1. Turkey’s Economic Transformation and the Role of Organized Industrial Zones Istanbul, 19 October 2009 tepav economic policy research foundation of turkey

2. Agenda Introduction to TEPAV Economic policies and economic performance  1980-now Snapshots from Turkey’s transformation  Structural transformation  Emerging and star sectors Regional transformation?  Emerging regions  Role of Organized Industrial Zones Some food for thought Economic transformation in Turkey

3. Economic Policy Research Foundation of Turkey (TEPAV) Established in 2004, with the support of the Union of Chambers and Commodity Exchanges of Turkey (TOBB) Independent, non-partisan think tank in Ankara Focuses on economic policy, competitiveness, governance and stability. www.tepav.org.tr Economic transformation in Turkey

4. TEPAV’s interdisciplinary approach Three major disciplinies:  Economic policy  Governance  Foreign policy Cross-cutting themes:  Competitiveness  Regional integration  EU accession process Modus operandi:  Think-tank activities  Projects Governance Studies Economic Studies Foreign Policy Studies Economic transformation in Turkey

5. A sample of TEPAV’s activities Developing policy tools for dialogue with the government  Investment Climate Assessment ( with the World Bank and Treasury)  Industrial Policy Document (with State Planning Organization)  Secretariat of the Competitiveness Council of Turkey  Industrial Policy Design Project, 2008 (for M of Industry & Trade)  Competition Environment Assessment (with the World Bank and FIAS)  Higher Education Sector Project (with the World Bank)  Regulatory Impact Assessment Projects (EU-funded) Governance of economic development  Decentralization studies, regional development framework (with The Ministry of Internal Affairs and local authorities)  Fiscal monitoring and transparency Economic transformation in Turkey

6. TEPAV’s regional integration activities Permanent dialogue mechanisms  Business association networks  Ankara Forum (Palestinian, Israeli and Turkish)  Istanbul forum (Afghan, Pakistani and Turkish) Private sector development projects  Tarqumia and Erez Industrial Estates in Palestine  Joint industrial area in Syrian-Turkish border  Trade facilitation in Central Asia – Silk Road  Tourism cluster development (Armenia, Azerbaijan, Turkey) Capacity building projects  Palestinian chambers, SMEs, industrial estates, customs  Pakistani Competition Authority  Ministries of Finance project-IMF Institute Various EU-related projects and activities Economic transformation in Turkey

7. Economic Overview Economic transformation in Turkey

8. Economic liberalization and export led growth strategy 1980-1990 Turkey’s economic policy framework and reform agenda were based on economic liberalization during 1980s  24 January 1980 Measures Reforms to ensure proper functioning of market mechanism Trade liberalization Fiscal liberalization Abolishing all sorts of subsidies except export subsidies Decreasing state’s share in total economic activity  Financial liberalization in 1989 Economic transformation in Turkey

9. Some economic indicators Economic transformation in Turkey 19801990 20012006 GDP per capita (PPP) 2,9815,933 Exports (million USD) 2,91012,959 Imports (million USD) 7,51322,407 Inflation 45%60% FDI (million USD) 18684 Domestic debt / GDP 45%14% 1980-19901990-20012001-2006 GDP (in reel terms, YTL)5.21% GDP per capita (PPP)7.12% Exports (million USD)16.11% Imports11.55% Average annual growth rates Source : TURKSTAT, Central Bank, Treasury

10. A period of economic crises 1990-2001 Macroeconomic and political instability High public sector debt High budget deficits High and chronic inflation High interest rates Economic transformation in Turkey Excessive boom-bust cycles

11. Some economic indicators Economic transformation in Turkey 19801990 20012006 GDP per capita (PPP) 2,9815,933 8,021 Exports (million USD) 2,91012,959 34,373 Imports 7,51322,407 38,103 Inflation 45%60% 69% FDI (million USD) 18684 3,352 Domestic debt / GDP 45%14% 69% 1980-19901990-20012001-2006 GDP (in reel terms, YTL)5.21%2.52% GDP per capita (PPP)7.12%2.78% Exports (million USD)16.11%9.27% Imports11.55%4.94% Average annual growth rates Source : TURKSTAT, Central Bank, Treasury

12. A new era after 2001 crisis A new economic program:  Strong macroeconomic policy framework  Structural reforms  Independent central bank  Banking sector reform  Floating exchange rate regime  A better investment climate Successful implementation of the economic program and the EU accession process triggered a deep structural transformation Economic transformation in Turkey

13. INDUSTRIAL POLICY VISION Becoming a production and services hub for medium and high tech industries Strategic Targets Creating strong and innovative firms Raising the share of medium and high tech industries Transforming the traditional industries towards a higher value added structure Horizontal Industrial Policy Areas Business environment Foreign economic relations Human capital and skills Access to finance Technology and R&D Physical infrastructure Environment Regional development Sector-specific industrial policy areas Initiatives to address the binding constraints in every sector and region Strategies to strengthen clusters Implementation, Monitoring, Evaluation and Coordination Mechanism Economic transformation in Turkey

14. Some economic indicators Economic transformation in Turkey 19801990 20012006 GDP per capita (PPP) 2,9815,933 8,02112,067 Exports (million USD) 2,91012,959 34,37391,912 Imports 7,51322,407 38,103132,088 Inflation 45%60% 69%9.70% FDI (million USD) 18684 3,35220,168 Domestic debt / GDP 45%14% 69%43.70% 1980-19901990-20012001-2006 GDP (in reel terms, YTL)5.21%2.52%7.20% GDP per capita (PPP)7.12%2.78%8.51% Exports (million USD)16.11%9.27%21.74% Imports11.55%4.94%28.23% Average annual growth rates Source : TURKSTAT, Central Bank, Treasury

15. Turkey’s historical growth performance Economic transformation in Turkey Average annual GDP growth rate for selected periods, 1970-2007, %‏

16. How does the crisis affect the Turkish economy? Foreign credit channel Domestic credit channel Foreign trade channel Confidence channel Economic transformation in Turkey

17. Crisis leads to contraction; let’s hope for recovery in 2010 and beyond... Economic transformation in Turkey GDP growth rate (y-o-y, 1999-2009)

18. Snapshots for Turkey’s transformation Economic transformation in Turkey

19. Shrinking agriculture; expanding industry and services Economic transformation in Turkey Shares of main economic activities in GDP, (%, 1968-2007)

20. Transformation speeded up recently Economic transformation in Turkey Sectoral employment trends (2002=100, 2002-2007)

21. Shift from traditional to modern: case of manufacturing industry Economic transformation in Turkey Average annual growth rates of manufacturing sub-sectors (2002-2007)

22. Changing structure of exports & changing opportunities and challenges Analysis based on UNIDO Technological Classification of Goods Source: UN COMTRADE Technological structure of exports 33,09%44,75%35,4%24,2%Medium tech 9,13%10,02%15,5%14,2%Resource based 22,75%20,86%42,4%52,7%Low tech 35,04%24,37%6,8%8,9%High tech 2005200020052000 ChinaTurkey Economic transformation in Turkey

23. Shift from traditional to modern: case of services Economic transformation in Turkey Number of retail stores and grocery stores (1998-2007)

24. Rapid increase in FDI Economic transformation in Turkey Foreign direct investment flows, million USD

25. The new incentive structure for firms Competitiveness  need for cheap labor  cost-based  very limited research and development  limited marketing Competitiveness:  need for qualified labor-force  quality-based  focus on research and development  marketing innovations Investment Climate:  High Inflation  Generous incentives, subsidies  Pegged Currency (95-01)‏ Old environment Investment Climate:  Low inflation  Limited incentives  Prudent banking sector  Floating Currency (post 2001)‏ Changing New enviornment Economic transformation in Turkey

26. The new game: Integration into the global economy Turkey’s import and export volumes, 2001-2007, billion USD Source: Central Bank of Turkey 2006 Economic transformation in Turkey

27. Competitiveness of Turkish Industries: Promising but also challenging… Star Sectors Emerging Sectors Snail Sectors Traditional Sectors Size of the bubbles indicate export volume in 2006 (Av. 1.8 %) ( Av. 35 %) Economic transformation in Turkey

28. Emerging and star sectors Construction – real estate Energy Telecommunication Logistics Media Health care Education – training Retail High-tech and e- commerce Automotive White goods Electric/electronics High quality apparels /textile (fashionwear) Pharmaceuticals Organic agribusiness Construction materials – cement Services Industry Economic transformation in Turkey

29. Regional dimension of the transformation process  Role of Organized Industrial Zones Economic transformation in Turkey

30. Post 1980s regional transformation as a result of economic orientation Before 1980s:  Import-substitution industrialization  Major industrial centers: İstanbul, İzmir, Adana, Bursa Peripepheries: Kocaeli, Manisa, Mersin, Eskişehir After 1980s:  Export-oriented industrialziation  New emerging industrial cities (Anatolian tigers): Denizli, Gaziantep, Kayseri, Konya, Ankara Economic transformation in Turkey

31. Implications of regional transformation Industrial activities spreading to a variety of regions  Higher overall growth rates because of unsaturated markets (unleashing the untapped potential) Fair income distribution across cities  Emergence of a middle class  Desire for political stability with strong economic roots Creation of new centers puts less pressure on big cities (old centers of economic activity) Key challenge: management of the process  Decentralization process; capacity of the state aparatus to act local Economic transformation in Turkey

32. How Turkey could trigger this process? Political will since the 1980s.. Macroeconomic conditions?  Roller-coaster macro environment  But generous incentives for producers... European Union accession framework  Raising the capacity to act local; focus on regional disparities Spread of Organized Industrial Zones (OIZs)  Necessary but not sufficient condition Economic transformation in Turkey

33. Turkey’s OIZ experience Main motive:  Improving the investment climate everywhere is not possible but we can designate certain areas as more equal Started as a urban development tool in the 1960s, with a loan from the World Bank 258 Organized Industrial Zones, 100 fully operational  Rapid spread in the 1990s... Private-public partnerships were facilitated through the local chambers Evolved over time to obtain regulatory oversight The Law on OIZs was enacted in 2000, after 40 years of learning  Changes came in 2009; a continous learning process....

34. Economic transformation in Turkey Performance of OIZs in Turkey Number of days to get infrastructure connected: firms in OIZs and non-OIZs Kaynak: TEPAV – World Bank Investment Climate Assessment Survey 2005 Number of days to get licenses and permits: firms in OIZs and non-OIZs

35. Some food for thought OIZs are highly instrumental regional actors  One-stop shops  Superrior infrastructure  Contribution to cluster enhancement (technoparks, vocational training schools, logistics centers) But do not forget:  Building OIZs alone do not lead to industrial development  They should be part of an overall industrial strategy Human capital and skills, off-site infrastructure/logistics, technology, access to finance Economic transformation in Turkey