Turkey country-report


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Turkey country-report

  1. 1. COUNTRY PROFILE - TURKEY Darpan Kulshreshtha – Roll no 21- IIFT EPGDIB09-11
  2. 2. COUNTRY REPORT OF TURKEY Introduction Turkey, as a European, Balkan, Black Sea, Mediterranean and Middle East country and as a country occupying a unique position in its region, has been taking the necessary steps to adapt itself to the new world order by achieving radical improvements with regard to its economic and social structure and by taking part in internationally agreed documents. Population growth rate of Turkey, which was above 2 percent until the year 1990, displays a decreasing trend in recent years. According to the 2000 Population Census, the population of Turkey is estimated to be 70.3 million at the end of the year 2002 with an annual growth rate of 1.48 percent. Birth rate and infant mortality rates are decreasing at a considerable level. Interprovincial migration appears to be the most outstanding population problem of Turkey. The interrelation between “population” and “development” has gained a new dimension reflecting the effects of globalisation, democratisation, participation and higher emphasis on the quality of life, human rights and poverty. These two basic concepts have been taken as main pillars of the development strategy in planning process in Turkey.
  3. 3. Demographics of Turkey Population: 77,804,122 (July 2010 est.) country comparison to the world: 17 Age structure: 0-14 years: 26.9% (male 10,708,999/female 10,229,102) 15-64 years: 66.9% (male 26,323,403/female 25,747,740) 65 years and over: 6.2% (male 2,190,593/female 2,604,285) (2010 est.) Median age: total: 28.1 years male: 27.7 years female: 28.4 years (2010 est.) Population growth rate: 1.272% (2010 est.) country comparison to the world: 99 Birth rate: 18.28 births/1,000 population (2010 est.) country comparison to the world: 106 Death rate: 6.1 deaths/1,000 population (July 2010 est.) country comparison to the world: 163 Net migration rate: 0.53 migrant(s)/1,000 population (2010 est.) country comparison to the world: 60 Urbanization: urban population: 69% of total population (2008) rate of urbanization: 1.9% annual rate of change (2005-10 est.) Sex ratio: at birth: 1.05 male(s)/female under 15 years: 1.05 male(s)/female 15-64 years: 1.02 male(s)/female 65 years and over: 0.84 male(s)/female total population: 1.02 male(s)/female (2010 est.) Infant mortality rate: total: 24.84 deaths/1,000 live births country comparison to the world: 86 male: 25.89 deaths/1,000 live births
  4. 4. female: 23.73 deaths/1,000 live births (2010 est.) Life expectancy at birth: total population: 72.23 years country comparison to the world: 126 male: 70.37 years female: 74.19 years (2010 est.) Total fertility rate: 2.18 children born/woman (2010 est.) country comparison to the world: 116 HIV/AIDS - adult prevalence rate: less than 0.1%; note - no country specific models provided (2001 est.) country comparison to the world: 160 HIV/AIDS - people living with HIV/AIDS: NA (2007 est.) HIV/AIDS - deaths: NA Nationality: noun: Turk(s) adjective: Turkish Ethnic groups: Turkish 70-75%, Kurdish 18%, other minorities 7-12% (2008 est.) Religions: Muslim 99.8% (mostly Sunni), other 0.2% (mostly Christians and Jews) Languages: Turkish (official), Kurdish, other minority languages Literacy: definition: age 15 and over can read and write total population: 87.4% male: 95.3% female: 79.6% (2004 est.) School life expectancy (primary to tertiary education): total: 11 years male: 12 years female: 11 years (2006) Education expenditures: 4% of GDP (2004)
  5. 5. country comparison to the world: 104
  6. 6. Religion There are no statistics of people's religious beliefs nor is it asked in the census. According to the government, 99.8% of the Turkish population is Muslim, mostly Sunni, some 10 to 20 million are Alevis. The remaining 0.2% is other - mostly Christians and Jews. The Eurobarometer Poll 2005 reported that in a poll 96% of Turkish citizens answered that "they believe there is a God", while 1% responded that "they do not believe there is any sort of spirit, God, or life force". In a Pew Research Center survey, 53% of Turkey's Muslims said that "religion is very important in their lives". Based on the Gallup Poll 2006-08, Turkey was defined as More religious, in which over 63 percent of people believe religion is important. According to the Turkish Economic and Social Studies Foundation, 49% of women wear the headscarf or hijab in Turkey. 33% of male Muslim citizens regularly attend Friday prayers. Religious groups according to estimates: Muslim - 99.83% (65-80% Sunni, 20-35% Alevi) Christian - 0.13% (70% Armenian Orthodox, 16% Syrian Orthodox, 4% Greek Orthodox, 4% Jehovah's Witness, 3%Protestant, 3% Chaldean) Jewish - 0.03% (96% Sephardi, 4% Ashkenazi) Bahá'í Faith - 0.01% The vast majority of the present-day Turkish people are Muslim and the most popular sect is the Hanafite school of Sunni Islam, which was officially espoused by the Ottoman Empire; according to the KONDA Research and Consultancy survey carried out throughout Turkey on 2007. 52.8% defined themselves as "a religious person who strives to fulfill religious obligations" (Religious) 34.3 % defined themselves as "“a believer who does not fulfill religious obligations" (Not religious). 9.7% defined themselves as "a fully devout person fulfilling all religious obligations" (Fully devout). 2.3% defined themselves as "someone who does not believe in religious obligations" (Non- believer). 0.9% defined themselves as "someone with no religious conviction" (Atheist).
  7. 7. Economy and Trade - overview: Turkey's dynamic economy is a complex mix of modern industry and commerce along with a traditional agriculture sector that still accounts for about 30% of employment. It has a strong and rapidly growing private sector, yet the state remains a major participant in basic industry, banking, transport, and communication. The largest industrial sector is textiles and clothing, which accounts for one-third of industrial employment; it faces stiff competition in international markets with the end of the global quota system. However, other sectors, notably the automotive and electronics industries, are rising in importance within Turkey's export mix. Real GDP growth has exceeded 6% in many years, but this strong expansion has been interrupted by sharp declines in output in 1994, 1999, and 2001. Due to global contractions, GDP fell to a 0.9% annual rate in 2008, and contracted by 5.8% in 2009. Inflation fell to 5.9% in 2009 - a 34-year low. Despite the strong economic gains from 2002- 07, which were largely due to renewed investor interest in emerging markets, IMF backing, and tighter fiscal policy, the economy is burdened by a high current account deficit and high external debt. Further economic and judicial reforms and prospective EU membership are expected to boost foreign direct investment. The stock value of FDI stood at more than $180 billion at year-end 2009. Privatization sales are currently approaching $21 billion. Oil began to flow through the Baku-Tblisi-Ceyhan pipeline in May 2006, marking a major milestone that will bring up to 1 million barrels per day from the Caspian to market. In 2007 and 2008, Turkish financial markets weathered significant domestic political turmoil, including turbulence sparked by controversy over the selection of former Foreign Minister Abdullah GUL as Turkey's 11th president and the possible closure of the Justice and Development Party (AKP). Turkey's financial markets and banking system also weathered the 2009 global financial crisis and did not suffer signifcant declines due to banking reforms implemented during the country's own financial crisis in 2001. Economic fundamentals are sound, but the Turkish economy may be faced with more negative economic indicators in 2010 as the global economic slowdown continues to curb demand for Turkish exports. In addition, Turkey's high current account deficit leaves the economy vulnerable to destabilizing shifts in investor confidence. GDP (purchasing power parity): $861.6 billion (2009 est.) $914.7 billion (2008 est.) $906.5 billion (2007 est.) note: data are in 2009 US dollars GDP (official exchange rate): $593.5 billion (2009 est.) GDP - real growth rate: -5.8% (2009 est.) 0.9% (2008 est.)
  8. 8. 4.7% (2007 est.) GDP - per capita (PPP): $11,200 (2009 est.) $12,100 (2008 est.) $12,100 (2007 est.) note: data are in 2009 US dollars GDP - composition by sector: agriculture: 9.4% industry: 25.9% services: 64.7% (2009 est.) Labor force: 24.2 million note: about 1.2 million Turks work abroad (2009 est.) Labor force - by occupation: agriculture: 29.5% industry: 24.7% services: 45.8% (2005) Unemployment rate: 14.6% (2009 est.) 10.975% (2008 est.) note: underemployment amounted to 4% in 2008 Population below poverty line: 20% (2002) Household income or consumption by percentage share: lowest 10%: 1.9% highest 10%: 33.2% (2005) Distribution of family income - Gini index: 43.6 (2003) Investment (gross fixed): 16.9% of GDP (2009 est.) Budget: revenues: $127 billion expenditures: $166.2 billion (2009 est.) Public debt: 48.5% of GDP (2009 est.) 40% of GDP (2008 est.) Inflation rate (consumer prices): 5.9% (2009 est.) 10.4% (2008 est.) Central bank discount rate: 25% (31 December 2008) 25% (31 December 2007) Commercial bank prime lending rate: NA% (31 December 2008)
  9. 9. Stock of money: $53.25 billion (31 December 2008) $63.88 billion (31 December 2007) Stock of quasi money: $248.4 billion (31 December 2008) $252.1 billion (31 December 2007) Stock of domestic credit: $326.4 billion (31 December 2008) $355 billion (31 December 2007) Market value of publicly traded shares: $117.9 billion (31 December 2008) $286.6 billion (31 December 2007) $162.4 billion (31 December 2006) Agriculture - products: tobacco, cotton, grain, olives, sugar beets, hazelnuts, pulse, citrus; livestock Industries: textiles, food processing, autos, electronics, mining (coal, chromite, copper, boron), steel, petroleum, construction, lumber, paper Industrial production growth rate: -9.8% (2009 est.) Electricity - production: 181.9 billion kWh (2007 est.) Electricity - consumption: 153.7 billion kWh (2007 est.) Electricity - exports: 1.063 billion kWh (2008 est.) Electricity - imports: 790 million kWh (2008 est.) Oil - production: 46,120 bbl/day (2008 est.) Oil - consumption: 675,500 bbl/day (2008 est.) Oil - exports: 141,700 bbl/day (2008 est.) Oil - imports: 783,800 bbl/day (2008 est.) Oil - proved reserves: 300 million bbl (1 January 2009 est.) Natural gas - production: 1.013 billion cu m (2008 est.) Natural gas - consumption: 37.18 billion cu m (2008 est.) Natural gas - exports: 435 million cu m (2008 est.) Natural gas - imports: 36.72 billion cu m (2008 est.) Natural gas - proved reserves: 8.495 billion cu m (1 January 2009 est.)
  10. 10. Current account balance: $-12.54 billion (2009 est.) $-41.69 billion (2008 est.) Exports: $111.1 billion (2009 est.) $140.7 billion (2008 est.) Exports - commodities: apparel, foodstuffs, textiles, metal manufactures, transport equipment Exports - partners: Germany 9.8%, UK 6.2%, UAE 6%, Italy 5.9%, France 5%, Russia 4.9% (2008) Imports: $134.2 billion (2009 est.) $193.9 billion (2008 est.) Imports - commodities: machinery, chemicals, semi-finished goods, fuels, transport equipment Imports - partners: Russia 15.5%, Germany 9.3%, China 7.8%, US 5.9%, Italy 5.5%, France 4.5%, Iran 4.1% (2008) Reserves of foreign exchange and gold: $72.7 billion (31 December 2009 est.) $73.66 billion (31 December 2008 est.) Debt - external: $253.2 billion (31 December 2009 est.) $278.1 billion (31 December 2008 est.) Stock of direct foreign investment - at home: $181.8 billion (31 December 2009 est.) $128.7 billion (31 December 2008 est.) Stock of direct foreign investment - abroad: $16.05 billion (31 December 2009 est.)
  11. 11. $14.8 billion (31 December 2008 est.) Exchange rates: Turkish liras (TRY) per US dollar - 1.5548 (2009), 1.3179 (2008), 1.319 (2007), 1.4286 (2006), 1.3436 (2005) note: on 1 January 2005, the old Turkish lira (TRL) was converted to new Turkish lira (TRY) at a rate of 1,000,000 old to 1 new Turkish lira; on 1 January 2009, the Turkish government dropped the word "new" and the currency is now called simply the Turkish lira
  12. 12. Communications ::Turkey Telephones - main lines in use: 17.502 million (2008) country comparison to the world: 18 Telephones - mobile cellular: 65.824 million (2008) country comparison to the world: 15 Telephone system: general assessment: comprehensive telecommunications network undergoing rapid modernization and expansion especially in mobile-cellular services domestic: additional digital exchanges are permitting a rapid increase in subscribers; the construction of a network of technologically advanced intercity trunk lines, using both fiber-optic cable and digital microwave radio relay, is facilitating communication between urban centers; remote areas are reached by a domestic satellite system; the number of subscribers to mobile-cellular telephone service is growing rapidly international: country code - 90; international service is provided by the SEA-ME-WE-3 submarine cable and by submarine fiber-optic cables in the Mediterranean and Black Seas that link Turkey with Italy, Greece, Israel, Bulgaria, Romania, and Russia; satellite earth stations - 12 Intelsat; mobile satellite terminals - 328 in the Inmarsat and Eutelsat systems (2002) Radio broadcast stations: 1,090 (station frequency types NA) (2009) Television broadcast stations: 251 (2009) Internet hosts: 2.961 million (2009) country comparison to the world: 27 Internet users: 24.483 million (2008) country comparison to the world: 15
  13. 13. Transportation ::Turkey Airports: 102 (2009) country comparison to the world: 59 Airports - with paved runways: total: 90 over 3,047 m: 16 2,438 to 3,047 m: 33 1,524 to 2,437 m: 20 914 to 1,523 m: 17 under 914 m: 4 (2009) Airports - with unpaved runways: total: 12 1,524 to 2,437 m: 1 914 to 1,523 m: 7 under 914 m: 4 (2009) Heliports: 21 (2009) Pipelines: gas 10,630 km; oil 3,636 km (2009) Railways: total: 8,697 km country comparison to the world: 23 standard gauge: 8,697 km 1.435-m gauge (1,920 km electrified) (2008) Roadways: total: 426,951 km (includes 1,987 km of expressways) (2006) country comparison to the world: 14 Waterways:
  14. 14. 1,200 km (2008) country comparison to the world: 60 Merchant marine: total: 612 country comparison to the world: 19 by type: bulk carrier 101, cargo 281, chemical tanker 70, combination ore/oil 1, container 35, liquefied gas 7, passenger 4, passenger/cargo 51, petroleum tanker 31, refrigerated cargo 1, roll on/roll off 28, specialized tanker 2 foreign-owned: 8 (Cyprus 2, Germany 1, Greece 1, Italy 3, UAE 1) registered in other countries: 595 (Albania 1, Antigua and Barbuda 6, Bahamas 8, Belize 15, Cambodia 26, Comoros 8, Dominica 5, Georgia 14, Greece 1, Isle of Man 2, Italy 1, Kiribati 1, Liberia 7, Malta 176, Marshall Islands 50, Moldova 3, Netherlands 1, Netherlands Antilles 10, Panama 94, Russia 80, Saint Kitts and Nevis 35, Saint Vincent and the Grenadines 20, Sierra Leone 15, Slovakia 10, Tuvalu 2, UK 2, unknown 2) (2008) Ports and terminals: Aliaga, Diliskelesi, Izmir, Kocaeli (Izmit), Mercin Limani, Nemrut Limani
  15. 15. Military ::Turkey Military branches: Turkish Armed Forces (TSK): Turkish Land Forces (Turk Kara Kuvvetleri), Turkish Naval Forces (Turk Deniz Kuvvetleri; includes naval air and naval infantry), Turkish Air Force (Turk Hava Kuvvetleri) (2010) Military service age and obligation: 20 years of age (2004) Manpower available for military service: males age 16-49: 20,832,658 females age 16-49: 20,337,037 (2010 est.) Manpower fit for military service: males age 16-49: 17,447,579 females age 16-49: 17,173,063 (2010 est.) Manpower reaching militarily significant age annually: male: 695,326 female: 666,026 (2010 est.) Military expenditures: 5.3% of GDP (2005 est.) country comparison to the world: 16 Military - note: a "National Security Policy Document" adopted in October 2005 increases the Turkish Armed Forces (TSK) role in internal security, augmenting the General Directorate of Security and Gendarmerie General Command (Jandarma); the TSK leadership continues to play a key role in politics and considers itself guardian of Turkey's secular state; in April 2007, it warned the ruling party about any pro-Islamic appointments; despite on-going negotiations on EU accession since October 2005, progress has been limited in establishing required civilian supremacy over the military; primary domestic threats are listed as fundamentalism (with the definition in some dispute with the civilian government), separatism (the Kurdish problem), and the extreme left wing; Ankara strongly opposed establishment of an autonomous Kurdish region; an overhaul of the Turkish Land Forces Command (TLFC) taking place under the "Force 2014" program is to produce 20-30% smaller, more highly trained forces characterized by greater mobility and firepower and capable of joint and combined
  16. 16. operations; the TLFC has taken on increasing international peacekeeping responsibilities, and took charge of a NATO International Security Assistance Force (ISAF) command in Afghanistan in April 2007; the Turkish Navy is a regional naval power that wants to develop the capability to project power beyond Turkey's coastal waters; the Navy is heavily involved in NATO, multinational, and UN operations; its roles include control of territorial waters and security for sea lines of communications; the Turkish Air Force adopted an "Aerospace and Missile Defense Concept" in 2002 and has initiated project work on an integrated missile defense system; Air Force priorities include attaining a modern deployable, survivable, and sustainable force structure, and establishing a sustainable command and control system (2008)
  17. 17. Market Trends and Shifts Economy Rankings - Ease of Doing Business Turkey is ranked 73 out of 183 economies. Singapore is the top ranked economy in the Ease of Doing Business. Turkey - Compared to global good practice economy as well as selected economies: Turkey's ranking in Doing Business 2010 Rank Doing Business 2010 Ease of Doing Business 73 Starting a Business 56 Dealing with Construction Permits 133 Employing Workers 145 Registering Property 36 Getting Credit 71 Protecting Investors 57 Paying Taxes 75 Trading Across Borders 67 Enforcing Contracts 27 2 Closing a Business 121
  18. 18. Starting a Business Procedures (number) 6 Time (days) 6 Cost (% of income per capita) 14.2 Min. capital (% of income per capita) 9.5 Dealing with Construction Permits Procedures (number) 25 Time (days) 188 Cost (% of income per capita) 218.8 Employing Workers Difficulty of hiring index (0-100) 44 Rigidity of hours index (0-100) 40 Difficulty of redundancy index (0-10) 20 Rigidity of employment index (0-100) 35 Redundancy costs (weeks of salary) 95 Registering Property Procedures (number) 6 Time (days) 6 Cost (% of property value) 3.0 Getting Credit Strength of legal rights index (0-10) 4 Depth of credit information index (0-6) 5 Public registry coverage (% of adults) 15.9 Private bureau coverage (% of adults) 42.9 Protecting Investors Extent of disclosure index (0-10) 9 Extent of director liability index (0-10) 4 Ease of shareholder suits index (0-10) 4 Strength of investor protection index (0-10) 5.7 Paying Taxes Payments (number per year) 15 Time (hours per year) 223 Profit tax (%) 17.0 Labor tax and contributions (%) 23.1 Other taxes (%) 4.4 Total tax rate (% profit) 44.5 4 Trading Across Borders Documents to export (number) 7 Time to export (days) 14 Cost to export (US$ per container) 990 Documents to import (number) 8 Time to import (days) 15 Cost to import (US$ per container) 1063 Enforcing Contracts Procedures (number) 35 Time (days) 420 Cost (% of claim) 18.8 Closing a Business Recovery rate (cents on the dollar) 20.2 Time (years) 3.3 Cost (% of estate) 15
  19. 19. Export / Import Market Exports $102.2 billion (2009 est.) Export goods apparel, foodstuffs, textiles, metal manufactures, transport equipment Main export partners Germany 9.6%, France 6.1%, U.K. 5.8%, Italy 5.8%, Iraq 5% (2009 est.) Imports $140.8 billion (2009 est.) Import goods machinery, chemicals, semi-finished goods, fuels, transport equipment Main import partners Russia 14%, Germany 10%, China 9%, U.S. 6.1%, Italy 5.4%, France 5% (2009 est.) FDI stock $205 billion (31 December 2009 est.)
  20. 20. Optical, photo, technical, medica l, etc apparatus Pharmaceutical products Iron and steel Plastics and articles thereof Turkey's imports from Germany Value in 2008, USD thousand Electrical, electronic equipment Vehicles other than railway, tramway Nuclear reactors, boilers, machinery, etc 0 10000000 20000000 Turkey - Germany and World import
  21. 21. According to the CIA World Factbook, Turkey imported $193.9 billion worth of foreign goods last year. Major commodities imported into Turkey include chemicals, fuels, machinery and semi-finished goods. Leading suppliers to Turkey were Russia (15.5%), Germany (9.3%), China (7.8%), the United States (5.9%), Italy (5.5%), France (4.5%) and Iran (4.1%). Share in world market 12% United States of America China 11% Germany 9% France 58% 5% Australia Others 5% Top 5 chemicals exporting countries 1
  22. 22. Share in world market 14% China 48% 13% Germany United States of America 11% 8% Japan 6% Italy Others Top 5 Machinery exporting countries Top 5 fuel exporting countries 1
  23. 23. Export products As the world’s 31st biggest exporter, Turkey shipped $140.8 billion worth of exports in 2008. Principal Turkish exports were apparel, foodstuffs, metal manufactures, textiles and transport equipment. Based on 2008 statistics, Turkey’s largest export clients were Germany (9.8%), the United Kingdom (6.2%), the United Arab Emirates (6%), Italy (5.9%), France (5%) and Russia (4.9%).
  24. 24. World share United States of America 16% Germany 8% France Others 6% 60% United Kingdom 5% Canada 5% Top 5 transport importers
  25. 25. Apparel Businesses in Turkey Textile and Apparel industry has a great contribution to the Turkish economy. The industry has been denominated as the locomotive of the Turkish Economy for years. Turkey's textile and apparel exports continued rising recently after began falling in January, with elimination of EU and US quotas. The textile and apparel sector has been the backbone of the Turkish economy with a vital role to play in the industrialisation process and market orientation of the economy in the last two decades. In the 1980s, it was the leading sector related to the global economy and the export revenues of this hard currency earning sector contributed substantially to the overall economy. The textile sector continued to be one of the major contributors to the Turkish economy, being one of the fastest growing sectors in the 1990s with an average 12.2% annual growth, while the Turkish economy had an average growth of 5.2% per year. Total investment in the sector exceeded US$ 150 billion, of which more than US$ 50 billion was invested in the last 5-10 years. Textile industry started out in the 1960s in small workshops, have rapidly developed and transformed Turkey into a global competitor. The total number of firms in the sector, dominated (95%) by the private sector, number around 44,000 and 25% of them are active exporters. The apparel industry is constituted mainly (80%) of small and medium sized firms whereas the technology-intensive textile production has been undertaken by large-scale companies. Today, around 20% of Turkey's 500 largest companies are involved in the textiles and apparel sector.Low labor costs, a qualified workforce, relatively cheap raw materials have played an important role in the significant growth of the sector; as well as a liberalized economic environment and export-led policies in the last two decades.The production value of the sector is over US$ 20 billion. Employment in the sector is estimated to be about 4 million people (2.5 million employed directly and a further 1.5 million indirectly through the sub-sectors). Official statistics also reveals that around 500,000 employees in the sector due to unregistered labor force.The apparel sector exports approximately 60% of its production. Capacity utilization rates are approximately 75% especially among exporting manufacturers. Turkey ranks also among the top ten global producers of wool cloth, carpets, synthetic filament and fiber, polyester and polyamide filament. While Europe's 3rd largest polyester producer is a Turkish- US joint venture, Turkey's synthetics production mounts to 15% of Western Europe's capacity.Besides the Turkish textile industry Turkish home textile industry has also shown a growth in terms of production and exports. In recent years the production of home textiles has shown a stable increase due to the rise in domestic and external demand for home textiles. Turkish home textile industry has recorded growth in terms of production and exports in recent years. Almost all kinds of home textiles are produced in Turkey. These may be listed as follows in order of their export values: bed linens, bedspreads, table linens, towels, bathrobes, voiles, curtains, lace, interior blinds, curtain or bed valances, blankets, cushions, pillows, quilts, eiderdowns. In home textile sector, besides large scale firms there are many small and medium sized firms scattered all around the country. As a division of the textile industry, the home textiles sector accounts for 3.2% share in Turkey's total exports and have been an important sub-sector for the Turkish economy. European countries are the most important markets for Turkey s home textile exports. At present Germany, the UK, France, the USA, Netherlands and Russian Federation are the major markets for Turkey s home textile exports. New markets such as Poland, Hungary, Romania and CIS countries are gaining more and more importance.
  26. 26. Specialization Cause Although annual average growth in the textiles and apparel subsector during 2000-05 (1%) was significantly lower than the 5.4% registered by the manufacturing sector over the same period, the subsector still constitutes Turkey's largest industry. It accounts for 4.2% of GDP, 13.3% of manufacturing output, and employs about 22% of workers in manufacturing. A key factor behind the industry's successful performance is Turkey's ample supply of home-grown cotton: Turkey is the world's sixth largest producer of raw cotton. Other factors are the top quality of the raw cotton crops, low wage costs, skilled labour force, and the strong integration between the textiles and apparel industries. The subsector is dominated by the private sector, particularly SMEs. The MFN tariffs on textiles, wearing apparel, and leather products average 7.8%, with rates ranging up to 17%. The textiles, clothing, and leather industries do not receive any specific incentives. However, these industries are the second most important beneficiaries of the incentives provided under IEP, such as exemption from customs duties and fund levies on imported machinery and equipment; VAT exemption on imported and locally purchased machinery and equipment; and interest rate support in favour of investment projects . In 2006, investment in the textiles and clothing industries accounted for 11.6% of the investment incentive certificates, down from 26.1% in 2002. Credit and guarantee programmes by Turk Eximbank are also among the more important incentives provided to textile and apparel investors. The performance of the textiles and clothing industries has suffered from volatile domestic prices of raw cotton in the past few years. To counter this problem, the private sector is working with the Government to establish a futures market in an attempt to stabilize these prices. Another problem for these industries, and many others in Turkey, is the frequent power cuts, as well as high prices for electricity by international comparison . Under the WTO Agreement on Textiles and Clothing (ATC), Turkey notified that, as from 1 January 2005, it would have integrated all products not previously integrated into GATT 1994. Turkey had retained its right to use the transitional safeguard mechanism under the provisions of the ATC but did not make use of it. Turkey has been involved in the WTO dispute settlement mechanism regarding its restrictions on imports of textile and clothing products from Hong, Kong, China; India; and Thailand . Turkey introduced import quotas on certain textiles and clothing products under the CUD. It applies quotas under the double checking system on 34 categories of product from Belarus with which an agreement has been reached; and under the single checking system on goods from countries with which an agreement has not been reached, i.e. the Democratic People's Republic of Korea (48 categories of products), Montenegro (12 categories), and Uzbekistan (2 categories). Moreover, Turkey has quotas on 44 categories of textiles and apparel products from China , for example, shirts, jerseys, T-shirts, and gloves. 1 Turkey does not auction its quotas; auctions would have transferred part of the economic "rent" gained by the quota holders to the Government as public revenues. Instead, the largest parts of the quotas are distributed among firms that exported the same category in the previous year; the remainder is allocated to new exporters of the category of goods.
  27. 27. Turkey’s Iron and Steel Industry The Turkish iron and steel sector, in existence since the late 1930’s, is growing rapidly, swiftly making Turkey one of the largest producers of crude steel in the world. In 2006, Turkey reached an annual production of 23.3 million tons of crude steel, which increased to 25.6 million tons in 2007 – enough to place it as the 11th largest producer worldwide and third in Europe. The new level of crude steel is 78 percent higher than it was in 2001, representing a huge boon for the industry. Turkey has also proven to be a good consumer of iron and steel, with consumption up to 18.5 million tons – a 110 percent increase since 2001. Turkey has become one of the largest traders of steel and steel articles. Iron and steel exports accounted for $15.2 billion USD in 2007 including crude and all kinds of finished goods. The sector now boasts 1,000 foundries and 20,000 employees nationwide, making it a vital component of the Turkish economy. Quick Facts: 1. In 2007, the Turkish steel industry was the world’s 11th and Europe’s third largest producer of crude steel, with an annual production of 25.6 million tons. 2. In 2007, Turkey’s exports of iron and steel products reached $8.5 billion USD. With related finished goods, it increased to $15.2 billion USD. With the privatization of KARDEM R and ERDEM R, the industry is entirely operated by the private sector. 3. Turkey has a share of 1.5 percent in the world’s total foundry production. Thus, Turkey ranks 15th in the world and sixth in the EU. 4. Turkey’s exports of iron and steel together with articles thereof exceeded $9.5 billion USD in 2006. Specialization Cause : The iron and steel industry has been the backbone of industrialization in Turkey, which is the world's 11th largest crude steel producer (about 2% of world production in 2006).2 The industry produced 23.3 million tonnes of crude steel in 2006 (up from 16.5 million tonnes in 2002); its estimated capacity is about 27.7 million tonnes (22 million tonnes in 2002). Crude steel production is divided into long steel (84.5% of total production in 2006), flat steel (13.5%), and special steel products (2%). The industry is now operated entirely by the private sector.3 Tariff rates on iron and steel products average 4.6%, with maximum rates of 23.4%. Exports of iron and steel accounted for 8.5% of Turkey's total merchandise exports in 2006; the EC and Middle East are the main markets. Turkey's finished steel consumption rose from 8.7 million tonnes in 2001 to 20.8 million tonnes in 2006, mainly due to a construction boom during the period. Turkey imports flat steel products (about US$4 billion in 2006), and special steel (US$1.3 billion), and is one of the biggest scrap iron importers (US$3.8 billion in 2006). Turkey is trying to balance the long/flat ratio by restructuring existing plants to produce more flat steel products. It is estimated that about US$4 billion of investment is necessary for the restructuring of the iron and steel industry.
  28. 28. With the expiry of the European Coal and Steel Communities (ECSC) agreement4, the five- year period to grant subsidies for the restructuring or conversion of the Turkish steel subsector ended in July 2001. 5 However, Turkey asked the EC for a five year extension to allow its steel companies to benefit from state aid for restructuring purposes (investments related to the conversion and modernization of existing facilities, which will not result in capacity increase). On 31 August 2006, Turkey sent its National Restructuring Programme for the steel industry to the EC; the Programme is being analysed by the EC Commission. Nonetheless, some Turkish companies are already modernizing their facilities according to the framework defined in the Programme.6 The iron and steel industries do not enjoy any specific incentives. Also, under the ECSC agreement, investment incentives are not available for the production of iron and steel products. However, the subsector accounts for a small share of investment incentives issued under the IEP (Chapter III(4)(i)). Iron and steel manufactures accounted for 9% of Türk Eximbank's credits in 2006 (against 10% in 2002).
  29. 29. Transport equipments The motor vehicle industry in Turkey consists of 15 assemblers and manufactures (some are foreign owned or joint ventures), generally operating under licences, and employing more than 40,000 people directly. In addition, there are about 700 automotive suppliers, employing around 150,000 workers.7 In the commercial vehicles industry, 12 companies operate under foreign licence, with a production capacity of over 400,000 units (2006); the passenger car industry is much larger and expanding, with a current production capacity of 796,000 units. Renault (in a joint-venture with Oyak), Toyota, and Fiat (in a joint-venture with Koc Com) accounted for about 89% of car output in 2006 (down from 93% in 2002), and dominated the market for imported licensed parts.8 Relatively low labour costs and duty-free access to the EC automotive market are some of the main advantages for foreign firms investing in Turkey's automotive component subsector. Nevertheless, as with the rest of the economy, FDI in the industry remains low, albeit increasing. Automotive (motor vehicles) production in Turkey increased from 347,000 units in 2002 to around 988,000 in 2006. Total automotive exports have also been rising steadily; they reached US$11.7 billion in 2005 (from US$4.3 billion in 2002), to become Turkey's second largest manufacturing export. The share of components in total automotive exports was 31.6% in 2005 (47.8% in 2002). Over 70% of automotive exports go to the EC market, mainly Germany, Italy, and the United Kingdom. Tariffs on motor vehicles average 6.4%, with a maximum rate of 22%. Other border measures include an import licensing system (Chapter III(2)(iv)). As at the time of the previous Review of Turkey, most motor vehicles (six items at the four-digit level) may only be imported against a pro forma invoice certified by the MIT.9 According to the authorities, pro forma invoice controls aim to assure the conformity of imported vehicles with EC Directives. In addition to customs duties, vehicles sold on the domestic market, either through importers or domestic producers, are subject to the highest VAT rate of 18%. The motor vehicle purchasing tax (MVPT) was abolishedon 1 August 2002, together with the environmental fund tax (25% of the MVPT).10 Passenger car manufacturers are not granted any specific incentives; however, as for all investors, they have access to incentives under the GIEP, and the export incentive programme .
  30. 30. Current Issues Turkey has in the past suffered from high levels of macroeconomic instability. Over the last ten years average economic growth has been modest. Sustained economic reform following the 2000-01 economic crisis has however improved the outlook for economic stability and higher medium-term economic growth significantly The continuation of macroeconomic discipline and structural reform is likely to be driven by the prospect of EU accession. The agreement reached between the EU and Turkey regarding the start of accession negotiations in October 2005 is the first step in that direction. Risks of setbacks stem from both sides, however. If Turkey realises its growth potential over the coming decade, it will be a very different country and a very different economy by the time it accedes to the EU. True, it will still be one of the poorest EU economies on a per capita basis and will have the largest agricultural sector. But Turkey’s level of economic development will be comparable, in relative terms, to the levels reached by Poland in 2004. While the continuation of economic reforms appears to be the most likely scenario, it is not, however, a foregone conclusion. Domestic political cleavages, setbacks on the IMF front and geo-political developments could yet undermine the upbeat economic outlook. We present two downside scenarios to account for this possibility.The political and economic impact of EU convergence will be unambiguously positive, as Turkey will benefit from continued EU-supervised reforms, increased economic stability and higher foreign investment flows. The banking sector in particular stands to benefit from enhanced stability and higher economic growth, and is likely to experience increased consolidation and foreign participation.
  31. 31. Transnational Issues ::Turkey Disputes - international: complex maritime, air, and territorial disputes with Greece in the Aegean Sea; status of north Cyprus question remains; Syria and Iraq protest Turkish hydrological projects to control upper Euphrates waters; Turkey has expressed concern over the status of Kurds in Iraq; border with Armenia remains closed over Nagorno-Karabakh Refugees and internally displaced persons: IDPs: 1-1.2 million (fighting 1984-99 between Kurdish PKK and Turkish military; most IDPs in southeastern provinces) (2007) Illicit drugs: key transit route for Southwest Asian heroin to Western Europe and, to a lesser extent, the US - via air, land, and sea routes; major Turkish and other international trafficking organizations operate out of Istanbul; laboratories to convert imported morphine base into heroin exist in remote regions of Turkey and near Istanbul; government maintains strict controls over areas of legal opium poppy cultivation and over output of poppy straw concentrate; lax enforcement of money-laundering controls Disputes - international: complex maritime, air, and territorial disputes with Greece in the Aegean Sea; status of north Cyprus question remains; Syria and Iraq protest Turkish hydrological projects to control upper Euphrates waters; Turkey has expressed concern over the status of Kurds in Iraq; border with Armenia remains closed over Nagorno-Karabakh Refugees and internally displaced persons: IDPs: 1-1.2 million (fighting 1984-99 between Kurdish PKK and Turkish military; most IDPs in southeastern provinces) (2007) Illicit drugs: key transit route for Southwest Asian heroin to Western Europe and, to a lesser extent, the US - via air, land, and sea routes; major Turkish and other international trafficking organizations operate out of Istanbul; laboratories to convert imported morphine base into heroin exist in remote regions of Turkey and near Istanbul; government maintains strict controls over areas of legal opium poppy cultivation and over output of poppy straw concentrate; lax enforcement of money-laundering controls
  32. 32. At the turn of the 19th century, the Ottoman Empire was called the “sick man of Europe”. Today, modern Turkey, the state that emerged from the ruins of the Ottoman Empire in the wake of WWI, has one of Europe’s most dynamic economies and societies. Reforms have led to a profound transformation of the Turkish economy since the most recent crisis in 2000-01. Thanks to a combination of favourable demographic trends, the prospect of continued economic reform and eventual EU membership, Turkey is on the verge of becoming one of Europe’s most attractive markets1. This prediction appears to be somewhat at odds with Turkey’s economic performance over the past decade. Between 1994 and 2003, Turkish economic growth averaged a mere 2.8% and the economy experienced several severe crises. Also, Turkey is still a relatively poor economy and a large share of its population is employed in the agricultural sector. Turkey’s GDP per capita income is low, but its economic catchup potential is considerable. Measured at market prices, Turkish GDP per capita was USD 3,400 in 2003, a level comparable to the likes of Bulgaria and Romania, but far below the Czech Republic and Hungary with roughly USD 8,300 . However, a more accurate measure of per capita wealth is GDP per capita measured on purchasing power parity (PPP) basis. Here Turkey’s per capita income amounts to around USD 6,700, again, comparable to the current EU accession candidates (Bulgaria, Romania), but only at around 20-25% of the biggest EU member, Germany. A low per capita income suggests substantial room for “economic catch-up”, meaning considerable room to improve productivity through technological innovation and investment. potential and estimate economic growth under different political scenarios.
  33. 33. The political economy of economic growth and stability Turkey is at a crossroads and in a position to put the economy on the path to sustainable growth. Structural factors point towards a considerable medium-term economic growth potential. Whether this potential can be realised will crucially depend on economic and political stability and continued reform. Over the past decade, Turkey has experienced several economic and financial crises (1994, 1999,2001). The crises were primarily due to political instability, weak regulation, poor macro-management or a combination of the above. What makes believe that Turkey can break with this volatile past? First of all, despite Turkey’s chronic political instability, itspolitical system is not necessarily ill-suited to the successful implementation of macro-policies. The centralised structure of the Turkish political system (unicameral parliamentary system,centralised bureaucracy) should make it possible to pursuedisciplined economic policies and even push through wide-rangingreforms. The problem is that, in the past, Turkey suffered from a high degree of political fragmentation despite institutional centralisation. Although political parties need to win more than 10% of the national vote to gain representation in the Grand Assembly, parliament was often very fragmented , which more often than not resulted in weak and incoherent macro-policies and slow structural reform. Empirical analyses show that the more fragmented– numerically and ideologically – a coalition government, the lessstability-oriented economic policies will be. Ceteris paribus singleparty governments are more conducive to stability-oriented economic policies. This is largely what differentiates the currentJustice and Development Party (AKP) government from previous government coalitions. The current single-party government emerged from the failureof ideologically split and numerically fragmented coalition governments of the 1990s. Following the Ozal governments of the1980s, a succession of weak and divided coalition
  34. 34. governments resulted in poor macro-management, financial volatility andrepeated economic crises. By contrast, given its 2/3 majority in theGrand Assembly, the AKP government has so far proven that it is both able and willing to push through important reforms and stabilise the macro-economy. The reason is simple. A single-party government cannot avoid responsibility if it fails to stabilise the economy or meet EU accession requirements. This means that even though the AKP government may be tempted to switch to more redistributive policies, which could potentially undermine the on-going process of macro-stabilisation, it is less likely to do so. Equally important, it also has the ability to stay the course due to its control over a disciplined parliamentary majority. Moreover, with the economy growing at record rates, the pressure to switch to redistributive, destabilising policies is low. Widespread political support for EU accession and considerable consensus with regard to economic consolidation create major incentives for the AKP to continue with its economic reform programme. It is important to note, though, that the AKP has so far enjoyed favourable tailwinds. The rebound post- 2001 crisis and favourable global political and economic conditions have created a virtuous cycle of higher growth, improving debt dynamics and lower domestic interest rates. This favourable constellation has greatly facilitated economic reform, particularly the achievement of a sizeable primary surplus (i.e. fiscal surplus before interest payments) to stabilise a precarious public debt position. The government still needs to prove its willingness to implement macro and structural reforms when circumstances are less favourable. But again, the government has limited incentives to reverse policies at this point. Recent institutional changes have facilitated the pursuit of disciplined macro- policies. Considerable structural reforms have improved the macroeconomic policy framework. Under the IMF programme, extra-budgetary funds have been closed and budgeting procedures have been improved and made more transparent, making the executive more accountable. A much-enhanced monetary framework has also improved the outlook for monetary stability. In April 2001, the central bank law was amended, making price stability the primary objective of central bank policy. Moreover, the adoption of a floating exchange rate regime also reduces the likelihood of a renewed currency crisis. Renewed macroeconomic instability, however, remains possible. But the EU convergence process and an already much higher degree of stability should help prevent renewed economic- financial volatility of the type seen in the 1990s. The continuation of reforms is set to be effectively locked in with the help of a new three-year IMF programme (see table) and the EU accession process. 35
  35. 35. Despite this upbeat outlook, downside risks remain. The government may become over-confident regarding its ability to manage the economy, overlooking the fact that part of the improvement in economic conditions is due to a very favourable macro-environment. For example, should the economy slow substantially, the government’s appetite for politically costly reforms might diminish. Even if the AKP wins a second term, it might be tempted to reward its electoral base through more redistributive policies which, if implemented via fiscal relaxation, could jeopardise economic stabilisation and undermine market confidence. Similarly, greater emphasis of religious issues during a second term could strain relations with the military and the secular establishment and upset markets. Finally, relations with Washington could sour over Iraq. So there are plenty of potential pitfalls. On balance, 60% chance is there that these pitfalls will be avoided and Turkey will make good progress with regard to EU convergence. This expectation is based on a combination of a more coherent party system and a powerful external constraint reinforced by strong support from the Turkish public and elite for EU membership.
  36. 36. High potential for increased trade and FDI Turkey is already a fairly open economy, both in terms of trade in goods & services and portfolio flows, especially when adjusted for the size of the economy. Imports and exports combined represent more than 60% of GDP (and rising). Export growth has been phenomenal over the past decade with exports of goods rising from around 20% of GDP in 1994 to 30% in 2003 . With continued economic reform and closer economic integration with the EU, the Turkish economy will become even more open in trade terms, which should benefit efficiency and growth. We expect exports to reach 40% of GDP by the end of the decade. The major problem is Turkey’s limited openness in terms of foreign direct investment. FDI averaged less than 1% of GDP over the past decade, a dismal performance by any standard . However, EU convergence, increased macroeconomic stability and privatisation could help attract substantial FDI over the next few years. Increased FDI inflows would help increase macroeconomic stability by providing a less volatile source of financing for the current account deficits. This would help prevent Turkish growth being hampered by a shortage of foreign-currency financing, the socalled balance of payments constraint. Equally important, FDI inflows will boost the investment ratios and bring technology and management skills Turkey badly needs. The potential for attracting FDI is considerable. A large domestic market, a stable macro-environment and effective domestic institutions are generally conducive to FDI. Turkey has the first, has advanced with regard to the second and is likely to improve the third as convergence to EU standards progresses. Turkey’s large internal market with a population of 70 m and considerable growth potential should make the country attractive to investors. Turkey’s strategiclocation between Europe, Central Asia and the Middle East is another advantage. Both the new FDI law (June 2003) and the creation of the Investment Advisory Council (March 2004) will also make Turkey more attractive to foreign direct investment. The privatisation of public sector companies could also help boost FDI inflows. The government seems more determined than in the past to sell a number of major companies in 2005. But if the past is anything to go by, caution is justified here. Currently, however, the Czech Republic, Hungary and Poland rank 13th, 33th and
  37. 37. 68th on the UNCTAD 2001-2003 FDI performance index, respectively, while Turkey ranks 110th! For the time being, however, FDI inflows remain at very low levels. As a USD 240 bn economy, Turkey would need to attract annual FDI of USD 6-9 bn to boost investment by 2-3% of GDP. Poland, an economy of USD 210 bn, benefited from annual FDI inflows of around USD 5 bn over the past decade, even though progress on privatisation has been less than stellar. Improving human capital stock and skills profileThe quality and level of education in Turkey is modest compared to other top-tier emerging markets. However, Turkey has made sizeable progress in recent years, especially as regards basic and intermediary skills. Primary school enrolment is close to 100%, which puts Turkey at a level comparable to Central and Eastern European countries. But at 55-60%, secondary enrolment ratios are comparatively low. An only gradual increase in the secondary school enrolment ratio is the most likely scenario given the government’s limited fiscal resources. But while overall literacy levels are low, youth literacy levels are fair. This is more indicative of future growth than overall literacy levels. After all, it is teenagers that will enter the job market, replacing their on average less welleducated parents and grand-parents in the labour market. Overall, Turkey’s human capital endowment still compares unfavourably toother emerging markets but continues to improve gradually. Additionally, Turkey has a very welleducated, often foreign-trained elite and a number of first-class universities churning out highly-skilled graduates. Most importantly, the human capital endowment is set to improve, as less skilled workers retire and younger better educated workers enter the workforce.
  38. 38. Institutional and regulatory environment below average The institutional and regulatory environment does not compare favourably with the more advanced CEE-3 countries. The EU Commission attests Turkey a “functioning market economy”. But “institutional quality”, broadly defined, has considerable room for improvement. According to the Transparency International Corruption Perceptions Index, Turkey ranks 77, behind the CEE-3 countries Poland, Czech Republic and Hungary, which ranked 67,51 and 42, respectively. Another well- known index, the Fraser Economic Freedom Index, ranks Turkey 100. By comparison, Poland is ranked 61, while Hungary is ranked 22 and Czech Republic 41. The World Economic Forum Growth Competitiveness Index and the World Bank Governance Indicators also show Turkey underperforming the CEE-3 countries. But continued reform in the context of EU accession negotiations makes improvement of the institutional environment very likely. If the experience of the Central and Eastern European economies is anything to go by, then institutional improvement will be forthcoming and Turkish institutions will gradually converge to the new EU-10 average over the next decade. Higher quality institutions should help attract investment and boost economic growth. Estimating Turkey’s growth potential: Considering Turkey’s history of highly volatile GDP growth, it would be difficult to estimate a reliable country-specific model. Taking the experience of other countries into account while still allowing for country-specific business cycles can generate a more reliable model. It quantifies the linkages between real per capita GDP and the four fundamental drivers of growth, taking account of the information in the time series. On estimating the model for 12 emerging markets and generated similar common long-run coefficients as the companion model for 21 OECD countries: a 10% rise in the investment rate raises GDP by 13% over the long run. A 10% increase in human capital (average years of education of the working age population) leads to a long-term gain in GDP of 9% in emerging markets. A half-point gain in openness (trade share adjusted for population size
  39. 39. and differences in price levels) raises GDP by 7% in the long run. Country- specific constants capture other influences on growth. The model forecasts for the four growth drivers stem from a three-stage approach. Extrapolation of the trajectories of the last 20 years or so is the starting point, with the exception of population growth, where we use the UN’s forecasts. The second stage takes information from levels and changes in other countries into account to dampen excessive movements in these variables that were generated at the first stage. The third and most important stage captures structural breaks through a broad-based country-specific assessment of six clusters of trends in politics, society and business – based on the country expert’s assessment.7 For example, DBR expects trends in the area of work and society to have a greater influence in Turkey in the future than in the past, partly because women are expected to gain more importance in employment. Major one-off events like increasing prospects of EU entry and the resulting significant changes to domestic institutions are added here as well. Depending on assessment of these trends, adjust the forecasts of all four growth drivers. This leads to annual per capita GDP growth of 2.8% on average in 2006-20 and total GDP growth of 4.1% p.a. in the baseline outlook. Alternative scenarios We attach the “EU convergence” scenario discussed above a probability of 60%. Two other scenarios are conceivable, although less likely. Alternative scenario I: “Back to the 1990s” (p = 30%) Continued, though manageable, tensions characterise the geopoliticalsituation and domestic politics. A less coherent coalition government emerges from the 2007 elections. Turkey will continue to work towards EU integration, though the process is more gradual and more difficult than expected. The economy remains vulnerable to shocks, but volatility will be lower than in the 1990s. Structural reforms only advance very gradually, but government commitment to disciplined macro-policies is tenuous at times, leading to occasional volatility. The regulatory environment improves slightly but not significantly. Combined with the failure to implement the large-scale privatisation of state assets, this will keep FDI inflows at low, and total investment at historical, levels. In this scenario, GDP growth would average 3.1%, in line with Turkey’s GDP growth in the past decade or so. 40
  40. 40. Alternative scenario II: “Turkey in the Middle East” (p = 10%): Increased geopolitical uncertainty and increased tensions between the Islamic government and the secular-oriented establishment produce recurrent political and economic instability. Turkey continues to be held at arm’s length by the EU. The economy will remain as volatile as in the 1990s, leading to erratic GDP growth, significant monetary and exchange rate volatility and recurring economic crises. Structural reforms stall. No significant FDI inflows. No improvement in institutional quality and regulatory environment. GDP growth would on average be only 1.9%.
  41. 41. SUMMARY OBSERVATIONS (1) THE ECONOMIC ENVIRONMENT 1. Following its economic crisis in 2001, Turkey has been implementing an ambitious reform programme, notably on the fiscal, privatization and social security fronts. The programme has been successful in stabilizing the economy, and has contributed to an annual average real GNP growth rate of 7.4% during 2002-06, a reduction in the inflation rate from 29.7% in 2002 to 9.6% in 2006, and a fall in the overall fiscal deficit, from 12.5% to 0.8% of GNP over the same period. Recent reforms have also been aimed at bringing Turkey closer to its goal of accession to the European Communities (EC). 2. Nonetheless, Turkey still faces key structural problems, including its widening current account deficit (0.8% of GNP in 2002 and 8.2% in 2006), which could make the economy vulnerable to external shocks. Unemployment also remains high (9.9% in 2006, against 10.3% in 2002), and key industries continue to be dominated by state-owned enterprises (SOEs), such as Turkish Petroleum Company (TPAO), Turkish Hardcoal Enterprises (TTK), Turkish Electricity Transmission Company (TEIAS), and Turkish State Railways. 3. On 1 January 2005, the new Turkish lira (YTL) was issued after the old Turkish lira was redenominated, dropping six zeros. The Central Bank of the Republic of Turkey (CBRT) moved from a crawling peg to a floating exchange rate system on 22 February 2001. During 2002-05, as a result of record high capital inflows, the real effective exchange rate appreciated over 10% per year on average. At the end of 2006, however, interest rate hikes in major industrial
  42. 42. countries prompted a real depreciation of the YTL estimated by the CBRT at 6.6%. 4. Since its last TPR in 2003, Turkey has adopted measures to improve its investment climate, including through the establishment of the Turkish Investment Support and Promotion Agency in June 2006. As a result, Turkey's annual FDI inflows averaged US$4,757 million over 2003-05, and reached a peak estimated at around US$20,000 million in 2006. Nevertheless, some restrictions to foreign investment have been introduced over the last few years on real estate acquisition, and a number of sectors are still subject to FDI restrictions (e.g. broadcasting, fishing, petroleum, mining, and financial services). 5. Turkey's merchandise exports have more than doubled since 2002, with the manufacturing sector contributing over 80% to its total merchandise exports, followed by agriculture, and mining products. More than half of Turkey's exports go to the EC; Germany remains the major export market. Turkey's merchandise imports have also more than doubled since 2002, with manufactured goods representing about two-thirds of total merchandise imports, followed by mining, and agriculture products. Turkey continues to be a net exporter of services, with a surplus of US$13.4 billion in 2006 (up from US$7.9 billion in 2002). (2) INSTITUTIONAL FRAMEWORK 6. Formulation, administration, and coordination of Turkey's trade policy are the responsibility of the Undersecretariat for Foreign Trade (UFT). Depending on the nature of the issue, the UFT consults with relevant ministries and other institutions that also take part directly or indirectly in foreign trade policy formulation and/or implementation. The views of the private sector, including NGOs, are customarily taken into consideration throughout the process (although this is not legally required). A WTO Coordination Committee, headed by the UFT with the participation of the private sector and NGOs, has been established. 7. The WTO Agreements and Turkey's current trade relations with the EC are the main factors influencing the Turkish trading system. Over the last few years, Turkey has amended its legislation on, inter alia, intellectual property rights, and enacted new legislation, notably on safeguards, to seek conformity with its obligations under the EC acquis communautaire and the WTO Agreements. 8. A Contracting Party to the GATT since 17 October 1951, Turkey became an original Member of the WTO on 26 March 1995. It accords at least MFN treatment to all its trading partners. Turkey is not a signatory to the Plurilateral Agreements that resulted from the Uruguay Round; it is an observer to the Plurilateral Agreements on Government Procurement and Trade in Civil Aircraft, and party to the Information Technology Agreement (ITA). Turkey has been involved in several cases under the WTO Dispute Settlement Mechanism. 9. Turkey has a customs union agreement (mainly on non-agricultural products) with the EC, a free-trade agreement with EFTA (also on non-agricultural goods), and nine bilateral agreements in force, of which six were concluded during the period under review, with Bosnia-Herzegovina, Egypt, Morocco, Palestinian Authority, Syria, and Tunisia; the others being with Croatia, Israel, and Macedonia (FYR). In addition, a bilateral trade agreement with Albania has been signed and is due to enter into force soon, while negotiations continue with other countries. Turkey is also part of the Euro-Mediterranean Partnership, aiming at establishing a free trade area in the region by 2010; the Economic Cooperation Organization (ECO); and the Black Sea Economic Cooperation (BSEC). (3) TRADE POLICY INSTRUMENTS 43
  43. 43. 10. Goods imported into Turkey may be subject to various charges: customs duties (customs tariffs, and the Mass Housing Fund levy); and internal taxes (excise duties also known as the Special Consumption Tax, the VAT, and the stamp duty). As a result of its participation in the customs union with the EC, Turkey has, since 1996, based its tariff on industrial products and the industrial components of processed agricultural products (imported from third countries) on the EC common external tariff. Turkey's tariff comprises ad valorem (97.9% of total lines, down from 98.5% in 2003) and non-ad valorem rates (specific, mixed, compound, and variable duties), applying to 378 items at the HS twelve-digit level, up from 284 in 2003. Using the WTO definition, the average applied MFN tariff is substantially higher in agriculture (47.6%) than on non-agricultural products (5%). 11. Some 46.3% of Turkey's tariff lines are bound. The simple average bound rate is 33.9%, and the simple average applied MFN rate 11.6% in 2007 (11.8% in 2003); the ceiling bound rates thus leaves Turkey ample margin for tariff increases. Moreover, the imposition of non-ad valorem tariff rates does not ensure compliance by Turkey with its WTO binding commitments made at ad valorem rates. In addition to applied and bound tariffs, Turkey also maintains the so-called statutory tariff. Indeed, the Government can replace rates of the applied MFN tariff by 150% of the corresponding rates of the statutory tariff, with a view to ensuring higher protection to local industries. In the case of products subject to tariff bindings, when the new rate (i.e. 150% of the statutory tariff rate) is higher than the corresponding bound tariff rate, then the latter applies. These three categories of tariff further complicate the regime and make it more unpredictable. 12. Turkey remains an important user of anti-dumping measures. As of August 2007, it had 93 definitive anti-dumping duties in force (compared with 27 at the end of 2002). Turkey has increasingly made use of safeguards during the last few years, imposing definitive measures on products such as motorcycles, salt, steam irons, vacuum cleaners, and footwear. Turkey has never initiated or imposed a countervailing measure. 13. Import licences are maintained on tariff quota administration, health, sanitary, phytosanitary and environmental grounds. Turkey has continued harmonizing its regime on standards and technical regulations with that of the EC. Export promotion is one of the main objectives of Turkey's trade regime. The incentives system comprises duty and tax concessions, finance, marketing assistance, and promotion. There are 20 free zones in Turkey (compared with 21 in 2003); in February 2004 new arrangements were made regarding the tax incentives provided under this regime. On the basis of the government procurement framework, supplies of Turkish origin are eligible for price preferences of up to 15%. Turkey has made progress in enforcing its TRIPS legislation over the last few years. Nevertheless, piracy and counterfeiting of copyright and trademark materials have been reported as problematic. (4) SECTORAL POLICIES 14. Since its previous TPR, Turkey has taken measures to tackle structural problems in some services subsectors, notably the monopoly of Turk Telekom over fixed telephone line, domestic long-distance and international telephony services ended on 31 December 2003. Nevertheless, various SOEs continue to dominate services activities, and in some cases still operate under monopoly, or hold exclusive rights in certain branches of the services sector, such as Turkish State Railways. Under the General Agreement on Trade in Services (GATS), 44
  44. 44. Turkey scheduled commitments in several service categories, and maintains some MFN exemptions. It has also tabled its initial and revised conditional offers in the ongoing services negotiations. 15. Manufacturing is a major beneficiary of state aid. It is also the main beneficiary of various incentive schemes (duty and tax concessions in particular), as well as export credits and guarantees. MFN customs tariffs on manufactured goods (Major Division 3 of ISIC Revision 2) average 10.9% (down from 11.1% in 2003); relatively high rates (ranging up to 225%) continue to apply to some processed food products. The tariff structure does not encourage investment in certain manufacturing activities, such as chemical and plastic industries where the tariff displays negative escalation. Furthermore, high effective protection of industries such as textile and apparel, beverages, and tobacco products hampers their competitiveness. 16. Turkey is implementing a wide-ranging programme to restructure its agriculture, so as to reduce the burden of support on its economy and move its policies closer to those of the EC's. Some of the potentially most production- distorting measures in the sector (e.g. administered output prices) are being phased out and replaced by a less distortionary direct support system. Nonetheless, the simple average applied MFN tariff in agriculture is 28.3%, up from 25% in 2003. This relatively high tariff protection, and the limited coverage of agricultural products under Turkey's preferential trade arrangements (with products generally subject to preferential tariff quotas) impedes the exposure of the sector to greater competition. 17. In mining and quarrying, customs tariffs average 0.3% (against 0.2% in 2003); imports of electricity are duty free. Several new energy-related laws have been enacted over the last few years aiming to further liberalize the subsector. The lack of adequate investment, together with large energy waste, still causes power shortages in some areas. Increasing Turkey's electricity generation capacity continues to be a top priority for the Government, which has open all segments of the electricity subsector (except transmission) to direct private participation. (5) TRADE POLICY AND TRADING PARTNERS 18. Turkey is pursuing a strategy of trade liberalization through negotiations at the multilateral, regional, and bilateral levels. It is actively participating in the Doha Development Agenda. Nonetheless, Turkey's membership in several arrangements makes its trade regime complex and seemingly difficult to manage. Future trade agreements could further complicate the trade regime and detract from multilateral efforts, given Turkey's limited resources as a single country. Moreover, delays in alignment of its preferential trade regime on the EC's may lead to trade diversion to the detriment of Turkey's exports. Further multilateral trade liberalization, both on goods and services, could reduce the need for preferential trade negotiations. 19. Turkey is taking steps to move towards a competition-based and consumer- welfare oriented economy to overcome the deep dualities between its few highly productive enterprises and its large number of low-productivity companies. However, the high level of tariff protection in agriculture has limited the exposure of the sector to competition, and has made it difficult for its products to be exported or to be used as inputs in the production of export goods without support, including subsidies. This could well hinder Turkey's long-term growth performance. 45
  45. 45. 20. An acceleration of Turkey's structural reforms, including completion of the privatization agenda, sectoral reforms (e.g. labour, education, health), extension of the scope of tariff binding commitments, reduction of bound rates, and further tariff rationalization would contribute to better resource allocation. This could attract larger FDI inflows, avoid falling back into the boom-bust cycle of the past, increase the predictability of the trade regime, reduce the need for concessions, and enhance the integration of Turkey into the multilateral trading system. Trading partners could help by ensuring that their markets are fully open to goods and services of interest to Turkey. The Turkish EU convergence process and eventual Turkish membership will be overwhelmingly positive. Turkey will need to implement wide-ranging economic reforms which will make it a more stable and more productive economy. The accession process will strengthen the hand of reform-minded groups in Turkey and help push through further growth-enhancing reforms, as wide-ranging reforms have to overcome entrenched interests and structures. A new reform impetus will substantially increase Turkey’s mediumterm economic growth and per capita income level. By the time of EU accession, as our analysis has shown, Turkey’s economic standing is likely to be comparable to some of the new EU members, a development that is to be unambiguously welcomed. 46
  46. 46. References http://www.worldbank.org.tr/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/TURKEY EXTN/0,,menuPK:361738~pagePK:141132~piPK:141109~theSitePK:361712,00.html http://en.wikipedia.org/wiki/Demographics_of_Turkey https://www.cia.gov/library/publications/the-world-factbook/geos/tu.html http://www.trademap.org http://import-export.suite101.com/article.cfm/turkeys_top_imports_exports_2008 Deutsche Bank Research paper on EU Integration and the three scenarios 47