Declining Market Shares In Traditional Sectors

Structural Transformation of the Turkish Industry & the Role of Regional Integration

Esen ÇağlarAnkara, 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


Slide 3

New climate & contrasts What’s new? What has changed?


Slide 4

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 5

“Every crisis brings both opportunities and risks”A new process after 2001? Growth without

inflation Interests rates are

falling Productivity is rising No net job creation

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

inflation

nominal interest

real interest rate

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Oca.99 Oca.00 Oca.01 Oca.02 Oca.03 Oca.04 Oca.05

Industrial Production

Interest Rate

Inflation

Non-inflationary growth (1999-2005)

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

140.0

150.0

160.0

1996 1997 1998 1999 2000 2001 2002 2003 2004

EmploymentProductionLabor Productivity

economic program

Productivity and Employment TrendsInflation and Interest Rates

Source: State Statistics Institutee


Slide 6

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.)

Reforms lead to a new incentive structure


Slide 7

And the new incentive structure changes the rules of the game at the corporate sector

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)

Old environment

Investment Climate: Low inflation Limited incentives, prudent

banking sector Floating Currency (post

2001)

New enviornment


Slide 8

Reflections on the industry

The story on competitiveness Integration into the EU economy

New trends, new risks


Slide 9

The new game: Integration into the global economy Growth rate of trade volume

1989-2001: %8.5 2002-2005: %29

Increase in import of intermediate inputs 1989-2001: %8 2002-2005: %33

0

20.000

40.000

60.000

80.000

100.000

1989 1991 1993 1995 1997 1999 2001 2003 2005

Billion $

Export Import

Import and Export of Intermediate Inputs, 1989-2005, billion $

Source: Central Bank of Turkey 2005

Turkey in global economy increasing trade of goods

and services increasing foreign direct

investment change in the sectoral

composition in exports and in manufacturing value added

Customs union 2001 crisis


Slide 10

Apparel

Automotiv e

Textiles

Iron&SteelFruit&Vegies

TVs and Telecom

Electrical Machinery

Non mettalic minerals

Metals

transportation equipment

General machinery

Petroleum Products

Güç kaynakları (makinalar)

Plastic Materials

0%

10%

20%

30%

40%

50%

60%

0% 1% 2% 3% 4% 5% 6%

Competitiveness of Turkish Industries: Promising but also challenging…

Size of the bubbles indicate export volume in 2004

Star SectorsEmerging Sectors

Traditional SectorsSnail Sectors

World market share %

200

0-20

04 a

nn

ual

gro

wth

rat

e o

f ex

po

rts

(CA

GR

)

Source: United Nations COMTRADE


Slide 11

… challenging because China does not only mean cheap labor

Office Equipment

TVs and Telecom

Aparell

Electrial Machinery

TextilesMetal productsi

Industrial Machinery

AutomotiveIron and Steel

Furniture

Scientific Equipment

Metal-dışı ürünlerCoal products

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35%

Size of the bubbles indicate export volume in 2004

Star SectorsEmerging Sectors

Traditional SectorsSnail Sectors

World market share %

200

0-20

04 a

nn

ual

gro

wth

rat

e o

f ex

po

rts

(CA

GR

)


Slide 12

The EU is Turkey’s largest trade partner

14

5

7

6

1111

17

8

7

11

8

5

13

8 311

26

914

USA

AfricaItaly

Other EURussia

Other Europe

France

Asia Germany

ImportsTotal USD 116 billion, 2005, (42% EU

share)

ExportsTotal USD 73 billion, 2005, (52% EU

share

USA

Middle East

Africa

Other

United Kingdom

Other EU

Other Europe

Russia

Germany

Middle East

Spain

Spain

Source: Undersecretariat of Foreign Trade


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)

Czech Republic 2004 (5.0)

Poland 1995 (2.3)

Romania 1995 (0.7)Czech Republic 1995

(1.4)

Turkey 1995 (2.1)

Poland 2004 (7.7)

Romania 2004 (2.2)Turkey 2004 (6.2)

5

10

15

20

25

30

35

0 0,5 1 1,5 2 2,5 3 3,5 4

Market share in EU's most dynamic 20 goods (%)

Sh

are

of

EU

's m

ost

dyn

am

ic 2

0 g

oo

ds

in m

an

ufa

ctu

rin

g e

xp

ort

s (

%)

Bubble site indicates countries' export value for the EU's 20 most dynamic imports (billion USD)

Market share in EU’s most dynamic 20 exports and the level of integration: 1995 vs. 2004

Source: United Nations COMTRADE


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


Slide 15

Current Account: at scary levels?

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Cu

rren

t A

cco

un

t D

efic

it /

GD

P (

%)

-25

-20

-15

-10

-5

-

5

Cu

rren

t A

cco

un

t D

efic

it (

bill

ion

US

D)

Current Account Deficit / GDP

Current Account Deficit (billion USD)

Source: Centrai Bank of Turkey


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.

Average Growth (2002-2005)

Import Dependency

office, accounting and computing machinery 37% 0.268 radio, television and communication equipment 27% 0.234 chemicals and chemicals products 11% 0.228 medical, precision and optical instruments 15% 0.226 Leather 1% 0.151 apparels -1% 0.132 Textiles 0% 0.13 Ttobacco products 0% 0.093 Source: State Statistics Institutee


Slide 17

Declining market shares in traditional sectors

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

Textile and Apparel Exports to EU-15 Countries: Turkey and China

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


Slide 18

Recent employment trends: sometimes good is not enough

Sectoral Employment and Demographic Trends, 1999-2005, 1999 indexed to 100

Source: TÜİK and WDI

Agriculture employment

Service Employment

Manufacturing employment

Total Employment

Working Age Population

Industrial Production Index

70

80

90

100

110

120

130

140

1999 2000 2001 2002 2003 2004 2005

Growth in recent years does generate jobs. But it’s not enough, unemployment persists. Declining share of agriculture Rising working age population Plus: strong competitive pressures, high tax wedges, high productivity growth

Both trends will continue =

risk generating factors


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 Agriculture (33 %) = 23 million Services (43 %) = 30 million Industry (24 %) = 17 million

Agriculture33%

Industry24%

Services43%

Sectoral Distribution of Employment in Turkey, 2004

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


Slide 20

Is Creative Destruction in place?Closer look at the companies closing down


0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000# of companies closed down

1995-2005 Number of Companies Closed Down

2001 Crisis

Old trendline

New trendline

Floating exchange rate as a sweeping mechanism? As a mechanism to break the inertia As an igniting mechanism for creative destruction?


Slide 21

0

5000

10000

15000

20000

25000

30000

35000

40000 # of companiesopened

# of companiesclosed

1995-2005 Number of Companies Started and Closed Down

Is Creative Destruction in place (2) ?



Slide 22

Towards a brand new agenda

Setting the priorities, implementing strategies Managing the EU process

Building capacity


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


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


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


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


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)


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)


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


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


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


Slide 32

Palestinian Industrial Free Zone


Slide 33

A Unique & Exemplary Project It is not an ordinary business project.

requires effective coordination among the two not-so-friendly 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.)


Slide 34

Thank you

www.tepav.org.tr

Declining Market Shares In Traditional Sectors

Economy & Finance

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