The Chairman's Speech at the Assembly / 26 March 2008
Mr. Chairman,Esteemed members of the Assembly,and of the Press,
On behalf of the board of directors I would like to welcome you to our March assembly
meeting. Our distinguished Finance Minister, Mr. Kemal Unakytan, has accepted our
invitation to be with us today and honored us with his presence. We would like to
thank him for joining us. Welcome, Mr. Minister! And welcome to our distinguished
bureaucrats as well! We regard the attention you pay to our meetings as a reflection
of your sensitivity to our industry and its problems, and we thank you for so graciously
accepting our invitation.
As always, today as well we are not only going to listen to your comments with great
pleasure and interest, but at the same time we are also going to listen with the
expectation that solutions will be found for our cumulative problems, and with the
even higher expectation this time of getting results.
Esteemed members of the assembly:
We have said many times that very important gains have been made in the Turkish
economy since 2002. Significant success has been achieved in the fight against inflation,
in growth, and in inflows of international direct investment. Indeed, at this point
it would, I think, not be wrong to say that our distinguished minister's determination
and solicitude have played a very significant role in the preservation of fiscal
discipline.
However, Mr. Minister, when we look at those six years from the standpoint of the
competitiveness of our industry, the gains column unfortunately appears empty. Gains
in the direction of establishing macro economic stability have of course impacted
positively on our competitiveness. But regrettably no improvement has been achieved
in the areas of direct concern to the competitiveness of our industry.
In 2004, 2005 and 2006, Turkey was the country with the most onerous burden of taxes
and premiums on employers among all the OECD countries! Our industrialists are also
paying a far higher price than their competitors for the energy they use! They are
still exposed to the unfair competition created by rampant unrecorded economic activity!
Their resources and opportunities for investment are severely limited! And unfortunately
no improvement was forthcoming in these area between 2002 and 2008.
Not only that, appreciation in the YTL is increasing by the day and has reached
an intolerable level from the standpoint of competitiveness. In spite of all this,
our industry has succeeded in boosting its production and exports. However, annual
growth rates in our industry have been stuck at around 5% for the last three years.
Most recently, the annual increase in industrial growth for 2007 was reported to
be 5.4%.
We point out at every opportunity that production growth rates in the neighborhood
of 5% in this sector, which is the engine of economic growth, are insufficient for
solving Turkey's problems. We of course greet this growth in our industrial production
and exports with pleasure. But the fact that in the background of that growth certain
problems and costs are looming steadily bigger, virtually becoming institutionalized,
casts a shadow over the pleasure we feel.
For a long time we have been attempting to draw attention to these costs which underlie
the apparent figures. We strive at every opportunity to keep the rise in the use
of imported inputs, unemployment and the steady increase in our employment problem,
and the growth in private sector debt on the agenda.
As I pointed out at our assembly meeting last month, our imports came to 170 billion
dollars in 2007. And 123.6 billion dollars of that, in other words 73%, consisted
of imports of intermediate goods. If we remember that our exports in 2007 came to
107 billion dollars, it is quite obvious that our total exports did not suffice
to offset even our imports of intermediate goods.
Exports made under such conditions do not create sufficient value added, nor do
they contribute sufficiently to enriching our country. Our domestic producers of
inputs are being virtually put out of business by this growth in imported inputs.
Mr. Minister:
Can this be the industrial structure, the vision of industry, that we target for
Turkey? Can we be content with this?
Where and how much farther is such an industrial structure going to take us?
Esteemed members of the assembly:
I would like today to bring to your attention another indicator, namely to consider
growth figures from the standpoint of investment expenditures, and to share with
you the picture that emerges here.
If we look at the trend in private sector investment spending since 2002, this rose
by 16.9% in 2002 and 23.7% in 2003, virtually peaking in 2004 at 36.1%. After 2004
we see that the growth rate in private sector investment spending declined step
by step, finally falling to 16.2% in 2005 and to 15% in 2006. When we come to 2007,
growth in private sector investment spending is 0% at the end of the first nine
months. In other words, there is no growth at all!
To better assess the situation, let us look also at investment in machinery and
equipment, a sub-category of investment spending. Investment in this category peaked
in 2004 at 48.2%. Later on, growth in investments in machinery and equipment fell
to 21.4% in 2005 and 12.2% in 2006. And at the end of the first nine months of 2007,
spending on investments in machinery and equipment in the private sector had contracted
by 2%. Private sector investment spending is regarded as a significant indicator
from the standpoint of the continuation of growth. And unfortunately, the picture
that emerges at this point is not very bright. We have to think about the reasons
for this unfavorable development. How is the contraction in investment going to
affect the economy? Why doesn't, why can't, the private sector make investments?
The first answer that springs to mind is that it is unable to generate funds! And
under the conditions of competition in which it finds itself, it is gradually losing
profitability and the capacity to generate funds. Indeed the results of our survey
of the top 500 industrial firms makes this situation crystal clear.
Among the private firms surveyed in the 'ISO 500' top industrial firms, return on
sales, which was around 8-9% in the 1980's and 1990's, fell to an average of 4.8%
in the period from 1998 to 2006. This fall in profitability constitutes a serious
threat to our industry and to our economy! How is an enterprise whose profitability
is falling going to generate funds? How is it going to make new investments? How
is it going to create new jobs? This is exactly what is happening in Turkey! Turkey
is unable to make adequate investments or to create adequate jobs.
Esteemed members of the assembly:
We are constantly repeating that enterprises themselves bear a great responsibility
for boosting profitability and value added. However, we also state at every opportunity
that the responsibility for creating a favorable climate of investment, production
and competition for enterprises lies with the government and economic management.
In this context, it is also the responsibility of governments to create a system
of taxation that is just, effective, readily comprehensible and workable, and that
at the same time supports growth and jobs.
Mr. Minister:
The widespread unrecorded economic activity in Turkey creates unfair competition
for our enterprises that operate within the law and fulfill their obligations. This
is one of the fundamental problems of both our economy and our industry which is
awaiting solution! We have repeatedly voiced the importance and the urgency, indeed
the necessity, of dealing with these problems in all our contacts with our government
over the past six years. We also pointed out in all sincerity that we would lend
all the support we could muster to that struggle. And we reiterate that support
here again today with equal sincerity.
Mr. Minister:
It is an indisputable fact that important work has been done within your ministry
and that many positive steps have been taken. Above all else, you have taken advantage
of the technological possibilities and made it easier for taxpayers to make tax
declarations and payments. At the same time, VAT rates have been lowered in the
textile, health, education, food and tourism sectors. With the new corporation tax
law, companies' taxes on their profits have also been reduced from 30% to 20%.
Simultaneously, in an issue very important for our industry, significant and positive
steps have been taken towards expanding research and development activities and
to developing technology, and a law governing the support of research and development
has been passed in the Turkish Parliament.
We know that you are continuing to work on the income tax law and we hope and expect
that it will result in income tax levels being brought down to more reasonable levels.
All these are truly important steps, and on behalf of our industry we would like
to express our gratitude to you once again for your support of R and D in particular.
However, Mr. Minister, in spite of all these positive steps, as I said a little
while ago, nothing in the nature of a reform which would bring a permanent and fundamental
solution to our tax-related problems has yet been effected.
Turkey is still the country with the highest rate of indirect taxes among total
income taxes! Unrecorded activities continue to create unfair competition for our
law-abiding industrialists! I brought this issue to your attention on our previous
visits as well. I would like to repeat one more time: Among the private firms surveyed
in the ISO 500 top industrial firms, the share of net indirect taxes in gross value
added, which was 10.2% in 1992, climbed to 31.3% in 2005 and 41.3% in 2006. A distortion
of this size, an increase of this magnitude, is not observed in any other economy
in the world!
This means that the industrialist is forced to turn over to the state a larger portion
each year of the scarce value added he takes such pains to create. As the state's
share increases, the share accruing to the producer and the work gradually shrinks,
and this in turn results in less investment, lower competitiveness, and less consumption.
Do we believe these distortions play no role in the failure of investments to grow
to the degree we would like? They do!
Not only that, the investment incentive which had been implemented for years and
played such a crucial role in encouraging investment was eliminated in 2006. We
said at the time that the investment incentive was important, in both its economic
and its psychological dimension, that it encouraged investment in the SME's especially,
that eliminating it was a mistake and that a need would soon be felt to return to
the old way of doing things. And indeed, the falling trend in investment can be
regarded as the outcome of that decision.
Finally, in the leasing sector, raising VAT from 1% to 18% was another move that
impacted negatively on investment decisions in my opinion.
Mr. Minister:
The private sector has taken on the responsibility for growth in the Turkish economy,
and the continuation of growth depends on boosting investment. One of our economic
dailies carries a news item today to the effect that the investment incentive is
going to be brought back!
We are not in a position to judge the truth of that report. But some new and old
mechanisms do need urgently to be brought into play to support investment. At the
same time, industry has driven the economy, and exports have driven industry for
the past five years. And, in a climate in which conditions of competition have not
improved, and at the point the exchange rate has reached today, there is a need
for new instruments to bolster exports. We are compelled to develop creative solutions
for investment, production, exports and jobs. Otherwise, Turkey may encounter problems,
indeed continuing problems, in sustaining her growth, and her finance ministry in
boosting tax revenues.
Esteemed members of the assembly:
As we leave behind the first quarter of 2008, we see that global conditions are
no longer as moderate as they were in the last five or six years. The effects of
the unease that began with the mortgage crisis in the U.S. housing sector are gradually
being felt more strongly, and external shocks are occurring with greater frequency!
Most recently, in the middle of this month a new cold shock wave hit our door. True,
in the face of these fluctuations our economy has successfully passed all the tests
so far. But these relative successes should not lull us into thinking that 'Nothing
can go wrong."
It is indisputable that the Turkish economy is much stronger than it was in previous
years. Nevertheless, it should also not be forgotten that we have fragilities, most
notably a current account deficit that is rapidly approaching 40 billion dollars!
To avoid heart palpitations with every fluctuation, Turkey must finally deal with
the chronic problems of its economy as soon as possible and solve them once and
for all. Structural reforms and micro reforms that will bolster the competitiveness
of our economy and our industry must no longer be delayed.
And so, Mr. Minister:
In January, during the first wave of external shock, you held a press conference
to outline our approach in the face of the global fluctuations. You said that from
now on, as a basic precaution, you intended to stand more firmly by the industrial
sector, which had made the biggest contribution to growth of all sectors since 2002
- those were your words - and to offer special subsidies to the SME's. In our opinion
this is exactly what needs to be done, and what we expect!
But in the period since January, Mr. Minister, there has unfortunately been no concrete
progress on these measures. The contents of the employment package have still not
been clarified! Uncertainty continues to surround the promised 5-point reduction
in employers' social security premiums! And only very slow progress is being made
on the social security reform! In the nine months since the election, the micro
measures to support enterprises have still not been translated into reality. All
of these things need to be swiftly brought to a conclusion.
Speaking of micro measures, Mr. Minister, I would like to bring to your attention
once again the subject of the Resource Utilization Support Fund, which has become
a sore spot between us. And not only to bring it to your attention but this time
to get some results.
Since we are claiming that the Turkish economy is stronger now, and that we have
our public deficits under control - so that our budgetary indicators have also improved
following the latest revision in the growth figures - in our opinion this problem
must finally be resolved. Let us not forget that given the situation we are in,
our industry has a greater need than ever for these little boosters.
Mr. Chairman,
Mr. Minister,
Esteemed members of the assembly:
In a climate in which the global winds have turned harsh abroad while at home the
competitiveness of our industry has been virtually eroded, a climate in which there
is a new risk of double-digit inflation, it is obvious that attention needs to be
focused first on the economy, that the economy must be the first priority! Unfortunately
however politics appears to have taken precedence over everything else recently!
A worrying atmosphere of polarization and tension has arisen! Similar periods of
tension and polarization occurred in the past and Turkey and the Turkish economy
were harmed by them! It could happen again!
To prevent such a possibility, all sectors of society, starting with our government
which bears executive responsibility, should act in such a way as to contribute
to alleviating the tension. Preserving the gains made by our Republic must not be
put into question!
Our nation will survive this process as along as reconciliation is sought through
social solidarity and with common sense and based on democracy, secularism and the
rule of law.
In closing, I salute you all once again on behalf of the Board of Directors in the
hope that we will reach the light at the end of the tunnel even though the way may
be thorny.
C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors