The Chairman's Speech at the Assembly / 27 February 2008

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 February assembly meeting. Our speaker at this meeting is our Minister of Commerce and Industry, Mr. Zafer Çağlayan. We would like to thank him for accepting our invitation to be with us today. It is always a special pleasure to have a minister from an industrial background among us, and we are fortunate in that sense today because Mr. Ali Co?kun, the former Ministry of Industry and an Honorary Member of our assembly, is also with us.

Welcome, Mr Ministers! And welcome also to the distinguished bureaucrats who have accompanied our esteemed Minister.

Esteemed members of the assembly: I would like to start my talk by remembering with mercy and gratitude the Turkish soldiers who have fallen in the operation undertaken in Northern Iraq. I offer my condolences to our entire nation and especially to their grieving families.

These losses are a source of deep sorrow for all of us, yet we know that we must submit to these tragedies in order to put an end to the terrorism that has been sapping Turkey's energy for 25 years and has cost the lives of thousands of our soldiers and our people.

We stand by our army, our troops and the families of the fallen with all our hearts.

Esteemed members of the assembly: At this meeting as always we are going to take up the state of our economy and our industry. However, taking our Minister's presence with us as a jumping off point, I would like today to try to look at our industry from a slightly broader perspective than usual, virtually to try to take a photograph of our industry if you will.

Our purpose is to be able to contribute to the production of solutions to our problems in the light of the realities that photograph reveals.

The year 2001 was in many respects a watershed for the Turkish economy. Our photograph is therefore going to focus on the post-2001 period. Following the 2001 crisis our economy embarked on a rapid process of recovery. And high growth in exports has been experienced since 2002.

Exports, which came to 31.3 billion dollars in 2001, 36 billion in 2002 and 47 billion in 2003, rose to 63 billion dollars in 2004. Climbing again to 73 billion dollars in 2005, they exceeded 85 billion in 2006, and in 2007 we closed the year with 107 billion dollars' worth of exports.

Since 2000 industrial goods have also made up more than 90% of our exports, the manufacturing industry's share in 2007 coming to 94.2%.

When we look at manufacturing industry exports by sub-sector, this is what we see:

Wearing apparel, textiles, primary metals, foodstuffs and motor vehicles were the top five sectors in exports in 2000 and 2001. In 2002 machine tools replaced foodstuffs in the ranking.

Wearing apparel and textiles, which had always been the top two, preserved their positions until 2003. But in 2004 the ranking changed.

Wearing apparel was again number one, but land vehicles rose to second place. In the last three years starting from 2005, land vehicles, in other words, the automotive sector, has been Turkey's top sector in exports. In fifth place with a 6.8% share in exports in 2000, the automotive sector has been the top sector in the last three years with a share around 15% -- in 2007 it was 16.8%.

Wearing apparel was in third place in 2007 and textiles in fourth. When we consider these two sectors together, they continue to occupy an important place among our exports. However, while the share in exports of these two sectors was 39.3% in 2000, in 2007 it declined to 22.4%.

In other words, there has been an important change in the ranking from 2001 to 2007! A change that can be discussed in all its positive and negative aspects, in all its dimensions.

Putting this aside for the moment, let us focus on change as a phenomenon. We know that change is usually a difficult and painful process which brings a number of costs in its wake! Therefore change must be managed, to lower those costs to a minimum and to take the gains even further. So, can we say that this is what's happening in Turkey today? We see that while some of our sectors have expanded rapidly in the last five or six years, in some sectors the growth rate has slowed, indeed has declined. Are we going to accept this as a natural development and let it take its own course? Or are we going to be able to develop a plan?

For a start, we must be able to put forward a vision for those sectors, starting with wearing apparel and textiles, that are slowing down but which are of enormous importance especially from the standpoint of jobs. Having made these assessments, let us continue to examine our photograph.

The economic data show that it is industry that has driven the economy in the last six years, and exports that have driven industry. Therefore the success of Turkish industry played an important role in the post-2001 economic recovery. But when we look at the conditions under which our industry achieved that success, an extremely discouraging picture emerges:

The heaviest burden of taxes and premiums on employment in the OECD,

Higher energy costs than our competitors, A rampant black economy, An onerous tax burden, and Scarce and costly financing possibilities.

Unfortunately there was no improvement in these areas from 2001 to 2007.

What's more, rising by the day, appreciation in the YTL has reached an intolerable level from the standpoint of Turkey's competitiveness. In January 2008 the WPI-based real exchange index climbed to 191.1, its highest level in the last 28 years.

Yet when we ask how production and exports grew despite these adverse conditions, the answer is this:

Seeking to sustain production and protect their markets abroad, our industrialists appear to have achieved this growth by Employing fewer workers in order to boost productivity, Turning to imported inputs made cheaper by the low exchange rates, Going into debt abroad by incurring exchange rate risk, and Sacrificing their profitability.

As we always say, these methods to which our industrialists were forced to resort involve a host of social and economic costs.

The quest for productivity and the decline in the growth rate of the labor-intensive sectors reduces our industry's employment capacity. The latest figures published, for example, have shown that employment in the industrial sector contracted by 1.2% in November 2007 for the first time since 2003.

This is a figure to which we need to be very sensitive and to monitor closely!

In principle, the figures for November 2007, besides a loss of industrial jobs, point to a deepening of our unemployment problem in general. Unemployment rose by 85,000 in the last year.

The number of jobless was 2,350,000 as of November 2007, yielding an unemployment rate of 10.1%. However, when seasonal unemployment, hidden unemployment, and those able to work but not actively looking for a job are added to this figure, the number of jobless exceeds 5 million and the unemployment rate jumps to 19.8%.

A country's employment rate is the ratio to the total population of those employed in the population age fifteen and up, which is regarded as the working age population. As in the case of the unemployment rate, in the employment rate as well things are not going well in Turkey.

The employment rate, which was 43.5% a year ago, fell to 42.1% as in November 2007. In 1990 it was 53.3%! Rather than boosting her employment rate, Turkey has actually brought her employment rate down by 11.2 points in the last 18 years! The average rate of employment in the countries of the European Union, to membership in which Turkey aspires, is 65%. In other words, 42% in Turkey and 65% in Europe. How are we going to close this gap?

The great excitement created in recent weeks over the mere news, the gist of which never became clear, that Norway was going to accept more migrant workers has revealed in a very clear and heart-breaking way the dimensions of unemployment in Turkey. And the problem is only going to get worse as the squeeze gets tighter in our labor-intensive sectors!

At the same time, we see that our rapidly growing sectors require even more skilled workers. How are we going to turn our labor force, with their average primary school level of education, into more qualified workers? How are we going to give them the skills they need?

Are not the on-the-job accidents at the dockyards which were recently in the news and were so distressing to all of us largely a result of Turkey's shortage of skilled labor?

If we put aside for a moment our findings with regard to employment and unemployment, another noteworthy aspect of our photograph is the growing volume of imports of intermediate goods.

Turkey's imports in 2007 came to 170 billion dollars. And 123.6 billion 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 clear that our total exports were not sufficient to cover even those intermediate goods imports.

And as the use of imported inputs rises, the capacity of Turkey's exports to generate value added is falling!

Sacrificing profitability in the name of sustaining exports results in a gradual decline in value added to lower and lower levels. Exports made under such conditions unfortunately also fail to enrich our country in the way we would like. As imports increase, our foreign trade and current account deficits are also widening rapidly.

Turkey's current account deficit grew by 18% on the previous year in 2007, reaching 38 billion dollars and breaking a new record. The failure to stem the widening of the current account deficit as national growth slows down is noteworthy and definitely something to think about.

As I said a little while ago, over-valuation in the YTL and the high costs of domestic financing are driving businesses to borrow abroad at the cost of incurring exchange rate risk. As a result of this trend, the debts of private sector firms other than financial institutions are rapidly on the rise!

The volume of foreign loans in this category, which came to 30.3 billion dollars in 2001, had risen to 96.7 billion by 2007.

Financing the current account deficit was never such a problem! Yet Turkey has successfully passed the tests up to now even in the face of existing global uncertainties. But we have no way of knowing what the future will bring.

In order not to be unduly upset by every global fluctuation, Turkey absolutely must come to grips with this problem and produce a solution.

But is that all? Exports low in value added, A large foreign trade deficit, A large current account deficit, High unemployment and a low rate of employment, Weak competitiveness--

How are we going to strengthen these weak links in our economy? How are we going to eliminate the uncertainties?

Nevertheless, steadily increasing uncertainties in the global economy in the recent period have made the elimination of these cumulative problems and of the existing fragility even more urgent. In our opinion, the key to solving all these problems is our industrial sector!

Continuation of growth, solving our employment problem and increasing our savings are all closely related to the structure and performance of our industrial sector. True, as production and the use of technology increase, our industry's capacity for employment may decline, but let us not forget that a strong industrial sector is also going to have a positive effect on the services sector and on agriculture, boosting the volume of these sectors as well as their employment capacity!

Without wasting any more time, Turkey must implement a comprehensive industrial policy that will identify her targets and respond to her needs.

Within this framework: Investment policy, incentive policy, Technology policy, Competition policy, and regional development policies need to be taken up one by one, A foreign trade policy also needs to be adopted in line with our targets.

Mr. Minister: Problems relating to production are increasing at both the micro and the macro level! Complaints are on the rise from every sector with regard to both production and exports.

Last week in Ankara more or less the same assessments were made at the meeting of our industrial council which you also attended. The chairmen of our fellow chambers also aired their views and problems. We know that you are very familiar with these problems. We are also well aware that you are making an effort to solve those problems. You said at our council meeting that you are very busy and that your work involves great self-sacrifice!

We know that you are well aware of the the state of our industry and its problems, but we nevertheless see a point in reminding you once again of the urgency of the situation.

The monthly index of industrial production has revealed that industrial production contracted by 1.4% in December 2007. This contraction 23 months after the contraction of 5.2% in January 2006 is a clear sign to us that the problems of our industry have increased significantly.

When we assess the internal and external conditions in the economy, the following picture emerges: if we lose even a little more time, then even those long-awaited reforms may not suffice to solve our problems.

Mr. Minister: I have tried to put forward our thoughts and our approach in their main lines. We are very interested in what you are going to say as a minister with the good fortune and the opportunity to view things from the other side of the table. But, I would especially like to point out at this juncture that we don't see ourselves on the opposite side of the table. We believe that we are on the same side of the table as our minister and our government when it comes to managing the economy.

We have always said that important gains have been achieved in the economy since 2001. We have never stinted on our expression of appreciation for those successes. But if we focus only on the successes, we might lose sight of the whole picture. We are compelled to look also at the problematic areas and at which oversights have resulted in problems. A correct diagnosis is said to be half the treatment. Our purpose has always been to contribute to the correct diagnosis of the problems in our economy and our industry. And our intention today is no different.

We are striving to put forward the state of our industry as objectively as possible, based on the economic indicators. As I said at the outset, whatever appears in the photograph, we are putting it on the agenda.

Mr. Minister: We know that the problems of our industry have built up over the years. But despite everything, together we can succeed in producing and implementing solutions as soon as possible.

We have always said, and we say again now, that we are prepared to give as much support as we can during the solution process.

I said at the start of my talk, we are also aware of your efforts. Similarly, we know that you too are aware of our needs, our problems and our good intentions.

And this enhances our belief and confidence that together we are going to overcome our existing difficulties and any others that may arise in the days ahead.

Mr. Minister, Esteemed members of the assembly: In closing I would like 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