RETURN TO RESTRICTED c- | |REPOFRTh DESK W4W - Report No. Z&4A-30a ONE WErEI_ L This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOFMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE DEVELOPMENT PROSPECTS OF TURKEY (in nine volumes) VOLUME I MAIN REPORT February 1, 1971 Europe, Middle East and North Africa Department CURRENCY EQUIVALENTS After August 9, 1970 US $1.00 T=L 15.0 TL 1 s US $0.067 TL 1 million US $66,667 Prior to August 9, 1970 uS $1.00 TL 9.00 TL 1 US $0.11 TL 1 million US $111,111 =-~~~~~~~~~~~~~~~~~~~~~~~~~~ PREFACE This report is based on the findings of an economic mission, which visited Turkey in April/May 1970, and was updated on the basis of a visit by Mr G.C. Billington in September 1970. The mission in April/May 1970 was c:omposed of: Gordon C. Billington (chief of mission), Gene D. IReese (agricultural adviser), Don Mitchell (consultant, agronomist), Jacobus van Assen (consultant, irrigation engineer), Bertil Walstedt (industrial adviser), Andrew Freyman (consultant, mining and metallurgy expert), David Beaton (consultant, metal fabricating and engineering expeirt), Antoine Bassili (UNIDO consultant, forest industries expert), Milivoje M. Stojanovic (industrial economist), Cyril J. Martin (planning adviser - organization and machinery of planning), N. Dean Ganjei (IMF consultant, fiscal adviser), Francesco Gallo (general economist), Hanjo Lell (general economist), Josefina Vial (nationa'L accounts), Rosalinda Dacumos ('statistical assistant), Zoe Carson (secretary). I TilE DEVELOPMENT PROSPECTS OF TURIEY Table of Contents VOLUME I - Main Report Page Basic Data Summary and Conclusions ............ ............ i I. Recent Developments ................ .......... 1 A. Introduction . .1 B. Relations with the EEC and the RCD. 2 C. Recent Economic Developments. . 3 D. The Stabilization Program . .13 II. Principal Economic Activities .15 A. Agriculture . .15 B. Mining (Except Fuels) and non-ferrous Metallurgy . .19 C. Manufacturing . .22 D. Energy . .26 E. Transportation . .28 F. State Economic Enterprises. . 29 G. Workers Abroad . .32 H. Tourism . .33 I. Urbanization . .34 III. Development Policies and Priorities .37 A. Development Objectives of the First and Second Five-Year Plans . .37 B. The Role of the Public and Private Sectors ............................. 39 C. Budgetary Management. 41 D. Monetary and Credit Institutions and Policies ............................... 44 E. The System of Trade and Payments . .46 IV. Prospects .49 A. Long-Term Prospects for External Viability 49 B. Slhort-term Outlook .54 C. External Aid and External l)ebt ........... 58 Table of Contents (Cont'd) Map of Turkey Appendix I - 1970 Stabilization Program Appendix II - Conditions for Entry into the Second Stage of the 1964 Association of Agreement Between Turkey and the European Economic Community Appendix III - Population, Employment and Income Levels VOLUME II Statistical Appendix SEPARATE VOLUMES Annexes III. Agricultural Policies and Problems IV. Mining Sector V. Industrialization VI. The Forest Industries VII. The Engineering Industries VIII. Fuel and Power Resources IX. Planning and Decision Making BASIC DATh Area 780,600 sq.km. Population (1970) 35.7 million Rate of growth 1965-69 2.8 percent per annum Density 45 per square kilometer Gross National Product (1969, current market prices) TL 126.1 billion (1970, provisional ) TL 133 billion Annual rate of growth (constant prices) 1963-67: 6.9%; 1969: 6.6%; 1970:5% GNP at factor cost (1969) TL 111.1 billion GNP per capita at factor cost (1969) TL 3,200 ($356) 1/ Annual rate of growth per capita (constant prices) 1963-67:4.0%; 1969:3.7%; Industrial Origin of NDP (% of NDP at constant prices) 1962 1969 Agriculture, forestry 39.7 30.9 Industry, mining, electricity 16.2 19.5 Construction 6.3 7.4 Transport, communication 7.2 7.8 Trade 8.1 8.7 Housing 4.8 5.3 Government services 9.7 10.6 Financial institutions and other services 8.1 9.8 Expenditure on GNP (% of GNP at constant prices) Private consumption 74.1 71.5 Public consumption 15.4 11.9 Gross fixed investment 14.8 19.1 Net imports of goods and services 3.6 3.1 Net factor income from abroad -0.6 -0.5 Gross national saving 10.5 16.6 Government tax revenue 15.6 17.1 A annual Public Finance (Billion TL) 1969Growth Rate Current receipts 21.6 27.1 16.3 13.4 Current expenditures 12.4 15.0) 13.3 Current and capital transfer 6.6 7.9) 16.6 24.O Surplus, net of transfer 2.6 4.2 5.1 -3.8 Investment expenditures 6.9 7.0 10.7 17.5 Money and Credit Prices (Billion TL) Sept.70 Total money supply, including sight saving deposits 30.1 30.4 15.6 15.1 Time and saving deposits 22.3 22.2 20.5 20.0 Total Central Bank credits and advances 12.9 14.6 37.0 21.0 Total commercial bank credits 33.2 37.8 17.7 19.2 Commercial bank credits to private sector 30.2 30.0 18.3 21.0 Rate of change of wholesale price index 5.9 6.5 5.7 5.2 Rate of change of consumer price index (Istanbul) 5.0 9.2 7.7 5.5 2 At the exchange rate current in 1969, TL 9 = US $1.00 2/ Budget ii - Balance of payments (Mil:lion US $) 1962 1967 1968 1969 1970 Imports of goods 622 685 76 81 935 Exports of goods 381 523 496 537 585 Net invisibles (including NATO receipts) - 1 48 37 13 113 Current account deficit -2h2 -114 -231 -221 -237 Commodity Concentration of Exports (%) 1962 1969 Cotton 17 21 Tobacco 25 3.5 Hazelnuts 17 20 Fruits, vegetables 7 10 External Public Debt (Million US $) Dec.31/68 Dec .31/69 Total outstanding debt 1984.2 2215.3 Debt service 103.1 137.1 Debt service ratio (% of exports of goods) 21 25 (% of exports of goods and services, gross) 17 20 (% of exports of goods, services and workers' remittances) 14 17 IBRD/IDA Operation (Million US $) 1968 1969 1970 Total loans - IBRD (including internal sales) 98.4 146.9 186.9 - IDA 80.3 92.3 92.3 Repayments - IBRD 39.6 41.9 45.1 Total loans outstanding - IBRD 55.8 io4.3 138.9 - IDA 80.5 92.5 92.3 Foreign Exchange Reserves (Million US $) Dec.31/68 Dec.31/69 June 1970 Dec.31/70 Gold and convertible fcreign exchange, gross 123 245 1/ 218 Gold and convertible foreign exchange, net 40 200 TI 144 41O Inconvertible currencies 92 125 1/ IMF Position (Million US $) 1968 1969 Nov. 1970 Dec. 1970 Quota 108 108 108 108 Fund holdings of Turkish lira 193 (179% of quota) Drawnngs outstanding 76 64 112 Allocation of SDR - - 18 1/ Reserves are not comparable. The increase primarily reflects a one-time shortening of the "lead" in import payments. THE DEVELOPMENT PROSPECTS OF TURKEY SUMMARY AND CONCLUSIONS i. The previous economic report of the ]3ank (February 1969) pointed out some of the major constraints, particularly those arising out of foreign exchange shortages, and concluded that a reforma in the system of external trade and payments was advisable. Turkey has t:aken some of these measures in August 1970. This report focuses mainly on the central problems in the economic framework of Turkey and obstacles to development in particular sec- tors, in relation to the aim of the authorities to achieve measurable pro- gress towards external viability in the seventiLes with a rapid rate of growth. It therefore concentrates on the immediate problems and priorities within the context of the new external orientation which Turkey has opted for. As a re- sult, discussion of some of the longer term issues and social objectives, in- cluding population control, employment and manpower planning is limited. ii. Turkey is undergoing a rapid economic, political and social transformation. During the 1960's, it enjoyed the longest period of con- sistent and rapid economic growth in its history, and the Government dem- onstrated its ability to achieve an ambitious rate of growth averaging over 6.5 percent per year since 1963. The First (1963-67) and the Second (1968-72) Five-Year Plans and the constituent annual programs have made for better balancing of savings and investments, mcore rational allocation of resources, and generally more consistent government economic policies. However, the process of mobilizing and redeveloping resources has led to pressure on the balance of payments, acute foreign exchange shortages, with severe restrictions on imports, persistent budget deficits and excessive credit expansion. iii. Turkey's foreign trade situation since 1968 has been overshadowed by a generally disappointing export performance! and increased imports and, during 1969 in particular, the expectation of aL change in the currency rate. These factors made the Turkish authorities extremely conscious of the vulnerability of the present range of exports and the priority that needs to be given to export promotion in future. Despite high costs, lack of competitiveness and marketing difficulties, the wide range of incentives to export, which have been stepped up since 1967, and in particular the export rebate system, are beginning to have a substantial impact on both traditional and manufactured products. There is also increasing export consciousness in the business community. Much of the increase in imports in 1968 and 1969 arose from high deliveries of investment goods under aid- financed agreements, with imports under the liberalized list and global quotas increasing by much less, as a result of increased delays in the allocation of foreign exchange. iv. 'T'he current account deficit of the balance of payments rose from $224 million in 1967 to an estimated $237 million in 1970, which reflects the continuing structural imbalance in the relative growth of imports and exports and the difficulty of developing earnings from tourism as rapidly as called for by Turkey's needs for foreign exchange. Hlowever, apart from tourism, there has been a continuting increase in the level of rer.-tttances from workers in Europe. These were $107 million in 1968, $141 million in - ii - 1969 and an estimated $230 million in 1970. Tn 1970, disbursements of proj- ect creidts reached $165 million compared with $127 million in 1968, while program credits, includinrg the European Monetary Agreement (EMA), at $75 mil- lion, are expected to amount to $190 million. Private capital inflow mostly in kind, has steadily increased since 1968, but remains small ($40 million). Turkey's official net hoLdings of gold and convertible foreign exchange rose from $40 million at the end of 1968 to $410 million at the end of 1970. v. In 1968 and 1969, there was an overall budget deficit of TL 3.6 billion and TL 4.3 billion, respectively, and in both years, the budget was balanced by calling i-or virtually compulsory contributions to savings bonds, by an increase in the volume of deferred payments to contractors and by abnormally high recourse to short-term advances from the Central Bank, amountina to TL 1.6 billion in 1969. This, together with the credit needs of the agricultura:L marketing organizations was primarily responsible for an excessive increase of 27 percent in Central Bank credit and a tight liquidity position in the private sector. The budget in 1970 provides for an increase in expenditure of some 15 percent. This involved, for the first time, virtually no additional investment expenditure but was mainly attributable to higher personnel expenditures and increased charges of State Economic Enterprises (SEEs), debt service and agricultural support payments. To finance this increase, the Government raised taxes by TL 5.5 billion. The new tax measures appear to have been well conceived, reflect- ing the need to suppress excessive demand, to divert domestic needs to export markets, to concentrate revenue increases on luxury or less essen- tial goods, and to divert building capacity from luxury housing. vi. On August 9, 1'370, the Government devalued the Turkish lira from the previous official rate of TL 9 = U.S.$1 to TL 15 = U.S.$1 and intro- duced a far-reaching stabilization program (see Appendix I) designed to reduce inflationary pressures in the economy and provide the basis for a new external orientation, with the objective of external viability in the longer run. The measures include elimination of the delays in allocating foreign exchange, restoration of a prompt payments system, introduction of a new import licensing procedure, reduction of the stamp duty and the advance import guarantee deposits. Steps have already been taken to simplify the system of export tax rebates and make some reduction in the rate of subsidy involved. The Government has reiterated its intention to balance the budget for 1970 and 1971 and use some of the additional re- sources arising from devaluation to reduce accumulated short-term debt. A renewed effort is to be made to reduce the operational deficits of the SEEs. The fiscal program has been supplemented by action of the monetary authorities in making higher interest rates effective and curbing the growth of domestic credit. vii. Agriculture. In recent years, Turkey's crucial agricultural sector has lagged behind the rest of the economy and generally fallen short of First and Second Plan targets. In the First Plan period, 1963- 67, agricultural value added expanded at 3.4 percent annually, but the rate dropped to 1.9 percent in 1968 and close to 1 percent in 1969. The - iii - Second Plan calls for an increase in gross agricultural value added of 23 percent, or 4.2 percent annually, during 1]968-72. Given the shortfalls in the first two years and the likelihood of another poor wheat crop in 1970, it is extremely doubtful that Turkey can reach the 1972 target in the remaining years of the Plan period. However, with reasonably favor- able weather and by concentrating on high priority programs, it should be possible to expand output in 1971 and 1972 enough to achieve an average annual growth rate of 3.0-3.5 percent for the Plan period. In the subse- quent Plan Period, 1973-77, Turkey should be able to step up aericultural growth significantly, with a 4.5-5.0 percent increase annually. Witlh changes in organization and policy, the following could form the basis for successful development through the Third Plan period: (a) completion and full utilization of existing irrigation projects; (b) increased wheat production, with particular emphasis on the Anatolian Plateau; (c) pro- duction of fruits and vegetables for export; (d) development of livestock, including dairying, fattening, feedstuffs, anid marketing; (e) reduced production of surplus commodities, thorough revision of pricing policies and development of alternative pursuits; (f) greater utilization of for- est resources; (g) expansion of credit facilities, inputs and other sup- porting services. viii. Mining. The mining industry plays a relatively small. role in the economy contributing about 1.0 percent to the net domestic product in 1969. The importance of the industry lies in its export potential. Mineral exports in 1969 amounted to $45 million, being 8 percent of the total value of exports. With the successful implementation of projects under way and planned, mineral exports may experience an average annual growt.h rate of 14 percent to contribute 16 percent of the projected value of exports in 1977. Widespread mineralization indicates that Turkey has a very signifi- cant minerals potential. Lack of domestic venture capital and know-how, and the effective exclusion of foreign investment, are the prinary problems affecting the development of the mineral industry. ix. ManufactuMing. The rate of industrial growth in recent years has averaged about 10 percent and has permitted the broadening of industrial structure and capability to cover steel and copper, a wide variety of heavy production equipment as well as consumer durable goods, phosphate and nitro- gen fertilizers, synthetic fibres, newsprint and kraft paper, etc. Plants under construction will make aluminium, motor vehicles, and maj4or chemical intermediates and plastic raw materials. The Government has been successful in assistinz the private sector and in bringing about some change in the al- location of resources between the public and private manufacturing sectors. x. Industry in general lhas been highly insulated from competition and inward-oriented, with little regard for cost competitiveness. Much of the additional value added has come from new bigh-cost import substitu- tion lines of production and often In those industries where Turlkey has no comparative advantage. Subject to financial and technical reorganiz- ation, consolidation and improved Management some have the potential for profitable operation tinder competitLve coladitlons in the mediumr term. In iv - contrast, industries with a major export potential (including food, proces- sing, textiles, mineral and forest product industries), in spite of a re- cent upsurge of interest, have nlot received the same attention as import substitution industries. xi. If Turkey is to rmake vigorous indlustrial progress in the future, the :nain objectives of industrial policy will need to encompass: (a) gradual reduction of protective barriers with emphasis on miniulum con- dition of cost competitiveness in wedium. term, associated with appropriate scale of operation, degree of integration, and other measures to improve productivity; (b) more rapid evolution towards a market economy including progressive integration with the Eturopean Common Market; (c) a more care- ful definition of industrial priorities, and better screening of projects in the light of rigorous economic evaluation; (d) acceleration of struc- tural and institutional change in certain areas of major growth notential, such as mining, forest industries, and engineering; and (e) enlistment of foreign capital ancd the management, technical lknow-how, and market accessibility of foreign industrial concerns in Turkish industrialization. xii. Energy, Growth in the consumption of commercial energy (crude petroleum, coal, lignite and hydro and subsequently nuclear generation) is projected to average 9.5 percent annually over the 1967-77 period, mainly in the transportation and electricity generation markets. Key factors on the domestic energy scene are the insufficiency of domestic crude petroleum supply, the high cost and operational difficulties of domestic bituminous coal, the availability of ample deposits of lig,nite of doubtful economic feasibility and a high consumption of dung and firewood. The prediction of future development is affected by such major uncertainties as discovery of a new domestic supply of oil and the construction of international oil and/or gas pipelines. xiii. Transportation. The physical capacity of Turkey's basic trans- portation system network is generally adequate to meet present needs but considerable improvements are needed in all modes in order to raise the efficiency of the system and lower transport costs. The railroad has the greatest and most urgent need for improvement, both in its infrastructure and its equipment and rolling stock. Transport policy is deficient in many respects and is badly coordinated. Road user charges are low and the fi- nancial losses of the major State transport enterprises are a substantial drain on public funds. The heaviest losses are incurred by the railways. Major measures contemplated during the Second Plan period include: the establishment of a transport coordination agency, rationalization of the transport system, modernization of equipment and the renewal and upgrading of the road and rail networks. Pre-investment studies are also under way on two pipeline projects, the Iran-Turkey oil pipeline and the Iraq-Turkey gas pipeline. xiv. State Economic Enterprises. In spite of some improvement during thie last decade the SEE sector continues to be a major problem. The fi- nancial weakness and inefficiency of many SEEs is well known. Thle study v and analysis of their shortcomings in general and of individ.1lNl. conlcernis in particular has been prol ific. I]L thorto , til appronch has boon gloha l and a search has been made for a general, and legislative soluttou. W4hLlit muclh zan be done to improve general standards of accounting, organization, operational efficiency, labor policies, by legislation, the time has now come to examine the management and technical operations of each individual enterprise in turn. At the same time, the quicIing princinles, which the government has already recognized as essential, should still be made to apply as speedily as possible, namely, the delegation of powers to indi- vidual managements, independence from ministerial interference except in terms of broad directives, the operation of thfe enterprises on a commer- cial profit-making basis, with individual management free to establish prices, salaries, and employment standards. xv. Other Activities. There are good prospects for a continued in- crease of about 15 percent per annum in the number of Turkish workers abroad, subject to continued economic growth in Europe. However, although Turkey has many of the assets required to develop her tourist industry its share of Mediterranean tourism is still small accounting for only 1 per- cent of all visitor arrivals. Major obstacles to the development of tour- ism in Turkey are inadequate accommodations for foreign visitors, insuffi- cient local experience in hostelry and tourism services, and inadequate transportation and communication facilities serving tourism centers. xvi. The Role of the Public and Private Sectors. Turkish economic policy in recent years has sparked off an upsurge of activity in the private industrial sector and the Government recognizes the importance of preserving this new dynamism in the economy. This will involve greater reliance on market incentives and less on Government intervention. The Plan provides for the continuous evolution of a mixed economic system in which the public and private sectors would function side by side in a mar- ket economy free from direct controls. This requires suitable encourage- ment of the private sector, and an effort should also be made to clarify its position and, in particular that of the foreign private investor, in regard to the development of Turkey's own resources. Successful develop- ment and marketing of mining and forestry resouLrces, would be speeded up by association with market outlets and with foreign enterprise. Nt the same time the Government will need to tackle the problem of dismantling many of the legacies of the past, the external trade regime, the pattern of Price determiination in agriculture and the State enterprises, the system of fi.inr- interest rates on lending below a market level, and the obstacles to efficiency and competitiveness represented by thle present system of State enterprises. xvii. Composition of Tnvestment. Major weaknesses in the planning process in the past have been the lack of a coordinated and annually phased public secror investtment program. 'rhere is now, a need to reappraise the ',econd Five-Yc'enr Plan, and to consol-idate and rationalize thie investment program, reinforcing th-o steps already providev! for in the 1969 and 1970 Ainnual Iror-rams. The m:uin objcc;tives shotild be to exnand production for - vi - export, develop unutilized naturil resources .3ndti utilize available capacity to obtain the maximuml rate of crowth from the structure of production, tlhat already exists. This means that priority will have to be given to the completion of ongoing projects bcfore nme ones are started. The 1969 and 1970 Annual Programs recognized some o& the basic problems ill the composition of investment, e.g. the need to shift the emphasis of the public sector invest- ment program from ir,rigation and infrastructure projects to industry and energy, to allow private investment a greater role in manufacturing industry and encourage joint ventures witl tihe State Economic Enterprises, the need for emphasis on international com.petitiveness and ezx)port developmlent prograLs in livestock, fruits and vegeta14es, forestry, m-ineral projects and touris:.i. ,igh priority should also br Fiven to wheat-self-sufficiency, on farm develop- ment, and investment likely to i'-orove the e-,port competitiveness of (1om;.estic m>.anufacturers. xviii. Budger 'anagement. The role of t!Le Government in maairtaining the balance of the econony, through an appronriate mix of fiscal and monetary policies, should become the raior concern of Turkish econo:aic policy today. This will only be effective if the techniques to control doniestic purchasing power are developed, by extending the range and incidence of taxation, creating a pattern of domestic borroiing., and by making interest rates and other monetary and credit tools effective. In the absence oF these techniques, the major burden for maintaining domestic balance must fall on the public sector and in particular on the level of public investment. xix. T'here is a long overdue need to review , in detail, all aspects of current expenditure, to scrutinize and revievy the justification of an ex- cessive volume of transfers, to reduce the payments to SEEs in particular, and to relate investment to realistic estimates of available resources. This, in turn, will depend on the improvement of the system and administra- tion of taxation and the development of budget programming. The Government has already begtn to extend the range and diversity of techniques of tax- ation but the range of impact is still limited. Major changes will be need- ed also in the organizational control of those Ministries and Departments at present responsible for collecting taxes. xx. Monetary and Credit Institutions and Policies. The Government has clearly in mind the desirability of the Central Bank playing a positive and constructive role in the distribution of credit and in the control and regu- lation of the financial sector. The emphasis, so far, has been on the active role and intervention of the Central Bank in pursuing policies designed to facilitate the achievement of the Plan's targets of investment and in allow- ing credit, at selective interest rates. As part of the stabilization pro- gram, the Government has raised deposit and lending interest rates and in- troduced a new system of interest rate subsidies. Effective implementation of credit and interest rate policies requires a flexible interest rate struc ture, greater incentives to lend at medium- and long-term and a more vigorous and a more flexible role on the part of the Central Bank in re- gulating the flow oi^ Central Bank funds to the banking sector. - vii - xxi. Lon-term Prpects. There is litt:le doubt that 'I'urkey can aim at a real growth rate of about 7 percent per annum and still maintain a reasonable degree of internal price stability. It also seenms reasonable to expect that Turkey's total export earnings over the period 1969-77 will grow at an overall rate of about 9 percent per annum. Assuming that Tur- key would be able to obtain an average capital inflow of some $380 million per year, compared with an average of $290 million over the last five years, such a rate of growth of exports wouldl be sufficient to enable merchandise imports to grow at a rate of some 9 percent per annum. Such a growth of imports wzould leave little room for a significant amount of liberalization. Moreover, Turkey's export earnings remain vulnerable to many adverse factors, some outside the immediate control of the Govern- ment. xxii. System of Trade and Payments. The most restrictive import barriers are not tariffs but the absolute prohibitions, quantity limitat:ions and other administrative controls exercised by the authorities. These have led to a high degree of protection which encourages domestic industry to operate with high costs, to enjoy excessive profits on the importation of goods in short supply, and to distort the relative importance of production for export or impor-tation. Apart from the ill effects of these shortcomings, the present system is not capable of providing for the optimum develop- ment requirements of the economy and is self-nerpetuating. It also severely handicaps potential exporters. As a result of the measures taken last August, Turkey has eliminated the delay in allocating foreign exchange. It now has the opportunity to prepare for other reforms, including: (a) the revision of the external tariff7so that it can become the central re- gulatory instrument of the Government for controlling imports; (b) termina- tion of the present system of multiple taxes on imports in favor of a single external customs duty; (c) specific provision for competitive im- ports; (d) rescheduling the system of import proaramming to provide a rational and informed basis for determining the country's needs and for rationing available resources in a more equitable manner; and (e) reduction and gradual elimination of the system of import deposit requirements. xxiii. Short-term Outlook. The success of devaluation and the accompa- nying short-term stabilization program will depend essentially on the Government's success in making the new exchange rate effective and in maintaining a reasonable degree of domestic price stability. Maintenance of prompt exchange allocation, a balanced budget, and a concentrated at- tack on the whole range of factors contributing to high costs, will be essential elements in achieving these objectives. Because of the basic disequilibrium of earlier months and the need for a period of readjustment, 1970 was expected to be a disappointing year in terms of gross domestic * output. There are good prospects for a rapid recovery in 1971. xxiv. External Aid. Aid disbursement needs are conservatively esti- matea at an annual average of $380 million over the next seven. years. If project aid is to replace program aid as the principal source of (ECD Consortium assistance to Turkey then, on the basis of past experience, - viii - commitments would havie to be rapidly built up to the level of around F400 million to sustain a disbursement figure of about $325 million by 1974. Assuming that a level of disbursement of $325 million could be reached by the mid-1970's, itself an ambitious target, the difference between project aid disbursemients and total isbhursements required durino the next few years would need to be nlade good by prog,ram aid. On t1ie assuimp- tions given in this report, the am,lount requtired to oake oo(d a sliortfall in project aid might be put at some $300 inillion per annum for 1971 through 1973. xxv. Turkey's debt service obligations in 1970 were about 20 percent of total foreign exchange earnings. On the balance of payments assuniptions of this report, this ratio would drop to 15 percent by 1977. Ilowever, iF capital needs prove to be larger than estimated, thle debt burden would de- cline less rapidly. 'Moreover, there are important additional short-term obligations to the IMY and the average terms of borrowing, assumed in the projections for the period, 1970-77, still fall short of normal conven- tional terms. In these circumstances Turkey has a margin for borrowing on long-term conventional aid terms but for the time being should seek to maintain a high proportion of assistance on concessionary terms and continue to limit borrowing on commercial terms. TUE DEVELOPMENT PROSPECTS OF TURBEY I. Recent Developments A. Introduction 1. During much of the 1950's, Turkey siuffered heavily from inflation and from economic policies which ill-served the country's economic problems. Modest growth was achieved mainly by extending the area under cultivation and increasing foreign debts beyond Turkey's capacity to service them. Much investment was misdirected and policies concerning pricing, production, credit, foreign trade, and the exchange rate gravely distorted the cost and price structure. 2. The management of the economy by successive Governments in the 1960's is in marked contrast with the experience of the middle and late 1950's. Following a period of stabilization, including devaluation, debt consolidation and refunding, from 1958 to 1960, the Government embarked upon an ambitious program of expansion within the framework of Five-Year Development Plans. In 1962 the OECD Turkish Consortium came into being. It has become the principal source of external financial assistance which has been on a generous scale, on favorable ccncessionary terms, and largely of a program nature. 3. During the 1960's Turkey has enjoyed the longest period of con- sistent and rapid economic growth in its hist:ory. The First (1963-67) and the Second (1968-72) Five-Year Plans and the constituent annual programs have made for better balancing of savings ancl investment, more rational allocation of resources, and generally more consistent Government economic policies. 4. During the First Plan period of 1963-67 the growth of GNP in real terms accelerated and the annual average growth rate of 6.9 percent achieved was very close to the Plan target of 7 percent. In the first two years of the Second Five-Year Plan period, GNP increased by 6.7 percent close to the Plan target of 7 percent. A reasonable degree of economic stability has also been achieved; since 1962 increases in the wholesale price index, were held to an average of 5 percent annually, in contrast to the 15-20 percent occurring in the middle and late 1950's. The inflationary psychology which in those years distorted the use of resources; has not reappeared. 5. During the period of the First and Second Plans there have been substantial changes in the structure of the Turkish economy. The high level of investment and increase in domestic savings envisaged by the plans have been achieved. The share of the private sector has increa,sed and the distribution of investment has been more evenly spread over the whole coun- try. The result has been a substantial increase in living standards, even in the less favored regions, and greater integration of the whole economy following the improvement in infrastructure. There has been a marked in- crease in employment owing to industrialization and the expansion of services. Because of the increase in population, however, unemployment of unskilled labor and large underemployment in the villages remain a serious problem. - 2 - 6. Since the beginning of the implementation of the First Develop- ment Plan in 1963, the process of mobilizing and redeploying resources has led to pressure on the balance of paynients and on prices. During the early part of the Plan period, the pressures on resources did not weaken confi- dence in the nation.al currency, although they did hamper the growth of ex- port industries and led to continued external. restrictions. In the past three years, however, the accumiulated pressures engendered by the develop- ment program have imposed increasingly serious strains on the economy. Resources had come under excessive strain and this was reflected in rising prices, acute foreign exchange shortages, and continuing restrictions on imports. 7. However, on August 9, 1970, the Government devalued the Turkish lira and introduced a stabilization program designed, on the one hand, to reduce existing inflationary pressures in the economy and provide the basis for a new external orientation, with the objective of external viability within the decade, and, on the otlher hand, to increase the rate of savings, to encourage the optimum allocation of resources, and to adapt economic in- stitutions to the changing character of thle economy. B. Relations with the EEC and the RCD 9. The 1964 Agreement of Association between Turkey and the European Economic Community (EEC) foresaw a preliminary period of 5-10 years to al- low Turkey to strengthen its economy with EEC assistance; a transitory pe- riod of up to 12 years to realize a limited custom union; and an additional final phase of 10 years to achieve full custom union and economic integra- tion. 9. In the preliminary period, EEC granted limited and unilateral con- cessions in the form of preferential quotas with reduced duties on Turkish exports of tobacco, raisins, dried figs and hazelnuts. Although EEC's share in Turkish exports of these products has increased, the quotas -- except for hazelnuts -- have not been fully utilized because of the French and Italian tobacco monopolies,, poor product standardization and inadequate export or- ganization. Since 1967, similar concessions have been granted for fish, grapes, quality wines, rugs and certain textiles. The Agreement included a financial protocol providing for investment credits through the European Investment Bank totalling $175 million, and bearing interest at 3 percent with 20-30 years maturity and 5-7 years grace period. Of this amount, which is fully committed, $105 million had been disbursed by the end of 1969. 10. Negotiations for entry into the transition period were initiated at the end of 1968 and finally concluded in July 1970, The new agreement between the Common Market and Turkey on the conditions of entry into a 22- year period of transition to a full customs union was signed on November 23, 1970. 11. As soon as the New Protocol comes into force, the Community will completely remove restrictions and duties for the whole industrial sector, except for manufactured carpets, cotton thread and materials, where removal will take place over twelve years. Turkey will eliminate duties for some industrial products over twelve years, and for others (representLng about 45% of imports from EEC) over 22 years. Quantitative restrictionls would be eliminated gradually over 22 years. The EEC will grant to Turkey at the beginning of the transitional phase concessionary treatment of 90 per- cent of its agricultural exports, for example, tobacco will get :Lmmediate ex- emption from tariffs, and citrus fruits will get 40-50 percent preferential reduction, varying with different fruits. Common agricultural policy mea- sures will be evolved over 22 years. Measures in the social and economic sphere provide for non-discrimination in the treatment of Turkish workers, as regards salary and working conditions, etc. These will come iLnto imme- diate effect. Free circulation of workers will be achieved gradually be- tween the twelfth and twenty-second year. A new Financial Protocol pro- vides for a sum of $195 million, and this can be committed for a period of 5.5 years after signing the Protocol. This aid is intended for financing projects with special terms: maximum duration of 30 years, period of grace up to 8 years, rate of interest ranging from 2.5 percent for long -estation period projects, to 4.5 percent for the others. 12. The long run objective of custom union with the EEC implies a fundamental change in the direction and methods of foreign trade policies, a major adjustment in the high cost industrial structure, harmonization of agricultural and tax policies and a considerable dilution in the present highly protective and restrictive system of public policies. The! success- ful adjustment of the Turkish economy will depend not only on domestic measures but also on the extent to which the Common Market is prepared to accept Turkish exports, particularly textiles, and assist in the adapta- tion of Turkish industry to a more competitive framework. Turkish thinking on these issues has hitherto tended to be hesitant and inward locking. This renewed commitment represents the first clear informed acceptance of the obligations to be progressively undertaken during the transition period. 13. Turkey is also a member, together with Iran and Pakistan, of the Organization for Regional Corporation and Development (RCD), an organiza- tion created in 1964 to promote cooperation ancd coordination in the eco- nomic, social and cultural fields. Much of the activity of the organiza- tion has been preparatory, but some practical results have been achieved: a multilateral payments union has been established, intra-region trade pro- moted, and cooperation in transport and communications expanded, and a start made on the creation of joint industrial enterprises. C. Recent Economic Developments 14. Supply and Use of Resources. 1968 was a year of rapid growth with GNP in real terms rising by 6.9 percent compared with 6.8 percent in 1967. 1969 was another good year with GNP rising 6.6 percent. Mainly responsible for maintaining the growth rate in these two years have been the expansion of industrial production and to some extent, acceleration of consitruction activity. Despite the low growth rate reflecting a shortfall in the wheat crop in 1968 and the disappointing outcome of the Wheat Program in 1969, an underlying technological improvement is taking place in agriculture. In 1970, bad weather has been responsible for poor agricultural crops which -4- may cause total agricultural output actually to decline. Activity in in- dustrv slowed dowm in tlhe first part of the year owing to shortages of imported inputs, tight credit conditions and probably some anticipation of devaluation. It now appears likely that real growth will be less than 5 percent for the year as a whole. Table 1: SUPPLY AND USE OF RESOUIRCES (In billions of Turkish lira, at 1965 prices) 1968 1969 1970 /1 1969 1970 Percent change Annual Annual Program Program Resources GNP 97.7 104.0 111.3 6.4 7.0 Net imports of goods and services 2.9 2.7 2.8 -6.9 5.3 Total 100.6 106.7 114.1 6.1 6.9 Uses Gross fixed investment 18.7 20.0 22.5 7.0 12.6 Private 8.7 9.6 11.0 10.3 14.3 Public 10.0 10.4 11.5 4.0 11.0 Stock changes 1.9 1.9 2.0 Public consumption 11.9 12.4 13.5 4.2 8.5 Private consumption 68.1 72.4 76.1 6.3 5.2 Total 100.6 106.7 114.1 6.1 6.9 /1 Estimates for 1970 at 1965 constant prices are derived from rate of change in the Annual Program. 15. Private consumption growth rate was 8.1 percent in 1967, 5.2 per- cent in 1968 and 6.3 petrcent in 1969; notably faster than the 5 percent target of the Second Five-Year Plan. These increases are significant when allowance is made for the moderating influence of the poor agricultural out- turn and resulting low rural incomes. The recent experience gives rise to considerable doubt whether the present rates of increase in investment and public and private consumption, if they were to continue, would prove mutually compatible. TChe growth of public consumption by 7.2 percent in 1968 and 4.2 percent in 1969 did not exceed the Plan estimate but was only maintained as a result of substantial cutbaclks in expenditure, arising from the anticipated shortfall in revenue, and the fortuitous relief given by the delay in the revision of salary levels in the public services. Salary adjustments are likely to raise public consumption by over 11 percent in 1970 with the full impact still to come in 1971. Private consumption has -5- continued to exert strong pressure on total demand in 1970 due to higher agricultural support prices and higher workers' remittances. The dampen- ing effect of higher tax rates may be less than desired as they were in- troduced only in the second half of the year and may have limited impact on the above sources of increased income. 16. Gross fixed investment grew at about: 10 percent per year during the First Five-Year Plan (1963-67). In 1968 it increased by nearly 21 percent and in 1969 by 7 percent, accounting for 21 percent of GNP over the last two years. Private investment activity rose by 10.5 percent in 1967, 17.6 percent in 1968 and 10.3 percent in 1969. This reflects the vigorous efforts made to encourage productive private investment and there is every reason to expect that this trend will continue. In the public sector, on the other hand, the rate of increase of investment was 5 percent in 1967, about 23 percent in 1968 and about 4 percent in 1969. This ap- pears to be due more to shortage of financial, resources and serious organ- izational problems rather than to any policies to reduce public investment. In 1970, real investment is expected to have increased but by much less than the planned rate of 12.6 percent. Growt:h in domestic savings has been impressive overall but has tended to slow dowm in 1969 and more noticeably in 1970. In 1968, the marginal savings ratio was 26 percent; this fell to 24 percent in 1969 and to less than 12 percent in 1970. Despite this, the share of GNP represented by domestic savings shouild be only slightly below the level of 20 percent in 1968 and 1969. 17. Agricultural nroduction. Agricultural output, comprising roughly one-third of net domestic product, increased 2 percent in 1968 and less than 1 percent in 1969, compared with an annual average expansion of 3 per- cent during the First Plan. Agricultural out:put still depends heavily upon weather, due in large part to the dominance of cereals. In spite of in- creased planting and greater use of high-yielding Mexican varieties, wqheat production in 1968 and 1969 fell short of domestic requirements and neces- sitated importing miore than 400,000 tons of wheat in 1969. After substan- tial gains in 1968, production of rzrapes, olives, citrus, and some other fruits and ve"etahles also declined in 1969 in part because of unfavorable weather. Pasture for livestock was seriously affected, particularly in the eastern and southeastern provinces. Shortage of feed supplies also remained a serious bottleneck. Agricultural growth has been inhibited, particularly in 1969, by problems in supplying modern inputs, notably fertilizers, and by the shortage of mediun- and long-term creclit. Until these are rectified, it would appear that the target in the Second Plan of 4 percent can only be nchieved in years when weather conditions are favorable. 18. Industrial Production. Production including mining- and power in- creased by 10 percent in 1.967 and 1968 with a slight fall to 9 percent in 1969. the demand for constumer 5-oods and investment goods is bouyant, while prodttction is supported by adequate ay,ricultural suipplies and, in general, larger imports. iTining nroduction has etxpanded only moderately, with a small increase in coal and 1iinite and most other ores, continuling decline in copzper ard an increase of 25 percent in iron ore in both 1'968 and 1969. On thie other hand, crude oil produiction hias increasedi by over 10 percent in -6- 1968 and almost 20 percent in 1969, and at almost 4 million tons it covers about 40 percent of domestic requirements. While output of crude petroleum has continued to increase rapidly, development of the remainder of the mining sector has been less than satisfactory in recent years. Coal and lignite are being mined under increasingly difficult technological condi- tions and costs have risen sharply. The marketing of some minerals, nota- bly chrome, has met with difficulties. Manufacturing production increased over a wide front but in the case of steel and key raw materials the gap between domestic output and demand has recently widened, exerting upward pressures on both prices and imports. Industrial exports have been tradi- tionally small, about $50 milli on per year, but after a large setback in 1968, showed an unusual increase to over $90 million in 1969. Mining ex- ports have tended to show a general upward tendency with an increase of over 30 percent in 1968 and 33-1/3 percent in 1969, despite increasing tech- nological problems. Industrial imports continue to account for the bulk of Turkey's imports. These have averaged about $600 million., As e ecently as 1967 few firms had serious problems with tne import regime and these were mainly connected with the administrative and tecinical inadequacies of the quota system. However, in 1968, but more noticeably in 1969 and 1970, un- derutilized capacity and excessive inventories, unexpected breakdowns and shortages of crit:Lcal replacement parts, or the inadequacy of a quota al- location, the high level of import guarantee deposits and the cost and dif- ficulty of obtaining medium- and long-term credit have all tended to in- crease the difficulties of operation, lead to a miisuse of management talent, and make production costs less and less competitive for potential exporters. 19. For 1969 the profits of State enterprises were expected to show a slight improvement on the outturn of 1968, however the losses of a small group of important enterprises again reduced the total profits of State enterprises by over 60 percent, and net profits before taxes have dropped almost 20 percent below the level of 1968 and are expected to show further deterioration in 1970. In addition, the State economic enterprises have begun to experienLce acute difficulties in meeting their debt repayment schedules and the 1970 program provided for a consolidation of the debts of a number of these, notably Turkish Railways, the Sugar Company, Coal Mines, maritime transport and the Maritime Bank. 20. Public Finance. The Government has stated that the overriding objective of fiscal policy is to achieve a balanced budget and to ensure that government expenditure did not exceed available non-inflationary fi- nance. However, in 1968 and 1969, the budget was balanced by calling for virtually compulsory contributions to savings bonds and Treasury bonds, which has become a normal practice, by an increase in the volume of defer- red payments to contractors, and by abnormally high recourse to short-term advances from the Central Bank, amounting to TL 1.6 billion in 1969. Ex- ternal financing continues to play an important role in the financing of the budget, accounting for TL 1.3 billion in 1968, TL 1 billion in 1969, and a proposed TL 1.3 billion in 1970. 21. In 1968 and in 1969 some fundamental shortcomings came to a head, and the Government's financial position was seriously affected by the short- fall between tax revenues and those budgeted for. This imbalance occurred -7- Table 2: Central Government Revemne and Expenditure (Billion TL) Budget Fiscal Year Beginning March 1 1962 1965 1966 1967 1968 1969 1970 Revenues General budget 7.5 11.1 13.1 16.1 17.9 20.8 26.1 - Direct taxes 2.3 3.4 4.2 ~.1 5.7 6.8 8.9 - Indirect taxes 4.8 6.9 8.2 9.8 10.5 12.3 15.2 - Other revenues 0.4 0.8 0.7 1.2 1.7 1.7 2.0 Annexed budget 0.4 0.5 0.6 0.7 0.8 o.8 1.0 Total revenues 7.9 11.6 13.7 16.8 18.7 21.6 27.1 Expenditures Current expenditures 6.5 7.6 8.6 9.7 11.0 12.4 15.0 Transfers to 3.5 3.8 4.3 5. 2 7.9 - SEEs - 0.8 1.0 o.8 0.8 2.1 1D. - Interest payments - 0.4 o.6 0.7 0.9 1.0 0.8 - Debt repayments - 1.0 1.0 1.1 1.0 1.3 2.2 - Other transfers - 1.3 1.2 1.7 2.5 2.2 3.8 Investment expenditures 3.0 3.6 4.4 5.o 6.1 6.9 7.0 Total expenditures 9.5 14.7 16.8 19.0 22.3 25.9 29.9 Balance -1.6 -3.1 -3.1 -2.2 -3.6 -4.3 -2.8 Financing External financing 1.1 1.2 1.2 1.1 1.3 1.0 1.3 Domestic financing 0.5 1.9 1.9 1.4 2..3 3.3 1.5 - Savings bonds 0.1 o.6 0.8 0.9 o.6 0.7 0.9 - Long-term borrowing - 0.4 0.7 0.5 0.5 o.6 o.6 - Short-term borrowing 0.1 0.9 0.5 -0.3 1.2 2.0 - Increase in advances from Central Bank - 0.5 0.3 0.5 0o4 1.6 Other short-term borrowing 0.1 o.4 0.2 -0.8 0.8 o.4 Total financing 1.6 3.1 3.1 2.2 3-6 4T3, b2..8 -8- in spite of the Government's understanding of the need to improve tax admin- istration, to spread the tax burden, and diversify the number an(d variety of taxes. The Government appears to have been unwilling to increase tax- ation except under the threat of exceptional budgetary deficits. The rev- enue outtuirn has been characterized by the continued failure of the Monop- olies' Administration, and other Government agencies to transfer to thie Treasury the indirect taxes they have collected, an(d the cost to the budget of customs tax exemptions on imports oF priority investment goodIs and of export rebates. On the expenditure sidie, the present unbalanced situation has also been building Up for a number of years. mne nee(d for rapid ex- pansion of revenue derived for the most part from the pressure to increase tihe rate of investmilent expenditure, the cost of the support for '1onopoly Administration and the Sugar Corporation, arising from agricultural sup- port prices, and the deterioratiln finances of the State Economic Enter- prises. 22. As a result of the im-ninence of a budget deficit in 196g and, again in 1969, and in order to keep the deficit within manageable limits, emergency measures were taken to increase revenue and cut back e-pendi- tures. The reductions in expenditure were borne in almost equal propor- tions bv current expenditure, investment expenditure, and transfer items but efforts to cut back the investmuent programs of two administrations withi annexed budgets -- the State TJater WTorks Administration and the Hig;h- way Administration -- were unsuccessful. 23. In the budget for 1970, an increase in expenditure of TL 4 bil- lion was planned, or some 15 percent. For the first time in many years, this involved virtually no additional investment expenditure but current expenditures were planned to increase by TT 2.6 billion to TL 35 billion and transfers to State Economic Enterprises and other sectors were planned to increase by TL 1.3 billion to TJ. 7.9 billion. The increases in current exDenditures are largely attributable to higher public service salaries. At the same time, the State Economic Enterprises, national debt servicing, social benefits, and support payments for the Monopoly Administration con- tinue to exert a disproportionate claim on the budget's resources. 24. On the revenue side, receipts were expected to increase by some 25 percent from TL, 21.6 billion to TL 27.1 billion for 1970. The Government's measures to raise the additional TI. 5.5 billion appear to be well conceived and represent a step in the right direction as far as correcting some of the shortcomings in Turkey's fiscal system is concerned. They would close some of the loopholes in the tax system, and make the tax gathering process more efficient. Approximately half of the total additional revenue required is to be met by new taxes or increased rates of taxation. The 1970 budget's tax provisions reflect the need to suppress excessive dem-and generally, to divert domestic goods to export markets, to concentrate revenue increases on luxury or less essential goods, and to divert building capacity from luxury. houses to low cost and smaller housing. These tax measures must be welcomed not only as new sources of revenue but also because of their beneficial effects upon the allocation of resouirces. - 9 - 25. Money and Credit. The money supply rose by 14.5 percent in 1968, which is in line with the average rates during the 1960's, and by 16 per- cent in 1969. In 1968 the consolidated volume of credit granted by the Cen- tral Bank and the commercial banks increased by 17 percent. 1969 witnessed a further creation of credit, of about 23 percent, by the Central Bank and the commercial banks. The increase in Central Bank Credit of TI. 2.9 bil- lion, or 27 percent, in 1969 was primarily absorbed by the Treasury and a number of Government agencies, associated with agricultural marketing. Within the framework of the overall priority given to the public: sector and the special credit claims of activities supported by the Government, the Central Bank generally pursued a restrictive credit policy vis-a-vis the private sector. The commercial banks, on the other hand, have tended to extend considerably their credit to business but part of this has been offset by the increasing sterilization of large sums of money in the form of advance import deposits. In 1969 the increase in import depcsits lodged with the Central Bank exceeded TL 1 billion. In the first half of 1970, Central Bank credit continued to rise at an amnual rate of about 25 percent. This was maore than offset by the increase of TL 2.5 billion in import de- posits and a serious liquidity squeeze developed. This, combined with a fall in the rate of increase in money supply of only 9 percent per annum up to June, led to a reduction in the liquid assets of banks almost to their minimum legal requirements. After devaluation, there was a substan- tial reduction in import deposits together with an increase in net foreign assets which led to a sizeable injection of liquidity. The annual rate of increase in money supply also appears to have risen to about 12 percent to the end of September. 26. Prices. The cost of living index for Ankara in 1969 showed an increase of 5.6 perceat compared with 4.1 percent in 1968 and an average of 5 percent during the First Plan period. The general wholesale price index increased by 5.9 percent in 1969 and 4.6 percent in 1968 compared with 4.4 percent during the First Plan period. The inadequacies of these published price indices as regards coverage and weighting, are well known but even these increases have gone beyond what: could well be considered as reasonable price stability. The implicit GNP deflator for 1969 is esti- mated to be over 6 percent compared with under 3 percent in 1968. In the first half of 1970, wholesale prices of industrial raw materials and semi- finished products rose faster than in the same: period of 1969. However, a seasonal decline in some agricultural prices constrained the overall increase of the index to less than 5 percent on an annual basis. The consumer price indices in Istanbul and Ankara showed a continuing acceler- ation and at the end of June were 8 to 10 percent higher respectLvely than a year earlier. A further substantial upward adjustment in prices may be expected as a result of devaluation, the increase in agricultural support prices and tht new tax on many consumer items. By September 1970, the cost of living index in Turkey was about 15 percent higher than a year earlier. 27. Exports and Imports. The foreign trade situation has been over- shadowed by disappointing export performance, and increased delays in imports and, during 1969 and the first half of 1970 in particular, the expectation - 10 - of a change in the currency rate. In 1968 the trade deficit widened as exports fell and iemports continued to increase. ITn 1969, however, exports began to pick up somewlhat whereas the growth of imports became more mod- erate. The decline in 1968 was the first serious setbackl in the field of exports since the dlevelopment plans began in the early 1960's. This, with the relatively slow pick-up in 1969, have had the desirable effect of ;iak- ing the Turkishi authorities extremely conscious of the vulnerability of the present range of exports and the priority that needs to be given to export promotion in future. The 1970 Annual Program gave consqiderable eniphasis to the need to push exports and the importance of establishing an equilib- rium in the external accounts. It emphasized the priority to be given to measures for export promotion, and investment which will increase exoort capacity and competitiveness of Turkish industry. 28. The wide range of incentives to export, recently stepped up, and, in particular, the export rebate system are now having, for the first .imae, a measurable impact on both traditional and manufactuired products. rrhe e>:- tent of the rebates now varies from. 10 to 40 percent depending on tht, coi;- modity. These rebates have had the effect of rmvaking export sales more profitable but have also served to underline the fact that Turkisli products can become competitive, given a reasonable readjustment in price relation- ships, and that foreign demand is sufficiently elastic for exports to grow. 29. Imports in 1968 and 1969 increased by 11.5 percent and 5 _,rcent, respectively, but much of the increase reflected high deliveries of invest- ment goods under aid financed agreements, with inports under the liberalized list and global quotas increasing by much less. Foreign exchange strir- gencies have limited transfers of currency by the Central bank to fJ,-y for current imports from convertible currency areas and given risL. in so-le sectors of industry, to difficulties in procuring sufficient imported raw materials to operate efficiently. At the end of March 1970, the volume of goods in the "waiting room", that was awaiting the allocation of foreign exchange, amounted to $240 million compared with less than half this in previous years. The "waiting room" had increased too approximately $300 million at the end of June. However, after devaluation the "waiting room" had been reduced to about $100 million at the end of October 1970, and was completely eliminated by the end of the year. Imports in 1970 are ex- pected to show a much larger increase than originally anticipated, due to the elimination of the "waiting room" and the continued heavy basic imports of petroleum products and fertilizers, the increasing gap between domestic demand and supply of iron and steel products, and the third successive failure of the wheat crop. 30. Balance of Payments. The current account deficit rose from $114 million in 1967 to $221 million in 1969, a sizeable deterioration which reflects the continuing structural imbalance in the relative growth of imports and exports and the difficulty of developing earnings from tourism - 11 - as rapidly as Turkey's needs for foreign exchange call for. This develop- ment is all the more serious as it has its counterpart in the legacy of a continued high level of debt servicing costs which, even after general re- funding and debt relief, is likely to average over $100 million per year for the next five years. These balance of payments difficulties have been deeply rooted in traditional Tuirkish policies; primarily, the emphasis on import substitution and self-sufficiency, reFardless of its economic cost, the low priority given to export promotion arid indu.stry's low competitive- ness. In 1970, the gap between imports and exports had widened sharnly, hut a large increase in workers remittances should offset most of thiis, leaving the current account deficit only slightly higher than in 1969. 31. Net tourist receipts continue to be disappointing partly because oF the initial slow development effort and partly because any increases are largely offset by increased expenditure abroad in foreign currency by Tturkish travellers. Due, in part, to the upswing of business activity in Germany, receipts from workers' remittances increased rapidly from $93 million in 1967 to $141 million in 1969, and to an estimated $230 million for 1970. Other elements in the current account of the balance of payments showed little change overall. 32. Capital Movements. Repayment of debt in 1969 amounted to $115 million compared with $94 million in 1968, the increase being mainly due to higher repayments to the EMA. In 1970 debt repaynient was expected to increase to $134 million mainly as a result of the heavy repayments of 'j65 million due to the FMA. Private capital imports increased from $24 million to $40 million. The total amount is small for a country of Turkey's size and stage of development but there remain many obstacles in the way of increasing this to the magnitude called for. The major soturce of official capital flows is the Turkish aid Consortium operating under the aegis of the OFCD. Disbursements oE project aid have risen progressively from some $A3 million in 1967 to $174 million in 1969 with an estimated figure of $165 million in 1970. This includes a small amount from non-consortium sources. Disbursements of program aid have fallen from $163 million in 1967 to $105 million in 1969. The Government's estimate of program aid requirements for 1970 was $177 million, including resources to offset the large EMA repayment. Actual aid provided is expected to amount to $190 million. The present structure of Turkey's balance of payments, in particular the need to service substantial amounts of foreign debt and the deficit on current account which must be expected to rise still further, implies, for the time being, a continuing need for program ai(l. In 1970, on the other hand, the increase in reserves is due to the unusual leveL of addi- tional external assistance following, devaluation. Following the elimina- tion of the "waiting, room" in the period September/December 1970, this increase is likely to be partly offset by the contingent liabilities for imports for which letters of credit have been opened but not yel: settled. 33. 'rurkey's official net holdings of gold and convertible foreign exchange rose from $40 million at the end of 1968 to $200 million at the end of 1969, and to $410 million at the end of 1970. The main factor in - 12 - Table 3: Balance of Payments, 1967-70 (Million US $) 1970 1967 1968 1969 Estimate A. Goods and services Imports, c.i.f. -685 -764 -801 -935 Exports, f.o.b. 523 496 537 585 Trade balance -162 -268 -264 -350 Interest paymenti - 35 - 41 - 45 - 60 Tourism and travel, net - 14 - 9 - 5 - 2 Profit transfers - 25 - 32 - 32 - 35 Workers' remittances 93 107 114 230 Infrastructure and offshore receipts 14 10 8 10 Other services (net 15 2 - 24 - 30 Invisibles balance 48 37 43 113 Total current account -114 -231 -221 -237 B. Capital, n.i.e. Debt repayxent -106 - 94 -115 -134 Direct private investment 17 13 24 40 Imports with waiver 12 22 20 22 Project assistance 83 127 174 165 Program assistance 117 112 94 181 PL 480 - - 41 50 Debt relief 46 35 11 9 Total 169 215 249 333 C. Net errors and onissions - 67 + 20 + 9k + 59 D. Reserve movements (+ decrease) + 12 - 4 -122 -155 - 13 - the reserve increase in 1969 was a shortening of the "lead" in import pay- ments under an agreement between the Central Bank and its foreign correspond- ents to delay the transfer of foreign exchange from the date of opening let- ter-- of credit until the specified date of settlement. There was no corres- ponding increase in the Central Bank's uncomm:Ltted external liquidity. E. The Stabilization Program 34. As mentioned elsewhere in this report, and in the previous Bank economic report, during the last three years Turkey has been subject to inflationary pressures and resources have been subject to excessive strain arising for the imost part, from the excessive level of demand represented by the Government's expenditure program. These pressures were reflected in rising prices, an over-valued exchange rate, acute foreign exchange shortages with continuing restrictions on imports and persistent budget deficits. At the same time, some of Turkev's administrative and institu- tional arrangements have proved inadequiate to cope with the requirements of a rapidly developing economy. Foremost ainonsst these are the existing system of trade and payments, the control of rnoney and credit, particularly excessive reliance on Central Bank advances by the Treasury, the method of financing of agriculture, in particular agricultural marketing, the orga- nization and management of State Economic Enterprises, the process for determination of wages and salaries, and the general role and effective- ness of the budget as a primary instrument of economic policy. 35. On August 9, 1970, the Government devalued the Turkish lira from the orevious official rate of TL 9 = US$1 to I'L 15 = US$1 and introduced a far-reaching stabi'i:zation program designed on the one hand to reduce inflationary nressures in the economy and correct the imbalances mentioned above an(d, on the other hland, to increase the rate of savings, to improve the allocation of resources and to adapt economic institutions to the changing character of the economy. The main thrust of the stabilization measures has been dictated by a new awareness of the need to develop ex- ports, the need for greater integration with t:he W-1orld economy and the need to meet the challenge of external competition. External viability has been declared as the long-term national objective. The stabilization program provi(les for measures to complement devaluation, namely, elimina- tion of the dielays in allocatin'g foreign eP.xchange, restoration of a prompt pvayments situation, introdtuction of a new import licensing procedure, re- dlicticn of tle stamp duty and the alvance import guarantee deposits on im- ports. Steps have been taken already to sim.pl-ify the system-Q of export tax rebates 'md make some reduction in the rate of subsidy involvecl. 36. Tn .e Fiscal sphere the Government has reiterated Its intention to balance the budgets for 1970 and 1971 and uise some of the additional resources arising from devaluation to redulce accumulated short-term debt. In the bulget for 1970 it has already taken a nunmber of measuires to in- crease taxation and to slow down the rate of growth of consumption. A renewed effort is to be made to reduce thie operational deficits of the S,Es. The fiscal nrogrram is heing supplemented by action of the monetary authorities in waking higher interest rates effective and in curbing the - 14 - growth of domestic credit. The Central Bank is being encouraged to play a more active role in regulating money and credit expansion and in chan- nelling credit into priority sectors. A system of interest subsidies to both banks and borrowers has been introduced to encourage banks to use their own resources for medium-term lending and to lend to preferred sectors, and to lower the cost of investment funds for investment in preferred sectors. 37. Proposals for reforms of a structural and institutional nature have been less precisely defined. They center on the recognition that agriculture will continue to be the backbone of the economy and that steps need to be taken to modernize agricultural production methods, to allow market forces a greater impact on incentives to produce, and to modify the existing policy of agricultural support prices whilst at the same time tak- ing steps to provide alternative incentives and alternative production pos- sibilities for farmers. In addition, it is proposed to take steps to en- courage savings in the rural areas and to channel these resources into investments and other developments which will have a more effective im- pact on productivity. Priority is to be given to more fundamental measures designed to improve the framework within which individual State Economic Enterprises will be required to operate. The Government is to expedite the passage through parliament of a new capital market bill. It also intends to diversify the banking system by sponsoring a new institution, the Export and Development Bank, which will be concerned with the provision of finance for the development of new export comaodities and to improve marketing ar- rangements. - 15 - II. Principal Economic Activities A. Agriculture 38. Agriculture continues to be a crucial sector in the economy of Turkey. Although it contributes only about 3) percent of the national pro- duct, it provides some 70 percent of total emp?loyment, supplies much of the raw materials for industry, and accounts for the bulk of the cotuntry's export earnings. 39. In recent years, agriculture has lagged behind the rest of the economy and generally fallen short of First and Second Plan targets. In the First Plan period (1963-67), agricultural value added expancled at 3.4 percent annually, but the rate dropped to 1.9 percent in 1968 and close to 1 percent in 1969. The Second Plan calls for an increase in gross agri- cultural value added of 23 percent, or 4.2 percent annually, during 1968- 72. Given the shortfalls in the first two years and the likelihood of another poor wheat crop in 1970, it is extremely doubtful that the 1972 target can be reached. However, with reasonably favorable weather and by concentrating on high priority programs, it should be possible to expand output in 1971 and 1972 enough to achieve an average annual growrth rate of 3.0-3.5 percent for the Plan period. In the subsequent Plan period (1973-77), Turkey should be able to step up agricultural growth signifi- cantly, with a 4.5-5.0 percent increase annually. 40. Much of the disappointing performance has been due to the lack of coordination in policy, organization and implementation of agricultural development. Insufficient attention has been given to the economic utili- zation of investments and resources in order to obtain maximum returns as quickly as possible with the result that available resources are thinly scattered. The provision of financial and technical assistance to the private sector has been inadequate. 41. Agriculture's generally poor perfornance can be improved markedly by changes in organization and policy, with greater concentration on high- priority activities. The following could forn the basis of a successful development program for the remainder of the Second Plan and probably dur- ing the subsequent Plan period: (a) completion and full utilization of existing irrigation projects; (b) increased wheat production, esipecially on the Anatolian Plateau; (c) production of fruits and vegetables for ex- port; (d) development of livestock, including dairying, fattening, feed- stuffs, and marketing; (e) reduced production of surplus commodities, through revision of pricing policies and development of alternative pro- ducts; (f) greater utilization of forest resources; (g) expansion of credit facilities, inputs and other supporting services. 42. Irrigation is vital to the development of Turkish agriculture, since much of Turkey has a low and variable rainfall, and even in many coastal areas where rainfall is higher, distribution is unreliable. The area served by Government irrigation schemes has expanded rapidly over the - 16 - past several years. While public investments in irrigation have been large, they have been seriously underutilized. Probably no more than one-half of the area in Government schemes is actually irrigated. In the light of this past experience, tthe anniounced policy of utilizing existing investments more fully is encouraging. This policy should be implemented by adopting measures to achieve a major realignment of existing organizational arrange- ments and priorities in resource allocation which, in the past, have favored construction of major works at the expense of providing distributaries, on- farm development and supporting research and extension. With such a re- alignment, it should be possible for Turkey each year to bring some 60-80,000 hectares of project lands under full irrigation and intensive agricultural development. Thus the entire remaining 800,000 or so hectares for which major works either have been or are being constructed could be covered in 10-13 years or less. 43. Wheat production fell short of Plan targets for 1968 and 1969, due mainly to adverse weather. Another poor wheat crop is likely in 1970. However, in years of favorable weather, and by the use of new varieties and cultural practices, Turkey presently could produce enough wheat to meet or even exceed domestic demand. The recent introduction of Mexican wheat varie- ties into some coastal regions has proved highly successful. Turkey proposes to achieve self-sufficiency in wheat during 1968-72. While it is doubtful that the production base can be expanded rapidly enough to reach this goal before the end of the Second Plan, it should be possible to reach it in the early part of the subsequent Plan period if sufficient funds, staffing, incentives and inputs are provided. The Ministry of Agriculture has prepared a Wheat Development Project which aims to bring 38 percent of the total wheat area under high-yielding varieties between 1968 and 1972. Self-sufficiency in wheat and the releasing of land for production of animal feedstuffs are crucial to the country's further agriculture development. A substantial in- crease in wheat production per hectare would not only prevent further en- croachment on pasture lands; it would also reduce the area devoted to wheat cultivation, freeing land for the production of feed grains and forage for livestock. 44. Fruit and vegetable production for both domestic consumption and export has grown rapidly in recent years, and there is considerable poten- tial for further expansion. Turkey has the advantages of favorable climate and easy access to export markets. The main impediments to further rapid expansion are lack of adequate supplies of seed and stock, medium- and long- term credit, and handling and internal marketing facilities. The Government is preparing a fruit and vegetable export project which would assist in raising fruit and vegetable exports from US$20 million in 1969 to US$80 million by 1975. With expansion of produce for export, there would also be an increase in produce for domestic consumption. While the rising domestic demand could easily absorb this increase, unless there are adequate market- ing, storage and processing facil4ties to handle it, conditions could be disastrous for growers. A thorough study of the organizational, policy and investment requirements for an increase in domestic and export production should be undertaken as soon as possible. - 17 - 45. Livestock production has failed to keep pace with a fast growing demand. The main obstacles are the lack of modern animal husbandry, an inadequate supply of feedstuffs, and the absence of adequate marketing frcilities. Government research and extension have as yet made little impact upon traditional practices or done much to promote the wider cuiltivation of fodder crops. Technically and economically feasible crop rotations have not been worked out nor suitable fodder crop varieties and cultivation practices sufficiently tested. The Second Plan aims at removing these obstacles. The Government has prepared a six-year program for overall livestock development which calls for investments totalling TL 1,848 million during 1969-72 and TL 1,268 million in 1973-74. An additional TL 1,302 and TL 697 million would be required during these periods as short-term financing. The program as proposed is highly ambitious and is being revised both in scope and con- tent. Expansion of Turkey's livestock industry will depend largely on the success of the wheat production program. Increased output cn presently cultivated areas should reduce further encroachment on pasture lands and release land for production of animal feedstvzffs. However, without con- siderable improvement in animal husbandry and marketing of botha feedstuffs and livestock products, any livestock expansion will be marginl1. 46. Tobacco, sugar and tea stocks are well in excess of requirements, despite measures to restrict ouitput and reduce existing supplies. Efforts need to be intensified to bring supply into better balance with demand and reduce accumulated stocks as soon as possible. Equally important is the need to upgrade the quality of production. What is required is a revision of present price support policies, studies cmn the feasibility of reducing production, a program for shifting to alternative crops, anid reduction of surplus stocks thro- >1 increased exports and domestic consumption. An es- timated 850-900 ,000 families are engaged in tobacco, sugarbeet and tea cultivation. Thius, any program to reduce production m.ust be accompanied by measures to assist affected farmers in making the transition to alterna- tive means of livelihood. 47. Forests in Turkey are extensive and are a major, though largely untapped, resource. There is a sizeable ancl growing domestic and export demand potential for Turkish wood and wood products. lHowever, present policies and planning are not related to overall industry requirements: logging and extraction policies are inefficient; infrastructure is irnade- quate; firewood and industrial wood are provided to forest villagers at higphly subsidized prices; size, type and location of plants are not based on economic priorities; the nature and accessibility of the various forest reserves are not fully considered; and forest industries have no control over raw material sources. For these reasons, l1ocal prices of wood and wood produicts, before devaluation, were almost double world prices. With- out major reform and a change in the national concept oL the role of forestry resources, the prospects for the forestrv industry are not encouraging. 48. Vigorous measures would be required for any accelerated forest development. These should include acceleration of the forest inventory, major infrastructure investments in access roads to the forests and in forest roads, reorganization to take advantage of the economics of both - 18 - vertical and horizontal integration, concentration of cuttings and the in- troduction of newr felling and transport systems, additional reforestation, and acceptance of the principle of major concessions under suitable safe- guards and, for smaller-scale needs, a more reliable form of material guarantees for wood-using industries. In the immediate future, however, the possibilities; which exist for exporting sawmnood should be exploited. Such a program as the above should be associated with a major effort to organize permanent employment in the forest industries and alternative forms of employment for surplus labor in thle forest areas. To facilitate achievement of these goals, the Ministry of Forests should be reorganized and strengthened in order to have a more direct role in policy-making and coordination. 49. Fertilizer consumption in Turkey has grown rapidly in recent years, and demand is expected to continue to rise. Steps should be taken to insure sufficient fertilizer, whether imported or domestically produced, is available to farmers when needed. Seed production and distribution gen- erally have progressed satisfactorily. However, the importation of vege- table seeds and fruit stock not available in Turkey has until recently been delayed by the Ministry of Agriculture. The use of tractors, seed drills, and other agricultural implements has grown markedly. Tractor use generally is not intensive due to lack of experience in operation, problems of main- tenance (especially shortages of spare parts), and the frequent absence of accompanying implements. Although data are not available, it appears that the amount of labor displaced by mechanization so far has been limited. Measures should *be taken to expand the local manufacture of farm machinery. 50. Most of the institutional credit available to farmers is provided by the Agricultural Bank, the country's second largest finanical institution. Besides lending directly to farmers, it lends to agricultural cooperatives and the Agricultural Supply Agency, finances the procurement and distribu- tion of fertilizers and seed, and aids the development of livestock, fisih- eries and agriculture-related industries. The bank has expanded its lend- ing substantially. Because its policy is to give priority to reaching as many small farmers as possible, it makes a large number of relatively small, short-term loans, mainly for seasonal production and marketing needs. Agri- cultural credit cooperatives using Agricultural Bank resources, also make large numbers of small, short-term loans to their members. Most of these loans are too small ia themselves to make more than a limited impact on de- velopment. At the same time, the amount of credit available to development- oriented medium and long-term investments generally has been inadequate. The demands which a growing Turkish agriculture will make on the already overburdened Agricultural Bank over the next several years will be large. In order to meet them, the funds available for development purposes will have to be expanded substantially and the bank's administrative capacity materially improved. 51. Extension and research activities in Turkey are fragmented among several agencies with little or no coordination. In general, they are in- effective in meeting immediate needs of farmers. These functions might be reorganized on a regional basis and strengthened substantially. - 19 - 52. While the activities discussed above should be given highest priority, there are others which are important and cannot be neglected. Cotton, hazelnuts and pistachio nuts, for example, will continue to be important foreign exchange earners. Efforts to improve their yields and quality should be intensified. The production of oilseeds will have to expand to keep pace with the growing demand for vegetable oils. Besides the completion and more intensive utilization of existing projects, some new major irrigation works, mainly those associated with electric power generation, will have to be undertaken. The! exploration and development of groundwater resources and the possibilities of small-scale irrigation works, especially on the Anatolian Plateau, should be thoroughly in- vestigated. Given the potential which exists, steps also should be taken to stimulate the development of marine fishing. Wide-scale organization of farmers into cooperatives will be essential to the success of many of the programs. Land consolidation in irrigated areas should be intensified. Immediate measures also should be taken to speed up the cadasteal survey and registration of titles to land, to provide a clearer picture of the present land-holding situation. B. Mining (Except Fuels) and non-ferrous Metallurgy 53. Growth of the industry was fairly rapid until the early 1950's, largely as a result of the high demand for chromite and copper. Since then there has been stagnation except for the rapid development of iron ore min- ing to feed the expanding steel industry and of magnesite and colemanite (a boron mineral) for export. The latter were aided, in part, by new for- eign investments. In the period 1959-69 real growth in output of mineral commodities with export potential has averagead about 2 percent annually. The value at the mine or plant of domestic m:Lneral production is estimated at TL 1.4 billion in 1969, quarry products making up 40 percent. of this value, copper 26 percent, chromite and ferrochrome 9 percent, iron ore 7 percent and boron minerals 7 percent. Domestic consumption of domestically produced mineral products in 1969 included all the iron ore (1,850,000 tons), iron pyrites (23,000 tons) and sulphur (25,000 tons); and 40 percent of the blister copper (9,600 tons). The indtstry plays a relatively small role in the economy, contributing about 1 percent of the net domestic pro- duct in 1969, and providing direct employment: for about 33,500. 54. The importance of the mineral industry lies in its export poten- tial. Mineral exports in 1969 amounted to $45 million, being 8 percent of the total value of exports. With the successful implementation of projects underway and planned, mineral exports may experience an average annual growth rate of 14 percent, achieving a level of $158 million in 1977, and making up about 15 percent of the projected value of exports in that year. Copper was the dominant export commodity in 1.969 accounting for 29 percent of the export value, followed by chromite (23 percent) and boron minerals (18 percent). In 1977 copper is still expected to be the dominant export commodity contributing 28 percent of the value, followed by boron minerals (19 percent), ferrochrome (11 percent), mercury (10 percent), and chromite (6 percent). - 20 - 55. Etibank, the State holding company for the mining sector, together with the State Iron Ore Mines, accounts for 70 percent of the value of the minerals output. It operates ten widely dispersed mines producing nine different commodities. About 85 percent of its 1969 after-tax profits of TL 64 million (on sales of TL 555 million) came from two copper operations. A pyrites mine and one of its mercury mines were also highly profitable. The other operations are only marginally profitable or incur losses (East- ern Chromite, Bandirma borax plant), or are completely uncompetitive (Keci- borlu sulphur mine). Since the mid-1960's, Etibank has embarked on a major expansion program, investing TL 374 million over the 1965-69 period in mercury development, a borax and boric acid plant, and the commencement of an aluminum complex. Projected investments over the 1970-77 period total no less than $471 million equivalent. 56. In the private mining sector there are about five medium-sized companies (in chromite, boron minerals, and iron ore), but the sector is characterized by over two hundred small mines producing a wide range of minerals, the dominant ones being chromite, iron ore, magnesite, and zinc and mercury ores. None of these companies carry out exploration on any significant scale. Even in chromite, which accounts for the largest Turk- ish mining operation, Etibank appears to be the only organization capable of developing and implementing major investment strategy, but jointly with State support, domestic private interests are seeking to develop zinc, mercury, asbestos and marble production. 57. Widespread mineralization strongly indicates that Turkey has a very significant minerals potential. Continued growth should be possible in both of the maJor minerals, copper and chromite. In boron minerals, Turkey could eventually attain a dominant position in the world. The coun- try's proximity to European markets makes it an attractive exploration tar- get for a wide range of base metals. The slow progress in the recent past is due to a series of tmutually reinforcing factors: poorly focused and insufficient exploration and development, Etibank's operational difficulties, environmental problems (poor mining law, high transportation costs), and, finally, difficulties in finding a modus vivendi with international mining firms which could make a substantial contribution at this atage. These will now be reviewed in turn. 58. The State Geological Survey (MTA) budget and professional staff are large in relation to the present minerals industry. It has not com- pleted the basic geological work (mapping and regional studies) nor has it proved any major new e,conomic ore reserves in spite of an investment to date of TL 542 million. Large-scale exploration has been regarded as beyond the role of Etibank, aad there is no private exploration activity on any meaningful scale. The SPO has tried to bridge this gap, and in 1969 allo- cated TL 30 million for exploration by newly-formed private companies as- sisted, as necessary, by experienced foreign experts or partners. While this work has been well focused and has brought some practical results, its efficiency is still affected by lack of exploration know-how and ex- perience. - 21 - 59. Etibank, as a major mining concern, has been subject ito some major constraints. Financially and administratively, the mining operations of Etibank have suffered because of its additional responsibility Eor power (only now are mining operations to be given a separate legal an,l financial identity), and many mines and installations need to be modernized. Like many other state enterprises, Etibank has had its management problems (low pay, red tape, location of mines in remote and primitive areas) and labor problems (high social expenses and low productivity). In many mines, min- ing methods are primitive (e.g. mercury) or operations uneconomical (sulphur). 60. Before devaluation, the overvalued exchange rate was partic- ularly damaging to expansion in commodities with a major export potential, mainly copper and chromite. For other commodities the effect has been less since the Turkish Government has always been prepared to allow the neces- sary protection of the domestic market (iron ore and sulphur) or even to encourage a dual pricing system (lead and zinc) where high pric,as in the domestic market would aid export prospects. Transportation costs are high, and weigh heavily in the cost structure for important minerals like chrom- ite and iron ore. Nearly two-thirds of the pre-devaluation selLing price for Eastern Region chromite f.o.b. Iskenderun was absorbed by transporta- tion costs from mine to ocean vessel. Iron ore costs less than TL 15 per ton at the mine in the major ore-mining area but TL 170 per ton when de- livered to the steel mills at Karabuk or Eregli after a long transport route. 61. The 1954 Mining Law does not permit effective mineral resource development. In particular, no provisions exist to prevent ineEficient or wasteful exploration of a mineral resource; exploration fees and penalties for violations are insufficient or low: there are many legal complexities with loopholes which permit extended possession. On the other hand, mineral rights are restricted to one mineral, which inhibits modern "saturation" exploration. Though the Turkish authorities are aware of these weaknesses, reform is a politically sensitive subject, and serious work on revision has not yet been started. 62. Foreign investment, with associated financial resources, and technological and marketing know-how, could play a major role at this junc- ture. According to one informed estimate, projected 1977 mineral exports of $150 million (compared with $45 million in 1969) could be doubled if major foreign investments were negotiated. The Government is generally aware of these potential benefits but is hampered by Turkey's unfavorable ex- periences in boron minerals and ferro-chrome. 63. For the balance of the Second Plan, mineral output will be deter- mined largely by projects already under way. The mission estimates that mineral and metal exports may reach $82 million equivalent by 1972, corre- sponding to an annual growth rate of about 10 percent. The target to expand exports four-fold by 1977 is not unrealistic and a Third Plan target of say $150 million exports could be achieved at a considerably lower invest- ment expenditure than the Second Plan expenditure of nearly $401) million - 22 - equivalent. The expansion in most major minerals now under way would ap- pear to be justified on economic grounds, except in the case of aluminum and a major lead-zinc project which are still doubtful. 64. The success of the Government efforts to develop mining resources is likely to depend on its own efforts to encourage foreign investment not only in sectors where further exploration and development are clearly pre- requisites but also in the extraction and processing of minerals. This calls for the investment of high resources, the utilization of the most modern and sometimes very sophisticated techniques, the application of skills and experience arid, for some minerals, special marketing channels. In this respect, foreign investment could make a very significant contribu- tion, perhaps even to tne extent of doubling otherwise attainable targets. 65. Further significant imnprovement in the financial and managerial control of Etibank mininig operations will also be important and a manage- ment and financial studv of Etibank covering both an assessment of present operations and the evolviement of a corporate strategy (relative emphasis on joint ventures as compared with own operations, degree of exploration by Etibank, etc) would be a useful first step. A companion study should develop a strategy of exploration for Turlkey which would be set within an overall mineral development policy and geared to a realistic budget. With respect to the future supply of pyrites and iron ore as raw material for domestic production of phosphate fertilizers and steel, the domestic out- look needs to be realistically assessed and compared to the alternative of importing some of the requirements. C. Manufacturing 66. In 1948-61, the growth in manufacturing output, at 5 percent per year, barely kept pace with the growth in GNP. In contrast, during the 1960's, manufacturing output probably grew by about 10 percent per year or more. However, the contribution to gross domestic product at 19 percent and the share in total employment at 10 percent in 1969 are still low. Manufacturing investments grew by about 13 percent between 1963 and 1969. There has been an upsurge in private sector investments particularly since 1965 with a steady increase in the share of manufacturing in GNP. Moreover, there is a large number of important projects in the pipeline. Foreign direct investment probably averaged more than 10 percent of total manufac- turing investments in the 1960's. Growing foreign industrial participations may permit new departures in the manufacture of motor vehicles and tractors, fertilizers and petrochemicals. 67. Industry is heavily concentrated in the Istanbul region, and to a lesser extent around Ankara, Izmir, and Adana. There is an increasingly diversified industrial structure and capability. Turkey produces steel and copper, a wide variety of heavy production equipment as well as consumer durable goods, phosphate and nitrogeni fertilizers, synthetic fibers, news- print and kraft paper, etc. Plants under construction will make aluminum, motor vehicles well beyond the assembly stage, diesel-electric locomotives, and major chemical intermediate products and plastic raw materials. Today - 23 - "new" industrial materials and equipment industries account for roughly the same proportion of value added as "traditional" industries. In contrast in spite of favorable resource endowments, the processing for export of agri- cultural, forest and mineral raw materials is underdeveloped. 68. In 1963-69, the output of certain "new" industries approximately doubled while the output of traditional industries grew only by slightly over 50 percent. Output of machinery quadrupled -- but from a very low base in 1963. The second highest growth rate was in steel, reflecting the coming into production of the first stage of Erdemir's flat products mill on the Black Sea. Though fertilizer production doubled, it rem.ained at a low level, and came nowhere near meeting the country's requirenments. Con- sidering Turkey's forest resources, the 48 percent growth rate for pulp and paper production was disappointing. Growth and efficiency have been hampered by limitations on capacity and the all pervasive foreign exchange constraint on the availability of imported inputs. Turkey represents a rather extreme case of import substitution, fostered by Government policies sometimes at the expense of comparative advantage, with the share of imports in the total supply of manufactured products actually falling from 15.6 percent in 1963 to 8.7 percent in 1969. Value-wise most of the import substitution has occurred in steel, machinery and transport equipment and chemicals, with disproportionately high prices for these items. Manufacturing exports have grown quite rapidly from the low base in 1963. Though a high propor- tion of these exports represents processed agricultural products, greater export incentives and Government exhortation have also led to exports of more typical factory products, particularly textiles but also smaller ex- ports of refrigerators, radiators, ship repairs, etc. 69. In 1963, (the latest census year), 238 establishments in the public sector produced about 442 percent of the total value added, 2,774 large and medium-sized private establishments 38 percent, and some 158,000 establishments (engaging ten workers or less) nearly 20 percent.. By 1968, there were about 50 State enterprises, each with more than one establish- ment, engaged in manufacturing. Nine of these had a combined sales volume of TL 6.1 billion and a total employment of about 91,000. In contrast, the 90 largest private companies had an estimated sales volume of TL 9.5 billion and employed approximately 86,000. These two groups together probably accounted for less than 20 percent of total employment, reflect- ing a striking industrial dualism. Small establishments are particularly important in clothing, wood and furniture manufacturing, and metal pro- ducts where they account for 45-90 percent of the sales and slightly lawer proportionls of value added. 70. Between 1958 and 1963, the value addled in State maanufacturing activ- ities grew by about one-half which was well above the overall rate of growth in manufacturing output. Between 1964 and 1969, with the overall growth rate in manufacturing accelerating, the State share did not change greatly. State enterprises have a virtual monopoly in steel, fertilizers and pulp and paper -- all areas in which severe shortages developed during the period. In the engineering industries the State operates seve,ral heavy engineering facil- ities. Otherwise, State penetration is mainly financial. It is greatly - 24 - increasing its stake in shipbuilding through a new partnership with Ishikawajima of Japan and will also increasingly dominate petroleum refin- ing, including the supply of inputs to petrochemicals plants. Turkey's first petrochemica:Ls complex, operated by Petkim, a new State enterprise, went on stream this year. Otlher major State projects under construction or in advanced planning include a large ammonia plant sponsored by the State Ipras Refinery Corporation, a third integrated steel mill and an aluminum smelter (both financed with USSR assistance) and a diesel-electric locomotive factory. 71. Individual production units in many of thie State industries are far below an economnic scale, in steel and nitrogenous fertilizers, the new petrochemicals complex, and to a lesser extent the three new pulp and paper mills. This is one reason for present high prices in the State sector; other factors include wrong technology and low labor productivity. In turn, these are a reflection of managerial and institutional problems, The com- bination of higher profitability with relatively moderate price i creases in recent years suggests some improvement in efficiency and competitiveness- but in the aggregate these enterprises made no contribution to the finan-- cing of new investments. 72. The architects of the 1968-72 Plan recognized that transition towards a market economy was essential to efficient resource allocation and competitive efficiency. Under the Second Plan, export development has been given much greater weight in relation to import substitution than in the past and efforts have been made from the beginning to build nesi indus- tries to viable capacities, if necessary by selling so~me of the output on the world market at little above marginal cost. Arrangewents have. a1so been made for domestically produced industrial materials to be supplied at world mar- ket prices when these materials were to be used for export prcluction. Ef- forts have been made with some success to give the main responslbiiIty for industrial development to private enterprise, with the public sector com- pleting investments already under way and concentrating on improving effi- ciency. In new ventures, the Government has been promoting a "mixed enter- prise" formula. Measures to assist the private sector include studies to identify projects, project preparation and the grant of important investment and export incentives. As of April 1970, the SPO list of new projects granted investment certificates in the private manufacturing sector totalled TL 5.7 billion (at, the old exchange rate). Fourteen large projects with individual investments exceeding TL 100 million accounted for TL 2.5 billion of this total. Irn addition, six major projects are under way or planned in the motor vehicle, tractor and component parts industries, with a com- bined investment of TL 1.1 billion. 73. Until recently, foreign direct investment played a relatively modest role in Turkish industry, particularly when compared with other countries in a similar stage of development. Within the past three years, however, 62 decrees have been passed authorizing foreign manufacturing in- vestments for a total project value of TL 2.9 billion equivalent. The mixed enterprise formula has also found favor with foreign companies. SPO continues its determined effort to attract leading international companies - 25 - to Turkey. However, in some areas the SPO has been attempting to impose specific conditions, as to the scale of output, domestic component of in- puts, etc. which appear to encroach to a considerable degree on t:he respon- sibilities of management. In addition, associated State enterpriLses with minority participation have sought to obtain a voice in management out of proportion to their contribution, however measured. In other fields, notably petrochemicals, the dominant State enterprise is reluctant to bring in for- eign partners. 74. Turkish industry in general has been inward-oriented with little regard for cost competitiveness. With investments decisions beirtg made within a hig,h protective wall in an economy where market forces have lit- tle free play, a great deal of production has not expanded on a reasonably competitive basis. Much of the additional value added has come from new high-cost lines of production and, therefore, has been smaller than its value would suggest. Measured by the net protection actually utilized, Turkey has considerable competitiveness over a wide range of mainly non-durable con- sumer goods. This suggests a considerable export potential once integra- tion with the Common Market becomes effective. In contrast, durable con- sumer goods, tractors, motor vehicles, and certain types of machinery are high-cost industries. Great variations in the protection needed for dif- ferent items within the same product group suggest deficiencies in resource allocation in a virtually closed, small market, The principal import sub- stitution industries comprise steel, fertilizers, metal engineering, motor vehicle and tractor manufacturing. All these suffer in some degree from lack of initial economic evaluation, over-capitalization, heavy debt burden, uneconomic plant size and location, inadequate vertical integration, or the fact that alternative supplies can be obtained in adequate quantities abroad, at internationally competitive prices, substantially less than pos- sible or foreseeable prices of domestic product:s. 75. Subject to certain conditions, financial reorganization and con- solidation, and improved management, some industries have the potential for profitable operation under competitive conditions in the medium term. In others and notably in some aspects of public sector engineering ac- tivities and the motor vehicle and tractor industries the weakness of the ori- ginal case for import substitution is still valid. The funds and resources appropriated for such investment could have been used at higher economic returns and with better employment effects elsewhere and the same would hold true for any further investment, unless it can be justified on the most rigorous criteria of economic feasibility. Inflation of the domestic cost structure by uneconomic industrialization has lessened the e:xport com- petitiveness of user industries. In contrast, industries with a major ex- port potential, in spite of a recent upsurge of interest, have nolt received the same attention as import substitution industries. Yet their economic prospects seem far better. This is particularly true for food processing, textiles, and mineral and forest product industries. 76. If Turkey is to make vigorous industrial progress in the future, the main objectives of industrial policy will need to encompass: (a) Grad- ual reduction of protective barriers with emphasis on comparative cost, - 2G minimum condition of cost competitiveness in medium term, rationalization with an appropriate scale of operation and degree of integration, and other measures to improve productivity; (b) More rapid evolution towards a market economy, including progressive integration within the Common Market; (c) A more careful definition of industrial priorities, and better screening of projects in the light, of a rigorous econoaic evaluation; (d) Accelera- tion of structural and institutional change in certain areas of major growth potential, such as metallurgy, forest industries, and engineering; (e) Successful enlistment of foreign capital and the management, technical know-how and market access of foreign industrial concerns in Turkish in- dustrialization. 77. Dynamic growth will depend, on the one hand, on the establishment of a satisfactory economic environment within a market economy suitably endowed with appropriate industrial incentives, including the reduction of protection; and, on the other hand, on a clearer distribution of respon- sibilities between the State and the private sector and a similar division of responsibility between large-scale and small-scale enterprises. Hither- to, the State Planning Organization has played a particularly vital role in galvanizing the private sector into action and in attracting foreign investors. For the future planning and administration of industrial growth, close tripartite cooperation between SPO, the Mfinistry of Industry and the industrial associations will be necessary. Equal entitlement to incentives and opportunities for investment should be established, to the extent pos- sible, beyond the need Eor bureaucratic intervention. D. Energy 78. The trend in Turkey's energy consumption reflects the changing structure of the Turkish economy toward increased industrialization. Total energy consumption in 1968 was equivalent to 19.4 million tons of crude petroleum, and 20 percent of total energy requirements were imported in the form of crude petroleum and minor quantities of petroleum products. Bitu- minous coal, 4.7 million tons in 1969, lignite 5.6 million tons, and petrol- eum, 3.6 mIllion tons, are the primary domestically-produced commercial fuels. Coke production, electricity generation and railways are the principal mar- kets for bituminous coal, accounting for about 75 percent of consumption. Electricity generation and domestic heating are the principal markets for lignite also accounting for about 75 percent of consumption. 79. Favorable geclogical structures have not yielded a major oil reserve despite extensive exploration. Coal reserves are extensive, esti- mated at about 1,300 million tons but there is no up-to-date evaluation of the reserve tonnage which could be mined at current production cost levels. Costs of production have risen steadily and are probably some 20 percent above c.i.f. prices. Operating losses amount to some TL 27 per ton of coal sold, due primarily to the Government setting retail prices which do not cover transportation costs. In the case of lignite there are about 400 million tons of proven lignite reserves with a calorific value above 2,000 Kal/kg. In addition, the Afsin-Elbistan lignite beds contain an estimated 3,200 million tons with an average calorific content of about - 27 - 1,150 Kal/kg. The lignite deposits are generally viewed as a vast and virtually untapped fuel resource. However, cost factors related to lig- nite development tend to indicate that this source of fuel is not likely to remain competitive with the domestically available excess heavy fuel oils (balancing the motive fuel requirements), in thermal power generation and major industrial heating uses. 80. Total installed capacity for electricity generation in 1970 is estimated at 2,470 Mw of which about 70 percent is on the interconnected system. About 76 percent of the load is on the interconnected system and about 75 percent of the installed capacity is thermal. Electrical energy is available to only about one-third of the population of Turkey. Some 300 municipalities (27 percent of the total) and about 35,000 villages (98 percent of the total) have no public supply of electricity. Average wholesale tariffs for the interconnected system were 15 krs per Kwh in 1970 and are expected to increase to 21 krs per Kwh in 1971. 81. Overall consumption of energy averaged an annual growth rate of 6.7 percent over the 1962-67 period and is projected to average 6.5 percent over the 1967-72 period and 7.5 percent over the 1972-77 period. The growth of consumption of commercial energy (crude petroleum, coal, lignite and hydro and subsequently nuclear) is projected to average 9.5 percent aMnually over the 1967-77 period. Major growth in energy consumption is projected in the transportation and electricity generation in the interconnected system, at 9 and 14 percent respectively. 82. A key problem on the energy scene in the past has been the lack of coordination and effective energy development plannino by the State agencies involved in the energy field. In 1966, renewed efforts were made to create a central electricity authority to be known as Turkiye Elektrik Kurumu (TEK). In November 1967, the Government undertook a major power re- organization introducing all the important changes incorporated, in the TEK Bill, which could be implemented prior to the actual passage of the Bill. The TEK Law has been passed by Parliament and TFK came into being in October 1970, taking over the assets of Etibank's power group. It is still doubtful whether this reorganization goes far enough to promote rationalization of power plan- ning, particularly in respect to the full range of problems mentioned below. 83. Given the alternative sources of domestic energy the major under- lying principle for a sound energy policy should be overall cost conscious- ness and an accurate evaluation of the alterniatives, particularly in the fields of inter-fuel competition. Key factors on the domestic energy scene are the insufficiency of domestic crude petroletum supply, the availability of domestic bituminous coal and lignite, and a high constimption. of dung and firewood. The prediction of future developments is affected by such major uncertainties as discovery of new domestic supply of oil and the construc- tion of international oil and/or gas pipelines. However, otiher significant factors and uncertainties are: (a) Government import policy on crude petroleum and on coal. (b) the trend in domestic production costs of coal and lignite and the pricing of these fuels; (c) Government policy cn domestic coal production and the extent of uti_lizatioa of lignite resources; (d) the trend in domestic steel production; (e) whether a petroleumli and/or gas pipeline will be constructed (from Iran and Iraq respectively); (f) Govern- ment policy on tne fuel to be used in tiiermnal power plant; (g) thte trend in the availability of oil handling and firing facilities in domaestic heating; (h) Government policy on foreign oil companiy exploration, refining and re- tailing; (i) refinery capacity. A coordinated strategy for the optimum de- velopment of energy appears to call for a number of studies on these subjects and a thorough appratisal of hydro-power costs and possibilities, witlh an overall examination of energy demand and the sources of least-cost supply. The study should exaLmine (in a trial manner) the costs imposed on the econ- omy as a result of deviating from the optimum cost strategy (due, for example, to strategic or political considerations). By keeping such a study current, the State would be aware of the costs of alternative policies. E. Transportation 84. In line with the vigorous growth of the economy, transportation services have contirnued to increase in tlhe last thiree years but at a slo- er pace than in the First Plan period. High growth rates were reported in road freight transport, 9 percent per annum and on air passenger transport, 15 percent per annur.. The annual growth rate of goods traffic has been es- timated at 8 percent in the next ten years, and trucking will continue to absorb the largest part of land transport. However, some growth in rail- road transport is expected, orinmarily for coal, iron and other minerals, but also for cereals, for which the railroad might be able to recapture some of the traffic previously lost to trucking. For coastal shipping and air passenger traffic, a rapid growth in demand is expected. 85. The physical capacity of Turkey's basic transportation network is generally adequate to meet present needs and would not constitute a bottle- neck for economic growth in the near future. Nevertheless, considerable improvements are needed in all modes in order to raise the efficiency of the system and lower transport costs. The physical standards and align- ment of existing roads are inadequate for current traffic volumes and ve- hicle overloads. Greater emphasis and resources need to be given to the development of feeder roads and the creation of a local road administra- tion. Almost all ports have serious difficulty in coping with the growing volume of traffic and increasing size of ships. Ships of the Turkish merchant fleet are fEor the most part too old and too small for economic operation. Unfavorable results of operations are due to low rates charged, the long periods ships are idle and unsatisfactory utilization of available passenger and cargo space. However, the railroad has the greatest anl most urgent need. for improvement, both in its infrastructure, which conforms badly with the present pattern of traffic flows and is characterized by unnecessarily circuitous alignments, and in the poor physical condition of its equipment, rolling stock and the system generally. Transport policy is deficient in many respects and is badly coordinated. Road transport oper- ations are ill organized, regulations inadequate, and road user charges low. In contrast, the financial losses of the major State transport enterprises are a substantial drain on public funds. The heaviest losses are incurred - 29 - by the railways. The cost (including a capital recovery quota), to the Turkish Government of the road and airport infrastructure, exceeded revenues from user charges and landing fees by TL 500-600 million and TL 35 million, respectively, in 1968. In addition operating deficits of the various State transport enterprises amounted to roughly TL 800 million in 1969, a substan- tial drain of about TL 1.5 billion on the resources of the public sector. 86. The Second Plan proposed a large increase of investment in trans- portation. Total investment in transportation and communication are expect- ed to be TL 17 billion -- nearly double that in the First Plan -- of which nearly two-thirds are planned for highways, TI, 12.2 billion and one-fifth for railroads, TL 3.2 billion, with TL 900 million for ports and TL 520 mil- lion for airports and aircraft. Major measures contemplated during the Plan period include: the establishment of a Transport Coordination Agency, ration- alization of the transport system, modernization of equipment and the renew- al and upgrading of the road and rail networks. Pre-investment studies are also under way on two pipeline projects, the Iran-Turkey oil pipeline and the Iraq-Turkey gas pipeline. F. State Economic Enterprises (SEEs) 87. Scope. There are currently some 26 SEEs and the Government has substantial participation in another 68 enterprises. Including t:he agri- cultural marketing organizations there are 22 major undertakings. They occupy a prominent position in every sector particularly mining, manufac- turing, transportation, trade, public utilities and banking. In 1969, the total volume of sales of productive enterprises amounted to TL 23.3 billion. All SEEs together employed about 345,000 persons out of a total of non-agri- cultural employment of 4.8 million persons. The value added by publicly owned industrial establishments amounted to TL 7.9 billion or about 50 per- cent of the aggregate industrial output of both public and private sector. Of the 60 percent of total investment allocated to the public sector in the Second Five-Year Plan more than half is accounl:ed for by investment of SEEs. In 1969 this amounted to TL 4.8 billion. 88. The financial outturn of a large number of SEEs has shown slow but steady improvement through the middle 1960"s until 1967, when operat- ing profits before deducting losses of other SE.Es reached TL 1.3 billion compared with TL 0.5 billion in 1963. After deducting losses the net result amounted to TL 0.7 billion in 1967 compared wit:h TL 0.0 billion in 1963. In 1968 and 1969 profits continued to rise but losses rose faster and the net results have deteriorated to TL 0.5 billion in 1969. The outturn in 1970 is expected to be worse again. Underlining the financial weakness of the SEEs are the heavy losses traditionally incurred by the coal mines, the nitrogen fertilizer industry and the transport enterprises, and not- ably the State Railways. At the same time, however, financial requirements have continued to increase rising from TL 1.8 billion in 1963 to TL 4.1 billion in 1967, and TL 8 in 1970. This reflects the continued increase in investment requirements as well as the growing debt service burden. Since 1968, internal cash generation has not been adequate to meet even the SEEs' obligations to repay debt and the balance of the needs, about 30 percent of total requirements, has had to be made good by the Treasury. - 30 - 89. Financially, the SEEs continue to be a major problem for the Turkish economy. Even allowing for inadequate depreciation provisions they have hardly contributed to tile saving process of the economy. The demand of the SEE sector for new resources for investment not only gener- ates a rapidly increasing indebtedness, but also absorbs a high proportion of the national savings, budgetary resources and external aid. A large part of thie additional resources required by the SEE sector have in fact been provided directly by the private sector in the form of pension and insurance contributions. 90. The Concept of SEEs. The State Economic Enterprises embody the Turkish concept of etatism which amounts to a pragmatic intermingling of State and private enterprise, with the State providing the usual infrastruc- ture of transport and utilities and, in the fields of credit, mining and manufacturing, stepping in to close thiose gaps which private enterprise is unable or reluctant to fill. The concept of a mixed economy is an in- herent and fundamental aspect of public policy, with SEEs regarded as the principal instrument on which Turkey can rely to achieve rapid development of the basic industrial structure, which it regards as its primary national objective and the principal means of ensuring a continued rising standard of living. The manufacturing enterprises are concentrated in the heavy and complex growth industries where efficient development is regarded as essential to the transformation of Turkey into a modern industrial society. 91. In addition to their role as the main vehicle of industrialization the SEEs have also been regarded as a major instrument of public policies responsible for generating income, providing employment and giving practical effect to the social policy of the Government. These obligations have taken the form of adherence to extra economic pricing policies, to assist the lower income and less favored population groups, and to investment policies which reflect national aspirations or the need for regional development. SEEs have been left relatively free to expand and diversify their activities, provided they could get the funds. In contrast, the Government has allowed SEEs very little autonomy in the discharge of surplus labor. There has been inadequate review of expansion plans and inadequate evaluation of particular projects. These obligations and conditions of operation have contributed to a situa- tion in which SEEs have incurred serious operating losses and have had re- course to the Budget to finance both their losses and new and uncontrolled expansion programs. 92. Reorganization Proposals. The reorganization of the SEEs has been on the agenda of various Governments throughout the 1960's and the basis for this has been exhaustively studied. Lack of finance, inadequate provision of working capital, weaknesses in organization, accounting, management, and professional and technical skills, a rapid turnover of key personnel at the top, defective investment and personnel administration have all been listed as major problems of thae SEEs by various Government organizations. In 1964 two laws 440 and 441 were voted with the objective of allowing the SEEs, within the framework of constructive Government surveillance, to concentrate on improved efficiency. The legislation was enacted to provide a basis for comprehensive improvement in the enterprises, and for the establishment of a State Investment Bank, and of a committee which has beeni charged with the - 31 - task of studying each enterprise and submitling recommendations for improve- ment. The recommendations incorporated in this legislation provided that the enterprises would be autononmous, would be run on commercial principles, that management would be full time and qualified and free to make all appoint- ments and policy decisions, including those relating to investment. The laws also provided that the prices of certain basic goods would be decided by the State, and that losses so incurred should be reimbursed to the enterprises from the budget. 93. The principles incorporated in Law 440 have been applied only to a limited extent. The financial and structural reorganization has hardly started. Commercial principles are often ignored and the dominance of extra-economic factors, particularly in pricing policy, continues through the system of special treatment of basic goods: power, coal, cement, iron and steel, fertilizers, merchandise transport for which Govern:ment retains the right to determine prices. Similarly the prices of sugar and cereals are controlled for social reasons. 94. Law 441 created the State Investment Bank to limit the financial autonomy previously enjoyed by SEEs. This, in conjunction wita the invest- ment guidelines laid down in the Five-Year Plans and the Annual Programs, was to provide a more rational approach to the investments of individual enterprises. The State Investment Bank finances about one-third of the SEE requirements for funds. It has gradually introduced some measure of uniform- ity in preparing and evaluating projects of SEEs. However, the SIB's influ- ence on the SEEs has been limited partly as a result of conflicting con- straints imposed by Government policies, particularly on the marketing side. It has also not been in the position to enforce rigid standards of debt re- payment and to reverse the SEEs' long history of not meeting their debts to the Government. 95. Other Government bodies also play a role in supervising the activi- ties of SEEs, the High Control Board, establisned to report annually to Par- liament on each SEE's operations and price policy, the responsLble ministry, which is required to report on each SEE's adherence to its organic laws, the SPO and the Ministry of Finance. Such fragmentation of control contri- butes to the risk of duplication and to the lack of any unifiedl, ultimate responsibility, and seems to have been an important factor in weakening surveillance of the investment proposals of SEEs. 96. Law 440 also provided for the creation of a Reorganization Commit- tee responsible directly to the Ministry of Finance. The tasks of the Com- mittee were (i) to assist in rewriting corporate charters; (ii) to determine proper fields of activity, proposing appropriate mergers, takeovers and liquidations; (iii) recommend improvised financial structures; (iv) formu- late principles of re-evaluation of assets and liabilities; and (v) determine appropriate accounting procedures and recommend ways and means of improving the technical and administrative aspects of the structure of individual en- terprises. The work of this committee was largely completed by 1968. 97. Twenty-nine draft bills have recently been submitted to Parliament for examination and enacting. These bills cover the activities of eacih of the major enterprises and establislh or modify its legal structure, fields of - i32 - activity, standards of profitability alnd efficiency, amount and source of canital distribution of profits and identify the controlling body of its regulations. One bill. has already been passed and the Government expects that the remainder will be passed before the end of the next Parliamentarv session. These bills will however require a period of two to three years for imnplementation anL to take full effect. G. Workers Abroad 98. When the First Plan was prepared in 1961, only a few thousand Turks had obtained jobs abroad and no sigaificant increase was forecast. By the end of the First Plan the number abroad exceeded 200,000, and by the end of 1969 was over 300,000. From 1961 to December 1969 more than 350,000 workers have been sent abroad (90 percent to Germany), of which only about 50,000 have returned. In addition to these "officially registered" workers, the number of workers who ei-iigrated as "tourists` or as family members and are also working, is substantial. In 1961, the remittances sent home by workers were too smal:L to appear in the balance of payments. In 1967, they were over $90 million, and by the end of 1969 amaounted to $140 million, second only to cotton as Turkey's greatest foreign exchange earner. Partly as a result of devaluation but also ref lecting increased economic activity in Western Europe, remittances in 1970 are expected to be about $230 million, With some 800,000 applications already on the official waiting list the supply of Turkish wor!kers seeking employment abroad seems to be assured for some time. Furthermore, the employment of Turkish workers abroad is now viewed as a practical solution to unemployment at home and the need for foreign exchange. Apart from the balance of payments aspects this develop- ment has an important impact on employment and the acquisition of skills, and gives rise to related social questions such as the conditions of Turk- ish workers abroad and their re-absorption into Turkey. 99. Official estimates of the average earnings of Turkish workers abroad are not available. However, fragmentary information suggests that an estimate of about $1,800-2,000 annually as average net current earnings of workers in Germany is reasonable. The proportion of average savings is very high, probably nearly 50 percent of net earnings, i.e. the annual saving can be about $900-1,000 per worker. The average remittances in 1968 were about $575 per annum, but declined in 1969 to $470 due to the large number of new emigrants who had only started making payments in the course of the latter year. In addition, workers made direct imports with waiver averaging $65 in 1969. It is estimated that another 25 percent of their savings has probably been saved in the employing country, and tnat accumu- lated savings in Germany exceed $250 million. 100. The prospect for a continued increase in the number of Turkish workers abroad is tied to economic growth in Europe. Over the short-term, the prospects appear excellent. Germany seems anxious to increase its present number of 270C,000 Turkish workers. According to the German Re- quirement Office in Istanbul many more trained workers could be employed. German entrepreneurs seen to be prepared to pay for pre-departure pro- fessional training up to about $50 per man per training month, as they do - 33 - in Italy and Yugoslavia. The Turkish authorities have recognizetl that im- proved short-term professional training on a big scale will be necessary to compete successfully witth other labor-surplus countries and that this is desirable to improve the unemployment and the balance of payments situation. Taking account of all these factors it seems reasonable to assume that the long-term net increase of Turkish workers abroad will be about 15 percent per annum. This would imply a figure approaching half a million workers abroad in 1972 and three-quarters of a million workers by 1977. Turkey's share of the European market for workers abroad would then have gone up from about 5 percent in 1965 to about 15 or 20 percent in 1977. 101. By 1977 wages in Europe will have risen and workers' savings could be biager than the present average annual figure of about $600. Some work- ers may be upgraded in skills but an increasing proportion of the workers mav become more permanently settled and, with decreasing links w.Lth Turkey, may tend to remit less. Standards of living of workers will also tend to increase. In the light of all these factors it is difficult to arrive at Xay firm conclusion as to the average level of future remittances. A very conservative estimate might put this figure at about $500 per worker. On this assumption worker remittances througlh official channels might be of the order of $375 million and workers' imports of goods under waiver might be expected to rise from $20 million in 1969 to some $40 million in 1977. These figures compare with the present figure of remittances for Italy of over $500 million, for Spain of over $350 million and for Greece of over $250 million. Hi. Tourism 102. Turkey has many of the assets required to develop a tourist in- dustry, but its sihare of Mediterranean tourism is still small, accounting for only 1 percent of all visitor arrivals. There seems little doubt about the growth potential of Turkish tourism. The number of tourists coming to the Mediterranean area, has grown from 5 million in 1950 to 45 million in 1966 and is expected to reach 100 million in 1977. Of the total of 45 million in 1966 less than 1 percent camie to Turkey. Iti this projection is correct andi if Turkey can increase its share by only a small percent each year the number of tourists visiting Turkey by 1972 couLd reach nearly one, million and by 1977 about two million. The basic issue is whether Turkey will be prepared to capitalize on the growth potential of tourism. 103. The Government of Turkey has adopted optimistic targets for the Second Five-Year Plan which projected an increase in revenues from tourism of $135 million by 1972. The Plan gives priority to touristic development in the Istaaoul-Marmara Sea region, the Aegean Coast north and scuth of Izmir, and the western MJediterranean Coast around Antalya. It provides for Invest- ment of TL 2.6 billion in tourism, of which TL 1.5 billion would be by pri- vate investors, with TL 1.2 billion for supporting expenditures and infra- structure investments. However, the Plan targets for 1972, 150,000 beds, 1.4 million foreign tourists, and foreign tourist receints of $135 million, appear unrealistic. The targets are not based on any market studies. and the existing touristic environment does not suggest such an optimistic deve lopment. - 34 - 104. In physical terms the major obstacle to the development of tourism in Turkey is the lack; of facilities bothl in quantity and quality to accommo- date foreign visitors. There are two basic problems: the first is the size of the challenge of providing accommodation and facilities on the scale re- quired and the seconci is whether the chloice of integrated tourism complexes as the principal means of providing touris-m1 facilities is either appropriate for the market or consistent with the capacity of Turkey to provide not only management and finance but also provision of hostelry and tourism services. 105. In general,, transportation and coimunication facilities serving tourism centers need to be expanded and improved. The limited nurulber of international airports accepting charter fllgLhts, the lack of secondarv roads, poor urban planning and laind conservation are all major deterrents to the rapid development of a tourism market. There is an urgent need for improvement if the tourists are to be attracted in large numbers and i
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Turkey - Development prospects (Vol. 1 of 8) : Main report
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