Turkey - Country assistance strategy public information notice (CPIN)

Report No. PIN50 CAS PUBLIC INFORMATION NOTICE World Bank Discusses Turkey Country Assistance Strategy Turkey has launched an ambitious and comprehensive economic program with which it hopes to kill inflation and restore stable growth, as it rebuilds from the earthquakes. It is introducing major reforms in agriculture, banking, and social security. It continues with a landmark basic education reform , which aims to provide compulsory education for eight years to all boys and girls. It is building consensus on broader reforms in public health administration, municipal finance and local administration to modernize its public institutions. At the same time through an ambitious privatization program Turkey wants to remove the last vestiges of state ownership in the industrial sector and encourage private entry into utilities. Learning from its past mistakes it is trying to build more effective institutions to mitigate the effects of future natural disasters. Conscious that Turkey's past growth and development strategy have shown some striking physical and economic vulnerabilities that must be addressed, the Bank Group proposes a Country Assistance Strategy with selected interventions that will help remove these vulnerabilities Stepping Up Bank Group Support The previous Country Assistance Strategy anticipated the possibility of such reforms and the Bank's technical assistance over the last few years has helped Turkey prepare its economic program - especially on structural and social aspects. The Bank has also triggered the High Case scenario, after almost one year of implementation of strong up front reforms, with an adjustment loan of $ 760 million. The current CAS continues with a High Case program with up to $ 2.4 billion of additional adjustment lending to help complete the reforms and a total lending envelope of $ 5 billion. The support is triggered by a series of carefully specified actions which are spelt out in the CAS document. If the reforms are not implemented, the Bank would continue to support Turkey's longer term development needs - focussed on rural development and education and other social interventions - with a total lending envelope of $ 1 billion. It also includes $ 500 million in possible emergency lending which could be triggered if the lending envelope has been exhausted. This program, along with the IMF's Stand-by of US $ 4 billion will assist Turkey's economic reforms and help catalyze very substantial private inflows - over $ 80 billion gross - which are needed during 2000-2003. The primary objective of the proposed Country Assistance Strategy is to help Turkey meet its goals of improving living standards and reducing economic vulnerability and poverty. It is impossible to make real progress in reducing economic vulnerability in Turkey without high growth and low inflation. Therefore, the Bank intends to support very strongly the Government's economic reform program which aims to decisively tame inflation and restore the economy to high and sustainable growth in output and employment. Within the overall reform program, Turkey's plans to improve agricultural productivity and better target agriculture subsidies to small farmers through the switch to direct income support command special attention because farmers make up a large share of the economically vulnerable population. These agriculture reforms will be complemented by steps to improve land and forestry management. The Bank will provide strong support to the agriculture reform program. While creating and sustaining growth will be a challenge for Turkey, growth alone will not suffice. Strengthening education, health and social assistance is another critical aspect of the strategy. The Bank will continue to support Turkey's successful basic education reforms which are leading to very substantial improvements in school enrollment - especially among girls. Similar bold reforms are needed in health, but sufficient consensus for this effort does not yet exist. Bank strategy in the health sector aims to help Turkey build the necessary consensus for reform through economic and sector work, and to ensure that sufficient funding is available for basic health services. The Government  has also requested Bank help to better target Turkey's social assistance programs and to improve municipal services for the rapidly growing urban population. Reform of municipal services and financing mechanisms form a core part of the proposed Bank strategy. The Government is giving increased priority to governance issues ranging from high profile remarks by top leaders about improved administration, effectiveness, and transparency to plans for public expenditure and institutional reform. The Bank is already working with Government to improve enforcement of housing codes following the August 1999 earthquake. There is growing realization in the country that Turkey must modernize its public institutions in order to deliver better services to people, and help Turkey's private sector in a fast-paced global environment and accelerate its prospects for EU entry. Turkey's ability to share in global prosperity will depend to a great extent on modernizing its public institutions to improve the delivery of public services, better regulate the economy and improve overall efficiency. Turkey must also deepen connectivity and expand technological capabilities, particularly information technology. Otherwise Turkey will lag behind in its quest to modernize the economy for the 21st century and the economic reforms will only be partially successful. The proposed strategy will encompass work in these areas vital to strengthening the country's ability to benefit from globalization and the new information economy, and improve public administration and accountability. Supporting the goal of equitable growth, and helping the private sector to take advantage of the opportunities offered by reform, the Bank Group's private sector arm the IFC is expected to play an important and increasing role in Turkey. IFC's focus in Turkey is on areas where private financing is not available on reasonable terms, where the Corporation's unique resources are needed, where its catalytic role can be clearly demonstrated and its development impact maximized. MIGA is also very active in Turkey, both in terms of guarantees and capacity building for foreign investment promotion and expects to remain active during the forthcoming CAS period. While MIGA's portfolio has been very active in the financial sector, other sectors are expected to grow in its portfolio - particularly in infrastructure investments. Managing the Risks The Government of Turkey is taking actions to manage the diverse set of risks which are inherent in any ambitious reform program. First the coalition has demonstrated its resilience by meeting tough challenges over the past 18 months, including the election of a new president last May. Second, the Government is ensuring adequate funding of existing safety net measures, including severance payments and other programs for workers affected by privatization, and is moving to introduce additional social programs including unemployment insurance and direct income support for farmers , in order to avoid social discord. The proposed Social Support Project would support these efforts, as will the proposed Agricultural Reform Implementation Project. The continued success of the program is in itself an insurance against political instability. The Government's reform program takes into account the key economic risks confronting Turkey. The program itself is a direct response to the risks posed by the very large macroeconomic imbalances that accumulated over a decade of inaction and partial reforms. The Government's response has been bold and should the program fail, the downside scenario would be worse than the pre-reform starting point, in part because the loss of credibility would have enduring effects. Working With Our Partners -2-  The Bank Group is working closely with a range of international and domestic partners, notably the IMF, in assisting Turkey shape its economic program and with many UN and bilateral agencies in supporting the country's long term development needs. Closer dialogue is developing with the European Union on structural and social issues as Turkey and the EU gradually establish the mechanisms for EU accession discussions. The EU candidacy agenda is comprehensive and the Bank Group strategy aims to assist in this process as it gains momentum. Close cooperation with many bilateral and international agencies, including the UN system, is vital to effective assistance to Turkey. Closer collaboration is also envisaged with several effective NGO's in the design and delivery of Bank Group assistance. The Bank Group's ability to assist Turkey has vital domestic consequences as the country tries to implement changes to improve the living standards of its population. But given Turkey's size, regional importance and inherent dynamism, its reform efforts will have a major impact well beyond its borders. Turkey is re-emerging as a major strategic hub in the region and its economic success will benefit its major trading partners and the broader regional economy of which Turkey is an important part -3-