between production for exports and other sectoral performance objectives, and developed an overview of the agroprocessing industries. Corollary was the evolution of appropriate sectoral conditionality for the Fourth SAL operation in Turkey, which was specifically designed to support sectoral policy developments; the delineation of agricultural issues to be pursued in the general country dialogue; and the identification of supporting ESW, technical and capital assistance operations. The draft report was based upon information available in June 1982. The findings and conclusions were discussed in December 1982 and March 1983 during the processing of the Fourth SAL operation, and a formal review was conducted with Government in April 1983. Because the policy environment for Turkish agriculture is changing rapidly, the Main Report was subsequently updated to reflect significant developments since the study mission's field visit. The broad conclusions remain, however--that Turkish agriculture will continue to play an important but diminishing role in the economy during the medium term; that historical sectoral growth rates can be reattained provided that certain key policies are pursued, including - continued support of essentially free-trade policies, including a deregulation of agricultural imports, - continued penetration of foreign markets, - continued deregulation of internal markets, - more efficient generation and transfer of productivity-increasing improvements in the sector, - an increase in the rates of investment in quick-yielding irrigation projects and on-farm investment, and - institution building, particularly in the areas of agricultural research and extension, irrigation development, agricultural credit, and sector planning and policy formulation; that a modest expansion of agricultural exports will be feasible and would be associated with increased employment but also with diminishing consumption balances; and that a much more rapid expansion of agroindustry exports can be expected, though the rate of expansion will be critically dependent upon the performance of primary production. 1/ The study mission was composed of Messrs. R. Burcroff II (mission leader), H. Gassner, Mmes. K. Saito and S. Tillier (Bank), and Messrs. M. Evans, H. Gencaga and N. Sanborn (Consultants). The mission was assisted with its modelling work by Messrs. S. Robinson and P. Scandizzo (Bank), and D. Bigman, V. Le-Si and J. Lewis (Consultants).   TURKEY AGRICULTURAL DEVELOPMENT ALTERNATIVES FOR GROWTH WITH EXPORTS SUMMARY i. This study was conducted to devise a medium-term development strategy for Turkish agriculture taking into account the potentially far-reaching policy changes introduced since 1980. In doing so, the study consolidates and explores in greater detail key findings of the recent report on Industrialization and Trade Strategy (Report No. 3641-TU, March 1982) and the Public Sector Investment Review (Report No. 3472-TU, December 1981) insofar as the agricultural sector is concerned, and the 1980 project identification mission's report on "Agricultural Development: Problems and Opportunities" (Report No. 3178a-TU, May 1981). ii. With the benefit of hindsight and a more focussed review of statistical and written materials, the present report was able to document the specific nature of the physical constraints which developed in the agricultural sector in the 1970s (e.g. on land and animal productivity). Programs, policies and institutional requirements to overcome these constraints are discussed, and particular emphasis is given in the report to weaknesses in the agricultural technology and information systems, public investment in irrigation and the agricultural credit system. The study also examines the patterns of export marketing and associated marketing arrangements that have developed since 1980 in order to evaluate possible constraints in this area for achieving the export growth targets. The study explored the incidence of malnutrition in Turkey which was found to be high, the relationship between policies which would maintain per capita consumption balances under a strategy of growth with exports, offsetting food import requirements, and the effectiveness of the present price stabilization and food security policies. Lastly, a general overview of agroindustry performance and requirements was carried out to establish a basis for a more in-depth examination by subsequent studies. iii. The analysis reported herein was facilitated by the use of a programming model of the agricultural sector and a stochastic model of interventions in the wheat trade, which were constructed by AGR and the study team. The intersectoral effects of sectoral performance were explored with the assistance of DRD using the recently updated version of the Bank's CGE model for Turkey. Past Performance and Constraints iv. Turkish development strategy during the 1960s and 1970s was based primarily upon industrial growth, with agriculture playing essentially a supportive role. Agricultural policies were geared to ensuring an adequate and cheap domestic supply of foodstuffs and industrial raw materials. The principal instruments of policy were budgetary and financial subsidies to  guarantee high producer prices, low cost inputs, and cheap credit in order to stimulate agricultural production and investment. The domestic market was highly protected to encourage self-sufficiency in foods, and agricultural commodity export markets were regarded as a vent for any surplus production, with public agencies extensively involved in the limited exporting that occurred. v. These policies encouraged the development of near self-sufficiency in foodstuffs, and a respectable growth and investment performance in the agricultural sector until about 1975. Agricultural GDP grew at an average rate of 4.7% p.a. from 1972-75, and sectoral fixed investment grew at an average rate of 17.9% p.a. The arable land frontier was reached in the early 1970s as a result of an extensive lateral expansion of cultivation during the 1960s, and production growth since then has been primarily through intensification of production. This was due mainly to increased yields and to the suppression of fallowed lands which, while not adding to the cropped area, accounted for up to one-third of the expansion of cultivated area. In particular, there were substantial increases in cereal production growth and yields, especially for wheat due to the successful wheat improvement programs implemented by the Government in the 1970s. The livestock sector, which accounted for one-third of agricultural GDP in 1981, showed no such improvement. There was a steady growth in the numbers of livestock during the 1970s, but no significant improvement in animal husbandry practices or productivity. Moreover, despite the availability of pasture land, substantial overgrazing is threatening its conservation. vi. The intensification of land use during the 1968-80 period was accompanied by a considerable increase in the consumption of modern inputs and mechanization. Fertilizer use developed in the mid-1960s, and the subsidization of retail prices encouraged its widespread use--by 1979 fertilizer consumption was more than three times the 1970 level. There was also a rapid increase in Turkey's tractor fleet in response to price and credit subsidies, leading to an improvement in yield and a reduction in fallow. However, it also facilitated the expansion of cropping onto marginal land, thus contributing to a depletion of soil fertility. It also discouraged the use of animal traction and the development of less powerful tractors more suitable for small farmers. vii. By the mid-1970s, the burden on the economy of the subsidies to the agricultural sector had become all too evident, although the basic development strategy did not change. Agriculture was thus still prevented from exploiting its comparative advantage in trade, which could have considerably reduced the subsidization needed to sustain the sectoral growth. By the mid-1970s, these rates were already declining, and agricultural GDP growth fell to 1.4% p.a. during 1976-79, with investment also declining to 1.7% p.a. over these years. During the entire decade, sectoral exports remained a small fraction of total production and way below potential due to the overvalued exchange rate and other disincentives to export. Mechanization and use of chemical inputs, however, caused the import content of production to increase.  - iii - Recent Economic Reforms viii. In 1980 the Government embarked on a more outward-oriented development strategy which emphasized market forces rather than Government direction and intervention. In the agricultural sector this new strategy meant an abrupt dismantling of the incentives system. There was a sharp reduction in input subsidies, particularly fertilizer, and in the number of production price supports with the remaining supports gradually converted to floor prices. The overall restraint on monetary policy forced a curtailment of agricultural credit, although interest rates remained negative in real terms. The introduction of a competitive exchange rate policy and new export incentives, together with a slack domestic demand, encouraged agriculturalists to seek markets abroad. ix. This shift in strategy initially resulted in considerable disarray in the agricultural sector: the growth of agricultural GDP in real terms fell to 1.5% in 1980 and further to 0.5% in 1981. In 1982, however, there were indications that farmers are adjusting to the new agricultural environment, and, aided by a good harvest, real growth in agricyltural GDP recovered somewhat. In 1980 and 1981, agricultural exports_ began to respond to the new measures, though less dramatically than industrial exports which had the advantages of substantial excess capacity. In these two years, agricultural export earnings grew by an average annual rate of 29%, twice the average annual rate of the previous five years. In 1982, export performance appears to have been somewhat mixed, with the rate of growth of crop exports declining while exports of livestock have almost doubled. x. Agriculture has thus begun to respond to a policy environment and marketing signals markedly different from the previous two decades. The implications of the recent shift in strategy over the medium-term raises fundamental questions which are examined in the following chapters. Key amongst these are the following: (a) what rate of sustained growth is feasible for the agricultural sector; (b) 'what are the trade-offs between a rapid expansion of exports, sectoral employment, and domestic food security; (c) what are the likely patterns of resource utilization and production resource requirements under an outwards-looking strategy; and (d) what specific policies and interventions are required to achieve a resumption of sustainable growth in agricultural GDP with exports? 1/ Including livestock and fisheries.  - is Performance Possibilities over the Medium-Term xi. The requirements for the agricultural sector over the medium-term are considerable. With limited possibilities for growth through expansion of area or livestock numbers, growth must now increasingly come from higher productivity and through a product mix which better reflects Turkey's comparative advanta es. The study demonstrates, however, that a growth rate in agricultural GDP-/ of 2.8-3.0% until 1990 is feasible if certain key policies are pursued. Amongst these are: - a continued support of essentially free-trade policies, including a deregulation of agricultural imports; - continued penetration of foreign markets; - continued deregulation of internal markets; - more efficient generation and transfer of productivity increasing improvements in the sector; - an increase in the rates of investment in quick-yielding irrigation projects and on-farm investment; and - institution building, particularly in the areas of agricultural research and extension, irrigation development, agricultural banking and credit, and sector planning and policy formulation. xii. Such increase of agricultural GDP appears to be sustainable, and is associated with growth possibilities for agricultural exports of between 4-6% p.a. and moderate growth in agricultural employment of about 1.0% p.a. However, the commodity composition of production must change and per capita domestic consumption will decline as a result of a shift from production of staples to barley, fruit and vegetables, other cash crops and exportable livestock products. Under conditions of limited food imports, the agricultural terms of trade would move markedly against consumers. The adoption of more efficient price stabilization and food security subventions in the wheat trade might lessen the severity of the trade-off. Since malnutrition is still an important concern, a delicate balance will have to be maintained between diversion of sectoral resources for export production and the related import and food security policies. The relatively low export growth possibilities when compared with performance possibilities in the non-agricultural sectors suggests, however, that the Government's export-led industrialization drive may indeed be the most promising growth strategy, viz. while agriculture should be expected to play an important role in Turkey's growth, its share of GDP should be expected to decrease. This kind of pattern certainly has characterized the successful performances of other medium-income developing countries. Technical and Institutional Requirements xiii. Technology generation. The requirements to restore and sustain growth rate of 2.8-3.0% in agricultural GDP during the 1980s are major.2/ The arable land frontier already effectively closed in the 1970s and hence the 1/ Government's definition. See Chapter III, para. 3.21. 2/ A tabular summary of the elements of strategy are presented in the appendix to the main report.  v resumption of agricultural growth will require a marked increase in agricultural productivity. Future production growth must come from a more intensive use of existing cultivated area through fallow suppression, expanded multiple cropping and crop yield increases. In the livestock subsector, which accounts for about one-third of agricultural GDP, future efforts should focus on raising the productivity of native ruminants which comprises the large bulk (85%) of the national herd. The government presently is not particularly well organized to intensify the use of either of these basic resources (land and animals). A reorganization, consolidation and regionalization of crop and animal husbandry research is required as well as an improved system to establish and monitor priorities for technology transfer and generation. These priorities should address both the needs of Turkey's semi-arid areas where mixed-crop livestock farming prevails--a cropping systems approach would be appropriate here--and the more commodity specific production and marketing requirements of sophisticated commercial producers. Increased emphasis on product quality and the needs of the importing countries is also required. Recent initiatives by Government to examine ways to improve agricultural research constitute an important step in the right direction. xiv. Diffusion of improved technologies. In parallel with improvement in the agricultural technology systems, should come an improvement in the operation of farmer information systems such as agricultural extension and the provision of improved inputs, principally seed, fertilizers, smaller tractors and implements and more appropriate breeding animals. To accomplish the former, the Government's diverse agricultural extension services also will have to be reorganized and consolidated, with retraining of staff. Links with the research entities must be strengthened and a more thoughtful approach to farmer training pursued. The scope of official extension assistance should be expanded to incorporate animal management, care and feeding, while the use of the effective but staff intensive T&V approach should be emphasized mainly in regions where it might have the greatest effect.!/ Program cost savings and a conservation of management input could be realized in the more commercialized areas, were the use of mass media further developed, and agribusiness encouraged.-V The Government recognizes these problems and intends to address some insofar as MAF's services are concerned through the format of an Agricultural Extension and Applied Research Project (field appraisal for Bank assistance in FY84 was carried out in June 1983). It also intends to establish an interministerial study group to examine ways to consolidate and regionalize its diverse agricultural extension services under future projects. A relaxation of import restrictions on high quality seeds, smaller tractors and implements not presently produced in Turkey would measurably assist the technology-diffusion process. 1/ In a first phase program, it might be limited to rainfed areas which feature mixed farming conditions and newly irrigated areas not previously served by intensive extension. 2/ In this connection, the strengthening of media-based marketing information services is to be encouraged.  -vi xv. Agribusiness. In adthteil _o the direct management of research and extension by Government line agercies, these activities have been carried out with some success by paras-Q aals which have been organized along the lines of an integrated agribusiness (e g SEKFR). A relatively recent development is the provision of technology and inforauation services to farmers by privately owned agribusiness, priicipl. in 7horticulture and, more recently, in livestock products. Although he scope of such operations has been confined to date to the coastal regions and tne more accessible parts of Anatolia, and the farmer-beneficiaries are no doubt the larger more successful operators, the promotion of an agribusiness approach could hasten the transfer and the diffusion of new techniques to the more commercialized areas, and thereby contribute to the resumption of growth. Investment xvi. To meet the growth targets al uded to above, an increase in the capability of the construction agencies to program and complete irrigation projects is required. This Darticularlv applies to TOPRAKSU, which currently has a backlog of oxver 500,00 ha on DSI schemes (roughly equivalent to one-quarter of the present area sarved by technically good irrigation headworks), but only has a capability to construct 30,000 ha./year. The growth forecasts assume that the TOPRAKSU capability will be increased to about 100,000 ha./year wh-ich iTnPlies that much more extensive use of contractors under TOPRAKSUes supervision is essential. DSI and TOPRAKSU should also prepare a detailed medium-term investment plan in which the programmed expenditures of these agencies' resources would be concentrated on projects which can be completed within a reasonable period of time. The annual staff, equipment and budgetary requirements should be realistically estimated and their relati-ionhi.- teo the elements of the program should be clearly indicated for carrying out the investment program. To this end, measures have been agreed under the TAEE Irrigation Project (FY83) to augment the utilization of contractors and develop an irrigation investment plan. xvii. The private investraent requirements for achieving the sector's growth and exports potential coul' oe considerable, both at the farm level and for export marketing facilities and representation abroad. Broad-based farm level investment is likely to m-aterialize only later in the decade but could amount to US$1-1.5 billion per year by 1990. A large demand for export oriented investments could materislize sooner. However, the present array of investment incentives give conflicting signals in regard to suitable factor proportions, in particular wsithi respect to the desired degree of capital intensity. Agricultural Credit xviii. The growth targets also imply a doubling of the provision of institutional credit in real 1981 terms during the 1980s, which could easily become larger if supplemented by a strong farmer demand for investment credit. Because of the magnitudes involved and the importance of achieving broad-based productivity increases, a much larger share of agricultural credit will have to be directed tou hrds the medium- and small-sized farmers. The  - Vii - present institutional system is unable to either generate the additional resources for this task, or effectively reach farmers in the required numbers. Three-fold action is desirable. First, to improve the system's resource mobilization capability, the short-term agricultural interest rate in real terms should be increased and institutional depositories should be set up at the village level to capture incremental savings from the expected increase in agricultural incomes over the medium term. Second, a diversion of existing agricultural credit to unintended uses by the quasi-parastatal sales cooperatives should be restrained by curtailing their guaranteed access to TCZB financing except during years when commodity price floors come into effect and compulsory procurement is required. Ultimately, however, it would be desirable to set up independent sources of financing for these purposes. Third, the efficiency of agricultural and agroindustrial lending should be improved by (a) strengthening TCZB, and (b) creating competing institutions which, hopefully, could also extend their offices deeper into the rural areas than TCZB has been able to do. Recent steps to improve the sales cooperatives' financial structure, and measures agreed under the Second Agricultural Credit Project (approved June 1983) in respect of the agricultural interest rate, the organization and management of TCZB, and a study of the credit cooperatives' capabilities represent significant progress towards implementing the suggested credit strategy. Foreign Trade Regime xix. Exports. Achievement of the sector's growth potential requires an average growth of exports in fresh and semi-processed form of 4-6% p.a. which is feasible under a strategy of continued penetration of Middle-Eastern markets and, towards the end of the 1980s, further expansion into the EEC. The principal policy requisites are a maintenance of a competitive exchange rate policy and continued deregulation of exports, since exports of raw and semi-processed commodities have responded principally to progressive devaluations since 1979 and the removal of restrictions kand much less so to the specific export credit and tax rebate incentives). Moreover, the system of export levies, as presently construed, bears no visible relationship to the government policy of maximizing value-added in exports. The application of the levies should therefore be detached from che system of commodity price supports, and applied only selectively to commodities wherein Turkey controls a large share of international trade. xx. Imports. In parallel with increased sales abroad, the current restrictions on food imports should be relaxed. The GDP and exports growth projections are associated with an increase in agricultural imports about 35% p.a., which would entail a fundamental change in Government's autarkic attitude towards certain strategic food co.mmodities, Expanded exports of horticultural produce and livestock products will tend to divert land and other resources away from the production of staples, Tne diversion of rainfed wheat land into the production of barley for export, and increased exports of higher quality wheat per se will place pressure on the availability of domestic supplies. A marked increase in domestic food prices (and of agroindustries' raw material prices) is projected to occur unless increased imports of principal food items are allowed such. us bread wheat, oils and possibly sugar.  V Yiii xxi. Institutions. In terms of institutions, the TMO's still predominant position in grain exports and monopoly of imports should be relaxed once and for all to facilitate the projected and considerable growth of barley and hard wheat exports, as well as offsetting bread wheat imports. TMO has neither the export marketing capability for such an expansion, nor are its related interventions for stabilizing domestic grain prices particularly appropriate. Price Stabilization/Food Security and Nutrition xxii. Food Security. In the field of price stabilization and food security, continued intervention is desirable both to reduce the loss of potential economic gains stemming from producer risk aversion and satisfy the need to stabilize household incomes, especially amongst the poor. The roots of the present price policy lie in the system of commodity price supports, which was excessive before 1980 both in terms of number of commodities supported and the resource costs of maintaining the system. The recent moves to reduce the number of supported commodities and shift from incentive pricing to floor pricing is to be encouraged. Within this framework, a new and non-inflationary method for financing the diverse procurement agencies must be found. Since the requirement to procure is compulsory when prices decline below trigger price levels, government itself should incur a duty loss. Such probably should be reimbursed through less inflationary general revenues or earmarked off budget transfers (e.g. the Price Stabilization Fund). With respect to grains price stabilization, the present system basically operates to stabilize producers' prices at still subsidized levels-! and to protect the producers from international price movements. In the process, however, it destabilizes consumer prices, while TMO's operating policy of first filling its storages before exporting in good years operates to reduce average grains production by constraining the sector's ability to avail of high valued export opportunities when these exist.2/ Amongst alternative grains stabilization policies examined in the study, a policy of free trade augmented by producer floor pricing and target consumer subsidies proved the most effective for simultaneously stabilizing producer and consumer prices and household incomes, while reducing the probability of "famine" among target consumers during periods of low production. xxiii. Nutrition. Regarding food availability and nutrition, the cheapest sources of calories and nutrients in Turkey are bread and other wheat flour derivatives, sugar, liquid oils and margarine, pulses and potatoes. The study concluded that the continued availability of reasonably low cost supplies would require a progressive relaxation of import constraints for bread wheat and oils. The analysis also shows that exports have induced a considerable increase in the domestic availability of pulses since only the better quality produce is exported; however, research is needed to augment the storage life, and thus the availability of potatoes (conversion to dried form may help). These interventions are all within the present capability of government institutions. 1/ As a result of Central Bank discounts at a preferential rate of interest. 21 The effect of these constraints on wheat are more far-reaching than any other commodity since wheat occupies about 45% of the cultivated area, and nearly every farmer in Turkey produces some wheat.  - ix - Agricultural Sector Planning Capability xxiv. The production and marketing structure of Turkish agriculture is exceedingly complex. A bewildering and often conflicting array of incentives, taxes, permissions, licenses and direct public sector involvement are used to carry out existing policies. In order to rationalize the pattern of intervention it will be necessary to create an effective capability for medium-term planning and policy monitoring whose scope will necessarily cut across ministries, and the parallel development of statistical resources and a policy analysis capability replete with appropriate modelling to provide checks on consistency. This effort should probably be located within the MAF, with the support of suitably qualified staff from appropriate disciplines. Agroindustries Subsector xxv. While the mission did not undertake an in-depth examination of agroindustries, some pertinent general conclusions were developed. Pre-mission CGE runs demonstrated that the feasible real growth of GDP from the food processing sector is about three times as high as growth in the agricultural sector, but quite sensitive to the agricultural growth rate, thus to productivity improvements in agriculture. The results also indicate that food processing exports could grow at more than twice the rate of agricultural exports, and that this performance could be associated with a near tripling by 1990 in the combined agriculture and food processing sectors' positive net foreign exchange earnings. xxvi. The study's findings with respect to agroindustries confirmed the recent Country Economic Mission's general findings with respect to manufacturing. As a result of overinvestment during the highly protected and subsidized policy environment of the 1970s, investment demand and capacity utilization rates generally have remained low, except for those comparatively few firms which have successfully expanded their export operations and thereby availed of the government's export incentives; the needed shake-out of inefficient firms is continuing. This is in line with Government's commendable approach to rationalize the subsector and open it to the forces of international competition. To strengthen the capital structure of firms which are able to expand exports and adjust to the new environment, steps have been taken to strengthen the equities markets, and others are planned to reduce the cost of debt financing. Specific incentives for exporting should also be continued until Turkish agroindustries have established a firm foothold in foreign markets. xxvii. Publicly owned agroprocessors do not appear to be faring much better than the private sector operators, in spite of their still favored access to public investment funds. Most are having cash flow problems. Moreover, their productivity is low, unit costs are high, and their management and overstaffing problems, and susceptibility to bureaucratic interference are on a level with other manufacturing SEEs. In recognition of this, SEE agroprocessors such as EBK, TSEK, TYT and SEKER were included within the purview of the recent SEE reform legislation. It would also be desirable to seek technical assistance for some of these entities to strengthen their managerial, staffing and operational capabilities.   TURKEY AGRICULTURAL DEVELOPMENT ALTERNATIVES FOR GROWTH WITH EXPORTS I. INTRODUCTION 1.01 The most recent Agricultural Sector Survey (Report No. 1684-TU) and "Memorandum on Turkey's Agricultural Sector" (Report No. 2267a-TU) were distributed in June and December 1978 respectively. Sector developments and prospects have been updated subsequently by a Country Economic Mission, whose report "Turkey - Policies and Prospects for Growth" (No. 2657a-TU) and Postcript were distributed in December 1979 and 1980; by two special economic missions treating, respectively, the public investment program (Report No. 3472-TU. December 1981) and "Industrialization and Trade Strategy" (Report No. 3641-TU, March 1982), a project identification mission, whose report "Agricultural Development: Problems and Opportunities" (No. 3178a-TU) was distributed in May 1981; and through the continuing work on project and structural adjustment lending to Turkey. 1.02 During preparation of the September 1981 Economic and Sector Work Indicative Statement, it was felt that an Agricultural Sector Study was needed to cover the recent trends in sector performance, examine the changing patterns of Government intervention, and assess the sector's medium-term prospects. It was intended that the study would primarily concern itself with an analysis of farm production and the export potential of primary agricultural produce. The Government's adjustment program for agriculture subsequently crystallized during Fall 1981, when a strategy of favoring agroindustrial exports over primary products was adopted, and agroindustrialists were extended the Government's full package of export incentives and additional investment incentives. The Government also announced export targets for agriculture which were both ambitious and could require a considerable reallocation of land from production of food and staples for domestic consumption to the production of other field and cash crops for export. However, some stubborn and potentially significant structural difficulties were manifested in 1981, including continued unfavorable movement in the domestic terms of trade, low levels of private investment, further decrease in the rate of growth of sectoral GDP, rapid build-up in fertilizer stocks, declining real wage rates and the stubborn persistence of general protein-calorie malnutrition amongst the rural segments of the population. Against this background, the scope of the study was expanded to quantify and analyze the trade-offs between export and production growth objectives, food security and income stabilization, sectoral employment objectives and the objectives of the import regime, and to provide a summary overview of developments in the agroindustries subsector. 1.03 In the following sections, the main findings and conclusions of the study are presented in Chapters II and III. These are followed by a recommended medium-term strategy for Government (Chapters IV through VI) to induce a resumption of agricultural sector growth and expansion of exports at sustainable levels. The final chapter contains an overview of agroindustries performance and problems.  -2- II. THE AGRICULTURAL SECTOR - A RETROSPECTIVE VIEW A. The Policy Environment and Past Performance 2.01 The decade of the 1970's. The development strategies pursued in the 1970's and their essentially deleterious effect on macroeconomic performance became a root cause of the general economic crisis of the late 1970's. The effects on agricultural performance have been detailed in recent Bank Reports (c.f. para. 1.01), however, the salient features are summarized here to provide background for a forward looking analysis. 2.02 Throughout the 1970's, agriculture was assigned a subordinate role to industry pursuant to the inward-oriented growth strategy adopted by Turkey during those years. Its primary role was to supply low cost inputs to industry and guaranteed food supplies for the urban work force. Although agricultural commodities accounted for a significant though declining share of total exports in the 1970's, sectoral exports as a fraction of total production were quite low and far below potential, which mirrored the generally poor export performance of the economy. Access to foreign agricultural markets was constrained by a combination of exchange rate policies, export licensing requirements, and niggardly foreign exchange retention privileges, which effectively altered the terms of trade in favor of industry and domestic markets. At the same time, the import content of production increased, again mirroring patterns in the non-agricultural sectors, as a result of programs which encouraged fairly indiscriminant agricultural mechanization and use of chemical inputs. 2.03 The sector also did not benefit as much as other sectors from the public investment drive of the 1970's, which gave rise to the strong non-agricultural growth rates experienced between 1972-1979. Much of the public investment which occurred, mainly in the irrigation subsector, gestated very slowly because resources were spread thinly over an excessive number of projects. As a result, the principal instruments of policy became a combina- tion of budgetary and financial subsidies to guarantee high producer prices, low cost inputs and cheap credit in order to stimulate agricultural production and private investment in the sector. These incentives induced fairly good production and investment performance until about 1975, but could not be sustained during the late 1970's as a result of the strain placed on the budget and the banking system and the competing demands for resources from the manufacturing sectors, and constraints to further expansion of the agricul- tural area. However, the basic development strategy did not change, and agriculture was still not allowed to exploit its many comparative advantages in trade which could have considerably reduced the extent of subsidization needed to sustain the, by then, declining rates of sectoral growth. 2.04 At the macroeconomic level, the effects of these policies on agriculture are manifested in sectoral GDP, export and investment performance. Between 1972 and 1979, real GDP increased at an annual average rate of 5.3% p.a.; more so in the early to mid-1970's at a rate of 7.6% p.a., and at the slower pace of 2.1% p.a. between 1976-79. Agricultural GDP growth  followed the same pattern though at lower levels: growth of 3.3% p.a. between 1972-1979; averaging higher at 4.7% p.a. from 1972-75, and falling off to 1.4% between 1976-79. As a result of disproportionately slower growth, the sector's share in real GDP declined from 25.0% in 1972 to 21.7% in 1979. Sectoral exports during this period increased by about 11% p.a. in US$ terms, (less in real terms) which is quite low considering the infinitesimal proportion of total sectoral production actually exported.l/ 2.05 Sectoral fixed investment manifested trends similar to agricultural GDP in the 1970's. It increased at an annual average rate of 17.9% p.a. between 1972-75, which declined by about 17.0% p.a. between 1976-79. Moreover, the composition of fixed investment changed. During the early 1970's, the investment drive in the sector was fueled by private investment, whose share in agricultural fixed investment expanded from 50.0% in 1972 to 60.7% in 1975. Thereafter, private capital formation fell off even more rapidly and, by 1979, its share was only 43.5%. 2.06 The period of economic reform. With the imposition of crisis management measures by the Government in 1980 and 1981, including revised price policies and measures to restore fiscal and financial discipline, the adoption of an export-led growth strategy, and conversion from a mixed two-tiered exchange rate system to an essentially unified crawling-peg system, much of the incentives apparatus put in place for agriculturalists during the 1970's was abruptly (though of macroeconomic necessity) dismantled. Of particular note is the sharp reduction of inputs subsidies,2/ the reduction in number of production price supports, the gradual conversion of the remaining supports from artificially high incentive prices to floor prices, and the enforcement of constraints on the availability of subsidized agricultural credit. These, coupled with deflationary demand management and the new export incentives, have forced exporters and commercial farmers to seek out foreign marketing opportunities. They have done so with vigor. The adjustment process, however, threw the agricultural sector into disarray, from which it is just now beginning to recover. As a result, the growth of agricultural GDP in real terms fell to 1.5% p.a. in 1980 and further during 1981 to only 0.5% p.a. Aided by good weather, but also amidst strong indications that agriculturalists are now adjusting to the new realities of farm management in Turkey--including considerably less subsidization, and greater exposure to market determined prices--the growth of real agricultural GDP has since begun to recover. In contrast with sector production performance, agricultural exports during 1980 and 1981 jumped to unprecedentedly high levels, increasing by an annual average rate of 29% over the two-year period. Physical exports continued to expand in 1982 amidst some indications that the diversion of existing production to foreign markets-- which probably accounted for the very high growth in exports in 1980-81--is being replaced as a source of export growth by a genuine supply response to the higher valued marketing opportunities which exporting presents. 1/ Agriculture's share in total exports, however, fell slightly from 60.6% in 1972 to 59.4% in 1979 as a result of the inward-oriented policies. As a fraction of agricultural GDP, agricultural sector exports amounted to less than 1% in 1979. 2/ Described in Annex 11. Also see Annex 4, Section B.  -4- 2.07 However, the policy and institutional issues which need to be addressed in order to achieve a sustaioable resumption of sectoral GDP growth are both profound and extensive. The encouraging sectoral export performance since 1980 represents a response to a long overdue change in price policies and the foreign trade regime -- itself, mandated by the rising costs of imported energy sources during the 1970's, capital inflows which were used in a less than efficient way without offsetting productivity increases and foreign exchange savings, and a similar squandering of domestic savings in highly protected, subsidized and inefficient public and private investments. However, it is unlikely that the price and foreign sector policy effects, necessary though these are, will provide a sufficient basis by themselves for sustained medium-term growth. These must also be supported by strong institutional measures to foster a continuous growth in the factor productivity of agriculture which include both technology generation and its dissemination to farmers, more effective public investments and higher levels of private capital formation, the provision of credit to encourage the uptake of improved technology at the farmIlevel, and further improvement of marketing and inputs distribution systems. In economic terms, this implies that as the Government moves from its present strategy of stabilization to one of structural change, increasing emphasis will have to be given to policies which can achieve an intertemporal or dynamic shift in production possibilities. This will be needed to complement the measures undertaken since 1980, which were essentially static in nature and designed to move the agricultural sector to the use of more efficient input combinations and a more economic commodity composition of output and balance between foreign and domestic disposals. 2.08 Related developments. Three related developments of note during the 1970's will condition the nature of growth with exports in the medium-term. Two of these bear directly on the prerequisite technological and market penetration strategies for growth, namely (a) the reaching of limits to further cropped area expansion and increases in animal numbers, and (b) the very significant change in the importance of and the direction and commodity composition of exports. The third factor is the incidence of malnutrition which remains of concern in spite of the near self-sufficiency in foods which Turkey achieved during the 1970's. These factors will have to be addressed when assessing the trade-offs between growth with exports and the maintenance of a desirable level of food security and per capita consumption balances. The aforementioned developments are reviewed in the following sections. B. Resource Use and Physical Performance!L 2.09 During the period under review, fundamental physical resource constraints developed which will influence the technological options employed and the commodity composition of production in the future. The most significant amongst these was an effective closing of the arable land frontier in the early 1970's as a result of an extensive lateral expansion of cultivation during previous decades which was accompanied by a broadened shift towards more intensive cultivation during the remainder of the 1970's. A second significant development was the accelerated degradation of 1/ The discussion in this section is based upon the findings reported in Annex 1.  -5- communally-operated grazing lands as a result of overstocking, and the effects this is having on the availability of feeds for Turkey's still largely traditional and low productivity systems of animal husbandry.l/ General Land Use 2.10 By 1980, about 44% of Turkey's agricultural land.?/ was occupied by permanent pastures and meadows..! The two principal sources of information concerning general land use are the 1980 Census of Agriculture and a soils and land classification study done by the General Directorate of Land and Water Development (TOPRAKSU). These give quite different figures for the total areas of pastures and meadows,4/ but agree very closely on their relative share in total agricultural land (Table 2.1). Pastures and meadows are most important in the North East, South East and Central East regions (see Map), where these constitute well above half of the agricultural land; grazing and forage lands are still quite important in the remainder of the Central Anatolian plateau (Central South and Central North regions) and in the Black Sea region, but become secondary in the western and southern coastal areas (Mediterranean, Aegean and Marmara regions), where these account for less than 30% of the agricultural land. 2.11 The remaining 56% of agricultural land represents the crop land, which is occupied by field crops (roughly 60%), fallow (roughly 28%), and vineyards, orchards and vegetable gardens (roughly 12%). The dominant system of cultivation in rainfed areas consists of a rotation including fallow 1 year out of 2, especially for the interior regions; fallow is of lesser importance in the coastal regions, which benefit from higher rainfall (in particular, the Black Sea and Marmara regions) and are usually better equipped with irrigation facilities (e.g. the Mediterranean and Aegean regions). 1/ The livestock subsector, though based largely on traditional husbandry methods, accounted for one-third of agricultural GDP in 1981. 2/ Defined here as including crop land, meadows and pastures. Crop land is itself defined here as including the area sown in field crops, fallow, vineyards and orchards and vegetable gardens. 3/ The pastures ("Mer'a") are the range grazing lands, which may vary considerably in quality as well as in accessibility, while the meadows ("Cayir") are more specifically defined as grasslands, usually located in wet lowlands, and hence not grazed but used for hay production. The meadows, which are usually quite productive, represent only about 3% of the total; they are privately-owned, while the pastures (97% of the total) are most of the time communal lands. 4/ 14.1 million ha according to the 1980 Census, 21.7 million ha according to TOPRAKSU. There is probably some under-reporting in the Census, while some of the areas classified as pastures by TOPRAKSU probably correspond to very low productivity and/or remote and relatively inaccessible rangeland; part of this 21.7 million ha is thus not used or not usable (while other parts are overgrazed).  -6- Table 2.1: General Land Use in Turkey % of Crop Area Annual Agricultural ('000 ha) Statistics /a Census /b TOPRAKSU /c 1. Sown 1970 15,591.0 (57%) 9,906.1 (62.7%) 17,202.4 (62.1%) 1980 16,379.0 (57.7%) 12,488.3 (63.2%) % increase 5.1 26.1 2. Fallow 1970 8,705.0 (31.8%) 4,664.3 (29.5%) 8,396.0 (30.3%) 1980 8,188.0 (28.9%) 5,004.6 (25.3%) % increase -5.9 7.3 3. Vineyards & Orchards 1970 2,595.0 (9.5%) 1,113.4 (7.1%) 1980 3,019.0 (10.6%) 1,844.2 (9.3%) % increase 16.3 65.6 2,100.8 (7.6%) 4. Vegetable -1970 448.0 (1.6%) 109.0 (0.7%) 1980 786.0 (2.8%) /e 411.0 (2.1%) % increase 75.4 277.1 5. Total Crop Area 1970 27,339.0 15,792.8 27,699.2 1980 28,372.0 19,748.2 % increase 3.8 25.0 6. Meadows & Pastures 1970 n.a. 657.4 /d 21,745.7 1980 n.a. 14,177.2 7. Forests & Scrubs 1970 18,273.0 153.6 /d 23,468.5 1980 20,199.0 23,487.4 8. Unused Land 1970 n.a. 294.9 Id - 1980 n.8. 4,995.4 9. Non-arable Land 1970 n.a. 166.4 /d 4,884.0 1980 n.a. 17,551.2 10. General Total 1970 n.a. 17,065.0 77,797.3 1980 n.a. 65,963.2 /a Source: The Summary of Agricultural Statistics, 1980, SIS. 7b Source: 1970 General Census of Agriculture, SIS. Preliminary results of the 1980 General Census of Agriculture, (village head questionnaire) SIS. /c Source: Land Wealth of Turkey, TOPRAKSU, 1978 (based on results of surveys done di,ring the 1966-71 period). Note: Fallow area has been calculated from the above source assuming that one year fallow follows one year cultivation. /d These figures (1970 census) correspond to a very partial reporting since they lead to a general total much below the total area of the country. It is likely that they correspond only to the privately owned areas, i.e., exclude all the communal pastures (and report only the privately-owned meadows) and most of the forest and non-arable areas. /e A lower figure (596.1) is given in "Agricultural Structure and Production, 1980", SIS. n.a.: not available.  -7- Trends in Land Use During the Last Decade./ 2.12 Total cultivated area. During the period 1968-80, the total crop area in Turkey expanded by only 0.3% p.a. On the other hand, the total cultivated area in Turkey (excluding fallow) increased by about 1.5 million ha at an annual rate of close to 0.8% a year (Annex 1, Table 11). Of this, about 0.5 million ha corresponded to a reduction of the fallow, while at least 1 million ha has been gained from grazing land, forest and other lands. The increase in cultivated area has been realized mostly in field crops (+0.8 million ha) and fruit trees (+0.5 million ha) and to a lesser extent vegetables (+0.2 million ha); these last two categories however experienced the fastest growth rates in area, and as a result, fruits and vegetables together now represent 19.7% of the cultivated area as opposed to 17.5% ten years ago. 2.13 Field crops. The results of the State Institute of Statistic's (SIS) annual statistics indicate that the relative share of cereals among field crops decreased slightly, from almost 85% of the area sown at the beginning of the 1970s to a little more than 82% by the end of the decade (Annex 1, Table 21). In connection with the overall increase in cultivated area, the total area of cereals in the country showed a slight increase of about 0.2% a year, while the wheat area increased the most (about 0.9% a year). 2.14 As opposed to cereals, the relative share of area sown to all of the other major field crops (pulses, industrial crops, oilseeds, tubers, fodder crops) increased between 1968 - 1980. In particular, oil seed crops and pulses experienced the fastest growth rate in area, while the share of sown area in industrial crops increased only marginally due to the expansion of sugar beet cultivation nationwide. Evolution of Crop Yields and Production 2.15 Although only modest growth in the area under cultivation was realized, a steady intensification of production occurred. This was manifested principally through increased yields which, for most major crops and some fruits, generally accounted for far more of the realized growth in physical production than did areal expansion (Annex 1, Table 21). Some intensification was also due to the suppression of fallowed lands during the decade, which, in itself - while not adding to the crop area - accounted for up to a third of the expansion of cultivated area. 2.16 Trends in crop production. During the 1970s, the total production of cereals increased on average by 4.2% per year, most being due to improvement in yields. Among cereals, wheat experienced the fastest production growth (+5.2% per year), followed by barley and to a lesser extent maize and rice. Yields improved for all cereals, but especially for wheat (+4.3% per year) as a result of an expansion of HYV's and to a lesser extent maize and barley. By 1980 the country was producing about 16.9 million tons of wheat according to official statistics. 1/ Except where mentioned otherwise, all results are derived from the State Institute of Statistics' annual statistics.  -8- 2.17 The most substantial gains in cereals yields were observed in the Marmara, Aegean, Mediterranean and Central North regions. Higher gains in these regions are mostly explained by the introduction in the i970s of semi-dwarf soft wheat varieties, capable of responding to high level of fertilizer use; such varieties could not express their full yield potential in non-irrigated, low-rainfall areas and therefore spread mostly in the western and southern coastal areas. These were followed up by the introduction of modern semi-hard varieties for rainfed areas, which substantially out-performed traditional rainfed wheat whenever rainfall was adequate and correct cultivation methods applied. Although relatively more modest, the yields achieved in other regions also show improvement resulting from uptake of semi-dwarf soft wheat and improved rainfed varieties, the progressive acceptance of intensified fertilizer use and tillage practices as well as, to a lesser extent, herbicide use.11 Thus, on the whole, the wheat improvement programs implemented by the Government in the 1970s successfully intensified the cultivation of cereals lands throughout the country. 2.18 Although the pulses production has increased on average by 3.0% per year, most is due to area increase. The national production of chick peas and lentils, which presently account for around 55% of all pulses, has been increasing by around 7% per year, with no significant change in yield. Among industrial crops, cotton production has remained more or less constant, with however a slight but insignificant increase of yield. The production of tobacco has increased by 5% per year, because of a yield increase of 7.3% per year which has more than offset the decrease of area of about -2.3% per year. Sugar beet yields have tended to decline in all regions, but area increase resulted in production growth of about 6.8% per year for the whole country. 2.19 The production of oilseeds during the last decade has been increasing on average by 2.9% per year, because of yield increases (1.5% per year) as well as area increases (1.3% per year). However, increases in sunflower seed production during the decade have been above 6% per year, mostly due to area increase (4% per year - most of which occurred in the early 1970's) and it presently accounts for about 40% of the total oilseed production, as opposed to only 28% ten years ago. During the last decade, the production of tuber crops (mostly potato) also increased steadily, principally through yield increases occuring during the latter part of the 1970's. The total production of fodder crops (alfalfa and sainfoin) increased by 5-6% per year, but still remains minimal. No yield increases were achieved in any of the 9 regions. 2.20 For all major categories of fruit and nuts production, increases of 4.1% (nuts) to almost 6% (citrus) have occurred. Among citrus, orange accounts for about 60% of the total production but has experienced the slowest growth rate (4.2% per year), while lemon (presently about 24% of the total citrus production) and mandarine (about 14% of the total) have experienced growth rates of production around 9% per year. 1/ This account is from C. K. Mann, "The effects of Government Policy on Income Distribution; A Case Study of Wheat Production in Turkey" in Political Economy of Income Distribution in Turkey, E. Ozbudun and A. Oluson (Editors), Holmes and Meir (Publishers), New York (1980).  -9- 2.21 The total production of vegetables increased by about 3.9% per year, mostly in the four coastal regions and the South East. Changes in the relative importance of different vegetable types may influence the total production in tons; since vegetable area is not broken down by vegetable type in the SIS statistics, it is impossible to determine whether productivity increases have taken place or not. If one assumes that no substantial change in vegetable mix has occurred, then yield increases have been negligible. 2.22 Use of purchased inputs and machinery. The expansion of production noted above was accompanied by a considerable increase in the consumption of modern inputs and mechanization. Although the data will not permit a further statistical association of the sources of growth, viz. areal expansion, suppression of fallow, expansion of irrigation, and yield increases in association with the use of particular inputs and combinations, it is generally believed that all crops and all rotations benefitted. The use of fertilizer in Turkey developed after the mid-1960s; the subsidization of retail prices subsequently encouraged its widespread use. In the 1970s, the national consumption of fertilizer increased on average by more than 11% per year (c.f. Annex 1, Table 38)1/, however, growth at this rate was actually attained only after 1971 and has been steady since, with the exception of 1974 and 1975 which were years of sharp retail price increases and serious supply shortages. Prices were subsequently rolled-back, and by 1979 fertilizer consumption had risen to more than triple the level achieved in 1970. A sharp decline occurred in 1980 when the government removed a portion of the high price subsidies granted during previous yeafs. In 1981, however, despite further price increases, total consumption returned to about 1977 level; the consumption of nitrogen in 1981 was indeed similar to the record level achieved in 1979, and most of the decrease in total consumption has been for phosphates. The use of agricultural chemicals (pesticides, fungicides, herbicides) has not grown significantly during the last ten years. While seed disinfection and use of insecticides and fungicides are fairly common, the use of chemical herbicides, which were introduced in the early 1970s, is still rather limited mostly because of high prices and lack of farmer know-how. The use of certified seeds, after an initial increase (Annex 1, Table 38), has been declining during the last five years. The main reason has been a lack of adequate and timely supply (discussed further in Chapter IV and Annex 8); since the introduction of high yielding wheat varieties in Turkey in the late 1960s, the farmers are fully convinced of the desirability of using improved seeds. 2.23 The growth of Turkey's tractor fleet during the period under review has been almost 15% per year. This growth, however, has fallen off during recent years. The sharp increase in mechanized farm operations started with the importation of tractors under the Marshall Plan, and facilitated the expansion of cropland onto marginal soils thereby contributing to depletion of soil fertility and accelerating erosion. On the other hand, it has also permitted more timely seedbed preparation and harvesting for field crops and hence increases in yields and the reduction of fallowed land. Until recently, the Government encouraged the strong demand for farm machinery through both 1/ Estimates of fertilizer consumption by major crops are presented in Table 39 of Annex 1.  - 10 - price and credit subsidies. At the same time, little official attention has been given to the design of suitable equipment for animal traction on small farms, again, until very recently, thus making the use of tractors even more attractive in comparison. Many non-tractor owning farmers, even those with only a small area, now have their land worked by tractor through custom work. While there is room for debate about whether the present number of tractors is excessive or notl/ (Annex 1), the average size and power of tractors in Turkey clearly is excessive. Only domestically manufactured tractors are widely available (which run from 40 HP upwards), imports are strictly regulated, and no small model has been adapted and widely marketed. Therefore, in many areas it might be better to avail for small and medium farmers, smaller and cheaper tractors sized more in proportion with their needs. 2.24 In respect of implements and other machinery, the total number of tractor-drawn plows, harrows and trailers more or less match the total number of tractors. However, the number of tractor-drawn seed drills is low, and a more widespread use will permit further increases in crop (especially cereals) yields. In certain areas, additional threshing machines would allow savings in time and peak season labor. Additional pumps, sprinklers and other irrigation equipment are required to intensify the utilization of irrigated areas, while a careful expansion in the numbers of combine harvesters may foster the spread of multiple cropping. Livestock Resource and Production 2.25 Turkey's livestock resource is extremely large. Although national statistics on livestock production are less than precise, the SIS annual statistics report that the national herd consists of upward of 15 million cattle, 65 million sheep and goats, and 3 million other large animal types. Other estimates of livestock numbers vary considerably according to sources, but similar orders of magnitude are displayed. Production estimates also vary both in respect to numbers of progeny and pedigree as well as animal product yields, thereby casting their reliability into doubt for methodological reasons. On the whole, however, virtually no broad-based improvement has taken place in animal husbandry practices and productivity during the last 10-15 years. Some exceptions exist (establishment of modern poultry operations and a few intensive dairy-cattle farms, expansion of animal finishing operations) but they concern only a limited number of large farms, bypassing the bulk of the livestock producers and the national herd. 2.26 According to the SIS annual statistics (Annex 1, Table 47), the total number of sheep and goats increased by 1.4% per year duri7ng the 1968-1980 period and the total number of cattle by 1.6% per year.21 The population of 1/ There is on average for the whole of Turkey one tractor for 38 ha. of sown land (Annex 1, Table 40). An indicative norm for the tractor sizes presently in use would be about one for every 75 ha., however tractors are also used extensively for farm to market transportation. 2/ Expansion of these rates suggests that the size of national herd has nearly doubled since World War II.  - 11 - animals of lesser importance such as buffaloes, horses, mules and donkeys has been declining. Poultry raising, however, has been expanding by around 5.4% per year. 2.27 The increase in the numbers of cattle and ovines has not been accompanied by any significant change in feeding practices. No pasture improvement has taken place in spite of the fact that pasture area has been steadily diverted to cropping during the 1970s. Some increase in feed availability for the winter period has occurred through increased availability of cereals and industrial crops byproducts; forage crop cultivation however remains extremely limited. It is usually recognized that despite the apparently large availability of pasture land (about 21 million ha according to TOPRAKSU) substantial over-grazing is jeopardizing the conservation of this resource because of low productivity and disorganized utilization (lack of rotational or deferred grazing). However, largely because of free access to pastures, winter feed availability and/or cost seems to be the main factor limiting individual herd sizes. 2.28 The number of animals reported in the SIS statistics corresponds to the inventory at the end of the calendar year, i.e. the middle of winter when livestock numbers are minimal after Autumn sales. It is most remarkable (Annex 1, Table 47) that the number of breeding cows in winter has been increasing much faster (+2.6% per year) than the total number of cattle (+1.6% per year); the cattle herd composition in the winter has consequently changed as shown in Table 48 of Annex 1. Farmers thus appear to be keeping an ever increasing number of cows, but sell their progeny at a younger age, which could be another manifestation of desire to avoid winter feeding. This also is reflected by reports that an increasing proportion of immature cattle is being slaughtered. Since this has not been accompanied by any improvement in feeding practices and hence weight gain of young cattle, the average carcass weight steadily decreased in the 1970s.l/ 2.29 For meat production, SIS reports only the figures for animals slaughtered in official facilities (i.e. the Meat and Fish Organization (EBK - a parastatal) and municipal slaughterhouses). In 1980, SIS reports 204,380 tons of red meat produced in such facilities (Tables 49-52 of Annex 1), while the SPO estimate of total red meat production for the same year is 898,500 tons (of which 433,100 for beef and 465,400 for sheep and goat). Official slaughters thus account for only about 25% of the total. No comprehensive estimate of growth in total meat production during the last decade is available. Such growth is in any case certainly well below the growth in number of breeding cows (2.6%) since the average carcass weight has been declining and a larger number of animals have been retained for herd growth. According to SIS, the milk production during the 1968-80 period has been increasing by around 2.1% per year barely matching the increase in the number of breeding females; no significant improvement in yield per lactation and/or in calving/lambing percentage has occurred. Wool production has been increasing at the same rate as the sheep flock. On the whole, mostly because of a persisting underfeeding of growing and lactating animals, all herd and production parameters have remained very low. 1/ There is scattered evidence that the trend may have been reversed since 1980, however, as a result of increased use of animal fattening credits which Government has made available to stimulate livestock exports.  - 12 - Resource Potential 2.30 The high rates of sectoral growth experienced in the 1960's and early 1970's were largely based upon an expansion of cropping to previously uncultivated lands and the lateral extension of traditional animal husbandry. The 1970's also witnessed a shift towards the more intensive cultivation of some crops, and the imposition of constraints on further increases in traditional animal numbers due to limits on the carrying capacity of the feed base. But the resumption of historical trend rates of growth in the medium-term will require a considerable further intensification of land use and increases in animal productivity. A steady growth in land and animal productivity is thus instrumental to the sectoral performance possibilities discussed in the next chapter, and serves as the foundation for the technology and information strategy proposed in Chapter IV. 2.31 An indication of the possibilities for further growth in yields is given with reference to nearby countries. When compared with performance in Syria, Iran, Yugoslavia and Greece, Turkish yields at the end of the decade fall within the low to middle range for nearly all major crops (see Annex 5, Table 6 to Appendix 2). Recent estimates of the total yield benefit obtainable from use of improved seed under Turkish conditions are presented in Annex 5, Table 7 to Appendix 2, and range from about 5% for some pulses to 150% for sunflower and soybean, and nearly 200% for hot house tomatoes. The mission's estimates of feasible annual growth in yields range from 0-1.8% for various pulses, oil and industrial crops, 2.0% for grains, 2.0-3.0% for horticultural crops and 3.1% for fodder crops (Annex 5, Table 5 to Appendix 1). Similarly, substantial increases in livestock productivity are possible through herd upgrading and better care and feeding. The possibilities are summarized in Annex 5, Table I of Appendix 3, which sets forth the mission's estimates of feasible meat and milk yields under Turkish conditions for native and improved breeds of cattle, sheep and goats. C. Exports & Marketing 1/ 2.32 A rapid development of internal agricultural marketing and distribution arrangements took place in the 1970's, including investment in related facilities. An increasing involvement by parastatals and quasi-public sales cooperatives in the procurement and marketing of agricultural commodities also occurred, particularly by those eligible for production price supports. By the end of the 1970s, the links between producers, the domestic retail markets, and the then rather limited export markets were well established. 2.33 As detailed below, the systematic opening of the economy after 1980 required--as still requires--a substantial though unquantifiable commitment of resources, time and effort for the expansion of export marketing channels and capabilities. Although it is a bit soon to generalize, the experience gained since 1980 indicates that the advantages of particular institutional marketing arrangements are quite specific to the kinds of commodities being exported and 1/ The material in this section has been extracted from Annex 2, which is a discussion of agricultural exports and marketing.  - 13 - their relative perishability. Other factors include the reliability of the existing procurement system and its ability to service exporters as well as domestic markets, and trade practices in the importing countries. The recently imposed incentives structure for exports also has influenced the kinds of marketing arrangements being developed. Turkish Comparative Advantage 2.34 During, the 1970's, agricultural commodity export markets were perceived as a vent for surplus production, and--apart from Turkey's traditional exports (hazelnuts, cotton, tobacco, tea and raisins)--performance was lackluster. Three quarters of the agricultural export revenues derived from these five traditional export crops up to the end of 1979, and the corresponding export quantities did not change significiantly between 1973 and 1981. Therefore, a large increase in sectoral exports in 1980-82 was expected, and did indeed occur, in response to the actual and potential comparative advantages Turkey possessed by 1979.1/ The extent is indicated by estimates of the ratio of domestic resource costs to net value added at border prices (the DRC ratio) for that year; these ratios are set forth for 1979 in Table 25 of Annex 5 along with the corresponding coefficients of effective and nominal protection.2/ 2.35 After exports were deregulated and the crawling peg exchange rate system was introduced, the exports of unprocessed agricultural commodities increased from $1.34 billion in 1979 to $2.14 billion in 1982. This expansion was concentrated in commodities possessing low DRC ratios viz. barley, pulses, cotton and tobacco, peppers, citrus, apples and animal products. As a result the share of the four traditional export crops which accounted for 75 percent of all agricultural exports in 1973, had reduced to 53 percent by 1981. This pattern is reflected in Table 2.2, which compares agricultural exports in 1981 with those realized in 1979 on the basis of commodities and destinations. Direction and Organization of Trade 2.36 In addition to rapid export expansion and some diversification of commodity composition, a fairly significant change in the direction of agricultural trade also occured. As a result of particularly rapid expansion of exports the Middle East and North Africa since 1979, exports to this region are now nearly equal in value with Turkey's exports to the EEC and Western Europe, as shown in Table 2.2 (the geographic pattern of exports displayed in 1979 is representative of the pattern during previous years). 2.37 The commodity mix of export growth to the various markets was by no means homogeneous, and its very diversity, and country specificity is instructive. The fact that private exporters have responded to these marketing opportunities with much more vigor than parastatals and quasi-public 1/ In the short term at least, i.e. at the cost structure and set of international prices pertaining in 1979. 2/ These were computed as part of a projections exercise using the Turkey Agricultural Sector Model - see Annex 5 for details.  - 14 - Table 2.2: The Changes in the Destination of Turkish Exports by Ccmmdities and Major Markets (US$''00) Middle East Rest of Commodity Groups & North Africa EEC Countries-l the World Total 1979 1981 1979 1981 1979 1981 1979 1981 1. Traditional Crops a. Cotton 1,931 31,520 133,494 255,047 92,399 61,697 227,824 348,264 b. Tobacco 965 6,103 46,507 107,901 129,499 281,099 176,971 395,103 c. Raisins 1,750 9,670 63,258 109,890 45,439 8,898 110,447 128,458 d. Figs 162 2,442 27,682 22,987 13,659 9,914 41,503 35,343 e. Hazelnuts 3,192 18,751 278,320 221,884 71,485 61,136 352,997 301,771 Subtotal 8,000 68,396 549,361 717,709 352,481 422,741 909,742 1,208,846 II. Fruits and Vegetables a. Citrus 5,330 35,159 13,677 29,399 38,285 60,385 57,292 124,943 b. Onion & Potatoes 12,637 21,145 75 662 650 1,855 13,362 23,662 c. Tomato 4,623 19,068 15 163 - - 4,638 19,231 d. Apple 16,740 58,508 114 539 3 71 16,857 59,118 e. Grapes 1,427 3,079 1,203 797 372 8 3,002 3,884 f. Other fruits 3,767 9,203 362 1,444 6 12 4,135 10,659 g. Other vegetables 1,031 3,227 2,592 4,800 - - 3,623 8,027 Subtotal 45,555 149,389 18,038 37,804 29,326 62,331 92,919 249,524 III. Pulses a. Chickpeas 21,404 36,751 9,371 25,134 1,409 5,558 32,184 67,443 b. Lentils 17,605 65,454 16,280 38,657 4,749 19,274 38,634 123,385 c. Beans 733 6,615 2,995 15,552 333 2,205 4,061 24,372 Subtotal 39,742 108,820 28,646 79,343 6,491 27,037 74,879 215,200 IV. Cereals a. Wheat 50,834 53,785 27,723 - 10,595 - 304,352 53,785 b. Barley - 43,349 - 5,985 85 6,975 85 56,309 Subtotal 50,834 97,134 27,723 5,985 10,680 6,975 89,237 110,094 V. Livestock 45,200 311,992 4,016 10,313 4,082 788 53,298 323,093 OVERALL TOTAL 189,331 735,731 627,784 851,154 403,060 519,875 1,220,175 2,106,760 /1 EEC countries include Greece, Spain and Portugal.  - 15 - sales cooperatives suggest that institutionally, the 1980 reforms--by permitting access to better prices, allowing the Turkish Lira to approximate its scarcity value against foreign currencies, and by reducing regulation and bureacratic control--also made it possible to tap previously suppressed entrepreneurial and managerial capabilities for export marketing, which is a needed complement for the effort to increase farm productivity in the medium term. 2.38 Both the public and the private sectors in Turkey are involved in export marketing of agricultural produce. The involvement of public and quasi-public marketing agencies (includes state economic enterprises - SEE's and sales cooperatives) has been confined to traditional crops such as cotton, tobacco, hazelnuts, raisins, figs and olive oil. In addition, EBK plays a marginal role in meat exports, and a recently established sales cooperative intends to export pulses. Until recently, the Soil Products Office (TMO) had the exclusive privilege for wheat exports, and it still retains exclusive use of the country's port silo facilities. However, the relative position of public agencies in exports has been declining in recent years, and their primary objective seems to have shifted to price setting rather than marketing. 2.39 Aside from directly exporting up to 60% of the relevant export crops, the public agencies have played a key role in the financing of the stocks and in setting domestic prices. During the years when the basic production support prices have been set above international prices, the public agencies' share of procurement increased, forcing private exporters out of the market. Some of these stocks were subsequently sold to private exporters for marketing abroad. The timing of deliveries and prices finally agreed upon, however, caused major disruptions in deliveries, which discouraged importers from entering into long-term delivery contracts with Turkish suppliers. 2.40 The products directly exported by the cooperatives are sold either to the importers or through dealers in the major export markets. Although the sales cooperatives frequently operate side-by-side with private Turkish exporters in these markets, arrangements for market sharing or other concerted action have not developed. 2.41 Private exporters dealing in the Western European and North American markets for traditional export crops and fresh fruits and vegetables tend to concentrate in Izmir, on the Aegean coast. The citrus, pulse and livestock marketing center is the main Mediterranean trading center of Mersin. A number of large holding companies have also entered the export trade during the last two years in response to strong government export promotion measures.l! All of these large firms are headquartered in Istanbul. 2.42 Most of the private trade in traditional export crops is handled by 6 to 8 firms in Izmir. These family firms also own orchards and land, and some have been in the export trade for over 100 years. Most of these firms either own or have access to packing facilities. Both in the Izmir and Mersin area, the exporters have considerably expanded their own orchards and land holdings since 1980 to guarantee sources of supply by partially financing such 1/ Detailed in Annex 11.  - 16 - investments out of low-cost export credits. The trade contacts and procedures are well developed for handling traditional crops, and a major bottleneck for further rapid expansion appears to be export demand, not the organizational capability. The Turkish share of the hazelnuts market for example is close to 70% of total trade. Thus the 30% increase in quantities exported in 1981 over the 1980 level reduced the prices by the same margin leaving export revenues unchanged. 2.43 While the exports of traditional crops into the European and North American market are handled by traders in Izmir, the expanding volume of trade in these same commodities in the Middle East since 1980 has been handled by well-established Mersin based firms which also are diversifying their export items to handle new marketing opportunities.l/ The old established firms have also become very active in the burgeoning pulse and livestock trade. Over a quarter of all Turkish pulse exports, for example, was handled by one firm in Mersin. The share of the five largest export firms is estimated to be around 70% of total pulse exports in 1981. There is a similar though lesser concentration in livestock exports. However, mostly new ventures have been formed in Mersin to handle the trade in barley to the Middle East which has occured since 1980, who apparently have accounted for the large bulk of this trade. 2.44 Control over expanding exports of highly perishable fruits and vegetables to Europe has been maintained by Izmir and Istanbul based firms. The firms which have vertically integrated mandarin exports, including production, packing and marketing, have recently been able to establish permanent distribution outlets in the F.R.G. and Austrian markets. Such outlets are also used for distribution of other fresh fruits and vegetables, particularly peaches, apples, and fresh grapes. On the other hand, much of the trade in fresh fruit and vegetables to the Middle East has been handled by foreign middlemen (para. 2.53) who secure their supplies directly from farmers or domestic wholesalers in Turkey. 2.45 The trading operations owned by large private sector holding companies have expanded into agricultural commodity exports during the last two years, following the widening of interest rate differentials between commercial lending and export credits since 1980. The interest rate differen- tial is a strong motive, because a primary objective of these operations is to provide their parent holdings with low cost credits. Another incentive for these companies seems to be the privilege exporters enjoy in retaining up to 25% of their hard currency receipts to finance imports of raw materials--use unspecified--while large traders have also been disproportionately favored by the tax rebate structure which is progressive in respect of the value of a firm's exports. 1/ Indeed, the established exporters with trade contacts in the Middle East have also been able to enter the European Market in relatively non-perishable food items in competition with Izmir based firms and sales cooperatives, while, in the Middle Eastern markets, the reverse does not seem to be happening due to the particularity of business practices.  - 17 - 2.46 Such companies operate in a number of sectors and tend to dislay no concentration in the geographic distribution of their markets. Despite the advantages they enjoy in rebate differentials and in favored access to export credits, they tend to compete with established Turkish firms for exports of traditional goods into traditional Turkish markets. In some cases, these firms have made arrangements with existing agricultural export firms to share the premiums that result by simply reporting (larger) conjoint exports. Trade Practices in Importing Countries 2.47 The most serious difficulties faced by the Turkish exporters seem to be in fresh fruit and vegetable markets in Western Europe. All fresh produce is shipped on consignment with no price guarantees. Independent deliveries from different Turkish suppliers and other exporting countries create wide fluctuations in daily prices. Payment for the goods is based on a weighted average of expected receipts for the various grades in each consignment. EEC custom duties, if any, handling charges, and in some cases transport fees are paid by the dealer with the remaining revenues credited to the account of the exporter. The exporter has no control over the prices at which the shipment is sold and the seasonality of market presence limits the leverage of the exporter over the dealer. In addition to uncertainty over price, there can be a substantial lag between the shipment of produce and the receipt of payments, with the associated carrying costs being absorbed by the exporters. 2.48 Since 1980, Turkish exporters have attempted to strengthen their presence in West European markets in two ways. Some major exporters have established permanent representation in the main markets in Germany and Austria to sell directly to supermarkets and fruit and vegetable stores. The latter, which primarily cater to around two million Turks living in Germany, Holland and Austria, have already established contacts with Turkish exporters, and as a result more than half of the exports of eggplants, capiscums, fresh beans and cucumbers went to West Germany in 1981. 2.49 Turkish exporters have also established recent joint ventures with food distributors in the main European markets. One Turkish firm has joined with a British firm for distribution in the United Kingdom, and others are expected to follow, particularly in fresh fruits and vegetables. 2.50 Tturkish exports of traditional crops such as raisins, figs, tobacco and cotton are generally sold on the basis of fixed prices, usually FOB. The payments for export commodities in these cases are fairly prompt and are made immediately against presentation of required documents to the banks. 2.51 The marketing channels for traditional crops, however, vary considerably between major markets in Western Europe. All major exporters, both private exporters and sales cooperatives, seem to have longstanding business ties with their importers and agents which have even been used by some exporters to raise loans in importing countries or receive payment in advance of shipment to partially finance their purchases from farmers.  - 18 - 2.52 In some Middle Eastern and North African countries (Libya, Algeria, Egypt and Iraq) government agencies are the major importers. There is no government involvement in imports in the Gulf countries. In other countries (Iran, Iraq and Egypt), semi-perishables and relatively durable items (e.g. pulses, meat, cereals, onions and potatoes) are imported by government agencies and parastatals, while highly perishable fresh fruits and vegetables are imported by the private operators. Turkish exporters have exploited all these channels since 1980, however sales to the government agencies make up the bulk of Turkish export earnings from these markets. 2.53 Most commodities exported to the Middle East and North Africa are on an FOB price basis. Standards for pulses and cereals are well developed and the Middle Eastern importer accepts Turkish government certification of conformity to specifications. Three characteristics of marketing in the Middle East are noteworthy for further penetration of these markets. First, unlike the marketing channels to Western Europe, over 80% of total fresh fruits and vegetables exported to the Middle East are purchased inside Turkey by merchants from the importing countries; however, sorting, grading and final packing is done outside the Turkish borders where packing materials are cheaper and of better quality. Most are small operators who buy a few truckloads of assorted commodities at a time. Some have links with major distributors in the Gulf, and the recent supply disruptions in Lebanon and Syria have encouraged Lebanese and Jordanian merchants to procure supplies in Turkey for ultimate disposal in the Gulf. 2.54 The second significant marketing development in the Middle East and North Africa is the increasing use of sub-contracting arrangements between the Turkish exporters and importing agents for government purchases in some of these countries. Instead of bidding directly, Turkish exporters sign delivery contracts with an indigenous importer who in turn bids for imports by the government agencies. These arrangements are becoming more common in commodities where the quality standards are not well specified and shipments could be rejected (in the case of carcass meat) or where the goods are sold on credit and collection requires special contacts. The profit margins of these intermediaries vary from 5 to 10%. 2.55 The third characteristic of these markets is the increasing importance of bulk procurements by government agencies, which can cause major fluctuations in purchases. In 1980, for example, Turkish exports of apples jumped to 128,000 tons from the previous year's level of 30,000 tons. More than half of the increase, however, was due to the Iraqi Government's decision to import apples that year. The decision whether to import the commodity and from where to import it seems to be a political one in some major markets and is not necessarily related to the quality or price of goods received. 2.56 Because of the uncertainty involved, both in regard to timing and expected receipts, such purchases tended to bypass the established marketing channels. Bulk purchases by governments seem to be particularly attractive to the recently established subsidiaries of large holding companies with no previous agricultural marketing experience. The tax rebate differential these companies enjoy, their relative access to export credit and ability to utilize  - 19 - these credits effectively in the domestic market through their parent holdings allows these firms to underbid other Turkish competitors. The prices of such well publicized bids then tend to set ceilings in other markets. This is creating serious problems in commodities where Turkey holds a major share of the market (pulses, lemons and hazelnuts), or where there are supply bottlenecks to expanded exports as in Satsumas and grapefruits. Implications 2.57 While somewhat impressionistic, the foregoing discussion indicates that the development of export marketing channels has entailed substantial economic investments and opportunity costs. To what extent these costs would affect the magnitudes of Turkey's comparative advantages as evidenced in simple indicators such as the DRC ratios is hard to judge because it is not possible to quantify market penetration premia which could be applied to the evaluation of value added at border prices in the DRC computations. The premia, however, would seem to be particularly high for markets and commodities where (a) sales on consignment predominate (e.g. fruits and vegetables in the EEC and sales of semi-perishables through importing agents to government in some Middle Eastern countries), (b) sales cooperatives and parastatals are the primary procurement agency used by private exporters (due to disruptions in supply--e.g. some traditional exports), and where (c) holding companies can use their favored access to subsidized export credit and of other incentives which normally are not applied to agricultural commodities to undercut the established border prices for Turkish produce (e.g. bulk procurements by Middle Eastern governments). These factors effectively increase the opportunity costs of exporting, and could require in the first instance substantial investments in procurement arrangements and marketing, both at home and in the importing countries, in order to improve capabilities in the areas of market information, quality control, packaging and delivery. Through the improved performance which should result, these investments could eventually encourage importers to bear more of the associated risk and cause a shift from sales on consignment to the use of longer-term agreements and more certainty in regard to price. In the second and third instances, improvement would require fairly fundamental policy changes in so far as the role, functions and financing of the cooperatives are concerned (discussed in Chapter V), and an eventual change in the application of the export and export financing incentives to permit the established agricultural exporters to compete on more equal terms with the holding companies and thereby discourage the potential opportunity costs associated with monopolistic restrictions of trade. D. Nutrition 2.58 Incidence of malnutrition. A major phenomena which could influence the commodity composition of the export drive is the extent of malnutrition in Turkey.!1 A large segment of the Turkish population still suffers from severe caloric deficiency. Eleven percent of the population consumed less 1/ Material in this section is drawn from the discussion of Food Consumption and Nutrition in Annex 3.  - 20 - than 1,600 calories per person daily in 1981/82--a level defined as the minimum requirement on the basis of population and occupational structure of Turkey. The degree of malnutrition was due primarily to the tight food availability situation in Turkey since the national average calory intake was about 2,395 calories/person/day.l/ In comparison with the results of a previous survey conducted in 1974, the extent of serious malnutrition has subsequently declined to about half of the levels in 1974, but it still affects some 5 million people. 2.59 Protein intake deficiency is less severe a problem. In 1974, about 10% of the population consumed less than 50 grams/person/day, which has subsequently fallen off to about 4% of the population. Furthermore, the Turkish diet is such that an increased intake of food to eliminate calorie deficiencies also provides protein since cereals and pulses are major elements in the diet. Although protein malnutrition is not a serious problem in general, a segment of the population still consumes insufficient animal protein; 26% of the population consumed less than 8 grams per person per day in 1981. The regional distribution of malnutrition for 1981 is shown below. The Proportion of Severely Malnourished Families in the Population/! (Percent of Total) Insufficient Insufficient Region Calorie Intake Protein Intake I. Aegean and Marmara 7.6 4.3 2. Black Sea 7.9 2.7 3. Central Anatolia 7.6 2.0 4. Mediterranean 13.6 4.0 5. Eastern Anatolia 19.9 8.2 Average of Turkey 11.3 4.2 /1 Malnutrition defined as less than 1,600 calories/person/day energy intake; 50 grams/person/day total protein; and 10 grams/person/day animal protein intake. Source; Turkish Development Research Foundation. 1/ Nutrient intake is not the only determinant of nutrition, but it is the most important one. For some of the issues involved, see Chernichovsky, D., "The Economic Theory of the Household and Impact Measurement of Nutrition and Related Health Programs", World Bank Reprint Series No. 121. See also, Srinivasan, T.N., "Malnutrition: Some Measurement and Policy Issues"' World Bank Reprint Series No. 178.  - 21 - 2.60 Another major nutritional problem in Turkey is infant malnutrition. Infant mortality rates of over 120 deaths per 1,000 live births in Turkey are 3 to 4 times higher than the average mortality rates prevailing in other countries with similar levels of per capita income. The primary factors leading to the high infant mortality rates, however, seem to be feeding practices!/ rather than food availability. 2.61 Determinants. Nutritional problems cut across the spectrum of the society. The most important determinant of malnutrition appears to be settlement size--inversely correlated with incidence--and socioeconomic region. The presence of severe malnutrition appears to be about twice as high in the rural villages as in towns and urban areas, while regionally, it is concentrated in Eastern Turkey and part of the Mediterranean Region. Severe malnutrition is invariant to household income, though the higher income groups generally consume greater quantities of all food items per capita except cereals, while the lower income households depend upon the largess of relatives and neighbors to top up their consumption levels. 2.62 Implications. It would therefore be difficult to encourage increased nutrient intake by malnourished households through measures to redistribute purchasing power. Rather, a nutritional information campaign should be initiated to emphasize proper storage, handling and preparation of foods, and the selection of consumption baskets having high nutritional value without entailing an undue increase in food expenditures. 2.63 The identification of food items whose consumption should be encouraged is made with reference to Tables 5 and 6 of Annex 3. The first table shows the relative cost of calory and protein intake from different sources, and how these cost ratios have changed between 1974 and 1981/82. Bread and other wheat flour derivatives are the cheapest source of nutrition, and provide more than half of the national protein and calory intake (see Table 6 of Annex 3). Sugar, liquid oils and margarine, pulses and potatoes, are other relatively inexpensive sources of calory intake. Pulses are the cheapest source of protein followed by cereals and cheese. The role of pulses as a source of protein in Turkish diet, however, is still small (6% of total protein intake). Cheese and milk supplied about 13% of all protein in 1981, and almost half of the total animal protein intake. While the level of cereal consumption appears to decline with income, the consumption levels of pulses, oils and sugar are basically invariant across income groups. Therefore, national programs to increase the availability of these food items would benefit all of the malnourished households, including those at the lower end of the income scale. 1/ Early weaning and late introduction of solid foods into the diet is a common practice.  - 22 - III. PERFORMANCE POSSIBILITIES FOR THE AGRICULTURAL SECTORd' A. Perceived Opportunities 3.01 In retrospect, the recently closed decade presented Turkish agriculture with an unusual set of opportunities. These are not likely to be repeated in the foreseeable future. In the field of technological adaptation, high yielding cereals technologies became available which could be, and were, adapted to Turkish conditions on a broad scale. Rising per capita incomes encouraged producers to both expand and diversify production, the latter being facilitated by the presence of extremely diverse agroclimatic zones within the country's borders. The cumulative effect of overgrazing on summer pastures was not evident, at least early in the 1970s, and it appeared that the traditional feedbase could still support a considerable expansion of livestock numbers. Equally important, the ability of the rapidly growing non-agricultural sectors to sustain agricultural production growth2/ appeared to be unlimited. This perception extended both to the direct stimulation of agriculture through production linkages and the perceived capability of Turkey's manufacturing sector to expand the production of manufactured inputs and mechanical equipment more or less indefinitely at limited opportunity cost, as well as indirectly, through subsidization of product sales and inputs acquisition via the fisc and public banking system. It also encompassed a perceived capability to sustain more or less indefinitely an inefficient and large-scale public investment program for agriculture. 3.02 Energy prices were kept low and Turkey became largely self-sufficient in foods during this happy period. The apparent constraints on industrial raw materials from agriculture also were few. Its agricultural policy makers therefore never really had to address the very difficult choices between production for domestic consumption or for export, since a high volume of foreign agricultural sales were not considered to be necessary or particularly desirable. Nor did they systematically accommodate questions of capital intensity in agriculture, more efficient management of land and animals, and the effects of rapidly escalating imported energy costs on sustainable inputs combinations. But when the long-postponed economic stabilization program was adopted in 1980, these kinds of intersectoral transfers into agriculture were no longer possible. The demands on the sector were increased because production for exports now had to be added to the other major sectoral production objectives of the 1970s (i.e. food self-sufficiency and raw materials for industry), but the financial wherewithal at the point of production to simultaneously satisfy all of these objectives had been dramatically constrained in relative terms by the imposition of measures to reduce producer subsidization. 1/ The discussion in this chapter is based upon the material presented in Annexes 5, 6 and 10. 2/ Albeit on an inefficient path.  - 23 - 3.03 Thus the future requirements of agriculture could contain an entirely different set of production priorities, input combinations and patterns of resource utilization than before. The Bank's Turkey Agricultural Sector Model (TASM) was therefore developed to provide a consistency check for policy analysis. It also permitted the identification of an economically feasible set of production and export marketing possibilities including related patterns of input utilization. B. Modelling Turkish Agriculture The Structure of TASM 3.04 Details of the construction and operation of this model, which is of the mathematical programming varity, are described in further in Annex 5 and in the final report for the Bank Research Program's project number RPO 672-78 (Agricultural Pricing Policies in Turkey). The crop subsectors are modelled in considerable detail in TASM--46 different crop production activities can be selected in model solutions from combinations in 70 rotations and 15 types of orchards; four categories of land quality are distinguished (irrigated, two categories of rainfed cropland and rangeland); and a choice can be made between using animals and tractors as the source of draft power. The livestock subsector in TASM is less complete: only 7 animal production activities are specified with fixed composites of feed and feed conversion efficiencies. Therefore, a modification of TASM to allow more flexible technology assumptions was begun during the mission's initial work with TASM and is briefly described in Annex 5, Appendix 3 and is referred to as TASM-ALV. 3.05 The maximand in TASM is the sum of producers' and consumers' surpluses in domestic markets and net revenue from foreign trade transactions in both raw and processed comodities. In the solution procedure, the model searches for that combination of production, consumption, import and export levels in raw or processed form for each commodity which, when aggregated for all commodities, produces the highest value of the objective function. Some key features of TASM including summary crop activities, input intensities and risk coefficients, resource and farm inputs availability, demand parameters, and projection assumptions are contained in Appendix 1 to Annex 5. Use of the Model 3.06 The model was utilized to examine the effects of various trade policies on the sectoral composition of output, trade flows, levels of consumption and, within these policy experiments, to make projections to 1990. These projections were based upon reasonable assumptions regarding technological progress in agriculture (c.f. para. 2.31 and Appendix 2 to Annex 5) , irrigation and other investments to determine feasible rates of growth of sectoral value-added, exports and employment for the medium term. Experiments were also conducted to identify the opportunity cost both of a failure to intensify production, and of maintaining per capita consumption balances during the projection period at base year levels. TASM was validated on 1979 performance figures. In carrying out the projections, it was assumed that Government would continue with a liberalization of its trade policies to a point where an essentially free trade position with respect to agriculture would be attained by 1990. This includes a considerable liberalization of imports.  - 24 - 3.07 The policy experiments were carried out for the following hypothetical situations: (a) one where a policy of unrestricted free trade is adopted with domestic markets fully responsive to the conditions prevailing in the markets of Turkey's trading partners with no external limitations on the quantities which can be marketed abroad or imported at base period real FOB and CIF prices; (b) a situation of limited exports (though still in the context of an unrestricted free trade policy) to more realistically portray the likely absorptive capacity of foreign markets for Turkish produce and possible limitations on the capabilities of Turkish exporters; and (c) a situation wherein the trade assumptions in the limited exports experiment are maintained, but the model is further constrained to maintain levels of consumption of individual commodities in 1990 at their per capita levels in 1979 by means of consumer subsidies. An additional experiment was carried out to determine (d) what effect price changes (in real terms) projected for major agricultural commodities and fertilizers on world markets would have on the model solutions for 1990. Other assumptions associated with limited exports were retained. Within the unrestricted free trade and limited exports scenarios ((a) and (b) above), a variant was run to shed light on the importance of technology policies in the context of freer trade. Here, crop and animal yields and area irrigated were not allowed to increase from 1979 levels. As a result, production increases could occur in response to trade policies only through an expansion of total crop area and herd sizes. Summary of Findings 3.08 Production and value-added. The solutions to the TASM projection year simulations imply that an average growth rate of 3.6% p.a. during 1979-90 would be possible for agricultural production under conditions of free trade and a situation unconstrained exports. An increase of 2.3% p.a. is associated with the more feasible limited export regime and 2.6% with the imposition of policies to maintain minimum consumption balances (see Table 3.1). The corresponding rates of growth in agricultural value-added would be 2.8%, 1.6% and 1.9% p.a. The solution to the projection with relative price changes is similar to the solution for the limited exports regime at constant relative prices. However, the assumed progression of technological imDrovements is critical for the realization of these results. Under the variant technology simulations, i.e. in the absence of intensification, the projected growth in production between 1979-1990 under unrestricted free trade declines to 1.9% p.a. (from 3.6% p.a.). Under the more feasible limited exports regime, it declines to 1.3% p.a. (from 2.3% p.a.). 3.09 In the four main experiments, the production of all main commodity groups except oil crops increases over base year (1979) levels, however, there is considerable variation in the commodity composition of production. Grain production in particular declines in importance under all four projections, due to a minimal increase in wheat (0.8% - 1.2% p.a.). The simulated growth of grains production is due mainly to a rapid expansion of barley production in response to export opportunities which cause "other grains" to increase as a proportion of total grain production from about one-third in the base year to nearly half under the unlimited exports projection. The production of oil crops declines considerably from an already low base under all four trade  - 25 - situations, and substantial imports are required. This appears to be another manifestation of the expansion of barley, which replaces wheat on good rainfed lands, causing some substitution of the latter for oils in irrigated areas. The model shows a strong production response for pulses and industrial crops, moderately above average for livestock products, and fruit and nuts except under the unlimited free trade projection where it is strong, and below average for vegetables except again under unlimited free trade where it is strong. These findings suggest that the production response of fruit and vegetables having the largest overall export potential, is also the most sensitive to foreign market conditions. Thus production, prices and incomes could fluctuate considerably from period to period in response to changing export opportunities. The variant technology simulations suggest that barley and livestock production will be the most sensitive to the technological assumptions made. Since the two activities are interlinked through the composition of feeds for improved animals, this result implies that the realization of barley's potential to become a major component of exports (para 3.11) is dependent both upon the new trade policies and a steady upgrading of native herds. 3.10 Consumption. Under conditions of a steady intensification of production, aggregate consumption of agricultural produce is projected as remaining constant in per capita terms: the 1979-90 growth rate under either the unlimited or limited export demand scenarios is about the same as that for total population: 2.1% p.a. (The slower rate of increase in commodity prices assumed under the experiment with changing relative prices slightly increases aggregate consumption above base year per capita levels.) However, considerable changes take place within the agricultural consumption bundle with large falls in grain consumption per capita, some decrease in pulses, vegetables, fruit and nuts and industrial crops, a small increase in oil crops consumption and a substantial increase in livestock products. Lacking reliable consumer-expenditure survey data, it is not possible to specify demand functions for different income groups in TASM to determine the income distributive effect of a changing composition of consumption. The decline in grain consumption per capita, however, and increase in livestock products is probably relative to the wealthier consumer groups, since the literature indicates that the Engel's elasticities for grains decline with higher per capita income, whereas for livestock products (as a group) these increase with income or at best are constant. There is, however, a trade-off between maintaining individual commodities consumption balances at their 1979 per capita levels, and feasible growth in exports (see next para). In the unlikely event that no intensification would occur, consumption is projected to increase by only 1.6% p.a., with a corresponding decline in agricultural exports and increase in imports. Particularly affected are the consumption balances of livestock products.  - 26 - Table 3.1: TA7O Projwtioie of Output, (.aptin mod International Trade in 1990 (All wolues at cutant ectual 1979 fa,pte prices; echge r te T47 - UStl) A B C D E F C Limited Exports P9trict tl8i.Ltad Expru, Litd Export, nd Minimom Liited Exports Unlimited Export Limited Exporta CwDth Rote Trde Unliited ports Unlutad Imports Copti with Price Cawge & No Inteneificatian 4 No Intenificftion 1979-1990 1a1 Solution Projcticon Projection Projection Projection Projection Projaction EK31R21T VARLA8rS 1979 1990 /a 1990 /b 1990 /c 1990 /d 1990 /e 1990 /e A- AC AD IrE A-F WG - - - - - - - - - - - - - - - - - - - - - azlm - - - - - - - - - - I lin - - - - - 7 - - - - - - - - - - - -- - - - - - - - (2 - -. - - - - - Pr46k tion Tntal 13.701 20.137 1 0 8,218 17,92 16,791 15,812 3.6 2.3 2.6 2.3 1.9 1.3 Grauw 2,277 3,021 2,749 2,922 2,749 2,204 2,204 2.6 T7 2.3 1.7 -0.3 -0.3 Of which: %Isat 1,502 1,633 1,632 1,70B 1,632 1,419 1,419 0.8 0.8 1.2 0a' -0.5 -0.5 Othir 775 1,380 1,117 1,214 1,117 785 785 3.4 3.4 4.2 3.4 0.1 0.1 pulas 349 497 497 499 490 497 497 3.3 3.3 3.3 3.1 3.2 3.2 Vegetables 2,851 4,565 3,557 3,728 3,551 4,565 3,610 4.4 2.0 2.5 2.0 4.4 2.2 Fruit nod tnut 2,745 4,841 3,644 3,875 3,643 3,601 3,505 5.3 2.6 3.2 2.6 2.5 2.2 Oil creps 499 345 349 348 345 348 348 -3.3 -3.2 -3.2 -3.3 -3.2 -3.2 'Indwtrial' crap 1,153 1,730 1,676 1,708 1,676 1,516 1,S8 3.8 3.5 3.6 3.5 2.5 2.9 Livtock peoAxcu 3,827 5,13 5,138 5,138 5,138 4,059 4,059 2.7 2.7 2.7 2.7 0.5 0.5 Option Total 11.655 14698 415845 14,757 13,0 13,859 2.1 2.1 2.7 2.2 1.6 1.6 Grain 1,612 1,597 1,597 2,030 1,597 1,597 1,596 -0.1 -0.1 2.1 -0.1 -0.1 -0.1 Of which: Wht 1,281 1,259 1,259 1,610 1,259 1,259 1,259 -0.2 -0.2 2.1 -0.2 -0.2 -0.2 oDter 331 338 336 420 338 338 337 0.2 0.2 2.2 0.2 0.2 0.2 Fule 20 324 332 352 324 324 330 1.3 1.6 2.1 1.3 1.3 1.5 Vbgetable 2,8D 3,333 3,363 3,534 3,358 3,385 3,416 1.6 1.7 2.1 1.7 1.7 1.8 Fruit nWd ma 2,336 2,727 2,745 2,982 2,744 2,747 2,759 1.4 1.5 2.2 1.5 I.S 1.5 Oil creps 407 537 544 536 540 541 554 2.5 2.7 2.5 2.6 2.6 2.8 'Inubstrial crqu 8 1,032 1,051 1,124 1,050 1,003 1,016 1.4 1.6 2.2 1.6 1.2 1.3 Li_eatoC, proBUta 3,332 5,038 S,059 5,087 5,144 4,235 4,187 3.8 3.9 3.9 4.0 2.2 2.1 batal 765.6 3,374.1 2,342.1 1.922.9 2,257.8 1,68.1 1,436.6 14.4 10.7 8.7 10.3 7.6 6.0 Grirm 156.0 1,050.5 671.9 352.7 711.9 105.8 105.8 18.9 14.2 7.7 14.8 -3.5 -35S Of which: Umt 134.6 312.0 312.6 0 302.2 91.4 91.4 6.6 6.6 - 6.3 -4.7 -4.7 ther 1,4 738.5 359.3 352.7 409.7 14.4 14,4 76.8 63.6 65.3 67.6 23.6 23.6 PFIse 72.5 201.7 192.2 171.0 192.3 201.5 192.8 9.7 9.3 8.1 9.3 9.7 9.3 Vftebble 14.7 562.3 181.7 181.7 181.7 537.7 181.7 39.3 25.7 25.7 25.7 38.7 25.8 Fruit nd iou 43.7 465.9 326.1 316.8 314.4 185.1 183.1 24.0 2D.1 19.7 19.7 14.0 13.9 Oil cops 4.7 0 0 0 0 0 0 - - - - - - 'Industrial' crops 396.5 837.0 731.9 731.9 749.5 618.5 731.9 7.0 5.7 5.7 6.0 4.1 5.7 Livestock prodcut 77.5 256.7 238.3 168.8 1IO.0 39.4 41.3 11.5 12.5 7.3 3.1 -6.0 -5.6 ToU.1 9.8 272.6 280.5 261.0 277.2 425.1 331.4 35.3 35.7 34.8 35.5 40.9 37.7 Grirs 0 0 O 0 o0 o Of dbich:I_t 0 0 0 0 0 0 0 Other 0 0 0 0 0 0 0 Pulos 0 0 0 0 0 0 Vegetublse 0 0 0 0 0 0 0 Fruit mid OtO 0 0 0 0 0 a 0 oil crop 0 146.9 147.1 144.6 141.7 145.1 IS2.2 'Iln trial' crep 0 0 O 0 0 0 0 - - 0 - - - Listck pe toa 9.8 127.7 133.4 132.6 119.3 280.0 179.1 26.4 26.8 25.5 26.8 35.6 30.2 Value-ad Total: I if 7,918 11,633 10,024 9,914 10,30B 8,777 8,025 3.6 2.2 2.4 2.1 0.3 0.1 Taua: f71 11,914 16,123 14,161 14,049 14,645 13,163 12,299 2.8 1.6 1.9 1.5 0.9 0.3 Popolatii ('WO) 43,801 55,058 55,05B 55,058 55,058 55,058 55,058 2.1 2.1 2.1 2.1 2.1 2.1 / It ia aa_ Cdha C t _ ia pspfactly las tic rid nopact to price. No retriction arsuasd for i.ports. 7i n this sileati it is ssm diet die ser5il _ r frce pain mrpU declisa uwe a certain wsae of trcde too bc readwld, d that the aboapiw capacity of otp snta at bae pwrid C7I ctUt prices is Iiuited in do cae of o8ur ctdiies. No restriction are eaa for importm /c Ihia sim7Jti. mu th ie l utatie an it o itias so un the Liadited Eqa simalation (Corlm, C), but the reel vael of conuptin im 190 ia hbld at tte 1979 pr capita 11ul. /d Thia Jsulatio _sm the see limitations a -st oetuniti_ a aider the Limited ubrta imlatinn (Clm, C), but relati_ CII eW pricm fcr se lwed ctiditis in 1490 a adjuwtad in sc . with world tht projectiene ft the period 1979-90. /. For aieulatice F ad C, no intrictis aen _ead for ivta, while doe n pctiwe asapti0a are rtained ebut mt o t,po tits oa wider Cbl.u B ad C. It ia as_d thdt crp yields d ani_l prodtivity will rnt ircgerea (althcgh land urder cultiv_tion aid band aims are peaitad to inn__ ), -bile irriptnd wm is bald Untent at the base tr lINal. L 1: Inpt cost inclui labor tat. II: Input ca luie labor tasts.  - 27 - 3.11 Trade. The export growth rates associated with unlimited free trade conditions and limited exports are 14% p.a. and 11% p.a., respectively. Under the limited export simulation with cbanging price ratios growth is 10%, which declines further to about 9% p.a. when minimum consumption balances are maintained. Thus a good marketing response is simulated across all commodity groups to the assumed trade policies, with the strongest manifested by vegetables, and fruit and nuts, followed by grains (barley). The growth of pulses and industrial crops exports are projected to be below average, pulses moderately so, because the model simulates the export of nearly 50% of their 1990 production, suggesting that the sector's capacity to produce for substantial further export of these crops will become limiting by 1990 1/ It should be noted that these percentages refer to increases from the relatively low base for agricultural exports of 1979; already the US$ value of exports has increased at an average rate of 29% p.a. between 1979-81. A signal result is the dramatic reduction in the export of grains under a policy of maintaining per capita consumption balances and the elimination of wheat exports. The exports of protein sources such as pulses and livestock products similarly decline from the levels projected for the unlimited trade and limited export scenarios. When the variant technology assumptions obtain, however, the projected exports of grains, fruits, nuts, and livestock products fall off even more dramatically, while livestock products imports expand to make up consumption shortfalls. 3.12 Sectoral foreign exchange flows. As the simulation results for commodity trade show, the value of agricultural exports substantially exceeds the value of agricultural imports under all types of foreign trade policies assumed, whether for the base year or projection year. To get an indication of the overall net foreign exchange earning/saving capacity of the agricultural sector, however, these figures need to be adjusted to reflect expenditure on imported inputs used in agriculture, whether directly or indirectly. In TASM, the inputs concerned are fertilizers, tractor power and other working capital items for certain crops. (Changes in fixed asset investment in agriculture are not modelled in the financial flows.) The net foreign exchange flows, valued at 1979 border prices, calculated on this basis are shown in Table 18 of Annex 5. The main point to note is that the greater intensity of input use in agricultural production for 1990 results in much lower net foreign exchange inflow under the conditions associated with the 'limited' export demand scenarios than when it is assumed that foreign markets could absorb as much produce as Turkey could produce. These results do not take account of value added in processed production and trade, which would be expected to increase substantially. 3.13 Land use. The projected growth rates of agricultural value-added of 2.8% p.a. under unlimited free trade and 1.6% p.a. under limited exports correspond to a 4.9% increase in area sown or planted to orchards in the first-instance and an 8.6% decrease in the second, when these are compared with the base solution (see Table 20 of Annex 5). The projected changes in land use also contain changes in the allocation of land among crops, though 1/ Due to the interaction of technical production considerations and domestic demand.  - 28 - grains as a percentage of the total remains predominant in 1990 as it was in 1979, occupying 62.5% and 63.1% of the cultivated area respectively under both trade policies. Within the grains category, however, a marked reallocation of area from wheat to other grains occurs (mostly to barley), which demonstrates the effect of permitting barley exports under the assumed trade policies. There also occurs a shift of wheat production from rainfed to irrigated areas as a result of its being replaced by barley in rainfed areas, and a corresponding increase in the irrigated rotations (depicted in Table 21 of Annex 5). This indicates that the model is selecting barley (principally for export) in lieu of hard wheat (another potentially high valued export) which is generally grown under rainfed conditions in Turkey, and allowing the production of bread (i.e. soft) wheat (whose export prospects are limited) to expand in irrigated areas, but under progressively marginal conditions insofar as returns to farmers are concerned. The other significant changes are the increased area devoted to the cultivation of fruit and nuts and vegetables under unlimited free trade conditions but the contraction of these when exports are limited, and, under either trade regime, the increased plantings of industrial crops and the marked contraction of area planted to oils. 3.14 Input utilization. Under the TASM projections to 1990, the utilization of fertilizers and mechanical power increases considerably (Table 22 of Annex 5 refers). A large part of the increased fertilizer consumption is caused by an expansion of production and the changes in input- output relationships associated with the model's technology assumptions. However, the referenced table also indicates that levels of fertilizer consumption are related to trade policy and performance. Under the limited export assumption, fertilizer consumption in 1990 is projected to increase by about 75% above the amount used in 1979, whereas under the unlimited trade situation consumption would almost double. This reflects the increased fertilizer requirement to expand production of fruit and vegetables for export and for industrial crops. The requirement for mechanical power in 1990 also nearly doubles though the magnitudes should be interpreted with care because of the indexing employed to illustrate this simulation. The relative effect of the trade policies is less on the utilization of tractor power than on fertilizer consumption, suggesting that the technology and scale assumptions in TASM explain most of the increased tractor utilization, which may not be especially influenced by the commodity composition of output. Table 23 of Annex 5 indicates that mechanical power is not a binding constraint on the model solutions for 1990, nor is employment except during the 3rd quarter of each year, which is the main harvest season. However, most kinds of land are binding, as is the supply of animal power. Thus the increased requirement for mechanical power would probably be used to supplement the limited animal power expected to be available for those farm operations which exceed the capability (or willingness) of farm labor to carry out unassisted. These probably would entail the increased land preparation and harvesting tasks required by the intensified cultivation which the model simulates for 1990. 3.15 Employment and labor productivity. The projected growth rates of agricultural value-added are associated with increases in employment of 1.7% p.a. (unconstrained export demand) and 0.6% p.a. (limited export demand), respectively, when employment is measured as the number of hours worked during  - 29 - the peak quarter of the year, and with increases of 1.1% p.a. and 0.3% p.a., respectively, when employment is measured as the total number of hours worked in all quarters (summarized in Table 24 of Annex 5). This compares with an assumed rate of increase of 1% p.a. in the availability of agricultural labor. The higher employment impact of the unconstrained trade policy again is due to the greater preponderance of the relatively labor-intensive fruit and vegetable crops in the output mix under the assumption of unlimited export demand. Depending on the employment definition used, about 40-60% of agricultural value-added growth during 1979-90 is thus accounted for by increases in labor productivity under the unlimited export demand assumptions and about 55-80% under the limited export demand assumptions. Table 24 of Annex 5 shows that the labor content of total costs in agriculture is projected as declining considerably. If labor costs are included in the definition of net income, then a small decrease in labor's share of net income from agriculture is projected. C. Sources of Growth 3.16 The policy experiments clearly suggest that substantial production increases can be expected as a result of lifting restrictions on foreign trade in agricultural commodities and opening up domestic markets to foreign market influences, and (implicitly) by allowing the currency to be exchanged against other currencies at rates approximating the free-market or shadow rate. Agricultural growth will also occur as a result of investments which increase resource availability and raise productivity through irrigation development, the development and uptake of improved production technologies, and from growth in domestic demand which sustains real price levels. Overall growth can thus be depicted as coming from two sources; changes of a structural nature in resource availabilities, states of technology, aggregate demand levels; and changes which represent producer response to alterations in market conditions due to the introduction of new foreign trade policies. By simulating trade policy changes under both base year and projection year conditions in TASM, the relative contributions of these two sources of growth to total growth between the base year and projection year can be identified. 3.17 Production, consumption and trade. This is done for total growth in production, consumption, imports and exports during 1979-90 in Table 26 of Annex 5 and for employment and value-added per worker in Table 27 of Annex 5. An analysis of these results suggest that the relative contribution of the structural and response effects (or 'growth' and 'policy' effects as they are termed in Table 26 of Annex 5) to overall growth simulated is as follows; under the limited export trade assumption the trade policy itself, i.e. lifting restrictions on imports and exports, accounts for 36% of the projected growth in production during 1979-90 while the 'growth' processes account for the remainder. If unconstrained exports are assumed, then the trade policy effect is proportionately greater (58%) because more of the production response is accounted for by increasing exports from the same resource base and less from an expansion of the productive capacity of that resource base. With regard to domestic consumption, the sources of change are quite different. Virtually all the increase in consumption during 1979-90 which is projected is due to the growth processes i.e. increasing population and income  - 30 - per capita create an increased demand for agricultural produce. In fact, the effect of a strong export orientation is to raise prices in the domestic market and reduce consumption. The reverse reflection of this process can be read in the export figures in Table 26 of Annex 5. In this case, growth counteracts the policy effect on exports since increasing domestic demand competes for available supplies. Finally, it may be noted that virtually all the increase in imports is accounted for by the growth process and very little (or none in the case of unconstrained exports) by trade policy. 3.18 Employment. The analysis indicates that the trade policy effect accounts totally for projected increases in employment under free trade conditions and more than offsets a slightly negative growth effect induced by mechanization and other factors (Table 27 of Annex 5). The sources of growth in value-added per worker are somewhat mixed, however, depending upon whether employment is scaled with respect to peak season requirements or "quarterly average" employment. In the former case, 98% of the increased value-added per worker in constant 1979 farmgate prices is attributed to the growth effect and only 2% to the trade policy effect, suggesting that aggregate employment would be expanded in fairly constant proportion to the utilization of other production inputs as a result of the assumed relaxation of trade restrictions in these simulations, but that a tendency to substitute for labor would occur--at least in value terms--as a result of the structural changes giving rise to the growth effect. When labor is scaled on a quarterly average basis, the sources of growth in value-added per worker are more evenly divided between the trade policy and growth effects. D. Interpretation of the TASM Results 3.19 The TASM framework provides a basis for delimiting the sector's performance potential. It also provides a framework for tracing the effects of policies through a fairly detailed representation of the exceedingly complex technical and structural relationships which characterizes Turkish agriculture; in doing so, it facilitates greater insight into the nature of the growth processes than previous sector work allowed. Because the model was validated on 1979 statistics, some interpretations of the model's quantitative estimates are required in light of subsequent events when assessing the sector's performance potential until 1990. However, the financial flows modelled by TASM are essentially internal to the agricultural sector, and its solutions are deterministic. The model therefore is not particularly well suited for an analysis of consumer price stabilization and food security policies, although it does establish the production and trade parameters within which domestic food security programs are likely to have to operate. It also does not make projections of the intersectoral terms of trade which would be important complementary information for analysis of the trade-off between exports and domestic consumption.l/ 3.20 Production and value-added. In view of limitations of exporting which could be experienced because of constraints on the absorptive capacity of Turkey's major trading partners and the fact that export market penetration 1/ These are handled by other means, as discussed below.  - 31 - is not a costless activity, it is more likely that the sector will continue to face conditions represented by the limited export scenario than by unlimited free trade. However, the projected growth in production and value-added were derived in the first instance from an assumption that all internal constraints to exports were removed in 1979 and that a complete liberalization of imports occured. In fact, constraints to exporting were not relaxed until 1980, and imports of food and needed agricultural inputs such as seeds, appropriately sized machinery, animal drugs, vaccines and chemical ingredients for feed concentrates are still discouraged and very tightly regulated. The nature of the projection exercise also assumed, again implicity, that the macroeconomic stabilization program would be immediately effective and that the domestic per capita incomes, thus demand, would rise steadily over the projection period. Again, this has yet to occur, indeed real per capita incomes have fallen substantially since 1979 and are only now begining to recover. In addition to an assumption of a liberalized trade regime, with which about 40-60% of the projected growth in production and value-added would be associated, the model also requires that the technological assumptions be satisfied--that a steady stream of productivity increasing innovations be introduced at the farm level over the projection period, and that public investments in irrigation be expanded and utilized efficiently. Although efforts have been made to increase the completion rate of ongoing irrigation projects, the rate of expansion since 1979 has been effectively limited by budgetary constraints on overall public investment and the annual construction capability of the infrastructure agencies, which presently is about one-third of the annual expansion assumed in the TASM simulations, though it could be augmented fairly rapidly. On the other hand, very little has been done since 1979 to increase the efficiency of the research, extension and livestock services, the input distribution networks and the agricultural credit system, although the problems are well known. 3.21 Thus many of the prerequisites for production growth simulated by TASM have not been satisfied and in fact only marginal sectoral growth actually occurred in 1980 and 1981 (para. 2.06). Because part of the trade and public investment policies have been in place since 1980, however, a substantial sectoral "growth-gap" has developed in relation to that which appears to be feasible under the limited export scenario. It seems reasonable to expect a higher rate of growth during the remainder of the decade if stabilization is successfully accomplished and the other complementary policies and institution building referred to are also adopted. It is thus crudely estimated that growth of sectoral production of about 2.8-3.0% p.a. is possible for the remainder of the decade. This is essentially equivalent to growth of sectoral GDP under the Turkish national income accounting conventions for the agricultural sector, and would correspond to a growth in value-added of about 2.1-2.3% p.a. 3.22 Trade balances. Policy adjustments consistent with a freer trade philosophy not unexpectedly have a substantial positive impact on agricultural commodity trade balances in TASM. The limited export projections indicate an increase in the size of the net surplus of exports over imports of nearly three times between 1979-1990, (Table 3.1) despite a rapid rise in imports. This corresponds with an expansion of exports by 11% p.a. in constant 1979  - 32 - terms. As noted in previous paragraphs, an immediate and substantial expansion of exports from the relatively low 1979 base already has been realized in 1980 and 1981 in response to the liberalization of exports. This was abetted by the deflationary policies which probably depressed disposable incomes and consumer demand below feasible trend levels and certainly below the levels assumed in TASM (which are allowed to increase by 2.4% p.a. over the projection period), thereby causing an unusally large diversion of current production into exports. Thus disposable incomes could be expected to "catch-up" to trend during the decade which through a resurgence of domestic demand could reduce the share of incremental production which can profitably be exported. The feasible rate of agricultural exports expansion for the remainder of the 1980s is therefore likely to be considerably less than projected in TASM, or on the order of 4-6% p.a. in constant 1979 terms. 3.23 Employment creation. The TASM projections indicate that there is a complementarity between export promotion and employment creation. Thus an employment/value-added elasticity of 0.2-0.4 is derived from the simulation of a limited export demand scenario but increases to 0.4-0.6 under unlimited free trade, mainly a consequence of the higher proportion of labor-intensive commodities in sectoral output under conditions of unlimited export opportunities. Indexes of the relative input-intensiveness (including labor) of different crops are given in Appendix 1, Table 2 to Annex 5. Table 27 of Annex 5 shows that the projected increase agricultural employment is entirely due to the trade policy/response effect under conditions of unconstrained trade--indeed the growth/structural effect works in the opposite direction, though, unfortunately, the areas in which Turkey looks like being able to find it 'easiest' to export, namely cereals, is the least labor-intensive subsector in agriculture. Thus the feasible rate of expansion of agricultural employment is about 1.0% p.a., which is less than the expected rate of expansion of the rural labor force of about 1.4% p.a. 3.24 Consumption. Under both the unlimited free trade and limited export conditions, the simulations indicate that the greater the export content of incremental output, the more is per capita consumption eroded as prices rise on internal markets. Thus, a strong drive towards export growth is likely to be achieved at the expense of domestic consumption. This could be serious for rural households in view of the incidence of malnutrition discussed in Chapter II and Annex 3. Measures to maintain consumption levels will mean some sacrifice of export potential but are not likely to make much difference to the rate of growth in overall agricultural value-added. The effects on consumption of opening the sector to free trade varies between and within commodity groups, and while total consumption of agricultural products in 1990 would be roughly maintained at base year (1979) levels in per capita terms, this would not be true for most individual commodities (see Table 3.1). A policy which had the effect of ensuring a minimum level of consumption for all commodities equal to base year per capita levels (e.g. through consumer subsidies) would reduce the potential for export growth. The results of such a policy experiment are also shown in Table 3.1, which suggests that export growth under the TASM assumptions during 1979-90 would be cut from 10.7% to 8.7% p,a. Thus the potential 1990 trade surplus for the sector would be considerably eroded, from $2,062 million under limited exports to $1,662 million under minimum consumption constraints at 1979 prices. Wheat, for  - 33 - example, would not be exported at all, while the growth in imports--responsive mainly to the growth effect--would hardly decline. Value-added in agriculture grows slightly faster under the minimum consumption/lower export policy than when no interventions are made to maintain per capita consumption levels. 3.25 Terms of trade and food security. Under the "freer trade" policies simulated by TASM, the intersectoral terms of trade are projected to move in agriculture's favor--at about 0.75% p.a.--when these are scaled by a crude index equating non-agricultural prices with agricultural input prices. A better indexing and more reliable indication of the direction and magnitude of intersectoral terms of trade was derived from forward runs of the Bank's Computable General Equilibrium (CGE) model for Turkey, which was recently revalidated on 19811' data. Variants of the model were run for this study in the context of achieving an economy-wide export growth target by 1990 (discussed in Annex 6) to examine the related performance of agriculture under conditions of high and low total factor productivity growth and price responsive sectoral exports. Policy experiments were also conducted to trace the effects of various agricultural imports regimes on the agricultural terms of trade. The results are sumnarized below. Total Factor Productivity Growth Moderately High Moderately Low Restricted Unrestricted Restricted Unrestricted Imports Imports Imports Imports