Public Disclosure Authorized Turkey Agricultural ... · F. State Economic Enterprises G. Elements...

Report No. 4204-TU

TurkeyAgricultural Development Alternativesfor Growth with Exports(In Three Volumes) Volume 1: Main Report

June 30, 1983Europe, Middle East and North AfricaProjects Department

FOR OFFICIAL USE ONLY

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Document of the Wo4rld Bank

This document has a restncted distributton and may be used by recipientsonly in the performance of their official duties Rts contents may not otherwisebe disclosed without World Bank authonzation.

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CURRENCY EQUIVALENTS

US$1 - ~Tbrk-tsh lira (TL) 2141/TL 1 = US$0.005TL 1,000,000 = US$4,673

WEIGHTS AND MEASURES

1 kilogram (kg) = 2.20 pounds1 metric ton = 1,000 kilograms1 metric ton = 0.98 long ton

1 meter (m) = 1.09 yards1 kilometer (km) = 0.62 mile

I hectare (na) 10,000 m 2 = 2.47 acres

I decare = 0.1 ha = 0.25 acreI square kilometer (km2) = 0.386 square mileI liter (1) = 0.264 gallon

ABBREVIATIONS

AI - Artificial InseminationCBT - Central Bank of Turkey

CGE - Computable General Equilibrium ModelDSI - State Hydraulic Works agency within the Ministry of EnergyEBK - Meat and Fish Organization, an SEEGDAA - General Directorate of Agricultural Affairs of MAFGDPPQ - General Directorate of Plant Protection and Quarantine of MAFGDSF - General Directorate of State Farms of MAFGDVA - General Directorate of Veterinary Affairs of MAFHara - Animal Breeding State Farm, under the GDVAMAF - Ministry of Agriculture and ForestryORKOY - Directorate of Forest Villages of MAFSEE - State Economic EnterpriseSEKER - Turkish Sugar Factories, an SEESIS - State Institute of StatisticsSPO - State Planning OrganizationTASM - Turkey Agricultural Sector ModelT&V - Training and Visit System of Agricultural ExtensionTCZB - Agricultural Bank of TurkeyTEKEL - Tea & Tobacco Monopoly, a ParastatalTMO - Soil Products Office, an SEETOPRAKSU - Land and Water Development agency of the Ministry

of Village AffairsTSEK - Milk Industries Organization, an SEETUBITAK - Turkish Scientific Research CouncilTYT - Wool and Mohair Corporation, an SEETZ - The Provincial Extension Services of GDAATZDK - Agricultural Supply Organization, an SEEYEM - Turkish Feed Industries, an SEEYSE - General Directorate of Rural Infrastructure of the

Ministry of Village Affairs

FISCAL YEAR

Government of Turkey - January 1 to December 31SEEs and TCZB - January 1 to December 31

1/ Exchange rate as of June 1, 1983.

FOR OFFICIAL USE ONLYTURKEY

AGRICULTURAL DEVELOPMENT ALTERNATIVES FOR GROWTH WITH EXPORTS

Table of Contents

Page No.

Volume I: Main Report

PREFACE

SUMMARY

I. INTRODUCTION I

II. THE AGRICULTURAL SECTOR - A RETROSPECTIVE VIEW 2

III. PERFORMANCE POSSIBILITIES FOR THE AGRICULTURAL SECTOR 22

IV. MEDIUM TERM REQUISITES - AGRICULTURAL TECHNOLOGYAND INFORMATION SYSTEMS 37

V. MEDIUM TERM REQUISITES - AGRICULTURAL INVESTMENTAND CREDIT POLICIES 61

VI. MEDIUM TERM REQUISITES - AGRICULTURAL TRADE ANDPRICE POLICIES, SECTOR PLANNING CAPABILITY 82

VII. AGROPROCESSING INDUSTRIES - AN OVERVIEW 91

APPENDIX - Elements of the Proposed Strategy 102

MAP - Agricultural Regions of Turkey

Volume II: Annexes 1-4

l. Patterns of Resource Use, Physical Performance, and Constraints(1968/70-1978/80)

2. Agricultural Exports and Marketing3. Food Consumption and Nutrition4. Agri-related Manufacturing Industries: An Overview

Volume III: Annexes 5-11

5. Agricultural Production, Consumption and Trade Possibilities6. Macroeconomic Consequences of Sectoral Performance7. Resource Potential and Technological Possibilities

in the Medium Term8. Supporting Services to Farmers9. Agricultural Credit and Agroindustries Financing10. Price Stabilization and Food Security Policies in Grains11. Agricultural Incentives Policies

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

TURKEY


Volume I: Main Report

Table of Contents

Page No.

PREFACE

SUMMARY i-ix

I. INTRODUCTION I

II. THE AGRICULTURAL SECTOR - A RETROSPECTIVE VIEW 2A. The Policy Environment and Past PerformanceB. Resource Use and Physical Performance

C. Exports and MarketingD. Nutrition

III. PERFORMANCE POSSIBILITIES FOR THE AGRICULTURAL SECTOR 22A. Perceived OpportunitiesB. Modelling Turkish AgricultureC. Sources of GrowthD. Interpretation of TASM ResultsE. From Modelling to Strategy

IV. MEDIUM TERM REQUISITES - AGRICULTURAL TECHNOLOGY 37AND INFORMATION SYSTEMSA. Technology GenerationB. Diffusion of Improved TechnologiesC. Elements of Strategy

V. MEDIUM TERM REQUISITES - AGRICULTURAL INVESTMENT 61AND CREDIT POLICIESA. Public and Private Investment Requirements and Strategy

B. Agricultural Credit Policies and Strategy

VI. MEDIUM TERM REQUISITES - AGRICULTURAL TRADE AND PRICE 82POLICIES, SECTOR PLANNING CAPABILITYA. Foreign Trade RegimeB. Price Policies and Production IncentivesC. Price Stabilization, Food Security and NutritionD. Plans and Policy FormationE. Elements of Strategy

VII. AGROPROCESSING INDUSTRIES - AN OVERVIEW 91

A. Performance PotentialB. History and PerformanceC. MarketingD. Capital Structure and FinanceE. Institutional StrategyF. State Economic EnterprisesG. Elements of Strategy

APPENDIX - Elements of the Proposed Strategy 102

MAP - Agricultural Regions of Turkey

Table of Contents (cont'd)

Text Tables

Page No.

2.1 General Land Use in Turkey 6

2.2 The Changes in the Destination of Turkish Exports 14

by Commodities and Major Markets

3.1 TASM: Projections of Output, Consumption and 26

International Trade in 1990

3.2 Main Stability and Food Security Indicators 35

TURKEY


PREFACE

This report originated in the findings of a mission!/ to Turkey inMay-June 1982 to examine developments in the agricultural sector following theadoption of the Government's 1980 economic policy package, and identify policyrequirements for a reattainment of sectoral growth under a more liberalizedtrade regime. The mission also examined possible trade-offs withinagriculture between production for exports and other sectoral performanceobjectives, and developed an overview of the agroprocessing industries.Corollary was the evolution of appropriate sectoral conditionality for theFourth SAL operation in Turkey, which was specifically designed to supportsectoral policy developments; the delineation of agricultural issues to bepursued in the general country dialogue; and the identification of supportingESW, technical and capital assistance operations.

The draft report was based upon information available in June 1982.The findings and conclusions were discussed in December 1982 and March 1983during the processing of the Fourth SAL operation, and a formal review wasconducted with Government in April 1983. Because the policy environment forTurkish agriculture is changing rapidly, the Main Report was subsequentlyupdated to reflect significant developments since the study mission's fieldvisit. The broad conclusions remain, however--that Turkish agriculture willcontinue to play an important but diminishing role in the economy during themedium term; that historical sectoral growth rates can be reattained providedthat certain key policies are pursued, including

- continued support of essentially free-trade policies, including aderegulation of agricultural imports,

- continued penetration of foreign markets,- continued deregulation of internal markets,- more efficient generation and transfer of productivity-increasing

improvements in the sector,- an increase in the rates of investment in quick-yielding

irrigation projects and on-farm investment, and- institution building, particularly in the areas of agricultural

research and extension, irrigation development, agriculturalcredit, and sector planning and policy formulation;

that a modest expansion of agricultural exports will be feasible and would beassociated with increased employment but also with diminishing consumptionbalances; and that a much more rapid expansion of agroindustry exports can beexpected, though the rate of expansion will be critically dependent upon theperformance of primary production.

1/ The study mission was composed of Messrs. R. Burcroff II (mission leader),H. Gassner, Mmes. K. Saito and S. Tillier (Bank), and Messrs. M. Evans,H. Gencaga and N. Sanborn (Consultants). The mission was assisted withits modelling work by Messrs. S. Robinson and P. Scandizzo (Bank), andD. Bigman, V. Le-Si and J. Lewis (Consultants).

TURKEY


SUMMARY

i. This study was conducted to devise a medium-term development strategyfor Turkish agriculture taking into account the potentially far-reachingpolicy changes introduced since 1980. In doing so, the study consolidates andexplores in greater detail key findings of the recent report onIndustrialization and Trade Strategy (Report No. 3641-TU, March 1982) and thePublic Sector Investment Review (Report No. 3472-TU, December 1981) insofar asthe agricultural sector is concerned, and the 1980 project identificationmission's report on "Agricultural Development: Problems and Opportunities"(Report No. 3178a-TU, May 1981).

ii. With the benefit of hindsight and a more focussed review ofstatistical and written materials, the present report was able to document thespecific nature of the physical constraints which developed in theagricultural sector in the 1970s (e.g. on land and animal productivity).Programs, policies and institutional requirements to overcome theseconstraints are discussed, and particular emphasis is given in the report toweaknesses in the agricultural technology and information systems, publicinvestment in irrigation and the agricultural credit system. The study alsoexamines the patterns of export marketing and associated marketingarrangements that have developed since 1980 in order to evaluate possibleconstraints in this area for achieving the export growth targets. The studyexplored the incidence of malnutrition in Turkey which was found to be high,the relationship between policies which would maintain per capita consumptionbalances under a strategy of growth with exports, offsetting food importrequirements, and the effectiveness of the present price stabilization andfood security policies. Lastly, a general overview of agroindustryperformance and requirements was carried out to establish a basis for a morein-depth examination by subsequent studies.

iii. The analysis reported herein was facilitated by the use of aprogramming model of the agricultural sector and a stochastic model ofinterventions in the wheat trade, which were constructed by AGR and the studyteam. The intersectoral effects of sectoral performance were explored withthe assistance of DRD using the recently updated version of the Bank's CGEmodel for Turkey.

Past Performance and Constraints

iv. Turkish development strategy during the 1960s and 1970s was based

primarily upon industrial growth, with agriculture playing essentially asupportive role. Agricultural policies were geared to ensuring an adequateand cheap domestic supply of foodstuffs and industrial raw materials. Theprincipal instruments of policy were budgetary and financial subsidies to

guarantee high producer prices, low cost inputs, and cheap credit in order tostimulate agricultural production and investment. The domestic market washighly protected to encourage self-sufficiency in foods, and agriculturalcommodity export markets were regarded as a vent for any surplus production,with public agencies extensively involved in the limited exporting thatoccurred.

v. These policies encouraged the development of near self-sufficiency in

foodstuffs, and a respectable growth and investment performance in theagricultural sector until about 1975. Agricultural GDP grew at an averagerate of 4.7% p.a. from 1972-75, and sectoral fixed investment grew at anaverage rate of 17.9% p.a. The arable land frontier was reached in the early1970s as a result of an extensive lateral expansion of cultivation during the1960s, and production growth since then has been primarily throughintensification of production. This was due mainly to increased yields and tothe suppression of fallowed lands which, while not adding to the cropped area,accounted for up to one-third of the expansion of cultivated area. Inparticular, there were substantial increases in cereal production growth andyields, especially for wheat due to the successful wheat improvement programsimplemented by the Government in the 1970s. The livestock sector, whichaccounted for one-third of agricultural GDP in 1981, showed no suchimprovement. There was a steady growth in the numbers of livestock during the1970s, but no significant improvement in animal husbandry practices orproductivity. Moreover, despite the availability of pasture land, substantialovergrazing is threatening its conservation.

vi. The intensification of land use during the 1968-80 period wasaccompanied by a considerable increase in the consumption of modern inputs andmechanization. Fertilizer use developed in the mid-1960s, and thesubsidization of retail prices encouraged its widespread use--by 1979fertilizer consumption was more than three times the 1970 level. There wasalso a rapid increase in Turkey's tractor fleet in response to price andcredit subsidies, leading to an improvement in yield and a reduction infallow. However, it also facilitated the expansion of cropping onto marginalland, thus contributing to a depletion of soil fertility. It also discouraged

the use of animal traction and the development of less powerful tractors moresuitable for small farmers.

vii. By the mid-1970s, the burden on the economy of the subsidies to theagricultural sector had become all too evident, although the basic developmentstrategy did not change. Agriculture was thus still prevented from exploitingits comparative advantage in trade, which could have considerably reduced thesubsidization needed to sustain the sectoral growth. By the mid-1970s, theserates were already declining, and agricultural GDP growth fell to 1.4% p.a.during 1976-79, with investment also declining to 1.7% p.a. over these years.During the entire decade, sectoral exports remained a small fraction of totalproduction and way below potential due to the overvalued exchange rate andother disincentives to export. Mechanization and use of chemical inputs,however, caused the import content of production to increase.

- iii -

Recent Economic Reforms

viii. In 1980 the Government embarked on a more outward-orienteddevelopment strategy which emphasized market forces rather than Governmentdirection and intervention. In the agricultural sector this new strategy

meant an abrupt dismantling of the incentives system. There was a sharpreduction in input subsidies, particularly fertilizer, and in the number ofproduction price supports with the remaining supports gradually converted tofloor prices. The overall restraint on monetary policy forced a curtailmentof agricultural credit, although interest rates remained negative in realterms. The introduction of a competitive exchange rate policy and new exportincentives, together with a slack domestic demand, encouraged agriculturaliststo seek markets abroad.

ix. This shift in strategy initially resulted in considerable disarray inthe agricultural sector: the growth of agricultural GDP in real terms fell to1.5% in 1980 and further to 0.5% in 1981. In 1982, however, there wereindications that farmers are adjusting to the new agricultural environment,and, aided by a good harvest, real growth in agricyltural GDP recoveredsomewhat. In 1980 and 1981, agricultural exports_ began to respond to thenew measures, though less dramatically than industrial exports which had theadvantages of substantial excess capacity. In these two years, agriculturalexport earnings grew by an average annual rate of 29%, twice the averageannual rate of the previous five years. In 1982, export performance appearsto have been somewhat mixed, with the rate of growth of crop exports decliningwhile exports of livestock have almost doubled.

x. Agriculture has thus begun to respond to a policy environment andmarketing signals markedly different from the previous two decades. Theimplications of the recent shift in strategy over the medium-term raisesfundamental questions which are examined in the following chapters. Keyamongst these are the following:

(a) what rate of sustained growth is feasible for the agriculturalsector;

(b) 'what are the trade-offs between a rapid expansion of exports,sectoral employment, and domestic food security;

(c) what are the likely patterns of resource utilization andproduction resource requirements under an outwards-lookingstrategy; and

(d) what specific policies and interventions are required to achievea resumption of sustainable growth in agricultural GDP withexports?

1/ Including livestock and fisheries.

- is

Performance Possibilities over the Medium-Term

xi. The requirements for the agricultural sector over the medium-term areconsiderable. With limited possibilities for growth through expansion of areaor livestock numbers, growth must now increasingly come from higherproductivity and through a product mix which better reflects Turkey'scomparative advanta es. The study demonstrates, however, that a growth ratein agricultural GDP-/ of 2.8-3.0% until 1990 is feasible if certain keypolicies are pursued. Amongst these are:

- a continued support of essentially free-trade policies,including a deregulation of agricultural imports;

- continued penetration of foreign markets;- continued deregulation of internal markets;- more efficient generation and transfer of productivity

increasing improvements in the sector;- an increase in the rates of investment in quick-yielding

irrigation projects and on-farm investment; and- institution building, particularly in the areas of agricultural

research and extension, irrigation development, agriculturalbanking and credit, and sector planning and policy formulation.

xii. Such increase of agricultural GDP appears to be sustainable, and isassociated with growth possibilities for agricultural exports of between 4-6%p.a. and moderate growth in agricultural employment of about 1.0% p.a.However, the commodity composition of production must change and per capitadomestic consumption will decline as a result of a shift from production ofstaples to barley, fruit and vegetables, other cash crops and exportablelivestock products. Under conditions of limited food imports, theagricultural terms of trade would move markedly against consumers. Theadoption of more efficient price stabilization and food security subventionsin the wheat trade might lessen the severity of the trade-off. Sincemalnutrition is still an important concern, a delicate balance will have to bemaintained between diversion of sectoral resources for export production andthe related import and food security policies. The relatively low exportgrowth possibilities when compared with performance possibilities in thenon-agricultural sectors suggests, however, that the Government's export-ledindustrialization drive may indeed be the most promising growth strategy, viz.while agriculture should be expected to play an important role in Turkey'sgrowth, its share of GDP should be expected to decrease. This kind of patterncertainly has characterized the successful performances of other medium-incomedeveloping countries.

Technical and Institutional Requirements

xiii. Technology generation. The requirements to restore and sustaingrowth rate of 2.8-3.0% in agricultural GDP during the 1980s are major.2/The arable land frontier already effectively closed in the 1970s and hence the

1/ Government's definition. See Chapter III, para. 3.21.

2/ A tabular summary of the elements of strategy are presented in theappendix to the main report.

v

resumption of agricultural growth will require a marked increase inagricultural productivity. Future production growth must come from a moreintensive use of existing cultivated area through fallow suppression, expandedmultiple cropping and crop yield increases. In the livestock subsector, whichaccounts for about one-third of agricultural GDP, future efforts should focuson raising the productivity of native ruminants which comprises the large bulk(85%) of the national herd. The government presently is not particularly wellorganized to intensify the use of either of these basic resources (land andanimals). A reorganization, consolidation and regionalization of crop andanimal husbandry research is required as well as an improved system toestablish and monitor priorities for technology transfer and generation.These priorities should address both the needs of Turkey's semi-arid areaswhere mixed-crop livestock farming prevails--a cropping systems approach wouldbe appropriate here--and the more commodity specific production and marketingrequirements of sophisticated commercial producers. Increased emphasis onproduct quality and the needs of the importing countries is also required.Recent initiatives by Government to examine ways to improve agriculturalresearch constitute an important step in the right direction.

xiv. Diffusion of improved technologies. In parallel with improvement inthe agricultural technology systems, should come an improvement in theoperation of farmer information systems such as agricultural extension and theprovision of improved inputs, principally seed, fertilizers, smaller tractorsand implements and more appropriate breeding animals. To accomplish theformer, the Government's diverse agricultural extension services also willhave to be reorganized and consolidated, with retraining of staff. Links withthe research entities must be strengthened and a more thoughtful approach tofarmer training pursued. The scope of official extension assistance should beexpanded to incorporate animal management, care and feeding, while the use ofthe effective but staff intensive T&V approach should be emphasized mainly inregions where it might have the greatest effect.!/ Program cost savings anda conservation of management input could be realized in the morecommercialized areas, were the use of mass media further developed, andagribusiness encouraged.-V The Government recognizes these problems andintends to address some insofar as MAF's services are concerned through theformat of an Agricultural Extension and Applied Research Project (fieldappraisal for Bank assistance in FY84 was carried out in June 1983). It alsointends to establish an interministerial study group to examine ways toconsolidate and regionalize its diverse agricultural extension services underfuture projects. A relaxation of import restrictions on high quality seeds,smaller tractors and implements not presently produced in Turkey wouldmeasurably assist the technology-diffusion process.

1/ In a first phase program, it might be limited to rainfed areas whichfeature mixed farming conditions and newly irrigated areas not previouslyserved by intensive extension.

2/ In this connection, the strengthening of media-based marketing informationservices is to be encouraged.

-vi

xv. Agribusiness. In adthteil _o the direct management of research and

extension by Government line agercies, these activities have been carried outwith some success by paras-Q aals which have been organized along the lines ofan integrated agribusiness (e g SEKFR). A relatively recent development isthe provision of technology and inforauation services to farmers by privatelyowned agribusiness, priicipl. in 7horticulture and, more recently, inlivestock products. Although he scope of such operations has been confinedto date to the coastal regions and tne more accessible parts of Anatolia, andthe farmer-beneficiaries are no doubt the larger more successful operators,the promotion of an agribusiness approach could hasten the transfer and thediffusion of new techniques to the more commercialized areas, and therebycontribute to the resumption of growth.

Investment

xvi. To meet the growth targets al uded to above, an increase in thecapability of the construction agencies to program and complete irrigationprojects is required. This Darticularlv applies to TOPRAKSU, which currentlyhas a backlog of oxver 500,00 ha on DSI schemes (roughly equivalent toone-quarter of the present area sarved by technically good irrigationheadworks), but only has a capability to construct 30,000 ha./year. Thegrowth forecasts assume that the TOPRAKSU capability will be increased toabout 100,000 ha./year wh-ich iTnPlies that much more extensive use ofcontractors under TOPRAKSUes supervision is essential. DSI and TOPRAKSUshould also prepare a detailed medium-term investment plan in which theprogrammed expenditures of these agencies' resources would be concentrated onprojects which can be completed within a reasonable period of time. Theannual staff, equipment and budgetary requirements should be realisticallyestimated and their relati-ionhi.- teo the elements of the program should beclearly indicated for carrying out the investment program. To this end,measures have been agreed under the TAEE Irrigation Project (FY83) to augmentthe utilization of contractors and develop an irrigation investment plan.

xvii. The private investraent requirements for achieving the sector's growthand exports potential coul' oe considerable, both at the farm level and forexport marketing facilities and representation abroad. Broad-based farm levelinvestment is likely to m-aterialize only later in the decade but could amountto US$1-1.5 billion per year by 1990. A large demand for export orientedinvestments could materislize sooner. However, the present array ofinvestment incentives give conflicting signals in regard to suitable factorproportions, in particular wsithi respect to the desired degree of capitalintensity.

Agricultural Credit

xviii. The growth targets also imply a doubling of the provision ofinstitutional credit in real 1981 terms during the 1980s, which could easilybecome larger if supplemented by a strong farmer demand for investmentcredit. Because of the magnitudes involved and the importance of achievingbroad-based productivity increases, a much larger share of agricultural creditwill have to be directed tou hrds the medium- and small-sized farmers. The

- Vii -

present institutional system is unable to either generate the additionalresources for this task, or effectively reach farmers in the requirednumbers. Three-fold action is desirable. First, to improve the system'sresource mobilization capability, the short-term agricultural interest rate inreal terms should be increased and institutional depositories should be set upat the village level to capture incremental savings from the expected increasein agricultural incomes over the medium term. Second, a diversion of existingagricultural credit to unintended uses by the quasi-parastatal salescooperatives should be restrained by curtailing their guaranteed access toTCZB financing except during years when commodity price floors come intoeffect and compulsory procurement is required. Ultimately, however, it wouldbe desirable to set up independent sources of financing for these purposes.Third, the efficiency of agricultural and agroindustrial lending should beimproved by (a) strengthening TCZB, and (b) creating competing institutionswhich, hopefully, could also extend their offices deeper into the rural areasthan TCZB has been able to do. Recent steps to improve the salescooperatives' financial structure, and measures agreed under the SecondAgricultural Credit Project (approved June 1983) in respect of theagricultural interest rate, the organization and management of TCZB, and astudy of the credit cooperatives' capabilities represent significant progresstowards implementing the suggested credit strategy.

Foreign Trade Regime

xix. Exports. Achievement of the sector's growth potential requires anaverage growth of exports in fresh and semi-processed form of 4-6% p.a. whichis feasible under a strategy of continued penetration of Middle-Easternmarkets and, towards the end of the 1980s, further expansion into the EEC.The principal policy requisites are a maintenance of a competitive exchangerate policy and continued deregulation of exports, since exports of raw andsemi-processed commodities have responded principally to progressivedevaluations since 1979 and the removal of restrictions kand much less so tothe specific export credit and tax rebate incentives). Moreover, the systemof export levies, as presently construed, bears no visible relationship to thegovernment policy of maximizing value-added in exports. The application ofthe levies should therefore be detached from che system of commodity pricesupports, and applied only selectively to commodities wherein Turkey controlsa large share of international trade.

xx. Imports. In parallel with increased sales abroad, the currentrestrictions on food imports should be relaxed. The GDP and exports growthprojections are associated with an increase in agricultural imports about 35%p.a., which would entail a fundamental change in Government's autarkicattitude towards certain strategic food co.mmodities, Expanded exports ofhorticultural produce and livestock products will tend to divert land andother resources away from the production of staples, Tne diversion of rainfedwheat land into the production of barley for export, and increased exports ofhigher quality wheat per se will place pressure on the availability ofdomestic supplies. A marked increase in domestic food prices (and ofagroindustries' raw material prices) is projected to occur unless increasedimports of principal food items are allowed such. us bread wheat, oils andpossibly sugar.

V Yiii

xxi. Institutions. In terms of institutions, the TMO's still predominantposition in grain exports and monopoly of imports should be relaxed once andfor all to facilitate the projected and considerable growth of barley and hardwheat exports, as well as offsetting bread wheat imports. TMO has neither the

export marketing capability for such an expansion, nor are its relatedinterventions for stabilizing domestic grain prices particularly appropriate.

Price Stabilization/Food Security and Nutrition

xxii. Food Security. In the field of price stabilization and foodsecurity, continued intervention is desirable both to reduce the loss ofpotential economic gains stemming from producer risk aversion and satisfy theneed to stabilize household incomes, especially amongst the poor. The rootsof the present price policy lie in the system of commodity price supports,which was excessive before 1980 both in terms of number of commoditiessupported and the resource costs of maintaining the system. The recent movesto reduce the number of supported commodities and shift from incentive pricing

to floor pricing is to be encouraged. Within this framework, a new andnon-inflationary method for financing the diverse procurement agencies must befound. Since the requirement to procure is compulsory when prices declinebelow trigger price levels, government itself should incur a duty loss. Suchprobably should be reimbursed through less inflationary general revenues orearmarked off budget transfers (e.g. the Price Stabilization Fund). Withrespect to grains price stabilization, the present system basically operatesto stabilize producers' prices at still subsidized levels-! and to protectthe producers from international price movements. In the process, however, itdestabilizes consumer prices, while TMO's operating policy of first fillingits storages before exporting in good years operates to reduce average grainsproduction by constraining the sector's ability to avail of high valued exportopportunities when these exist.2/ Amongst alternative grains stabilizationpolicies examined in the study, a policy of free trade augmented by producerfloor pricing and target consumer subsidies proved the most effective forsimultaneously stabilizing producer and consumer prices and household incomes,while reducing the probability of "famine" among target consumers duringperiods of low production.

xxiii. Nutrition. Regarding food availability and nutrition, the cheapestsources of calories and nutrients in Turkey are bread and other wheat flourderivatives, sugar, liquid oils and margarine, pulses and potatoes. The studyconcluded that the continued availability of reasonably low cost supplieswould require a progressive relaxation of import constraints for bread wheatand oils. The analysis also shows that exports have induced a considerableincrease in the domestic availability of pulses since only the better qualityproduce is exported; however, research is needed to augment the storage life,and thus the availability of potatoes (conversion to dried form may help).These interventions are all within the present capability of governmentinstitutions.

1/ As a result of Central Bank discounts at a preferential rate of interest.

21 The effect of these constraints on wheat are more far-reaching than anyother commodity since wheat occupies about 45% of the cultivated area, andnearly every farmer in Turkey produces some wheat.

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Agricultural Sector Planning Capability

xxiv. The production and marketing structure of Turkish agriculture isexceedingly complex. A bewildering and often conflicting array of incentives,

taxes, permissions, licenses and direct public sector involvement are used tocarry out existing policies. In order to rationalize the pattern ofintervention it will be necessary to create an effective capability formedium-term planning and policy monitoring whose scope will necessarily cutacross ministries, and the parallel development of statistical resources and apolicy analysis capability replete with appropriate modelling to provide

checks on consistency. This effort should probably be located within the MAF,with the support of suitably qualified staff from appropriate disciplines.

Agroindustries Subsector

xxv. While the mission did not undertake an in-depth examination ofagroindustries, some pertinent general conclusions were developed.Pre-mission CGE runs demonstrated that the feasible real growth of GDP fromthe food processing sector is about three times as high as growth in theagricultural sector, but quite sensitive to the agricultural growth rate, thusto productivity improvements in agriculture. The results also indicate thatfood processing exports could grow at more than twice the rate of agriculturalexports, and that this performance could be associated with a near tripling by1990 in the combined agriculture and food processing sectors' positive netforeign exchange earnings.

xxvi. The study's findings with respect to agroindustries confirmed therecent Country Economic Mission's general findings with respect tomanufacturing. As a result of overinvestment during the highly protected andsubsidized policy environment of the 1970s, investment demand and capacityutilization rates generally have remained low, except for those comparativelyfew firms which have successfully expanded their export operations and therebyavailed of the government's export incentives; the needed shake-out ofinefficient firms is continuing. This is in line with Government'scommendable approach to rationalize the subsector and open it to the forces ofinternational competition. To strengthen the capital structure of firms whichare able to expand exports and adjust to the new environment, steps have beentaken to strengthen the equities markets, and others are planned to reduce thecost of debt financing. Specific incentives for exporting should also becontinued until Turkish agroindustries have established a firm foothold inforeign markets.

xxvii. Publicly owned agroprocessors do not appear to be faring much betterthan the private sector operators, in spite of their still favored access topublic investment funds. Most are having cash flow problems. Moreover, theirproductivity is low, unit costs are high, and their management andoverstaffing problems, and susceptibility to bureaucratic interference are ona level with other manufacturing SEEs. In recognition of this, SEEagroprocessors such as EBK, TSEK, TYT and SEKER were included within the

purview of the recent SEE reform legislation. It would also be desirable toseek technical assistance for some of these entities to strengthen theirmanagerial, staffing and operational capabilities.

TURKEY


I. INTRODUCTION

1.01 The most recent Agricultural Sector Survey (Report No. 1684-TU) and"Memorandum on Turkey's Agricultural Sector" (Report No. 2267a-TU) weredistributed in June and December 1978 respectively. Sector developments andprospects have been updated subsequently by a Country Economic Mission, whosereport "Turkey - Policies and Prospects for Growth" (No. 2657a-TU) andPostcript were distributed in December 1979 and 1980; by two special economicmissions treating, respectively, the public investment program (Report No.3472-TU. December 1981) and "Industrialization and Trade Strategy" (Report No.3641-TU, March 1982), a project identification mission, whose report"Agricultural Development: Problems and Opportunities" (No. 3178a-TU) wasdistributed in May 1981; and through the continuing work on project andstructural adjustment lending to Turkey.

1.02 During preparation of the September 1981 Economic and Sector WorkIndicative Statement, it was felt that an Agricultural Sector Study was neededto cover the recent trends in sector performance, examine the changingpatterns of Government intervention, and assess the sector's medium-termprospects. It was intended that the study would primarily concern itself withan analysis of farm production and the export potential of primaryagricultural produce. The Government's adjustment program for agriculturesubsequently crystallized during Fall 1981, when a strategy of favoringagroindustrial exports over primary products was adopted, andagroindustrialists were extended the Government's full package of exportincentives and additional investment incentives. The Government alsoannounced export targets for agriculture which were both ambitious and couldrequire a considerable reallocation of land from production of food andstaples for domestic consumption to the production of other field and cashcrops for export. However, some stubborn and potentially significantstructural difficulties were manifested in 1981, including continuedunfavorable movement in the domestic terms of trade, low levels of privateinvestment, further decrease in the rate of growth of sectoral GDP, rapidbuild-up in fertilizer stocks, declining real wage rates and the stubborn

persistence of general protein-calorie malnutrition amongst the rural segmentsof the population. Against this background, the scope of the study wasexpanded to quantify and analyze the trade-offs between export and productiongrowth objectives, food security and income stabilization, sectoral employmentobjectives and the objectives of the import regime, and to provide a summaryoverview of developments in the agroindustries subsector.1.03 In the following sections, the main findings and conclusions of thestudy are presented in Chapters II and III. These are followed by arecommended medium-term strategy for Government (Chapters IV through VI) toinduce a resumption of agricultural sector growth and expansion of exports at

sustainable levels. The final chapter contains an overview of agroindustriesperformance and problems.

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II. THE AGRICULTURAL SECTOR - A RETROSPECTIVE VIEW

A. The Policy Environment and Past Performance

2.01 The decade of the 1970's. The development strategies pursued in the1970's and their essentially deleterious effect on macroeconomic performancebecame a root cause of the general economic crisis of the late 1970's. The

effects on agricultural performance have been detailed in recent Bank Reports(c.f. para. 1.01), however, the salient features are summarized here toprovide background for a forward looking analysis.

2.02 Throughout the 1970's, agriculture was assigned a subordinate role to

industry pursuant to the inward-oriented growth strategy adopted by Turkeyduring those years. Its primary role was to supply low cost inputs toindustry and guaranteed food supplies for the urban work force. Althoughagricultural commodities accounted for a significant though declining share of

total exports in the 1970's, sectoral exports as a fraction of totalproduction were quite low and far below potential, which mirrored thegenerally poor export performance of the economy. Access to foreignagricultural markets was constrained by a combination of exchange ratepolicies, export licensing requirements, and niggardly foreign exchangeretention privileges, which effectively altered the terms of trade in favor ofindustry and domestic markets. At the same time, the import content ofproduction increased, again mirroring patterns in the non-agriculturalsectors, as a result of programs which encouraged fairly indiscriminantagricultural mechanization and use of chemical inputs.

2.03 The sector also did not benefit as much as other sectors from thepublic investment drive of the 1970's, which gave rise to the strongnon-agricultural growth rates experienced between 1972-1979. Much of thepublic investment which occurred, mainly in the irrigation subsector, gestatedvery slowly because resources were spread thinly over an excessive number ofprojects. As a result, the principal instruments of policy became a combina-

tion of budgetary and financial subsidies to guarantee high producer prices,low cost inputs and cheap credit in order to stimulate agricultural productionand private investment in the sector. These incentives induced fairly goodproduction and investment performance until about 1975, but could not besustained during the late 1970's as a result of the strain placed on thebudget and the banking system and the competing demands for resources from themanufacturing sectors, and constraints to further expansion of the agricul-tural area. However, the basic development strategy did not change, andagriculture was still not allowed to exploit its many comparative advantagesin trade which could have considerably reduced the extent of subsidizationneeded to sustain the, by then, declining rates of sectoral growth.

2.04 At the macroeconomic level, the effects of these policies onagriculture are manifested in sectoral GDP, export and investmentperformance. Between 1972 and 1979, real GDP increased at an annual averagerate of 5.3% p.a.; more so in the early to mid-1970's at a rate of 7.6% p.a.,and at the slower pace of 2.1% p.a. between 1976-79. Agricultural GDP growth

followed the same pattern though at lower levels: growth of 3.3% p.a. between1972-1979; averaging higher at 4.7% p.a. from 1972-75, and falling off to 1.4%between 1976-79. As a result of disproportionately slower growth, thesector's share in real GDP declined from 25.0% in 1972 to 21.7% in 1979.Sectoral exports during this period increased by about 11% p.a. in US$ terms,(less in real terms) which is quite low considering the infinitesimalproportion of total sectoral production actually exported.l/

2.05 Sectoral fixed investment manifested trends similar to agriculturalGDP in the 1970's. It increased at an annual average rate of 17.9% p.a.between 1972-75, which declined by about 17.0% p.a. between 1976-79.

Moreover, the composition of fixed investment changed. During the early1970's, the investment drive in the sector was fueled by private investment,whose share in agricultural fixed investment expanded from 50.0% in 1972 to60.7% in 1975. Thereafter, private capital formation fell off even morerapidly and, by 1979, its share was only 43.5%.

2.06 The period of economic reform. With the imposition of crisismanagement measures by the Government in 1980 and 1981, including revisedprice policies and measures to restore fiscal and financial discipline, theadoption of an export-led growth strategy, and conversion from a mixedtwo-tiered exchange rate system to an essentially unified crawling-peg system,much of the incentives apparatus put in place for agriculturalists during the1970's was abruptly (though of macroeconomic necessity) dismantled. Ofparticular note is the sharp reduction of inputs subsidies,2/ the reductionin number of production price supports, the gradual conversion of theremaining supports from artificially high incentive prices to floor prices,and the enforcement of constraints on the availability of subsidized

agricultural credit. These, coupled with deflationary demand management andthe new export incentives, have forced exporters and commercial farmers toseek out foreign marketing opportunities. They have done so with vigor. Theadjustment process, however, threw the agricultural sector into disarray, fromwhich it is just now beginning to recover. As a result, the growth ofagricultural GDP in real terms fell to 1.5% p.a. in 1980 and further during1981 to only 0.5% p.a. Aided by good weather, but also amidst strongindications that agriculturalists are now adjusting to the new realities offarm management in Turkey--including considerably less subsidization, andgreater exposure to market determined prices--the growth of real agriculturalGDP has since begun to recover. In contrast with sector productionperformance, agricultural exports during 1980 and 1981 jumped tounprecedentedly high levels, increasing by an annual average rate of 29% overthe two-year period. Physical exports continued to expand in 1982 amidst someindications that the diversion of existing production to foreign markets--which probably accounted for the very high growth in exports in 1980-81--isbeing replaced as a source of export growth by a genuine supply response tothe higher valued marketing opportunities which exporting presents.

1/ Agriculture's share in total exports, however, fell slightly from 60.6% in

1972 to 59.4% in 1979 as a result of the inward-oriented policies. As afraction of agricultural GDP, agricultural sector exports amounted to lessthan 1% in 1979.

2/ Described in Annex 11. Also see Annex 4, Section B.

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2.07 However, the policy and institutional issues which need to beaddressed in order to achieve a sustaioable resumption of sectoral GDP growthare both profound and extensive. The encouraging sectoral export performancesince 1980 represents a response to a long overdue change in price policiesand the foreign trade regime -- itself, mandated by the rising costs ofimported energy sources during the 1970's, capital inflows which were used ina less than efficient way without offsetting productivity increases andforeign exchange savings, and a similar squandering of domestic savings inhighly protected, subsidized and inefficient public and private investments.However, it is unlikely that the price and foreign sector policy effects,necessary though these are, will provide a sufficient basis by themselves forsustained medium-term growth. These must also be supported by stronginstitutional measures to foster a continuous growth in the factorproductivity of agriculture which include both technology generation and itsdissemination to farmers, more effective public investments and higher levelsof private capital formation, the provision of credit to encourage the uptakeof improved technology at the farmIlevel, and further improvement of marketingand inputs distribution systems. In economic terms, this implies that as theGovernment moves from its present strategy of stabilization to one ofstructural change, increasing emphasis will have to be given to policies whichcan achieve an intertemporal or dynamic shift in production possibilities.This will be needed to complement the measures undertaken since 1980, whichwere essentially static in nature and designed to move the agricultural sectorto the use of more efficient input combinations and a more economic commoditycomposition of output and balance between foreign and domestic disposals.

2.08 Related developments. Three related developments of note during the1970's will condition the nature of growth with exports in the medium-term.Two of these bear directly on the prerequisite technological and marketpenetration strategies for growth, namely (a) the reaching of limits tofurther cropped area expansion and increases in animal numbers, and (b) thevery significant change in the importance of and the direction and commoditycomposition of exports. The third factor is the incidence of malnutritionwhich remains of concern in spite of the near self-sufficiency in foods whichTurkey achieved during the 1970's. These factors will have to be addressedwhen assessing the trade-offs between growth with exports and the maintenanceof a desirable level of food security and per capita consumption balances.

The aforementioned developments are reviewed in the following sections.

B. Resource Use and Physical Performance!L

2.09 During the period under review, fundamental physical resourceconstraints developed which will influence the technological options employedand the commodity composition of production in the future. The mostsignificant amongst these was an effective closing of the arable land frontierin the early 1970's as a result of an extensive lateral expansion ofcultivation during previous decades which was accompanied by a broadened shifttowards more intensive cultivation during the remainder of the 1970's. Asecond significant development was the accelerated degradation of

1/ The discussion in this section is based upon the findings reported inAnnex 1.

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communally-operated grazing lands as a result of overstocking, and the effectsthis is having on the availability of feeds for Turkey's still largely

traditional and low productivity systems of animal husbandry.l/

General Land Use

2.10 By 1980, about 44% of Turkey's agricultural land.?/ was occupied bypermanent pastures and meadows..! The two principal sources of informationconcerning general land use are the 1980 Census of Agriculture and a soils andland classification study done by the General Directorate of Land and WaterDevelopment (TOPRAKSU). These give quite different figures for the totalareas of pastures and meadows,4/ but agree very closely on their relativeshare in total agricultural land (Table 2.1). Pastures and meadows are mostimportant in the North East, South East and Central East regions (see Map),where these constitute well above half of the agricultural land; grazing andforage lands are still quite important in the remainder of the CentralAnatolian plateau (Central South and Central North regions) and in the BlackSea region, but become secondary in the western and southern coastal areas(Mediterranean, Aegean and Marmara regions), where these account for less than30% of the agricultural land.

2.11 The remaining 56% of agricultural land represents the crop land,which is occupied by field crops (roughly 60%), fallow (roughly 28%), andvineyards, orchards and vegetable gardens (roughly 12%). The dominant systemof cultivation in rainfed areas consists of a rotation including fallow 1 yearout of 2, especially for the interior regions; fallow is of lesser importancein the coastal regions, which benefit from higher rainfall (in particular, theBlack Sea and Marmara regions) and are usually better equipped with irrigationfacilities (e.g. the Mediterranean and Aegean regions).

1/ The livestock subsector, though based largely on traditional husbandrymethods, accounted for one-third of agricultural GDP in 1981.

2/ Defined here as including crop land, meadows and pastures. Crop land isitself defined here as including the area sown in field crops, fallow,vineyards and orchards and vegetable gardens.

3/ The pastures ("Mer'a") are the range grazing lands, which may varyconsiderably in quality as well as in accessibility, while the meadows("Cayir") are more specifically defined as grasslands, usually located inwet lowlands, and hence not grazed but used for hay production. Themeadows, which are usually quite productive, represent only about 3% ofthe total; they are privately-owned, while the pastures (97% of the total)are most of the time communal lands.

4/ 14.1 million ha according to the 1980 Census, 21.7 million ha according toTOPRAKSU. There is probably some under-reporting in the Census, whilesome of the areas classified as pastures by TOPRAKSU probably correspondto very low productivity and/or remote and relatively inaccessiblerangeland; part of this 21.7 million ha is thus not used or not usable(while other parts are overgrazed).

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Table 2.1: General Land Use in Turkey

% of Crop Area Annual Agricultural('000 ha) Statistics /a Census /b TOPRAKSU /c

1. Sown1970 15,591.0 (57%) 9,906.1 (62.7%) 17,202.4 (62.1%)1980 16,379.0 (57.7%) 12,488.3 (63.2%)% increase 5.1 26.1

2. Fallow1970 8,705.0 (31.8%) 4,664.3 (29.5%) 8,396.0 (30.3%)1980 8,188.0 (28.9%) 5,004.6 (25.3%)% increase -5.9 7.3

3. Vineyards & Orchards1970 2,595.0 (9.5%) 1,113.4 (7.1%)1980 3,019.0 (10.6%) 1,844.2 (9.3%)% increase 16.3 65.6

2,100.8 (7.6%)4. Vegetable

-1970 448.0 (1.6%) 109.0 (0.7%)1980 786.0 (2.8%) /e 411.0 (2.1%)% increase 75.4 277.1

5. Total Crop Area1970 27,339.0 15,792.8 27,699.21980 28,372.0 19,748.2% increase 3.8 25.0

6. Meadows & Pastures1970 n.a. 657.4 /d 21,745.71980 n.a. 14,177.2

7. Forests & Scrubs1970 18,273.0 153.6 /d 23,468.51980 20,199.0 23,487.4

8. Unused Land1970 n.a. 294.9 Id -1980 n.8. 4,995.4

9. Non-arable Land1970 n.a. 166.4 /d 4,884.01980 n.a. 17,551.2

10. General Total1970 n.a. 17,065.0 77,797.31980 n.a. 65,963.2

/a Source: The Summary of Agricultural Statistics, 1980, SIS.7b Source: 1970 General Census of Agriculture, SIS. Preliminary results of the 1980

General Census of Agriculture, (village head questionnaire) SIS./c Source: Land Wealth of Turkey, TOPRAKSU, 1978 (based on results of surveys done di,ring

the 1966-71 period).Note: Fallow area has been calculated from the above source assuming that one yearfallow follows one year cultivation.

/d These figures (1970 census) correspond to a very partial reporting since they lead to ageneral total much below the total area of the country. It is likely that theycorrespond only to the privately owned areas, i.e., exclude all the communal pastures(and report only the privately-owned meadows) and most of the forest and non-arable areas.

/e A lower figure (596.1) is given in "Agricultural Structure and Production, 1980", SIS.

n.a.: not available.

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Trends in Land Use During the Last Decade./

2.12 Total cultivated area. During the period 1968-80, the total croparea in Turkey expanded by only 0.3% p.a. On the other hand, the totalcultivated area in Turkey (excluding fallow) increased by about 1.5 million haat an annual rate of close to 0.8% a year (Annex 1, Table 11). Of this, about0.5 million ha corresponded to a reduction of the fallow, while at least 1million ha has been gained from grazing land, forest and other lands. Theincrease in cultivated area has been realized mostly in field crops (+0.8million ha) and fruit trees (+0.5 million ha) and to a lesser extentvegetables (+0.2 million ha); these last two categories however experiencedthe fastest growth rates in area, and as a result, fruits and vegetablestogether now represent 19.7% of the cultivated area as opposed to 17.5% tenyears ago.

2.13 Field crops. The results of the State Institute of Statistic's (SIS)

annual statistics indicate that the relative share of cereals among fieldcrops decreased slightly, from almost 85% of the area sown at the beginning ofthe 1970s to a little more than 82% by the end of the decade (Annex 1,Table 21). In connection with the overall increase in cultivated area, the

total area of cereals in the country showed a slight increase of about 0.2% ayear, while the wheat area increased the most (about 0.9% a year).

2.14 As opposed to cereals, the relative share of area sown to all of theother major field crops (pulses, industrial crops, oilseeds, tubers, foddercrops) increased between 1968 - 1980. In particular, oil seed crops andpulses experienced the fastest growth rate in area, while the share of sownarea in industrial crops increased only marginally due to the expansion ofsugar beet cultivation nationwide.

Evolution of Crop Yields and Production

2.15 Although only modest growth in the area under cultivation wasrealized, a steady intensification of production occurred. This wasmanifested principally through increased yields which, for most major cropsand some fruits, generally accounted for far more of the realized growth inphysical production than did areal expansion (Annex 1, Table 21). Someintensification was also due to the suppression of fallowed lands during thedecade, which, in itself - while not adding to the crop area - accounted forup to a third of the expansion of cultivated area.

2.16 Trends in crop production. During the 1970s, the total production ofcereals increased on average by 4.2% per year, most being due to improvementin yields. Among cereals, wheat experienced the fastest production growth(+5.2% per year), followed by barley and to a lesser extent maize and rice.Yields improved for all cereals, but especially for wheat (+4.3% per year) asa result of an expansion of HYV's and to a lesser extent maize and barley. By

1980 the country was producing about 16.9 million tons of wheat according toofficial statistics.

1/ Except where mentioned otherwise, all results are derived from the StateInstitute of Statistics' annual statistics.

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2.17 The most substantial gains in cereals yields were observed in theMarmara, Aegean, Mediterranean and Central North regions. Higher gains inthese regions are mostly explained by the introduction in the i970s ofsemi-dwarf soft wheat varieties, capable of responding to high level offertilizer use; such varieties could not express their full yield potential innon-irrigated, low-rainfall areas and therefore spread mostly in the westernand southern coastal areas. These were followed up by the introduction ofmodern semi-hard varieties for rainfed areas, which substantiallyout-performed traditional rainfed wheat whenever rainfall was adequate andcorrect cultivation methods applied. Although relatively more modest, theyields achieved in other regions also show improvement resulting from uptakeof semi-dwarf soft wheat and improved rainfed varieties, the progressiveacceptance of intensified fertilizer use and tillage practices as well as, toa lesser extent, herbicide use.11 Thus, on the whole, the wheat improvementprograms implemented by the Government in the 1970s successfully intensifiedthe cultivation of cereals lands throughout the country.

2.18 Although the pulses production has increased on average by 3.0% peryear, most is due to area increase. The national production of chick peas andlentils, which presently account for around 55% of all pulses, has beenincreasing by around 7% per year, with no significant change in yield. Amongindustrial crops, cotton production has remained more or less constant, withhowever a slight but insignificant increase of yield. The production oftobacco has increased by 5% per year, because of a yield increase of 7.3% peryear which has more than offset the decrease of area of about -2.3% per year.Sugar beet yields have tended to decline in all regions, but area increaseresulted in production growth of about 6.8% per year for the whole country.

2.19 The production of oilseeds during the last decade has been increasingon average by 2.9% per year, because of yield increases (1.5% per year) aswell as area increases (1.3% per year). However, increases in sunflower seedproduction during the decade have been above 6% per year, mostly due to areaincrease (4% per year - most of which occurred in the early 1970's) and itpresently accounts for about 40% of the total oilseed production, as opposedto only 28% ten years ago. During the last decade, the production of tubercrops (mostly potato) also increased steadily, principally through yieldincreases occuring during the latter part of the 1970's. The total productionof fodder crops (alfalfa and sainfoin) increased by 5-6% per year, but stillremains minimal. No yield increases were achieved in any of the 9 regions.

2.20 For all major categories of fruit and nuts production, increases of4.1% (nuts) to almost 6% (citrus) have occurred. Among citrus, orangeaccounts for about 60% of the total production but has experienced the slowestgrowth rate (4.2% per year), while lemon (presently about 24% of the totalcitrus production) and mandarine (about 14% of the total) have experiencedgrowth rates of production around 9% per year.

1/ This account is from C. K. Mann, "The effects of Government Policy onIncome Distribution; A Case Study of Wheat Production in Turkey" inPolitical Economy of Income Distribution in Turkey, E. Ozbudun andA. Oluson (Editors), Holmes and Meir (Publishers), New York (1980).

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2.21 The total production of vegetables increased by about 3.9% per year,mostly in the four coastal regions and the South East. Changes in therelative importance of different vegetable types may influence the totalproduction in tons; since vegetable area is not broken down by vegetable type

in the SIS statistics, it is impossible to determine whether productivityincreases have taken place or not. If one assumes that no substantial changein vegetable mix has occurred, then yield increases have been negligible.

2.22 Use of purchased inputs and machinery. The expansion of productionnoted above was accompanied by a considerable increase in the consumption ofmodern inputs and mechanization. Although the data will not permit a furtherstatistical association of the sources of growth, viz. areal expansion,suppression of fallow, expansion of irrigation, and yield increases inassociation with the use of particular inputs and combinations, it isgenerally believed that all crops and all rotations benefitted. The use offertilizer in Turkey developed after the mid-1960s; the subsidization ofretail prices subsequently encouraged its widespread use. In the 1970s, thenational consumption of fertilizer increased on average by more than 11% peryear (c.f. Annex 1, Table 38)1/, however, growth at this rate was actuallyattained only after 1971 and has been steady since, with the exception of 1974and 1975 which were years of sharp retail price increases and serious supplyshortages. Prices were subsequently rolled-back, and by 1979 fertilizerconsumption had risen to more than triple the level achieved in 1970. A sharpdecline occurred in 1980 when the government removed a portion of the highprice subsidies granted during previous yeafs. In 1981, however, despitefurther price increases, total consumption returned to about 1977 level; theconsumption of nitrogen in 1981 was indeed similar to the record levelachieved in 1979, and most of the decrease in total consumption has been forphosphates. The use of agricultural chemicals (pesticides, fungicides,herbicides) has not grown significantly during the last ten years. While seeddisinfection and use of insecticides and fungicides are fairly common, the useof chemical herbicides, which were introduced in the early 1970s, is stillrather limited mostly because of high prices and lack of farmer know-how. Theuse of certified seeds, after an initial increase (Annex 1, Table 38), hasbeen declining during the last five years. The main reason has been a lack ofadequate and timely supply (discussed further in Chapter IV and Annex 8);since the introduction of high yielding wheat varieties in Turkey in the late1960s, the farmers are fully convinced of the desirability of using improvedseeds.

2.23 The growth of Turkey's tractor fleet during the period under reviewhas been almost 15% per year. This growth, however, has fallen off duringrecent years. The sharp increase in mechanized farm operations started withthe importation of tractors under the Marshall Plan, and facilitated theexpansion of cropland onto marginal soils thereby contributing to depletion ofsoil fertility and accelerating erosion. On the other hand, it has alsopermitted more timely seedbed preparation and harvesting for field crops andhence increases in yields and the reduction of fallowed land. Until recently,the Government encouraged the strong demand for farm machinery through both

1/ Estimates of fertilizer consumption by major crops are presented in Table39 of Annex 1.

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price and credit subsidies. At the same time, little official attention hasbeen given to the design of suitable equipment for animal traction on small

farms, again, until very recently, thus making the use of tractors even moreattractive in comparison. Many non-tractor owning farmers, even those withonly a small area, now have their land worked by tractor through custom work.While there is room for debate about whether the present number of tractors isexcessive or notl/ (Annex 1), the average size and power of tractors inTurkey clearly is excessive. Only domestically manufactured tractors arewidely available (which run from 40 HP upwards), imports are strictlyregulated, and no small model has been adapted and widely marketed.Therefore, in many areas it might be better to avail for small and mediumfarmers, smaller and cheaper tractors sized more in proportion with theirneeds.

2.24 In respect of implements and other machinery, the total number oftractor-drawn plows, harrows and trailers more or less match the total numberof tractors. However, the number of tractor-drawn seed drills is low, and amore widespread use will permit further increases in crop (especially cereals)yields. In certain areas, additional threshing machines would allow savingsin time and peak season labor. Additional pumps, sprinklers and otherirrigation equipment are required to intensify the utilization of irrigatedareas, while a careful expansion in the numbers of combine harvesters mayfoster the spread of multiple cropping.

Livestock Resource and Production

2.25 Turkey's livestock resource is extremely large. Although nationalstatistics on livestock production are less than precise, the SIS annualstatistics report that the national herd consists of upward of 15 millioncattle, 65 million sheep and goats, and 3 million other large animal types.Other estimates of livestock numbers vary considerably according to sources,but similar orders of magnitude are displayed. Production estimates also varyboth in respect to numbers of progeny and pedigree as well as animal productyields, thereby casting their reliability into doubt for methodologicalreasons. On the whole, however, virtually no broad-based improvement hastaken place in animal husbandry practices and productivity during the last10-15 years. Some exceptions exist (establishment of modern poultry

operations and a few intensive dairy-cattle farms, expansion of animalfinishing operations) but they concern only a limited number of large farms,bypassing the bulk of the livestock producers and the national herd.

2.26 According to the SIS annual statistics (Annex 1, Table 47), the totalnumber of sheep and goats increased by 1.4% per year duri7ng the 1968-1980period and the total number of cattle by 1.6% per year.21 The population of

1/ There is on average for the whole of Turkey one tractor for 38 ha. ofsown land (Annex 1, Table 40). An indicative norm for the tractor sizespresently in use would be about one for every 75 ha., however tractorsare also used extensively for farm to market transportation.

2/ Expansion of these rates suggests that the size of national herd hasnearly doubled since World War II.

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animals of lesser importance such as buffaloes, horses, mules and donkeys hasbeen declining. Poultry raising, however, has been expanding by around 5.4%per year.

2.27 The increase in the numbers of cattle and ovines has not beenaccompanied by any significant change in feeding practices. No pastureimprovement has taken place in spite of the fact that pasture area has beensteadily diverted to cropping during the 1970s. Some increase in feedavailability for the winter period has occurred through increased availabilityof cereals and industrial crops byproducts; forage crop cultivation howeverremains extremely limited. It is usually recognized that despite theapparently large availability of pasture land (about 21 million ha accordingto TOPRAKSU) substantial over-grazing is jeopardizing the conservation of thisresource because of low productivity and disorganized utilization (lack ofrotational or deferred grazing). However, largely because of free access topastures, winter feed availability and/or cost seems to be the main factorlimiting individual herd sizes.

2.28 The number of animals reported in the SIS statistics corresponds tothe inventory at the end of the calendar year, i.e. the middle of winter whenlivestock numbers are minimal after Autumn sales. It is most remarkable(Annex 1, Table 47) that the number of breeding cows in winter has beenincreasing much faster (+2.6% per year) than the total number of cattle (+1.6%per year); the cattle herd composition in the winter has consequently changedas shown in Table 48 of Annex 1. Farmers thus appear to be keeping an everincreasing number of cows, but sell their progeny at a younger age, whichcould be another manifestation of desire to avoid winter feeding. This alsois reflected by reports that an increasing proportion of immature cattle isbeing slaughtered. Since this has not been accompanied by any improvement infeeding practices and hence weight gain of young cattle, the average carcassweight steadily decreased in the 1970s.l/

2.29 For meat production, SIS reports only the figures for animalsslaughtered in official facilities (i.e. the Meat and Fish Organization(EBK - a parastatal) and municipal slaughterhouses). In 1980, SIS reports204,380 tons of red meat produced in such facilities (Tables 49-52 of Annex1), while the SPO estimate of total red meat production for the same year is898,500 tons (of which 433,100 for beef and 465,400 for sheep and goat).Official slaughters thus account for only about 25% of the total. Nocomprehensive estimate of growth in total meat production during the lastdecade is available. Such growth is in any case certainly well below thegrowth in number of breeding cows (2.6%) since the average carcass weight hasbeen declining and a larger number of animals have been retained for herdgrowth. According to SIS, the milk production during the 1968-80 period has

been increasing by around 2.1% per year barely matching the increase in thenumber of breeding females; no significant improvement in yield per lactationand/or in calving/lambing percentage has occurred. Wool production has beenincreasing at the same rate as the sheep flock. On the whole, mostly becauseof a persisting underfeeding of growing and lactating animals, all herd andproduction parameters have remained very low.

1/ There is scattered evidence that the trend may have been reversed since1980, however, as a result of increased use of animal fattening creditswhich Government has made available to stimulate livestock exports.

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Resource Potential

2.30 The high rates of sectoral growth experienced in the 1960's and early1970's were largely based upon an expansion of cropping to previouslyuncultivated lands and the lateral extension of traditional animal husbandry.The 1970's also witnessed a shift towards the more intensive cultivation ofsome crops, and the imposition of constraints on further increases intraditional animal numbers due to limits on the carrying capacity of the feedbase. But the resumption of historical trend rates of growth in themedium-term will require a considerable further intensification of land useand increases in animal productivity. A steady growth in land and animalproductivity is thus instrumental to the sectoral performance possibilitiesdiscussed in the next chapter, and serves as the foundation for the technologyand information strategy proposed in Chapter IV.

2.31 An indication of the possibilities for further growth in yields isgiven with reference to nearby countries. When compared with performance inSyria, Iran, Yugoslavia and Greece, Turkish yields at the end of the decadefall within the low to middle range for nearly all major crops (see Annex 5,Table 6 to Appendix 2). Recent estimates of the total yield benefitobtainable from use of improved seed under Turkish conditions are presented inAnnex 5, Table 7 to Appendix 2, and range from about 5% for some pulses to150% for sunflower and soybean, and nearly 200% for hot house tomatoes. Themission's estimates of feasible annual growth in yields range from 0-1.8% forvarious pulses, oil and industrial crops, 2.0% for grains, 2.0-3.0% forhorticultural crops and 3.1% for fodder crops (Annex 5, Table 5 toAppendix 1). Similarly, substantial increases in livestock productivity arepossible through herd upgrading and better care and feeding. Thepossibilities are summarized in Annex 5, Table I of Appendix 3, which setsforth the mission's estimates of feasible meat and milk yields under Turkishconditions for native and improved breeds of cattle, sheep and goats.

C. Exports & Marketing 1/

2.32 A rapid development of internal agricultural marketing anddistribution arrangements took place in the 1970's, including investment inrelated facilities. An increasing involvement by parastatals and quasi-publicsales cooperatives in the procurement and marketing of agriculturalcommodities also occurred, particularly by those eligible for production pricesupports. By the end of the 1970s, the links between producers, the domesticretail markets, and the then rather limited export markets were wellestablished.

2.33 As detailed below, the systematic opening of the economy after 1980required--as still requires--a substantial though unquantifiable commitment ofresources, time and effort for the expansion of export marketing channels andcapabilities. Although it is a bit soon to generalize, the experience gainedsince 1980 indicates that the advantages of particular institutional marketingarrangements are quite specific to the kinds of commodities being exported and

1/ The material in this section has been extracted from Annex 2, which is adiscussion of agricultural exports and marketing.

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their relative perishability. Other factors include the reliability of theexisting procurement system and its ability to service exporters as well asdomestic markets, and trade practices in the importing countries. Therecently imposed incentives structure for exports also has influenced the

kinds of marketing arrangements being developed.

Turkish Comparative Advantage

2.34 During, the 1970's, agricultural commodity export markets wereperceived as a vent for surplus production, and--apart from Turkey'straditional exports (hazelnuts, cotton, tobacco, tea and raisins)--performancewas lackluster. Three quarters of the agricultural export revenues derivedfrom these five traditional export crops up to the end of 1979, and thecorresponding export quantities did not change significiantly between 1973 and1981. Therefore, a large increase in sectoral exports in 1980-82 wasexpected, and did indeed occur, in response to the actual and potentialcomparative advantages Turkey possessed by 1979.1/ The extent is indicatedby estimates of the ratio of domestic resource costs to net value added atborder prices (the DRC ratio) for that year; these ratios are set forth for1979 in Table 25 of Annex 5 along with the corresponding coefficients ofeffective and nominal protection.2/

2.35 After exports were deregulated and the crawling peg exchange ratesystem was introduced, the exports of unprocessed agricultural commoditiesincreased from $1.34 billion in 1979 to $2.14 billion in 1982. This expansion

was concentrated in commodities possessing low DRC ratios viz. barley, pulses,cotton and tobacco, peppers, citrus, apples and animal products. As a resultthe share of the four traditional export crops which accounted for 75 percentof all agricultural exports in 1973, had reduced to 53 percent by 1981. Thispattern is reflected in Table 2.2, which compares agricultural exports in 1981with those realized in 1979 on the basis of commodities and destinations.

Direction and Organization of Trade

2.36 In addition to rapid export expansion and some diversification ofcommodity composition, a fairly significant change in the direction ofagricultural trade also occured. As a result of particularly rapid expansionof exports the Middle East and North Africa since 1979, exports to this regionare now nearly equal in value with Turkey's exports to the EEC and WesternEurope, as shown in Table 2.2 (the geographic pattern of exports displayed in1979 is representative of the pattern during previous years).

2.37 The commodity mix of export growth to the various markets was by nomeans homogeneous, and its very diversity, and country specificity isinstructive. The fact that private exporters have responded to thesemarketing opportunities with much more vigor than parastatals and quasi-public

1/ In the short term at least, i.e. at the cost structure and set ofinternational prices pertaining in 1979.

2/ These were computed as part of a projections exercise using the TurkeyAgricultural Sector Model - see Annex 5 for details.

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Table 2.2: The Changes in the Destination of Turkish Exports byCcmmdities and Major Markets

(US$''00)

Middle East Rest ofCommodity Groups & North Africa EEC Countries-l the World Total

1979 1981 1979 1981 1979 1981 1979 1981

1. Traditional Cropsa. Cotton 1,931 31,520 133,494 255,047 92,399 61,697 227,824 348,264

b. Tobacco 965 6,103 46,507 107,901 129,499 281,099 176,971 395,103c. Raisins 1,750 9,670 63,258 109,890 45,439 8,898 110,447 128,458

d. Figs 162 2,442 27,682 22,987 13,659 9,914 41,503 35,343

e. Hazelnuts 3,192 18,751 278,320 221,884 71,485 61,136 352,997 301,771

Subtotal 8,000 68,396 549,361 717,709 352,481 422,741 909,742 1,208,846

II. Fruits and Vegetables

a. Citrus 5,330 35,159 13,677 29,399 38,285 60,385 57,292 124,943

b. Onion & Potatoes 12,637 21,145 75 662 650 1,855 13,362 23,662c. Tomato 4,623 19,068 15 163 - - 4,638 19,231

d. Apple 16,740 58,508 114 539 3 71 16,857 59,118e. Grapes 1,427 3,079 1,203 797 372 8 3,002 3,884

f. Other fruits 3,767 9,203 362 1,444 6 12 4,135 10,659

g. Other vegetables 1,031 3,227 2,592 4,800 - - 3,623 8,027

Subtotal 45,555 149,389 18,038 37,804 29,326 62,331 92,919 249,524

III. Pulsesa. Chickpeas 21,404 36,751 9,371 25,134 1,409 5,558 32,184 67,443

b. Lentils 17,605 65,454 16,280 38,657 4,749 19,274 38,634 123,385c. Beans 733 6,615 2,995 15,552 333 2,205 4,061 24,372

Subtotal 39,742 108,820 28,646 79,343 6,491 27,037 74,879 215,200

IV. Cerealsa. Wheat 50,834 53,785 27,723 - 10,595 - 304,352 53,785

b. Barley - 43,349 - 5,985 85 6,975 85 56,309

Subtotal 50,834 97,134 27,723 5,985 10,680 6,975 89,237 110,094

V. Livestock 45,200 311,992 4,016 10,313 4,082 788 53,298 323,093

OVERALL TOTAL 189,331 735,731 627,784 851,154 403,060 519,875 1,220,175 2,106,760

/1 EEC countries include Greece, Spain and Portugal.

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sales cooperatives suggest that institutionally, the 1980 reforms--bypermitting access to better prices, allowing the Turkish Lira to approximateits scarcity value against foreign currencies, and by reducing regulation andbureacratic control--also made it possible to tap previously suppressedentrepreneurial and managerial capabilities for export marketing, which is aneeded complement for the effort to increase farm productivity in the mediumterm.

2.38 Both the public and the private sectors in Turkey are involved in

export marketing of agricultural produce. The involvement of public andquasi-public marketing agencies (includes state economic enterprises - SEE'sand sales cooperatives) has been confined to traditional crops such as cotton,tobacco, hazelnuts, raisins, figs and olive oil. In addition, EBK plays amarginal role in meat exports, and a recently established sales cooperativeintends to export pulses. Until recently, the Soil Products Office (TMO) hadthe exclusive privilege for wheat exports, and it still retains exclusive useof the country's port silo facilities. However, the relative position of

public agencies in exports has been declining in recent years, and theirprimary objective seems to have shifted to price setting rather than marketing.

2.39 Aside from directly exporting up to 60% of the relevant export crops,the public agencies have played a key role in the financing of the stocks andin setting domestic prices. During the years when the basic productionsupport prices have been set above international prices, the public agencies'share of procurement increased, forcing private exporters out of the market.Some of these stocks were subsequently sold to private exporters for marketingabroad. The timing of deliveries and prices finally agreed upon, however,caused major disruptions in deliveries, which discouraged importers fromentering into long-term delivery contracts with Turkish suppliers.

2.40 The products directly exported by the cooperatives are sold either tothe importers or through dealers in the major export markets. Although thesales cooperatives frequently operate side-by-side with private Turkishexporters in these markets, arrangements for market sharing or other concertedaction have not developed.

2.41 Private exporters dealing in the Western European and North Americanmarkets for traditional export crops and fresh fruits and vegetables tend toconcentrate in Izmir, on the Aegean coast. The citrus, pulse and livestockmarketing center is the main Mediterranean trading center of Mersin. A numberof large holding companies have also entered the export trade during the lasttwo years in response to strong government export promotion measures.l! Allof these large firms are headquartered in Istanbul.

2.42 Most of the private trade in traditional export crops is handled by 6to 8 firms in Izmir. These family firms also own orchards and land, and somehave been in the export trade for over 100 years. Most of these firms eitherown or have access to packing facilities. Both in the Izmir and Mersin area,the exporters have considerably expanded their own orchards and land holdingssince 1980 to guarantee sources of supply by partially financing such

1/ Detailed in Annex 11.

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investments out of low-cost export credits. The trade contacts and proceduresare well developed for handling traditional crops, and a major bottleneck forfurther rapid expansion appears to be export demand, not the organizationalcapability. The Turkish share of the hazelnuts market for example is close to70% of total trade. Thus the 30% increase in quantities exported in 1981 overthe 1980 level reduced the prices by the same margin leaving export revenuesunchanged.

2.43 While the exports of traditional crops into the European and NorthAmerican market are handled by traders in Izmir, the expanding volume of tradein these same commodities in the Middle East since 1980 has been handled bywell-established Mersin based firms which also are diversifying their exportitems to handle new marketing opportunities.l/ The old established firmshave also become very active in the burgeoning pulse and livestock trade.

Over a quarter of all Turkish pulse exports, for example, was handled by onefirm in Mersin. The share of the five largest export firms is estimated to bearound 70% of total pulse exports in 1981. There is a similar though lesserconcentration in livestock exports. However, mostly new ventures have beenformed in Mersin to handle the trade in barley to the Middle East which hasoccured since 1980, who apparently have accounted for the large bulk of thistrade.

2.44 Control over expanding exports of highly perishable fruits and

vegetables to Europe has been maintained by Izmir and Istanbul based firms.The firms which have vertically integrated mandarin exports, includingproduction, packing and marketing, have recently been able to establishpermanent distribution outlets in the F.R.G. and Austrian markets. Suchoutlets are also used for distribution of other fresh fruits and vegetables,particularly peaches, apples, and fresh grapes. On the other hand, much of

the trade in fresh fruit and vegetables to the Middle East has been handled byforeign middlemen (para. 2.53) who secure their supplies directly from farmersor domestic wholesalers in Turkey.

2.45 The trading operations owned by large private sector holdingcompanies have expanded into agricultural commodity exports during the lasttwo years, following the widening of interest rate differentials betweencommercial lending and export credits since 1980. The interest rate differen-tial is a strong motive, because a primary objective of these operations is toprovide their parent holdings with low cost credits. Another incentive forthese companies seems to be the privilege exporters enjoy in retaining up to25% of their hard currency receipts to finance imports of raw materials--useunspecified--while large traders have also been disproportionately favored bythe tax rebate structure which is progressive in respect of the value of afirm's exports.

1/ Indeed, the established exporters with trade contacts in the Middle Easthave also been able to enter the European Market in relativelynon-perishable food items in competition with Izmir based firms and sales

cooperatives, while, in the Middle Eastern markets, the reverse does notseem to be happening due to the particularity of business practices.

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2.46 Such companies operate in a number of sectors and tend to dislay no

concentration in the geographic distribution of their markets. Despite theadvantages they enjoy in rebate differentials and in favored access to exportcredits, they tend to compete with established Turkish firms for exports oftraditional goods into traditional Turkish markets. In some cases, thesefirms have made arrangements with existing agricultural export firms to sharethe premiums that result by simply reporting (larger) conjoint exports.

Trade Practices in Importing Countries

2.47 The most serious difficulties faced by the Turkish exporters seem to

be in fresh fruit and vegetable markets in Western Europe. All fresh produceis shipped on consignment with no price guarantees. Independent deliveriesfrom different Turkish suppliers and other exporting countries create widefluctuations in daily prices. Payment for the goods is based on a weightedaverage of expected receipts for the various grades in each consignment. EECcustom duties, if any, handling charges, and in some cases transport fees arepaid by the dealer with the remaining revenues credited to the account of theexporter. The exporter has no control over the prices at which the shipmentis sold and the seasonality of market presence limits the leverage of theexporter over the dealer. In addition to uncertainty over price, there can bea substantial lag between the shipment of produce and the receipt of payments,with the associated carrying costs being absorbed by the exporters.

2.48 Since 1980, Turkish exporters have attempted to strengthen theirpresence in West European markets in two ways. Some major exporters haveestablished permanent representation in the main markets in Germany andAustria to sell directly to supermarkets and fruit and vegetable stores. Thelatter, which primarily cater to around two million Turks living in Germany,Holland and Austria, have already established contacts with Turkish exporters,and as a result more than half of the exports of eggplants, capiscums, freshbeans and cucumbers went to West Germany in 1981.

2.49 Turkish exporters have also established recent joint ventures withfood distributors in the main European markets. One Turkish firm has joinedwith a British firm for distribution in the United Kingdom, and others areexpected to follow, particularly in fresh fruits and vegetables.

2.50 Tturkish exports of traditional crops such as raisins, figs, tobaccoand cotton are generally sold on the basis of fixed prices, usually FOB. The

payments for export commodities in these cases are fairly prompt and are madeimmediately against presentation of required documents to the banks.

2.51 The marketing channels for traditional crops, however, varyconsiderably between major markets in Western Europe. All major exporters,

both private exporters and sales cooperatives, seem to have longstandingbusiness ties with their importers and agents which have even been used by

some exporters to raise loans in importing countries or receive payment inadvance of shipment to partially finance their purchases from farmers.

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2.52 In some Middle Eastern and North African countries (Libya, Algeria,

Egypt and Iraq) government agencies are the major importers. There is nogovernment involvement in imports in the Gulf countries. In other countries(Iran, Iraq and Egypt), semi-perishables and relatively durable items (e.g.pulses, meat, cereals, onions and potatoes) are imported by governmentagencies and parastatals, while highly perishable fresh fruits and vegetablesare imported by the private operators. Turkish exporters have exploited all

these channels since 1980, however sales to the government agencies make upthe bulk of Turkish export earnings from these markets.

2.53 Most commodities exported to the Middle East and North Africa are onan FOB price basis. Standards for pulses and cereals are well developed andthe Middle Eastern importer accepts Turkish government certification ofconformity to specifications. Three characteristics of marketing in theMiddle East are noteworthy for further penetration of these markets. First,unlike the marketing channels to Western Europe, over 80% of total freshfruits and vegetables exported to the Middle East are purchased inside Turkeyby merchants from the importing countries; however, sorting, grading and finalpacking is done outside the Turkish borders where packing materials arecheaper and of better quality. Most are small operators who buy a fewtruckloads of assorted commodities at a time. Some have links with majordistributors in the Gulf, and the recent supply disruptions in Lebanon andSyria have encouraged Lebanese and Jordanian merchants to procure supplies inTurkey for ultimate disposal in the Gulf.

2.54 The second significant marketing development in the Middle East andNorth Africa is the increasing use of sub-contracting arrangements between theTurkish exporters and importing agents for government purchases in some ofthese countries. Instead of bidding directly, Turkish exporters sign deliverycontracts with an indigenous importer who in turn bids for imports by thegovernment agencies. These arrangements are becoming more common incommodities where the quality standards are not well specified and shipmentscould be rejected (in the case of carcass meat) or where the goods are sold oncredit and collection requires special contacts. The profit margins of theseintermediaries vary from 5 to 10%.

2.55 The third characteristic of these markets is the increasingimportance of bulk procurements by government agencies, which can cause majorfluctuations in purchases. In 1980, for example, Turkish exports of applesjumped to 128,000 tons from the previous year's level of 30,000 tons. Morethan half of the increase, however, was due to the Iraqi Government's decisionto import apples that year. The decision whether to import the commodity andfrom where to import it seems to be a political one in some major markets andis not necessarily related to the quality or price of goods received.

2.56 Because of the uncertainty involved, both in regard to timing andexpected receipts, such purchases tended to bypass the established marketingchannels. Bulk purchases by governments seem to be particularly attractive tothe recently established subsidiaries of large holding companies with noprevious agricultural marketing experience. The tax rebate differential thesecompanies enjoy, their relative access to export credit and ability to utilize

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these credits effectively in the domestic market through their parent holdingsallows these firms to underbid other Turkish competitors. The prices of such

well publicized bids then tend to set ceilings in other markets. This iscreating serious problems in commodities where Turkey holds a major share ofthe market (pulses, lemons and hazelnuts), or where there are supplybottlenecks to expanded exports as in Satsumas and grapefruits.

Implications

2.57 While somewhat impressionistic, the foregoing discussion indicates

that the development of export marketing channels has entailed substantialeconomic investments and opportunity costs. To what extent these costs wouldaffect the magnitudes of Turkey's comparative advantages as evidenced insimple indicators such as the DRC ratios is hard to judge because it is notpossible to quantify market penetration premia which could be applied to theevaluation of value added at border prices in the DRC computations. Thepremia, however, would seem to be particularly high for markets andcommodities where (a) sales on consignment predominate (e.g. fruits andvegetables in the EEC and sales of semi-perishables through importing agentsto government in some Middle Eastern countries), (b) sales cooperatives andparastatals are the primary procurement agency used by private exporters (dueto disruptions in supply--e.g. some traditional exports), and where (c)holding companies can use their favored access to subsidized export credit andof other incentives which normally are not applied to agricultural commoditiesto undercut the established border prices for Turkish produce (e.g. bulkprocurements by Middle Eastern governments). These factors effectivelyincrease the opportunity costs of exporting, and could require in the firstinstance substantial investments in procurement arrangements and marketing,both at home and in the importing countries, in order to improve capabilitiesin the areas of market information, quality control, packaging and delivery.Through the improved performance which should result, these investments couldeventually encourage importers to bear more of the associated risk and cause a

shift from sales on consignment to the use of longer-term agreements and morecertainty in regard to price. In the second and third instances, improvementwould require fairly fundamental policy changes in so far as the role,functions and financing of the cooperatives are concerned (discussed inChapter V), and an eventual change in the application of the export and exportfinancing incentives to permit the established agricultural exporters tocompete on more equal terms with the holding companies and thereby discouragethe potential opportunity costs associated with monopolistic restrictions oftrade.

D. Nutrition

2.58 Incidence of malnutrition. A major phenomena which could influencethe commodity composition of the export drive is the extent of malnutrition inTurkey.!1 A large segment of the Turkish population still suffers fromsevere caloric deficiency. Eleven percent of the population consumed less

1/ Material in this section is drawn from the discussion of Food Consumptionand Nutrition in Annex 3.

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than 1,600 calories per person daily in 1981/82--a level defined as theminimum requirement on the basis of population and occupational structure of

Turkey. The degree of malnutrition was due primarily to the tight foodavailability situation in Turkey since the national average calory intake wasabout 2,395 calories/person/day.l/ In comparison with the results of aprevious survey conducted in 1974, the extent of serious malnutrition hassubsequently declined to about half of the levels in 1974, but it stillaffects some 5 million people.

2.59 Protein intake deficiency is less severe a problem. In 1974, about

10% of the population consumed less than 50 grams/person/day, which hassubsequently fallen off to about 4% of the population. Furthermore, theTurkish diet is such that an increased intake of food to eliminate caloriedeficiencies also provides protein since cereals and pulses are major elementsin the diet. Although protein malnutrition is not a serious problem ingeneral, a segment of the population still consumes insufficient animalprotein; 26% of the population consumed less than 8 grams per person per dayin 1981. The regional distribution of malnutrition for 1981 is shown below.

The Proportion of Severely Malnourished Families in the Population/!(Percent of Total)

Insufficient InsufficientRegion Calorie Intake Protein Intake

I. Aegean and Marmara 7.6 4.32. Black Sea 7.9 2.73. Central Anatolia 7.6 2.04. Mediterranean 13.6 4.05. Eastern Anatolia 19.9 8.2

Average of Turkey 11.3 4.2

/1 Malnutrition defined as less than 1,600 calories/person/day energyintake; 50 grams/person/day total protein; and 10 grams/person/day animalprotein intake.

Source; Turkish Development Research Foundation.

1/ Nutrient intake is not the only determinant of nutrition, but it is themost important one. For some of the issues involved, see Chernichovsky,D., "The Economic Theory of the Household and Impact Measurement ofNutrition and Related Health Programs", World Bank Reprint SeriesNo. 121. See also, Srinivasan, T.N., "Malnutrition: Some Measurement andPolicy Issues"' World Bank Reprint Series No. 178.

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2.60 Another major nutritional problem in Turkey is infant malnutrition.Infant mortality rates of over 120 deaths per 1,000 live births in Turkey are3 to 4 times higher than the average mortality rates prevailing in othercountries with similar levels of per capita income. The primary factorsleading to the high infant mortality rates, however, seem to be feedingpractices!/ rather than food availability.

2.61 Determinants. Nutritional problems cut across the spectrum of thesociety. The most important determinant of malnutrition appears to besettlement size--inversely correlated with incidence--and socioeconomicregion. The presence of severe malnutrition appears to be about twice as highin the rural villages as in towns and urban areas, while regionally, it isconcentrated in Eastern Turkey and part of the Mediterranean Region. Severemalnutrition is invariant to household income, though the higher income groupsgenerally consume greater quantities of all food items per capita exceptcereals, while the lower income households depend upon the largess ofrelatives and neighbors to top up their consumption levels.

2.62 Implications. It would therefore be difficult to encourage increasednutrient intake by malnourished households through measures to redistributepurchasing power. Rather, a nutritional information campaign should beinitiated to emphasize proper storage, handling and preparation of foods, andthe selection of consumption baskets having high nutritional value withoutentailing an undue increase in food expenditures.

2.63 The identification of food items whose consumption should beencouraged is made with reference to Tables 5 and 6 of Annex 3. The firsttable shows the relative cost of calory and protein intake from differentsources, and how these cost ratios have changed between 1974 and 1981/82.Bread and other wheat flour derivatives are the cheapest source of nutrition,and provide more than half of the national protein and calory intake (seeTable 6 of Annex 3). Sugar, liquid oils and margarine, pulses and potatoes,are other relatively inexpensive sources of calory intake. Pulses are thecheapest source of protein followed by cereals and cheese. The role of pulsesas a source of protein in Turkish diet, however, is still small (6% of totalprotein intake). Cheese and milk supplied about 13% of all protein in 1981,and almost half of the total animal protein intake. While the level of cerealconsumption appears to decline with income, the consumption levels of pulses,oils and sugar are basically invariant across income groups. Therefore,national programs to increase the availability of these food items wouldbenefit all of the malnourished households, including those at the lower endof the income scale.

1/ Early weaning and late introduction of solid foods into the diet is acommon practice.

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III. PERFORMANCE POSSIBILITIES FOR THE AGRICULTURAL SECTORd'

A. Perceived Opportunities

3.01 In retrospect, the recently closed decade presented Turkishagriculture with an unusual set of opportunities. These are not likely to berepeated in the foreseeable future. In the field of technological adaptation,high yielding cereals technologies became available which could be, and were,adapted to Turkish conditions on a broad scale. Rising per capita incomes

encouraged producers to both expand and diversify production, the latter beingfacilitated by the presence of extremely diverse agroclimatic zones within thecountry's borders. The cumulative effect of overgrazing on summer pastureswas not evident, at least early in the 1970s, and it appeared that the

traditional feedbase could still support a considerable expansion of livestocknumbers. Equally important, the ability of the rapidly growingnon-agricultural sectors to sustain agricultural production growth2/appeared to be unlimited. This perception extended both to the directstimulation of agriculture through production linkages and the perceivedcapability of Turkey's manufacturing sector to expand the production ofmanufactured inputs and mechanical equipment more or less indefinitely atlimited opportunity cost, as well as indirectly, through subsidization ofproduct sales and inputs acquisition via the fisc and public banking system.It also encompassed a perceived capability to sustain more or lessindefinitely an inefficient and large-scale public investment program foragriculture.

3.02 Energy prices were kept low and Turkey became largely self-sufficientin foods during this happy period. The apparent constraints on industrial rawmaterials from agriculture also were few. Its agricultural policy makerstherefore never really had to address the very difficult choices betweenproduction for domestic consumption or for export, since a high volume offoreign agricultural sales were not considered to be necessary or particularlydesirable. Nor did they systematically accommodate questions of capitalintensity in agriculture, more efficient management of land and animals, andthe effects of rapidly escalating imported energy costs on sustainable inputscombinations. But when the long-postponed economic stabilization program wasadopted in 1980, these kinds of intersectoral transfers into agriculture wereno longer possible. The demands on the sector were increased becauseproduction for exports now had to be added to the other major sectoralproduction objectives of the 1970s (i.e. food self-sufficiency and rawmaterials for industry), but the financial wherewithal at the point ofproduction to simultaneously satisfy all of these objectives had beendramatically constrained in relative terms by the imposition of measures toreduce producer subsidization.

1/ The discussion in this chapter is based upon the material presented inAnnexes 5, 6 and 10.

2/ Albeit on an inefficient path.

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3.03 Thus the future requirements of agriculture could contain an entirely

different set of production priorities, input combinations and patterns ofresource utilization than before. The Bank's Turkey Agricultural Sector Model(TASM) was therefore developed to provide a consistency check for policyanalysis. It also permitted the identification of an economically feasibleset of production and export marketing possibilities including relatedpatterns of input utilization.

B. Modelling Turkish Agriculture

The Structure of TASM

3.04 Details of the construction and operation of this model, which is of

the mathematical programming varity, are described in further in Annex 5 andin the final report for the Bank Research Program's project number RPO 672-78(Agricultural Pricing Policies in Turkey). The crop subsectors are modelledin considerable detail in TASM--46 different crop production activities can beselected in model solutions from combinations in 70 rotations and 15 types oforchards; four categories of land quality are distinguished (irrigated, twocategories of rainfed cropland and rangeland); and a choice can be madebetween using animals and tractors as the source of draft power. The

livestock subsector in TASM is less complete: only 7 animal productionactivities are specified with fixed composites of feed and feed conversionefficiencies. Therefore, a modification of TASM to allow more flexibletechnology assumptions was begun during the mission's initial work with TASMand is briefly described in Annex 5, Appendix 3 and is referred to as TASM-ALV.

3.05 The maximand in TASM is the sum of producers' and consumers'

surpluses in domestic markets and net revenue from foreign trade transactionsin both raw and processed comodities. In the solution procedure, the modelsearches for that combination of production, consumption, import and exportlevels in raw or processed form for each commodity which, when aggregated forall commodities, produces the highest value of the objective function. Somekey features of TASM including summary crop activities, input intensities and

risk coefficients, resource and farm inputs availability, demand parameters,and projection assumptions are contained in Appendix 1 to Annex 5.

Use of the Model

3.06 The model was utilized to examine the effects of various tradepolicies on the sectoral composition of output, trade flows, levels ofconsumption and, within these policy experiments, to make projections to1990. These projections were based upon reasonable assumptions regardingtechnological progress in agriculture (c.f. para. 2.31 and Appendix 2 toAnnex 5) , irrigation and other investments to determine feasible rates ofgrowth of sectoral value-added, exports and employment for the medium term.Experiments were also conducted to identify the opportunity cost both of afailure to intensify production, and of maintaining per capita consumptionbalances during the projection period at base year levels. TASM was validatedon 1979 performance figures. In carrying out the projections, it was assumed

that Government would continue with a liberalization of its trade policies toa point where an essentially free trade position with respect to agriculture

would be attained by 1990. This includes a considerable liberalization ofimports.

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3.07 The policy experiments were carried out for the followinghypothetical situations: (a) one where a policy of unrestricted free trade isadopted with domestic markets fully responsive to the conditions prevailing inthe markets of Turkey's trading partners with no external limitations on thequantities which can be marketed abroad or imported at base period real FOBand CIF prices; (b) a situation of limited exports (though still in thecontext of an unrestricted free trade policy) to more realistically portraythe likely absorptive capacity of foreign markets for Turkish produce andpossible limitations on the capabilities of Turkish exporters; and (c) asituation wherein the trade assumptions in the limited exports experiment aremaintained, but the model is further constrained to maintain levels ofconsumption of individual commodities in 1990 at their per capita levels in1979 by means of consumer subsidies. An additional experiment was carried outto determine (d) what effect price changes (in real terms) projected for majoragricultural commodities and fertilizers on world markets would have on themodel solutions for 1990. Other assumptions associated with limited exportswere retained. Within the unrestricted free trade and limited exportsscenarios ((a) and (b) above), a variant was run to shed light on theimportance of technology policies in the context of freer trade. Here, cropand animal yields and area irrigated were not allowed to increase from 1979levels. As a result, production increases could occur in response to tradepolicies only through an expansion of total crop area and herd sizes.

Summary of Findings

3.08 Production and value-added. The solutions to the TASM projectionyear simulations imply that an average growth rate of 3.6% p.a. during 1979-90would be possible for agricultural production under conditions of free tradeand a situation unconstrained exports. An increase of 2.3% p.a. is associatedwith the more feasible limited export regime and 2.6% with the imposition ofpolicies to maintain minimum consumption balances (see Table 3.1). Thecorresponding rates of growth in agricultural value-added would be 2.8%, 1.6%and 1.9% p.a. The solution to the projection with relative price changes issimilar to the solution for the limited exports regime at constant relativeprices. However, the assumed progression of technological imDrovements iscritical for the realization of these results. Under the variant technologysimulations, i.e. in the absence of intensification, the projected growth inproduction between 1979-1990 under unrestricted free trade declines to 1.9%p.a. (from 3.6% p.a.). Under the more feasible limited exports regime, itdeclines to 1.3% p.a. (from 2.3% p.a.).

3.09 In the four main experiments, the production of all main commoditygroups except oil crops increases over base year (1979) levels, however, thereis considerable variation in the commodity composition of production. Grainproduction in particular declines in importance under all four projections,due to a minimal increase in wheat (0.8% - 1.2% p.a.). The simulated growthof grains production is due mainly to a rapid expansion of barley productionin response to export opportunities which cause "other grains" to increase asa proportion of total grain production from about one-third in the base yearto nearly half under the unlimited exports projection. The production of oilcrops declines considerably from an already low base under all four trade

- 25 -

situations, and substantial imports are required. This appears to be anothermanifestation of the expansion of barley, which replaces wheat on good rainfedlands, causing some substitution of the latter for oils in irrigated areas.The model shows a strong production response for pulses and industrial crops,moderately above average for livestock products, and fruit and nuts exceptunder the unlimited free trade projection where it is strong, and belowaverage for vegetables except again under unlimited free trade where it isstrong. These findings suggest that the production response of fruit andvegetables having the largest overall export potential, is also the mostsensitive to foreign market conditions. Thus production, prices and incomescould fluctuate considerably from period to period in response to changingexport opportunities. The variant technology simulations suggest that barleyand livestock production will be the most sensitive to the technologicalassumptions made. Since the two activities are interlinked through thecomposition of feeds for improved animals, this result implies that therealization of barley's potential to become a major component of exports(para 3.11) is dependent both upon the new trade policies and a steadyupgrading of native herds.

3.10 Consumption. Under conditions of a steady intensification ofproduction, aggregate consumption of agricultural produce is projected asremaining constant in per capita terms: the 1979-90 growth rate under eitherthe unlimited or limited export demand scenarios is about the same as that fortotal population: 2.1% p.a. (The slower rate of increase in commodity pricesassumed under the experiment with changing relative prices slightly increasesaggregate consumption above base year per capita levels.) However,considerable changes take place within the agricultural consumption bundlewith large falls in grain consumption per capita, some decrease in pulses,vegetables, fruit and nuts and industrial crops, a small increase in oil cropsconsumption and a substantial increase in livestock products. Lackingreliable consumer-expenditure survey data, it is not possible to specifydemand functions for different income groups in TASM to determine the incomedistributive effect of a changing composition of consumption. The decline ingrain consumption per capita, however, and increase in livestock products isprobably relative to the wealthier consumer groups, since the literatureindicates that the Engel's elasticities for grains decline with higher percapita income, whereas for livestock products (as a group) these increase withincome or at best are constant. There is, however, a trade-off betweenmaintaining individual commodities consumption balances at their 1979 percapita levels, and feasible growth in exports (see next para). In theunlikely event that no intensification would occur, consumption is projectedto increase by only 1.6% p.a., with a corresponding decline in agriculturalexports and increase in imports. Particularly affected are the consumptionbalances of livestock products.

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Table 3.1: TA7O Projwtioie of Output, (.aptin mod International Trade in 1990

(All wolues at cutant ectual 1979 fa,pte prices; echge r te T47 - UStl)

A B C D E F CLimited Exports

P9trict tl8i.Ltad Expru, Litd Export, nd Minimom Liited Exports Unlimited Export Limited Exporta CwDth RoteTrde Unliited ports Unlutad Imports Copti with Price Cawge & No Inteneificatian 4 No Intenificftion 1979-1990

1a1 Solution Projcticon Projection Projection Projection Projection Projaction EK31R21T VARLA8rS1979 1990 /a 1990 /b 1990 /c 1990 /d 1990 /e 1990 /e A- AC AD IrE A-F WG- - - - - - - - - - - - - - - - - - -- - azlm - - - - - - - - - -I lin - - - - - 7 - - - - - - - - - - - -- - - - - - - - (2 - -. - - - - -

Pr46k tionTntal 13.701 20.137 1 0 8,218 17,92 16,791 15,812 3.6 2.3 2.6 2.3 1.9 1.3Grauw 2,277 3,021 2,749 2,922 2,749 2,204 2,204 2.6 T7 2.3 1.7 -0.3 -0.3

Of which: %Isat 1,502 1,633 1,632 1,70B 1,632 1,419 1,419 0.8 0.8 1.2 0a' -0.5 -0.5Othir 775 1,380 1,117 1,214 1,117 785 785 3.4 3.4 4.2 3.4 0.1 0.1

pulas 349 497 497 499 490 497 497 3.3 3.3 3.3 3.1 3.2 3.2Vegetables 2,851 4,565 3,557 3,728 3,551 4,565 3,610 4.4 2.0 2.5 2.0 4.4 2.2Fruit nod tnut 2,745 4,841 3,644 3,875 3,643 3,601 3,505 5.3 2.6 3.2 2.6 2.5 2.2Oil creps 499 345 349 348 345 348 348 -3.3 -3.2 -3.2 -3.3 -3.2 -3.2'Indwtrial' crap 1,153 1,730 1,676 1,708 1,676 1,516 1,S8 3.8 3.5 3.6 3.5 2.5 2.9Livtock peoAxcu 3,827 5,13 5,138 5,138 5,138 4,059 4,059 2.7 2.7 2.7 2.7 0.5 0.5

OptionTotal 11.655 14698 415845 14,757 13,0 13,859 2.1 2.1 2.7 2.2 1.6 1.6Grain 1,612 1,597 1,597 2,030 1,597 1,597 1,596 -0.1 -0.1 2.1 -0.1 -0.1 -0.1Of which: Wht 1,281 1,259 1,259 1,610 1,259 1,259 1,259 -0.2 -0.2 2.1 -0.2 -0.2 -0.2

oDter 331 338 336 420 338 338 337 0.2 0.2 2.2 0.2 0.2 0.2Fule 20 324 332 352 324 324 330 1.3 1.6 2.1 1.3 1.3 1.5Vbgetable 2,8D 3,333 3,363 3,534 3,358 3,385 3,416 1.6 1.7 2.1 1.7 1.7 1.8Fruit nWd ma 2,336 2,727 2,745 2,982 2,744 2,747 2,759 1.4 1.5 2.2 1.5 I.S 1.5Oil creps 407 537 544 536 540 541 554 2.5 2.7 2.5 2.6 2.6 2.8'Inubstrial crqu 8 1,032 1,051 1,124 1,050 1,003 1,016 1.4 1.6 2.2 1.6 1.2 1.3Li_eatoC, proBUta 3,332 5,038 S,059 5,087 5,144 4,235 4,187 3.8 3.9 3.9 4.0 2.2 2.1

batal 765.6 3,374.1 2,342.1 1.922.9 2,257.8 1,68.1 1,436.6 14.4 10.7 8.7 10.3 7.6 6.0Grirm 156.0 1,050.5 671.9 352.7 711.9 105.8 105.8 18.9 14.2 7.7 14.8 -3.5 -35SOf which: Umt 134.6 312.0 312.6 0 302.2 91.4 91.4 6.6 6.6 - 6.3 -4.7 -4.7

ther 1,4 738.5 359.3 352.7 409.7 14.4 14,4 76.8 63.6 65.3 67.6 23.6 23.6PFIse 72.5 201.7 192.2 171.0 192.3 201.5 192.8 9.7 9.3 8.1 9.3 9.7 9.3Vftebble 14.7 562.3 181.7 181.7 181.7 537.7 181.7 39.3 25.7 25.7 25.7 38.7 25.8Fruit nd iou 43.7 465.9 326.1 316.8 314.4 185.1 183.1 24.0 2D.1 19.7 19.7 14.0 13.9Oil cops 4.7 0 0 0 0 0 0 - - - - - -'Industrial' crops 396.5 837.0 731.9 731.9 749.5 618.5 731.9 7.0 5.7 5.7 6.0 4.1 5.7Livestock prodcut 77.5 256.7 238.3 168.8 1IO.0 39.4 41.3 11.5 12.5 7.3 3.1 -6.0 -5.6

ToU.1 9.8 272.6 280.5 261.0 277.2 425.1 331.4 35.3 35.7 34.8 35.5 40.9 37.7Grirs 0 0 O 0 o0 oOf dbich:I_t 0 0 0 0 0 0 0

Other 0 0 0 0 0 0 0Pulos 0 0 0 0 0 0Vegetublse 0 0 0 0 0 0 0Fruit mid OtO 0 0 0 0 0 a 0oil crop 0 146.9 147.1 144.6 141.7 145.1 IS2.2'Iln trial' crep 0 0 O 0 0 0 0 - - 0 - - -

Listck pe toa 9.8 127.7 133.4 132.6 119.3 280.0 179.1 26.4 26.8 25.5 26.8 35.6 30.2

Value-adTotal: I if 7,918 11,633 10,024 9,914 10,30B 8,777 8,025 3.6 2.2 2.4 2.1 0.3 0.1Taua: f71 11,914 16,123 14,161 14,049 14,645 13,163 12,299 2.8 1.6 1.9 1.5 0.9 0.3

Popolatii ('WO) 43,801 55,058 55,05B 55,058 55,058 55,058 55,058 2.1 2.1 2.1 2.1 2.1 2.1

/ It ia aa_ Cdha C t _ ia pspfactly las tic rid nopact to price. No retriction arsuasd for i.ports.7i n this sileati it is ssm diet die ser5 il _ r frce pain mrpU declisa uwe a certain wsae of trcde too bc readwld, d that the

aboapiw capacity of otp snta at bae pwrid C7I ctUt prices is Iiuited in do cae of o8ur ctdiies. No restriction are eaa forimportm

/c Ihia sim7Jti. mu th ie l utatie an it o itias so un the Liadited Eqa simalation (Corlm, C), but the reel vael ofconuptin im 190 ia hbld at tte 1979 pr capita 11ul.

/d Thia Jsulatio _sm the see limitations a -st oetuniti_ a aider the Limited ubrta imlatinn (Clm, C), but relati_ CII eW pricmfcr se lwed ctiditis in 1490 a adjuwtad in sc . with world tht projectiene ft the period 1979-90.

/. For aieulatice F ad C, no intrictis aen _ead for ivta, while doe n pctiwe asapti0a are rtained ebut mt o t,po tits oa widerCbl.u B ad C. It ia as_d thdt crp yields d ani_l prodtivity will rnt ircgerea (althcgh land urder cultiv_tion aid band aims are peaitadto inn__ ), -bile irriptnd wm is bald Untent at the base tr lINal.

L 1: Inpt cost inclui labor tat.II: Input ca luie labor tasts.

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3.11 Trade. The export growth rates associated with unlimited free trade

conditions and limited exports are 14% p.a. and 11% p.a., respectively. Underthe limited export simulation with cbanging price ratios growth is 10%, whichdeclines further to about 9% p.a. when minimum consumption balances aremaintained. Thus a good marketing response is simulated across all commoditygroups to the assumed trade policies, with the strongest manifested byvegetables, and fruit and nuts, followed by grains (barley). The growth of

pulses and industrial crops exports are projected to be below average, pulsesmoderately so, because the model simulates the export of nearly 50% of their1990 production, suggesting that the sector's capacity to produce forsubstantial further export of these crops will become limiting by 1990 1/It should be noted that these percentages refer to increases from therelatively low base for agricultural exports of 1979; already the US$ value ofexports has increased at an average rate of 29% p.a. between 1979-81. Asignal result is the dramatic reduction in the export of grains under a policyof maintaining per capita consumption balances and the elimination of wheatexports. The exports of protein sources such as pulses and livestock productssimilarly decline from the levels projected for the unlimited trade andlimited export scenarios. When the variant technology assumptions obtain,however, the projected exports of grains, fruits, nuts, and livestock productsfall off even more dramatically, while livestock products imports expand tomake up consumption shortfalls.

3.12 Sectoral foreign exchange flows. As the simulation results forcommodity trade show, the value of agricultural exports substantially exceedsthe value of agricultural imports under all types of foreign trade policies

assumed, whether for the base year or projection year. To get an indicationof the overall net foreign exchange earning/saving capacity of theagricultural sector, however, these figures need to be adjusted to reflectexpenditure on imported inputs used in agriculture, whether directly orindirectly. In TASM, the inputs concerned are fertilizers, tractor power andother working capital items for certain crops. (Changes in fixed assetinvestment in agriculture are not modelled in the financial flows.) The netforeign exchange flows, valued at 1979 border prices, calculated on this basisare shown in Table 18 of Annex 5. The main point to note is that the greaterintensity of input use in agricultural production for 1990 results in muchlower net foreign exchange inflow under the conditions associated with the'limited' export demand scenarios than when it is assumed that foreign marketscould absorb as much produce as Turkey could produce. These results do nottake account of value added in processed production and trade, which would beexpected to increase substantially.

3.13 Land use. The projected growth rates of agricultural value-added of2.8% p.a. under unlimited free trade and 1.6% p.a. under limited exportscorrespond to a 4.9% increase in area sown or planted to orchards in thefirst-instance and an 8.6% decrease in the second, when these are comparedwith the base solution (see Table 20 of Annex 5). The projected changes inland use also contain changes in the allocation of land among crops, though

1/ Due to the interaction of technical production considerations and domesticdemand.

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grains as a percentage of the total remains predominant in 1990 as it was in1979, occupying 62.5% and 63.1% of the cultivated area respectively under bothtrade policies. Within the grains category, however, a marked reallocation ofarea from wheat to other grains occurs (mostly to barley), which demonstrates

the effect of permitting barley exports under the assumed trade policies.There also occurs a shift of wheat production from rainfed to irrigated areasas a result of its being replaced by barley in rainfed areas, and acorresponding increase in the irrigated rotations (depicted in Table 21 ofAnnex 5). This indicates that the model is selecting barley (principally forexport) in lieu of hard wheat (another potentially high valued export) whichis generally grown under rainfed conditions in Turkey, and allowing theproduction of bread (i.e. soft) wheat (whose export prospects are limited) toexpand in irrigated areas, but under progressively marginal conditions insofaras returns to farmers are concerned. The other significant changes are theincreased area devoted to the cultivation of fruit and nuts and vegetablesunder unlimited free trade conditions but the contraction of these when

exports are limited, and, under either trade regime, the increased plantingsof industrial crops and the marked contraction of area planted to oils.

3.14 Input utilization. Under the TASM projections to 1990, theutilization of fertilizers and mechanical power increases considerably(Table 22 of Annex 5 refers). A large part of the increased fertilizerconsumption is caused by an expansion of production and the changes in input-output relationships associated with the model's technology assumptions.However, the referenced table also indicates that levels of fertilizerconsumption are related to trade policy and performance. Under the limitedexport assumption, fertilizer consumption in 1990 is projected to increase byabout 75% above the amount used in 1979, whereas under the unlimited tradesituation consumption would almost double. This reflects the increasedfertilizer requirement to expand production of fruit and vegetables for exportand for industrial crops. The requirement for mechanical power in 1990 alsonearly doubles though the magnitudes should be interpreted with care becauseof the indexing employed to illustrate this simulation. The relative effectof the trade policies is less on the utilization of tractor power than onfertilizer consumption, suggesting that the technology and scale assumptionsin TASM explain most of the increased tractor utilization, which may not beespecially influenced by the commodity composition of output. Table 23 ofAnnex 5 indicates that mechanical power is not a binding constraint on themodel solutions for 1990, nor is employment except during the 3rd quarter ofeach year, which is the main harvest season. However, most kinds of land arebinding, as is the supply of animal power. Thus the increased requirement formechanical power would probably be used to supplement the limited animal powerexpected to be available for those farm operations which exceed the capability(or willingness) of farm labor to carry out unassisted. These probably wouldentail the increased land preparation and harvesting tasks required by theintensified cultivation which the model simulates for 1990.

3.15 Employment and labor productivity. The projected growth rates ofagricultural value-added are associated with increases in employment of1.7% p.a. (unconstrained export demand) and 0.6% p.a. (limited export demand),respectively, when employment is measured as the number of hours worked during

- 29 -

the peak quarter of the year, and with increases of 1.1% p.a. and 0.3% p.a.,respectively, when employment is measured as the total number of hours workedin all quarters (summarized in Table 24 of Annex 5). This compares with anassumed rate of increase of 1% p.a. in the availability of agriculturallabor. The higher employment impact of the unconstrained trade policy againis due to the greater preponderance of the relatively labor-intensive fruitand vegetable crops in the output mix under the assumption of unlimited exportdemand. Depending on the employment definition used, about 40-60% ofagricultural value-added growth during 1979-90 is thus accounted for byincreases in labor productivity under the unlimited export demand assumptionsand about 55-80% under the limited export demand assumptions. Table 24 ofAnnex 5 shows that the labor content of total costs in agriculture isprojected as declining considerably. If labor costs are included in thedefinition of net income, then a small decrease in labor's share of net incomefrom agriculture is projected.

C. Sources of Growth

3.16 The policy experiments clearly suggest that substantial productionincreases can be expected as a result of lifting restrictions on foreign tradein agricultural commodities and opening up domestic markets to foreign marketinfluences, and (implicitly) by allowing the currency to be exchanged againstother currencies at rates approximating the free-market or shadow rate.Agricultural growth will also occur as a result of investments which increaseresource availability and raise productivity through irrigation development,the development and uptake of improved production technologies, and fromgrowth in domestic demand which sustains real price levels. Overall growthcan thus be depicted as coming from two sources; changes of a structuralnature in resource availabilities, states of technology, aggregate demand

levels; and changes which represent producer response to alterations in marketconditions due to the introduction of new foreign trade policies. Bysimulating trade policy changes under both base year and projection yearconditions in TASM, the relative contributions of these two sources of growthto total growth between the base year and projection year can be identified.

3.17 Production, consumption and trade. This is done for total growth in

production, consumption, imports and exports during 1979-90 in Table 26 ofAnnex 5 and for employment and value-added per worker in Table 27 of Annex 5.An analysis of these results suggest that the relative contribution of thestructural and response effects (or 'growth' and 'policy' effects as they aretermed in Table 26 of Annex 5) to overall growth simulated is as follows;under the limited export trade assumption the trade policy itself, i.e.lifting restrictions on imports and exports, accounts for 36% of the projectedgrowth in production during 1979-90 while the 'growth' processes account forthe remainder. If unconstrained exports are assumed, then the trade policyeffect is proportionately greater (58%) because more of the productionresponse is accounted for by increasing exports from the same resource baseand less from an expansion of the productive capacity of that resource base.With regard to domestic consumption, the sources of change are quitedifferent. Virtually all the increase in consumption during 1979-90 which isprojected is due to the growth processes i.e. increasing population and income

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per capita create an increased demand for agricultural produce. In fact, theeffect of a strong export orientation is to raise prices in the domesticmarket and reduce consumption. The reverse reflection of this process can beread in the export figures in Table 26 of Annex 5. In this case, growthcounteracts the policy effect on exports since increasing domestic demandcompetes for available supplies. Finally, it may be noted that virtually allthe increase in imports is accounted for by the growth process and very little(or none in the case of unconstrained exports) by trade policy.

3.18 Employment. The analysis indicates that the trade policy effectaccounts totally for projected increases in employment under free tradeconditions and more than offsets a slightly negative growth effect induced bymechanization and other factors (Table 27 of Annex 5). The sources of growthin value-added per worker are somewhat mixed, however, depending upon whetheremployment is scaled with respect to peak season requirements or "quarterlyaverage" employment. In the former case, 98% of the increased value-added perworker in constant 1979 farmgate prices is attributed to the growth effect andonly 2% to the trade policy effect, suggesting that aggregate employment wouldbe expanded in fairly constant proportion to the utilization of other

production inputs as a result of the assumed relaxation of trade restrictionsin these simulations, but that a tendency to substitute for labor wouldoccur--at least in value terms--as a result of the structural changes givingrise to the growth effect. When labor is scaled on a quarterly average basis,the sources of growth in value-added per worker are more evenly dividedbetween the trade policy and growth effects.

D. Interpretation of the TASM Results

3.19 The TASM framework provides a basis for delimiting the sector'sperformance potential. It also provides a framework for tracing the effectsof policies through a fairly detailed representation of the exceedinglycomplex technical and structural relationships which characterizes Turkishagriculture; in doing so, it facilitates greater insight into the nature ofthe growth processes than previous sector work allowed. Because the model wasvalidated on 1979 statistics, some interpretations of the model's quantitativeestimates are required in light of subsequent events when assessing thesector's performance potential until 1990. However, the financial flowsmodelled by TASM are essentially internal to the agricultural sector, and itssolutions are deterministic. The model therefore is not particularly wellsuited for an analysis of consumer price stabilization and food securitypolicies, although it does establish the production and trade parameterswithin which domestic food security programs are likely to have to operate.It also does not make projections of the intersectoral terms of trade whichwould be important complementary information for analysis of the trade-offbetween exports and domestic consumption.l/

3.20 Production and value-added. In view of limitations of exportingwhich could be experienced because of constraints on the absorptive capacityof Turkey's major trading partners and the fact that export market penetration

1/ These are handled by other means, as discussed below.

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is not a costless activity, it is more likely that the sector will continue toface conditions represented by the limited export scenario than by unlimitedfree trade. However, the projected growth in production and value-added werederived in the first instance from an assumption that all internal constraintsto exports were removed in 1979 and that a complete liberalization of importsoccured. In fact, constraints to exporting were not relaxed until 1980, andimports of food and needed agricultural inputs such as seeds, appropriatelysized machinery, animal drugs, vaccines and chemical ingredients for feed

concentrates are still discouraged and very tightly regulated. The nature ofthe projection exercise also assumed, again implicity, that the macroeconomicstabilization program would be immediately effective and that the domestic percapita incomes, thus demand, would rise steadily over the projection period.Again, this has yet to occur, indeed real per capita incomes have fallensubstantially since 1979 and are only now begining to recover. In addition toan assumption of a liberalized trade regime, with which about 40-60% of theprojected growth in production and value-added would be associated, the modelalso requires that the technological assumptions be satisfied--that a steadystream of productivity increasing innovations be introduced at the farm levelover the projection period, and that public investments in irrigation beexpanded and utilized efficiently. Although efforts have been made toincrease the completion rate of ongoing irrigation projects, the rate ofexpansion since 1979 has been effectively limited by budgetary constraints onoverall public investment and the annual construction capability of theinfrastructure agencies, which presently is about one-third of the annualexpansion assumed in the TASM simulations, though it could be augmented fairlyrapidly. On the other hand, very little has been done since 1979 to increasethe efficiency of the research, extension and livestock services, the inputdistribution networks and the agricultural credit system, although theproblems are well known.

3.21 Thus many of the prerequisites for production growth simulated byTASM have not been satisfied and in fact only marginal sectoral growthactually occurred in 1980 and 1981 (para. 2.06). Because part of the tradeand public investment policies have been in place since 1980, however, asubstantial sectoral "growth-gap" has developed in relation to that whichappears to be feasible under the limited export scenario. It seems reasonableto expect a higher rate of growth during the remainder of the decade ifstabilization is successfully accomplished and the other complementarypolicies and institution building referred to are also adopted. It is thuscrudely estimated that growth of sectoral production of about 2.8-3.0% p.a. ispossible for the remainder of the decade. This is essentially equivalent togrowth of sectoral GDP under the Turkish national income accountingconventions for the agricultural sector, and would correspond to a growth invalue-added of about 2.1-2.3% p.a.

3.22 Trade balances. Policy adjustments consistent with a freer tradephilosophy not unexpectedly have a substantial positive impact on agriculturalcommodity trade balances in TASM. The limited export projections indicate anincrease in the size of the net surplus of exports over imports of nearlythree times between 1979-1990, (Table 3.1) despite a rapid rise in imports.

This corresponds with an expansion of exports by 11% p.a. in constant 1979

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terms. As noted in previous paragraphs, an immediate and substantialexpansion of exports from the relatively low 1979 base already has beenrealized in 1980 and 1981 in response to the liberalization of exports. Thiswas abetted by the deflationary policies which probably depressed disposableincomes and consumer demand below feasible trend levels and certainly belowthe levels assumed in TASM (which are allowed to increase by 2.4% p.a. overthe projection period), thereby causing an unusally large diversion of currentproduction into exports. Thus disposable incomes could be expected to"catch-up" to trend during the decade which through a resurgence of domesticdemand could reduce the share of incremental production which can profitablybe exported. The feasible rate of agricultural exports expansion for theremainder of the 1980s is therefore likely to be considerably less thanprojected in TASM, or on the order of 4-6% p.a. in constant 1979 terms.

3.23 Employment creation. The TASM projections indicate that there is acomplementarity between export promotion and employment creation. Thus anemployment/value-added elasticity of 0.2-0.4 is derived from the simulation ofa limited export demand scenario but increases to 0.4-0.6 under unlimited freetrade, mainly a consequence of the higher proportion of labor-intensivecommodities in sectoral output under conditions of unlimited exportopportunities. Indexes of the relative input-intensiveness (including labor)of different crops are given in Appendix 1, Table 2 to Annex 5. Table 27 ofAnnex 5 shows that the projected increase agricultural employment is entirelydue to the trade policy/response effect under conditions of unconstrainedtrade--indeed the growth/structural effect works in the opposite direction,though, unfortunately, the areas in which Turkey looks like being able to findit 'easiest' to export, namely cereals, is the least labor-intensive subsectorin agriculture. Thus the feasible rate of expansion of agriculturalemployment is about 1.0% p.a., which is less than the expected rate ofexpansion of the rural labor force of about 1.4% p.a.

3.24 Consumption. Under both the unlimited free trade and limited exportconditions, the simulations indicate that the greater the export content ofincremental output, the more is per capita consumption eroded as prices riseon internal markets. Thus, a strong drive towards export growth is likely tobe achieved at the expense of domestic consumption. This could be serious forrural households in view of the incidence of malnutrition discussed in ChapterII and Annex 3. Measures to maintain consumption levels will mean somesacrifice of export potential but are not likely to make much difference tothe rate of growth in overall agricultural value-added. The effects onconsumption of opening the sector to free trade varies between and withincommodity groups, and while total consumption of agricultural products in 1990would be roughly maintained at base year (1979) levels in per capita terms,this would not be true for most individual commodities (see Table 3.1). Apolicy which had the effect of ensuring a minimum level of consumption for allcommodities equal to base year per capita levels (e.g. through consumersubsidies) would reduce the potential for export growth. The results of sucha policy experiment are also shown in Table 3.1, which suggests that exportgrowth under the TASM assumptions during 1979-90 would be cut from 10.7% to8.7% p,a. Thus the potential 1990 trade surplus for the sector would beconsiderably eroded, from $2,062 million under limited exports to $1,662million under minimum consumption constraints at 1979 prices. Wheat, for

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example, would not be exported at all, while the growth in imports--responsivemainly to the growth effect--would hardly decline. Value-added in agriculturegrows slightly faster under the minimum consumption/lower export policy thanwhen no interventions are made to maintain per capita consumption levels.

3.25 Terms of trade and food security. Under the "freer trade" policiessimulated by TASM, the intersectoral terms of trade are projected to move inagriculture's favor--at about 0.75% p.a.--when these are scaled by a crudeindex equating non-agricultural prices with agricultural input prices. Abetter indexing and more reliable indication of the direction and magnitude ofintersectoral terms of trade was derived from forward runs of the Bank'sComputable General Equilibrium (CGE) model for Turkey, which was recentlyrevalidated on 19811' data. Variants of the model were run for this studyin the context of achieving an economy-wide export growth target by 1990(discussed in Annex 6) to examine the related performance of agriculture underconditions of high and low total factor productivity growth and priceresponsive sectoral exports. Policy experiments were also conducted to tracethe effects of various agricultural imports regimes on the agricultural termsof trade. The results are sumnarized below.

Total Factor Productivity Growth

Moderately High Moderately LowRestricted Unrestricted Restricted Unrestricted

Imports Imports Imports Imports…(% p.a., 1981-1990)-----------------

Ag. GDP Growth 2.8 2.8 1.5 1.5Growth in Ag. Exports 6.5 6.7 4.3 4.6Change in Ag./Non Ag.Terns of Trade 2.9 2.6 4.5 4.2Domestic Ag. Prices/Ag. Import Prices 3.1 2.5 4.7 3.7

3.26 The results indicate that a substantial increase in the agricultureterms of trade can be anticipated under a strategy of growth with exports,that the magnitude of the increase will be--not unexpectedly--related to thelevel of total factor productivity achieved in the agricultural sector, andthat these will move sharply against non-agriculture if restrictions onagricultural imports are maintained while export expansion occurs. Thus thenegative impact on the freer trade policies on consumers' purchasing powernet of expenditures on agricultural commodities could be profound. Suchadverse movement could especially affect the poorer segments of thepopulation.

1/ The structure of the model and its mathematical formulation are presentedin a recent paper by Jeffery D. Lewis and Shujiro Urata, "Turkey: RecentEconomic Performance and Medium-term Prospects, 1978-1990", World BankStaff Working Paper (forthcoming). The main characteristics ofprojections done for this study using the CGE and the solutions arecontained in Annex 6.

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3.27 A related topic is food security, which entails an analysis of theeffectiveness of related interventions including price stabilization,maintenance of reserve stocks, and foreign sales and procurements of strategiccommodities.l/ The most strategic of the food commodities in Turkey iswheat whose importance is indicated by the fact that roughly 60% of theTurkish population works in the agricultural sector, most of whom produce somegrain for sale or for home consumption; value added in grains comprises aboutone-third of the agricultural GDP; wheat alone accounts for 45% of the areasown and 19% of the wholesale price index, and bread accounts for 11-12% ofthe consumer price index. The policy alternatives which were examinedconsisted of (a) maintenance of policies existing in June 1982 which featureddomestic procurement to maintain producer's prices, maintenance of a grainsstockpile by the Soil Products Office (TMO), domestic disposals and licensedimports to constrain consumer price increases, and official exports only afterTMO's vacant storage is filled; (b) a policy of free trade with no external orinternal intervention; (c) a consumer price stabilization policy through freetrade, with producers' prices maintained in accord with existing policies; (d)an "external stabilization" policy to insulate the wheat sector from externalprice fluctuations through the use of variable import and export levies; and(e) a policy of constrained imports by imposition of an ad valorem tariff toraise producer prices. The model, which is of the stochastic programmingfamily, was "initialized" using national wheat production, sales and tradefigures for 1978-80, then placed in projection mode on the basis of parametersand production trends derived from TASM. Measures of comparative performancewere obtained by scaling the simulated effects of the various types ofintervention along a number of economic criterion. These includedcoefficients of variation calculated over a 30-year projection period forconsumer's prices, producer's prices, domestic consumption and farmer'sincomes, and specific insecurity measures for total and low income consumersand for farmer's revenues, which were scaled by use of cut-off probabilitiesthat an indicator would fall by more than a specified percentage beneath itsexpected value during a given year.

3.28 A number of interesting conclusions derive from these experiments.First, a continuation of the existing policies is projected to enhanceinstability. Associated with the large increase in price instability underthe existing policies compared with free-trade (and even more so compared withthe alternative stabilization policies), is a rather discouraging decrease infood security. Thus, for instance, under generally-exporting conditions, forwhich summary results are portrayed in Table 3.2, the probability of having abread wheat shortage in excess of 5% of normal consumption rises from 2.6%under free trade (and 1% under a policy of internal stabilization under freetrade with TMO intervention only to maintain producer prices) to 18.9% underthe existing pattern of intervention. This insecurity is magnified for thelow income segments of the population, where the probability of having ashortfall by more than 10% below their normal (though not necessarilyadequate) consumption, rises from 0.7% under free trade to 14.7% underexisting policies. These results therefore strongly suggest the need for

1/ The modelling and analysis for this section is described in Annex 10.

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special target consumption programs if the government continues to follow itspresent policies. The results further suggest, because of this instability,that the expected value of wheat production would be lower under existingpolicies than the others,l/ that as a percentage of normal supply, theaverage quantity imported (over a 30-year period) would be higher than for thealternative policies and quantities exported would be lowest, as would be the(positive) net foreign exchange earnings-when expressed as a percentage ofnormal domestic expenditures on wheat. In this regard, a policy which wouldmaintain producer floor prices (only) with no other intervention and theexternal stabilization policy both perform far better than the existingpolicies, or a simple free trade policy, or a policy of free trade with atariff on imports.

Table 3.2: Main Stability and Food Security Indicators

Indication of Policies (para. 3.27 refers)Expected Outcome (a) (b) (c) (d) (e)

-------- Coefficient of Variation--------

Consumers' price 18.6 7.6 5.3 3.0 10.0Producers' price 16.5 7.6 5.3 3.0 10.0Domestic consumption 4.9 2.1 2.1 0.8 2.8Farmers' income 5.9 12.0 11.4 10.8 11.0

Insecurity Indicators/I Probability of Falling Below Critical Level

Total consumption (5%) 18.9 2.6 1.0 0.0 6.9Low-income consumption (5%) 25.3 9.6 4.8 0.4 14.9

(10%) 14.7 0.7 0.3 0.0 3.0Farmers' revenue (15%) 22.0 15.9 12.1 9.3 17.1

/1 Probability that variable falls by more than the percent specified belowits expected level.

3.29 The TASM simulations indicated that there would be a trade-offbetween export growth and the maintenance of domestic per capita consumptionat current (1979) levels. This trade-off applies to the production anddisposal of wheat as well as other commodities. The analysis described abovesuggests that the average level of production and degree of food securitywhich can be expected to result is very much a function of policies pursued.In the case of wheat, the comparative instability and lack of security whichcould be expected from a maintenance of existing policies could furtheramplify the dimension of the trade-off between exports and domestic

1/ It is highest under the external stabilization policy, followed by apolicy of simple producer price supports.

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consumption. In addition to constraining wheat exports below what could beachieved under alternative policies with no loss in food security, the

institution of measures to further stimulate production within the confines ofexisting food security policies is also likely to decrease the expectedproduction of important exports which otherwise compete for land with wheat,principally barley,l/ below levels which could be produced under a moreefficient approach to food security.

E. From Modelling to Strategy

3.30 The strategy and policy requirements for a realization of themedium-term performance possibilities discussed above are on the one handextensive, but on the other, within the capabilities of the Turkish Governmentif it continues to demonstrate a willingness to institute structural reformsand to utilize the authorization recently granted to reorganize itself alonglines deemed desirable. In this connection, however, a note of caution isdue. In contrast to the rapid progress in the field of policy which has beenachieved since 1980, a more guarded expectation would appear to be essentialhereafter. With the prospective revitalization of the political process inTurkey, the adoption of a gradualist approach towards future structuraladjustments in agriculture might make it easier for Govyrnment both tocontinue with its initiatives of the past three years,2, while introducingfurther fundamental change in the pattern and organization of its varioussubventions. These considerations lay behind the proposed medium-termstrategy as set forth in the following chapters, and the choice ofinstrumentality open for implementing the strategy. For reference, a tabularsummary of the elements of the proposed strategy is presented in the appendixto the main report.

1/ As well as the diversion of wheat from human to animal consumption in the

form of feed concentrates and straw to, again, foster the production ofexportable products.

2/ Which have essentially depoliticized the setting of irrigation investmentpriorities and price policies, and eliminated a large portion of theinputs subsidies in spite of strong opposition.

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IV. MEDIUM TERM REQUISITES - AGRICULTURAL TECHNOLOGYAND INFORMATION SYSTEMS 1/

A. Technology Generation

l. The Scope For Improved Research

4.01 The requirements to reattain and sustain a growth rate of 2.8-3.0% inagricultural GDP during the 1980s are both extensive and fairly profound. Inaddition to the maintenance of the announced exchange rate policies and afurther liberalization of trade, the resumption of sustained sectoral growthwill require a marked increase in agricultural productivity. The arable landfrontier was effectively closed in the 1970s, and future production growthwill have to be grounded in attempts to intensify the use of existingcultivated area through fallow suppression, expanded multiple cropping andcrop yield increases. In the livestock subsector, which accounts for aboutone-third of agricultural GDP, future efforts should focus on raising theproductivity of native ruminants (which comprise about 85% of the nationalherd) through more effective selection and cross-breeding, improved feedingand disease prevention measures. The Government presently is not particularlywell organized to intensify the use of either of these basic resources (landand animals). A reorganization and consolidation of crop, soils and animalhusbandry research is required as well as an improved system to monitorpriorities for technology transfer and generation. These priorities shouldaddress both the needs of Turkey's semi-arid areas where mixed-crop livestockfarming prevails--a cropping systems approach would be appropriate here--andthe more commodity specific production and marketing requirements ofsophisticated commercial producers, who are often located in irrigated areas.Increased emphasis on product quality and the needs of the importing countriesalso is required.

4.02 The unexploited opportunities for technology transfer and adaptationare considerable for the livestock subsector. However, the livestock researchprogram has been severely constrained by the very parochial attitude of theveterinary services; their deep-seated resistance to any kind ofspecialization in the fields of animal husbandry and livestock managementresearch and its dissemination; the unjustifiably broad scope of theirofficial responsibilities, which encompass, in addition to disease preventionand control and related research, nearly all aspects of animal husbandry withthe exception of feed base development. On the cropping side, newopportunities have been opened for technology transfer and adaptation as aresult of the liberalization of exports and the progressive removal ofsubsidization, which require on the one hand, a fairly intensive effort toadapt cultivars preferred by consumers in Turkey's export markets to Turkishsoils and farm management conditions, as well as research to considerablyimprove the productivity of existing crops.

1/ The discussion in this chapter has been derived principally from materialspresented in Annexes 7 and 8.

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2. Physical Dimensions of Research

4.03 Under the resource constraints and research capabilities whichpresently exist in Turkey, agricultural productivity can basically beincreased in three ways:

(a) by raising the intensity with which existing land is used forcropping, and indirectly, animal husbandry, through increasingthe average number of crop production cycles completed;

(b) by increasing the productivity of the land input during a singlecrop cycle, i.e. raising yields per hectare; and

(c) by increasing the productivity of livestock through more carefulbreeding and herd management, with emphasis on animal nutrition,preventative health measures and genetic selection.

a. Intensifying Land Use

4.04 Mainly for reasons of moisture conservation, large areas of land areleft fallow each year. Estimates range from 5 to 8 million ha, depending onthe estimate of the total area under arable cropping, but there is generalagreement that the proportion of the arable area fallowed is about 30%. Thisgives a minimum figure for the overall index of cropping intensity (includingtree crop land) of 70-75% (see Table 3 of Appendix 2 to Annex 5). Rainfall isthe key factor limiting the amount of fallowed land which could be cropped,400 mm p.a. being regarded as the cut-off point. Thus, about 3 million ha ofland presently held in fallow could be continuously cropped, given existingtechniques. Scope also exists in irrigated areas, particularly in the Aegeanand Mediterranean regions, for a considerable increase in multiple cropping.Possibly 250-300,000 ha could be sown to a second crop in these regions.

4.05 Fallow reduction. In the area of fallow suppression, pulses(chickpeas, lentils) and fodders (e.g. vetches) are seen as the most promisingcrops to follow wheat (and to some extent, barley) in place of the traditionalfallow. The essential requirements in the pulses are cold-tolerant varietieswhich are sufficiently quick developers to take advantage of the first rains,allowing time after harvest for the land to be readied for winter grains.Timeliness in seedbed preparation is important--if it is done too soon thetilthe is too fine and dry and susceptible to erosion, if too late, sowing isdelayed and the ground becomes too cold--which means the availability of sometractor power is critical. The requisite techniques for successfulgrain/pulse or grain/fodder rotations are known and are being adopted byfarmers in some areas, for example, in the Corum-Cankiri Rural DevelopmentProject. Further adaptation for other areas requires applied research, butprovided that the recommended crop husbandry package is followed, it wouldappear that risk of reduction in yield of the grain crop would not be large.

4.06 The key factor which will affect the rate at which farmers cut downon their fallow area will be the profitability of the new rotations, takingdue account of the risk factor. It was not until channels to export markets

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opened up that farmers showed much interest in growing these crops. For sometypes of green lentil, mechanical harvesting with present types of equipmentis impractical and labor availability could become a limiting factor.Shortages of suitable seed have also been a problem. The low prices receivedby milk producers in the more remote areas have also discouraged efforts toextend fodder crop production to fallow lands.

4.07 Calculations of the potential for decreasing the fallow area whichare based largely on agronomic considerations, tend to result in a higherfigure than suggested by experience with farmers to date. It appears thatdespite successful results from continuous cropping with cereal/pulses orcereal/fodder rotations, farmers resist the notion of going more than four orfive years without a break. Thus, for example, the ultimate target for fallowin the Corum-Cankiri Rural Development Project has been set at 15-20%,compared with the 6% envisaged at the time of project appraisal. It may alsobe noted that fallow grazing is an important source of animal feeds in manyareas.

4.08 Multiple cropping. Possibilities for a marked expansion of multiplecropping also exist. Double-cropping possibilities are largely confined toareas with good water supplies and long growing seasons, which means irrigatedland in the south and south-east of the country, although the area presentlybeing double cropped is believed to be very small. A Second Crop DevelopmentProject was introduced by the Ministry of Agriculture and Forestry (MAF) intoseven provinces in the Aegean and Mediterranean regions during the 1981/82crop year, with the aim of bringing an additional 55,000 ha of corn and oilcrops (soyabean, groundnut, sesame) into land already being cropped duringanother part of the year. It is intended to add sorghum, rice and sunflowerto the project next year. The overall target is an incremental 380,000 ha in15 provinces by the end of the Fifth Plan period (1987/88). Details of theplanned area breakdown by crop are given in Table 3 of Annex 7.

4.09 Doubt has been expressed as to whether all the technical packageswhich are to be extended to farmers under the Second Crop Project have yetbeen fully proven in terms of their commercial viability under theagro-climatic and farm management conditions prevailing. Soyabean, forexample, has given disappointing results in the past despite estimates thatthe area of land suited to this crop in Turkey could be as much as500,000 ha.l/ Inadequate supplies of proven seed of suitable short-termseasonal varieties have hampered previous efforts to promote double croppingbased on some of the other crops included in the project, but it can bepresumed that these difficulties could be overcome with the systematicapplication of adaptive and applied research.

b. Increasing Crop Yields Per Hectare

4.10 Progress was made during the 1970s to improve yields of a number ofcrops (details are given in Chapter II and Annex 1). The exceptions aresugarbeet, the major pulses, cotton, alfalfa and sunflower. (The data on

1/ Consultant's report to the Industrial Development Bank of Turkey,April 1980.

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fruit, nut and vegetable yields are generally too unreliable to permit firmconclusions to be drawn.) In the longer term, the major source of yieldimprovement will be the progressive upgrading of the genetic material used byfarmers so that the input-responsiveness of the total crop is increased. The

process typically involves the adoption of a package of complementarypractices required to produce the specific micro-physiological environmentneeded to realize the superior yield potential of the crop. The kind oftechnology shift involved is well illustrated by the case of wheat in Turkey(para. 2.17) There is little doubt that for several other crops, superiortechnological packages are available for further adaptation which could bemade suitable for farmer uptake in many areas. Table 7 of Appendix 2 to Annex5 shows some estimates of the yield increases which can be obtained by farmersfrom using certified improved seeds for corn, oil crops, vegetables andfodder. There is still considered to be substantial room for improvement inaverage wheat yields, both in irrigated and rainfed areas, for both winter!'and spring wheats, assuming that the area sown will remain at its presentlevel: 2.2-2.3 tons/ha is thought to be a reasonable longer termpossibility. Barley out-performs wheat under low moisture regimes and newbarley varieties coming into use appear to be particularly promising. Foodlegume (pulse) improvement is proceeding rather slowly, probably due toshortage of adequately trained professional staff allocated to the researchprogram. Yields of both lentils and chickpeas could be doubled. The priorityin lentil improvement is for high yielding varieties for both winter andspring planting and which are shatter-resistant. Certain diseases, such ascrop blight, and bacterial inoculation techniques present problems atpresent. A winter-hardy variety of chickpeas is being developed but is stilla long way from the point at which it can be recommended to farmers.Chickpeas are more disease prone than lentils. Mechanized harvesting alsopresents difficulties.

c. Improving the Productivity of Livestock

4.11 Successful and affordable programs for intensifying production fromTurkey's animal resources could have a profound impact on agriculturalperformance. Even at the present low levels of productivity (as indicated inTable 8 to Appendix 2 to Annex 5), nearly every farm operator in Turkey (andsome rural families having no access to farm land) keeps grazing animals.

4.12 In principle, the remedy for the low productivity exhibited bycattle, buffalo, sheep and goats in Turkey is known--it requires a coordinatedeffort to improve: (a) standards of disease prevention and control; (b) thegenetic composition of the herds through topcrossing with exotic breeds andtheir crossbred progeny; and, in particular, (c) animal nutrition. The maindifficulties encountered in practice relate to traditional attitudes towardsthe use of communal pastures which are regarded essentially as a 'free good'accessible to all and, therefore, difficult to improve through controlledgrazing and fertilizer application; weak market demand in many areas for red

lt For example, a winter-hardy red wheat (the Canadian Lancer variety) hasbeen adapted on State Farms, which could measurably improve winter cropyields and is suitable for export.

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meat, milk, and live animals (a large proportion of the total production isconsumed directly by the producers themselves) which favors continuation oflow cost input-low output husbandry systems over more advanced technologies oneconomic grounds; and the deficiencies of livestock research in many respects(see Annex 8).

4.13 Remedial actions would require a large-scale reorientation of currentbreeding programs, these having emphasized to date the replacement of nativecattle with exotic breeds, principally to augment milk production, whosesuperior performance requires both levels of intensive feeding and veterinarycare which are largely beyond the means of the villagers and veterinaryservices to provide, and replacement of fat-tailed sheep with the moredisease-prone Merino. Recently, some efforts have been made to select andmake full use of good local breeds, such as the Southeastern Red cattle (whichhas both a high meat and milk potential), Anatolian Blacks (which reportedlyhave good meat production potential), or local sheep breeds, some of whichhave a higher meat productivity than Merino and, in the case of the Karaman

and other fat-tailed local breeds, can command a substantial price premium asmeat in Middle Eastern Markets. Breeding priorities were also revised inrecognition of the fact that recent price trends on the domestic market andespecially recent export opportunities suggest that cross-breeding cattle andsheep to emphasize meat production would ultimately be of greater benefit tothe economy. Additional research will be required to develop more efficientfeeding regimes for native and crossbred animals and simple, inexpensiveprophylactic health measures including treatment of parasites.l/ However, thegrazing resource base will not stand up to further substantial increases inanimal numbers. Thus, so long as the communal pastures continue to providethe bulk of the dry-matter intake during summer for the preponderantly nativebreeds, parallel efforts will also have to be made to prevent furtherexpansion in their numbers, and to promote the intensified cultivation offorage crops.

3. Future Research Directions

4.14 Regional priorities. The determination of priorities for theinvestment of public sector resources in productivity-raising research anddevelopment is a complex one. The extensive geoclimatic disparities amongstTurkey's nine agricultural regions, related land and irrigation capabilities,land-labor ratios and proximity to markets require that region specificpriorities be followed.

4.15 Technology alone cannot solve these problems, but the design ofappropriate technologies can alleviate rather than aggravate them. In therainfed area appropriate technologies will be those suitable for adopfion onsmall farms and which tend to enhance the use of available local resources, inparticular fallowed land, labor, and native animals. This also impliesinnovations which can be backed up by relatively unsophisticated support

1/ These have been initiated for Central Anatolia by the Ministry of

Agriculture's Grasslands and Animal Husbandry Research Institute, and inNortheastern Turkey under the Bank-assisted Erzurum Rural DevelopmentProject (Loan 2094-TU), however, a considerable expansion of this kind ofresearch to other parts of the country will be required.

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systems, are risk minimizing, low-cost (especially in terms of supportinginputs), are demonstrably superior over traditional methods, and can make animpact in a relatively short time.l/ Thus, a farming systems approach toresearch and development for these regions is likely to be as rewarding as acommodity and animal specific focus, though there is clearly need for both.

4.16 In the irrigated areas of these regions--and "irrigation" means fully

technical surface and groundwater systems constructed to DSI and TOPRAKSU'sstandards2/--and throughout the more developed and commercially orientedregions of Marmara/Thrace, the Black Sea, Aegean, Mediterranean, and parts ofSouthern and Western Anatolia regions, a different set of technologicalpriorities exist. Here, the requirement is more commodity and problemspecific in order to improve and refine cropping and animal productioncapabilities on commercial farms, enhance the efficiency of irrigated farming,and improve the efficiency of on-farm and transit storage, handling,extraction and processing, particularly for purposes of export (e.g. researchinto the technology of packaging horticultural produce using localmaterials). In terms of strictly agricultural production technology, emphasisis needed in the following areas: the adaptation and propagation of highyielding cultivars not presently in widespread use in Turkey (e.g. hybridvegetable seeds, improved citrus and deciduous fruit seedlings, winter hardywheats and pulses), seed and soil treatment and plant disease prevention andcontrol, crop/water balances and on-farm water management, optimum use offertilizers and plant protection materials under farmers conditions, thedevelopment and performance testing of improved animal feeding regimes--again

under farmers conditions--for native and crossbred cattle and ovines, animaldisease prevention and control measures and simple anti-parasitism practices.Although the menu is long, a considerable number of research findings ofinterest already exist in Turkey, particularly on crops, which could be drawnupon and adapted to form a basis for improved technical packages. Theparticulars of available results are discussed in Annex 8.

4.17 An area which has not been adequately researched to date concernsmechanical technologies for on-farm operations. The TASM simulations indicatethat labor is not likely to become a binding constraint on production during

1/ An important gap concerns cropping patterns and rotations for rainfedareas. The interaction between consecutive crops through factors such assoil moisture, residual nutrients, disease and weed control, and theeffect of such interaction on rainfed yields have not been sufficientlystudied, however a wealth of relevant material is now availableinternationally, and local research would not require equipment beyondwhat is presently available at the main stations. Although a croppingsystems approach and the present commodity-based approach are not mutuallyexclusive and may converge in many cases, the present practice leads torecommendations which provide only a partial answer to the rainfedfarmers' needs.

2/ DSI (the State Hyraulic Works agency within the Ministry of Energy) isresponsible for the construction of major irrigation and drainage works inTurkey. TOPRAKSU handles small-scale developments and on-farm irrigationdevelopment on DSI systems.

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the remainder of the 1980s, except during the 3rd Quarter of each year.However, animal power, irrigated and some types of rainfed land could becomebinding. Thus, in general terms, it is suggested by the results of thesimulations that any mechanization which can supplement or more likely can

replace animal power will be appropriate, while the land constraint dictatesthat such mechanization should be designed to maximize output per unit ofland. Mechanization which maximizes the output per unit of labor ought to beavoided except for harvest and post harvest operations, which would help torelax the 3rd Quarter constraint on labor. The mechanical farm technologywhich was introduced in the 1960s and 1970s was often inappropriately sized,particularly tractors, whose uptake and diffusion was sustained byinappropriate pricing and subsidizing credit. Research to adapt appropriateforms of mechanical technology must be aligned with research in other closelyrelated areas, e.g. in cropping and feed/livestock systems, which have, asprincipal objectives, the intensification of crop and animal production.

4.18 Finally, it is worth noting that very little meaningful socioeconomicresearch has been conducted by the agricultural research entities in Turkeywhich could assist with the setting of technical research priorities and the

diffusion of results to the farm level. A major problem, not yet fullyrecognized, is that the direct transference of a new cultivation technique oranimal production method from the very specific environment of the researchcenters to the widely ranging environments found at the farm level, may reducepotential benefits considerably and render innovations unprofitable.Therefore, socioeconomic research should be directed towards identifying thegap between existing and potential crop and animal yields under farmconditions--or cropping systems and mixed crop-livestock farming systemsyields--and determine in conjunction with the biological scientists,agriculturalists and engineers, what proportion of this is economicallyrecoverable and the kind of additional adaptation, development and farminvestment required to make the package more viable. The very excellentapproach followed by the International Rice Research Institute and cooperatingnational research agencies in its "Constraints to Higher Yields" project!/could serve as a point of departure for similar research in Turkey.

4. The Organization of Research

4.19 Multiplicity of institutions. Responsibility for agriculturalresearch is apportioned amongst a bewildering array of agencies. It iscarried out by about 90 research institutes and stations, which can beclassified into six main categories:

(a) The Research Department of the General Directorate ofAgricultural Affairs (GDAA) within the Ministry of Agricultureand Forestry (MAF), which is authorized to carry out researchprograms for all annual and perennial crops except cotton andsugar beet, as well as pastures, meadows and animal husbandry,including feeding and breed improvement;

1/ c.f. IRRI, Changes in Rice Farming in Selected Ares of Asia, LosBanos, Philippines (1975) and subsequent publications.

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(b) The General Directorate of Plant Protection and Quarantine(GDPPQ), within MAF, whose responsibilities cover research ondiseases, pests and weed control affecting all crops exceptsugar beets;

(c) The General Directorate of Veterinary Affairs (GDVA), withinMAF, whose current research deals primarily with animal diseaseand its control;

(d) TOPRAKSU (Ministry of Village Affairs), which conducts researchon hydrology, drainage, irrigation and soil physics andagronomic matters pertaining to irrigated crops; and

(e) Crop specific research by specialized institutes under theDepartment of Cotton Affairs (MAF), SEKER (sugarbeets), TEKEL(the parastatal tea and tobacco monopoly), and MAF's CentralForest Research Institute, located in Ankara.

In addition, research establishments are operated by the four mainagricultural faculties in Turkey, which sometimes complements officialresearch, but often is carried out in isolation from national researchpriorities which, admittedly, are unclear.

4.20 Planning and programming of research. Within MAF, an interagencyboard is charged with deciding GDAA's research programs for the forthcomingyear. It provides a means for exchanging information about research programsof different agencies, but up to now it has not been able to define clearpriorities for GDAA's various research programs. Within TOPRAKSU, anothernational research committee has been organized to coordinate activities, whichmeets once a year to review progress and plan future actions. As opposed toGDAA, TOPRAKSU has achieved a high degree of coordination between thenational, regional and local research personnel, as shown by research alreadydone on subjects such as water consumption, response to fertilization, orproduction costs of various crops in different agricultural areas of thecountry. There presently is, however, no umbrella committee which overseesall research by the various agencies, and sets and insures compliance withnational priorities.

4.21 Coordination between research institutes. Although the agronomicpart of the research done by TOPRAKSU concerns mainly plant nutrition andfertilization (TOPRAKSU is specifically responsible for performing soilanalysis and giving recommendations on fertilizer use), it also givesattention to crop adaptation and variety testing, thus duplicating work doneon GDAA's institutes and stations. In turn, the latter--at the researchprogramming level--has inadequate information about useful findings ofTOPRAKSU.

4.22 A recent attempt has been made to correct this situation through thecreation of multidisciplinary research projects focussed along commodityspecific or subject matter lines. In 1969 a national wheat research programwas initiated, which involved the collaboration of GDAA (mainly for breeding

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and selection, as well as some agronomic research), TOPRAKSU (mainly forfertilization), and GDPPQ (for weed control and disease problems). Themultidisciplinary wheat program was a success, and, following the release ofseveral high yielding varieties, it has been utilized as a prototype for 27additional commodity specific projects that bave been initiated or are in thefinal stages of planning. Following the wheat 'model', one research instituteor station of GDAA has been designated as the leader for each of the researchprojects, while other agencies (e.g. GDPPQ and TOPRAKSU) are expected tocollaborate in their respective field of expertise.

4.23 Although coordination has not proceeded as smoothly under these newprojects as under the wheat project, the definition of a limited number ofcountrywide research projects represents an improvement over the previoussituation whereby, in 1976, the GDAA alone was carrying out more than 400research projects. However, each of the cooperating institutes or stations ofGDAA still retains in addition specific research activities (regional, or'line' projects) along the same lines as before, while the collaborationachieved with GDPPQ and TOPRAKSU in the wheat project has not materialized inthe newer projects. As a result of these factors, a considerable duplicationof research activities, staff and physical resources persists.

4.24 This situation has even developed among agencies within MAF--wherecoordination and cooperation should be routine--because of different policiesand bureaucratic procedures at the central level in GDAA and GDPPQ andexcessive administrative centralization. Although both general directoratesare now under a common deputy undersecretary, this situation will probablycontinue so long as GDPPQ continues to function under separate legal andbudgetary authority from GDAA, which is in part a result of the failure toconsolidate the research activities of these two entities under previousreorganizations of the MAF.

4.25 In order to improve the efficiency of research under itsadministrative control, GDAA has initiated a comprehensive review of its some30 operating research institutes and stations. Many are presentlyunderstaffed and under-equipped, and thus are unable to contribute in anymeaningful way to the development of improved production technology. Thisstudy endorses the opinion expressed by several senior officials within MAFthat, as a first step towards improving GDAA's research capabilities, anational network of research facilities should be designed which would giveprimary programming responsibility to the seven regional agricultural researchinstitutes, with smaller stations being placed under the technical supervisionof the main regional institutes. This would implicitly recognize that

regional adaptive research deserves priority, and that government institutesshould no longer emphasize basic research, the need for which is limited inTurkey, and which in any event is best carried out by universities andinternational agricultural research institutes. A second step should be theinclusion of related research by GDPPQ and the Department of Cotton Affairswithin the purview of the regional research institutes, as well as some of thepresent research of TOPRAKSU and the veterinary services. However, the needfor strong central presence would continue, both to set national priorities,coordinate the budgeting process in Ankara, ensure that allocations requested

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by the regional institutes are in accord with the priorities, and to maintainuniformity of technical research standards and procedures. The setting up of

a body to exercise these responsibilities (or the revitalization of anexisting entity at the central level), thus constitutes a third step which,

together with the previous two would lay the necessary institutionalfoundation for more effective research.

4.26 Links with extension services. The shortcomings in current researchprograms are partly due to the fact that the links between research on oneside, and the extension services and farming community on the other have beenrather weak. Final experiments on the farmers' fields are carried out onlyexceptionally and there is very little sustained, systematic contact betweenGDAA research and extension services at the field level. As a consequenceresearch is often too theoretical, which is all the more unfortunateconsidering that research efforts should mainly be aimed at selectivelydrawing upon knowledge accumulated elsewhere for testing and choosing improvedpractices suited to national and local conditions.

4.27 In connection with the recent reorganization of MAF, GDAA has set upcrash programs to improve the efficiency of the research and extension

services under its control. The main emphasis is on integrating research,extension and the provision of credit for the promotion of specificagricultural development projects; the implementation of two such projects(Fallow Reduction and Second Crop Development) is underway. This new approachis sound in principle, and focuses correctly on trying to solve majorshortcomings of the past. However, both preparatory research and fieldexperiments under farmer's conditions have been sacrificed to the commendabledesire for quick implementation. Such delays in implementing the researchcomponent will in effect force participating farmers to bear the bulk of thetechnical risk, and--if too many wrong recommendations are made--coulddiscredit these programs among the intended recipients.

B. Diffusion of Improved Technologies

1. General Issues

4.28 In parallel with improvement in the agricultural technology systems,should come an improvement in the operation of farmer information systems suchas agricultural extension, and systems which diffuse more productivetechnologies when these are embodied in improved production factors,principally seed, more appropriately sized tractors and implements, animaldrugs, vaccines, selected concentrates and more appropriate breeding animals.To accomplish the former, the Government's diverse agricultural extensionservices also will have to be reorganized, consolidated, retrained, links withthe research entities must be strengthened and a more thoughtful (andcomprehensive) approach to farmer training pursued. The scope of officialextension assistance should be expanded to incorporate animal management, careand feeding, while the use of the expensive T&V approach should be emphasizedmainly in regions where it might have the greatest effect. Program costsavings and a conservation of management input could be realized in the morecommercialized areas, were the use of mass media further developed and

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agribusiness encouraged. A relaxation of import restrictions on high quality

cultivars, smaller tractors and implements, and animal husbandry inputs notpresently produced in quantity in Turkey would measurably assist thetechnology-diffusion process.

2. Agricultural Extension

4.29 Among the many agencies providing extension services to farmers, theExtension Department of GDAA has by far the largest number of field staff, whocover virtually every aspect of agricultural production. The Sugar Factories

Corporation also has a network of extension agents and foremen who work withbeet farmers under an integrated research-extension-input supply system.l/In addition, commodity specific advice is provided by agents of the Tea andTobacco Monopoly (TEKEL), and by the Department of Cotton Affairs of MAF. Butthe latter are less numerous and rely upon GDAA's field extension network to alarge extent. GDPPQ has its own field extension staff, with an organizationnetwork almost parallel to that of GDAA down to the provincial level; some ofGDAA's field offices are shared with GDPPQ. The veterinary field services ofGDVA, which are posted to the county level, mainly respond to outbreaks ofanimal disease through vaccination campaigns and undertake some artificialinsemination work. They also carry out limited extension work (like teachingfarmers health and animal hygiene measures), but the provision of advice foranimal feeding and management has been assumed by GDAA in response to farmers'requests for information. TOPRAKSU has its own field extension agents whoinstruct the farmers in irrigation practices, fertilizer use and crop

rotations, while the Directorate of Forest Villages (ORKOY) within MAFprovides extension specifically for villages on the forest margins.

a. GDAA Extension Services (Teknik Ziraat)

4.30 Organization. Teknik Ziraat (TZ) is GDAA's provincial and countylevel agricultural extension service. TZ has a directorate in each of the 67provinces and also maintains a direct representation in all 629 counties. TZprovincial directorates are divided in a number of specialist sections,2/ eachsupervised by a senior agricultural engineer and a team of 2-3 other graduatespecialists. The county offices vary in size but usually consist of a senioragricultural engineer or technician and a team of engineers and technicians.The county is in theory divided into village groups for extension purposes,each with a 'focal' village; in reality, only a relatively small number ofvillage group offices have been constructed and properly staffed.

4.31 Work programs. Until the recent reorganization of MAF, GDAA wasdivided at the central level in specialist sections equivalent to those foundat the provincial level. The new central organization is now lesscommodity-specific and places more emphasis on a division along functional

1/ The Sugar Factories Corporation employs an average about 1 foreman for400 farmers, which is a much more intensive system than GDAA's.

2! e.g. field crops, horticulture, meadows and pasture, agriculturaleconomics, irrigation and soil conservation, animal husbandry,agricultural mechanization, home economics.

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lines. For the time being, however, little effective reorganization hasoccurred in the provinces,l/ and the field extension staff of the provincialoffices continue to specialize along commodity lines. This pattern isreinforced by the system of budgetary approvals for local extension projects,usually commodity specific, which presently constitute the only consistentlyprogrammed activities for TZ field staff (e.g. propagation of early variety ofpotato, demonstration of one particular technique, etc.). Each county ends upwith around 15-30 such projects in its annual program, many being carried overfrom year to year. As a result, although the county level staff arepolyvalent, they are required to devote most of their time to these activitieswhich cover only one or two aspects of the farmer's operation. In contrast,the more general aspects of extension do not benefit from an organizedstructure of technical or specialist support for the county agents and, ofcourse, are consistently underbudgetted. As with research, there is nogeneral operational procedure for incorporating feedback from the farmers tothe extension services.

4.32 TZ's field staff also has been given extensive administrative duties,which range from the preparation of agricultural statistics to the issuance ofrequisition forms enabling the farmers to obtain fertilizers from theAgricultural Supply Organization, the distribution of planting materials andcertification of farmer's creditworthiness on loan applications. While someinvolvement of TZ staff in assisting farmer's to obtain credit appearsnecessary, these 'policing' functions have proved detrimental to realextension work, and should be vested in the responsible agencies.

4.33 Aside from a sizable corps of female agricultural engineers andtechnicians who are employed both in the specialist sections of the provincialdirectorates and at county level, TZ employs a substantial number of homeeconomists, who are always women. Such qualified women are seldom, if ever,permitted to carry out field extension work on their own. However, women onthe farms perform a major share of the agricultural tasks, often the moreburdensome ones, and contribute to the farm decision-making process. In viewof the present social climate in many Turkish villages, productivity gainscould be considerable were the available female extension staff utilized moresystematically to carry out direct extension on agricultural matters with farmwomen.

4.34 Considerable retraining of TZ's field extension staff is required,which GDAA has begun to address in the context of a General ExtensionIntensification Program begun for six provinces in 1982 which it intends toexpand to a total of 16 provinces in 1984 with Bank assistance under aproposed Agricultural Extension and Applied Research Project. Some lacunae ingeneral extension activities represent, however, the inability of the researchestablishment to generate suitable technical packages at the regional level,

1/ A Provincial Director of Agriculture has been designated for most of the67 provinces, and is given authority to coordinate the activities of MAF'sextension, veterinary and forestry services in the province. The

functional lines of authority for this position are still being developed.

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thus little extension work has been or can be done on appropriatelymechanized cultivation methods, crop rotations and inexpensive animal feedingregimes until the requisite research has been accomplished. In recognitionof this problem, an attempt will be made under the aforementioned project tostrengthen the applied research capabilities of five regional researchinstitutes and an animal husbandry institute, and to involve theparticipation of their staffs in extension service training and workprogramming. If successful, the GDAA plans to implement the concepts evolvedin the project nationwide in the coming years.

4.35 Mass media. The use of mass media to supplement field extension isreceiving increasing attention by MAF, and correctly so. TZ distributesvarious written materials, and has begun to utilize radio and television.GDAA recognizes that in many parts of the country, the electronic media havea higher potential than print media for the dissemination of information andfor promoting various extension campaigns because they are better adapted tothe current educational level. However, radio programs need to be made morerelevant to the partictular farmer's condition in the various regions. TVprograms are presently irregular and many use films purchased abroad whichhave limited relevance to local conditions. The GDAA plans to rehabilitateits media production center and establish an extension information print shopand documentation center in 1984 under the proposed Agricultural Extensionand Applied Research Project, to strengthen its capabilities in this fieldand to increase the volume and availability of locally produced materials.

4.36 Staffing. The current numbers of TZ staff by agricultural regionare shown in Table 1 of Annex 8. For the whole country, there is presentlyon average one extension agent (agricultural engineer or agriculturaltechnician--home economists excluded) for 664 rural households. Some havemostly administrative responsibilities, but on the whole the situation is notalarming insofar as TZ's total staff numbers are concerned. Contrary to thegenerally held view, TZ's extension staff are fairly evenly distributedthroughout the country, particularly when compared with GDVA's veterinarystaff (c.f. para. 4.41 below). In each region, however, the situation varieswidely between provinces.

4.37 Following the reorganization of GDAA, a detailed review of TZ'sextension staff resources has been carried out, and a staffing plan drawn upfor each province, based on (a) the respective agricultural activities ineach province and hence the number of technical specialists required at theagricultural engineer level; and (b) the number of countries and villages,and hence of polyvalent technicians required. Under this plan, 1 villagetechnician would be assigned in each village where irrigated agricultureprevails, and I for every 5 villages practicing mostly rainfed agriculture;I additional village technician would be located in each of 1,681 villagecenters. Thus some of TZ's staff would be reassigned, and its total staffwould be expanded to comprise a total of 2,567 agricultural engineers and12,358 agricultural technicians, as compared with its present fiela staff of1,033 engineers and 5,377 technicians. This augmentation of staff wouldproceed simultaneously with the adoption of a training and visit (T&V)approach to extension nationwide.

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4.38 While movement towards the T&V extension system and devoting moreresources to extension are both steps in the right direction, the proposedplan appears to be ambitious. The T&V system is very effective in reachingsmall and medium scale farmers with limited education. However, the T&Vsystem is also a comparatively expensive approach to extension, which may notbe the uniformly most cost efficient way to transfer agricultural informationwithin Turkey's diverse regions, and second, where it is appropriate, the

intensity of staff and farmer training activity associated with the T&Vapproach need not be retained indefinitely. The extension needs of the moredeveloped and commercialized areas, for example, might be more effectivelyserved through electronic media campaigns supported by the print media and asmall corps of technical specialists who could advise on particular problemsas these arise. In such areas, farmers tend to be educated and literate andhave--by virtue of past performance--developed a capability to quicklyunderstand and apply promising new techniques. It is doubtful that anagricultural school graduate, e.g. a polyvalent county or village technician,could convey substantially additional information to these kinds of receptivefarmers beyond that which could be transmitted via media techniques.

4.39 For regions where extensive and continual personal contact would berequired, a T&V system is clearly appropriate, and the school and in-servicetraining should be improved and better organized along lines presently beingattempted by GDAA. As a general principle, a T&V approach would appear to bemore appropriate for the presently rainfed areas in Central and EasternAnatolia and Southeastern Turkey, and areas which are scheduled to receiveirrigation, or have recently been provided with irrigation but have yet toreceive proper extension assistance on wet farming techniques. However, thenumbers of additional staff for TZ may not be excessive and a substantial

redeployment of existing country and village agents to these areas maysatisfy the bulk of the program's personnel needs. Moreover, within theseareas, a selective focussing of T&V on core or centrally located villages maybe the most cost-effective strategy.l/ In the context of the afore-mentioned Agricultural Extension and Applied Research Project, the GDAAintends to develop an appropriate balance between media-based and T&Vextension approaches in four of the country's nine agroecological zonescommencing 1984.

b. Veterinary and Animal Husbandry Services

4.40 The field staff of GDVA are mostly concerned with responding tooutbreaks of animal disease and artificial insemination services. They alsodistribute breeding animals (especially bulls) from the State Breeding Farms(Haras) to the villages, and carry out various projects such as a cattlebreeding project in Northeastern Anatolia and a lamb fattening project inWestern Anatolia, whereby GDVA ensures coordination with TCZB for theprovision of credit to farmers; such activities often duplicate similaractivities of TZ.

1/ The extension strategy being instituted under the Erzurum RuralDevelopment Project (FY81) may be instructive.

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4.41 Staffing. Table 2 of Annex 8 gives the number of veterinarians andveterinary technicians per agricultural region. This staff is distributed inprovincial and county offices. The number of staff assigned to the variousregions is quite unbalanced in respect of animal numbers, and variesconsiderably among the regions. In the Marmara region, there is oneveterinarian or technician for every 3,600 head of cattle and 11,500 of sheepor goat, while in the North East region there is one for every 16,700 cattleand 48,600 sheep.l/ Those regions which have the lowest densities of staff

(North East, South East, Black Sea) account for the largest share of thenational herd and where livestock raising is a main source of farm income.While it is debatable whether feeding, livestock credit and even breedimprovement should be veterinary responsibilities, the available resources ofthe veterinary organizations and the number of animals whose health is theirprimary responsibility suggests GDVA has barely enough resources for thiswithout undertaking other responsibilities.

4.42 Programs. National, regional and sometimes provincial programs aredrawn up for the control of major epidemic diseases. Usually these programsare only implemented when an outbreak occurs and an epidemic threatens. Thenvaccination by the Government services is provided free of charge. But whena farmer wishes to take prophylactic precautions he must usually pay a chargefor the vaccine, if it is available, and for the veterinarian's service.Since shortages of vaccines and transport tend to be associated with theshortage of staff, the regions with the most animals tend to incur the leastefficient vaccination campaigns. Under this regime, parasite control hasreceived little emphasis, even though the impact of sustained parasitism onanimal productivity can be as severe as pandemic disease, though perhaps itsmanifestations are less dramatic.

4.43 Considerable improvement is thus needed in implementing vaccinationcampaigns, teaching animal health care to the farmers and ensuring day to dayveterinary care when specific problems arise on the farms. Artificial

insemination is poorly developed in Turkey, and not associated withcomplementary extension on livestock feeding and general husbandry.Recruitment of additional staff is needed for the less developed areas, inparticular technicians (for the whole of Turkey, there presently are 922veterinarians and 1,270 veterinary technicians in the Government fieldservices). They should focus exclusively on health care, emphasizing theprophylactic aspects as much as disease control, and on artificialinsemination services. Concentration areas should be defined where thesematters would be tackled through the provision of complete animal healthpackages on a village basis, with the collaboration of TZ for complementaryactions such as extension on animal feeding, forage crops production andgeneral husbandry.

1/ There are also some private veterinarians in Turkey, the number of whichis not known (for example there are 16 in Izmir province). The privateveterinarians are more concentrated in the coastal western areas, like theofficial staff is, and deal only with the largest farmers who can affordtheir services.

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3* Distribution of Production Factors

4.44 In varying degrees, biochemical and mechanical technologies areembodied in the genetic characteristics of available planting materials,breeding animals and the sizes and capabilities of machinery and implements.To an extent these can be applied effectively at the farm level within thephysical constraints presented by soil, climate and topography of an area, andthat more efficient input combinations and factor proportions will result fromtheir uptake by farmers, then the efficiency of the technological diffusionprocess could be measurably improved by measures to augment the availabilityof appropriate current inputs and other production factors.

4.45 In Turkey, particular and well-known problems exist in regard tosupplies of certified seeds and breeding animals (discussed in Annexes 1 and8), the fertilizer distribution system (Annex 4) and the availability of asufficient range of appropriate tractor powers and sizes (Annex 1). Therequired remedial measures are outlined in the following paragraphs for themost important of these.

a. Seeds

4.46 Limitations on the availability of high quality seeds stem from theinability of the State Farms, nurseries and local seeds companies to producecommonly utilized seeds and seedlings in quantities sufficient to meetfarmer's demand. Seed availability is also limited by overly restrictiveregulations governing the importation and testing of improved cultivarsincluding some varieties more suited for export than present Turkishvarieties, and a regulatory apparatus which still discourages international

seed companies.l/ A related problem concerns the quantity of seeds beingproduced (see Annex 8 for details). In consequence, grain farmers have hadincreasingly to rely on their own seeds, even though they are in generalconvinced of the superior performance of certified seeds.

4.47 To alleviate this difficulty for wheat, barley and cotton seeds, theMAF in 1982 reinforced its National Seeds Program which aims to coordinate allthe seed production activities and tailor these to the farmers' needs. Underthe new arrangements, the budget of the State Farms and staff and operatingbudget for the Seed Control and Certification Institute have been augmented,while the Seeds Department of GDAA should be better informed of seed stocksavailable in the State Farms as well as of the seed requirements of thevarious provinces as estimated by the extension services. It will thus be ina position to monitor the production and distribution of seed and provideadvanced information about seed availability for each province. Each StateFarm is now required to follow an approved seed production program coherentwith the regional and national needs. Although it is too early to judge theeffectiveness of this effort, some improvement is expected in 1982 and initial

1/ However, it is widely recognized in Government that these companies, withtheir international experience and wide selection of proven geneticmaterials, could measurably augment the availability of improved seedsthrough programs which could involve the cooperation of state farms andparticipation by local seed companies.

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indications are that it has already been achieved. With respect to themultiplication of hybrid vegetable and maize seeds, and a range of improvedforage crop seeds which are in particularly short supply, it was decided thatjoint ventures between local and foreign seed companies would be the mostefficacious way to import and produce certified seed in large quantities.While local seed companies have been enthusiastic, it has been difficult toattract foreign participation in the absence of guaranteed profitability andfears of subsequent bureaucratic intervention. Until these concerns areaddressed, probably through promulgation of a less stringent Seeds Decree, theadaption and production of high yielding vegetables, maize and forages willprobably lag since the Government's research establishment is insufficientlystaffed for these tasks nor has it access to the basic genetic material neededfor an accelerated seed production program. Recently, however, foreign seedcompanies participated in an American-Turkish Agribusiness Conference (June1983) having semi-official sponsorship, and some are reported to haveexpressed a renewed interest in joint venture seed production investments.

b. Breeding Animals

4.48 Central to the herd upgrading required over the next decade is thepropagation and distribution of high quality breeding animals which canprovide both natural service for native herds and supply semen for the nascentartificial insemination program. Aside from a limited number of breedinganimals kept by the farmers--often in poor condition--government agenciesinclude among their activities the breeding and distribution of improvedanimals, principally bovines and ovines. These activities are centered on 18State Breeding Farms operated by GDVA, however similar activities are alsocarried out by the General Directorate of State Farms (GDSF) on its 21 StateFarms as well as by diverse production stations operated by GDAA. The pastperformance of government involvement in breeding animals is uniformlydiscouraging, and mirrors the nearly general disarray of livestock managementand production programs in Turkey. Farmers who wish to purchase breedinganimals from these sources usually apply to the local GDAA extension services,GDVA veterinary services, or TCZB if they are to get animals under one of theexisting credit schemes. The quality is uneven since animal selection andperformance control on the Haras and State Farms are far from systematic, andfarmers are often not involved in the selection of the animals they willreceive.

4.49 The distribution of the animals to the farmers also is poorlyorganized, and in some cases Haras and State Farms have sent for slaughterimproved animals which could have been distributed. These phenomena are ofmajor concern of MAF, though to date, its senior officials have been unable tosubstantially implement remedial action.

4.50 Critical to the maintenance of improved herds and the effectiveutilization of prior crossbreeds is the maintenance of herd pedigree andperformance records. Unfortunately, no systematic recording scheme exists inTurkey, and breeding control at the farm level is usually lost after the firstgeneration. This is an area in which the concerned department within GDVA hasbeen remiss although it has been charged with a specific duty to improve

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national herds. Because of the total absence of any attempt to organize theregistration, selection and record-keeping of the succeeding generations, theopportunity to make these animals the basis for improvement of the nationalherd is being lost.

4.51 The limitations of the breeding services have long been recognizedbut the entrenched interests within MAF have been able to frustrate mostattempts to improve their efficiency. Thus, under four of the five Bankassisted livestock development projects, an attempt has been made to providesuperior genetic material directly to farmers through credit arrangements andunder the supervision of a special project agency. Primary emphasis has beengiven to the importation of exotic milk cattle breeds in order to establishnucleus herds and modern dairy operations near large urban areas. To date,about 20,000 cattle have been imported under these projects, and those located

near the milk consumption centers have been comparatively successful althoughcontrol over the distribution of progeny has not been good. There areindications that the projects have also begun to accomplish their secondaryobjective of provoking the veterinary services to reorganize and become moreattentive to weaknesses in their breeding and related animal health programs.The GDVA is now directly participating as an executing agency in twoBank-assisted projects in the fields of artificial insemination, provision ofnatural bull and ram service at the farm level, and associated herd recordingand disease prevention and control measures. It has also, in 1981, initiateda special project to topcross native cattle on Northeast Anatolian farms withMontefon bulls, itself a crossbreed with good meat production characteristics,using AI and natural service. If the breeding component of Livestock V (FY80)and this project are successful, and in particular, if the associated feedingand veterinary requirements do not exceed the carrying capacity of the areasserved, it would represent a major improvement in MAF's ability to supplybreeding material to farmers in large numbers. By emphasizing husbandry ofcrossbreeds rather than exotics the strategy would be in accord with theoptimal selection of animal types manifested in the projection exercise(TASM-ALV) when consideration is given to the relative costs of alternativefeeds, their relationship to feed-conversion efficiencies, and the limitedscope for expansion of traditional animal numbers.

c. Fertilizer Marketing and Distribution./

4.52 The TASM simulations indicated that fertilizer consumption could beexpected to double by 1990 if the production projections are realized. It ishighly unlikely that the fertilizer distribution arrangements, as presentlyorganized could effectively satisfy the rapid expansion of demand implied bythese projections. Fertilizer distribution has been made a monopoly of twopublic sector companies--the Agricultural Supply Organization (TZDK) and theTurkish Sugar Company (SEKER), ostensibly to ensure orderly distribution in aswide an area as possible and to prevent black marketing during the periods ofshortage.

1/ Discussed in detail in Annex 4.

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4.53 TZDK is by far the largest fertilizer distributor accounting forabout 90% of the fertilizer--both local and imported--distributed in thecountry. TZDK does not undertake sales promotion and is not involved inextension services. On fertilizer sales, TZDK incurs large financial lossesbecause the fertilizer retail prices (fixed by the Government) are much lowerthan TZDK's purchase price of local and imported fertilizers. These lossesare compensated by Government from levies on the export earnings of certainagricultural commodities.

4.54 As a monopoly with cost compensation guaranteed by the Government,TZDK has little incentive to develop methods for reducing transportation andwarehousing costs or improving handling efficiency. As a rather bureaucraticGovernment agency, TZDK also lacks the flexibility of the private sector inmaking ad hoc arrangements to take advantage of marketing and procurementopportunities and has demonstrated little motivation or capability of doingso. The current system also provides little flexibility for adjusting pricesof various competing fertilizers in line with supply and demand. It wouldtherefore be desirable from the standpoint of efficient technology transfer,as well as pricing and distribution management to open up fertilizer sales andfertilizer imports to competition between the private sector and TZDK (as hasalready been done in the case of pesticides). The Government has hiredconsultants to review the issues of fertilizer distribution and pricing; theirreport and recommendations are scheduled to be completed by June 1983.

4. Vertically Integrated Agribusiness

4.55 In addition to the direct management of research and extension byGovernment line-agencies and the distribution of agricultural factors ofproduction which embody improved technologies, it is worth noting that theseactivities have been carried out with some success by a parastatals which havebeen organized along the lines of an integrated agribusiness (e.g. SEKER andTEKEL). A relatively recent development is the provision of technology andinformation services to farmers by privately owned agribusinesses, principallyin horticulture and, only recently, in livestock products. Although the scopeof their operations have been confined to date to the coastal regions and themore accessible parts of Anatolia, and the farmer-beneficiaries are no doubtthe larger more successful operators, the promotion of an agribusinessapproach could hasten the transfer into Turkey and the diffusion of knowntechniques to the more commercialized areas, and thereby contribute to theresumption of growth.

C. Elements of Strategy

1. Need for Decentralization

4.56 While a better definition and coordination at the central level ofthe agencies and parastatals involved in the generation and diffusion ofagricultural technologies is a prerequisite for improved performance, it isequally important that such coordination also be achieved at regional,provincial, and local levels. At present, decision making for fieldimplementation is excessively centralized. All the field offices are closelytied vertically to their own Ankara headquarters, with only weak horizontallinks at regional and provincial level. At the same time, effective feedbackfrom the field offices to the central level rarely takes place.

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4.57 Considerably more authority should thus be given to field offices fordecision making and day to day implementation of their programs. Their workprogram and overall priorities should be planned for at least one year ahead,and within this framework they should be given the responsibility and

financial resources to carry them out with only general supervision fromheadquarters. Also, the field offices should be consulted and closelyassociated in the definition of such priorities, programs and their annualtargets since an assessment of feasible targets and future impact requires agood local knowledge of existing field practices and constraints, and needs tobe supported by some kind of local marketing analysis to more realistically

identify crop-income potential.

4.58 Provincial directors of agriculture have been recently appointed byMAF in most of the 67 provincesl/ and are being given authority tocoordinate, program and budget for all agricultural services in the provinceson behalf of the provincial governor. Their responsibility, however, ispresently limited to MAF services, and does not encompass agencies from otherministries; it is also still unclear how they can exert their authority, andwhether they have to deal with each of the individual central bureaucracies ofthe field services under their control. Furthermore, if field offices are tobe given increased participation in program definition, it is doubtful thatall 67 provinces could be adequately staffed and develop the capacity toperform such functions. While offering the advantage of fitting into theGovernment's present structure of local administration, the existingorganization of MAF's extension, livestock and input supply services on aprovincial basis usually does not correspond to homogeneous geographical andagricultural units, which cut across provincial boundaries.

2. Consolidation and Regionalization of Supporting Services

4.59 In order to overcome the main difficulties and constraints describedabove, very serious consideration should be given to establishing a limitednumber of semi-autonomous regional agricultural development agencies, withbroad regions defined on the basis of natural conditions and hence dominantfarming systems (similar for instance though not necessarily corresponding tothe nine agricultural regions defined by the SIS for statistical purposes).In order to achieve regional integration and cooperation among differentinstitutions, a certain degree of regional autonomy will be required,including, possibly, independent budgeting authority. All routine operationalaspects of agricultural research, agricultural extension and animal husbandryservices, infrastructure development, special projects and inputs supply,which are presently provided by GDAA and GDPPQ extension and researchservices, GDVA, ORKOY, TOPRAKSU, Cotton Affairs, TZDK, YEM and SEKER, could becarried out or coordinated by such regional agricultural developmentagencies. At the center, only a residual authority for operations would be

1/ Depending on the province, either the provincial director of extensionservices (Teknik Ziraat), the provincial director of veterinary servicesor the provincial director of forestry has been designated as provincialdirector of agriculture.

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retained to establish and maintain technical standards, apply nationalpriorities, coordinate the preparation and approval of national budgets,facilitate inter-regional staff and resource transfers and carry outsupportive tasks beyond the capability of the regions to accomplish such asthose related to foreign technical and capital assistance, degree leveltraining, establishment of medium term development priorities and relatedpolicies. However such authority at the national level should be exercised bysingle offices covering all activities in a subject area, e.g. one forresearch, another for extension, a third for planning and programming, whichwill require as profound a consolidation of existing offices at the centrallevel as would the consolidation at the regional level proposed above.

4.60 A first step towards regionalization would be the taking of aninventory of existing farm practices in the region so as to determine whichamongst presently available improved technical packages can be extended, andto identify the areas in which further adaptive research will be required.l/At the same time, an inventory should be made of ongoing special projects,actions and research activities by the various existing institutions. Theagricultural region could then be divided into a series of agriculturallyhomogeneous subregional development areas, and one of the existinginstitutions (such as GDAA, TOPRAKSU, SEKER, ORKOY) assigned primaryresponsibility for extension activities and supporting research in each ofthese subregional areas on the basis of the dominant type of commodity and/ortechnology. In the future, a development plan would be drawn for eachdevelopment area (and possibly sub-area) on the basis of its own particularproblems and circumstances. A regional authority would be created whose staffcould be drawn initially from the existing staffs of the line agencies. Forexample, agricultural supporting services for valley irrigation projects

require somewhat different skills and expertise from hill country development,and the distribution of responsibilities and skills at the regional levelwould take this into consideration. Obviously, there will have to be closecommunication and cooperation between each development area because of theinevitable overlaps and interdependencies (e.g. between hill and valley), andensuring this will be a major role of the regional agricultural developmentagency.

4.61 The staff in charge of implementing the development activities shouldbe relieved as much as possible of distracting duties such as input supply,statistical duties or administrative control. However, the regional extensionstaff--because it will continue to play a role in loan generation as a resultof its general extension activities--should remain involved in farm planpreparation for credit applications, and the regional branches of theAgricultural Bank of Turkey (TCZB) and other credit agencies should beconsiderably strengthened and given appropriate programming authority tofacilitate coordination with the regional agricultural developmentagencies.2/ The veterinary services, whose role in the provision of livestock

I/ Some work has been initiated by GDAA for the 16 provinces to be included

under the proposed Agricultural Extension and Applied Research Project.

2/ Needless to say, the achievement of good collaboration between TCZB andextension services at the regional level will also require closecooperation and dialogue at the central level.

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services will need to be more clearly defined, and focused on the diseaseprevention and control aspects of animal husbandry, and to a certain extentplant protection services (for pest eradication campaigns) could be viewed assupporting services to the regional development agencies and kept separatefrom these, provided MAF is given at the central level the authority to ensurethat their activities, staff and budgetary resource allocations arecoordinated with the needs stemming from the development programs of theregional agencies.!. Similarly, specialized construction agencies such asTOPRAKSU and the General Directorate of Rural Infrastructure (YSE) wouldremain responsible for designs, construction and O&M training, as needed.

4.62 For the extension services, integrated programs will have to be drawnup in specific regions, and an appropriate balance made between use of the T&Vsystem, other approaches and mass media. In each development area/sub-areawithin the regions, appropriate extension methods will have to be designed,and will depend on factors such as the type of technology to be extended, thelevel of education of the farmers and the prevailing social and agriculturalconditions. Depending on the definition of the development areas and theirrespective programs, some redistribution of extension staff between

institutions (e.g. TOPRAKSU and TZ) may be necessary; in any case, a globalinventory of staff resources is needed, including all existing agencies, and anationally consistent program of priorities decided upon, before extensiveadditional recruitment is decided. More important changes will probably haveto occur as far as research staff and facilities are concerned; it is mosturgent to pool the existing resources of various ministries and generaldirectorates together. Although the carrying out of adaptive and appliedresearch should be regionalized, instead of the currently prevailingfragmentation into isolated institutes or stations (particularly for GDAA),regional research will have to be linked to some form of central control toensure that a proper uniformity of methodologies and standards are maintained,and to maintain working relationships with the international researchcommunity. The role of the agricultural universities will also need carefulconsideration; they could be given a major role as regional informationresource centers and make their curriculum more relevant to the needs, as wellas develop appropriate in-service training for research and extension staffand coordinate their own research activities with the regional programs.

4.63 It is worth noting that the present Government has under seriousconsideration a proposal to create an intermediate level of regionaladministration between the central and provincial levels. Amongst its duties,the regional administration would have responsibility to program and implementdevelopment programs under the auspices of a regional governor and regionaldevelopment committees. If the Government is politically able to reorganizeand consolidate its central offices and regionalize its overall development

t1 Although administratively both are located within MAF, the GDVA and GDPPQpresently operate under independent foundation laws. This legal anomalyhas allowed them to exercise considerable autonomy.

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administration, it may also have an opportunity to carry out the sweeping

consolidation and devolution of authority for the agricultural supportservices discussed above. The magnitude of the organizational andadministrative changes required by these proposals is too large to beimplemented quickly or even within the context of specific Bank capitalassistance to Turkey. However, the importance of devolution andregionalization should be emphasized as part of the country economic andsector dialogue. The specific actions discussed below with respect to thereorganization of the research and extension services--which might be amenableto technical and capital assistance from the Bank--could foster progresstowards these goals.

3. Agricultural Technology Systems!/

4.64 In order to improve the capabilities of the agricultural researchsystem, the Government should establish an Interministerial ResearchPriorities Steering Committee, which initially would establish crop, livestockand soils research priorities, and have authority to monitor the expenditureof line agency funds of research. It would also develop a plan for

consolidating the Government's diverse research programs and entities, and toregionalize important aspects of program development and execution along linesdiscussed above. Ultimately, the committee would prepare or at least adviseon draft legislation to accomplish these goals. This should be accomplished

within a three-year period beginning in 1983. The Government indicated in itsStatement of Development Policies for the Fourth SAL operation (FY83) that itintends to set up an interministerial working group to set priorities for theuse of research and to develop medium-term plans for reorganizing andconsolidating agricultural research activities. This will partially satisfythe responsibilities suggested for the Interministerial Research PrioritiesSteering Committee. Although details are still being worked out, it isexpected that the group's work would be responsive to a decree issued by thePrime Minister in early 1983, mandating a review of all sectoral research inTurkey (including agriculture) to assess its quality and effectiveness. TheTurkish scientific Research Council (TUBITAK) has been made responsible foroverall coordination, though--for agricultural research--it is expected thatthe interministerial working group will be attached to a high research councilwhich Government intends to establish in 1983, to be chaired by the MAF. Tosupport the work of the group, it would be desirable to conduct a detailedagricultural technology subsector study to identify and inventory existingresearch results, determine their applicability to regional production andmarketing possibilities, and delineate additional testing and adaptationrequirements at the laboratory and production levels. The results of thisstudy could be followed up by one or more projects.

1/ Includes production and marketing technologies, for both crops andlivestock.

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4. Agricultural Information Systems

4.65 With respect to agricultural information systems, the same general

objectives should be pursued--e.g. consolidation and regionalization, to besupplemented by substantial retraining, links with research, use ofdiversif ed approaches (e.g. T&V where appropriate, lecture/demonstrations andmedia)Tl However, a higher degree of project-type investments would bedesirable, and a longer implementation period would be needed. In view of theoverriding size of GDAA's extension service amongst the multifarious extensionservices presently existing in Turkey (e.g. GDAA, GDPPQ, Cotton Affairs,TOPRAKSU, SEKER, and others), and the fact that MAF already is implementing orpreparing programs to further expand GDAA largely in isolation from theothers, it would be desirable to establish an intergovernmental study group

with T.O.R. to be executed over, say, a two year period commencing in 1984,which would conduct a detailed review of existing extension strategies andapproaches, establish national extension priorities, explore ways to merge theprogramming, budgeting and monitoring functions of the agencies' centraloffices, and regionalize the implementation of the priorities and importantaspects of program development. It would be particularly important toformally incorporate responsibilities for animal husbandry under thecommittee's terms of reference. The Government also indicated in connectionwith SAL IV that an interministerial study group would be established todevelop medium-term plans for reorganizing and consolidating the Government'sdiverse extension services including decentralization of responsibility to theregional level in addition to improving links with agricultural research. Aswith research, this initiative would partially satisfy the responsibilitiessuggested for the extension study group. It is expected that implementationof the group's findings and consolidation/regionalization would be carried outin the context of subsequent investment projects.

1/ However, this should be done in a phased manner so as not to weaken thespecialized extension services prior to an adequate strengthening ofGDAA's general extension service.

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V. MEDIUM TERM REQUISITES - AGRICULTURAL INVESTMENT & CREDIT POLICIES

A. Public & Private Investment Requirements and Strategy

1. Investments in Irrigation Infrastructure!/

5.01 Performance and constraints. Public investment in the agriculturalsector has consistently favored capital expenditures for physicalinfrastructure, and therefore resulted in a high capital-output ratio towardsthe end of the 1970s, i.e., 2.3:1. The high capital coefficient reflects adevelopment strategy and corresponding amounts of public investment founded onthe premise that irrigation and related land improvements have become basicrequirements for future agricultural growth.11 Thus, roughly 55-65% ofpublic investment in the sector has been allocated for infrastructure, mainlyfor the construction of large reservoirs, dams and water distribution systemsby DSI, plus smaller works by TOPRAKSU. The high rate of growth ofagricultural GDP up to 1975 partially reflects the emphasis on irrigationinfrastructure and the technical progress through the increased use offertilizer, improved seeds, mechanization, etc. These in combination alsohave steadily increased the net contribution of irrigated agriculture toaggregate crop production. Although area in irrigated crops represented about11% of total crop area (excluding fallow) in 1977, output accounted forroughly 39% of the total value of crop production. An analysis of the TASMprojections indicates that by 1990, the latter ratio could increase to morethan half of the total value of crop production, while about 55% of theincremental crop exports would derive from the continued expansion of theirrigated area and its more intensive use.

5.02 In many respects, however, irrigated agriculture has operated wellbelow its capacity. For a number of reasons, including incomplete on-farmdevelopment, less than 70% of the presently irrigable land is cultivated underirrigation. In addition, the net value of output has been reduced bysuboptimal yields of irrigated crops (such as horticultural and mostindustrial crops) due to inadequate O&M and inefficient research and extensionservices. Increases in output of irrigated crops have therefore lagged wellbehind the expansion of irrigated areas. During the last few years, theprogress of irrigated agriculture has been further stifled by the slow rate ofcompletion of ongoing projects. A sharp decline in public investment since1977 has slowed the expansion of irrigated area from a previous average of50,000 ha annually to less than 20,000 ha in 1979. This led to a largebacklog of incomplete and stalled projects, and concomitant sunk costs.Therefore, current priorities for irrigated agriculture lie in the completionof partially constructed schemes, on-farm development and the improvement ofsupporting services in commanded areas.

1/ The material in this section is discussed further in Annexes I and 7.

2/ The programming and management of public investment for irrigationdevelopment is discussed further in "Turkey - Public Sector InvestmentReview" (Report No. 3472-TU), Volume II, Chapter I.

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5.03 Total irrigated area. Estimates of the area of 'irrigated' land inTurkey center on a figure of 3 million ha + 0.25 million.1" Much depends onwhat is considered to be irrigation (e.g. does one application of water percrop count as 'irrigated') and on how much privately-financed irrigationoperations exist. Most of the presently irrigated area is not usedintensively. About 1.1 million ha are served by large-scale irrigationfacilities built by DSI; however it is estimated that on-farm developmentworks (such as land levelling, drainage facilities and on-farm distributionsystems, which are under the responsibility of TOPRAKSU) have been completedon only about half of this area. An additional 0.9 million ha is served bysmall-scale facilities developed totally by TOPRAKSU. A total of about 2.0million ha is thus under the command of public (DSI and TOPRAKSU) irrigationinfrastructure, with about 1.4 million ha fully equipped with on-farm works tomake efficient use of this infrastructure. Furthermore, part of the 1.4million ha also is inadequately or improperly irrigated, mostly due toinefficient water management (stemming in part from insufficient farmertraining).

5.04 Very little is known about private irrigation development, exceptthat its growth in recent years has been less important than construction ofpublic irrigation. The efficiency of private irrigation varies substantially,but is generally low due to absence of land levelling, use of traditionalirrigation methods and suboptimal cropping patterns. Exceptions can be found,however, in the more commercialized areas.

5.05 Only scattered information is available about irrigated croppingpatterns, and no comprehensive study has been made on the subject. Data fromthe 1980 Agricultural Census (Table 43 of Annex 1) confirm the low croppingintensity in these areas, since about 7% of the irrigated land is annuallyleft under fallow, this proportion being less in the coastal regions. Neitherthe SIS annual statistics nor the 1980 Agricultural Census give indicationsabout average yields in irrigated areas but it is likely that they are muchbelow the existing potential for reasons discussed. Regionally, the qualityand efficiency of irrigation seems lowest in the Central and Eastern regions(as shown in Table 43 of Annex 1). In an effort to intensify the use ofexisting irrigated areas, the MAF initiated in 1981 the aforementioned SecondCrop Development Project in the southern and western parts of the country,where the highest production potential exists.

5.06 Irrigation potential. According to TOPRAKSU an additional 5.7

million ha could be irrigated, thus bringing the total irrigated area to 8.7million ha. Although the figure of 8.7 million ha is considered feasible byboth DSI and TOPRAKSU under present technology, it is likely that only asmaller area could be developed economically since this figure has been

1/ The total irrigated area reported by TOPRAKSU's Land Use and Capability

Study is 2.99 million ha; according to the 1980 Census of Agriculture itwould be now about 3.23 miilion ha (see Tables 5, 43 and 44 of Annex 1),while DSI estimates the total irrigated area at 3.99 million ha (of which3.81 million ha from surface water sources and 0.18 million ha fromgroundwater sources).

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derived from very crude national averages of land slope and wateravailability. The estimate is not based on economic criterion, nor was it

constructed from regional or watershed-specific hydrological and topographicsurveys.

5.07 The Government is presently giving emphasis to the completion ofon-farm works in areas already served by major infrastructure, and anirrigation project covering about 120,000 ha has recently been presented tothe Board. However, TOPRAKSU still does not have sufficient capacity tocomplete all the on-farm works needed on large projects constructed by DSI.Nevertheless, DSI is proceeding with the construction of new large-scale worksunder an indicative annual program of about 130,000 ha p.a.

5.08 Investment programming. A major constraint to efficient futuredevelopment (which the aforementioned project will seek to rectify) is theabsence of a capability to systematically program public investments forirrigation. DSI's and TOPRAKSU's project selection and evaluation criteriaprimarily emphasize technical considerations; both have responded only withdifficulty to the new exigencies of public investment mandated by the economicstabilization program, viz. a concentration of future investments on quicklygestating projects with high economic returns. The problem has beencompounded by a lack of coordination between DSI and TOPRAKSU at the planninglevel. As a result, the agencies have tended to carry out their annual workprograms for service area development independently.

5.09 The nature of irrigation planning is typified by the summary lists ofprojects prepared for the annual public investment budgeting exercize. Theseare sparse in content and devoid of the kinds of indicators which an in-depthreview of the application of sectoral priorities and subsequent monitoring ofprogress would require. This has hampered the Government's efforts to focuspublic expenditures on fewer irrigation projects in 1981 and 1982 and hasresulted in near total emphasis on the scaling-back of financial aggregates inreal terms, supported only by rule of thumb measures to modify the existingportfolio to hasten the rate of completion.

5.10 The pattern of adjustments since 1980 is instructive. At the heightof the economic crisis in 1980, DSI's resources were spread thinly--across 142irrigation, drainage and flood control "projects" serving an undeterminednumber of hectares. The severity of the crisis mandated a complete portfolioreview, a reassessment (indeed, simply an initial estimate) of the economicviability of its contents, and a subsequent reordering of priorities. Thiswas not attempted in 1980 for a number of reasons, though an importantconsideration was the fear of subsequent liability should outstanding

contracts be unilaterally impaled by DSI. Moreover, the DSI--which wasallocated about 90% of the budget for water resources development in 1980--hadneither the staffing nor the institutional capability to carry out asystematic review.

5.11 By 1981, however, the need had become abundantly clear; adjustmentswere made to DSI's portfolio under the guidance of the SPO and the Ministry of

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Finance. The preliminary list of 1981 projects contained 133 investments_'of which 14 were slated for completion in 1981. Subsequently, the list wasrevised, when one major project was dropped, five received token allocationsto avert litigation, and others were scaled back. The final approved programfor 1981 thus contained 108 projects, covering some 965,800 ha in total, ofwhich DSI works (though not the on-farm works) for 85,681 ha were to becompleted in 1981. Under the 1982 program for DSI, the completion schedulewas further accelerated by assigning token allocations to 8 more projects andmarkedly augmenting the allocation for about 25 of the smaller ones. Thefinal budget in 1982 thus contained 95 projects, to be carried out under onlya marginal real increase over the 1981 budgetary allocation. As a result, DSIworks for 70,341 additional ha were scheduled for completion in 1982, whilethe indicative completion figures for 1983 and 1984 were enlarged to about253,000 ha for the two years.

5.12 Construction capabilities. Although these rates of irrigationdevelopment are roughly in line with the annual rate of 80,000-100,000 haprojected as being necessary to achieve performance possibilities fromirrigated agriculture noted in para 5.01, it is by no means certain that DSIhas the design and supervision capacity to attain these targets in view ofrecent staff attrition to the private sector. Nor have DSI (or TOPRAKSU) donethe requisite programming and budgetting analysis to establish a benchmark forcomparison with its present capabilities. Moreover, the per hectare"completion" figures cited above refer to hectares scheduled to be broughtunder the command of DS!-constructed headworks and distribution canals; suchgenerally are not synonomous with the provision of service to farmers' fields,which also requires the construction of associated field channels and on-farmworks by TOPRAKSU. TOPRAKSU's backlog of works for on-farm development onDSI's schemes has remained at 300-400,000 ha throughout the 1970s, equivalentto roughly one-quarter of the area under the command of technically goodheadworks. During the early 1970s, TOPRAKSU's completion rate averaged 45,000ha/year. This declined by the late 1970s to about 20,000 ha/year. AlthoughTOPRAKSU was given an allocation to complete on-farm development on about30,000 ha in 1981 and 1982, only 20,000 ha could again be constructed.Moreover, its completion capability is severely constrained by a near totalreliance on force account construction for major works with the use ofcontractors being confined to supplemental tasks.

5.13 Measures to accelerate completion. A rapid expansion of thecompletion rate is possible, but it will entail a considerable furtherreorientation of the public investment budget for irrigation. Particularaspects include (a) a concentration of both DSI's and TOPRAKSU's resources onservice area development of ongoing DSI schemes, (b) the further scaling backor postponement of many projects in DSI's pipeline which were initiated in thelate 1970s, but for which sunk costs to date are comparatively insignificant,and (c) a concomitant increase in TOPRAKSU's construction capability.Although investment planning data is very limited, the scope for an additionalconcentration of resources still appears to be high. It is crudely estimatedin current terms that the capital expenditure required on new irrigation

1/ Report No. 3472-TU, o 4i; Appendix 2, page 1.

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construction by DSI is approximately $4000 per ha, including headworks andmajor conveyances. This delivers water to the farm gate. In contrast,TOPRAKSU's on-farm development costs currently amount to about $500 per ha,which are considerably less. Therefore, with further concentration of DSI'sresources on the completion of distributaries and a marked shift of itsconstruction program to also encompass on-farm works, the average incrementalexpenditure per ha to provide full irrigation service could be reduced fromabout $4,500 to $2-2,500 per ha which, in the 1982 investment program, mighthave allowed DSI by itself to program the complete development for about115-120,000 ha in 1982 Furthermore, with a selective expansion of TOPRAKSU'sstaff to augment its design and construction supervision capabilities, and anincrease in its use of private contractors, it might be possible to rapidlyaugment TOPRAKSU's on-farm development capabilities to 80-100,000 ha/year.These indicative figures, based on the implementation of priorities followedby readjustment in budgetary allocation, therefore suggest that DSI andTOPRAKSU together could relieve the current backlog on DSI schemes within twoto three years should a firm decision to pursue this course be adopted byGovernment.

5.14 Post-implementation services. On schemes developed by TOPRAKSU,some O&M training and extension advice is offered during the immediatepost-implementation period, however such assistance is usually withdrawn aftertwo or three years. More effective measures to recover construction and O&Mcosts would therefore be desirable so as to generate additional resources bothto sustain further public investments in the subsector and foster moreeffective O&M by DSI and O&M training by TOPRAKSU. In this connection, theestablishment of more effective agricultural extension assistance toirrigation service areas would help introduce irrigated techniques to firsttime users and forge a link between applied research and the beneficiaryfarmers for the dissemination of correct irrigated farming practices.

5.15 Medium-term strategy. Many of the Bank's immediate concerns aboutthe slow development of irrigation in Turkey have been addressed by thereorientation of the public investment program to emphasize quick yieldingprojects. However, to meet the growth and export targets alluded to above, anincrease in the capability of the construction agencies to complete irrigationprojects is required. The sectoral growth projections assume that the servicearea development capability will be increased to about 100,000 ha/year whichimplies that much more extensive use of contractors under TOPRAKSU'ssupervision is essential. It is thus expected that irrigation developmentwill continue to absorb the largest share of the public investment budget foragriculture (presently about 66%), and that on the basis of per ha developmentcost of $2,500 in constant 1982 dollars, annual expenditures for irrigationdevelopment of $250 - 300 million would be required for land improvementsassociated with service area developments. This compares with an allocationin 1982 of about $100 million for such purposes.l/

1/ The total public investment allocation for irrigation was about $660million in 1982, which includes construction of major headworks anddrainage, flood protection, river training and land conservation works aswell as service area development.

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5.16 To support a public investment program of this character andmagnitude will require (a) a continuation of the emphasis given since 1980 toquickly gestating irrigation investments and completion/rehabilitation ofareas presently under the command of existing or nearly completed impoundmentsand groundwater developments; (b) the preparation by DSI and TOPRAKSU of adetailed medium-term investment plan in which the programmed expenditures ofthese agencies' resources would be clearly concentrated on projects which canbe completed within a reasonable period of time. The associated staff,

equipment and budget requirements would be indicated; (c) a rapid expansion ofthe agencies' construction capacity which clearly requires a marked increasein the use of private contractors to supplement TOPRAKSU's force accountcapabilities; (d) a corresponding expansion of the agencies' technical andengineering staffs to refine their longer term scheduling and planning as wellas project identification and evaluation capabilities, accelerate the rate ofproject preparation and finalization of designs, and expand their constructionsupervision and 0 & M training capabilities; (e) measures to recoverconstruction costs through imposition of direct or indirect levies on thefarmer, consumer and/or exporter beneficiaries of irrigation; and (f) moreeffective extension in irrigated areas.

2. On-Farm Investment

5.17 While the development of irrigation infrastructure is likely toremain in the domain of public investment, most investments for on-farmdevelopment will remain in the private sector. Assuming that the economicstabilization program will succeed and investor confidence will return, aconsiderable recovery in private on-farm investment could be expected to occurtowards the end of the 1980's if policies consistent with a resumption ofsectoral growth continue to be adopted. In broad terms, the major privateinvestment items in the agricultural sector would continue to be farmmachinery and vehicles, animal purchases, construction or renovation of farmbuildings, orchards establishment or rehabilitation, greenhouse constructieo,and possibly some land levelling and irrigation channel development financedby private resources.

5.18 Vehicles and machinery. In view of (a) the substantial investmentsin heavy agricultural vehicles and machinery made between 1975-1980, when over45% of the country's estimated 436,000 tractors were purchased and more thanhalf of its farm vehicles were sold at subsidized prices by TZDK, (b) generalrecognition that Turkish agriculture is over-mechanized insofar as heavymachinery is concerned, (c) the subsequent dramatic decline in demand forheavy farm equipment after the subsidies were removed in 1980 and theconcessionality in TCZB's credits was somewhat reduced, and (d) an averagelife span of these equipment items in Turkey of between 10-15. years, there isunlikely to be any major demand for heavy farm equipment in the short term.However, towards the end of the 1980s, an investment demand could develop toreplace and modernize heavy vehicles and machinery. On the other hand, ademand for substantial numbers of smaller items could develop as soon as 1985if the crop and/or livestock technologies to be demonstrated under the MAF'sFallow Suppression and the Second Crop Development Projects and a hopefullyrevitalized general extension program are accepted by Turkish farmers. Inparticular, farmers may desire to invest in more appropriately sized

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ploughing, tillage and harvesting equipment including rototillers, especiallyfor hilly rainfed areas and the service areas of TOPRAKSU's small-scaleirrigation systems. Because of poor farm management data, and virtually nodetailed information about machinery utilization and states of repair, it isnot possible to quantify estimates of potential private investmentrequirements for these purposes.

5.19 Orchards and greenhouses. The significant investment demand which-has already developed for the establishment or rehabilitation of citrus anddeciduous fruit orchards, nut orchards, vineyards, and greenhouses for theproduction of vegetables and ornamental plants can be expected to intensify infuture years. The available financing is adequate for present needs, namely,the credit funds under the Bank assisted Second Fruit and Vegetable Project(FY81), and the proceeds of a special investment credit facility establishedin 1981 by the Central Bank for the expansion of horticultural production forexport. Although the following estimate is necessarily rough, the annualinvestment demand for these purposes by 1990 could reach US$l billion in 1981prices, and additional sources of financing might be required.!! A ThirdFruit and Vegetable Project has been suggested for the Bank's pipeline forTurkey with this eventuality in mind.

5.20 Animal purchases/farm buildings. A major area of uncertaintyconcerning on-farm investment demand is in the livestock subsector. As aresult of recent programming decisions, the MAF has effectively committeditself in the medium-term to a policy of herd improvement principally throughuse of artificial insemination (Al). As a result of past importations, theMAF now possesses a large inventory of pedigree bulls and rams which itintends to utilize as a source of semen for AI. If the campaign issuccessful, it could reduce the farmer investment in breeding stock below thealready low existing levels, which have mainly been devoted to herdreplacement plans of the kind implemented under five Bank assisted livestockdevelopment projects. This decrease in demand could be partially offset by aneed to improve farm buildings and feed stores, due to the higher feeding andanimal management requirements that would result from the progressiveupgrading of native stock on a large scale. However, the magnitudes would notbe large. If the AI program is not successful, and the Bank has expressed itsreservations on numerous occasions about MAF's ability to quickly expand itsAI activities, then the Government should be prepared to again expand credit

allocations for the financing of animal purchases, though future demand wouldmore likely emphasize purchase of low cost domestic crossbreeds than importedpedigrees, since the management requirements of the farmer are considerablysimpler and feeding costs are less.

5.21 Land improvements. The second major area of uncertainty in regard toprivate investment is in land improvements associated with service areadevelopment, i.e. whether on-farm levelling and channel development measures

1/ This estimate is based upon the incremental area allocated to fruit and

vegetable production as estimated for the unrestricted free trade runs ofthe TASM model (Annex 5), and the per decare investment requirementsestimated during appraisal of the Second Fruit and Vegetable Project.

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being coordinated by TOPRAKSU will be financed directly by farmers, byutilizing their own resources and debt financing from the banking system, orthrough the public investment budget. In either event, the amounts involvedcould be substantial as discussed in para. 5.15 above.

3. Investment Incentives for Exportersl/

5.22 The discussions of Chapters II and III suggested that potentiallylarge investments may be required to foster deeper penetration into themarkets of Turkey's major trading partners over the medium term, includinginvestments in permanent representation abroad to establish trading on thebasis of standing agreements rather than the more costly (risky) consignmentbasis, and within Turkey to improve the grading and presentation of perishableand semi-processed goods as well as to limit deterioration in transit andimproving the reliability of deliveries.

5.23 It is difficult to estimate the scope and magnitude of the associatedoverall investment requirements, and neither the Government nor this study hasattempted to do so. However, the need to encourage such investment has beenrecognized, and specific incentives have been provided by Government.Historically, the investment incentive system in Turkey has played asignificant but not major role in the allocation of investment by the privatesector, which has been influenced more by selective credit policies andmacroeconomic factors such as the industrialization drive, the strategy untilrecently of favoring import-substitution over exports, and the desire tomodernize using the latest technology.

5.24 The incentive system has for long been designed to encourageinvestment in agriculture as well as manufacturing, mining, and less developedregions. The instruments used have remained unchanged for more than a decade,and consist of (a) exemption from customs and other duties on importedmachinery; (b) as an alternative, the spreading of duties over a period offive years; (c) an allowance of a percentage of equity funds invested againsttaxable income for corporate income tax purposes (30% in general, and 50% forless developed regions); (d) interest rebates; (e) accelerated depreciation;and (f) exemption from building construction tax. The incentives aregenerally quite specific in terms of eligible commodities and activities.

5.25 Since January 1980, the switch in both development strategy andseveral major policies has changed the incentives for different kinds ofinvestment. The emphasis on exports rather than import substitution has beenreflected in successive refinements of the incentives tables. These changesaffected agriculture to the extent that agricultural commodities were exportedconjointly with eligible commodities.

5.26 Although the emphasis given to exporting is clear, the ranking oftechnology priorities tends to vary at present depending on the policyinstrument. The more flexible exchange rate policy, and the increase ininterest rates after their deregulation, have reduced the incentive towards

1/ These are outlined in considerable detail in Annex 11.

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capital and import-intensity of investment, but there has been no specificchange with these aims in mind in the investment incentives themselves. Thecustoms exemption/deferral and interest rebates tend to subsidize imports andcapital, while income tax concessions might be more neutral in their impact onfactor proportions. Control over desired factor proportions, particularly thecapital intensity of private investment in the various sectors (includingupstream and downstream facilities to serve agriculture) is maintained throughthe screening of applications for encouragement and investment certificates,although the volume of such applications is rather large. Thus the monitoringof technical priorities and associated factor proportions is largely implicitin the incentives per se and the revenue and cost relatives therebypresented. Presently, the array of incentives are fine tuned from time totime to encourage the exploitation of changing export opportunities as theseoccur. The maintenance of this pattern of close control is justified insofaras exporting is concerned, because Turkish exporters are still learning how tooperate in foreign markets, while the continuing requirements of theGovernment's stabilization strategy dictates that the drive to furtherincrease exports be sustained. However, the pattern of incentives, taken as agroup, and its constant fine tuning, can present a confusing picture toinvestors whose purchasing decisions in regard to machinery and equipment--once made--will necessarily lock them into an activity for a considerableperiod of time.

5.27 As the economy (and the agricultural sector) continues to stabilize,the Government would be well advised to consider a gradual replacement of thecurrent detailed incentives, as well as the fine tuning, with a system of afew general incentives applicable to activities aggregated to the two or threedigit SIC level. Such incentives should clearly reflect the Government'stechnology policies, which are currently under review by TUBITAK. Since mostof the present incentives are in the form of selective credit policies, taxrebates and deferrals and exemption from customs duties, the enunciation ofrevised incentives should also await the completion of the ongoing financialsector and fiscal reforms, and further refinements to the structure ofprotection in order to guarantee consistency.

5.28 At an aggregate level there has been an improvement inimplementation, however. A Government study in 1980 suggested that itseffectiveness had previously been low: nearly half of the agriculturalprojects with incentive certificates issued earlier for agriculture had notbeen implemented, and hardly any of the export guarantees given had beenfulfilled. However, data provided in May 1982 with respect to investmentcertificates show a somewhat different picture for the 1979-81 period; 96% ofthe projects with investment certificates issued for poultry development and97% of those issued for livestock during this period are currently beingimplemented (See Annex 11, Table 3).

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B. Agricultural Credit Policies and Strategy!'

1. The Agricultural Credit System

5.29 Agricultural credit in Turkey is provided by the Central Bank, anagricultural bank, agricultural credit cooperatives, agricultural salescooperatives, commercial banks, and agroindustries--all in the organizedsector, and informal groups such as money lenders and relatives in theunorganized sector. Information on the amount of credit provided by theinformal groups and agroindustries is not available. However, the amountsinvolved are believed to be substantial and interest rates charged are high.The Government policy is to provide loans to agriculture through the formalsector on preferential terms. Pursuant to this policy, the Government (a)establishes the interest rates that can be charged on preferential loans tothe agriculture sector; (b) directs the Central Bank of Turkey (CBT) toprovide loans to selected state enterprises to finance support purchases, andthe Agricultural Bank of Turkey (TCZB) for on-lending directly and throughcredit cooperatives to farmers; (c) approves the annual lending program ofTCZB; (d) requires that TCZB should allocate at least 80% of its total lendingto agriculture; and (e) authorizes an interest rate subsidy to be paid tobanks lending to agriculture out of their resources.

5.30 The CBT is the most important source of institutional funds lent toagriculture, providing about two-thirds of the funds; the balance is providedby the TCZB, a Government-owned bank, out of resources mobilized by it fromcommercial, household, and official deposits. The credit and salescooperatives derive their resources from CBT and TCZB, while the funds lent bycommercial banks to farmers are insignificant. The CBT supports theagricultural sector through (a) direct credits to state enterprises foragricultural support purchases (without using TCZB as the intermediary), (b)credits to agricultural sales cooperatives through TCZB for support purchases,(c) credits to agricultural credit cooperatives through TCZB for on-lending tofarmers, (d) credits to the Agricultural Supply Agency (TZDK) for purchase,distribution, and manufacture of agricultural inputs; and (e) rediscounting ofagricultural loans made by TCZB. In addition, the CBT is the administrator ofthe Government's selective credit policies. The TCZB, besides acting as thechannel for agricultural credits by CBT, devotes most of its own resources toagricultural loans. These credits are distributed through a network of 1,050branches as well as 2,450 agricultural credit cooperatives. In 1981, the mainagricultural sector loan beneficiaries from TCZB were the agricultural salescooperatives with 38% of total agricultural loan amounts disbursed; theAgricultural Supply Agency, 35%; farmers, 15%; agricultural creditcooperatives, 10%; and agroindustrial enterprises, 1%. Over the years, TCZBhas become a very large institution, vested with a multiplicity of banking andnon-banking responsibilities.Y/

1/ The materials in this section are based upon the discussion in Annex 9.

21 It is the official agent of the Central Bank for all official financialand fiscal transactions in nearly half of the country's administrativedistricts. These activities are carried out by TCZB without directfinancial compensation.

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As a result, its agricultural and agroindustries lending activities havebecome inefficient, while its cash flow problems, which stem partially fromlow interest received, have forced TCZB to institute a number of de factocredit rationing procedures, including a stringent application of credit-worthiness criteria, a tendency to underfinance individual farm and agro-industry credit needs, late disbursements, and insistence in much of itsproject lending that physical equity be fully committed before disbursementscommence.

5.31 The agricultural credit cooperative system in Turkey comprises acentral union, 16 regional unions, 2,450 credit cooperatives with 1.5 millionmembers, and serves about 40% of the farm households in Turkey. It is&ftinistered by the Ministry of Commerce. The credit cooperatives financetheir lending operations almost entirely from funds borrowed from TCZB whileusing the membership dues to cover operating expenses. Besides providingshort-term and medium-term loans to their members, the credit cooperativesalso purchase and market commodities, and help with the distribution of inputssuch as seeds, fertilizer, and pesticides. As of December 31, 1981, 63% ofthe loans by the credit cooperatives were for the purchase of fertilizers, 21%for working capital needs, 14% for equipment purchases, and 2% for otherpurposes. The agricultural sales cooperatives have the principal aim ofpurchasing the agricultural products of their members and selling themprofitably. They act as intermediaries for the price support program. To dothis, they get priority in the allocation of agricultural credit.l/

5.32 While the inputs subsidies were substantially reduced in 1980 and1981, the financing of input purchases through credit at preferential ratesremains, and in fact, has increased to cover the much higher fertilizer pricesfollowing the subsidy reduction. Similarly, the support price policy has beenmodified to become more of a floor pricing policy, but the practice offinancing the purchase of crop inventories by the sales cooperatives and otherpublic agencies through credit at preferential rates remains. These twoactivities alone account for 65% of all agricultural credit in Turkey.

5.33 In recent years, 60-70% of agricultural credit has been financeddirectly or indirectly through the CBT, with an interest rate subsidy of 20 to25 percentage points. Such a large subsidy has led to an excess demand foragricultural credit, and as long as the subsidization is based on Central Bankrediscounts, the overall supply is constrained by the Government's ceiling onCentral Bank credit. Pursuant to priorities established by the High Councilon Money and Banking, a process of rationing of agricultural credit hasemerged, with priority given to the financing of the cooperatives engaged inprice support, and input purchase activities. Credit allocated directly to

1/ The share of commercial banks in total agricultural credit isinsignificant. Indirectly, however, commercial banks provide support toagriculture through their export financing activities. The credit isextended to trading companies and agroindustries who in turn providecredit to farmers for purchase of goods. The banks are reluctant to lenddirectly to the farmers due to the higher profits obtainable in lending toindustry and commerce, relatively higher transaction costs of lending toagriculture, and their lack of technical expertise.

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the farmer is thus a residual. The share of total agricultural creditallocated to the small- and medium-scale farmer is particularly small.

5.34 The multiple responsibilities assigned to TCZB, as well as theresultant overstaffing and excessive centralization, have impeded its abilityto operate effectively as the "apex" intermediator in the agricultural creditsystem. There also are serious institutional problems with the salescooperatives, which administer the floor pricing policies. They have enjoyeda lack of effective accountability either to their members or to TCZB, whichhas led to: (a) an unwarranted expansion of staff, with all operating expensescovered by Central Bank rediscounts (in the guise of agricultural credit); and(b) an unchecked expansion of their manufacturing activities. Given thecurrent shortage of agricultural credit, particularly production credit, aswell as the large projected credit requirements over the medium-term, majorinstitutional and policy reform is needed if these requirements are to be met.

2. Past Supply Trends

5.35 Recent performance. In real terms, the supply of total agriculturalcredit declined steadily from a peak in 1975 to 1980, and then rose in 1981(Table 1 of Annex 9). Between 1975 and 1980 the real level of credit wasreduced by almost one-half, and as a share of agricultural GDP it fell from27% to 16%. In 1981, however, there was a reversal of policy and agriculturalcredit was allowed to increase by 16% in real terms over 1980.

5.36 As noted above, almost all of the agricultural credit supply in theorganized sector takes place on preferential terms and originates in CBT andTCZB. The total agricultural credit supply from CBT and TCZB resources andits distribution by main purposes during the period 1977-81 are shown in thetable below:

1977 1978 1979 1980 1981

A. Total Agricultural Credits/l(TL billions) 107.7 135.1 210.7 323.5 524.4

B. Distribution of Total Creditsby Main Purposes (% share of A)(i Direct credits to producers/2 19 20 18 21 21(ii) Credits for support purchases/3 74 71 63 60 62(iii) Credits for input supply/4 7 9 19 19 17

C. Sources of Financing ofTotal Credits (% share of A)(i) Central Bank of Turkey 66 65 67 69 60

(ii) TCZB Resources 34 35 33 31 40

/1 For details, see Annex 9, Table 12./2 Includes loans to farmers (directly by TCZB as well as by credit

cooperatives, and sales cooperatives) and loans to other agriculturalenterprises including agroindustries.

/3 Includes credits by CBT to state enterprises support purchases and creditsby TCZB to sales cooperatives.

/4 Comprises amounts lent by TCZB and CBT to the Agricultural SupplyOrganization (TZDK)

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The distribution of agricultural credit, shown in the above table, reflectsthe priorities established by the Government. About two-thirds of totalagricultural credits were allocated for financing of the state enterprises foragricultural price support purchases. The remainder was equally shared byinput supply activities and the direct lending to the farmers. The creditsfor support purchase and input supply activities were short-term. About onehalf of the direct lending to farmers was for medium-term loans and the otherhalf for short-term loans.

5.37 Credits for support purchases to State Economic Enterprises areprovided mainly from the CBT resources and in 1981 were distributed asfollows: agricultural sales cooperatives, 34%; Soil Products Office (TMO),27%; the Tea and Tobacco Monopoly (TEKEL), 25%; Meat and Fish Organization(EBK), 8%; Tea Industry, 5%; and Milk Industries Organization (TSEK), 1%. Allof these SEEs are granted credits directly by CBT except for salescooperatives who are financed by the TCZB. The sales cooperatives whichreceive the largest share in credits for support purchases have beendelinquent in repaying their loans to TCZB, thereby aggravating the overallshortage of funds available for direct lending to farmers. As part of areorganization of the public sector administrative structure, the Governmentis considering a reorganization of sales cooperatives, to improve theefficiency of their operations.

5.38 Most of the direct lending to farmers is done by the TCZB and thecredit cooperatives. The limited availability of funds available for directlending to farmers, together with the low interest rates on agricultural loansand the deficiencies of the TCZB has created a situation in which the loans tofarmers tend to be insufficient for the intended use, late in being disbursed,and often given in installments which lag behind needs.

5.39 Access to farmers. Although the TCZB, with about 1,050 branches, hasthe largest branch network of any bank in Turkey, its branches and personnelhave been concentrated in the urban locales for the more commercializedregions to serve its commercial banking and non-banking activities as well asits agricultural lending operations. As a result, in many parts of thecountry, TCZB's network extends only to the sub-province level. In someprovinces, each branch serves literally hundreds of villages, and farmeraccess and communication with the branch is made difficult by the distancesinvolved. For these reasons, and because of TCZB's general preoccupation withlending to the sales and credit cooperatives and the larger farmers, the staffof Teknik Zireat (TZ) have served as an unofficial link between the smaller,individual borrowers and the branch offices. This arrangement, which isprevalent throughout the country, is not an efficient link because TZ's thinlyspread staff lack mobility, and are diverted by TCZB's attendantadministrative procedures from their main task of advising farmers on theutilization of improved production techniques.

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3. Sources and Cost of Funds

5.40 Central Bank rediscounting. The growing significance over the lastdecade of the Central Bank as a source of funds for agricultural credit isstriking. In 1971, the Central Bank financed 30% of total agricultural creditand by 1980 this share had increased to almost 70%, though it declined in1981. This development primarily reflects the increasing volume of funds

channeled to the cooperatives, whose membership equity contributions of only10% of their lending provide a very limited equity base, insufficient even tocover operating expenses. The sales cooperatives have absorbed the largestshare of Central Bank funds throughout the decade, but the credit cooperativeshave needed a growing percentage to cover fertilizer costs which is likely tocontinue to grow. The Central Bank rediscounts funds with TCZB for thefinancing of input purchases (fertilizer and pesticides) and commoditypurchases. The former are on-lent by TCZB through credit cooperatives, andthe latter through sales cooperatives, with a margin of 2%. Each year theCentral Bank stipulates a ceiling on the amounts it is willing to rediscountwith the sales and credit cooperatives. TCZB has hardly availed itself of theCentral Bank medium-term rediscount facility, preferring to extend termfinance from its own resources, thereby benefitting from the investmentincentives available (including a share of the interest rate rebates).'/

5.41 Bonds. TCZB issued bonds in the 1960s, but has not done so since.There is little possibility of raising resources through bonds in the nearfuture due to the currently high interest rate offered on deposits. Undermore stable conditions, the issue of indexed bonds by TCZB would be one way ofgenerating additional funds, assuming a suitable price index could be devised,and assuming that a market for TCZB bonds could be developed.

5.42 Interest rates. Agricultural interest rates continue to be set byGovernment, pursuant to its selective credit policy. Because TCZB, as themajor intermediator for agricultural credit, has been mandated to give lendingpreference to small- and medium-sized farming operations, the most popularjustification of this policy is the relative risk inherent in smallagricultural operations once investment and production decisions have beenmade. In fact, however, the share of agricultural credit flowing to SSF and4SF borrowers is not large (Annex 9, paras. 17-19).

5.43 The low interest rate policy for agriculture is a part of the overallGovernment policy to provide selective credits at subsidized interest ratesfor priority sectors such as tourism, housing, agriculture, exports, and lessdeveloped areas. Under this policy, the Government (a) provides an interestrate subsidy to any bank, which makes agricultural loans out of its ownresources, to compensate it for the negative spread between the cost ofresources and the permissible interest rate on agricultural loans; (b) directsthe CBT to provide funds, through a rediscounting mechanism, to local banks atinterest rates 2-3 points below the interest rate allowed on agriculturalloans; and (c) establishes the interest rate that can be charged onpreferential loans (benefitting from (a) and (b) above) to the agriculturesector.

1/ Details given in Annex 11.

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5.44 The on-lending interest rates in Turkey vary from 14% to over 70%,

the highest rates being applied to non-preferential credits and lowest topriority sectors. Interest rates on savings and time deposits range from20-45%; no interest is paid on official and commercial deposits. The currenton-lending interest rates!1 for agriculture are 20% on short-term loans and22% on medium- and long-term loans. The interest rates on CBT rediscounts are16-18%, and the interest rate subsidy on agricultural loans granted by the

banks from resources other than CBT borrowings is 8%. Since 1980 theGovernment has revised the interest rates 4 times; 3 times to increase themfrom 14-16% to 22-24% in response to accelerating inflation and 1 time toreduce them from 22-24% to their current level of 20-22% as the inflationsharply declined in 1981. A noteworthy feature of the current interest ratepolicy in Turkey is that whenever the interest rates are revised they areapplicable to the outstanding loans as well as the new loans. This policy hashelped TCZB to remain financially sound and kept the subsidies lower than theywould be otherwise.

5.45 The current short-term agricultural interest rate is negative in realterms as compared to the 1982 inflation rate, as measured by the WholesalePrice Index, of 25%. Nevertheless, it should be recognized that by holdingthe agricultural interest rate relatively constant while inflation rates havebeen reduced from over 100% in 1980 to 25% in 1982, the Government has alreadyachieved a substantial decrease in the negative spread.

5.46 In addition to interest received from borrowers, TCZB is paid 6% p.a.for all agricultural loans from an Interest Rate Differential Fund (IRDF)which is maintained and operated by the Central Bank of Turkey from payment ofa part of the interest collected on commercial loans. Because agriculturalborrowers are allowed to pay lower rates of interest than commercial

borrowers, a considerable portion of TCZB's interest income is raised bysubsidy from the IRDF.

5.47 In many respects, however, the maintenance of interest rate ceilingson agricultural loans below the rate of inflation has denied to TCZB anadditional source of "discretionary" income with which it could have expandedits direct lending to farmers. Its use of Central Bank discounts andgovernment deposits carries with it an implicit understanding that the bulk ofthese funds will be utilized to offset the financing needs of the sales andcredit cooperatives.

4. Medium-Term Credit Requirements

5.48 An analysis of the contribution of agricultural credit to sectoral

performance is not possible given the paucity of historical production andfarm management data in Turkey. It is possible to achieve a prospective viewin broad dimension, however, with reference to the TASM projections. Theresults of the analysis reported in Chapter III indicate that under different

trade regimes, the growth effect could account for between 42-64% of the

1/ For support purchases as well as direct lending to farmers.

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production growth estimated until 1990. Thus the provision of reliable andtimely supplies of agricultural credit, of the amount and term structurerequired, would measurably enhance the prospect of timely adoption of improvedagricultural practices and the on-farm investments necessary to fulfill thetechnological assumptions behind the growth effect, which would alsocomplement and reinforce the contribution of public investment to the growtheffect.

5.49 It is estimated (Annex 5, paras. 63-70) that the short-term creditrequirement could exceed US$2 billion in 1981 terms, to which should be addedanother $0.5-1.0 billion to meet the M&LT credit requirements expected to

develop in the mid-to-late 1980's. In view of the magnitude of the foregoingestimates of credit demand, the requirements of the formal credit system toservice the needs of Turkish agriculturalists in the coming years could beprofound. A sobering perspective is provided with reference to the volume ofoutstanding loans for agriculture as of end 1981, including borrowings bysales cooperatives, of about US$2.6 billion. The amounts outstanding underloans made directly to farmers, or indirectly via the agricultural creditcooperatives were considerably less: about $1.3 billion, of which only $293million was for medium- and long-term investment credit. Thus the scale ofinstitutional credit operation for agriculture will have to be expandedconsiderably in real terms over the next few years, lest the sector'sproduction potential--and by implication some of the country's agriculturalexport potential--again remain unrealized in the 1980s as it was in the1970s. To enable such expansion to occur, it will be necessary to undertakereforms in the policy framework and the institutional structure along thelines discussed below.

5. Institutional and Policy Requirements

a. Credit Channels and Depositories

5.50 Future reorganization of TCZB. While the administrative problems ofTCZB abound, Government and the TCZB are taking steps to improve it. TheBank, the TCZB and the Government all agree on the need to reorganize andstrengthen TCZB's institutional capability. The basis for a reorganizationshould be TCZB's own analysis and studies, a recent examination of TCZB'smanagement and organization (the "Touche-Ross" study--commissioned underLoan 1248-TU) the Government's reform programs concerning SEE's (TCZB legallyis an SEE) and the banking sector, and a development program for TCZB to beimplemented along lines set forth in the Board documents for the recentlyapproved Second Agricultural Credit Project. This program summarized theproposals of the Touche Ross Report, and organized them into a plan, withspecific headquarters units given the responsibility to implement eachproposal; a sequence for implementation was established. The plan, if adheredto and if it can be implemented, would lead to improvements in TCZB'sadministration by simplifying its internal lines of communication.

5.51 Looking more into the future, however, moves are currently afoot toamend TCZB's foundation law and institute further improvements in TCZB'soperations to enable it to more efficiently service the expected sectoral

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credit needs of the medium term. In parallel to improvements in TCZB'sorganization structure, measures are being discussed or implemented todecentralize TCZB, improve its lending policies and procedures, financialplanning and budgeting procedures, accounting and automated informationsystems, management information systems, and to improve the coordination ofits lending operations with other government interventions in the agriculturalsector. To provide some real competition for TCZB in the field of farmers'finance, consideration could also be given to the establishment of a series ofregional agricultural banks, under the policy guidance and financialsupervision of a central administration, perhaps the Central Bank andTreasury's Bank Examiners. Such regional banks could be established under theexisting banking law, and would have responsibility in managing their ownfinances and autonomy in lending practices, subject only to general guidelinesfrom the center. But paramount would be responsibility over their ownfinances. Such banks would be in a better position to serve the particularcredit requirements of their region, and the problem of delays in loanadministration would be reduced by no longer requiring approval from Ankara.It is not mere happenstance that this hypothetical organization is similar tothe organization of the credit cooperatives which through 16 regional unions,carries out quasi-banking activities and oversees the operations of the 2,450individual cooperatives. The possibility of providing them with full bankingresponsibilities to serve as an independent source of farmers credit isdiscussed in the next section.

5.52 The agricultural credit cooperatives. The credit cooperative systemis one of few financial institutions operating at the grass roots level andtaking an active role in small farm financing. While their main function isto on-lend TCZB funds to their members for the purchase of production inputs,they also purchase and market commodities, provide secondary extensionservices, and help with the distribution of inputs such as seeds, feeds,fertilizer and pesticides, and machinery. They have the largest network ofany financial institution in Turkey; as of end 1981 there were 2,450 creditcooperatives, with a membership of 1.5 million encompassing about 40% of thefarming households in Turkey (Table 8 of Annex 9). Unlike TCZB and the salescooperatives, the credit cooperatives are located primarily in rural areas;only 8% are in the "urban" provinces of Ankara, Istanbul and Izmir, comparedto 23% of TCZB branches and 33% of the sales cooperatives.

5.53 The credit cooperative system, which was originally established bythe TCZB, was given autonomy in 1972. Ir place of TCZB's central and regionaloffices, a central administration and 16 regional unions were created tooversee the operations of all the cooperatives and provide a channel ofcommunication to the seats of central and regional government. The regionalunions provide technical and financial assistance to individual cooperatives,and assist them in gaining access to production inputs desired by the membersfrom official and private distributors. The central administration and theregional unions also coordinate with the TCZB to program and monitor thecooperatives annual credit programs. They also assist with marketing members'products, and last year set up an export company to help the cooperatives'move into export marketing. The regional unions inspect the performance ofthe individual cooperatives, which are required to submit an annual report

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(income statement, budget report and program for the next year) to theregional unions for review and consolidation, which are then transmitted tocentral headquarters. Finally the regional unions provide training forcooperative employees.

5.54 According to their foundation law, the credit cooperatives areallowed to collect deposits once they have Ministry of Finance approval. TheUnion of Credit Cooperatives has applied for Ministry of Finance approval,- andclaim that they have the expertise for collecting deposits; in fact from1955-1970 credit cooperatives were collecting deposits on behalf of TCZB, and

banking training for employees has been initiated on a small-scale. If theauthority is granted, such training would have to be expanded considerably.Any sound institutional means for improving the resource mobilization effortsin the rural areas and of providing competition to the TCZB should bewholeheartedly endorsed. There are two areas of concern, however: first, theadequacy of the banking expertise of credit cooperative personnel, and,clearly, much would depend on the training provided and on the monitoring oftheir banking activities by the Central Bank. This factor becomesparticularly important in view of the recent upheavals in the financialsector. Second, it is not clear how deposit collection could be profitable

for the cooperatives, given that they must offer 45-50% return, hold reserverequirements of 35% plus a 15% liquidity requirement, and yet earn only 20-22%on their loans. The cooperatives explain the feasibility of this proposal bytwo factors: first, they are optimistic that deposits can be attracted fromfarmers who, true to Moslem belief, would require no interest but seek to holdtheir funds in a secure place, and also one from where, should the need arise,they can obtain credit. Second, they hope to attract the deposits of localgovernments, on which no interest is paid. Currently, these are held at TCZBwhose nearest branch can be located at some distance from the localauthorities. In view of the uncertainties of these elements, it would beprudent to first undertake an indepth study of the credit cooperatives systemto identify appropriate changes in laws and regulations governing thecooperatives, as well as measures to improve on-lending capabilities and thecooperatives' management systems, staff recruitment and training programs,accounting and financial control procedures, and explore the viability oftheir collecting deposits.l/ Should deposit collection appear to be feasible,a second step would be to allow certain credit cooperatives to proceed withdeposit collection on a trial basis, with some public assistance being givenon banking training for employees. If lending operations are subsequentlyauthorized, and this possibility should be given serious consideration in viewof the credit cooperatives demonstrated ability to reach smaller farmers inlarge number, the cooperatives should be discouraged from operating as fullcommercial banks to ensure that their operations remain focussed on anddirected to the credit needs of agriculturalists.

1/ The Government has recently indicated it will carry out such a studyfollowing terms of reference agreed upon during negotiations for theSecond Agricultural Credit Project.

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5.55 Commercial banks. The extent to which commercial banksl/ areinvolved in agricultural lending is negligible. As of end 1981 less than 0.6%of outstanding agricultural loans were by commercial banks. Theoretically,commercial banks and the Industrial Development Bank of Turkey have access tothe CBT rediscount window under the same conditions as TCZB provided they arewilling to charge the official agricultural lending interest rate (20 and22%). In practice, however, the CBT first considers the financing needs ofTCZB for crop purchase and input financing, and allocates funds for thesepurposes. After serving these needs, the small amounts remaining under theGovernment's credit ceilings are then allocated to TCZB for other purposes, orto other public institutions.2/

b. Measures to Reduce Inefficient Allocations

5.56 Agricultural sales cooperatives. Sales cooperatives have theprincipal aim of purchasing the agricultural products of their members andselling them profitably. There are 21 sales cooperatives, four of which areworking together as the Izmir-based sales union TARIS. In 1981, the salescooperatives utilized about one-half of TCZB's total agricultural credit.They act as intermediaries for the price support program, using these funds topurchase crops from the farmers at the support price and then selling thecrops domestically or abroad. After selling the crops, the cooperatives havean obligation to repay the borrowed funds to TCZB; any loss they make iscovered by the Central Bank, and any profit--and in 1981 all but one of themmade a profit--should be returned to the farmers. In practice, however,neither of these requirements have been well observed. First, the salescooperatives have accumulated substantial arrears with TCZB, due, in part, tothe time lag between the buying and selling of the crops, but also due to theexcessive operating costs of these overstaffed entities.3/ Between 15-17% ofthe total amount of rediscounted funds made available to the salescooperatives are for operating expenses. However, even these funds, which areequivalent to more than half of TCZB's total medium-term lending, areapparently insufficient to cover their operating expenses. Secondly, thesales cooperatives have deliberately accumulated substantial arrears withTCZB. At the beginning of 1982, TL 54 billion of such arrears (14% of totaloutstanding TCZB credit) were written off by the CBT under a specialconsolidation law, and this covered only the 1980 procurements. It isexpected that further consolidation will be necessary to cover 1981 crops.

1/ "Commercial banks" refers to deposit money banks excluding TCZB.

2/ In 1981, for example, only TL 3.5 billion remained for agriculturallending to institutions other than TCZB, out of a total of TL 153 billion,and of this TL 2 billion was allocated to Sekerbank for SEKER's sugar beetoperation.

3/ The study had considerable difficulty in obtaining data relating to thesales cooperatives. The information given here was pieced together fromdiverse official sources.

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5.57 The sales cooperatives also are involved in diverse manufacturingactivities. They have increasingly been using profits earned from their main

processing and sales activities, and funds obtained by non-repayment of loansfrom TCZB for investment in manufacturing enterprises. In view of the seriousshortage of institutional credit, it is a wasteful diversion of agriculturallending resources for sales cooperatives to use CBT rediscount funds to cover

their operating costs, and use profits and arrears to TCZB to finance suchinvestments. It is also worth noting that since the TCZB is required to cover

all of their operating costs, there is no incentive for the cooperatives tooperate more efficiently.

5.58 Policy directions. The Government is quite concerned with theproblem and has recently issued a framework decree to separate the salescooperatives' manufacturing from their trading activities so that their fundscan be traced, earmark 2% of interest owned for farmer's share in the equityof the cooperatives, and strengthen their operating flexibility by permittingthem to procure from members at higher prices than the announced supportprices, povided they also bear unanticipated losses in the event that salesprices are too low to cover the procurement and handling expenses. It isintended that these measures will make them more responsive to market forcesand reduce the dependence of the cooperatives on CBT rediscount money fortheir working capital requirements. A general reorganization of the salescooperatives system is also under active consideration by Government.

5.59 In view of the abuses noted above, however, it is becoming ofparamount importance to the integrity of the agricultural credit system, thatthe financing of the sales cooperatives' procurements and operating costs becompletely detached from the main instruments for financing agriculturalcredit (i.e., TCZB's reserves and Central Bank rediscounts earmarked foragricultural credit) and, at least initially, to allocate Central Bank fundsdirectly to the sales cooperatives for their support purchases in a manner

similar to TMO or TEKEL. Ultimately, the rapidity of the transition from apolicy of production price supports to one of floor pricing will determine theappropriate operating rules for the sales cooperatives and financialassistance from Government. It would be totally consistent with currentpolicy for other parastatals to require them to become self-sufficient onoperating account (e.g., to seek their own sources of debt financing, and paycommercial export credit rates of interest as appropriate), and eventually oncapital account, except in years when compulsory procurements are necessary tomaintain price floors. In these years, Government financial assistance wouldbe appropriate, but in the form of a transfer from budgetary or off-budgetsources, which would explicitly recognize that compulsory procurements entailsa duty-loss (i.e., an official obligation), and--to an extent such financingis backed by general or earmarked revenues--the duty-loss could thus berequitted in a non-inflationary way.

c. Elements of Strategy

5.60 In sunmary, the growth targets imply a doubling of the provision ofinstitutional credit in real 1981 terms during the 1980s, which could easilybecome larger if supplemented by a strong farmer demand for investment

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credit. Because of the magnitudes involved and the importance of achievingbroad-based productivity increases, a much larger share of agriculture creditwill have to be funneled into direct lending to medium and small-sizedfarmers. The present institutional system is unable either to generate theadditional resources for this task, or effectively reach farmers in therequired numbers. The proposed sector credit strategy therefore consists ofactions both to improve resource mobilization and the lending capability ofthe agricultural credit system. On the resource mobilization side, threeactions are deemed necessary: (a) the short-term agricultural lending rateshould be permitted to continue to increase in real terms, (b) institutionaldepositories should be set up at the village level to capture both previouslyuntapped resources at this level (to an extent such presently exists) and,more importantly, to capture the new savings expected from incremental ruralincomes which would incur as a result of the resumption of agricultural growthin the medium term. In addition, (c) the de facto diversion of existingagricultural credit to unintended uses by the quasi-parastatal salescooperatives should be restrained by curtailing their access to officialfinancing except during years when commodity price floors come into effect andcompulsory procurement is required.l/ Ultimately, however, it would bedesirable to set up independent sources of financing for these purposes. Onthe lending operations side, it would be desirable both to (a) strengthenTCZB's capabilities along lines intended by Government since it is, and islikely to remain, the major source of intermediated funds for agriculture. Amarked decentralization of authority for loan approvals and loan administra-tion along lines presently being considered by Government would be a necessaryconcomitant; and (b) create alternative credit institutions both at theregional and village level, which would inject an element of neededcompetition in the agricultural credit system, while bringing access to "loan

windows" physically closer to the farm population, particularly the small- andmedium-sized farmers whose participation is essential to achieve the broadbased productivity increases required for medium-term growth.

1/ The reallocation of Central Bank and other sources from financing sales

cooperatives' procurements could augment the present supply of credit tofarmers by up to 33%.

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VI. MEDIUM-TERM REQUISITES - AGRICULTURAL TRADE AND PRICE POLICIES,SECTOR PLANNING CAPABILITY

A. Foreign Trade Regime

6.01 Exports. A principal medium-term objective of Government is toreorient the economy from inward looking industrialization to export ledindustrialization and growth. Agriculture still has been assigned asubordinate role under this new orientation, as indeed it probably should be,but the sector is expected to sustain a growth of exports somewhat in excessof its own rate of sectoral growth and, as a share of total exports, at levelsin excess of the sectoral share of GDP. Achievement of the sector's growthpotential requires an average growth of exports in fresh and semi-processedform of 4-6% p.a.l/ which is feasible under a strategy of continuedpenetration of Middle-Eastern markets and, towards the end of the 1980sfurther expansion into the EEC.

6.02 It was noted in this regard in Annex 2, that the substantialrealignment in real foreign exchange rates since 1980 and the reducedrestrictions and bureaucratic barriers to exporting were highly effective infostering growth in agricultural exports during 1980 and 1981.2/ However,following the major devaluations of 1980, the tax rebates, continuing importrestrictions and exchange rate adjustments have been used in combination in amanner which might prevent a further substantial real devaluation of theexchange rate after aggregate demand recovers and a strong demand develops forimports on the quotas list (which includes many agricultural products andproduction factors). Should a position of "creeping" overvaluation develop inthe future under these policies, such could work to deny the agriculturalsector the full benefit of one of the two primary policy instruments to whichagricultural exports have responded.

6.03 Imports. In parallel with increased sales abroad, the currentrestrictions on food imports should be relaxed. The GDP and exports growthprojections are associated with an increase of agricultural imports of about35 percent per annum, which while not excessive since the base is exceedinglysmall, would entail a fundamental change in Government's autarkic attitudetowards certain strategic food commodities. At present, the importation ofagricultural commodities and agroindustrial products is very closelyregulated, and there is a strongly held view in some circles in Turkey thatfurther liberalization for agricultural products, particularly foodstuffs,would run counter to the Government's policy regarding self-sufficiency infood. As discussed in Chapter III, increased food imports may becomeimperative in the medium-term to permit domestic production to shift to cropsyielding higher economic returns without resulting in (a) an unnecessarily

1/ The growth potential for agroindustrial exports appears to be considerablyhigher (c.f. para. 7.02).

2/ While the direct export incentives including export credits at favorablerates of interest, foreign exchange retention priviledges and tax rebateshave had a considerably lesser impact on agricultural exports.

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large erosion of domestic per capita food consumption balances caused both bydiversion of foodcrops and livestock products to export markets, and aprojected shift of some cereal lands out of wheat production into barley andother exportable grains; and (b) a marked increase in the domestic retailprices of farm products vis-a-vis non-agricultural goods.!! It should,therefore, be recognized that Turkey may have to de-emphasize self-sufficiencyas a policy objective in commodities such as wheat, oils and possibly sugar,or at least insist upon a lesser degree of self-sufficiency than before. Inaddition, current restrictions on the importation of critical imports neededto encourage an intensification of crops and livestock production should berelaxed as noted in Chapters III and IV. This applies particularly to certaincultivars, animal drugs, vaccines, some chemical ingredients for feedconcentrates, and for smaller tractors and associated implements.

B. Price Policies and Production Incentives

6.04 The extensive use of farm income support and incentives policies hasa long history in Turkey. In the 1930s these policies were originated in theexpectation of stimulating production. Later, in the 1960s and 1970s, thepolicy objectives were expanded to protect farm incomes from the distortionscreated by the myriad subsidies and protective devices enacted to sustainTurkey's industrialization drive. Only recently have the farm income policiesbeen curtailed, of necessity, because of the large budgetary and financialdrain which their continuation would require'.

6.05 Support prices.l/ A key element of the farm production incentiveshas been the use of production price supports. Commodity support prices havebeen set largely on the basis of production costs without adequate attentionto the level and structure of domestic demand and supply, links with consumerprice stabilization in the case of grains, and international marketconditions. In recent years, support prices tended to rise aboveinternational levels, although since 1979, successive devaluations and adeliberate attempt to lower price supports in real terms have brought most inline with or below export prices.

6.06 During the 1970s, successive governments found it necessary to expandthe number of commodity supports to fully 25 commodities by end 1979, coveringmost major field crops and animal products except fresh fruit and vegetables.These had to be adjusted from time to time, invariably upwards, which made itdifficult for the Government to coordinate production planning and supporting

services with the support price incentives, particularly for crops which fallunder the purview of MAF. This has made the planning of production for export

1/ The maintenance of per capita consumption balances could assume evengreater importance from the standpoint of preventing further erosion ofnutrition standards, as discussed in Annex 3 (although it is not clear howmuch of the incidence of malnutrition can be ascribed to generallimitations on food availability, as opposed to a skewed distribution ofavailable supplies as a result of disparities in income).

2/ See Annex 11 for additional details.

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equally difficult. Both the annual increases in the announced prices and themethods of financing placed a heavy burden on the economy. On more than oneoccasion during the 1970s, the support price program contributed to andpossibly even precipitated an inflationary spiral.!/

6.07 Recently, the Government has taken steps to rationalize theproduction price supports. By end 1981, the number of announced supports hadbeen reduced from 25 to 16 and implicitly, farmgate price stabilization has

become the main policy objective in lieu of incentive pricing and incomeparity. Although there has been no official announcement to this effect, itappears that stabilization is henceforth to be achieved through a system offloor prices, thus the real value of remaining commodity supports has beenallowed to erode so that in one or two years the level of the announced priceswill be below seasonally adjusted market prices.-/ (Table 4 of Annex 11portrays the pattern of announced support prices in current values). Inaddition to reducing the levels of price support in real terms, the Governmentalso has begun to rationalize the financing of support prices by providing alocus of financial control with the Central Bank. For the short term atleast, it appears that the large resource costs of the program have beenbrought under control.l/

6.08 For the medium-term, however, there is a need to further strengthenthe policy making procedure for farm price supports, which--because of theirimportance to various entrenched interests--could easily get out of handagain. In particular, the announced objectives of the program should be madeconsistent with the goals actually being pursued in 1981 and 1982, namely adeliberate move towards price stabilization and price floors, the number of"supported" commodities should be further reduced (16 is still a rather largenumber), and a much more rigorous analytical framework and statistical baseshould be utilized to establish the announced prices than presently isavailable. Moreover, the stabilization of farm gate prices for grains shouldnot proceed independently of consumer price stabilization measures (Annex 10).

1/ K. Somel, "Agricultural Support Policies in Turkey: A Survey ofLiterature," METU Studies in Development, 6 (1979), 275-323, and Annex 1to IBRD; TURKEY; Policies and Prospects for Growth, 1979 (ReportNo. 2657a-TU).

2/ The substitution of floor pricing for incentive pricing and income supportat high levels also will curtail the inherent bias toward large farmerbeneficiaries in the workings of the previous program. The new policy

implicitly recognizes the fact that small farmers first require effectiveextension assistance and better access to the means of production beforethey can respond to the incentives offered by price supports.

3/ Financial outlays through the public banking system to various salescooperatives, marketing SEEs and State Monopolies amounted to TL 180.6billion in 1981, compared with TL 122.9 billion in 1980, which are roughlyequivalent in real terms, (Table 5 of Annex 11 indicates amounts purchasedand financial outlays).

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6.09 Inputs subsidies. Through the 1970s, official prices for seeds,fertilizers, irrigation water, and machinery and spares were kept low,obstensibly to encourage the adoption of new crop technologies and thediffusion of more productive agricultural practices. The artificially lowprices in fact led to an uneconomic use of inputs and were much lower thannecessary to stimulate their acceptance by farmers. By end of 1979, theretail prices of fertilizers (Table 6 of Annex 11) were at levels only 15-48%of domestic manufacturing costs and between 18-41% of import costs. Althoughmost all plant protection materials were imported, the prices were heldconstant between 1970-1979, and by end 1979, represented only 16-20% of importcosts. Similarly, water charges for major irrigation schemes were set atlevels well below the real costs of operation and maintenance, which thereforeresulted in poor maintenance, while recovery of capital costs was negligible.

6.10 Since 1980, the Government has instituted measures to reverse thesituation. The subsidy for plant protection materials was eliminated and suchare now sold to farmers at cost. Fertilizer prices were increased five-foldin 1980 and fertilizer consumption decreased by about 25% as a result. Retailprices were again increased in September 1981, further reducing the subsidy.

6.11 It is the Government's policy to eliminate the remaining subsidy overthe next two or three years, concomitant with cost-reducing innovations inTZDK's fertilizer handling and distribution network, and rehabilitation ofthe domestic fertilizer industry with assistance under two Bank-assistedprojects. However, its desire to further increase retail prices in 1982 wasfrustrated by the unexpectedly large and unbalanced accumulation of fertilizerstocks during 1981. See Annex 4 for additional details of fertilizerspolicies.

6.12 Water and land development charges. The irrigation cost recoverypolicy of the Government for larger systems constructed by the State HydraulicWorks (DSI), is to levy water charges sufficient to recover all costs foroperation and maintenance (O&M) and to recover investment costs over a periodof 50 years at no interest.-Y In practice, the amounts charged have beenfar less, usually less than 50% of the requirement, due to inadequatecollection procedures and penalties. The Government recently increased DSI'sO&M charges to cover 37.5% of total O&M requirements during 1983, and plansfurther increases over a three-year period between 1983-1986, so as to reachfull recovery of O&M costs by 1986. Actions to improve collection proceduresand impose higher penalties should also be taken.

6.13 The Government in 1983 has also submitted legislation to theConsultative Assembly to enable TOPRAKSU to recover capital construction costs.TOPRAKSU has responsibility for service area development on DSI schemes, and thedevelopment of small-scale irrigation works. The collection of charges for suchservices would provide both needed additional revenues, and encourage farmers toundertake service area development with their own resources through directcontracts with works contractors rather than wait for TOPRAKSU's cost

1/ Assessments are made on a per hectare basis by type of crop grown.

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free but severely rationed services. In addition, TOPRAKSU has recently begunto expand its land development capabilities through increased employment ofprivate contractors. Previously, the direct execution of TOPRAKSU's works wascarried out largely on force account. These actions could increase the rateof completion and rehabilitation of works under TOPRAKSU's supervision toabout 100,000 ha/year, which will be necessary to achieve the medium-termgrowth targets. These actions therefore represent major changes in policyand, if successfully implemented, would substantially redress the Bank'slong-standing concerns about the adequacy of finance for O&M and thepreviously very slow pace of service area development.

C. Price Stabilization, Food Security and Nutrition

6.14 Food security. In the field of price stabilization and foodsecurity, continued intervention is desirable both to reduce the loss ofpotential economic gains stemming from producer risk aversion and satisfy theneed to stabilize household incomes, especially amongst the poor. The recentmoves to reduce the number of supported commodities and shift from incentivepricing to floor pricing is to be encouraged. Within this framework, a newand non-inflationary method for financing the diverse official procurementagencies (which include both SEEs and the sales cooperatives) must be found.Since the requirement to procure is compulsory when prices decline belowtrigger price levels, Government itself should incur a duty loss. Suchprobably should be reimbursed through less inflationary general revenues orearmarked off budget transfers (e.g. the price stabilization fund). Amongstalternative wheat stabilization policies examined by the mission, (see para.3.28 and Annex 10) a policy of free trade augmented by producer floor pricingand target consumer subsidies could be expected to prove more effective forsimultaneously stabilizing producer and consumer prices and household incomes,while reducing the probability of "famine" amongst target consumers duringperiods of low production than the current pattern of intervention.

6.15 Nutrition. A study of food availability and nutrition indicated thatthe cheapest sources of calories and nutrients are bread and other wheat flourderivatives, sugar, liquid oils and margarine, pulses and potatoes. It wasconcluded from the projections exercise (Annex 5) that the continuedavailability of reasonably low cost supplies would require a progressiverelaxation of import constraints for--again--bread wheat and oils, and thatexports have induced a considerable increase in the domestic availability ofpulses since production has increased, and the poorer quality produce flows tolocal markets after being sorted from the better quality produce, which isexported (Annexes 2 and 3). It was also concluded (Annex 3) that research isneeded to augment the storage life, and thus the availability of potatoes(conversion to dried form may help). Thus it would appear that appropriateinterventions would all fall within the present capability of Governmentinstitutions and need not exact an excessively large and negative opportunitycost in terms of production for exports. On the other hand, some form ofnon-price rationing may be required to offset the inevitable inequities in the

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distribution of these foods amongst households. If adopted, such schemesshould be extended principally to rural areas since an inverse relationshipappears to exist between settlement size and the incidence of malnutrition.

D. Plans and Policy Formation

6.16 The production and marketing structure of Turkish agriculture isexceedingly complex, while a bewildering and often conflicting array ofincentives, subsidies, taxes, permissions, licenses and direct public sectorinvolvement is used to carry out existing policies. Up to now, each of theGeneral Directorates of MAF, as well as other agencies and parastatalsdirectly involved in agriculture and the institutionally dispersed loci ofregulatory authority have had a large degree of autonomy in the definition andexecution of their operations. Insufficient attention has been given to theformulation of coherent policy and programs at the national level. A clearerdefinition of national policies and program priorities for the agriculturalsector has become prerequisite to improving the efficiency of the activites ofthe various agencies involved as well as their collaboration and mutualsupport, thus future improvement in the services and functions performed bypublic institutions dealing with agriculture (and in particular MAF and theagricultural credit system) will require that a badly needed capability forpolicy analysis, program evaluation and medium-term planning be created at thenational level. In order to rationalize the pattern of intervention a locusof central authority is required, and such authority will necessarily have tocut across the existing structure of central Government ministries andparastatals. Because their important position in the nexus of agriculturalpolicymaking, the locus of authority should probably be placed within MAF, inwhich case this agency's present capabilities for planning will have to beconsiderably strengthened. This will require considerable investments in thedevelopment of statistical resources across a broad spectrum of physical,financial and economic indicators and analytical capabilities replete withmodelling to provide checks on consistency.

E. Elements of Strategy

l. Foreign Trade Regime

6.17 During the medium-term, the government should continue to emphasizeuse of flexible exchange rates and deregulation of exports for reasonsdiscussed in paras. 6.01-6.02 above. It should further recognize that themaintenance of policies which emphasize complete self-sufficiency in foods andautarky in the production or manufacture of key agricultural inputs is likelyto extract a high opportunity cost once growth is resumed. In anticipation ofthe requisites for sustained agricultural growth with exports, the initiationof further moves to deregulate both food imports (especially grains and oils)and imports of key agricultural factors of production, especially seeds andsmaller tractors and farm machinery, would be highly desirable. A first steptowards deregulation would be the inclusion of such items on the moreliberalized import list in the not too distant future.

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2. Price Stabilization and Food Security

6.18 The government's steady progress in shifting from a system ofproduction incentive prices to commodity floor prices should be continueduntil the number of commodities and the financial burden have been redulced tomanageable levels. Related institutional adjustments include:

(a) a reform of the financing of the (new) commodity floor prices,which burden should ultimately be transferred to the Government'sbudget or off-budget resources and treated as a duty-loss;

(b) improvements in the efficiency of parastatal intervention inprocurement and marketing, including both the sales cooperativesand agricultural SEEs; and

(c) reassessment of the Government's intervention patterns in grains,

A reform in the financing of commodity floor prices could be achieved as partof the strategy proposed for detaching these from the agricultural creditsystem. A major first step under (b) has been the issuance of a Money andCredit Board circular which permits the agricultural sales cooperatives toprocure at prices higher than the announced support prices provided theyassume responsibility for bearing losses, the measures to strengthen the salescooperatives' financial structure by allocating a portion of their interestpayments to members' equity in order to permit them eventually to diversifysources of debt financing,_/ the recent spin-off of some of the salescooperatives' manufacturing ventures to other parastatals, and the inclusionof the agricultural marketing SEEs under the recently issued SEE reformlegislation. With respect to (c), the Government should carefully reexaminethe implications for price stabilization and domestic grains security as wellas for exports of (i) maintaining TMO's dominant position in the foreigngrains trade and its monopoly on wheat imports; and (ii) allowing TMO tofollow its present and costly stockpiling rules, which emphasizes"full-storage-first" before engaging in exports or domestic disposals.

3. Inputs Policies

6.19 Government's prior commitment under SAL's to eliminate fertilizersubsidies should continue to be implemented. With respect to the weakness ofthe fertilizer distribution system noted above and problems presented byTZDK's near monopoly, the results of a study commissioned under the FirstFertilizer Rationalization and Energy Savings Project (FY81)2/ are expectedto be available in FY83. An interministerial steering committee has beenestablished under the fertilizer project to supervise the study, and to

1/ Presently, the sales cooperatives are restricted to borrowing from TCZB.

2/ The principal objective of this project is to provide technical andcapital assistance for rehabilitating the fertilizer manufacturingindustry.

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prepare an action plan for implementing the study's recommendations. Since itwas further covenanted in this project that execution of the action would

commence not later than June 30, 1984, decisions regarding additionalintervention in the field of fertilizers distribution should be postponed

until the action plan has been prepared and reviewed.

4. Agricultural Sector Planning Capability

6.20 Various governments have, since the formulation of the Fourth Five

Year Plan, recognized the need to create within Government a medium-termsector planning and agricultural policy analysis capability. A limitedtechnical assistance for this purpose was provided under the Grain StorageProject (FY80) through it has only been partially utilized. To providesupport for this study and its on-going sector work, the Bank has subsequentlydeveloped prototype sector modelling (see Annexes 5 and 10) and software in

collaboration with the Middle-East Technical University under an externalresearch project (RPO 672-78), hosted informal seminars in Turkey and helddiscussions on numerous occasions with senior Government officials concerningthe availability and use of these models. Steps have also been recently takenby MAF to improve the production data base, which is an important corrolary.With FAO assistance, a new unit which reports to MAF's undersecretary has

implemented a remote sensing project to improve the reliability of estimatesof area sown in grains. In parallel, a Crop Forecasting and Collection ofCurrent Agricultural Statistics Project has been started, also with FAOassistance, to improve the methodology for collecting agricultural statistics(these being based on farmer interviews and rudimentary eye-estimationtechniques). The project will address both the reliability of crop productionestimates, and the coordination of statistical reporting and aggregationactivities among the various departments of MAF. A third undertaking in theform of an Agroecological Zoning Project was presented to UNDP for funding inlate 1982. This project has been designed to develop a detailed land resource

data base, using a factor analysis and computerized techniques for erroranalysis in order to provide more reliable estimates of potential yields in

Turkey's diverse agroecological zones. At present, however, neither the MAFnor the SPO are staffed to sustain these efforts after the aforementionedprojects terminate, nor to operate the Turkey-specific computer models whichare now available.

6.21 In view of the considerable waste and misallocation of Government's

resources which occurred in the past as a result of uncoordinatedinterventions, the Government indicated in its Statement of DevelopmentPolicies for the Fourth SAL operation that it intends to establish aninterministerial working group to examine ways to create an effect ivemedium-term planning and agricultural policy analysis capability 1/ Itwould be desirable for the working group to determine, firstly, where the

1/ Should the working group require technical assistance while carrying out

its T.O.R., the undisbursed balances for this purpose from the GrainStorage Project could be utilized and perhaps could be supplemented withadditional assistance under future loans.

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responsibility for sector planning belongs, then assign major responsibilityto representatives of the chosen agency for coordinating the group'ssubsequent work program. To this end, it would appear most appropriate toassign major responsibility to MAF in view of the latter's extensive executiveauthority vis-a-vis current sectoral policies, as well as the related workalready commissioned by MAF through its statistical and policy unit. Aprimary task for the working group would be to detail an action plan todevelop and institutionalize the statistical, modelling and analytical tasksassociated with medium and short term sectoral planning, including land useand production policies; technology policies; producer price, inputs andinvestment policies; the marketing and trade aspects and the incomes andemployment dimensions of these; food security interventions and consumer pricestabilization. The MAF's draft proposal to UNDP for "Training and TechnicalAssistance to Agriculture Sector Analysis and Planning" (March 1983) couldserve as a useful point of departure. The action plan must also address thelegal problem of coordination, and in particular, the provision of specificlegal authority for the sector planning unit to review all aspects of sectoralpolicy--regardless of whether the responsibility for implementing suchpolicies falls within the purview of the unit's parent ministry or not.Finally, the present civil service salary structure is generally inadequateconsidering the requirement for several specialized disciplines (i.e.econometricians, systems analysts, mathematical programmers) having advanceddegree training. The action plan will therefore have to identify changes inGovernment's personnel law to permit the unit to staff itself with requisitetechnical disciplines on a continuing basis.

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VII. AGROPROCESSING INDUSTRIES - AN OVERVIEW!/

A. Performance Potential

7.01 Concomitant with the resurrection in 1980 of export oriented growthpolicies following a 10-15 year hiatus, and decisions by Government to fosterprivate sector operations in manufacturing, commerce and trade, the largepotential of the agroindustries subsector to support a resumption of GDPgrowth and net gains in foreign exchange earnings assumed greater importance.The subsector's potential is manifested in two ways--through production forultimate export by agroprocessing industries, which can capture for theTurkish economy some of the value-added in agricultural processing presentlyenjoyed by the importing or intermediary countries, and by expansion ofdomestic fertilizers manufacturing to, again, capture some of the foreignvalue added in this activity.

7.02 The performance potential for agroindustries is quite high. This isreflected in the results of macroeconomic simulations done for this studyutilizing the Bank's computable general equilibrium (CGE) model for Turkey,

whose results are discussed in Annex 6. The CGE runs generally indicate thatthe feasible growth rate for value-added in constant prices for the foodprocessing subsector (which encompasses nearly all agroprocessing activities)is about three times the growth rate projected for the agricultural sectorbetween 1981 and 1990 (Annex 6, Table 1). However, the food processing growthrate is predictably quite sensitive to the agricultural growth rate. Theresults also indicate that food processing exports could grow at more thantwice the rate of agricultural exports, and that this performance could beassociated with a near quadrupling of the combined net foreign exchangeearnings of the food processing and agricultural sectors (Annex 6, Table 3).In the remainder of this chapter a broad overview of performance byagroprocessing industries is presented and some important constraints arediscussed which could be germaine to a subsequent in-depth examination ofparticular agroindustries. Developments of note in the fertilizer

manufacturing industry are discussed in Annex 4.

B. History and Performance

7.03 The industrial processing of agricultural produce is relatively newin Turkey. Sugar beet refining was introduced in 1926. Large-scale oil seedprocessing developed after World War II. The pasta products industry becamesignificant only during the last two decades, while nearly all of the tomatopaste and fruit juice processing capacity in Turkey was constructed during the1970s. Livestock slaughterhouse sales have been 99% comprised of cleanedcarcasses, and only recently is much attention being paid to the processing ofmeat cuts for wholesale distribution and exports.

1/ The discussion in this section is based on the material presented inAnnex 4. Case studies of the tomato paste, fruit juice, pasta, meatprocessing, sugar and edible oils industries are contained inAppendices 1-6 of Annex 4.

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7.04 Major intervention by the Turkish government to encourageagroprocessing primarily for domestic markets began in the 1970's. TheGovernment provided low interest investment and working capital loans forprivate enterprises, insured against foreign exchange rate risks forinvestment loans and increased the rate of investment in publicly ownedagro-processing companies (SEE's). In the rush to develop these industries,the construction of production and processing capacity outstripped growth anddevelopment of sources of supply, trained labor, grading standards, qualitypackaging, transportation facilities, and the capabilities of domestic marketsto absorb the goods produced.

7.05 These phenomena are evident in the patterns of investment andproduction during the 1970s. As can be seen in Annex 4, Table 1, real fixedinvestment in activities loosely classified as agroprocessing industriesincreased by nearly 100% between 1973 and 1977, but then fell off even morerapidly by 1979. As a result, investment in food, beverage and tobaccoprocessing comprised 8.6% of total manufacturing investment in 1973, 11.3% in1977, then had declined to 8.6% again by 1979. Indications are thatinvestment has not recovered since 1979 except in some of those industriesthat have successfully switched to exporting.

7.06 Reflecting trends in investment and real per capita incomes, thevalue of agro-processing output followed a similar pattern. Table 2 ofAnnex 4 shows numbers of agro-processing establishments in operation, workersemployed and the nominal and real values of output for both the private andpublic sectors from 1975 to 1979. The value of output from parastatalagroprocessors (i.e. SEEs and State Monopolies) rose 31% in constant 1976Turkish Lira from 1975 to 1977 but declined 36% by 1979, registering a 16%decrease in real terms for the entire 1975-1979 period. Private processors,who produced slightly more than 50% of total sector output, experienced asteady 18% decline in output over the five-year period. Thereafter, (notshown) the value of food processing output held constant from 1979 to 1980 androse 4.7% in 1981. The value of beverage output increased 4.8% over the1979-1981 period.

7.07 Statistics on changes in value added in constant dollars (seeAnnex 4, Table 4) reveal that real value added by parastatal processorsdeclined by 30% from 1975 to 1979 while real value added by privateagroprocessors increased by 22% over the same period. Because 69% of totalindustry value added was contributed by state-owned enterprises in 1979, valueadded for the industry as a whole declined by 15% during the period. Valueadded as a percent of value of output also declined from 43% in 1975 to 35% in1979 for the public sector. The private sector showed an increase from 17% to25% for the same time period. These figures repeat a familiar story forperformance of manufacturing sector enterprises in the 1970s and indicate thatinput costs and inefficiencies in the utilization of inputs became relativelymore significant for the parastatals, but relatively less so for privateoperations. An examination of the private sector agroprocessing enterprisesthat expanded during the 1970s (tomato paste, macaroni, fruit juices andothers) indicates that the increased percentage of value added was dueprimarily to industry evolution into more highly processed food products.

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7.08 The state-owned agroprocessors are considerably larger than privatesector operators. Though the parastatals presently produced about 50% ofindustry output, they comprise only 12-14% of the total number ofestablishments and in 1979 employed 63% of the workers in the industry(Table 2 of Annex 4). The number of public sector establishments grewsteadily from 177 to 205 between 1975 and 1979, while parastatal employmentincreased from 83,500 to 110,000. In contrast, the number of private sectorestablishments fluctuated, declining overall from 1,328 in 1975 to 1,298 in1979. Private sector employment also fluctuated but declined slightly overallfrom 64,100 to 63,600.

7.09 The sudden changes in economic policy that were implemented in 1980had the intended effect on agroprocessing industries, which was both immediateand profound. Exports of industrially processed foods had fluctuated duringthe 1970s, from a high of $149.1 million in 1973 to a low of $86.8 million in1976 (Table 9 of Annex 4). A very strong expansion of processed food exportsoccurred under the economic policy reforms, from $135 million in 1979 to $568million in 1982, while the potential for further expansion is generallybelieved to be quite good. This performance is even more impressive in lightof the fact that Turkish food processors and trading companies knew littleabout foreign markets before 1980, had few business contacts outside of theirown country in the area of processed foods, and thus had very little incentive

to achieve world standards of quality, price, delivery and operatingefficiency. Today, however, many agroindustry concerns view overseas marketsas their primary growth opportunity.

7.10 A second aspect of the 1970 reforms was the adoption of measures toforce more efficient capacity utilization and financial management byagroindustrialists. It was intended that both the private and public sectoroperatives would learn to respond efficiently to market signals, and toexploit new marketing opportunities as these emerged--while their dependenceon the then existing array of government capital and operating subsidies wouldbe curtailed, except as necessary to encourage production for exports. Thisalso occurred. Plans for new private investment, drawn up before 1980, wereeliminated when commercial interest rates were increased and investors wererequired to bear foreign exchange risks. The publicly owned firms weremandated to become financially viable on operating accounts, an environment towhich they were quite unaccustomed, and their operating subsidies weredrastically reduced. As disposable consumer incomes decreased under thegeneral stabilization policies, the domestic markets for luxury foods such asfruit juices shrank substantially. Agroindustry growth rates fell off asconsumers returned to less expensive unprocessed goods. Capacity utilizationrates, which were never particularly high, declined in parallel withinvestment. This resulted in the anticipated shake-out of inefficient firmsrequired for the intended restructuring of the agroprocessing industries. Inthe face of an ensuing outcry, Government has demonstrated commendablepolitical will by holding fast to the new policies which are essential forrevitalization of this important subsector.

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7.11 In the following paragraphs, the study's findings in regard to exportmarketing, the financial constraints of the private sector, the relativelyrecent phenomena of conglomeration, and the array of difficulties experiencedby parastatal agroprocessors are discussed. The evidence is impressionisticand somewhat narrow in scope, and does not in any detailed way deal with theunderlying industry-specific topics of cost and financial structures, problemsof plant siting, raw materials acquisition and inventory management, marketingperformance and capacity utilization, modernization, managerial systems andskills requirements. (To do justice to these topics, a full agroindustrysubsector study would be required--and is recommended.)

C. Marketing

7.12 Along with the acquisition of exporting experience, a number ofindustry specific marketing problems have become apparent that require, andare receiving, attention by exporters and the concerned technical agencies.However, progress with overcoming these problems will necessarily be gradualsince most entail either the refinement of existing marketing techniques on atrial and error basis or the introduction and adaptation of new ones.

7.13 Quality. For some of the agroindustries which are relative newcomersto the field of exporting, improvements would be desirable in a number ofareas, from the acquisition of raw materials, to the processing, shipping andhandling of final product. For example, some fruit juice processors will haveto emphasize procurement of top quality industrial juicing oranges to enablethem to compete more effectively in high income export markets. At present,this represents a varietal selection problem at the farm level since Turkishnurseries have only recently begun to produce industrial orange budlings inlarge number. It is also reported that inadequate slaughterhouse sanitationand animal disease have made it difficult for Turkish livestock products togain entry into European markets. On the other hand, there is ample evidencethat European inspectors, particularly in the EEC countries, have been undulyharsh towards Turkish meat shipments for reasons which are not particularlywell understood.

7.14 Product formulation. Exporters are becoming sensitive to thespecific tastes and eating habits of their target markets, though moreattention in this area could lead to increased export revenues. To an extentthat the varietal composition of an industry's raw material is not appropriateto preferences in the importing countries, the industry will either have totake direct steps to ensure that farmers are supplied with appropriateplanting materials (which some Turkish firms are doing by distributingimported seeds), or encourage the nascent local seeds industry to makeavailable proper seeds to their raw material suppliers, or both. The problemis recognized and Government has initiated steps within the confines of theexisting seeds decree to encourage the importation of improved fruit andvegetable cultivars with minimal testing. However, this is understood to be atemporary solution to a longstanding problem, pending development of the localseeds industry. Within existing product lines, also, reformulation could leadto increased value-added from exporting. For example, consumers of tomatopaste in the Middle East and North Africa enjoy a very salty product.

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Currently nearly all of Turkey's tomato paste exports to this area are bulk

packaged and shipped to Iraq where salt is added and the product is canned and

re-exported. Fruit juice exporters to the Middle East are confronted by verylow cost drinks that contain only 5 or 10% fruit juice. Here Turkish firms

must decide whether to reduce the juice content of their product and competeon the basis of price rather than quality. European pasta consumers preferpasta made with egg. Turkish pasta currently contains no egg so it finds

little acceptance in Europe but does sell well in North Africa where tastesare different.

7.15 A related consideration is the notion of a "product package". Unlike

the example for oranges quoted above (and other fruits), most varieties ofagricultural commodities are not differentiated between table and industrialtypes. Therefore, a multiple-market strategy could be pursued to maximizereturns after sorting the freshly harvested produce. The top quality would be

exported unprocessed, the second order of grades would be sold also in freshform to domestic markets, while the rest would be processed for disposal

either in foreign or domestic markets. The livestock products industryprovides a parallel example. Livestock exporters have discovered that MiddleEast beef importers will pay as much for prime cuts as they pay for an entirecarcass. Though Turkish exporters continue to ship whole carcasses, a profitopportunity can be gained by product reformulation because the secondary cutscould be disposed of in the domestic market at minimal additional cost.

7.16 Other marketing constraints. Agroprocessors still find that durable,lightweight and attractive packaging can be difficult to obtain, though recent

moves by Government to encourage the packaging materials industry and permitimports of finished materials appears to have eased this constraint in recent

months. Similarly, a problem of consistent deliveries developed soon afterthe export drive commenced, when some of the inexperienced exporters respondedto the Government's incentives in an opportunistic way, while others haddifficulty maintaining deliveries as a result of transportation bottlenecks.The air of opportunism has largely disappeared in the face of Government'sattempts to organize exporting through large and conglomerated marketing

firms, and as a result of exposure to the rigors of export marketing. Thetransportation bottlenecks have also eased considerably, following theimportation of over 10,000 refrigerated trucks and development of transit coldstores since 1980 under specific investment incentives which were establishedfor this purpose.

D. Capital Structure and Finance

Undercapitalization

7.17 Of necessity, the 1980 reforms caught many agroindustrialists in

highly exposed positions. The equity market had become particularly distortedduring the 1970s due to the erosion of asset values as a result of inflation,

thin equity trading and dated evaluation methods. The combination ofGovernment investment incentives during those years, negative real interest

rates and scarcity of long-term debt capital encouraged firms to borrowheavily and short-term for purposes of investment. This was a viable, if

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speculative financial strategy, so long as interest rates were low and creditwas freely available. But with the imposition of stringent credit ceilings in1979-1980 and the corresponding marked increased in the commercial rates ofinterest, many firms found themselves with an excess of short-term debt intheir capital structure, and therefore, having to refinance their investmentsat high and positive real interest rates provided such financing could befound. As discussed at length in other Bank reports,l/ the Government hasrecently enacted legislation which permits industrial firms to revalue theirfixed assets and accumulated depreciation without incurring an immediate taxobligation, and measures are being implemented to strengthen the primary andsecondary securities market.

7.18 A dearth of long-term debt financing has also been a problem inTurkey. On the demand side, companies were reluctant to borrow long-termduring the recent period of high inflation because a decrease in inflationwould produce a corresponding increase in their real (inflation adjusted)borrowing costs. The use of flexible borrowing agreements would ease therisks of long-term debt capital for both the lender and the borrower.Although this is a highly sophisticated form of financing, there is evidencethat informal agreements already exist between some bankers and clients thatperform functions similar to a variable interest rate. Today, however, thepresence of substantial underutilized agroprocessing capacity (with thenotable exception of firms which have successfully switched to exporting) hasconsiderably choked off demand for investment credits, while Governmentintroduced several measures at the beginning of 1983 which are designed tolower the costs of intermediation and credit. Through these and othermeasures discussed in recent Bank reports (para. 7.17), all aimed at improvingthe efficiency of financial intermediation, the Government expects thatsufficient long-term credit will become available--both at commercial ratesand for activities receiving preference--to serve the strong agroindustryinvestment demand which is expected to develop after the current shake-out ofinefficient firms is finished.

E. Institutional Strategy

7.19 Pursuant to Government's policy, large, well capitalized holdingcompanies have become increasingly active in agroindustries. One holding,which already dominates the beer and malt industry, is planning investments inlivestock processing and marketing that could revolutionize the industry andgive them an important foothold in the market. Another is expanding intolivestock processing with IFC support. A third purchased 85% of the activefruit juice processing capacity in Turkey in 1981. The large holdingcompanies have the advantage of a strong capital base, established exportmarketing channels, advanced financial skills, and experienced managers.

1/ Notably, the PR for the Fourth Structural Adjustment Loan to Turkey(Report No. P-3543-TU, dated May 26, 1983) and the Special EconomicReport: "Turkey - Policies for the Financial Sector" (Report No. 4459-TU(draft yellow cover), dated April 18, 1983).

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7.20 Most of the holding companies own banks, which provides advantages inthe current situation of financial stringency. First, banks can obtain

certain amounts of low cost, preferential money from the Government. Thismoney can be allocated to qualified projects within the holding company. The

cost of some of the loans has been less than the inflation rate. Second, whenborrowing at market rates, the holding company pays no banker's fees. InTurkey, these fees have been quite significant, adding about 5 percentagepoints to the cost of the loan. There is added safety in owning a bank. When

money is in short supply, the affiliates of the company that owns the bankwill be the last ones to be denied credit. Along with this safety comes

freedom since the bank will not force onerous loan conditions on affiliatedenterprises. Banks in Turkey are also allowed to make equity investments,thus a holding company can instruct its bank to provide equity for newinvestments. This system greatly reduces the cost of capital for the newventure.

7.21 The jury is still out on the long-term desirability of agglomeration

and the merging of agroprocessing activities with a major source of debt andequity finance under one organizational umbrella. The advantages are evident

wherever a degree of backwards and forward integration would improveefficiency, but large investments and/or large and unbalanced cash flows arerequired to initiate and sustain operations. This may be particularly thecase when an industry must introduce new technologies to its suppliers toquickly upgrade the quality and quantity of its raw materials, while at thesame time undertake investments in processing facilities and extend itsmarketing operations into unknown markets. Conglomeration allows the firm'smanagement to reduce the considerable risk which accompanies such an ambitiousapproach, and may be appropriate considering the extreme and justifiableurgency attached by Government to a rapid expansion of agroindustrial exports.

7.22 On the other hand, the combination of banks and holding companiescould have a number of negative effects on the agroindustries subsector. It

can lead to an unwarranted degree of concentration when these conglomeratesbuy up already well-established processing industries rather than develop new

ones. Second, because the established agroindustries are often small ormedium-sized operations, they are particularly affected by the changes inbanking practices which occur when a holding company assumes control of abank, usually because less credit is subsequently made available for the

unaffiliated operators after the equity, credit and liquidity needs of theholding company have been fulfilled. Also, because banks so acquired are

reluctant to enforce stiff loan covenants on their new affiliates, the levelsof riskiness in their loan portfolios could increase.

7.23 The Government remains wedded to conglomeration as a main instrumentfor promoting manufactured exports, and perhaps correctly so. It isrecognized, however, that close links between large industrial groups and thebanking system could work to the detriment of new entrepreneurs. The

Government is therefore considering proposals for revision of the Banking Lawwhich would inter alia more closely regulate credit extension limits bycommercial banks to a single customer.

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F. State Economic Enterprises

7.24 Statistics on publicly-owned food processing operations indicate thatthe SEE's hire more people per establishment than comparable private sectorestablishments, require more capital, pay higher wages and salaries, but ranklower in terms of output and value added per worker. Drawing from 1979 datafrom the SIS, aggregated profiles of public and private agroprocessing firmshave been constructed as follows:

Food Processing Establishment(1979 Data)

Public Private

Average;Workers per Establishment 353 46Wages and Salaries per Worker TL 167,200 TL 124,1001979 Investment per Worker TL 24,800 TL 13,800Output per Worker TL 941,600 TL 1,562,900Value Added per Worker TL 222,500 TL 348,000

Source: State Institute of Statistics

7.25 These statistics indicate that the publicly owned and operated foodprocessing establishments pay 35% higher wages to workers who are only 60% asproductive than those in the private sector. Higher wages can generally bejustified by capital intensive industries as increased skill levels are oftenneeded to operate sophisticated equipment.'/ However, such industries whenefficiently operated also have very high levels of output per worker and valueadded per workers. Thus, the preceding food processing establishment profilesindicate that the publicly owned food processors are grossly overstaffed, that

workers may be overpaid and that efficiency is a major problem.

7.26 The problem of SEE inefficiency worsened significantly from 1975 to1979. Table 10 of Annex 4 shows worker pay and productivity measured inconstant 1976 Turkish lira for the period 1975-1979. Agroindustry employeesin the public sector saw their real wages increase 15.1% from 1975 to 1979while value added per worker declined 47.6% and wages as a percent of valueadded rose from 24% to 53%. In contrast, among private sector agro-processingfirms the 27.3% real increase in wages was almost balanced by a 21% rise invalue added per worker. Private sector wages as a percent of value added sawmodest increase from 31% to 33%. Recently, in response to Governmentpressures, some of the agricultural SEE's, notably the Turkish Sugar FactoriesIndustry, are making attempts to improve efficiency. SEKER has not beenreplacing staff lost through normal attrition, while holding down wageincreases in the face of inflation. As a result, between 1979 and 1982 workercosts were reduced from 17.6% of total sugar costs to 11.%.

1/ Even capital intensive industries that do not require high skill levelsusually pay higher wages because the capital cost of strikes and workstoppages is very high while labor comprises a small portion of productcosts.

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7.27 In the field of agroprocessing, and in other sectors where they areinvolved, SEE reform has been a major goal of the Government's structuraladjustment program. The Government's strategy is to bring about greaterefficiency through decentralization of responsibility, greater managementautonomy and competition. The ultimate objective is to place the SEEs in aneconomic environment where they would compete on an equal footing with privatesector firms, especially with regard to output prices, factor inputs, andcredit. During 1980 and 1981, a number of interim measures were implementedto improve short-term financial performance, reduce operating subsidies,redirect the SEEs' investment programs and finance them increasingly fromnon-budget sources, and undertake legal reforms to institutionalize thesechanges. The core of the Government's program, however, is a wide-rangingreform decree that has recently been approved. The new decree classifiesState enterprises into different categories and lays down uniform principlesrelating to the composition of their Boards of Directors, the tenure of Boardmembers and the qualifications required of top management. The enterpriseswill henceforth be allowed to determine their product prices; if for anyreason the Government establishes prices, the loss to the enterprise will bemade up. Employees of the enterprises will be subject to a new personnelregime different from that applicable to government employees. Theenterprises will also have greater autonomy in determining their investmentprograms, within the framework of the national plans. While it is recognized

that the main requirement for effective reform is to change deep-rootedattitudes, not merely laws, the new decree should have considerable impact bysignaling the new approach towards SEEs.

7.28 This process should eventually be completed by eliminating all profitguarantees and by rationing investment capital to the SEEs in a way whichreflects the scarcity of investible resources for private industry. On the

other hand, since some SEEs like SEKER dominate their industries, pressures toreduce operating deficits could as well lead to unwarranted upwards priceadjustments rather than a genuine increase in productive efficiency. Suchpricing, in turn, could price out of the market private agroprocessors whichhave backward linkages to the parastatals, as in the case of tin-plate andcanning materials.

7.29 Over the medium-term, the facilities of some agroprocessing SEEs,such as EBK's (see Appendix 4 to Annex 4), should perhaps be sold to orreplaced by the private sector. However, a very large and highly integratedoperation such as SEKER would require careful study before such a drasticdecision could be made. By installing high quality management and improving

efficiency, SEKER might become reasonably viable as an SEE. It is alsopossible, however, that a careful and comprehensive program to turn sugar

processing completely over to the private sector might be worth the economicdislocation that would occur in the short- and perhaps medium-term.

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G. Elements of Strategy

7.30 The findings of this study with respect to agroindustries confirmedthe recent Country Economic Mission's general findings with respect tomanufacturing. Investment demand and capacity utilization rates generallyhave remained low since 1980, except for those firms which have successfullyexpanded their export operations and thereby availed of the incentives policypackage. It is worth repeating that this was anticipated when the economicpolicy package was introduced in 1980, and is a necessary concomitant to therevitalization of Turkey's agroprocessing subsector. The expansion ofagroindustry exports occurred mostly in the traditional lines, viz. tomato

paste, fruit juices, juice concentrates, and chilled meat. As a result ofexport market penetration and cash flow problems, a shakeout of less efficient

or more debt-ridden firms appears to be occurring. The agroprocessors that dosurvive the crisis will be primarily those that are large, have access tofinancing, and are well managed. As intended by the Turkish Government, theshakeout occurring in agroprocessing and other industrial sectors is apainful, though in many ways an inevitable one.

7.31 Publicly owned agroprocessors do not appear to be faring much betterthan many of the private sector operators in spite of their still favoredaccess to public investment funds. Most are having cash flow problems. Theirproductivity is low, unit costs are high, and their management, overstaffingproblems, and susceptibility to bureaucratic manipulation and interference areon a level with other manufacturing SEEs. The Government recognized that itis also essential to improve the management structure and efficiency of

organizations with agroprocessing responsibilities such as EBK, TSEK, TYT, andSEKER, thus, these were also included within the purview of the recentlypassed SEE reform legislation.

7.32 At the level of strategy, the Government intends to continue theweeding out of inefficient firms, which this study fully endorses. Exportincentives should be continued for a few more years to assist companies withthe large start-up costs incurred as they attempt to enter foreign markets.Eventually, however, and after a firm foothold has been established in foreignmarkets, the progressivity of these incentives in respect of the dollar amountof a company's exports could be reduced, at least to the agroindustriessubsector. This would provide the smaller, more specialized exports with anoption--effectively denied under the current system--to employ an export houseonly if they feel they could benefit from the service. It might thuslyencourage direct contact between the agroprocessors and purchasing agents fromthe importing countries, which could increase the flow of information andideas, enabling Turkish producers to more efficiently adjust their products,packaging, and marketing practices to suit the changing tastes of their targetmarkets. The discouragement of holding company control of banks would alsofoster more competition.

7.33 The general problems of agroindustries have been fairly wellidentified by Government, especially on the financial side, but theformulation of industry specific strategies to exploit their particulardevelopment potentials and relax constraints awaits further investigation. An

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agroindustries subsector survey during 1984 would appear to have considerablemerit. The T.O.R. of the study should inter alia encompass the industryspecific topics noted in para 7.11 above as well as the general findings ofthis report. It could be used by government in conjunction with the surveysof the milk, meat and feed industries commissioned with Bank assistance forpreparation of a livestock products project, to provide a basis for specificfuture policy actions and the programming of additional investment projects orinstitutional credits for the agroindustries subsector.

7.34 With respect to reform of the parastatal agroprocessors, it would bedesirable to backstop the broad changes in their organization and managementwith technical assistance to improve their production, marketing and financialperformance. Such is already being provided to SEKER under a Bank assistedproject,_ and could be extended to other SEE agroprocessors under atechnical assistance loan which is currently being prepared for Bank financing.

1/ State Industrial Enterprise Finance Project (Loan 1998-TU).

eloaet of the yt3nd Strtey

wEaccives Elesmts of St0tegy Actioi Ppdby StitS Actioa T*eo Actice Iotesd

A. Agrioultal Setot

Agr.culturml Teuilqi Systts Drellp bedchical package tww peimitiy, str cliin, Establish inteaminioairial mgschl lnsetocy of tiog avesarch reulta. EatablUlh id tecijiisriab wokigicto irensitc y tiva ti colid5te md rqeli p tio st eriag cmicls. 1se en t of future requireet prv (SAL V, 3IIP, par 36(iii)b)ispro4e livestock pradec- cmp, sils ad aiamm r:eech Ao ltecixlq atiar. beir carried aut by IU ALtivity ad eecetio eetabliimt. Draft l#gial*tiw. A.roCaciqoy l *o , 755 (_oped)_irketility of hSePtecuts. Im t project(s). Appraisal of Ag. Ectesion & Applied Re_searh

PrOJect (7584) in pacew. Damian providesfor portiel cooolidstion oad rgimaeliatln.

A tUrlbrl tnfoitim qno capability of Establish extsion priorities, Eattbli itert enwetal etaty group to Eatablis intaniniatrsial workingSptLW f in_tioa strarthve, caoliate ad reste. enleting vatesic. approachi r, Sp (SL IV, Sl W, p 36(iii)c)

invurae. regimline dive cup mod estoblijb priorities, exple soys to erpanoil hbadndry sewvie dwugh ad rqirgcli*e divas extnmim snv.., AgreBd dasigr Apric. Extesian 6 Appliedapprlita osi 198 enta ic yts.m D 'l ic t project(e). Ima:b PVOJect (FM58) will iypne TNVrre apprprte aid son _i dascirlwe. atr-qre ees adiatechniqes, etcurgd lick with cqbility, and links wigh rinch._ilb satabludet.

kat;im ttff" to aveoage Turkish mgribsinieas s_anns (e.g. NWC, Iountios to 60cu"pagribaiass. in -o cDial- JlNI 1983). IRC inpot for selectal agribusine reffioad;icd nm. v_reg. set°r study diacummicom

irrigsion Bw_wta Au_t tarical mad Cmti-m to __mic quickly Prearation of detailed _ediu-te - Agree fo t for 1A Itrrptionfinai l capbility of gstating ieMD. Refin in nt panVrin Project (FYt3) provid tl ical C)conction a i_ to project slection mi evmluetiao IA_t project(s). ami t for dslIt of

dwip, catoat _d criteria. Ibeadly _t ue of I a_xes to _it arorecy of m SI coot o_ry lqialatian i n t plan, binieg, iecresdointaio irriatim pria cotractore, i _. UMINt aid tQLl coAs. bittad Co osGultativa Aesably. uw of cttrectr, _emes to

pmojec. Cespltion rts Expan gmacies' tchnical ad incase cost recoqn on DSI andsdhuld be inras fem mfamerns staff. IJ .p t ,ODD be/eerto bt 100,0181 ba/yar

Inst tImniv fo Esablish clar-cut llepe "atiug iatiw ad 1a mw na r.wletias, refomlate ieatiww.Er rtig sipls for radnkug of al "finrm ine wicka syst_

terhad-k priorities, of a f clear incestiwe forproductim/e rtii activiti switdin a gasi cl_e.

Agricultural Credit tysm Improve csp*bility of Itrree cul inet c h Re duce nutivs sIred betin rate of infl- Pfrti l interest rates positiveforal credit "St" to nder elwCtive agricultual ticn A ret Sr agricltur inteet rats,. by ad 1984 (S&L YI, SWparsefficiastly srvaoe credit policy. Eutidalis Ime draft fr _mmck decres for "sIa 35(i)(b)), indnteg agrrt forfore n s ad finaic in titutianal depositories coaporative. aric. interet trte, SrMrMt tolrF expcted incra at villag level. Ourtail acces Crelit projects. IRmy DD Credit Ibtd circular ia Co atudy credit coopeatiw syta ,in invsatnt ad sr sales cooperatives to als stresgcken financial structure aid equity Md actiu plan to ro,isT 1TZB,credit d . Ilocatei for gricultr l credit position of ales coopmtiv. Samend Credit Projct (FM83).

except ide claoctYprmern_nt reuired. Ultimately,establish nan-inflationary mea.for fnci c flu prices. f

atr @ cspsbiliieuk. Revised lC Foundation law mittad to Davlop sd ispleat Proposals toCret alternotive credit ctutil of Miniates. impro efficieny Ed conmtsbility -Matitutio at regiaDl md of sals coopmtiv.; study _mma village leve. to *e them finmncially viable aD

detach dth fro official fin ing.(8)1. IV, SE, pmv 36(iv))

* Stat_nt of dNdlont policies.

- 103 -APPENDIXPage 2

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