The Chairman's Speech at the Assembly / 28 November 2007

Mr. Chairman, Esteemed members of the assembly, members of the press,

On behalf of the Board of Directors, I would like to welcome you to our November assembly meeting. Our guest today is Mr Nazym Ekren, Deputy Prime Minister of Turkey and Minister of State. We would like to thank Mr Ekren for being with us. We would also like to welcome our guest of honor, Ali Co?kun, as well as the Undersecretary of the State Planning Organization and our esteemed Ministers. It gives us great pleasure to have you with us!

This is our first time to come together with our esteemed Minister at an Assembly meeting. We have however been in close contact with him ever since the Justice and Development Party's first term in office. We have met with him numerous times and conveyed to him the problems of our industry and our proposals for solving those problems, as well as familiarizing him with our activities, views and reports.

Mr Minister:

I am well aware of how much importance you attach to the real sector and the sensitivity with which you follow our problems. And, I would especially like to say that, from the standpoint of solving those problems, we regard it as fortunate for us that you have undertaken to be Minister of State in charge of the economy.

Mr. Minister, Esteemed members of the assembly:

We are always saying that significant gains have been made in the Turkish economy since 2002. At the top of the list are the success achieved in GNP and in the fight against inflation and the increased inflows of international direct investment. When we look at those five years on the competitiveness front, however, the gains column unfortunately appears empty. The measures aimed at establishing macro economic stability have certainly impacted positively on our competitiveness. Nevertheless, no improvement has as yet been achieved in the areas of direct concern to the competitiveness of our industry.

In the last five years Turkey has been the country shouldering the heaviest burden of taxes and premiums on employers in the OECD. Starting with electrical energy, the energy we use has been and remains more expensive than that in the countries with which we compete, and it is probably going to become even more expensive in the near future.

Grey activity continues to make up half of Turkey's economy. In spite of all this, our industry nevertheless managed to boost production and be the engine of economic growth during this period thanks to its success in exports. Industrial production in 2002, 2003 and 2004 was up by over 9% annually. Unfortunately however this brilliant period was short-lived, and growth rates fell to around 5% in 2005. Industrial production, which rose by 5.4% in 2005 and 5.8% in 2006, was up by 4.9% in the first nine months of 2007. A fall in growth from around 9% to around 5% means a tremendous loss for both our industry and our economy.

At the same time, when we look at what lies behind growth in exports and industrial production and how such growth is achieved, losses and various social and economic costs again emerge. Under the difficult conditions in which we find ourselves, our industry has sought to keep on producing and to preserve its competitiveness, and it has done so by: employing fewer workers in the name of boosting production, turning to imported inputs which have been made cheaper by the falling exchange rates, going into debt abroad, and thereby incurring exchange rate risk, in order to reduce financing costs, and giving up on making a profit.

And the economic indicators make it clear that this is no mere subjective observation or impression.

With the exception of crude oil and natural gas imports, for example, imports of the intermediate goods used in production were up by 27% in the first nine months of 2007, 18.6% faster than growth in Turkey's imports as a whole.

We all know that this increase in imports of the intermediate goods used in production means a further erosion of our local input producers' capacity for production and employment.

Imports of Intermediate Goods and Developments in Imports of Intermediate Goods, Excluding Crude Oil and Natural Gas Imports(on a Dollar Basis)

At the same time, private sector borrowing outside the financial institutions is rapidly on the rise as our table shows:

Distribution of Foreign Debt (%)

The proportion of such borrowing in the total volume of foreign debt was 40.8% in 2004, 50.5 in 2005, 58.8% in 2006. Now, in 2007, it rose to 61.2% in the first six months. As for the situation in profitability, I would like to draw your attention to the results of our survey of Turkey's top 500 firms, which we have been compiling without interruption for the last 39 years. If we look at a broader slice of time, we see that in the 26 years from 1980 to 2006, the private firms in the ISO 500 experienced their highest return on sales in 1980 at 10.5%. From the standpoint of return on sales, the other top years appear to have been 1987, 1994 and 1995 when this ratio was around 9%. But 1998 was a turning point. Profitability plummeted to 5.6% in one year, never again to rise to its previous level. Average return on sales between 1998 and 2006 was 4.8%.

Return on Sales in the ISO 500 Private Firms (1980-2006) (%)

Taking a look at the change in profitability by sector, again in the context of our ISO 500 survey, we see that if we take 1994 = 100, a large majority of sub-sectors in the manufacturing industry struggled to stay afloat with far lower profitability ratios in 2006. But the most dramatic fall in profitability has been in the textiles, wearing apparel and footwear group whose return on sales dropped to 8.3 in 2006 based on 1994 = 100. This group is followed by electrical machinery and electronics with 19.2 and the automotive sector with 29.2.

Return on Sales by Sector in the ISO 500 Private Firms
(Index number for 2006 based on 1994 = 100)

In the interests of time I won't go into detail. I can't however fail to point out that even more dramatic drops in profitability occurred in the private firms among the second 500, in which small and medium scale enterprises make up the majority.

We regard this decline in profitability as a serious threat to our industry and our economy, and we are therefore urgently trying to draw attention to it. I should also underscore the fact that profitability is not a micro problem that concerns only the enterprises but rather a macro problem of concern to the economy as a whole. How is an enterprise whose profits are falling going to generate funds, how is it going to make new investments, how is it going to create jobs, and how is it going to pay its workers a satisfactory wage?

How are savings ever going to increase in an economy whose enterprises cannot generate sufficient profit and whose workers cannot earn a decent wage?

An economy with insufficient savings is inevitably going to fall hopelessly into debt by having recourse to foreign funds in order to make investments and continue producing. And its current account deficit is inevitably going to widen.

This all becomes clear when we look at the share of private savings and foreign funds in GNP over the last five years. The ratio of private savings to GNP was 25.3% in 2002. In 2006 it declined strikingly to 9.8%, its lowest in the last five years. The share of foreign funds in GNP on the other hand developed in exactly the opposite direction. At 2.6% in 2002, it expanded to a 7.8% share of GNP in 2006. Yes, profitability is falling in our private industrial enterprises. But that's not all of the problem!

Ratio to GNP of Domestic Savings and Foreign Funds (Foreign Savings)
(In Current Prices) (%)

Again, turning to the results of our ISO survey of Turkey's top 500 industrial firms we see that among the private firms surveyed, the share of net indirect taxes in gross value added in 1992 was 10.5%, rising to 31.3% in 2005 and 41.3% in 2006. Such a distortion, such a rate of increase, is not seen in any other economy in the world! We can describe the adverse effect of this high increase in indirect taxes on our industry as follows: The industrialist is forced to turn over to the State a larger and larger portion every year of the scant amount of valued added he works so hard to create. And as the State's share increases, the share accruing to the producer and the worker steadily decreases, which means less investment, less competitiveness and less consumption.

Distribution of Gross Value Added on a Factor Income Basis (Private Firms)

Mr. Minister,

How much longer can Turkey be the country with the highest proportion of indirect taxes among its total tax revenues?

How much longer are we going to wait for our tax system to be rendered just and effective?

How much longer is grey activity going to create unfair competition for our law-abiding industrialists?

I have to say, Mr. Minister, that there is a total consensus among industrialists on the necessity for tackling the black economy. The key condition for this is political will. But it cannot be done without public support. And we, for our part, have always expressed our sincere support for this tackling the black economy, and not a day passes but that we reiterate that support, as we do again today.

We have only one reservation: under the existing tax rates, any initiative to bring the black economy onto the books is doomed to fail. If tax rates are brought down to more reasonable levels, this will facilitate the broadening of the tax base. We see tackling the black economy as very important not only from the standpoint of financial structure but for the future of our industry as well. Because enterprises that operate in the grey area remain outside the system and therefore forfeit their chance to benefit from the financial mechanisms and from opportunities to adapt to global competition. They also do harm to law-abiding enterprises.

Mr. Minister,

In the research we carry out and pass along to our government here at the Istanbul Chamber of Industry we have drawn attention to the necessity for reducing the obligations on employers by at least 5 to 5.5 points so as to create a significant impact on competitiveness. The 60th Government program indicated that the social security premium for employers would be brought down in steps by five points starting in 2008. We were of course pleased by this belated but encouraging development. Recently we have heard other sounds coming our government regarding the starting date for lowering the premium. We remain convinced however that this is a done deal and that the reduction is going to become reality in 2008 as envisaged in the program.

In the context of reducing those obligations, the current 2% unemployment insurance premium obligation on employers should definitely be brought down to 1%. And the high 6% premium imposed on workplaces that employ 50 workers or less should also be reduced. In place of quotas and compulsory obligations, a system based on incentives and voluntariness should be adopted. Some 98% of legally registered work places in Turkey today employ fewer than 50 people, a situation which raises the suspicion that workplaces deliberately keep numbers low in order to evade their legal obligations -- obligations that deter employers from hiring more workers and encourage them to operate in the grey area. These obligations must therefore be reduced! The problem of severance pay must also be solved in an approach that takes into account both worker and employer.

Mr. Minister,

When our Prime Minister was our guest at our first assembly meeting of the year, we described to him in detail all these problems of ours together with our demands. "This year, 2007, is an election year," we said, "and we are not expecting any progress on structural reforms in an election year. We can however concentrate on micro reforms this year and 2007 could be a year of gain from that standpoint."

Besides reducing the obligations on employers, our micro reform expectations include our demands regarding the TRT's share in electricity bills, and the complete lifting of the Resource Utilization Support Premium (KKDF) which is charged on imports of raw materials and machinery as indicated in capacity reports.

As we said then, "Even such isolated measures are going to have a positive effect on our competitiveness." And we added, "Even more importantly. they will raise the morale of our industrialists who are in despair and ready to give up from talking and explaining until they are blue in the face and yet getting no results."

As we approach the last month of 2007, however, unfortunately we see that we have again gotten no results in terms of solving our problems. From the standpoint of both structural and micro reforms, 2007 has been a lost year!

Under the circumstances, appreciation in the YTL has now reached an even more intolerable level from the standpoint of competitiveness. While there has been absolutely no progress on the reforms that could boost our competitiveness, the CPI-based real exchange rate index rose by 188.1% in 2007, its highest level since 1980. Very serious problems are being experienced in production, exports and jobs. Even if nothing can be done about the exchange rate, improvement in other areas has become more urgent than ever. We have come to such a pass today that even instituting the reforms I mentioned earlier may not be suifficient to solve our problems. The patient is on the verge of a coma! New and creative instruments urgently need to be brought in to save his life! Otherwise, we are going to pay an even higher price and enormous losses are going to be in the offing. Support for our exporting industrialists is therefore of vital importance from the standpoint of the economy as a whole. Because, while GNP grew by 43.2% in the last five years, production in the industrial sector rose by 45.6%. As is obvious, growth in the two was parallel. On the other hand, imports in the same period rose by 173% on a dollar basis and by 98.4% in volume. What these figures tell us is that Turkey's economic growth in the last five years was driven by industry, and that industrial growth in turn was export-driven!

Link Between GNP, Production and Exports

The situation appears to be the same in 2007, and the dynamics in the economy point to a similar trend in 2008. Therefore, the heart of our near-comatose patient is exports! And the first emergency intervention must be in this area!

Mr. Minister:

I have tried to paint a picture of the state of our industry. As I said at the start of my talk, important gains have been made in the economy in the last five years, but no solution has been produced for the problems of the real sector. We would like to believe that our government in its second term in office will finally take this up as a top priority and at last resolve the problems of the real sector.

We are expecting a lot in 2008! It should be a year in which concrete steps are taken to solve our problems once and for all. I would also like to say once again that you have raised our hopes for the solution of our problems through your awareness of those problems and your sensitive approach.

Mr. Minister,

Esteemed members of the assembly:

As we frequently try to emphasize, what we say here should not be construed to mean that we expect everything from the Government when it comes to solving our problems and developing our competitiveness. Turkish industry is well aware of its own responsibilities in this area. We are not trying to hide behind either the low exchange rates or the obstacles in front of us. We are endeavoring with all our might to stay in the global competition. Indeed the best proof of this is the success we have already had, and the struggle we have waged despite our difficulties and the absence of any specific industrial policy.

As you know, yesterday we concluded the sixth of the industrial congresses we have organized in our quest to do whatever falls upon us in the global competition to the best of our ability.

The local success stories that we heard at our sixth congress, based on the theme, "Sustainable Competitiveness, Industrial Technology and Innovation", further consolidated the confidence we already have in the dynamism of Turkish industry and of Turkey's private sector.

We were strengthened in our conviction that Turkey is going to become a global player in industry when the obstacles in front of us are finally eliminated.

In the hope that those obstacles will soon be removed and that our industry is going to run faster in the near future, I would like to close by thanking you for your patience and to salute you all once again on behalf of the board of directors!

C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors