Transcript Average Growth in Market Share

Structural Transformation of the
Turkish Industry & the Role of
Regional Integration
Esen Çağlar
Ankara, 28 June 2006
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 2
Agenda
 The on-going structural changes in the Turkish industry
 Emerging risks and sustainability of the growth process
 current account deficit
 unemployment
 creative destruction
 Towards a brand new agenda
 adjustment management
 risk management
 raising competitiveness
 Building capacity & the role of TEPAV – Economic Policy
Research Institute
 Some thoughts on Regional Integration in the Middle East
 a concrete example: TOBB-BIS initative
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 3
 New climate & contrasts
 What’s new? What has changed?
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Where do we come from?
The Turkish economy in the 1990s
 Despite huge potential, Turkish economy significantly
underperformed in the 1990s:






boom and bust cycles in growth
high and chronic inflation
high public sector deficit
fiscal indiscipline
high levels of uncertainty (political and macroeconomic)
very high interest rates
 three economic crises, internal conflict, 1999 earthquake…
 the 2001 economic crisis = GDP shrank by 10%
Slide 4
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 5
“Every crisis brings both opportunities and risks”
A new process after 2001?
 Growth without inflation
Non-inflationary growth (1999-2005)
140.00
 Interests rates are falling
120.00
100.00
 Productivity is rising
Industrial Production
Interest Rate
80.00
Inflation
60.00
 No net job creation
40.00
20.00
0.00
Oca.99
Inflation and Interest Rates
Oca.00
Oca.01
Oca.02
Oca.03
Oca.04
Oca.05
Productivity and Employment Trends
100%
160.0
80%
140.0
60%
130.0
40%
economic program
Employment
Production
Labor Productivity
150.0
120.0
20%
110.0
100.0
0%
90.0
inflation
-20%
80.0
nominal interest
-40%
70.0
real interest rate
60.0
-60%
1978
1980
1982
1984 1986
1988
1990
1992
1994
1996 1998
2000
2002
2004
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: State Statistics Institutee
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 6
Reforms lead to a new incentive structure
 Features of the economic program after the 2001 crisis
 Monetary Discipline (coupled with Central Bank independence and
floating exchange rate regime)
 Fiscal Discipline
 Public Administration Reform
 Banking Sector Reform-Corporate Restructuring
 Results and Outcomes:






Impressive growth without inflation
Rising Productivity as the driver of growth
Unemployment does not decrease
Move from implicit to formal inflation targeting
Currency appreciates
Current account continues to deteriorate
 Of course, presence of some external factors help speed up the
process (growing competition from East Asia, global liquidity etc.)
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 7
And the new incentive structure changes the
rules of the game at the corporate sector
Old environment
New enviornment
 Competitiveness
 need for cheap labor
 cost and price 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)
 Investment Climate:
 Low inflation
 Limited incentives, prudent
banking sector
 Floating Currency (post 2001)
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 8
 Reflections on the industry
 The story on competitiveness
 Integration into the EU economy
 New trends, new risks
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 9
The new game: Integration into the
global economy
 Growth rate of trade volume
 Turkey in global economy
 increasing trade of goods and
 1989-2001: %8.5
 2002-2005: %29
services
 increasing foreign direct
investment
 change in the sectoral
composition in exports and in
manufacturing value added
 Increase in import of
intermediate inputs
 1989-2001: %8
 2002-2005: %33
Import and Export of Intermediate Inputs, 1989-2005, billion $
100.000
Billion $
80.000
Export
60.000
Import
Customs union
2001 crisis
40.000
20.000
0
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source: Central Bank of Turkey 2005
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 10
2000-2004 annual growth rate of exports (CAGR)
Competitiveness of Turkish Industries:
Promising but also challenging…
Size of the bubbles indicate export volume in 2004
60%
Emerging
Sectors
50%
Petroleum Products
40%
Automotiv e
30%
20%
Star Sectors
TVs and Telecom
Electrical Machinery
Metals
Güç kaynakları (makinalar)
General machinery
10%
Iron&Steel
Non mettalic minerals
Plastic Materials
Fruit&Vegies
Textiles
Apparel
transportation equipment
0%
Traditional Sectors
Snail Sectors
0%
1%
2%
3%
4%
5%
6%
World market share %
Source: United Nations COMTRADE
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 11
2000-2004 annual growth rate of exports (CAGR)
… challenging because China does not
only mean cheap labor
Size of the bubbles indicate export volume in 2004
60%
Emerging
Sectors
Star Sectors
50%
Office Equipment
40%
Scientific Equipment
30%
TVs and Telecom
Industrial Machinery
Electrial Machinery
20%
Furniture
Iron and Steel
Metal productsi
Metal-dışı ürünler
Automotive
Textiles
Coal products
10%
Aparell
Snail Sectors
Traditional Sectors
0%
0%
5%
10%World market
15% share %20%
25%
30%
35%
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 12
The EU is Turkey’s largest trade partner
Imports
Total USD 116 billion, 2005, (42% EU share)
Asia
Spain
Germany
Germany
11
14
Africa
Italy
7
5
Middle East
Exports
Total USD 73 billion, 2005, (52% EU share
8
France
7
Spain
Other
17
11
Other EU
11
Other Europe
26
8
USA
Russia
9
14
Africa
6
United Kingdom
Middle East
Other EU
5
13
8
USA
11
3
Other Europe
Russia
Source: Undersecretariat of Foreign Trade
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 13
Fast integration into the EU: Could it be
even faster?
The share of the EU’s most dynamic 20 goods in Turkey’s total exports is rising.
(vertical axis) This means trends in Europe increasingly change the production
structure in Turkey.
 Turkey’s markets share in these markets also rise, but slower than those of
Czech Republic and Poland. (horizontal axis)

Share of EU's most dynamic 20 goods
in manufacturing exports (%)
Market share in EU’s most dynamic 20 exports and the level of integration: 1995 vs. 2004
35
30
Czech Republic 2004
(5.0)
25
20
Poland 1995 (2.3)
Romania 2004 (2.2)
15
Turkey 2004 (6.2)
Romania 1995 (0.7)
Czech Republic 1995
(1.4)
10
Poland 2004 (7.7)
Turkey 1995 (2.1)
Bubble site indicates countries' export value for
the EU's 20 most dynamic imports (billion USD)
5
0
0,5
1
1,5
2
2,5
3
3,5
4
Market share in EU's most dynamic 20 goods (%)
Source: United Nations COMTRADE
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 14
 Emerging Risks & Sustainability of the Growth Process
 Current account deficit and its structural components
 Employment Trends
• Demographic window of opportunity (or threat?)
• Structural transformation across sectors: Decline in agriculture
 Rising creative destruction
• Structural transformation within sectors: Move from traditional toward modern
in retail industry
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 15
Current Account: at scary levels?
5
2,0
-
0,0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-5
-2,0
-10
-4,0
-6,0
-8,0
-10,0
Current Account Deficit / GDP
Current Account Deficit (billion USD)
-15
-20
Current Account Deficit (billion USD)
Current Account Deficit / GDP (%)
4,0
-25
Source: Centrai Bank of Turkey
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 16
Fast growing sectors import more:
Coincidence or curse? It’s a fact and a serious
risk generating factor
 The current account deficit seems to have a structural component and
an external trigger (i.e. China), which are closely linked
 More “modern” sectors tend to be more dependent on intermediate
good imports. They are also the engine of export growth.
 Currency appreciation plays a role
 Cheap alternatives from East Asia
 Lack of strong local clusters in modern sectors (role of industrial policy)
 Bottom-line: Production process are getting more global, but accounts
remain national; and hence vulnerabilities.
office, accounting and computing machinery
radio, television and communication equipment
chemicals and chemicals products
medical, precision and optical instruments
Leather
apparels
Textiles
Ttobacco products
Average
Growth
(20022005)
Import
Dependency
37%
27%
11%
15%
1%
-1%
0%
0%
0.268
0.234
0.228
0.226
0.151
0.132
0.13
0.093
Source: State Statistics Institutee
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 17
Declining market shares in traditional
sectors
 The traditonal sectors that tend to grow slower in the recent
years also face rising competition from China
 The textile industry for instance, which makes up %12 of the
manufacturing value added is going through hard times
Textile and Apparel Exports to EU-15 Countries: Turkey and China
Market
Share
1995
Market
Share
2002
Average Growth
in Market Share
(1995-2002)
Market Share
2004
Average Growth in
Market Share
(2002-2004)
Turkey
%4,6
%6,5
%5,1
%6,9
%3,6
China
%2,9
%5,3
%9,4
%6,5
%10,9
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 18
Recent employment trends: sometimes good
is not enough
 Growth in recent years does generate jobs. But it’s not enough,
unemployment persists.
 Declining share of agriculture
Both trends will continue =
 Rising working age population
risk generating factors
 Plus: strong competitive pressures, high tax wedges, high productivity growth
140
Sectoral Employment and Demographic Trends, 1999-2005, 1999 indexed to 100
Industrial Production
Index
130
Service Employment
120
Manufacturing
em ploym ent
110
Working Age
Population
Total Employment
100
90
80
Agriculture
em ploym ent
70
1999
2000
2001
2002
2003
2004
2005 Source: TÜİK and WDI
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 19
Modernization inevitably leads to decline in agriculture
 EU accession process will surely
accelerate transformation (plus
globalization and trade
liberalization)
 Turkey’s total population = 70
million
Sectoral Distribution of Employment in Turkey, 2004
Agriculture
33%
Services
43%
 Agriculture (33 %) = 23 million
 Services (43 %) = 30 million
 Industry (24 %) = 17 million
Industry
24%
Economic Structure before and after EU accession in Greece, Portugal and Spain
Before Accession
After Accession
1981
1986
1986
2001
2001
2001
Greece
Portugal
Spain
Greece
Portugal
Spain
Agriculture
31
22
16
16
12
6
Industry
29
34
32
23
35
31
Services
40
44
52
63
53
61
Source: World Development Indicators
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 20
Is Creative Destruction in place?
Closer look at the companies closing down
 Floating exchange rate as a sweeping mechanism?
 As a mechanism to break the inertia
 As an igniting mechanism for creative destruction?
1995-2005 Number of Companies Closed Down
5000
# of companies closed dow n
4500
4000
3500
3000
2001 Crisis
2500
2000
1500
1000
500
-0
5
Ju
n
-0
4
Ju
n
-0
3
Ju
n
-0
2
Ju
n
-0
1
Ju
n
-0
0
Ju
n
-9
9
Ju
n
-9
8
Ju
n
-9
7
Ju
n
-9
6
n
Ju
Ju
n
-9
5
0
Source: State Statistics Institutee
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 21
Is Creative Destruction in place (2) ?
1995-2005 Number of Companies Started and Closed Down
40000
# of companies
opened
35000
# of companies
closed
30000
25000
20000
15000
10000
5000
Ju
n05
Ju
n04
Ju
n03
Ju
n02
Ju
n01
Ju
n00
Ju
n99
Ju
n98
Ju
n97
Ju
n96
Ju
n95
0
Source: State Statistics Institutee
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 22
 Towards a brand new agenda
 Setting the priorities, implementing strategies
 Managing the EU process
 Building capacity
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 23
Towards a new agenda
Picture is not bad at all
 recent growth performance
 macroeconomic stability
 a new and healthy incentive
structure
 global integration with also
growing regional integration
However, risks are serious
and require competent
management
 Current account deficit
 Rising unemployment
 Creative destruction
 .. + external factors: (i.e.
foreign affairs)
There is an urgent need for a new agenda
 Setting the priorities, strategic action plans, effective delivery
 Managing the EU process as a mechanism to mitigate risks
 Building the required capacity for the new environment
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 24
Setting the priorities
 We feel there should be three key areas:
 Adjustment management
 Risk management
 Raising Competitiveness
 Government needs to have the capacity to
 set the priorities
 design strategies
 implement effectively
 If managed wisely, EU process will be highly useful
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 25
Towards a new industrial strategy for
Turkey: SPO-TEPAV document
 Strategic integration into the global economy
 public-private dialogue mechanisms for right investment decisions
 reform of the incentive system
 foreign direct investment strategy
 Removing the barriers to investment, doing business, and
productivity






entry and exit barriers
informal economy and scale problems
services sector restructuring and input costs
Fostering R&D and innovation
improving the quality of the workforce
quality standards
 Cluster Development Programs
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 26
Building capacity for the new agenda
 Can the government undertake all of this all
alone?
 Capacity problems both at the decision making and
service delivery levels
 The need for public-private dialogue mechanisms
 Continuous feeding of the contents of the agendas
 Removing the binding constraints to effective
decision making and service delivery
 TEPAV – Economic Policy Research Institute
 TOBB – Economics and Technology University
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 27
TEPAV – Economic Policy Research Institute
 Developing policy tools for dialogues with the government
 Industrial Policy Document (with State Planning Organization)
 Investment Climate Assessment (with the World Bank and Treasury)
 Competition Environment Assessment (with the World Bank, FIAS and
Competition Authority)
 Higher Education Sector Project (with the World Bank)
 Governance of economic development
 Decentralization studies, regional development framework (with
The Ministry of Internal Affairs and local authorities)
 Fiscal monitoring and transparency
 Regional Integration
 Industry for Peace Initiative (with TOBB)
 Black Sea and Central Asia Project (with TOBB)
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 28
TOBB-BIS Industry for Peace Initiative
 Job creation will be highly critical for stability and peace
 Solution lies in industrial development
 Manufacturing base as well as the capacity to promote
such activities is very limited
 First-best option: Building overall capacity, build
industrial infrastructure, improve investment climate
(takes a long time but the need is urgent…)
 Second-best option: Mobilizing Industrial Parks as
instruments for job creation and economic growth (can
be done in short term if there is a strong dialogue
mechanism)
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 29
Why Industrial Parks for Growth?
 Clustering is useful
 Governments cannot deliver adequate services
everywhere equally and efficiently
 Second-Best Solution: Certain areas can be
designated as more equal (i.e. superior
infrastructure, faster permits & licenses)
 Investment Climate at the local level can be
improved via PPPs
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 30
Turkey’s Experience in a Nutshell
 200+ Organized Industrial Zones, 70 fully
operational
 Started as a urban development tool in the
1960s, with a loan from the World Bank
 Private-public partnerships were
facilitated through the local chambers
 Evolved over time to obtain regulatory
oversight
 The Law on OIZs was enacted in 2000
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 31
TOBB’s Estate Project in Gaza
 We started with the most difficult area
 Idea came at one of the Ankara Forum meetings
 Forum first started as a network of businessmen for
cooperation
 A concrete project was needed to monitor and test the
words of politicians
 An opportunity to leverage the know-how of Turkish
Chambers in:
 public-private dialogue
 Industrial park management
 Doing business under extraordinary circumstances
 A microcosm of all political and economic problems
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Palestinian Industrial Free Zone
Slide 32
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Slide 33
A Unique & Exemplary Project
 It is not an ordinary business project.
 requires effective coordination among the two not-sofriendly sides – PA and Israel
 private-public dialogue is key throughout the entire
process
 But, it is still a business project.
 If we want it to be sustainable, it must generate
profits. Under appropriate security conditions.
 If there’s fresh air for the investors, business prospects
don’t seem too bad (especially, given the resources
ready to flow into the region and generous FTAs.)
Transformation of the Turkish Industry: The New Agenda for
Adjustment, Risk Management, and Competitiveness
Thank you
www.tepav.org.tr
Slide 34