The Chairman's Speech at the Assembly / 22 December 2010
Mr. Chairman, Distinguished Members of the Assembly and of the Press:
On behalf of the Board of Directors, I would like to welcome you to our December meeting. As our distinguished Chairman has also said, the guest we had announced for this month's meeting, Mr. Durmuş Yılmaz, the Governor of Turkey's Central Bank, was unable to attend at the last minute and sends his regrets. In our conversation, Mr. Yılmaz expressed his unhappiness about this unforeseen circumstance, which was completely outside his control, and said he looked forward to working with us as soon as possible. We too will take great pleasure in having him with us in the months ahead.
Esteemed members of the Assembly:
Time passes quickly. We bade farewell to the 20th century, and now, when the days when we were excitedly approaching the 2000's seem like only yesterday, we are already about to leave behind the first decade of the new millennium, a decade in which we sustained two major economic crises.
It all began in 2001 with a crisis unique to Turkey. But in the last three years, we, along with the rest of the world, have lived in the shadow of a global crisis that is being described as the most severe in a century. Despite these two massive crises, the first decade of the 2000's has been a period in which major changes occurred in the economy. High inflation had been one of the fundamental problems of the Turkish economy since the end of the seventies. Albeit a little late compared with the rest of the world, Turkey finally made headway in the fight against inflation in the first decade of the 2000's and succeeded in pulling down the inflation rate, which was 68.5% in 2001, to 8.4% in 2007 and 6.5% in 2009. As of November 2010, annual inflation stands at 7.3%.
Another important problem in the Turkish economy was the high rate of government deficits and heavy burden of public debt. On this point too major improvement was achieved between 2001 and 2009 as the ratio of public domestic debt to GDP fell from 66.6% to 34.6%, of public domestic debt to GDP from 57.7% to 13.5%, and of total public debt to GDP from 123.7% to 48.1%.
In the 1990's the public sector expropriated, if you will, a large portion of the country's already scarce savings, leaving no resources for the private sector. The banks were, in effect, in the position of intermediaries for public borrowing. In the post 2001-period, with falling inflation and a decline in the public borrowing requirement, relations between the banks and the real sector were put on a more sound footing.
But one steadily worsening problem of this decade has been unemployment, a problem which is severely exacerbated by crises. Prior to 2001 unemployment in Turkey was around 6%. Post-crisis it neared 10% and stabilized at that level. Then, in the global crisis Turkey's unemployment rate climbed three points to 14%. Since then, as is evident in the medium term program, it appears to have settled at around 11-12%. I should point out here that unemployment is not a problem only in Turkey but has become a grave and persistent problem throughout the world.
Esteemed members of the Assembly:
In the decade we have left behind, the Turkish economy was swiftly and profoundly affected by crises. At the same time, however, we also see that it was able to recover rather quickly in both cases. The Turkish economy contracted by 5.7% in 2001 and by 4.7% in 2009, and only managed to grow by 0.7% in 2008. Our average annual growth in the Republican period has been 4.6%. If we assume 10% growth in 2010, then we will have grown by almost 3.8% a year between 2001 and 2010 despite two major crises.
And industry played a key role in Turkey's rapid recovery from both crises as well as in the growth that was achieved.
Due to a flight of funds, a major devaluation was undertaken in the 2001 crisis when we had a large balance of payments deficit. Interest rates suddenly shot up to around 1000% and inflation soared. But as difficult as the situation in Turkey was, world conditions held steady and we had no trouble finding funds.
At the same time, the domestic market contracted sharply while foreign demand remained strong, and in a climate in which domestic demand dried up almost completely, Turkey's industrialists turned to exports and managed to find a way out both for themselves and for the economy.
As you will recall, our industrial engine of growth managed to expand for 27 consecutive quarters from the first quarter of 2001 to the last quarter of 2008. And in the crisis of 2008-2009, unlike other crises, no balance of payments crisis, major devaluation or sharp rise in interest rates occurred.
In the recent crisis, however, demand had already been stagnant since before the downturn, since May of 2006. Together with the global crisis, foreign demand, especially in our biggest export market, the European Union, also took a blow, and we had trouble even making exports. When domestic and foreign demand alike were choked off, industrial output contracted for 14 straight months.
Despite being choked in both directions, however, Turkish industry did not abandon the struggle in this crisis either, instead expending strenuous efforts to diversify its export markets. At the same time, thanks to the restructuring undertaken after 2001, our banking system stood firm. And a little later, under the impact of the decline in interest rates, the credit mechanism started to function and domestic demand got going again in a big way.
Largely due to that domestic demand, Turkey's industrial output has been on the rise for eleven consecutive months, making a major contribution to the country's continued expansion. Finally, in October production rose by 9.8%.
October is special because it was the first time industrial output began to rise again after an interval of 14 months. Coming on the heels of last year's growth, this is significant and encouraging.
Esteemed members of the Assembly:
In addition to its contribution to growth and to the process of exiting the crises, Turkey's industry in the first decade of the 2000's is also remarkable for the transformation it has effected in moving from a low-technology structure of production to a more high-tech structure, a transformation that is clearly evident in the composition of the country's exports over the years.
At the same time, our survey, "Ten-Year Development Trends 1999-2008 in Turkey's Top 500 Industrial Firms" (aka "ISO 500"), which is based on the results of our annual surveys of the country's top 500 industrial firms, has produced a noteworthy finding in this regard. According to the survey, in ten years the motor vehicle, primary metal, petro-chemical, metal products, and machinery, apparatus and professional instruments sectors increased their share in the ISO 500's net value added created from 55% in 1999 to over 70% in 2008.
As those assembly members who joined with us and followed these developments have seen, the current state of Turkish industry, its place in the global picture and the room for movement this presents were all taken up at our ninth Industry Congress on December 7th and 8th. In particular, the analyses made by our guest speakers, which are important in terms of representing an outside, and therefore more objective, point of view, showed us that, although we have shortcomings, Turkey and we, as Turkish industrialists, are not in a bad place at all, that we have accomplished important things in the last 20-30 years and that we are in a position to aim even higher now.
It gave us special pleasure during our Congress to see Turkey frequently touted as one of the world's shining stars thanks to its strong growth potential and success in recovering from the crisis. In order to go to better places and advance to the next step in industry, it is crucial now that we train our labor force well. The "Specialized Vocational Centers Project 2010 Project" (UMEM) outlined to us by the Deputy Undersecretary of the Ministry of Labor and Social Security is, in that sense, a very significant step at this juncture. We place a lot of importance on that project here at the Istanbul Chamber of Industry, and we are striving to give it all the support we can.
Esteemed members of the Assembly:
As we all witnessed, the integration of our economy with the global economy gathered momentum and our exports increased significantly in the 2001-2010 period. But our imports consistently rose faster than our exports. To wit, our exports, which had come to 31 billion dollars in 2001, rose to a period high of 132 billion dollars in 2008, while our imports, at 41 billion dollars in 2002, soared to 202 billion. That same imbalance continues today.
The vicious cycle of high interest rates, the hot money chasing them, and the over-valued Turkish Lira that marked this period was an important factor in the rapid growth in Turkey's imports. While the over-valued TL eroded the competitiveness of our industry, in particular of our Turkish input producers, it also gave rise to record levels in the foreign trade and current account deficits, which the global crisis then turned into chronic problems.
But the economic recovery brought them to our attention once again in 2010, and in a far more powerful way.
Seeking ways out of the global crisis, the developed countries adopted a recipe for abundant liquidity coupled with low interest. This in turn unleashed a flood of greedy-for-profit short-term funds into the developed countries that were offering higher interest, of which Turkey was one. Together with this influx of funds, these countries' currencies also became over valued, and the expression "foreign exchange wars" was coined to describe this extraordinary situation.
Although the situation has been different recently, the Turkish Lira briefly fell to 1.4 against the U.S. dollar. Appreciation in the TL put a further strain on our competitiveness, eroding it even further, and the question of how to stem the influx of hot money was debated at length. For Turkey to undertake radical interest rate cuts when inflation was still relatively high was a difficult choice. On the other hand, although too much hot money was damaging, the Turkish economy nevertheless needed a certain amount of it, indeed was dependent on it.
As if this weren't enough, the gaping current account deficit, which was rapidly becoming an "Achilles' heel", was another growing risk factor for the economy. In the January-October period the foreign trade deficit widened to 55 billion dollars, and the current account deficit, widening by 288%, rose to 36 billion. As of year's end, it is expected to be in the neighborhood of 43 billion, the highest in our history. Previously, the biggest current account deficit was 41.9 billion dollars in 2008. In that year, however, 37.5% of the deficit was offset by foreign direct investment. At the end of the first nine months of 2010 that ratio was only 12.9%, and we therefore face a serious problem in terms of financing the current account deficit this year.
The quality of that financing aside, however, we have always held the view that a high current account deficit is in itself a risk for the economy. We remain of the same opinion today, and we are voicing the need to implement policies to change that structure.
Turkey's Central Bank, which is one of the most important parties to the issue, has been strongly criticized for its policies beginning with that of high interest rates. In the recent period, we have greeted with pleasure the Central Bank's new approach and policy with regard to the current account deficit and the over-valued TL. Together with price stability, the Central Bank is insisting on the importance of financial stability, starting with the current account deficit, and is taking steps in that direction. Even though we don't expect any miraculous overnight solutions, I should say that we find these steps and the Central Bank's new discourse positive and important as a sign of a change in approach and understanding. I should also point out that these steps taken by the Central Bank are not in themselves going to be enough. Together with all the units of our government and the management of the economy, fully integrated and multi-dimensional policies need to be put in place as soon as possible.
Not only price stability and financial stability, but also production, investment, competitiveness, exports, jobs and of course stability in growth all need to be brought to the agenda as well. We realize of course that achieving all these goals and establishing ideal balances within the rules of, and possibilities offered by, the economy will not be easy and that there are many inter-related variables, such that regulation on one point can have effects on another. Nor do we expect solutions to be produced overnight.
But after the crises we have sustained and the degree of experience we have gained, we believe that Turkey can and must finally demonstrate the ingenuity needed. At the same time, significant gains have been made in certain areas of the economy in the past decade. And we, as industry and the real sector, have supported that process. In economic emergencies we have accepted and supported the priority given to the fight against inflation, to maintaining fiscal discipline, and to restructuring the banking sector. And we assumed that our shortcomings in the area of competitiveness would be eliminated along the way.
It is nevertheless a fact that even though some steps were taken, these ten years have not been put to sufficiently good use by effecting the radical and permanent reforms that would shore up our competitiveness. It is our hope and expectation that 2011 and the decade beginning with it will be different. In order to make good use this time of our "shining star" status, the most important factor, in our opinion, is a strong economy and a strong industry. We have striven for that goal up to now and we will continue to do so with the same resolve from here on out. As the Istanbul Chamber of Industry we have aimed to be a part of the solution. We have put the goal of a Turkish industry high in the global competition at the center of our activities. If I may draw your attention once again to those activities in their main lines: As you know, we are a member of the Enterprise Europe Network under the European Union "Competitiveness and Innovation Framework Program", and as such are responsible not only for Istanbul but for the Thrace region. The purpose of the framework program is to encourage small and medium sized enterprises to open up to the international markets, to undertake joint investments with EU firms, and to take advantage of the superior opportunities offered by the Enterprise Europe Network in the areas of technology, R&D and know-how.
In line with that, we are providing intensive training, arranging bilateral talks and making the latest research available for our SME's to use. We carried out a total of 4.7 million Euros' worth of projects through the Enterprise Europe Network in 2008-2010. And our new, 2.7 million Euro project for 2011-2012 has been accepted by the EU Commission. Our special committee on quality and technology is also pursuing its efforts on the subject of innovation, technology development and R&D.
For two years now our Industry Congresses have been further enriched by innovation exhibitions. We place great importance on collaboration between industry and the universities, and on the coming together of the academic and industrial agenda. Our projects aimed at developing industry-university collaboration between Istanbul Technical University, Yıldız Technical University, Marmara University and Turkey's High Commission on Education is continuing apace. As a result of the projects presented in doctoral and other advanced degree dissertations selected by our industrialists, those dissertations are finally being turned into value added for our economy.
Vocational training is another major heading on our program of activities. We are engaged in efforts in this area jointly with our foundation and through the contributions of our ISO-ISOV special commission on education, and take special pride in our "ISOV Vocational Training Center". Last but not least, yesterday we signed a protocol for a training complex, which will also include a vocational high school, to be built by our Istanbul Chamber of Industry Foundation (ISOV) at Beykoz. At the same time, as part of its concept of continuing education, our chamber is going on with its training programs and seminars aimed at members. In the first nine months of 2010 we held 92 seminars and training programs with a total of 5,095 participants.
Another of the key aims of our projects is to enable our members to take advantage of state and private financing opportunities under the most favorable conditions. Our cooperation with İş Bankası and Türkiye Finans Katılım Bankası and our contacts with Halk Bankası are therefore continuing without pause. Meanwhile we also continue to pursue joint efforts with KOSGEB (Small & Medium Enterprises Development Organization) through the KOSGEB office at our Chamber's headquarters.
Our surveys and publications have become a household name in Turkey and continue to rank high on the agenda; thanks to the contributions of our special committee on the subject, the environment occupies an important place as always among our activities, and our efforts aimed at developing our export markets continue to expand with the contributions of our special committee on foreign trade. Our efforts will continue to expand in 2011 as well with the aim of turning our industry into one with global player status and a structure of production high in value added with intensive know-how and technology content.
Mr. Chairman,
Esteemed members of the Assembly:
In conclusion, I would like to express my hope that 2011 will bring our economy and our industry more investment, more jobs and greater competitiveness, and our country and the world more peace and prosperity.
Wishing you, our esteemed assembly members, and all the members of the Istanbul Chamber of Industry and its staff a very Happy New Year, I salute you once again on behalf of the Board of Directors with my best wishes for health, happiness and success in 2011.
C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors