Turkey country-report

COUNTRY PROFILE - TURKEY

Darpan Kulshreshtha – Roll no 21- IIFT EPGDIB09-11

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.

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.)
Birth rate:
18.28 births/1,000 population (2010 est.)
Death rate:
6.1 deaths/1,000 population (July 2010 est.)
Net migration rate:
0.53 migrant(s)/1,000 population (2010 est.)
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
male: 25.89 deaths/1,000 live births

female: 23.73 deaths/1,000 live births (2010 est.)

Life expectancy at birth:
total population: 72.23 years
male: 70.37 years
female: 74.19 years (2010 est.)

Total fertility rate:
2.18 children born/woman (2010 est.)
HIV/AIDS - adult prevalence rate:
less than 0.1%; note - no country specific models provided (2001 est.)
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)

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).

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.)

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)

Stock of money:
$53.25 billion (31 December 2008)
Stock of quasi money:
Stock of domestic credit:
$355 billion (31 December 2007)
Market value of publicly traded shares:
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:
Electricity - exports:
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:
Natural gas - exports:
435 million cu m (2008 est.)
Natural gas - imports:
Natural gas - proved reserves:
8.495 billion cu m (1 January 2009 est.)

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.)


Debt - external:


Stock of direct foreign investment - at home:


Stock of direct foreign investment - abroad:


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

Communications ::Turkey
Telephones - main lines in use:

17.502 million (2008)

Telephones - mobile cellular:

65.824 million (2008)

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)

Internet users:

24.483 million (2008)

Transportation ::Turkey
Airports:

102 (2009)

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
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)

Waterways:

1,200 km (2008)

Merchant marine:

total: 612
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

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.)

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

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)

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

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

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.)

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

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

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

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%).

World share
United States of
America
16%

Germany
8%
France
Others 6%
60% United
Kingdom
5%
Canada
5%

Top 5 transport importers

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.

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.

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.

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).

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
.

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.

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

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.

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

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

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.

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

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.

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

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

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%.

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

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

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

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

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

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

Turkey country-report

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (13)

Similar to Turkey country-report

Similar to Turkey country-report (20)

Recently uploaded

Recently uploaded (20)

Turkey country-report