The Chairman's Speech at the Assembly / 30 September 2009

Mr. Chairman,Distinguished members of the Assembly and of the Press:

On behalf of the Board of Directors, I would like to welcome all of you to our September meeting. We would like to thank Minister of State and EU Chief Negotiator Egemen Bağış for accepting our invitation to be with us today. Welcome, Mr. Minister!

Esteemed members of the assembly:

With the month of September we leave behind one year of global economic crisis. As you will remember, the financial crisis, the first signs of which surfaced in summer 2007, worsened in the fall of 2008 when reports of failed banks, companies and mortgages, and of government bailouts, began to come in one after the other. Even Lehman Brothers, a 158-year-old institution that survived the crash of 1929, collapsed unexpectedly in a virtual economic watershed. Question marks and uncertainty regarding the future of the world economy began to snowball, and naturally a basic question in the minds of all of us during that process was how and to what extent Turkey and the Turkish economy would be affected by the crisis.

One year later when we look at the economic indicators, we see that the Turkish economy has unfortunately been quite severely impacted by this crisis which, although it started outside Turkey, has nonetheless become 'our crisis'. The Turkish economy has contracted for three consecutive quarters since the last quarter of 2008.

A recently publicized medium-range plan forecasts that we are going to finish 2009 with a contraction of 6%. According to the latest updated national income series, the rate of contraction in the Turkish economy in the crisis year 2001 was 5.7%! The current crisis thus emerges as the most devastating in recent years. At the same time however it started as a financial crisis, and here in Turkey anyway our banking and financial sector was expected to be hit even harder than it actually has been. (Table 1)

TABLE 1. GDP GROWTH RATES (%)

But the developments were much different from what was expected! Our real sector, especially the industry, was practically devastated, whereas our banking system was not affected that much.

A decrease in the industrial production level was seen for the first time in the August of 2008. The decrease continues, unfortunately, for 12 months, exactly one year without any break. (Graph 1)

Besides the production levels, big losses have also appeared in the employment levels, especially in the industry. The unemployment has reached a record-high level.

The first quarter of 2009 was very negative in terms of industrial production. The second quarter was relatively better. (Table 2)

In the first month of the third quarter, July, the decrease turned out to be 9.2%, which can still be considered as very high but is at least one digit.

In August, the capacity utilization rate, which we can consider as the leading indicator of production, was lower than the previous month. (Graph 2)

GRAPH 1. INDUSTRIAL PRODUCTION (%)

TABLE 2

GRAPH 2. RATE OF CAPACITY UTILIZATION (%)

When we assess all the data together, it appears that the recovery in production is going to be very slow. Nevertheless the Turkish economy, and Turkey, are in need of bigger and more rapid steps, steps she can only make by stimulating industry, the locomotive of the economy. The most recent growth figures have confirmed once again that our industry plays a key role in growth.

In the first, extremely negative, quarter of 2009, value added in manufacturing was down by 20.2% as the economy contracted by 14.3%. In the second quarter manufacturing recovered a little, bringing the fall in value added up to 8.7%, more or less parallel with the 7% contraction in the economy. These data make clear beyond words our industry's crucial role in generating growth. (Table 2)

TABLE 2

When industrial growth figures for the first and second quarters of 2009 are examined a little more closely, another development emerges, namely, that the contraction in value added in the industrial sector is smaller than the contraction in production. While production in manufacturing shrank by 16.9% in the second quarter of 2009, value added contracted by only half that much at 8.7%. What these figures mean is that Turkey's manufacturing industry in the second quarter made efficient use of all its inputs, substantially boosting productivity. In other words, our industrialists, who are struggling to survive under hardship conditions, used the means at their disposal to the best advantage to improve their input/output ratio and clearly deserve a helping hand for making such an effort.

If we continue looking at the growth figures, another, in our opinion very remarkable, development emerges in the second quarter, namely, that while private consumer spending fell by 10.2% in the first quarter of the year, in the second quarter the drop was only 1.2%. In other words, there was an improvement of 9 points in consumer spending. No recovery of this magnitude has been observed in any other item.

The VAT and SCT discounts that were introduced in mid-March to stimulate spending on the domestic market clearly played a key role in this positive development. The growth figures prove that the measures taken did the trick. As we have said from the outset at every opportunity, VAT and SCT not only must continue to be lowered but the discounts must be expanded to all the sectors.

Yesterday I was in New York for an investment conference. I returned this morning. Our Minister of State and Deputy Prime Minister Ali Babacan also attended the conference and we flew back together. I took this opportunity to pass along to Mr. Babacan our views on the VAT and SCT discounts. Turkey suffered enormously from public deficits in the 1990's. Still, we must remember this: In a country like Turkey where indirect taxes make up close to seventy percent of tax revenues, such revenues are going to go down when consumption slows.

In a climate of economic stagnation, many countries resort to broader fiscal policies as a solution. We too may need to revise our notion of fiscal discipline in such a climate. Let me remind you that in the second quarter the VAT-SCT discounts were continued but were narrower in scope. Had this been done differently, with all probability a more positive picture would have emerged in industrial production in July and August, and the recovery trend would have continued on a larger scale.

Mr. Minister:

We are bringing this subject to your attention in the hope that you will lend us your support in the cabinet meetings.

Esteemed members of the Assembly:

As our industry and our industrialists weather one of the most difficult periods in our history, another disaster has, as you know, come knocking at our door. A great natural disaster struck recently in the western region of Thrace, primarily in Istanbul, the heart of the Turkish economy and center of the Turkish manufacturing industry and the face of modern Turkey. There were 4,142 of our Chamber's member firms in the area affected by the flash floods. We contacted those 4,142 member firms immediately on the day of the disaster. Again, on the same day, we got in touch with our Minister of Industry and Trade and our Minister of Housing and Public Works and passed along to them the problems communicated to us by our afflicted members and their request for an urgent solution. At the same time, we stepped up our contacts with Mr. Cemil Çiçek, our Deputy Prime Minister and coordinator of relief efforts. Not only that, we were also continuously in touch with the local administrations in the disaster region.

We passed along these problems at a meeting with Minister of State Zafer Çağlayan, after which a twenty-person team of our Chamber's experts paid frequent visits to the flooded factories to assess the damage to their machinery parks. At the conclusion of our investigation, it was calculated that the damage to machinery is in the neighborhood of 74 million Turkish Liras. But this is only the part relating to the machinery park. The floods also caused huge losses in raw materials, and semi-finished and finished goods in the factories themselves. Istanbul industry is therefore looking at a very hefty bill indeed.

We have sent the results of our damage assessment together with our report to our Deputy Prime Minister Cemil Çiçek and the other relevant ministers. We are going to follow up on the subject and do our best to get results.

Mr. Minister:

We are expecting your support in binding up the wounds of our industrialists hard hit by the flooding. We believe that our government is going to demonstrate sensitivity on this issue. An important first step in this sense was the tax postponement for flood-damaged enterprises, which must definitely be continued. Such government support will go at least some way towards compensating the material losses. It is not however going to bring back the 31 Turks who lost their lives in the floods. The loss of this many lives is distressing and extremely worrying.

Following the disaster the first priority of course is to bind up the wounds. Equally important however is to make sure that such a disaster does not happen again. The necessary measures therefore need to be taken. If Istanbul has become a metropolis vulnerable to flooding, then we all bear a certain amount of responsibility for creating an Istanbul, and a Turkey, that respects nature, obeys the rules, takes measures in advance and is prepared for disaster. Again, all of us bear a responsibility for effecting the intellectual and institutional change this requires.

It is a fact that here in Turkey we sometimes have trouble bringing about, or bringing about in time anyway, the change and transformation we need. As a case in point, the European Union project, which has left its stamp on the last half century of our country's history, beyond its economic and political dimensions, is of paramount importance as a project for comprehensive social transformation on the road to modern civilization.

Indeed, the belief that the journey itself is more important than arriving at the destination stems precisely from this. Following the 2002 elections, our government pursued an extremely active policy towards the goal of full membership in the European Union, putting its signature on an important success like elevating Turkey to the status of a negotiating country.

Since 2005, however, due to factors stemming from both sides, the process has become bogged down and fraught with difficulties. A political leadership that does not look favorably upon Turkey's membership has now gained dominance in the European Union. More than from the technical standpoint, Turkey's full membership is now being considered in political terms, and the right-wing parties in particular are insisting on a privileged partnership. Finally, the recent German elections resulted in gains for the political right, which does not favor full membership for Turkey.

At the same time, the global financial crisis has wreaked serious damage in the Euro region. Rising unemployment due to the crisis have impacted negatively on attitudes towards Turkey's full membership in the EU.

The European Union has failed to effect some of the institutional and political reforms necessitated by the recent wave of expansion. When the global crisis is added to this failure, the European Union appears to have entered a period of difficulty in surmounting its economic and social problems and is having trouble as it focuses on the process both of expanding and of deepening. All these things in turn are making Turkey's job more difficult as well.

Turning now to our country, since 2005 our government appears to have lost its initial drive and determination regarding the European Union, which was virtually forgotten for a rather long time. The updating of the national program in 2008 was therefore an important step towards renewing that determination.

Another important step on the Turkish front was the appointment of a new chief negotiator who can focus exclusively on negotiations with the EU. Mr. Minister, let me say that I find encouraging both your appointment and the attitude you have shown and initiatives you have taken to accelerate the process. As the Turkish private sector, we have from the outset supported the European Union process, which we regard as a project that will finally elevate the Turkish people to the level they deserve. We are going to continue that support from here on out and work together with our government on the road to full EU membership.

In addition to that support, however, we also regard it as our duty to bring to your attention certain issues distress us. First of all, the problems stemming from visas, transport quotas and free trade agreements have still not been eliminated despite the passage of fifty years. The visa requirement for Turkish businessmen, whose goods circulate freely on the European market, must be eliminated. Disagreement on the right to freedom of movement, a point on which legal clarity seemingly cannot be achieved, must be resolved through diplomatic channels and agreements concluded with the EU member countries. It is common knowledge that the European Union has concluded agreements with a number of countries regarding the lifting of visa requirements. If Turkey too could engage in initiatives aimed at concluding such an agreement, and get results, this would have an extremely positive impact on the whole accession process.

It is also common knowledge that harmonization with the EU Acquis Communitaire has placed an onerous material burden on our firms. We of the Istanbul Chamber of Industry are striving to pursue with determination the efforts to harmonize our industry with that of the EU.

Let me also point out that the current unfavorable atmosphere in the EU, just like the apparent disappearance of the subject from our national agenda, are eroding public belief in Turkey's full membership. This is turn is causing our firms to question the changes in legislation. Eliminating the doubts of the Turkish public would therefore make a significant contribution to accelerating our harmonization process.

Yes, on both sides we are now in a period of weakened public and political support. But we do know this, namely, that for Turkey in the long run the European Union is an important anchor in the political, economic and social sense. Turkey should stick to its guns and insist that no alternative other than full membership will be acceptable.

Mr. Minister:

I have tried to sketch out our views in their main lines. Now we need to listen to what you have to say and be briefed concerning the road map for the period ahead. We are therefore especially happy to have you with us today.

Mr. Minister,

Esteemed members of the Assembly:

I have spoken about the negative impact of the economic crisis and the recent floods. I would like to conclude my remarks with hopes for a Turkey that has solved all her problems relating to growth, employment and competitiveness and that is advancing rapidly along the path to bringing her level of prosperity up to EU standards. In closing I 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