The Chairman's Speech at the Assembly / 27 October 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 October meeting. We are gradually approaching the end of 2010. Next year, 2011, is going to be an election year for us. On the run-up to the elections, we too feel a need to find out in greater detail about our political parties? views on the economy and our industry, as well, of course, as conveying our own views and expectations to those parties. To that end, our opposition leader, Mr Kemal Kılıçdaroğlu, the Chairman of the Republican People?s Party, is with us today to share his views on the economy, on our industry and on the present and future of our country. We would like to welcome him and thank him for accepting our invitation and honoring us with his presence. Welcome, Sir! It gives us great pleasure to have you with us. As well as our honorable party chairman, I would also like to welcome our distinguished members of parliament and party officials.
Esteemed members of the Assembly:
If we were to remember briefly the performance of our economy and our industry in the ten months of 2010 that we have left behind: In the first six months of the year the Turkish economy grew by an average of 11%. And 5.4 points of the 11.7% growth in the first quarter, and 4 points of the 10.3% growth in the second quarter, derived from growth in the manufacturing industry.
As the figures indicate, our industry in the first quarter once again successfully fulfilled its role as the growth engine of the economy. The trend in the second half is also encouraging. The 8.8% growth in July was followed by 11% in August, putting August growth higher than the 6.5% contraction in the same month last year.
Beyond compensating the earlier loss, the August rate is therefore important as a sign of a transition to growth.
According to figures released yesterday, growth in capacity utilization in the manufacturing industry at 75.3% was the highest since October 2008.
Besides growth and industrial output, the budget is also performing well. All this good news has raised expectations regarding the Turkish economy both at home and abroad. In the medium term program, for example, the growth forecast for 2010 has been raised from 3.5% to 6.8%. The IMF meanwhile has set its growth forecast for Turkey in 2010 even higher at 7.8%.
Despite the positive trend in the Turkish economy, however, the world economy is on an extremely unusual course at present under conditions which are being spoken of as the exchange rate wars. If we are not careful the positive trend has the potential of turning into a series of traps, because the developed countries have adopted a policy of low interest - high liquidity as a recipe for exiting the crisis.
Under the circumstances, developed country funds seeking high gains, aka ?hot money?, have begun to pour into the developing markets, where interest rates are higher. Turkey, whose interest rates are still rather high in comparison with those in the developed countries, is one of the economies most popular with such funds.
We?ve all noticed how the Turkish Lira appreciated as inflows of hot money gathered speed, and how it has fallen from around 1.50 to 1.40 against the U.S. dollar between mid-September and now. Together with the exchange rate, our industrialists? competitiveness in exports has declined as well. Imports have become cheaper, and cheaper imports have begun to put a strain on our Turkish producers? capacity to produce and to create jobs.
In essence, these rates are not new but a repeat of a story we?ve heard, a film we?ve seen, before. A low exchange rate, weak competitiveness, rapid growth in imports, high unemployment, a high rate of borrowing from abroad in the real sector, a large foreign trade deficit and a gaping current account deficit have all left their stamp on the Turkish economy in the post-2001 period, particularly in the years since 2004-2005. As industrialists we tried hard in those years to draw attention to the destruction that the low exchange rate was wreaking on production, exports, employment and the macro economic balances. But either we failed to make ourselves heard, or else no one was listening!
Since the second half of 2008 on the other hand, the global crisis has dominated our agenda. Our industry was hard hit by the crisis and our economy contracted. How fortunate then that exactly one year ago, in October 2009, growth in industrial output was a turning point in our emergence from the crisis. Since December 2009 Turkey?s industrial output has been on the rise for nine consecutive months, and signs of a recovery in the economy are gaining strength.
Together with that recovery however we also see that structural weaknesses in our economy have begun to resurface. On a dollar basis, for example, our exports in the January-September period of 2010 grew by 12% and our imports by 30%. The export-import offset ratio has fallen from 72.7% to 62.7%. Our imports of intermediate goods are up by 32% on the same period last year, accounting for 72% of our total imports. Our total exports in those nine months came to 82 billion dollars, whereas our imports of intermediate goods, energy included, came to 94.1 billion. The exports we made, therefore, did not suffice to meet the cost of the intermediate goods we imported in order to be able to produce.
Again in those nine months, our foreign trade deficit grew by 77% to 48.6 billion dollars. And our current account deficit shot up by 220.3% to 28 billion. Furthermore, our economic management has revised the volume of the current account deficit forecast for 2010 from 18 billion to 39.3 billion dollars.
Yes, when we look at the Turkish economy, we see on the one hand an economy that is being kept afloat by hot money and on the other an economy whose dynamics are being brought down by hot money. How is Turkey going to get out of this dilemma? What should it do? This has been a big topic of debate of late.
Central Bank interventions have not succeeded in stemming depreciation in the Turkish Lira. Lowering interest rates was one of the solutions most frequently proposed. Compared with other countries, interest rates in Turkey are still rather high. That is true. Radical reductions in interest rates would not however appear to be very easy in view of the necessity of fighting inflation insofar as our inflation rate in 2009 was 6.5% and has risen as of September 2010 to an annualized 9.24% on the Consumer Price Index.
In the medium-term program the forecast for annual inflation at the end of 2010 was 7.5% on the Consumer Price Index. Yes, battling inflation is an important issue for Turkey, but for the sake of growth and employment Turkey is also compelled to maintain a high level of competitiveness both in the domestic market and in exports.
At the same time, a structure of growth that is dependent on inflows of hot money and a high current account deficit is not sustainable. In the past we frequently heard the view that the current account deficit is no problem as along as it is being financed. Thanks to the privatizations that have taken place and the hefty inflows of direct investment, we really didn?t experience any problem with the current account, and we probably won?t in the near term. But we do know this: a large current account deficit is a major, a very major, risk for the economy!
So, what should be done? Under existing conditions, the possibility of undertaking radical changes in interest and exchange rate policy would appear rather limited. In our view, to compensate for the damage to Turkey?s competitiveness caused by the low exchange rate, one important tool at our disposal is to rapidly implement the macro and micro reforms that will shore up our competitiveness.
A lack of adequate resources is one of our industry?s fundamental problems. Compared with their counterparts in the U.S., the EU and the OECD, companies in Turkey have far higher rates of debt. And the reason for this is that input costs make up a large portion of production costs. If the costs of energy, labor and financing were brought down to levels equivalent to those in our competitor countries, input costs would be reduced and this in turn would give our industry some breathing space.
The results for 2009 of our ISO 500 Survey of Turkey?s top 500 industrial firms showed what a positive effect even a relative reduction in financial costs could have on profitability and the capacity to generate funds. Energy costs in Turkey are still high compared with those in our competitor countries. An important factor here is the large share within energy costs of taxes and totally arbitrary mandatory contributions, the TRT share in the industrial power bills being a case in point. The share of this contribution, which came to 3.5% of industrial power bills in 2003, has been lowered to 2%. As industrialists, it is our wish that it be eliminated completely.
Although such an arrangement, which can be regarded as being at the micro level, is something we have insisted on for years, unfortunately not one thing has been done. A similar micro arrangement that we have also been bringing up for years is the subject of the Resource Utilization Support Fund (KKDF). Our demand as the Istanbul Chamber of Industry is that this be lifted completely, at least on imports of investment goods.
At the same time, Turkey?s rigid and high-cost labor market constitutes another major obstacle to its competitiveness. Turkey is the country with the most rigid labor laws in the OECD. The way should be paved to greater flexibility in the labor market based on a flexibility-security approach.
Unfortunately no distance has been covered towards solving the problem of severance pay. The tax burden on employers has been reduced since 2007 following a five-point reduction in the employer?s premium and tax breaks aimed at employment. But despite this positive development, there is still a difference of ten points between Turkey and the OECD average.
Turkey ranks 8th in the OECD in 2009 in terms of the tax burden on the employment of a single worker married with children, which stands at 32.6% compared with the OECD average of 26%. A restructuring of accrued taxes and outstanding premium payments was recently brought to the agenda. Yes, an answer needs to be found for our struggling enterprises, but in doing so some support and incentives need to be made available at the same time for those firms that fulfill their obligations and pay their taxes and premiums on time. This is very important from the standpoint of preserving a sense of justice, reinforcing confidence in the system and preventing unfair competition.
Furthermore we believe that tax breaks that reward people who pay their taxes will be more effective than tax amnesties as a way of building a tax system that encourages regular payments. Another key condition for this is that premiums be lowered to levels that are actually payable. Reductions in the premium burden should definitely be pursued in increments. At the same time, the black economy is one of the most pressing issues, and comprehensive tax reform aimed at fighting the black economy must absolutely be put on the agenda.
Mr. Chairman,
Mr. Kılıçdaroğlu and distinguished guests,
Esteemed members of the Assembly:
Various proposals may be tabled and discussed concerning the measures that could be taken to ward off a downward trend in the exchange rates using monetary and fiscal policy as tools. Confronted with such discussions, we insist that, together with such measures, it is very important from the standpoint of our competitiveness that permanent macro and micro reforms also be undertaken. Eliminating our deficiencies in these areas is imperative.
When we look at the world, we see that in the Asian economies the value of the national currencies is low and their competitiveness in exports high. These countries have opted for controlled exchange rate regimes. Apart from that, we see that they differ from Turkey on two more key points: First of all, inflation rates are low in those economies, and, unlike Turkey, they have trade surpluses rather than trade deficits. Nor do they have any current account problems. It is essential that Turkey modify her growth model, which is what drives her foreign trade and current account deficits. For this, we should target a transition to a production model that is knowledge- and technology-intensive and high in value added. At the same time, in order to be able to solve our unemployment problem we are also compelled to develop employment-friendly policies.
We need to frame an industrial policy that will take us to those goals. The macro and micro reforms that we demanded a short while ago are key paving stones on the road to those targets. Enhancing the competitiveness of our firms and alleviating the problem of unemployment is going to impact favorably on our capacity to generate funds and savings. A relative improvement has been noted in unemployment of late. This is encouraging, but it should not be forgotten that our jobless rate is still very high.
Nevertheless, the emphasis we have put on macro and micro reforms should not be construed to mean that we expect the government to do everything. The Turkish private sector is striving to do everything it can to enhance its competitiveness and expand its capacity for both innovation and R&D. Our expectation from the government is that it should shore up our struggle by creating a more suitable macro economic environment for production, investment, exports, employment and competitiveness.
Yes, the Turkish economy has embarked on a process of rapid recovery following the global crisis. Important ground has been covered towards exiting that crisis. We certainly see and acknowledge these things.
From time to time there may be some misunderstandings on this point. I would therefore emphatically stress that our efforts to draw attention to shortcomings should not be perceived as intended to highlight those deficiencies. As I said a short while ago, we are striving to do whatever we can. But naturally we are also going to continue to demand from the government that it do what is incumbent on it, and to point out any shortcomings that we see. We did this in the past and we are doing so today. And I believe it it going to be this way in the future as well. The Istanbul Chamber of Industry is going to continue to draw attention to whatever shortcomings it perceives.
We know from experience that starting from four or five months before an election the agenda is focused entirely on politics and the campaign. Consequently, there is only a very short period ahead of us for the reforms so urgently needed by our industry to be realized. That period must be put to very good use.
I should also say at this point that when our honorable prime minister visited this assembly prior to the previous general election in 2007, we said: ?This is an election year. We are not hopeful for macro reforms, but if we can at least implement some arrangements at the micro level we could keep this year from going completely to waste.? Unfortunately, however, let alone in 2007, we are still awaiting solutions to those same problems all these years later.
Mr Kılıçdaroğlu,
Prior to the general election, it is our view that an important duty and responsibility falls upon you, as leader of the main opposition party, to produce solutions to our competitiveness problems, to make good use, in that sense, of the period up to the election, and, especially, to keep the fundamental problems of our industry, to which I have tried to draw your attention, on the agenda.
As we always say, the industrial sector is the engine of growth. And the catalyst for growth in the service, trade and transport sectors is again industry. Industry means work, it means food! And we should underscore once again the fact that a country on the scale of Turkey cannot solve its problems without a strong industry. Given all this, the figures do not point to a positive development. The industrial sector?s share in GDP, in current prices, was 28.3% in the first six months of 1998. In the first six months of 2010 that share contracted to 19.8%. This is a drop of almost 10 percentage points, and it would be difficult to find another country in a similar situation.
Mr. Kılıçdaroğlu,
I would like to point out that we expect special sensitivity on your part, as leader of the main opposition party, to the structural problems of our industry, both the everyday problems and the problems that are a matter of concern to our economy as a whole.
Mr. Chairman,
Mr. Kılıçdaroğlu and distinguished guests,
Esteemed members of the Assembly:
Two days from now we are going to celebrate the 87th anniversary of the founding of our Republic. In the hearts and minds of the Turkish people that Republic is synonymous with our great leader, Mustafa Kemal Ataturk. And industrialization was one of his highest ideals for the Republic that he founded on the principle of Turkey?s attaining the level of modern civilization. In his own words, he regarded industrialization as one of the highest purposes of the nation. Yes, we have problems. But, out of a country that imported even safety pins, we have created a country that exports industrial products to the four corners of the earth. We have taken our place among the 20 biggest economies in the world today.
Could we have done even better? Of course we could have. Some countries that set out on the road with us have been more successful. But is it an indisputable fact that the industrialization that was created out of nothing in the Republican period is, despite everything, a success story. In real terms the agricultural sector grew 10 times, the service sector 70 times and the industrial sector a total of 192 times between 1923 and 2009! Therefore the biggest contribution to Turkey?s arriving at the point she has attained today came from the industrial sector. As industrialists, we are pleased about, and proud of, the contribution we have made to the development of our Republic. And as Turkish industrialists we, like our forefathers, regard taking Turkish industry to even greater heights as a national purpose for which we strive with all our might.
Yes, we have some important problems. But if we think of states as living organisms, then it is inevitable that the need for development and change will arise in a place that is moving, and that problems too should crop up and proliferate. What is important is that, together with those problems, there is also an ability to solve them. It is at this juncture that a great responsibility falls upon the political establishment and our political parties.
We believe with all our heart that we are going to be able to solve our problems, together and in concert, and arrive at a richer and happier Turkey with higher democratic standards. We look with hope upon the future of our Republic, which was entrusted to us by its founder and the father of our country.
As I conclude my words, I would like to remember the founder of our Republic, the great leader, Mustafa Kemal Ataturk, and his colleagues, and the heroes of our war of liberation and all those who have given their lives for this country, and to bow with respect before their memories.
Lastly, I would like to thank you for your patience, and to congratulate you all once again on the anniversary of our Republic and salute you on behalf of the board of directors.
C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors