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

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

Welcome to our regular Assembly meeting in the month of March. I greet you with respect on behalf of our Board of Directors.

As of the last several months of 2006, we have been getting together with the leaders of the political parties represented in the Grand National Assembly of the Republic of Turkey and getting briefed on their approaches and programs. Today, we are going to hear the views of Mr. Deniz Baykal, main opposition party leader and President of the Republican People's Party, regarding our country's economy and industry, its today and tomorrow. We thank the President for accepting our invitation and honoring us with his presence. Welcome, Sir. We also welcome the Members of Parliament and party administrators who are with us today together with Mr. President.

Mr. Deniz Baykal had been our guest earlier in September 2003. We are together again after three and a half years. Where do we stand in the economy after three and a half years? It might be more meaningful to put the question like this: What kind of a point did we arrive at in the economy after 2001 - from 2002 to the end of 2006? As we often point out, the most favorable development during this period is doubtless the uninterrupted growth in the economy for five years since 2002. An approximate growth rate of 5.5 to 6 percent is estimated in 2006. If this estimate bears out, the total growth in the 2002-2006 period will be approximately 43 percent. The average annual growth rate is about 7.5 percent. We can chalk up this period in the gains column of our tally sheet when we remember that the average annual growth rate was 4.6 percent during the 83 years from 1923 to 2006.

Mr. Chairman,

Esteemed Members of our Assembly,

The industrial sector has a very great share in the growth achieved during the last five years. Today, nearly 94 percent of our exports consist of industrial products. Our industry's contribution will be seen much more clearly when we note that our exports rose from 31 billion dollars in 2001 to 85 billion dollars at the end of 2006. As industrialists, we are naturally proud of this fact; however, there is another reality to which we have been trying to attract attention at every opportunity: Our exports keep increasing but at what cost? Are we aware of the costs in the background of this visible achievement? Because, as we often declare, our industrialists achieve this increase by employing fewer workers for the sake of pushing productivity higher; by switching to imported inputs made cheaper by the low exchange rate, which involves borrowing from abroad at the cost of taking risks in foreign exchange rates; and most importantly, by giving up their profitability.

These methods that our industry has to resort to in order to continue exporting and competing unfortunately entail certain grave economic and social costs. Our domestic input producers are literally getting wiped out of the market, unemployment is expanding, the capacities of businesses to generate new investment and employment is diminishing as their profitability declines, and our imports are continuing to grow far more rapidly than our exports. As of year end 2006, our volume of foreign trade was 222 billion dollars and our foreign trade deficit 52 billion dollars. When we compare our foreign trade picture in 2006 with that in 2001, we see increases of 172 percent in exports, 231 percent in imports, 206 percent in our foreign trade volume, and 415 percent in our foreign trade deficit. The increase in employment, on the other hand, is merely 3.7 percent.

The economy has grown, our foreign trade volume has expanded but our unemployment problem has not lessened - on the contrary, it has grown bigger. Economic problems have begun to turn into problems of security and order. According to the Turkish Statistical Institution (TÜYK), the number of people without a job was 2,608,000 as of December 2006 and this figure appears to have decreased by 94,000 compared to the corresponding period in the preceding year, as does the rate of unemployment - from 11.2 percent to 10.5 percent. However, the number of unemployed people rises to 5.5 million and the rate of unemployment to the 20 percent levels when we add to the number of open unemployed people - that is, the people that declare themselves to be seeking employment - those that are not in search of a job but are prepared to work, those that have no hope of finding a job, and the underemployment.

Boosting the flow of capital and the inflow of direct investment was among the primary objectives of the economic program. Not much success was achieved in this area between the years 2002 and 2004. A great increase occurred, however, in the inflow of capital due to the developments that took place on the European Union side of things, in particular. The inflow of direct investment also increased. From approximately 2 billion dollars in 2004, the net inflow of direct investment climbed to 19.2 billion dollars in 2006. A very large majority of this amount, though, has gone to the sectors of communications and financial brokerage. Investments in the manufacturing industry are very small. While the amount of direct foreign investment in the manufacturing industry was a scant 1.5 billion dollars in 2006, the amount that flowed into the financial brokerage and communications sectors was 13.6 billion dollars. We do not have any data on how much of this 1.5 billion dollars invested in the manufacturing industry was new investment. But we know that the inflows of direct investment in all sectors are mostly in the nature of existing plants changing hands. Consequently, these inflows have contributed but very little to increasing production capacity and unemployment. What we really need is direct new investment and being able to attract it.

On the other hand, the competitive power of our industry keeps waning in an environment where structural reforms have not taken place and low rates of exchange prevail. Increasing by 9.3 percent in 2003 and 10.4 percent in 2005, the production in the manufacturing industry grew by only 4.8 percent in 2005 and 5.5 percent in 2006. Although the situation in 2006 looks slightly better than in 2005, these rates that are markedly lower than in the previous years are a sign of the pronounced recession pervading the sector for the last two years."

Mr. Chairman

Mr. President

Esteemed Members of our Assembly,

Budgetary performance improved and the problem of public deficit was alleviated after 2001. As you know, however, another deficit - the current deficit - was lodged in the country's agenda. We closed the year 2006 with a current deficit of 31.5 billion dollars. The current deficit in 2002 was only 1.5 billion dollars. The current deficit swelled up nearly twenty times from 2002 to 2006. The total foreign debt of the private sector also grew heavily during the same period: 164.5 percent. Reason? Because the private sector, whose profitability kept declining, and whose capability of generating savings and equity capital diminished as a result, wanted to grow nevertheless and had to borrow. This was a significant factor in the growth of the current deficit. 30.4 billion dollars of current deficit is forecasted in the year 2007.

Yes, the current deficit has been financed so far. No problems were encountered in this because international conditions of liquidity were extremely favorable. No problems were encountered because Turkey resigned itself to paying a very high interest. According to the Economist, Turkey was the runaway champion in the league of high interest-paying countries in 2006. How much longer can we bear such a burden? There are recent views, voiced increasingly frequently, that the global winds that hitherto favored us might turn around. In other words, we may be entering a period when we will be hard put to attract funds despite the high interest. To make matters worse, Turkey is cited as one of the countries to be impacted the most severely by possible global fluctuations.

I remind you that we witnessed this clearly during the fluctuation last May and I say that Turkey must by all means pull back its current deficit to affordable levels. Some countries that were in the same category as Turkey took advantage of the favorable environment in international liquidity very well and managed to use this opportunity for reducing their dependence. China, Brazil, and Russia are better prepared to confront global storms than we are. Unfortunately, we were unable to do this. Today, Turkey has a record foreign deficit. Worse, Turkey has the appearance of a country that sustains its growth by means of the inflow of hot money. The economy grows for as long as hot money flows in from the outside and it becomes stagnant and even shrinks when the inflow of money slows down.

When we look ahead, we see that the developments in the global markets will play the main role in the sustainment of the economic stability and growth that has been achieved. The presidential election and the general elections that are drawing near also bear considerable importance. Would there be an outflow of capital if tension and uncertainty intensified during the approaching pre-election period? This is a question that is nagging many a mind. Election periods may and do naturally lead to some uncertainties in all democracies. But we see too many question marks flying around on the threshold of the presidential election in the Turkey of 2007.

The presidency is the highest office in the Republic of Turkey; it's the summit, a seat of ultimate symbolic importance. As will be remembered, the presidency had a different structure before 1980 but the Constitution of 1982 greatly expanded the powers of the president. In the 25 years that passed since 1982, Turkish politics did not seem inclined work out an amendment or restructuring designed to curtail these powers. Similarly, the political parties law and the elections law were not amended, could not be amended, either. In the existing structure, the president is of key importance in ensuring that the estates function in harmony. Therefore, one can never stress too strongly the importance to our country's peace and stability of the necessity that the person to assume this highly important and meaningful duty must be someone who is capable of ensuring this harmony, and that he should be identified by political and social consensus and be welcomed by the hearts and minds of a very large majority of the people. We here are hoping that things will turn out this way. We are saying that this is how it should be. We wish to believe that Turkey and Turkish politics can deal with this process not by creating an impasse but by creating a solution. If we succeed, Turkey and Turkish democracy will have passed another crucial test and significant ground will have been covered towards maintaining political and economic stability.

Mr. Chairman

Mr. President

Esteemed Members of our Assembly,

As the Istanbul Chamber of Industry, we have always tried to evaluate economic developments objectively. We have never withheld our appreciation for positive developments, things well done, and gains achieved. Likewise, we held it to be our duty to point out mistakes, discrepancies, failures. We believed that this was how we could best fulfill our obligation to our country and our industry. We stuck to this outspoken style of ours also when we hosted our Prime Minister, our Cabinet Ministers, and other esteemed political party leaders. Today, with the same approach, we tried to voice both the gains and the deficiencies because we can correct the mistakes and remedy the deficiencies only by being aware of them and pointing them out. It is also our belief that many problems in the Turkish economy are structural issues that need to be handled with a suprapartisan approach. Foreign-dependent growth is not an issue of the last five years. Turkey has been displaying a growth pattern relying on the inflow of foreign funds for long years. How are we going to overcome these structural problems? On the other hand, we have global competition and the global financial system standing as realities which we cannot avoid and have to learn to live with. How are we going to deal with these realities? How are going to manage to protect ourselves from threats and risks while taking advantage of the associated opportunities? How are we going to make a global-scale player of Turkey in industry?

Mr. President

We would like to hear the answers to these questions today. We listened to your speeches that included very accurate and in-depth economic analyses at the General Assemblies of the Union of Chambers and Exchanges of Turkey (TOBB) in 2005 and 2006. Recently, though, we observe that you have adopted a discourse focusing on political motifs rather than the problems related to production, investment, and competitive power; and that you have been conducting your opposition in that direction, which, perhaps, may have been dictated by the circumstances. On the other hand, the European Union seems to have dropped entirely from the agenda recently. We knew, and we still know, that this journey that had been going on for nearly half a century was still a long way from completion, that the going was to be rough, and that the path could be blocked from time to time. Our conviction is that Turkey should never lose its EU perspective and should carry on with determination and calm.

Mr. President

Your opinions on all these topics are important to us. Today, we would like to hear your views on the economy, the industry, and the EU; and, in particular to get briefed on your program for promoting investment, production, competitive power, and employment - for we believe that a Turkey that cannot produce enough and cannot invest adequately and correctly cannot solve its problems and cannot get rich. Many things about which a lot of fuss is being made today will turn out to be unworthy of discussion in the Turkey of tomorrow that will be producing more, investing more, generating more employment, and having greater competitive power.

As I finish on that hopeful note, I give you my respect once again on behalf of our Board of Directors.

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