Privatization in Turkey

Policy, Research, and External Affairs WORKING PAPERS Country Operations Country Department I Europe, Middle East, and North Africa Regional Office The World Bank November 1990 WPS 532 Privatization in Turkey Sven B. Kjellstrom Turkey's privatization effort has shrunk to being a technique for financing the budget deficit, with loftier targets for greater efficiency pushed into the background. The Policy,Research, and External Affairs Complex distiibutes PRE Working Papers to dissrroinate the findings of work in progress and to encourage the exchange of ideas among Bank staff and all others intaested in developnent issues. These papers carry the names of the authors, reflect only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own. They should not be attributed to the World Bank, its Board of Directors, its managanent, or any of its member countries.  Policy, Research, and Externati Affairs Country Operations WPS 532 This paper - a product of the Resident Mission in Turkey, Country Department 1, Europe, Middle East, and North Africa Regional Office - is part of the Bank's effort to evaluate the experience with privatization. Copies are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Thouria Nana-Sinkan, room H4-091, extension 36026 (73 pages, with graphs and tables). State capitalism has been a basic tenet of the sales without thorough preparation of the legal developing strategy of the Turkish Republic for ground. The sales wen! to foreigners, the highest half a century, with import-substituting industri- bidders, but this generated much controversy alization through state economic enterprises among unions, opposition parties, and industrial- (SEEs) as a guiding principle. But by 1980 a ists. serious economic and political crisis called for a reassessment of economic policies. The policy Privatization became a contentious political reorientation was radical: from import substitu- issue that the opposition parties exploited, often tion to export promotion, from interventionism in a populist manner. They got the block sales to market forces, and from the promotion of canceled by court orders - on the grounds that SEEs to the promotion of the private sector. the switch to foreign sales was illegal. The state's role in the economy was to be The government had not prepared the legal, reduced. SEEs were to be streamlined and made institutional, and political base for privatization. more efficient by operating in a more competi- It had no clear strategy and concrete program for tive environment under greater cost and price privatization and its assumption that awareness. Greater efficiency would come from privatization could be treated as an administra- either SEE reform or privatization. tive matter was proven wrong. Much was said, little done. Excessive claims, withovt due Apart from greater price flexibility and the safeguards, generated a malaise among groups dilution of some monopolies, SEE reforn has that privatization col!ld adversely affect. not made much headway - mainly because the government has been reluctant to adopt and The cancelation of block sales coincided pursue an effective reform program. with a boom on the stock market. Moreover, the treasury came under pressure to generate revenue Emphasis has instead been put on to contain a growing budget deficit. The sales privatization broadly defined, with the additional strategy thus switched back to stock market sales objectives of developing the domestic capital of minority shares. The share sales program has markets and generating revenue for the treasury. so far been a success, and the proceeds could The initial operations were in the form of sales finance a large part of the 1990 budget deficit. of revenue-sharing bonds and minority share At least for the moment, privatization has thus sales. The first attempt at stock sales flopped, shrunk to a budget-deficit financing technique, because it took place in a falling market. The with the loftier targets of enhanced efficiency approach was then quietly switched to block pushed into the background. The PRE Working Paper Serics disseminates thc findings of work under way in the Bank's Policy, Research, and Extemal AffairsComplex. Anobjectiveof theseries is to get these fundings outquickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy. Produced by the PRE Dissemination Center  Table of Contents Page Number Acknowledgements I. Background A. Origin of State Capitalism 1 - 3 B. Economic Policies and Performance, 1950-80 3 - 6 C. Macroeconomic Performance in the 1980s 6 - 10 D. Dissatisfaction with SEE Performance 11 - 16 E. Strategic Options for Improving SEE Performance: 16 - 19 Reforms and Privatization {I. Privatization A. Initial Strategy 20 - 24 B. Preparations 25 - 27 C. Initial Test Cases 28 - 29 D. Stepped Up Privatization 29 - 32 E. Change in Strategy in Response to Criticism 32 - 38 F. Planned Future Privatizations 38 - 43 G. Lessons 43 - 47 H. Opposition 47 - 51 I. Medium-term Outlook 51 - 56 References 57 - 59 Annex I. List of State Economic Enterprises and Public Economic Establishments 60 - 63 Annex II. List of State Economic Enterprises Transferred to the Public Partnership Administration and Its Participations 64 Statistical Appendix 65 - 73 i  List of Text Tables 1. Summary Macroeconomic Indicators, 1980-89 2. Indicators of SEE Performance, 1980-89 3. Average Daily Trading Volume on the Istanbul Stock Exchange, 1986-90 4. Central Government 1990 Budget List of Text Graphs 1. Share of Public Sector in the Economy, 1980-90 2. Share of SEE Investment in Total Public Investment, 1980-90 3. Public/Private Sector Terms of Trade, 1987-90 4. Monthly Closing Values of the Istanbul Stock Exchange Index, 1986-90 ii  ACKNOWLEDGEMENTS A shorter version of this paper constituted the mein topic of the June 1990 Monthly Economic Report of the Turkey Resident Mission. At the helpful suggestion of John Nellis of CECPS, the paper was subsequently expanded to provide economic and political background, while amplifying relevant economic and financial aspects. This was necessary to make the paper self-contained. I am indebted to my colleagues Tevflk Yaprak and Sebnem Akkaya of the Economic Unit of the Turkey Resident Mission for many useful comments and suggestions. Sebnem Akkaya prepared several iterations of the tables and graphs with great forbearance. Ipek Kutay made the final revisions in the paper and designed the layout with skill and speed. Barbara Mondestin at World Bank Headquarters finalized the format of the paper with her habitual helpfulness. The contributions of other writers included in the list of references should also be ackiLowledged. My understanding of the intricacies of the Turkish economy and political system, partial as it is bound to remain, nonetheless owes much to their works, both with respect to the total picture and privatization is.ues. iii  The usual final disclaimer is warranted in this case too. The author remains solely responsible for the views expressed in this paper and any errors of fact or judgement that may remain. In a more innovative vein, my esteemed colleague Tevfik Yaprak wants to disclaim any responsibility for the format of Graph 4, an issue on which we have had to agree to disagree. iv  I. BACKGROUND A. Origin of State Capitalism 1. Modern Turkey emerged from a costly war of national independence in 1923 with no firm view on the respective roles in the economy of the private and public sectors. Infrastructure was in public hands, but much of the rest of the economy remained in private hands. Most of the pra-war entrepreneurs had belonged to ethnic and religious minorities that had departed as a result of the war. The national class of entrepreneurs that grew to fill the void was a major source of support for the new regime. '.ocal private investors tended however to prefer commerce over industry. There was an absence of foreign investors, who anyway were viewed with suspicion after the war of national independence. Th.e economy remained predominantly agrarian. 2. The Government was bound in its economic policies by various trade concessions granted to foreign nations (a latter day version of the controversial "capitulations" that the Ottoman Empire had granted western powers since 1535). The 1923 peace treaty, which formally ended Turkey's state of belligerency in World War I, stipulated that these concessions would continue until 1929. 3. The expiration of the trade concessions coincided with the world economic crisis in 1929. Through foreign trade the domestic economy was badly affected. The national entrepreneurs, whose performance in industry had not 1  been all that impressive, reeled under the ensuing recession. Liberal and open-door econcmic policies relying on market forces were discredited. Models for economic development strategies were being sought elsewhere. Fascist Italy with its proclivity for a corporate state was one source of inspiration. So was the Soviet Union, where heavy industrialization through five-year plans was under way. Politically republican Turkey had little sympathy for the Soviet Union, but in economic matters Turkey was willing to pick and choose in an eclectic manner without ideological blinds. 4. The concept of state capitalism!/ had appealed to the military and bureaucratic leaders of the time, since they had grown up under a centralized system with a certain distrust of private entrepreneurs. They were also distrustful of the external world, but at the same time keen to emulate the West in order to strengthen Turkey's place among the concert of European nations. Thus both domestic and external factors prompted Turkey to opt for state capitalism. It seemed to be the only practical way of !rcoming the predicament in which the country found itself at the end of the 1920s. Pragmatism rather than political dogma dictated the choice. State capitalism was chosen after some soul-searching and as a faute de mieux. I/ Under state capitalism, as opposed to socialism, the state assumes a leading role in industry through the creation of large enterprises that are designed to have a multiplier effect on the private sector, which remains dominant in agriculture and services. A comprehensive regulatory framework and planning (usually indicative for the private sector) are used to ensure a synergy between the public and private sectors, Key production units are in state hands not because of any ideological imperative, but as a practical shortcut to speed up industrialization (or modernization) against the background of a private sector assumed to lack the means or inclination to invest in large modern industrial ventures. 2  5. Under the state capitalist approach chosen by Turkey, the state assumed a leading role in the mobilization and allocation of resources. The state set the basic parameters for the private sector. A protective trade regime was adopted in 1929 and the following year a Central Bank was created. Market forces were frequently tampered with through interventionism. State directed procurement, rationing, subsidies and incentives spread. The state assumed the leading role in heavy industry (iron and coal), light industry (textiles) and transport. Non-strategic industrial sectors, commerce and agriculture were largely left to the private sector. State-led import substituting industrialization become the guiding principle for economic planners. In the turbulent 1930s, and through the disruptions caused by World War II, this strategy had its merits. B. Economic Policies and Performance 1950-80 6. During the postwar decades to 1980, the Turkish economy came repeatedly under strain as the pace of economic change quickened arid external shocks occurred, while both economic policies and performance were slow to adjust to changing circumstances. Each decade tended to end with a balance of payments crisis compounded by a political crisis.2/ Rapid growth was sustained by expansionary fiscal policies coupled with accommodating monetary policies. The ensuing inflation tended to make the exchange rate overvalued, which undermined the balance of payments. External borrowing, often of a short-term nature, was used to close the current account deficits and postpone the 2/ See Peter Wolf: "Stabilization Policy and Structural Adjustment in Turkey, 1980-1985", pages 46-60 (German Development Institute, 1987, for a summary of economic developments during this period. 3  cutback in excessive domestic demand. Debt service rose. Ultimately the debt service burden became unmanageable. The availability of foreign capital dried up. Debt had to be rescheduled, the currency devalued and .omestic demand curtailed. 7. In terms of economic policies, import-substituting industrialization was pursued, although with more scope for the private sector after the introduction of multi-party politics in the late 1940s. The private sector had become increasingly restive within the straight-jacket imposed on it by comprehensive state intervention. The state relaxed the grip a bit, realizing that it could also benefit from giving more room to the private sector. Nonetheless in substance much of the guiding role of the state was retained. The State Planning Organization (SPO) was created in 1963 and indicative planning, of French inspiration, reinforced. Its aim was to guide the deployment of public resources and to induce the private sectar to comply with public targets and priorities. 8. The ten year "boom-bust" cycle of the 1970s started under particularly favorable auspices, but ended with a serious aconomic crisis, compounded by political violence and paralysis. In 1973 Turkey registered an unprecedented current account surplus thanks to large workers' remittances, mainly from West Germany. By 1973 Turkey had however become very dependent on oil imports for industry and transport, with the result that the first oil shock led to renewed and growing current account deficits starting in 1974. 4  9. The policy responsc to the oil shock was inadequate. Weak and fractious coalition governments tried to spend their way out of the adjustment problem. Both public expenditure and recourse to central bank financing were stepped up. Inflation rose. The requisite external borrowing became increasingly short-term and volatile. When Turkey had to default on its debt service in late 1977, it was faced with a full-blown balance of payments crisis. Because of political uncertainties, it took three years for a package of forceful adjustment policies to be adopted. In the meaetime inflation rose further, foreign exchange became increasingly scarce, while extearnal arrears accumulated, supplies were disrupted, production fell and unemployment rose. Turkey had reached a crossroad in Its economic development. 10. Until the crisis of the late 1970s, Turkey had pursued both a consistent and undifferentiated import substitution policy. Capital-intensive state economic enterprises (SEEs) occupied many of the commanding heights of the economy. There was however also an increasingly important private sector, accounting for about half of industrial output. The emphasis on import substitution over export promotion had initially yielded impressive results, but by the 1970s most of the opportunities for successful import substitution had been exhausted. As import substitution moved from light consumer goods to intermediary and capital goods, the benefits to the economy declined, while the costs rose. Given the small size of the domestic market, there were few economies of scale left to reap. As a result, it was diff.cult to achieve an optimal size of firms. This was reflected in rising capital/output ratios. Moreover, negative real interest rates were conducive to excessive capital 5  intensity. Few jobs were created.2/ Little foreign exchange was saved as production became more import dependent, and not just in oil. Protective barriers and -an overvalued exchange rate precluded competitive exports. 11. Even without the balance of payments crisis that erupted in 1977, the policy of import substitution focussing on SEEs had run its course. A major policy change was overdue. In the aggregate, SEEs became increasingly unprofitable after 1974, despite various implicit subsidies, not least of which were subsidized interest rates. In addition to internal inefficiencies, a major reason for their poor financial performance was that prices for their output were not allowed to rise in line with cost in the increasingly inflationary environment then prevailing. Rather than Deipr engines of growth as hoped for by the planners, SEEs had on the whole become brakes on growth by the late 1970s. C. Macroeconomic Performance in the 1980s 12. In 1980 the Turkish Government finally decided that a drastic policy reorientation to cope with the multi-faceted crisis was needed. It is noteworthy that the economic reform program was adopted by a civilian government eight months before the military take-over in September 1980. lhe military Government that followed endorsed the economic reform program, while limiting political activities, such as disbanding Parliament and banning 2/ SEEs possessed a small but highly unionized (and well paid) labor force that constituted a veritable labor aristocracy (Caglar Keyder: "State and Class in Turkey: A Study in Capitalist Development", pages 160-61, Verso, 1987). 6  political parties, unions a.ad strikes. Both in economic and political terms, 1980 was a turning point. 13. The gravity of the economic crisis forced the Government to critically re-examine many of its past basic policy premises. New courses were explored and old shibboleths jettisoned. In 1980 Turkey radically broke with the thrust of economic policies pursued since the inception of the Republic by switching from inward orieni.3d import substitution to outward oriented export promotion. On the domestic side, there was a concomitant shift from interventionism to reliance on market forces, combined with a reduced role for the public sector and promotion of the private sector. An encompassing liberalization of the economy was attempted to overcome the crisis and restore rapid growth in a non-inflationary context of enhanced international competitiveness. 14. The instruments used to realize the new policy objectives were also out of the ordinary: a massive devaluation follcwed by a crawling peg plus step- wise import liberalization and a broad array of export incentives. On the domestic side, use was made of fiscal and monetary tightening, including positive real interest rates, freeing of prices end removal of state monopolies. Relative prices were shifted in favor of tradables, while domestic demand was restrained, including throrgh an erosion of real wages. 15. Impressive results were speedily achieved as shown in Table 1 below. Between 1980 and 1984 negative growth had been turned into high positive growth. 7  Table 1. Summary Macroeconomic Indicators, 1980-89 1980 1984 1989 Real GNP growth rate (percent) -1.1 6.0 1.7 Resource gap, minus-surplus (in 5.5 2.8 -0.9 percent of GNP) Average annual change in wholesale 90.3 50.3 69.6 price index (percent) Public sector borrowing requirement, 10.3 6.5 5.6 1/ PSBR, (in percent of GNP) Annual growth in broad money 66.3 58.0 73.3 (percent) In percent of GNP Exports (fob) 5.0 14.7 14.6 Imports (fob) 12.9 20.6 19.9 Trade balance -7.9 -5.9 -5.2 Current account balance -5.8 -2.9 1.2 Non-interest current account balance -3.9 0.3 4.8 In billions of US Dollars Debt outstanding and disbursed 16.3 20.7 41.0 Debt service 1.0 4.0 7.2 Debt over GNP (percent) 27.9 41.2 51.0 Debt over exports (percent) 443.9 210.2 216.4 Debt service ratio 2/ (percent) 27.8 41.1 37.8 Source Statistical Appendix, Tables 1-2 1/ Likely to be revised upward to around 6.0 percent when final results of SEEs become available. 2/ Debt service over exports of goods and services plus workers' remittances. The shift to tradables meant that the resource gap was cut in half. The public sector borrowing requirement (PSBR) was also cut significantly. So was inflation, although less success was achieved in reducing the growth in money supply. The most conspicuous progress was in terms of exports, whose share of GNP nearly tripled to 14.7 percent. Sluggish domestic demand and booming demand in oil-exporting Middle Eastern countries were the main reasons in addition to the change in relative prices. Exports to OECD countries also increased rapidly. 16. The rapid increase in exports permitted both a sizable increase in imports and a major reduction in the trade and current account deficits. By 1984 a small non-interest current account surplus had even emerged. In the 8  wake of debt reschedulings, and resumed debt service, debt service payments rose however rapidly, with the result that the debt service ratio rose from 28 to 41 percent between 1980 and 1984. Capital losses on the external debt through real depreciations of the exchange rate meant that the debt to GNP ratio also increased from 28 to 41 percent. 17. In contrast to the success of the first half of the 1980s, the second half of the decade has been characterized by marking time. Table 1 again presents a summary picture. Growth slowed and inflation rose. Further progress in reducing the PSBR proved difficult. Restraining the growth in money supply turned out to be elusive. On the external side, no further progress was made in terms of the relative size of foreign trade. A current account surplus did however emerge thanks to higher service receipts, mainly from tourism (in addition, a recession depressed import demand in 1989). The external debt nearly doubled to $41 billion, but this was largely due to cross-currency movements (especially the weakening of the dollar). The debt to GNP ratio rose much less, to 51 percent. Growing foreign excnange receipts under the current account balance led to a decline in the debt service ratio to 38 percent, despite a large increase in debt service payments. 18. By the end of the 1980s a strong external performance co-existed with a domestic performance that continued to display structural weaknesses. The most salient structural weakness has been the inability of the public sector to live within its own means. One manifestation of this phenomenon is that the size of the public sector in the economy, which was reduced between 1980 and 1984 iTn line with the enunciated policy, has, if anything, tended to rise 9  after 1984, as sho-in in Graph 1. It has been difficult to change the modus operandi of the public sector and to reduce the deficit. Moreover, the Government has found it difficult to submit itself to the discipline of market forces. When under pressure, the atavistic reaction of the Government is often to resort to interventionism. 19. The public sector has appropriated a large share of domestic private savings, more through borrowing than through the inflation tax. This has pulled up interest rates and entrenched inflationary expectations. Private investment in manufacturing has been sluggish, thereby undercutting the sustainability of the export drive. Planning horizons have shortened, as the credibility of government policies has diminished, allegedly due to numerous and unpredictable policy adjustments for short-term political gain. 10  Graph 1 Share of Public Sector in the Economy, 1980-90 percent of GNP 25 In etme t 79 ... .......... 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989E 1990 T E: Estimate T: Target SOURCE: State Planning Organization. D. Dissatisfaction with SEE Performance 20. By 1980 the poor performance of SEEs had become all too visible. Of a PSBR of 10.3 percent of GNP in that year, SEEs accounted for 6.4 percentage points, that is nearly two thirds. Part of the poor performance stemmed from internal inefficiency, but a large part was also caused by government-imposed constraints, such as frozen prices, overstaffing and politically motivated managerial appointments. Perceiving SEEs more as a drag than a dynamo for the 11  economy, in its economic reform program the Government stressed the need for improved performance of SEEs, including the shedding of SEEs through privatization and liquidations. Improving the performance of SEEs has however turned out to be a difficult task. After a good start, further progress has been harder to come by.A/ 21. Between 1980 and 1984 the financial performance of SEEs improved significantly, as shown in Table 2. The PSBR of SEEs declined to 2.3 percent of GNP (barely a third of the total PSBR). A major explanation was the opportunity given to SEEs in 1980 to raise prices to compensate for the erosion in relative sales prices since 1973. Some prices were henceforth freed altogether, but most remained subject to de facto ministerial approval. Another explanation for the lower PSBR was the reduction in the share of SEEs in total public investment (the latter remained a relatively stable portion of GNP throughout the 1980s), as depicted in Graph 2. A lower PSBR also meant that the share of SEEs in outstanding bank credit could be reduced from 33 percent in 198C to 12 percent in 1984. 22. After 1984 there was no further visible improvement in the performance of SEEs. Their PSBR barely changed between 1984 and 1989, whereas their profit margin shrunk from 7.5 to 1.7 percent. Sales per worker declined by about 5 percent in real terms. SEE investment was slashed significantly, but was offset by higher interest payments, in part due to upward pressure on interest rates exerted through stepped up borrowing by the Central Government. In 1984 A/ See Luc Everaert: "Turkey SEEs" (unpublished World Bank paper, 1989) for an analysis of the performance of SEEs in the 1980s. 12  SEEs benefitted from a reduction in interest payments, when part of their debt to the Central Bank was consolidated and assumed by the Treasury. Following an erosion in real wages through most of the 1980s, in 1989 wage payments rose sharply following a framework agreement with the unions stipulating a 143 percent wage increase (compared to an annual inflation rate of 70 percent). No further increase in relative sales prices was realized. But sales prices were in the short run manipulated for political purposes, as highlighted in Graph 3. Before elections, SEE price increases were allowed to Ttble 2. Indicators of SEE Performance, 1980-89 1980 1984 1989 SEE PSBR (percent of GNP) 6.4 2.3 2.4 Total PSBR (percent of GNP) 10.3 6.5 5.6 Share of SEE PSBR (percent of total) 62.3 35.4 42.9 SEE share in total public investment 66.6 51.9 41.5 (percent) SEE share in outstanding bank credit 33.0 11.5 14.2 (percent) Profit margin 1/ (percent) .. 7.5 1.7 Share of wages and salaries in total .. 11.8 14.7 current expenditure (percent) Sales per worker (in millions of TL .. 38.0 36.4 at 1988 prices) In percent of GNP Financing requirements .. 8.6 6.0 Internally generated funds .. 3.5 2.7 Transfers from the budget and extra .. 2.5 0.9 budgetary funds Other 2/ .. 2.7 2.4 Source : Statistical Appendix, Tables 3-7 1/ Operating surplus/sales of goods and services. 2/ Defe,red payments, change in cash balances and borrowing (domestic and external). 13  Graph 2 Share of SEE Investment In Total Public Investment. l9BO-90 70 60 .\ ............................................................................................................................... 35. 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989E 1990 T E: Estimate T: Target Source: State Planning Organization. Graph 3 Public/Private Sector Terms of Trade Vl, (1987:100) 110 105 .................................. ............... ...........I........................................ 100 Preslintial. 95 . ........c..................c.........ti. .. ectlons Local Policy pf sl 0lasg elections prce increases Peril eatlentry in pubilc set tor election announce 90 1 5 9 1 5 9 1 5 9 1 5 1 87 8 99 1 99 go average (1107-51901 99.9 percent Source: State Institute of Statistics. 14  lag private sector price increases, with a speedy recuperation immediately after elections. This pattern vitiates the claim that market forces increasingly deternine SEE price policy. The short-term manipulation of SEE prices does however not necessarily lead to distortion over the medium term, because over the 1987 - May 1990 period, the terms of trade between public and private sector prices remained unchanged. 23. Because of a cutback in investment, the financing requirement of SEEs, as shown in Table 2, declined from 8.6 percent of GNP in 1984 to 6.0 percent in 1989. Most of the decline was reflected in lower transfers from the budget and extra-budgetary funds. SEEs have thus become less of a burden on the budget. When a variety of implicit subsidies are included, it is clear that in financial terms the performance of SEEs has continued to improve. Implicit subsidies are estimated, with a considerable margin of error due to data limitations, to have fallen from 11 percent of GNP in 1984 to 2 percent in 1990.5/ 24. SEEs still constitute a major block of the economy. Their share of total value added (GDP at factor cost) has hovered around 10 pe cent. The share of the 31 largest SEEs in the civilian labor force has remained at 4 percent since 1984. Reducing overstaffing in SEEs has met with only limited success. The initial enthusiasm for SEE reform began to wear off when the Government discovered what important bastions of vested labor interest SEEs constituted, j/ Luc Everaert, op. cit. Implicit subsidies comprise capital transfers, aid, imputed duty losses, imputed interest subsidies (the major component) and foregone dividends. 15  and how handy it could be to prov'de the ?arty faithful with sinecures in SEEs. A concerted attempt to alter the modus operandi of SEEs was never made. As a result, the SEEs continued to be afflicted by the common problems of overstaffing, political interference and multiplicity of objectives detracting from efficient commercial operations. 25. The conclusion is that streamlining the size of the sector and improving the performance of the SEEs were consistently put forward as goals, but were not sufficiently implemented in the structural adjustment policies pursued by the Turkish Government since 1980. SEEs resisted being dethroned from their previously leading and privileged position. The entrenched interests profiting from the SEE status quo were and are well organized and vocal. SEEs are falling behind in the modernization of the economy. They are thereby remaining a burden, which is difficult to remove. Coping with the problems caused by SEEs by starving them of resources and running down their investment budget may be a feasible solution,J/ )ut it is unlikely to be a very efficient solution, including in terms of preparing SEEs for privatization. E. Strategic Options for Improving SEE Performance: Reforms and Privatization 26. The need to persist with efforts to improve the performance of SEEs is beyond argument. The prime issue is how to improve productivity, rather than merely paper over inefficiencies by exploiting monopoly or oligopoly power