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INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONAL DEVELOPMENTASSOCIATION Public Disclosure Authorized

THE DEVELOPMENT PROSPECTS

TURKEY

(in nine volumes) Public Disclosure Authorized

VOLUME V

ANNEX III - THE MANUFACTURI:NG INDUSTRI

MAIN TEXT

December 10, 1971 Public Disclosure Authorized

Europe, Middle East and North Africa Department CURRUCI EQIVATS

After August 9, 1970

US $1.0 = TL 150 TL 1 . US $0.067

TL 1 million = US $66,667

Prior to August 9, 1970

US $1.00= TL 9.00

TL 1 US $0.11

TL 1 million US $111,111

t PREFACE

This report is based.on the findings of an economic mission,,which visited Turkey in April/May 1970. The mission was composed of: Gordon C. Billington (chief of mission),Gene D. Reese (agricultural adviser),Don Mlitchell(consultant, agronomist), Jacobus van Assen (consultant, irrigationengineer), Bertil Walstedt (industrialadviser),, Andrew Freyman (consultant,mining and metallurgy expert), David Beaton (consultant, metal fabricatingand engineeringreport), Antoino Bassili (UNIDO consultant, forest industriesexpert), Milivoje M. Stojancvic (industrialeconomist), Cyril J. Martin (planningadviser - organizationand machinery o:Eplanning), N. Dean Ganjai (IMF Consultant,fiscal adviser), Francesco Gallo (general economist),Hajo Lell (general economist),Josefina Vial (nationalaccounts), Rosalinda Dacumos (statisticalassistant), Zoe! Carson (secretary).

The industrialteam was headed by Mr. Walstedt and the agricultural group by Mr. Reese. The sector volumes of the report also draw on other special studies on Turkey, initiated or undertakenby Bank staff, in related fields, notably textiles (by James Nannery, consultant),petro-chemicals and fertilizers (by Erich Becker-Boostof IFC Staff).

4 IV t S TABLE OF CONTENTS

Page

SU'MI4ARY. ,.... i

1. INTRODUCTION . .. 1...... 1

11. INDUSTRIAL POSITION AND RECENT PERFORMANCE ... 2

A. Historical Perspective...... , 2 B. The Second Plan ..... 4 C. Recent Performance ..... 5 D. Industrial Structure * ...... 16

111. PRINCIPAL BRANCH{ESOF tMANUFACTURING - PERFORIANCE AND PROSPECTS .. 9.9...... 25

A. Textiles .... . O9* .... 26 B. Forest Products...... *..... 32 C. Fertilizers ...... *...... 9 40 D. Petrochemicals and Plastics . ... 44 E. Steel , ...... 50 F. tMachinery and Metal Products Industries. . 54 G. Motor Vehicles and Tractors ...... 59

IV. RESOURCE ENDOWIENT, FACTORS OF PRODUICTIONAND DEVELOPMENT PROSPECTS . .64

A. Resource Endowment...... 9. 9 .. 64 B. Manpower ...... I.... 65 C. Management and Entrepreneurship ...... 66 D. Outlook for Trade in Manufactured Products ...... 66

V. STRPATEGYAND POLICIES FOR INDUSTRIAILGROWTII ...... 70

A. Historical Perspective ...... to 70 B. The Second Plan and SPO ... 71 C. The New Framework for Trade ...... 71 D. Industrial Programming and Project Identification 73 E. Investment and Export Incentive.s 75 F. Small and Medium Enterprise . . 76 C. Location of Industry ... 9999 ...... 77 II. State Enterprise ...... 78 I. Industrial Finance ...... I ..... 81

4 J. Foreign Direct Investment 99 9...... 84 K. Management of Industrial Growth; ...... * ...... 85

This report was prepared by Bertil Walstedt - ii -

APPENDIXES

I. Statistical.Appendix II. Brief Note on Industrial Statistics III. Import projections for Manufactured Products IV. Industrial Objectives of the Second Plan V. Suimary of pre-devaluation system of foreign trade controls and export incentives VI. Summary of Recent Turkish Measures to Support Industrial Growth VII. Brief Summary of Major State Enterprises in the Manufacturing Field VIII. Summary of Recommendations

LIST OF CIIARTSAND TABLES

Charts and Tables in the Text

Charts

1. Net Protection Rates Implied by Price Differences Between Turkish and Imported Products. 2. Population and Imsured Workers, By Provinces, 1958-1960

Tables

1. Value Added in Manufacturing by Major Industrial Groupings 2. Import Dependence and Export Development by Manufacturing Sectors, 1969 3. Exports of Manufactures 4. Manufacturing Investments 1963-1969 5. Structure of Turkish Industry, 1963 6. Sales, by Manufacturing Sector 7. Value Added in St:ateManufacturing Sector f' Production Indices for State Manufacturing Sector 9. Financial Data for Ten Largest State Enterprises in the ManufacturingFie!ld, 1967 10. Role of Small Establishments 11. Value Added in Manufacturing, By Industry Groups, 1969 12. Installe(dCapacity in Textile Industry 13. Size Distribution of Plants in Textile Industry 14. Textile Industry: Projected Capacity Increases and Export Growth 15. Turkisliand Foreign Production Costs for Textiles 16. Production of Forest Industries in 1968 17. Turkish Prices for Forest Products Compared with International Prices - iiI -

18. Targets for Wood Removal 19. DevelopmentTargets for Forest Industries 20. Shares of Major Sectors in Forestry and Forest Industries Contributionto GNP (%) 21. Fertilizer Consumption,1964-1969 22. Projected FertilizerConsumption 23. Demand-SupplyOutlook for Fertilizers,1969-1977 24. PetrochemicalsSector: Recent Additions to Capacity 25. Demand for Petrochemicalsand Plastics in Turkey 26. Aliaga Complex - AlternativeProposal 27. Import Requirementsfor Petro-Chemicals 28. Demand-SupplyOutlook for Steel, 1967-1977 29. Domestic Demand, Production,and Imports of lachinery,1967 30. Motor Vehicles and Tractors: Imports, Domestic Production, and Import Content of Domestic Production, 1962-69 31. Demand for Motor Vehicles and Tractors, 1967-1977 32. Approved Investmentsin EngineeringIndustries, April 1970 33. Import Projections for ManufacturedProducts 1972-1977 34. Turkish Exports of Manufactures 35. ProjectedForeign Trade in ManufacturedProducts, 1967-1977 36. Summary of IndustrialProjects with InvestmentCertificates, April 1970

Tables in the StatisticalAppendix

See Table of Contents in the StatisticalAppendix of this report. i' THE MANUFACTURINGINDUSTRIES OF TURKEY

SUMMARY

Performance i. In 1948-1961,manufacturing output growing at 5% per year barely kept pace with GDP. In contrast, during the 1960's,manufacturing has grown by over 10% per year. An upsurge in private sector investmentscontributed to a steady increase in the share of manufacturingin the total gross national product. A large number of importantnew projects have been put in the pipeline. Foreign industrialparticipations are growing, permitting new departures in e.g. the manufactureof motor vehicles and tractors and in fertilizersproduction. ii. During the last six years (1963-1969),the output of certain "new" industries approximately doubled. Output of machinery quadrupled -- albeit from a very low base in 1963. The second highest growth rate was in steel, reflecting the coming into producl:ionof the first stage of Erdemir's flat products mill on the Black Sea. Though fertilizer production doubled, it is still far from meeting the country'srequirements. ConsideringTurkey's forest resources, the 48% growth rate for pulp and paper productionwas disappointing. iii. For a country its size, Turkey represents an extreme case of import substitution. During the 1960's the position of autarchy was accentuated,with the share of imports in the total supply of manufactured products falling from 15.6% in 1963 to 8.7% in 1969. Most of the import substitutionoccurred in steel, machinery and transport:equipment. iv. Exports of manufacturedgoods are small though they have been increasingby more than 12% per year since 1963. A high proportion of manufactured exports represent processed agriculturalproducts. Nevertheless, increased export incentivesand Government exhortationhave aLso led to exports of more typical factory products, particularlytextiles but also a small volume of refrigerators,radiators, ship repairs, etc. v. Measured by the net protectionactually utilized, Turkey is competitiveover a wide range of consumer goods, mainly non-durables. Here lies a considerableexport potential once integrationwith the Common Market becomes effective. In contrast, competitivenessin durable consumer goods is relatively poor, and it is very low for tractors, motor vehicles, and certain types of machinery. Great variations in the protection needed for different items within the same product group suggest deficienciesin resource allocation in a closed and small market.

vi. Today, growth in manufacturingis handicappedby the all-per- vasive foreign exchange constraint. One tractor company, during the mission's visit, was at a complete standstillbecause of a shortage of imported parts and components. Another serious constraint iE capacity bottlenecks,e.g. in steel, cement, textiles,and electrical equipment. ii -

For the long-term outlook, however, the decisive factor of success or failure will be the orientationand quality of the country's industrial structure.

Present industrialStructure vii. The "new" in-,dustrialmaterials and equipment industries,including steel, fertilizers, auchinery,motor vehicles, tractors,etc. today account for roughly te seameproportion of the total value added by manufacture as traditionalindustries (food, textiles,clothing, footwear, wood products). viii. On an overall basis, imports account for less than 10% of the supply of manufacturedproducts. Manufactured imports consist mainly of metal products and machinery (52%), chemicals (27%) and basic metals (10%). Though import substitUt!onhas been facilitatedby Turkey's varied resource endowment, it is equally a result of past Governmentpolicies which emphasized autarchy. ImporL substitutionin Turkey has been pushed as allend ir itself, sometimeswithout regard for economic implications. ix, In contr-^t,3 and In spite of the country's favorable resource endowment, the process-ngfor export of agricultural,forest and mineral raw materials is un1erdeveloped,a point reinforced by a comparisonbetween Turkey and other countries in a simuilar position of economic development. This reflects the long period of an overvaluedexchange rate, the absence, until recently, of adequate export incentives,and the earlier weakness and lack of self-confidenceof the private sector. x. In 1963 (the latest census year), 238 establishmentsin the public sector produced about 42% of the total value added, 2,774 large and medium-sizedprivate establishments38%, and the remaining 158,000 establishments(engagirg ten workers or less) not quite 20%. State enterprisepredominated ih major potential growth industrieslike basic metals, pulp and papt

shortages have developed. In steel and fertilizers,existing production units are well below an economic size; this is also partly true for the three new paper mills. The State enterprisesin the engineeringfield suffer from dispersion of effort. The lack of competitivenessis accentuated in several cases by inappropriatetechnology and very low labor productivity. In recent years there has been some improvement in efficiency and competitiveness. The total profit:sbefore taxes for six major establishedState enterprisesrose from aboul:TL 113-115 million in 1963 to TL 349 million in 1969. Nevertheless,the cash generation of these establishedenterprises was unsatisfactoryal: the beginning of the period and had fallen to TL 73 million in 1969 (after debt repayments)which compares with total assets of about TL 9 billion.

xiii. Historically,there is some lack of industrialbalance between Western and Eastern Turkey and between Istanbul and the rest of the country. In 1963, Istanbul alone accounted for nearly 40% of t:hevalue added in manufacturingas compared with only 16.5% combined for the three next largest industrial centers (Ankara, Izmir and Adana). Thef eastern three quarters of Turkey (apart from Ankara and Adana) held 63% of the population but only 28% of manufacturingemployment. The proportionsare probably very similar today. This is notwithstandingsubstant:Lal government efforts to decentralizeindustry (e.g. in cement, textiles, lumber).

Strategy,Policies and Execution of the Second Plan

xiv. The Second Plan (1968-1972)embodies the experience and philosophy of the Governmentwhich came to power in 1965. This Plan specifically recognized transition towards a market:economy as essential to efficient resource allocation and competitiveefficiency. Export development would be given equal weight with import substitution. New industries would be built at the outset to viable capacities, if necessaryby selling some of the output on the world market at prices giving some coverage above marginal cost. State enterpriseswould supply industrial materials at world market prices when these materials were to be used for export production.

xv. Private enterprise would be given the main responsibilityfor industrialdevelopment. The Government would assist the private sector in project preparationand would grant sizeable investmentand export incentives. The public sector would concentrateon completing invest- 4 ments already under way and on improving efficiency. In large projects which could not be undertaken by the private sector alone, the "mixed enterprise"approach would be given preference to wholly State-owned enterprise.

xvi. The decisive first step towards reestablishmentof a free market and eventual abolition of rigid controls --- i.e. devaluation -- was taken only several months after the mission left Turkey. Progress towards other objectives was as follows: - iv -

a) Private enterprise. The main State Planning Organization (SPO) instrumentfor guidance and support of private enterprisewas the "investmentcertificate" generally entitling the holder to several privilegesand incentives,most importantlyimport licenses for needed equipment and raw materials but also tax rebates and duty exemption on imported equipment. As of April 1970, no less than 171 certificateshad been issued for projects totalling -L 5.7 billion (at the old exchange rate); fourteen of these were for individualinvestments exceeding Tb 100 million.

b) Exports. Substantialexport incentives,intrinsically only a correctiornfor the overvalued exchange rate, were effective in promotingan array of new exports. Quantitatively,the greatest impact was in the textiles sector.

c) Foreign investments. The change in official attitude is reflected in 62 decrees during the last three years authorizing foreiginrinnufacturing Investments for a total project value of TL 2.9 billion equivalent.

d) State entr1px-ise. Contrary to the Plan objectives, the State manufacturing sector has been expanding its sphere of operations. During the last few years, petroleum refining (including the supply of feedstocks to petrochemicals plants) has become a virtual State monopoly. Major new State projects include Turkey's third `ntegrated steel mill, its first aluminum smelter. its first petrochmicalsplant and its first ammonia plant. Meanwhile, the State is also greatly increasingits stake in the productionof ships, diesel locomotives,automobiles, tractors,and diesel engines, generally in partnership with foreign companies.

Position and Prospectsfor Maior Industries xvii. The textile industry accounts for 22% of Turkey's manufacturing output. But its contribution to the economy can be gauged better by two facts. First, value added is only one-third of the output value, and the vaz:rt bulkl of the inputs are bought locally. Secondly, the industry is widely dispersed regionally -- a trend vigorously supported by the Govern- ment. Trade in textiles, in spite of recent increases, is quite small, with exports totalling only $17.2 million equivalent in 1969. The average productivity of Turkish textile mills is relatively low, with excess manning and poor machine efficiencies. There is a lack of specialization (each cotton mill typically producing a range of 20-40 different types of cloth), and there is excess fin:ishing capacity. Yet, some of the largest private plants have excellent labor productivities comparing favorably even with the United States. In contrast, the equipment and productivity of some 18 state and six "mixed" enterprise establishments in this industry are generally well below the standard set by the better private plants. v xviii. Demand for cotton textiles is expanding rapidly, and Turkey hopes to capture a growing share of trade in the Common Market, with total textile exports increasing to $22.5 million equivalent in 1970 and nearly $50 million equivalentby 1975. Investments 1970-75required to meet increaseddomestic demand and planned exports are estimated at about $380 million equivalent which is about 50% higher on an annual basis than in 1967-69. The export targets are, if anything, too modest in view of the comparativeadvantage of Turkey: good quality cotton, low wages, and geographicalproximity to the Common Market. Yet, Turkey's advantagemust be pushed quickly; some measures to this effect are suggested in this report. xix. The net value added in the forest products industries in 1969 was about 8% of the total value added by all manufacturingindustries but the net value added in forestry was almost twice as high as in forest products industries. The forests are estimated to have provided partial employmentand livelihood for a populationof 4.5 million. Turkey's important forest capital is underexploitedwith many undesirableconsequences (deteriorationof overmature trees, high cost of infrastructurein relation to production,etc.). Perversely,imports of forest products,ait $20 million equivalent,are about five times as high as exports. The fiorestsare nationalized,and pulp and paper production and trade is virtually a state monopoly under the SEKA enterprise. There are also State enterprisesin saw-milling,fibreboard manufacture, plywood production,and the manufacture of wooden boxes, though private enterprise-- generallymedium or small scale -- predominatesin these industries. After the devaluation,Turkish prices for most forest products (other than kraft paper) are quLte competitive but quality presents a major problem for export sales in lumber, sleepers,beech plywood and particle board.

xx. A recent UNDP/FAO report addresses itself to targets and policies for the forest and forest industries. According to that report, the cut of industrialwood should be raised from 4.1 million cu m in 1968 to 14.6 million cu m by 1982. Most of the increasedoutput would be absorbed in Turkey, with exports of forest products growiLngonly to $15 million by 1977 and $25 million by 1982. The attainmenl:of a 14.6 million cu m cut will prove a formidable task. It will call for accelerationof the forest inventory,major improvementsin infrastructure,and new log removals systems. On the industrial side, it will require careful and skilled planning taking into account markets, logisticsof wood and product movement, economies of scale, maximum utilizationof sawmill waste, etc. Progress in the industry will be slow and disappointingunless there is decentralization of effort and modernizationof industry structure. To foster competition and reduce red tape, Turkey might be divided into a series of major forest concessions,each large enough to feed an economic-sizeintegrated forest complex.

xxi. Fertilizer production in 1969 accountedfor at the most 1.5% of net manufacturingoutput. Its value at world market prices averaged about $12.5 million equivalent in recent years, divided more or less equally between phosphate and nitrogen fertilizers. The three major plants are - vi -

all in the State sector. The present raw materials costs for both nitrogen and phosphate productionare excessive. Costs of conversion are also high, reflectingsmall plant scales, equipment procured under tied aid, and managementdifficulties. Since consumptionof fertilizershas been rising very rapidly in recent years, with domestic productionstagnant, imports rose from an average of $8 million per year in 1964-67 to an average of $43 million equivalentin 1968-69.

xxii. Consumptionof nitrogen is projected to rise rapidly. The Tur- kish Governmentplans 1tomeet this demand essentiallyby constructionof new economic-sizeplants making highly concentratedcomposite and simple fertilizers. Altogether five such units are under constructionor planned with total scheduled investmentsexceeding $200 million equivalent. Under proper management,all five proposed fertilizerplants would be profitable. The major doubts concern the managerialcapability of building these new plants, bringing them into operation on schedule, and inducing the Turkish farmers to absorb a rapidly increasingsupply of fertilizers. Increased foreign equity participationcould help resolve these difficulties.

xxiii. The petrochemicalsand plastics industry in Turkey is represented mainly by Petkim, a State Economic Enterprisewhich, as from early 1970, produces polyethylene,PVC, and dodecyl benzene at its new-Yarimcacomplex. Units for the manufactureof synthetic rubber are under construction. A few small plants in the private sector make plasticizerraw materials (phthalicanhydride), paints and lacquers, urea-formaldehyderesins, etc. Together with steel and paper, petrochemicalsrepresented the bulk of planned investmentsin the State manufacturingsector in 1969 and 1970, totallingabout TL 0.5 billion for both years. Neither Petkim's naphtha cracker nor the associatedPVC complex, low-densitypolyethylene plant, dodecyl benzene unit, or various intermediatesplants are of economic size. The synthetic rubber plant, on the other hand, is of reasonable size. xxiv. Present Turkish plans envisage substantialexpansion of the Yarimca complex, constructionof a new large complex at Aliaga, with "downstream"plants to convert basic intermediatesfrom the above complexes into other intermediatesor end products. The new strategy espoused by SP0 is to build-the downstream plants first, phasing in the upstream plants only as a market can be developed for economic size operations, and to push exports through cooperationwith foreign investment partners who might be willing to arrange such exports in order to make early investmentsviable. Even a very carefully tailored plan along these lines would be likely to require investments 1970-75of, say, $500 million. Turkey should carefully analyze these expiensiveinvest'ients in an industry which is highly capital and technology-intensive,and where Turkey may have little comparativeadvantage. xxv. The Turkish steel industry accounts for roughly 8% of the value added in manufacturing. Its impootanceto the economy is enhanced by Turkey's present near-self-sufficiencyin iron ore and coal. Turkish steel expansionhas been lagging behind the rapidly increasingdemand. - vii -

There are two major integrated producers, both in the State sector, plus a number of medium--sizedand small producers in the private sector. Karabik produces non-flat products,with an ingot steel capacity of about 600,000 tons; Erdemir, built with United States aid produces flat products, and has an ingot capacity of 525,000 tons. The only major producer of alloyed steels, MKEK, is also in the State sector. xxvi. An expert study of the future demand for steel would be highly useful. Provisionally,it is estimated that steel consumptionmay triple between 1967 and 1977, reaching 3,2 milliorntons of finished steel in the latter year. Turkey's Third Integrated Steel Mill, sponsoredand partly financed by the USSR, is scheduled t:ostart operations at Iskenderun in 1974, with a first-stagecapacity of about 900,000 tons of non-flat steel (includingsome billets for sale). At the same time, Erdemir would be expanded'fromabout 400,000 tons to roughly 1.2 million tons of finished steel. If both Iskenderun and Erdemir move ahead on schedule,total import requirementsmight reach a peak of about one million tons by 1974 but could fall to half that total or less by 1977. Investmentrequirements for Iskenderun and for Erdemir expansionare estimatedat about $800 million equivalent. xxvii. Turkey is fortunate indeed to have a plausiblepotential for both major steel-makingmaterials - iron ore and coal, with Eregli located virtually on the coal deposits. The recent steep increases in world market prices for coking coal coupledwith the Turkish devaluationhave made Turkish coking coal competitive. Planning and developmentwith respect to both coal and iron ore is however behind schedule. A realistic national strategy for coal would be retractionfrom high-cost mining areas, with the main focus on coking coal production for the steel indusl:ryand use of low-grade co-productsfrom the mining and washing processes for mine- based power stations.

xxviii. In terms of the original investmentand recent conversion costs, the country has made a heavy sacrifice for its ambition to become a substantial steel producer. Nevertheless,the proposed expansion of Erdemir would show adequate economic returns, and the likely selling price after expansion might be only about 15% higher than the expected equivalent import price. The correspondingprotection for the new mill at Iskenderun is likely to be considerablyhigher. In both cases, the combinationof tied aid with inadequateplanning are mainly responsible for the high costs. Erdemir was premature in terms of timing (low initial capacity), Iskenderun is located away from the coal and, even more important,from the major markets.

xxix. The machinery and metal products industries in 1969 accounted for about 11.5% of the total Turkish manufacturingoutput; in 1963-69 machinery productionwas the most rapidly expanding branch of all Turkish manufacturingindustries. Imports, mainly of machinery, were valued at $277.5 million equivalent in 1969 - about 31% of total manufacturedimports. Over three-fourthsof the domestic output came from factories - viii - employing more than 100 persons, including heavy fabricating plants (making items like cranes, rock crushers, boilers, sugar and cement mill equipment) as well as machine tools, small diesel engines and pumps, motor cycles, refrigerators, washing machines, etc. A sizeable number of these factories have modern machine tools, and products are often manufactured to a high standard of technology and finish. Hence, a promising potential for growth exists. xxx. The plans fcor expansion in this sector are particularly ambitious, including facilities for the production of boilers and other pressure vessels, pulp and paper machinery, textile machinery, machine tools, pumps, compressors, valves, as well as parts for the motor vehicle and tractor industries. The total.investment volume for some 33 major engineering industry products granted SPO approval is about TL 1 billion. Considering also expansion of existing lines, the average annual growth in machinery output could approach 20% per year. xxxi. Turkey suffers from an acute shortage of management and skilled labor and the low utilization rate for heavy engineering facilities. Ex- pansion must be t.iiloredto economic feasibility, taking into account the small demand for specialized industrial equipment and the likelihood of substantial fluctuations in that demand. Time must be allowed for the development of managerial and design capability, supplier capacity for items like castings and forgings, etc. and growth of workers' skill and experience. An inventory of metal working capacity, increased sub-contracting of specialized operations, promotion of standardization, and dissemina- tion of new technology and new production methods would be extremely useful. A dynamic industrial association would have a particularly important role in pioneering this type of change. The State sector needs restructuring with a view to better use of its present metal working facilities and the separation, as independent units, of activities not linked by any economic or managerial rationale. Most important, procurement and subcontracting in Turkey by industrialized countries should be vigorously promoted. xxxii. Until recently, Turkish production of motor vehicles and tractors had not gone much beyond the assembly stage. Nevertheless, between 1964 and 1969 the domestic component of tractors, trucks and buses was raised from 20-30% to 52% for trucks and tractors and 70% for buses. The total numberof such vehicles assembled grew from less than 4,000 units in 1962 to about 33,000 units in 1969 and the number of passenger cars assembled from less than 1,000 units to over 4,000. Unfortunately, growth has been haphazard,with no less than 19 companies now engaged in motor vehicle and tractor production. Of these, six produce trucks, another six tractors,while four produce buses and three passenger cars and/or light pick-ups. Imports of motor vehicle and parts rose moderately from about $21 million equivalentin 1964 to about $55 million equivalent in 1969, with passenger vehicles severely rationed. - ix - xxxiii. The second phase of the industry's development (1970-1977)would be highlightedby an increase in the domestic content of truck and tractor manufacture to 85-90% and a major increase in passenger car production to 65,000 units by 1977, by which time the domestic integrationwould be nearly the same as for trucks. The main new items to be produced are engines, transmissions,auto-electric equipment and various cast and forged parts. There are six large projects with an initial investment exceeding TL 100 million. xxxiv. However, there are severe limitat:ionsimposed by a small market, e.g. competitive passengercar manufactureprobably requires a minimum output of 200,000 vehicles per year as compared with the 20,000 cars per year level targeted for 1977 by both Fiat

xxxv. The motor vehicle and tractor industries are severely hurt by shortages of foreign exchange to import materials, parts and components. In the future, it would seem necessary for Turkey to allocate a higher proportion of foreign exchange availabilitiesfor maintenance-of-production imports and a lower proportion for capital-intensiveprojects of low economic priority.

Future Strategy and Major Policies

xxxvi. Turkey has a good potential for industrialization. It has substantial natural resources, excellent low--costiman-power, a rising and increasinglycapable entrepreneurialand managerial class. Recent planning and industrial promotion by SPO has been imaginativeand aggressive. Yet, recent industrializationalso suffers from two weaknesses: expansion on too wide a front, without sufficient regard for economic priorities, and ineffectivecontrol of the investmentsand operations of State industrial enterprises.

xxxvii. IndustrialTargets. At the timieof the Mission's visit, work on the Third Plan had barely started. A tentativeprojection biythe Mission suggested that, under recent policies,nanufacturing imports; would increase by some 50% between 1969 and 1972, with a tapering off after that date to less than $1 billion equivalent as import substitutionin steel, motor vehicles and tractors, fertilizersand petrochemicalswould make its impact. At the same time, manufacturingexports could conceivablytriple between 1969 and 1972, with a further 150% increase to $400 million equivalentby 1977. The main weakness of this perspective is that much oifthe projected x import substitution may not e econoAmical or at least would need to be more carefu.l17 appraised. The export targets, on the other hand, do represent a desirable and plausible goal; the main need here would be for a series of institutional and organizational changes to achieve these targets. xxxviii. The first ,hnse of Turkey's Association Agreement with the Common Market, wvL, rll virtually coincide with the Third Plan, calls for mnjor cha,.6 es ia ludustrial objectives. The first need is for a series of intensive sefLur studiets to determine where Turkey's comparative advantage lies Much of this work could be geared into the Third Plan and assigned to secial cumLittees for each industry, grouping industry members with representatives for the Government and independent experts. These committees should be responsible for proposing both targets and the policies and investme-rtsrequired for the realization of such targets. SPO wouI' c-.orMaate thin work and provide the committees with a general macrz-eo .2:J.c framework and overall criteria for determining economic priorities. xxxix. Sed., ' n drie s,'ouldr,ort have the highest priority. Fi- nancial support sh L-' given to mnrket study. The institutional framework for export-tri E - l1 ojL-.(trade representation, training of personnel, export fmlancin-, market intelligence, etc.). Every effort must be made to remove, by negotiation, artificial and harmful roadblocks to the entry of Turkish industrial pioducts on the Common Market. xxxx. Indu3trial Structure. Changes in the pace and direction of industrialization call for an industrial structure which can respond quickly and flexiJIy tw n ew incentives and new opportunities, make optizmum use of existing res3curcesin entrepreneurial and labor skills and, finally, draw on direct particfpation by foreign companies with respect to capital, know-how, the opening (if new markets, etc. At the present moment, three problems jeopardize al strong and flexible response: uncertainties as to the respective roles of large and small enterprise, conflicting claims of State and private ernterprise, and ambivalent Turkish policies with respect to foreign direct investment. xxxxi. A division of tasks may be envisaged between some 200-300 "large" enterprises which would spearhead industrial growth and bear the prime resporsibility for Turkey's adjustment to the world market and medium and small enterprises which might evolve in specialist trades and as suppliers for new mass production industries (perhaps on the Japanese model). xxxxii. The advantages of large enterprises lie in their cost competitive-- ness in the atriet mrkt sease, whereas small and medium enterprise is generally more labor-intensive and can, in some cases, be more widely dispersed regionally. Thle main requirement for the large enterprises at this moment is a properly functionirngcapital market and an improved supply of managerial and professional personnel. The needs of medium-sized enterprise are more complex, but two poirts may be brought out. First, they would be tremendously helped by the kind of industrial restructuring which - xi - would create independentspecialists, whether for textile finishingor for engineeringtasks such as gear cutting, heat treatment,etc. Secondly, both regional developmentnuclei and, in particular industrialestates, should be carefully studied and evaluated. xxxxiii. Foreign investment clearly has an importantrole to play, particularly as a source of technologicaland management know-how and as a bridge for Turkish export penetration into foreign markets. There is need for hard bargainingwith foreign firms but also an objectiveview of the benefits they could bring and of the conditions needed to attract them. Restructuring (eliminationof dualism between the State and private sectors, strengtheningof medium-sizedindustries) would make Turkish firms valid partners and increase their bargaining power. xxxxiv. It is concluded in the following report that State enterprise in Turkey has been assigned an industrializationrole which it:has not been able to fulfill. Its large claims on available finance and foreign exchange thus far have not been matched by correspondingresu]Lts. The Turkish public is not adequately informed on the economic periormanceof these enterprisesor the efficiency of their investment. In spite of many studies, State IndustrialEnterprises lack a proper institutionalframe- work. The dualism between State and private enterprise- separate markets for factors of production (both labor and management) and separate channels of financingand import allocation- creates antagonism,hampers comparisons of economic and financial performanceand drastically limits the scope for fruitful cooperationand dynamic growth.

xxxxv. Differencesin employment conditions and financing channels as between State and private enterprise should be eliminated at the most rapid rate practicable. Secondly, State enterpriLsemight be essentiallylimited to fields where (a) private enterprise is unlikely to venture (becauseof size or risk of investments),and (b) the same purpose cannot be fulfilled through State financial participation. This might reduce State participation in industrieslike textiles and plywood. A study should be made regarding optimum administrativeand corporate structuresof State enterprises. The main objectiveswould include effective management,eventual restructuring of individual State Enterprises,and more public informationon operations and performance.

xxxxvi. Industrial financing and incentives. A high proportionof even the "large" Turkish enterprises are not of viable size and organization to compete in the Common Market. They need more support in rhe form of feasibilitystudies, project credits, efficientdevelopment bank aid and an organized capital market. The supply of marketable shares and bonds would be greatly increasedby industrial restructuring. The demand for such shares and bonds, in Turkey's early phase of industrialization,can only be mobilized through institutions(banks, insurance companies,pension funds). These institutionsneed strEtngthening,and their legal capability of investment in industrial securities increased. Equally - xii - important,in a new unified view of the Turkish industrialeconomy, preferential allocationiof funds to the State sector (e.g., through the Army Pension Fund or even the State InvestmentBank other than reconstruction and emergency aid) should be gradually eliminated,and all funds channeled through the market into the financially most attractive projects whether in the State or in tht -rl ate- sector. xxxxvii. Special suoport woT.i !- needed for regional industrializaticn and for small and medium enterpr'ise to permit the latter to make their maximum contributiono) an.economic basis (industrialestates, technical assistance, sector and narket studieds).The extent to which special "infant industry" support would be needed for individualindustries (apart from the export industriesalready mentioned)will only become clear after the individual sector studies have keen completed. The sub-sectorreviews of the mining, engine-,r.i.'a;and f£trst industriesundertaken in connection with this report suggest trhstsound growth may be as much dependent upon structuralreform (e.g., of the supply of wood or the improved utilization of existing metal-c:r.s- eapacity, etc.) as upotl general or selective incentives. xxxxviii. Managemener WC 'GlUStriGrowth. The institutional framework for the planning and adminlstr:ation of industrial growth needs revision. In the recent past, SPO has provided the groundwork,ideas and direction. The Ministry of Industry has bkI4 -u-,ncernedwith State Enterprises (a function it shares with the Miis-tTvyof Finance, SPO, the High Control Board, and the St-ate nvestment ank,) with import allocationand with medium and small _-enterprise.Industrial associations, in turn, are weak- ened by their excessive focus on import allocationand by the split between public and private enterprise. xxxxix. With due recognitionfor the role of SPO in overall strategy formulation, control actdsttpervision, the Ministry of Industry should play a more vigorous role in,the pl-aJing and promotion of specifically industrial growth. There is much t? be said for removing the burden of adminis- tering State industrial enterprises from the Ministry of Industry, allowing the Ministry to concentrate on overall planning, monitoring and support of industrial growth. At the same time, the various industrial associations and its central organization, the Chamber of Industries, should be strengthened.

1. Suggestions and Recommendations. For ease of reference, the suggestions and recommendations made in this report are summarized in Appendix VIII. I. INTRODUCTION

1. During the 1960's Turkey achieved substantial industrial growth and increases in investment activity. Turkish trade in manufactured products has always been low. There was a further increase in import substitution during the 1960's while exports of manufactured products, except at the very end of the decade, continued to be abnormally low.

2L The State industrial sector which accounts for nearly one-half of the total manufacturing output, continued to expand its investments in capital intensive industries like steel, fertilizers, pulp andlpaper, etc. In the late 1960's it initiated the construction of large industrial complexes to produce petrochemicals and aluminum, as well as a third integrated steel mill. The private sector which had been held back during the 1950's by the priority given to State enterprise in investment financing and import allocation, showed a remarkable upswing duringt the 1960's. i4ew industrial entrepreneurs emerged on the scene, and many leading private entrepreneurs showed increased willingness and determinatLion to enter the world market.

3. ToTo events of major importance dtLring 1970 confirm Turkey's intent to break its past economic isolation and to move towards a free economy. These are the devaluation of the Turkish lira from a previous rate of TL 9 per dollar to a new rate of Tl, 15 per dollar and the new agreement with the European Economic Comm1unity (EEC) defining conditions for the final integration of Turkey with the Common Hlarket.

4. One of the purposes of the devaltuation is to permit a gradual dismantling of the quantitative restrictions and excessive duties and other charges against imports which have constrained and distorted growth in recent years. In this respect the association agreement between Turkey and the European Economic Community will set the pace. It provides for a 22-year period of transition, though industrial planning must clearly take into account integration in a shorter time perspective. The Comnmunity will completely remove restrictions and duties on all industrial imports from Turlkey, with the exception of certain textile items; these will be removed after 12 years. Turkey will eliminate duties for some categories of industrial products over 12 years and for the remaining categories (representing about 45 percent of present imports from EEC) over 22 years. Quantitative restrictioniswill also be eliminated gradually over 22 years.

5. Turkey is a member, with Iran and Pakistan of the Organization for Regional Cooperation and Development (RCD). The work of that organization in the industrial field has been preparatory and no major results have been aclhieved as yet. As a result all members are expanding, more- or-less simultaneously, over a wide industrial front, jeopardizing division of labor and coordination in industries like steel, aluminum, tractors, automobiles, diesel engines, petrochemicals, etc. whiclh would be highly beneficial to all parties. -2-

II. INDUSTRIALPOSITION AND RECENT PERFORMANCE

A. HistoricalPerspective

6. At the end of the Ottoman Empire, Turkish industry was in a very primitive state. The countrywas lacking in every type of infrastructure, and there were grave deficienciesin education. The little industry that existed was concentratedin the Aegean region. Much of the trade and industry was in the hands of foreigners,or Turks of foreign origin (Greeks, Armenians, Jews). The predominanceof these groups and the privileges granted to foreign capitalwas resented. Eventuallymany in these groups were driven away leaving a wide gap in private entrepreneurialtalent.

7. The AtatUrk Regime which came to power in 1923 believed that growth should be planned, that the state would need to shoulder some of the burden of industrial development, and that industry should be made to spread east- wards. The founding of the £9 Bank in 1924 to assist private enterprise did not lead to major immediate developments. In contrast, the visit by a Russian Mission in 1931 ignited a spark. This Russian Mission recommended the creation of industries to produce steel, chemicals, and textiles. In rapid succession,several State Enterpriseswere formed to engage in industrial activities;including SUmerbank (for textiles) in 1933, Etibank (for mining and power) in 1935, the State Steel Works at KarabUk in 1937, the Pulp and Paper Corporation at Izmit (1938), and the SUmerbank Cement Factory at Sivas (1943).

8. Industrialization outside the State sector gained momentum only in the early 1950's. It was fostered by severe import restrictions and stimulatedby high profits earned in a protected market. The creation of the Turkish IndustrialDevelopment Bank in 1950 also had a far-reachingeffect upon the growth of the private sector.

9. Nevertheless,during most of the 1950's and in the first Five-Year Plan started in 1963 particular emphasis was still placed on State Enter- prises. Several new State textile mills were created in 1949-1957 (virtually one for every major provincial center); some of these were taken over from the private sector (probably because of financial difficulties). The Turkish Cement Corporationwas formed in 1953, and followed a similar policy of regional decentralization(aided by the widespread occurrence of limestone). The growing internal markets in mining, power generation,and steel- making also led to the establishment, in 1950, of MKEK, a general engineering company. It grew initially from an existing armaments industry at Kirikkale in a remote area of Anatolia. Finally, in 1954, the State Nitrogen Corpora- tion was formed, and started with much difficulty the production of nitrogen fertilizers based upon the lignite deposits at KUtahaya.

10. In spite of the substantial industrial activity in the 1950's, manufacturing growth during that decade was not impressive. In fact, the share of manufacturing in total economic activity declined slightly: -3-

1948 1961 : 1961 1967

Net national product (Indices)

at 1948 factor cost /1 100 190 : at 1961 factor cost 100 146

Share of manufacturing(%)

at 1948 factor cost 9.4 9.2: at 1961 factor cost : 14.1 16.7

/1 I.e. essentiallyafter correctingnet national product at market prices for the effect of indirect taxes and subsidies.

At constant prices, net national product grew by about 5 percent per year in 1948-1961and manufacturingbarely kept pace. The reasons for this disappointing performancewere mainly the effect of import controls on growth and efficiency, the running out of easy avenues of import substitution,the underdevelopedprivate sector, and the inefficienciesof the State manufacturing sector.

11. During the period 1961-1967the performanceimproved considerably. Not only did the total national product grow more rapidly (by about 6.5 percent cumulatively)but manufacturingwas a lead sector, with a growth rate of nearly 10 percent per year. Growth in industrial productionresponded to rapidly rising agriculturalincomes and booming constructionactivity, and there was a noticeable developmentof intermediategoods industries (iron and steel, cement, glass and petroleum products). Nevertheless,private manufacturing investmentsdid not develop as rapidly as hoped, due to greater attractivenessof housing investmentsand also to failures to implementmany of the inducementsoriginally stipulated in the First Plan. Public sector investmentsin manufacturingwere held back by difficultiesin project preparation and implementationas well as lack of finance. 1/

12. In 1967, the last year of the First Plan, Turkey presented somewhat of an industrialparadox. The share of manufacturing output in total domestic output (19%) was low. Manufacturedexports were abnormally low, and manufacturedimports lower than might have been

1/ The contributionof industry to national product was much higher in terms of 1961 prices than at 1948 prices. In fact, there was a substantialupward shift in industrialprices compared to other prices, apparently reflecting the cost-raisingeffects of import substitution,including a more rapid rise of income for persons engaged in industry than in most other sectors. expected for a country with Turkey's per capita income or total volume of industrial production. Manufacturing accounted for less than 10% of total employment, and the average value added per worker in manufacturing establishments was onlI $1,000.

13. Against tbhesE IndT-ces of underdevelopment, Turkey had a surpris- ingly differentiated indst-rialstructure. The country produced steel and copper as well as a varitty of engineeringproducts, includingheavy production equipment aud domestic appliances. Both phosphate and nitrogen type fertilizerswere made, though not yet in volumes permitting self-sufficiency, and production of synthetic fibers had been initiated. Also, construction had started on three new integrated pulp and paper mills which, it was hoped, would make the country self-sufficient in the near future. This industrial structure had been shaped by two major constraints: the rigid import control system and the failure to develop exports. These in turn were connected with an overvaluedexchange rate. Behind this protectivewall the Turkish economy had become increasinylvyinsulated from foreign competitionand from world market prices as a , to resource allocation.

B. The Second Plan

14. The Second Plan, 1968-1972,set a target of a 12 percent per annum growth in industrial output 1/ (related to a 7% growth target for the gross national product) and an increase in the share of industrial output in GNP from 16.3 percenit to 20.5 percent in 1972. Steps would be taken to integrate Turkey with the world market and to give the private sector the lead role it the development of manufacturing.

15. More detoiled analysis of the Plan shows that the structure of Turkish industry would shift only mildly towards a more outward orienta- tion; the Plan was drafted before the AssociationAgreement with the Common Market. Instea-, t,e main thrust was to "lead Turkey away from a primitive economic 'tructure in which raw materials are sold and manufactured products bought, to one which is industrialized and where manufacturedproducts are both produced and sold". 2/ Though manufacturing exports were planned to approximatelydouble and their share in total exports grow from 17.5% in 1967 to 27.5% in 1972, even in the latter year they would represent a very small proportion (less than 5%) of the gross value of manufacturingoutput. Employment in manufacturingwas expected to grow by 8.6% per year from about 1.26 million in 1967 to

1/ Industry in this case tucludes mining and manufacturing,plus electricity, gas and water works. In 1967, the approximate shares of these branches in th-.e net industrial product were - manufacturing 88%, mining 8%, electricity, gas and water 4%.

2/ Foreword to the Secotnd F'ive-Year Development Plan. -5-

1.9 million by 1972, with the share of manufacturingin total employment increasingfrom 33.2 to 36.4%. (This future employmentestimate, however, was only a rough statisticalprojection with little analytical support.)

C. Recent Performance

16. Although there is considerabledata on various aspects of the Turkish industrialeconomy, these have not been pulled together :Lntoa consistent and reliable statisticalframe. The latest Census of Manufactures was taken in 1963, there is no industrialproduction index, and no unambi- guous information on the changing role of the State sector. This represents a serious limitation on the analysis, and the conclusions presented in the following paragraphs are subject to a correspondingmargin of un- certainty (See Appendix II). In the mission's view it would be highly desirable for a new industrialcensus be taken as soon as practicable. Meanwhile available data might be pulled together to construct a provisionalindex of manufacturingoutput.

Production and Trade

17. Turkey being only about half-way through the Second Five-Year Plan (1968-1972),the growth of production and trade must be judged in a wider perspective than the Plan. For this purpose, we have generally focussed on the six-year period 1963-69. In terms of output andltrade, the program for manufacturingunder the Second Plan is a projectionof the path already charted in the First (1963-67)Plan. New directions become apparent mostly in the volume and compositionof private manufacturing investments and in approvals of new projects.

18. SIS figures for values added in manufacturing (at constant 1961 prices) show the following changes:

Share of Manufacturing Index Rate of Growth in GNP

1963 100 14.3 1964 107 7.3 14.7 1965 118 9.7 15.6 1966 131 11.0 15.7 1967 148 13.0 16.8 1968 163 10.4 17.3 1969(est.) 179 10.0 (17.5)

Though lagging somewhat behind the targeted rate of 12% per year, manufacturing growth has been steady and relativelyvigorous. The share of manufacturingin GNP which was 14.3% in 1963 was estimated to be about 17.5% per 1969. - 6 -

19. A significant change in industrial structure occurred between 1963 and 1969. The new industrial materials and equipment industries have grown considerably faster than "traditional" (mainly consumer goods) industries, and now account for nearly the same proportion of the total value added in manufacturing. In real terms, of course, the contribution of the new industries is considerably overstated; while prices for consumer goods are generally very competitive, Turkish prices for many industrial materials and equipment are well above the world level. The relevant growth trends are summarized below; for details, see Tables I and II.

Table 1: VALUE ADDED IN MANUFACTURINGBY MAJOR INDUSTRIAL GROUPINGS (billion TL at 1963 prices)

1969 Production Index 1963 1969 (1963 = 100)

Food, beverages, tobacco 28.8 23.9 144 Textiles, clothing, footwear 22.6 21.8 167 Wood and cork 1.8 1.8 173 Other 4.2 4.0 164

"Traditional" 57.3 51.5 155

Pulp and paper 3.3 2.9 150 Chemicals and petroleum 12.2 11.5 163 Non-metallic minerals 5.5 6.1 189 Basic metals 6.8 9.4 240 Metal products and machinery 15.0 18.7 216

"New" 42.7 48.5 196

All industries 100.0 100.0 172.5

20. The table suggests the following principal comments:

(a) the figure for traditional industries is reduced by the relatively low growth rate in food processing; up to now Turkey has not succeeded in developing exports of processed foods in spite of its very promising potential. In textiles, clothing, and leather on the other hand, factory production is believed to have grown by 67-75% above the 1963 level. Among the "new" industries, the forest products sector, in spite of a favorable industrial potential, has thus far failed to serve as a growth point. (b) cement and glass production more than doubled reflecting record construction activity. Though fertilizer production also doubled, it remained at a low level, and came nowhere near meeting the country's requirements. -7-

(c) a tremendouseffort has gone into the productionof basic metals and machinery,with machinery productior. showing the highest growth rate of all sectors - 300%, albeit from a very low base in 1963. This reflects En increase not only in the quantities produced but also in the "depth" of output; thus the average domestic component of agricultural machinery and tractors rose from 24 to 44% and of refrigerators from 60 to 90%. The second highest growth rate was in steel, reflecting t:he coming into production of the first stage of the Erdemir integrated flat products mill on the Black Sea.

21. Industrial growth was propelled mainly by the general. expansion of the Turkish economy including a high rate of growth in fixed investments which nearly doubled between 1963-1969. Imports substitution was not a major factor in the sense of new industries covering rapidly increasing proportions of the country's requirements. The extent of Turkey's industrial autarchy is illustrated in the following table: -8-

Table 2: IMPORT DEPENDENCE AND EXPORT DEVELOPMENT BY MANUFACTURINGSECTORS, 1969 (TL Billion)

Ip. Prod. Exp.

Food, beverages, tobacco .01 25.9 1.45 Textiles, clothing, footwear .09 11.0 .15 Wood and cork products .00 2.7 .04 Others .07 1.5 .06

"Traditional" .17 41.1 1.70

Pulp, paper, and printing .24 1.1 .00 Chemicals 1.78 4.0 .05 Petroleum products .21 4.5 .00 Non-metallic minerals .07 2.1 .01 Basic metals .64 4.9 .14 Metal products and machinery 3.44 9.7 .04

"New" 6.38 26.9 .21

All industries 6.57 68.1 1.92

Share of trade in production 9.7% 2.8%

Some comparative data on share of trade in production (1966) /1

Turkey 13.5% 0.3% Pakistan 17.1% 8.0% Philippines 13.7% 1.9% United Arab Republic 15.5% 4.0% Greece 22.9% 2.1% Portugal 11.2% 11.8% Colombia 12.9% 1.4%

/1 Excluding primary products processing and non-ferrous metals.

22. Imports of manufactures (Table III) are highly concentrated in a few categories: heavy electrical equipment, components for the vehicle industries, industrial machinery, instruments, special chemicals. Exports (Table III) are essentially limited to a few resource-based specialities (sugar, olive oil, animal feedstuffs, copper, ferro-chrome, and fuel oil to balance refinery operations). Only recently, under the influence of improved export incentives, has there been an interest in exporting other items, particularly cotton yarn (of which there is a shortage in Western Europe) and other cotton textiles. While Portugal and Colombia are more -9- extreme cases of import substitution in manufactured products, none of the countries listed has a poorer record than Turkey with respect to export development.

23. Between 1963 and 1969 import subst:Ltution accounted for only TL 5.5 billion of the total growth in the value of industrial production, estimated at TL 42.5 billion, while increased exports contributed only about TL 1.5 billion (Table IV). 1/ Most of the import substitution occurred in steel, machinery, and transport equipment (about 60% of the total), with another 15% accounted for by petroleum refiniLng and rubber. Particularly in the last three industries, however, the net import substitution effect was relatively modest due to the prominence of imported raw materials and components in the cost structure of these industries. Another reason why import substitution had such a modest influence is that Turkey's import dependence in manufacturers was low even at the beginning of the period. The share of imports in the total supply of manu:Eactured products was 15.6% in 1963; continuing import substitution reduced this figure to 8.7% in 1969.

24. Manufacturing exports are very muclh underdeveloped and, before 1969 showed a stagnating trend in the 1960's. The following figures are summarized from Table V in the Statistical Appendix:

Table 3: EXPORTSOF MANUFACTURES (million US$ equivalent)

1963 1969

Processed foods and beverages 24.4 29.5 Textiles 2.7 15.4. Chemicals 2.1 8.9 Petroleum Products 9.0 2.6 Non-ferrous metals 6.2 6.7 Other manufactures 2.4 11.3,

Total manufactures 46.8 74.4

Minerals 10.0 34.0 Agricultural products 311.3 428.4

All exports 368.1 536.8

1/ We have defined "import substitution" as the difference between: (a) 1969 imports for each major industrial category; and (b) hypothetical imports representing the same share of total domestic consumption of each category as in 1963. - 10 -

Three points may be noted. First, non-ferrousmetal exports reached a high $25 million in 1966 and then declined due to the unfavorableex- change rate and lagging mineral development. Secondly,Turkey, in spite of favorable resources,is a net importer of forest products. Thirdly, most of the growth over the six-year period occurred in 1969, e.g. in processed foods, textiles,and chemicals. This growth was spurred by higher export incentives;Government exhortationcontinued in 1970 and has spread to more typical factory products. New business, only partly reflected in 1969 trade returns, includes large orders for textile yarns to the Common Market, refrigeratorsfor Tunisia and shoes for the United States. On a lesser scale, exports of items like cast iron radiators and ceramic plates as well as an increasedvolume of ship repairs may be noted.

25. In our descriptions of the Plan we mentioned that Turkey is trying to extricate itself from excessivereliance upon import substitutionfor industrialdevelopment.. It is paradoxical therefore that Turkey should have largely neglected a promising export potential in processed foods, forest products and metals to invest enormous amounts of foreign exchange in the production of steel, aluminum, fertilizers,or even tractors. An economic argument for this choice would presumably run somewhat along the following lines:

(a) As Turkey develops, to import the bulk of her requirements for basic corrmodities like steel and fertilizers, or even motor vehicles and tractors, would eventually absorb tremendous amounts of foreign exchange.

(b) Apart from the foreign exchange constraints, the country needs to establish a strategic base (of worker and management experience and know-how, and supplier capabilities) to gain industrial momentum. Only after certain minimum capabilitieshad been acquiredwould it be possible to specialize in accordance with comparativeadvantage and to seize opportunities as they develop.

26. These argumeintsare questionable. In any case, the deeper motiva- tion was hardly an economic one but rather more intangiblegoals of national destiny, prestige, and self-respect. This past orientationbecomes important only to the extent that it either (a) has seriouslyweakened or damaged the industrialstructure or (b) for reasons of inertia, past policies are likely to carry over into the future. Both these dangers are present to some extent as we shall see in our discussionof the present competitiveness of Turkish industry and of industrialpriorities. On the other hand, the country now has a good industrialbase to build upon, and the Government is increasingly applying economic criteria to industrial development, and is pragmatically developing new policies to stimulate industrial growth. - 1 1 -

27. One might also raise the question to what extent industrialization policies may be responsiblefor the foreign exchange stringencyin Turkey. An answer to this question goes beyond a study focusing on the manufacturing Eector alone. Nevertheless,two aspects should be brought out. First, heavy investment in new industries has led to serious constraints on industrial, capacity in other industries. Thus expansion in, e.g. cement and electrical equipment has fallen behind requirements. The textile industry is operating on three shifts, and cannot take advantageof excellent export opportunities. Secondly, the foreign exchange stringency has severely reduced imports of industrialmaterials and components. One manifestationis an acute shortage of steel; another illustration is the complete standstill of e.g. an agriculturaltractor plant because of a shortage of imported parts and components.

Present Competitiveness

28. A major test of the industrializationeffort is the extent to which Turkish industries are competitive,and major distortionsin industrial structurehave been avoided. Technically,a comparisonof Turkish cost and prices with the world mafKti raises two problems:

(a) Exchange rate. Unless we select the correct exchange rate, any comparison would be biaE-^-dand misleading. Our comparison is based upon the new rate of TL 15 per dollar. It is a rate adjusted to the 1970 cost structure in Turkey, with some allowance for direct cost-raisingeffects of the devaluation. If we assume that, in the minds of the Turkish au- thorities, this new rate would be consistentwith the gradual demobilizationof trade barriers (both quantitativerestrictions and excessive tariffs),it would come close to the theoreticalconcept of an equilibriumrate. Any judgment on this, of course,would be well beyond the scope of this report, and the comparisons given below should be interpreted with this caution.

(b) Price versus conversion cost. Rather than price we would use a measure of the efficiency or competitiveness of domestic conversion. This is because the final selling price is affected (favorablyor unfavorably)by the relative competitiveness at prior stages of the production chain - i.e. the price of cotton yarn is greatly affected by the price of cotton. To measure conversionefficiency we have calculatednet protection rates for different industries as follows: Net protection = Local element of Production cost Value added in a Free Trade Situation - 12 -

The numerator shows the actual total cost minus the value of all imported materials and services. The denominator shows what the domestic value added would have been had the product been sold at the import price excluding all duties and if the manufacturerhad also been free to import necessary materials, components,or services free of duty.

29. The actual data have been borrowed from a recent Turkish study 1/. On points of details, such a study must be interpretedwith caution - it is subject to problems of comparabilityand accuracy in data collection. There are also some reservationson the methodology used in the study. 2/ Nevertheless,we believe the general picture con- veyed by Chart I (page 13) to be essentially correct. It suggests the followingmajor conclusions:

-Turkey has substantial conipetitivenessover a wide range of conventionalconsumer goods (mainly 'non-durable'). Many of these goods involve labor-intensiveproduction, and most of them (e.g. canned vegetables, cotton, textiles, simple metal products) utilize domestic materials. One would infer a considerable export potential once integrationwith the Common Market has been achieved.

-Competitivenessin durable consumer goods (gas stoves, refrigerators,3/ washing machines, vacuum cleaners)is relatively poor.

-Competitivenessis poor for tractors and, to an even more marked extent, for motor vehicles and certain types of machinery.

-Even in industries; which are, on the whole competitive, certain individual items are produced at a heavy sacrifice in domestic resources. This suggests the need for a detailed technical review of the present structure of protection. The long-run implications of these observed differences between Turkish prices and international prices will become apparent only through the subsequent analysis of the outlook for individualindustries and of major policy issues (Chapters III-V).

1/ Ahmed Aker, Study of the IndustrialPrice Structure of Turkey, (1969) The data are summarizedin Tables VI-VIII. 2/ See footnote to Table VI. 3/ In the case of refErigerators,the mission's sub-sectorreview of the Engineering Industriesshows considerablybetter competitivenessthan the Aker study. 'he reasons for this differencewould need to be explored. NET PROTECTIONRATES IMPLIED BY PRICE DIFFERENCESBETWEEN TURKISH AND IMPORTEDPRODUCTS.

I T E M -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120

OODS AND BEVRAGES - . --___

TEXTILES ------

SOAP

LU1RMIAND SOARD ...

PU LP AND PAPER

URLBEEP.TIRES

PETROLEUM PRODUCTS

NITROGEN FERTIUZRIS

CEMENT

WN11DOWGLAS

GLASS FIBER

GLASS BOTTL.ES

STEEL BARS

FLAT STEEL

STEEL PIPE

HAND TOOLS

RADIATORS(CAST IRON)

PUMPS, COMPRESSORS,...... TsMALI ENGINES

| ATH TUBS

:7 AL,L !'_!E-TRI :C'C .M,. _.,."

DRY RATTETIES

STORAGEBATTERIES

| EAVY CABLE

TS`-IlC- MACHINES

R4OTORCYCLES RADIOS ...... R!FxicERATORS *

WASHING tRACHINES

OIL SLUPNERS134 13

GAS STOVES |4|

VACULUM CLEANERS 33T

TRACTORS, 45HP -. 'a '- …

BUSES

FMNIRUSES .....

HEAVY TRUCKS IRso .... 315

PICK-UPTRUCKS -- 655 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120

Al, -999 4* | o/ur Pl OrrC,,Oj, ArCA . SOURCE- AE4T A--- .,DYITT T> INDAI C K fLR TrAn O TLTU&A... Wr LTIMJTES Cv Cn, -UTPL-MCKOTA LAflc*

'NOTE N-t --l-r-CiOi -ATt A-P...U...IIiAtLV -UA T NC*FWrC tATIO (A) -AM ACT-AL LOCAL P.-Ul.C' COTSs (TOAL COIT CIi.SCAL-t t I_ PORTnO ST(RlLOCC CACPOCC"T .P 050 SnAICIC) o,., t ) TOM COLUt WA Ct WAOUOt0.0CM CMM ASCIir LocaaesL00 rtAI CULT MOON SCUD AT

TAMMlVPTC-ACL P A I-OW-t ACT 0 AClOt TL 15 ... UAS, -D ALL I-P--T-- ITS A. OCA r IOr

TOflO $075

- 14 -

Investments

30. The following table shows the growth in manufacturinginvest- ment 1963-1969. Investmentsin the steel industry have been separately stated because of (a) their great impact in certain years and (b) the ambiguitiesin allocating investmentsin the Erdemir steel mill to either the public or the private sector.

Table 4: MANUFACTURINGINVESTMENTS 1963-1969 /1 (TL billion at 1965 prices)

Share of Manu- Iron and facturing in Steel and NF Private Fixed Investment Total Public Metals /2 Private Share %

1963 2.54 .43 1.23 .88 34.7

1964 2.03 .48 .75 .80 39.5

1965 16.7 1.99 .55 .30 1.14 57.4

1966 17.6 2.47 .83 .20 1.44 58.3

1967 20.4 3.34 1.30 .26 1.78 53.3

1968 21.4 3.77 1.44 .25 2.09 55.4

1969 (Progr.) 4.40 1.65 .22 2.53 57.5

1969 (Actual) /3 (5.28) (2.0)3) (.20) (3.07) (58.0)

/1 For details, by industrial sub-sector, see Table IX. /2 From 1966 on, only steel. (In earlier years, no breakdown was availablebetween steel and non-ferrousmetals.) /3 Current prices. the breakdown by sectors is approximate. SPO shows TL 2.05 billion for public sector and 3.22 for private sector, with no details for iron and steel.

Mtanufacturinginvestments grew by 13% per year between 1963 and 1969. As stipulated in the Plan, an increasing proportionof available investment funds have been channeledinto manufacturing.

31. In the 1950's and in the First Five-YearPlan published in 1962, considerableemphasis had been placed on State enterprise. This emphasis shifted but heavy investments in the Erdemir steel mill in 1963-64 pre-empted much of the investment (as governed mainly by foreign I - 15 - exchange allocations for equipment purchasesJ. The table shows the tremendous drain by a major steel project on a medium-sized developing country's resources. The tendency for the Turkish State to invest in huge industrial complexeswithout much weight to immediate economic returns still persists, as evidenced, e.g. by the investmentsin petrochemicalcomplexes and in an aluminium smelter.

32. From 1964 on, the private manufacturingsector has been given every kind of encouragement,and private investmentstook a sharp upturn in 1965. Manufacturinghas thereforeattracted funds previousLy channeled into real estate and agriculture. There was a lull during the first eight months of 1969 but after the national elections a spectacular outburst occurred. Thus, loan requests to TSKB in eaLrly1970 were running at more than double the 1969 rate. This heavy investment demand was no doubt also influencedby the expectationof devaluation, Nevertheless,there has been no major change in the proportionsof public and private investment in manu- facturingsince 1965.

33. Foreign direct investmentsplayed a relativelymodest role in the 1960's. The total 'new' foreign direct investments(including sectors other than manufacturing)averaged $23 mill.Lonequivalent in 1963-65, 1/ about 10% of manufacturinginvestments. They did not significantlyincrease during 1966-1969 (Table X). There are several reasons for this: reluctance of Turkish Government to permit foreign entry in resource-basedindustries (e.g. forest and mining industries),resistance of Turkish private entrepreneurs to foreign penetrationof traditionalindustries, restrictions on profit remittances,and difficultiesimpeding an associationbetween internationalcompanies and Turkish State Enterprises. Until recently, the main foreign direct investmentswere in oil refining (under a time-limited agreement only), rubber tire manufacturing, ferro-chrome smelting (the foreign partner has now withdrawn), steel pipe manufacturing,(oine of the earliest foreign participations),cable-making (again, the foreign partner withdrew), and a number of vehicle and equipment assembly plants and pharmaceutical packaging plants (representinga! low degree of industrial commit- ment). This picture is now changing under the impact of new policies.

1/ Second Five-YearDevelopment Plan, p. 35. According to information supplied, this figure representsnew capital transfers from abroad minus repatriatedcapital and earnings. In other words, it makes no allowance for earnings and depreciationallowances 'ploughedback' into Turkish industry. - 16 -

D. Industrial Structure

Size and Ownership Pattern

34. The 1963 Census is our main source of Information with respect to Turkey's industrial s It suggests that Turkey's manufacturing industry may be divided -intothree sectors, with different ownership, organization, and industrial characteristics, and often with conflicting ideas on industrial policy. These are the public sector, the large and medium-scale private enterprise stettor,and "small" industrial establishments, using employment of ten workers or less as the criterion for smallness. Structural data for these three sectors are shown below:

Table 5: STRUCTEUREOF TUR(KISHINDUSTRY, 1963 /1

NuTber EmlomenLt Output _ Value added of (th.) (TL billion) (TL bil.) Perc. TL Per XsFffiW- shares Person l1shwceats Employed

Large and medium- sized 3,(12 325,4 19.63 6.64 80.7% 20,400

Public ( 238) (1I3x4) ( 8.67) (3.50) (42.6%o) (25,000)

Private (2,774) (185.0) (10.96) (3.14) (38.1%) (17,000)

Small 157,759 131.7 6.34 1.59 19.3% 12,000

Total 160,771 457.1 25.97 8.23 100.0% 18,000

/1 Statistical Yearbook of Turkey_1968, Tables 186 and 187.

35. Public enterprise accounted for 53% of the value added by "large" mioe2ium-sized establishments and 43% of the total value added by all establishments. The value added per worker was higher in the public sector, due mainly to the higher capital intensity. Thus, in the large and medium- sized establishments group, the public sector accounted for 65% of the installed horsepower of power equipment but only 43% of total employment, It was particularly Jin the new and capital-intensive industries that public enterprise . 'il lir:a;ilvirtually taken over basic metals, pulp and paper and petroleum refining. In contrast private, enterprise was small and traditional. In "new industries", the private sector was pr-omiinent only in metal products and machinery, a sector where manufacturing un-its were small and produced mainly for the local market. - 17 -

Table 6: SALES, BY MANUFACTURINGSECTOR (TL billion)

Subsector Total Private Public "Small" "Larg">

Food 6.7 1.4 3.5 1.8 Beverages and tobacco 2.1 - 0.5 1.6 Textiles, clothing, footwear 5.9 1.6 3.2 1.1 Wood and cork products 1.0 0.8 0.1 0.1 Leather, rubber, printing, etc. 1.3 0.7 0.6 0.0

"Traditional" 17.0 4.5 7.9 4.6

Pulp and paper 0.5 - 0.1 0.4 Chemicals 1.3 0.2 0.8 0.3 Petroleum and coal products 1.1 - - 1.1 Non-metalic minerals 0.8 0.1 0.4 0.3 Basic metals 1.1 - 0.2 1.1 Metal products 2.0 0.9 0.7 0.4 Machinery 0.5 0.1 0.3 0.1 El. machinery 0.5 0.1 0.4 0.0 Transport equipment 0.8 0.2 0.2 0.4

''New" 8.8 1.6 3.1 4.1

Grand Total 26.0 6.3 11.0 8.7

36. Since 1963, industrial power has become more concentrated. In 1968 nine large State manufacturing concerns had combined sales of TL 6.1 billion, employing about 91,000. By comparison, the 90 largest private companies had sales of TL 9.5 billion, employing approximately 86,000. These two groups together probably accounted for one-half of the net output in manufacturing though less than one-fifth of totial employment.

The State Sector

37. The following figures summarized from Table XI show the growth in the net output of State Manufacturing Enterprises: - 18 -

Table 7: VALUE ADDED IN STATE MANUFACTURINGSECTOR (rL million at 1962 prices)

Index 1963 1954 1958 1963 (1954 = 100)

Heavy Industry /1 370 379 820 221

Food Processing 300 556 705 235

Textiles 727 798 963 132

Others /2 230 332 724 314

1,627 2,029 3,212 198

/1 Iron and Steel Corporation, Mechanical Industries Corporation and, from 1960 on, Ipras Oil Refinery.

/2 Altogether 18 enterprises in fertilizers, cement, agricultural machinery, shoes, porcelain and ceramics, refractories, forest products, etc.

Measured at constant 15162prices, State manufacturing activity approximately doubled between 1954 and 1963. The "others" group was expanding into many new activities. The textile group showed the lowest growth rate, and apparently did not fare well against private sector competition. The State sector as a whole advanced relatively slowly in 1954-1958 but in 1958-1963 its rate of growth was well in advance of private sector growth.

38. In 1964-1970, State manufacturing activities appear to have grown at roughly the same rate as private manufacturing. (Compare Tables I and XII). Physical production indices for major items produced by the State Sector suggest the increasing weight of new and capital-intensive industries.

Table 8: PRODUCTION-INDICES FOR STATE MANUFACTURING SECTOR (Index 1969; 1964 = 100)

Sugar 109 (1968) Cement 205

Cotton fabrics 130 Refined petroleum products 200

Woolen fabrics 127 Nitrogen fertilizers 200

Paper 120 Steel ingots 238 - 19 -

Except for petroleum refining, major production increases (i.e., in cement, steel, and nitrogen fertilizers)have come through the constructionof new plants. In steel, fertilizers,and papers, expansionwas too slow to pre- vent a massive increase in imports and severe rationing of consumption. In the main, this was due to managerial and institutionalweakness of State enterprise coupled with difficultiesin obtaining financing for the major investmentsrequired.

39. Although there are some 45 State enterprisesin the manufacturing fiela, the eight largest, in 1967, accounted for 90 percent of the total sales. (Tables XI and XII.) Below, certain data are shown for the ten largest companies (includingthe Erdemir Steel Company which is not offi- cially counted as a "State Enterprise"and the Petkim chemicals concern which was about to start operations in 1970). - 20 -

Table 9: FINANCIAL DATA FOR TEN LARGEST STATE ENTERPRISES IN THE MANUFACTURINGFIELD, 1967

Main Employ- Sales Assets Equity Profit Activities ment TL TL TL or loss million million million TL mill.

Sugar Corporation Sugar 13.9 1,085 3,424 194 38

S{lmerbank,con- Cotton and 34.2 1,327 2,952 1,131 165 solidated wool textiles, cement, sanitary porcelain

Erdemir flat steel 3.8 689 2,925 558 -52 products

Demir ve Celik steel 11.2 934 1,835 666 102 (KarabUk)

Makina ve Kimya heavy struc- 15.1 609 1,280 706 91 (MKEK) tures, castings and forgings, machinery

Cement Group cement 4.2 357 1,131 425 68

Azot Sanayii nitrogen 2.5 152 825 139 5 fertilizers

SEKA pulp and paper 6.1 501 585 281 44

Petkim petrochemicals .3 458 232

Ipras Refinery petroleum .4 487 341 187 73 refining _

(Total (10 com!panies) 91.7 6,141 15,756 4,519 534

40. The above companies, in 1967, had assets varying from about TL 3 billion for the three largest ones (Sugar Corporation, Erdemir Steel, SUmerbank) to about TL 350 million (Ipras Refinery). With the exception of Ipras (1960) and Petkim, all the companies had been in operation in their respective fields for 15 years or more. Other major state projects under - 21 -

construction or in advanced planning include a large ammonia p.Lant, a third integrated steel mill, an aluminium smelter (the latter two fillanced with USSR assistance), a diesel-electric locomotive factory, and a major shipyard.

41. Main economic aspects of the present operations of State Manufac- turing Enterprises are as follows:

(a) State enterprises have a virtual monopoly in pulp and paper, fertilizers, and steel. They wil,l increasingly dominate petroleum refining (including the supply of feedstocks for petro-chemical plants). In the engineering industries, State penetration is mainly financial (partnership with Fiat in automobile and tractor production, and proposed partnership with a foreign company yet to be selected in diesel engine production). The State is greatly increasing its stake in shipbuilding through a partnership with Ishikawajima..

(b) The scale of operations of individual State enterprises is expanding very rapidly, except in traditional indust:ries like cement, textiles, or sugar. Two years ago, Turkey's only ammonia plant had a capacity of 140 tons per day; the new plant projected by Ipras will have a capacity of 90CItons per day. One year ago, SEKA's paper-making capacity concentrated in the original Izmit plant was 116,000 tons divided between ten machines. Today, SEKA is in the process of running in three new integrated paper mills in different regions of l'urkey; each will have an initial paper production capacity in the range of 60-80,000 tons.

(c) The profitability of State manufacturing enterprises, judging by official figures, improved considerably in 1967-1969 (Table XIII). The only loss maker among the major manufacturing companies is now the Nitrogen Corporation.

(d) Prices charged by State manufacturing enterprises have been increasing at a relative moderate rate in recent ye.ars; nevertheless before the recent devaluation their competitiveness in relation to long-run world market: prices for steel, pulp and paper and nitrogen fertilizers seems to have been declining. - 22 -

Percent Price Increase 1964-1969 (October)

Sugar

Cotton fabrics 4 - 12

Woolen fabrics no increase

Cement 22

Paper

Gasoline 10

Nitrogen fert:ilizers - /1

Steel Bars, 8-20 cm. 39

Galvanizedcorrugated sheets 24

(e) Prices for textiles, cement, and refined petroleum products are reasonablycompetitive. In sugar, paper, nitrogen fertilizers, and steel, there is a disturbinglack of competitiveness.

(f) The proximate and interactingreasons why costs and prices are high include: uneconomicscale of output, particularly in fertilizers,steel and paper; low labor productivitye.g. SEKA uses more manpower per ton paper produced than mills with comparableequipment in Northern Europe or U.S.A. which is also true for the State textile mills. Finally, the con- sequencesof tied aid are demonstratedin the high investment cost of the Erdemir plant and the lignite fertilizerplant.

/1 The price is fixed by the Governmentwhich pays the Nitrogen Corporation the difference between the fixed price and the company's actual production cost. The company's losses were TL 59 million in 1963; they had apparently fallen somewhat to TL 48 million in 1968.

The Private Sector

42. A major transformationhas taken place in the last ten-fifteen years in the Turkish private entrepreneurand his industrialenvironment. Many entrepreneurshave accumulatedsubstantial funds and are now willing to invest in large projects. Between 1967 and 1969 alone, the average size of projects financed by TSKB rose from TL 28 million to TL 55 million. At the same time, Turkish manufacturersare beginning to look towards - 23 - exports as a means of attaining viable size and keeping in touch with changes in markets and technology. The human element is no lornger the same severe bottleneck; the supply of Turkish engineers, econonists, and business administrators is growing rapidly. The basic infrastructure (e.g. tranportation and telecommunication services) has also greatly improved. Finally, increased industrial maturity is reflected in improved availability of industrial services and skills, as well as domestically made materials and components.

43. A recently published list of "Turkey's 100 largest industrial firms" may have some important omissions but it gives a good bird's eye view of the private manufacturing sector (Tables XIV and XV). Because the list includes only members of the Istanbul, Ankara, Izmir, Andana, and Kayseri Chambers of Commerce, it apparently excludes all but three of the major State manufacturing enterprises listed in Table 9. Hence, the list is essentially a reflection of the private sector. There atre probably 40-45 private manufacturing companies with an equity exceeding TL 30 million and about 20 with an equity exceeding TL 62.5 million, of which we have identified 14. These include two rubber tire companies, two cement companies, one manufacturer of window and bottle glass, one pharmaceuticals company, one major foundry (for radiators, low-pressure boilers, stoves, etc.), two tractor and truck manufacturers, one electrolytic copper refinery, and four textile manufactures.

44. The largest private manufacturer in Turkey is the Koc Holding Company with a capital of TL 125 million (Decenber 1968). The Koc Group has interests in fifteen manufacturing companies producing such varied items as agricultural machinery, refrigerators, washing machines, vacuum cleaners, gas ranges, castings, electric light bulbs, surgical dressing and friction tape, steel furniture and office supplies, tomatco paste and other canned vegetables. It has major interests in the present Turkish production of motor vehicles, trucks and trailers, and motor vehicle tyres, and is a substantial minority shareholder in a new automobile manufacturing plant being set up by Fiat. Certain other family groups with considerable diversification of interests have also emerged.

Medium-sized and Small Establishments

45. The typical industrial establishment in Turkey is oi-medium size, employing 11-250 persons (Tables XVI-XVII). In fact, industrial concentration appears to be lower in Turkey than in most other countries; certain comparative data are reproduced in Table XVIII. In the following sub-- sectors, small establishments engaging 10 c,r less persons accounted for a substantial portion of the total output in 1963. - 24 -

Table 10: ROLE OF SMALL ESTABLISHMENTS

Percent of employ- Percent Percent of ment in sub-sector of sales value added

Food processinig 40.7 22.2 14.2

Textiles 19.7 18.5 9.9

Clothing and footwear 97.0 88.7 88.0

Wood, cork, and furniture 83.8 69.5 60.0

Metal products 73.2 45.6 38.4

All other

Total 50.8 24.6 12.4

Source: Table X'II. Large and Small Establishmentsin Turkish Manufacturing,1963.

Location of Industry

46. Historically,there is some lack of industrialbalance between Western and Eastern Turkey and between Istanbul and the rest of the country. In 1963, Istanbul alone accounted for nearly 40 percent of the value added in manufacturing as compared with only 16.5% combined for the next three largest industrial centers (Ankara, Izrmit and Adana).

47. The dominance of the Istanbul area is more pronounced if atten- tention is focussed on the 100 largest corporations(Table XIV). Of these, no less than 68 belong to the Istanbul Chamber of Commerce (althoughthis includes several companieswhose major productionfacilities are located as far out as Izmit). In this type of ranking, the Aegean region (princi- pally Izmir) comes out quite well with 19 firms listed; a high proportion falls within traditionalindustries. Next come Ankara (7), Adana (5), and Kayseri (1). Ankara's ranking could be misleading. Several State enterprises mnaintain theirl head offices there, e.g. Nitrogen Corporation, Antal- ya Ferrochrome, though their production facilities are elsewhere.

48. Although there are pockets of underdevelopment in Western Turkey (e.g. Antalya and Balikesir), the major underdeveloped region is Eastern Turkey. If one draws a line east of Ankara (excepting only the industrialized Adana district), this would include virtually one-half of the Turkish population. Inspectioinof Chart II, however, suggests that Eastern Turkey may itself be divided :Lnto two subregions, each encompassing about one quarter of the Turkish population. The area east of the 360 meridian (roughly the Adana-Kayseri-Samsun line), is the heart of the underdevelopment problem. In this area with the exception of the mining district 25- 30.' .. 5 B U L G A R I A /ackSeaU.S.S.R 8/ack Sea ~~~~~~~~~~~~~~~~~~~~~~~~~~~~U.S. S. R. -KIRKtA4RF4t t

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FE y 19skend71 TURKEY /7 '~~~ ~ 'j4'~~POPULATION AND INSURED WORKERS 1958 -1960

35' 1, ( Workmen's Insurance institution boundaries _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/I I ___ R A 4/fSe e cli a / e r r ea n S Y R I A 7,631 Number of insured workersor krs per7p r area-Nrea- NovemberN ve mber 195e8d9 5 Ratio of insored workers to population (percent):3 - CYPRUS~ Le Ss than 1.0 \ 1.0-1.5 0 100 2Q~~oo aOoo .-. 1.6 -2.4 0 It~~~ILOMETERSIS 112.5 -3 8 3.9- 56 0 50 00o iSO 200 --- Provinccial boundaries MILES International boundaries

FEBRUARY197] BD32 I - 25 - around Elazig, insured workers in 1960 representedabout 0.7-0.8% of the population as comparedwith a national average of 2.0. It is a primitive region with an average per capita income of only about $150 and a largely feudal social structure. Animal husbandry is the main economic activity (often in association with barter trade and smuggling). Banditry still flourishes, even in the cities and towns. Yet, substantial social and economic infrastructure exists already. The main centers are Gaziantep, Diyarbakir (with a School of Medicine) and Erzerum in the North (with a University). The rail and road system is relatively well developed. Power will be available from the Keban Dam and other sources, and the southeastern part of the region would be favorably located in relation to the proposed oil and gas pipelines from Iran and Iraq, if these materialize.

III. PRINCIPAL BRANCHESOF MANUFACTURING- PERFORMANCE AND PROSPECTS

49. The value added for Turkish manufacturing industries in 1969 was estimated about TL 17 billion at current prices. The structure of the 1969 manufacturing output was as follows: 1/

Table 11:

VALUEADDED IN MANUFACTURING,BY INDUSTRYGROUPS, 1969 (TL billion at 1963 prices)

Food, beverages, tobacco 2.75 Textiles, clothing, and footwear 2.51 Other .66

Sub-total,"Traditional" 5.92

Pulp and paper .33 Fertilizers,chemicals, and petroleum refining 1.32 Non-metallic minerals .70 Basic metals and products 1.68 Machinery, other than transportequipment 1.07 Transport equipment .49

Sub-total, "New" 5.59

Total 11.54

1/ Rough estimates by Mission based upon proJections of Census data for 1963 by physical production statistics and other data. No estimate is available for value added at 1969 prices. - 26 -

50. The following review will be focussed essentially on new and expanding industries (generally industrial materials and equipment) plus those sub-sectors of the traditional (generally consumer goods) industries, for which important export possibilities are envisaged. The vast bulk of Turkish industry, and virtually all sectors where important developments are expected, will be covered. The industries not specifically commented upon include most of the food industries (other than fruit and vegetable canning), clothing, leather and rubber products, printing, some traditional chemicals (other than petrochemicals, sulphuric acid and fertilizers) and electrical machinery and equipment. Non-ferrous metals are discussed in the companion study of the Mineral Industry in Turkey.

A. Textiles 1/

51. The share of the textile industry in Turkey's manufacturing output, at 22 percent, is only slightly lower today than it was in the early 1960's. Its share in the total number of insured workers in the manufacturing sector has, in fact, been increasing, and was not far below one-quarter in 1967. The value added by manufacture represents only about one-third of the output value; the vast bulk of the inputs are bought locally. The textile industry is widely dispersed regionally - a trend supported by the Governmwent. The cotton textile sector, in particular, has flourished in Adana and generally in the Mediterranean Region where much of the cotton is grown (Table XIV) With 1969 exports totalling only $17.2 million equivalent and imports $8.5 million equivalent, the trend towards autarchy is nowhere more apparent than in the textile sector. Even the present level of exports is the result of a recent upsurge fostered by Govern- ment incentives and a boom in the cotton yarn market in Western Europe. Under an overvalued exchange rate, the well-known and beautifully designed Turkish carpets which ntight have formed the basls for substantial export industry, now make only a negligible contribution to exports. On the other hand, there are about 100,000 Turks working in European textile mills. In recent years, investments in the textile sector have averaged about $50 million equivalent of which all but 15% in the private sector.

52. Whereas the demand for cotton textiles has been growing at about the same rate as the gross national product, the demand for woolen and worsted textiles has been expanding at less than half that rate. iu.s a substa ntial prducer (and exporter) of cotton of excellent quality. In contrast, the local supply of wool is limited to coarse qualities suitable mainly for carpets and blankets; qualities required for an export trade in worsted fabrics or garments would have to be imported. As is true for most developing countries, only a small

1/ The above summary is basec, in large part, upon a consultant study sponsored jointly by the Bank and TSKB, with the support and assistance of SPO. Tnis is referred to be below as "The Bank/TSKB Textile Study" t . - 27 - proportion of artificial and synthetic fibres are used in TurkiLsh textiles production. This is likely to change in the near future as a result of major approved investments in man-made fibre production.

53. A rough idea of the present structure of the industrr is con- veyed by the following figures taken from a recent joint study by the SPO and the Turkish Industrial Development Bank:

Table 12: INSTALLEDCAPACITY IN TEXTILE INDUSTRY (Percentage Distribution)

Cotton Woolen Worsted Spindles Looms Spindles Looms Spindles Looms

Private 63 56 86 92 76 74

State 24 36 14 8 24 26

Mixed 13 8 - - -

100 100 100 ll00 100 100

Total Nr (1,000) 1,154 19.3 67 2.5 167 1.7

Table 13: SIZE DISTRIBUTION OF PLANTS IN TEXTILE INDUSTRY

No. of spindles per plant Private State Mixed Total

Cotton Sector 129 11 6 146

71,000 - 17,600 17 9 5 31 12,100 - 6,400 21 2 1 24 5,920 - 200 26 - - 26 none 65 - - 65

Woolen Sector 38 5 - 43

6,400 - 2,950 4 2 - 6 2,500 - 1,280 9 3 - 12 1,200 - 600 13 - - 13 600 - 200 12 - - 12

Worsted Sector 39 2 - 41

20,000 1 1 - 2 10,400 - 6,800 7 - - 7 4,600 - 2,000 11 - - 11 1,800 - 240 20 1 - 21 - 28 -

54. There are five plants with approximately 1 ,000 looms each in the cotton textile sector -- two of these, both in the Adana region, have respectively about 70,000 and 55,000 spindles and have a surplus of yarn, of which a large portion is exported. The two largest worsted mills operate 23 and 14.5 percent respectively of the spindles for worsted yarn. Though generally adequate, the structure of the textile industry could be improved in some respects. In t:he cotton sector, all but seven plants in the largest size group have their own finishing facilities which are only very imper- fectly utilized. Moreover, each cotton mill typically produces a range or 20-40 different types of cloth as compared with generally only 2 types in many United States nmills.

55. Most Turkish cotton textile mills are now working to capacity on three shifts. According to market studies by SPO and the Industrial De- velopment Bank, these capacities would need to be expanded as follows to meet rmiarketopportunities over the next five years (percentages related to present levels of output):

Table 14: TRXTILE INDUSTRY: PROJECTED CAPACITY INCREASES AND EXPORT GROWTH

Proj. exports Capacity Increase (%) ($ million) Total Domestic Exports 1970 1975

Cotton spinning 65 45 20 15.6 31.2

Weaving 55 42 13 5.0 10.5

Woolen and worsted Modernization only 1.5 2.0

Knitting industry 66 60 6 .5 4.0 22.6 97.7

Total 1969 (16.0)

56. The approximaLte cost of such expansion is estimated as follows (million $ equivalent):

Cotton 290.0

Woolen and worsteds 75.0

Knitting, 12.5

378.0

The annual rate of investment would be about 50 percent higher than in 1967-69. Nevertheless, the above total does not include the cost of new building construction since the additional floorspace needed has not yet been determined. - 29 -

57. In the realization of these plans, particularly on the export side, Turkey will be aided by having good qtLality cotton at below world market prices, 1/ high quality labor at wages (including social charges) comparable to HlongKong for spinning and weaving though higher in the garment trade. Even at the projected export: level of $50 million equivalent, Turkey would account for only a minor portion of the Common Market textile imports, presently estimated at $2,300 million.

58. Nevertheless, these assets and opportunities cannot be turned to full advantage unless certain major problems are solved.

59. Marketing, product development, and specialization. The recent decade has been one of feverish change in the world textile industry charac- terized by the increased use of synthetic and mixed fabrics, increased variety of fabrics and garmets offered, great progriess in knitted goods as compared with the previously predominating weaving technique, and substantial regrouping of firms generally with a view to forward integration, e.g. synthetic fibre manufactures have bought into the textile industry. Admitting that, within the Common Market, Turkey would have a comparative advantage in textile production, two questions inevitably crop up: What products should Turkey sell (cotton or wool textiles, yarn or fabrics, greycloth or printed fabrics, knitwear or woven fabrics, workers clothing or fashionwear)? And hoq should such sales be organized? The first question is very difficult to answer. A very preliminary clue may be gained from the followTing comparison between present prodtuction costs in Turkey, the Common Market and Hong-Kong for a series of representative textiles items.

1/ When a new parity of TL 15 per US$ was established, exceptions were made for certain specified major agricultural exports, for which a purchase rate of TL 12 per dollar was decreed. It must be assumed that this export rate will also determine the domestic price for cotton. The effect of this hidden subsidy is a major one. For a typical cctton print cloth where the price of the seed cotton before ginning may be about one- fourth of the final cost of the cloth, the TL 12 special. rate lowers the production cost by 12 percentage points. - 30 -

Table 15: TURKISiI AND FOREIGN PRODUCTION COSTS FOR TEXTILES /1/2 (TL per yard)

Tu C.M. Hong Kong

a b a b a b Cotton print cloth 40.16" 4.58 6.43 7.04 8.60 4.73 5.93 Cotton duvetyne 37.40" 6.02 7.34 4.91 34.48" 5.61 6.93 6.54 7.67 5.21 6.56 32.10" 5.32 6.40 5.07 Polyester/cottonpique 16.75 16.90 12.29 Tropical polyester/wool 37.46 29.50 Worsted top-dyed serge 60.41 73.97 51.98 63.95 Worsted vigoureux printed serge 70.83 55.01 Worsted tropical mohair 49.52 38.96 Ladies all-wool cardigan 72.39 79.30 63.20 63.98 57.09 70 Denier texterizednylon yarn per pound 29.77 31.66 28.32(J)

Source: Bank/TSKB Textile Study

/1 Based in the Turkish case, upon cotton at internationalprices (rather than the special export price) and assuming duty-free im-portsof textile machinery (rather than 50-83 percent import duties).

/2 Column (a) represoentsoriginal unadjustedfigures as shown by the consultants; column (b) are cost figures adjusted to include a normal rate of return on the investment in all cases.

60. The major reason why Turkish production costs are higher than in Common Market countries for items like tropical worsted or top-dyed serge is the high cost of the raw material - a problem which is discussed separately below. But even in terms of conversion costs alone, it is the preliminary conclusionof the study that Turkey would have a greater comparativeadvantage in the cotton sector.

61. Tn terms of the degree of processing,present exports have been focussed on the yarn sector. Yarn carries no duty in the Common Market as compared with 17 percent duty on cotton fabrics and 23 percent on ready-made clothing. Turkey is competing successfullywith, say, Pakistan partly because the Turkish yarns are considerablycleaner (accordingto Turkish sources) but more importantlyperhlaps because they can be moved by truck to Western Europe in a week while a similar shipment would take about 2 months by vessel from India or Pakistan. Once Turkey gains preferentialaccess to the Common Market, however, completely new perspectives open up. At the moment this is written, no informationis availableregarding the details olf the newqprotocal between Turkey and the Common Market countries. Nevertheless, - 31 - the assumption that, by 1975, two-thirds of the value of textile exports wouAd be in the form of yarn merits close scrutiny. Whereas prices for grey goods are depressed and the Common Market external tariff comparatively low, opportunities exist both in printed fabrics, work garments, and knitwear - the latter sector, in particular, is developing very rapidly in Turkey. The argument has been advanced, particularly with reference to printed cottons, that it is difficult for Turkish manufacturers to keep abreast of changes in designs and fabrics. But this handicap couLd be overcome through close col- laboration with major Western European manul-acturers or distributors. Mean- while, three leading Turkish manufacturers, even before the devaluation, created a joint export agency to coordinate market research and sales policies.

62. Raw Materials. The economics of Turkish manufacture of artificial and synthetic fibres will be discussed separately below. We encounter the same problem here as in steel - using industries that high cost domestic production of raw materials and intermediates poses a threat to the natural expansion of industries fturther "downstream" in the production chain, in which Turkey's comparative advantage would seem to lie. "Dual pricing" for exports could no doubt be extend - .oinclude "indirect exports" where the fibres are incorporated into exported textile pr-.dcts. But the administration of such a policy may well prove difficult and it may also ha found to contravene the Common Market agreement.

63. Labor productivity and industry structure. The average productivity of workers in Turkish textile mills is relatively low, which expresses itself in excess manning and low machline efficiencies. The textile study indicates that, with the exception of certain State sector mills, "the equipment in the Turkish mills visited was representative of mills in most countries." Yet, on comparable equipment, Turkish productivity is only about 25 percent of the IJnited States productivity and perhaps 55-65 percent of EEC or Japanese productivity. The reasons are both internal to the enterprises and "external" (structural); or a mixture of the two. They irnclude insuffi- ciently trained management, and deficiencies in job training, job evaluation, control of operating conditions, quality control, etc. Structural weaknesses are excessive product mix, poor utilization of the industry's finishing capacity (and also of e.g. combing equipment in the cotton sector and tops-making equipment in the woolen sector), and non-optimum size of production units (mainly too small but in some cases too large for efficient supervision).

64. A few recently engineered Turkish private plants have excellent worker productivity comparing favorably even with the United ';tates. Wide variations in productivity within the textile sector is, in fact, a picture common to many developing countries (e.g. Brazil and Mexico) and alsQ some industrialized countries. Its root causes include iimperfect competition, and the payment of lower taxes and wages by inefficient firms. The cure must come mainly from increased competition in the product andl labor markets. Yet joint Government-industry action with a view to restructuring may also be required (as in e.g. the United Kingdom or Mexico). To exploit its export potential, the growth of the Turkish textiles industry must be orderly and well pl anned (e.g. in terms of size, layout and product mix oi individual plants). Yet the very existence of this potential should greatly smooth the nee(!eri restructuring process. - 32 -

65. State Sector. According to the textile study, the State te.tile mills generally are not as well equipped and operated as the private sector mills; the study expresses ooncern about their long-termviability. Particu- larly the SUmerboankKayseri mill is in very poor physical condition, producing sub-standardqualities at high cost. The management of this mill argues that the Anatolian peasant does not look for high quality but the study counters that it would not cost more to make a better quality product. Ex- perience in launching the new lead-zinc venture suggests that there is considerable private enterprise and private capital in the Kayseri area, and a determined effort should be made to bring such newi blood into the existing ailing establishment.

66. In conclusion,the mission believes that the Turkish textile industry, after years of relative stagnation, should once again become a growth sector. The Government should aid this process through substantial support of an export drive, through improved facilities for management and worker training and possibly through financial aid for restructuring. It should also consider whether the operation of Stiate textile mills is in the national interest, or whether the time has comIe to sell some, or all the State mills to the private sector. The industry needs a well-staffed trade assocIation as an instrument for its rapid development. One of its first tasks should be to undertake a comparative cost and productivity survey of aLl mills above a certain size as an aid to (a) internal productivity measures and (b) eventual restructuring.

B. Forest ProduCts

67, The net value added in -he forest products industries in 1967 was about TL 750 millioin,of which rather less than one-quarter was contributed by pullp and paper ma.king. The net value added in fcrestry, at TL 1,432 million, was alros. twice as high, of which over one-third was contributed by firewood production. Together, forestry and forest industries account tor about 2.5 percent of the gross domestic product; the proportion has been slowly falling during the 1960ts. Exports of forest products averaged only about $4 million equivalent in 1963-1969; more than one-half of these exports were products of gathering, like leaves, acorns, resins, gums, etc. On the other hand, imports (princi- pal3y pubp and paper) rose from about $10 mIllion equivalent in 1963-

-1'. o'.. ill -)-Om, ecuiv,aIe t in 1967-69 reflecting delays in the commissioning of chree new paper mills.

68. From a social and economic point of view, the greatest importance of the forest sector is in providing at least partial employment and livelihood for a substantial population; altogether 4.5 million people are estimated to lixe in and around the forests. Total employment in the forest industries in November 1063, including wood and corke manufacture, furniture manufacture, and pulp anid paper production was over 55,000, of which 41,000 in small-scale establishments. This represented about 8 percent of total manufactt mring employmsent. - 33 -

69. The structure of the wood-using iindustries is summarized in the following table:

Table 16: PRODUCTION OF FOREST INDUSTRIES IN 1968

Quantities Value of Output Produced (TL nLillion)

Lumber

Softwood (cu. m.) 1,632,000 '1,100 Hlardwood(cu. m.) 485,000 Sleepers (cu. m.) 40,000 40

Wood-based panels

Plywood (cu. mi.) 5C,000 90 Fibreboard (tons) 28,000 45 Particle board (tons) 42,000 105

Secondary wood processing

Boxes and crates (million) 42.2 133 Joinery -- (400) /1 Furniture (600) /1

Paper

Newsprint (tons) 13,100 11 Printing and writing papers (tons) 40,300 131 Other paper and board (tons) 91,100 228

/1 Rough estimate.

70. The vast bulk of the saw-milling industry is in the private sector, consisting mainly of several thousand small and extremely inefficient mills, although there are a few modern mills. Fourteen State mills, all medium--sized, account for about 7 percent of the total output of lumber and the entire output of sleepers. The wood-based panels and secondary wood processing industries are relatively underdeveloped. At present, there are ten plywood mills with a total rated capacity for one shift of 42,500 M 3; one small mill belonging to the State sector provides packaging for munitions boxes. Three fibreboard mills have a combined capacity of 46,000 tons; the State SUmerbank mill accounts for about one half of this capacity. There are only two medium-sized particle-board plants, both in the private sector, with a combined capacity of about 42,000 tons (say 65,000 m3 ). The wooden box industry, import:ant to the - 34 - fruit export trade also consists of very small units, the most notable exception being a new State mill with an annual capacity per shift of 1.5 million boxes.

71. The paper industry is dominated by the State SEKA concern, with a present paper maLking capacity at its Izmit plant of about 116,000 tons and a pulping capacity of about 90,000 tons. A wide range of papers is produced on ten machines, some of them very old. In addition,SERA since 1965 has been constructingthree new paper mills (Caycuma, Dalaman, and Aksu), with a combined pulp capacity of 240,000 tons and paper capacity of 230,000 tons which will become operative in 1970/71. The combined investment (financedin large part by supplier credits) is now estimated at about $170 million equivalent. Fifteen small private mills, with a combined capacity of 15,000 tons, produce wrapping papers from waste paper and rags. Until recently, the Turkish Governmenthas not been willing to sanc- tion major private ventures in pulp and paper production.

72. After the devaluation,Turkish prices for forest products other than kraft paper and particle board appear quite competitive;the particle board price is expected to drop in 3-4 years when the present expansion wave in this industry has been completed.

Table 17: TURKIST1PRICES FOR FOREST PRODUCTSCOMPARED WITn INTERNATIONALPRICES (in US$ equivalents)

Turkish International Price Reference Price

Pine lumber, per m3 Sleepers,per piece 10.67 Beech plywood, per m3 140-183 176-196 Lebanon export price. Lebanese quality is higher. Fibreboard,per ton 93-120 100 Average import price c.i.f. United Kingdom Particle board (19 mm), Average import price c.i.f. per ton 174 113 United Kingdom 13>cScs[or citrus fruits per box 0.14-0.16 0.20 Newsprint, per ton 150 148.70 Average import price c.i.f. United Kingdom Kraft paper, per ton 233.33 149.14 Average import price c.i.f. United Kingdom

73. In evaluating Turkey's competitiveness, qualities must also be considered. While the few large and medium-sizedsaw mills produce lumber of adequate quality, this is not true for a majority of the small private saw mills which exhibit poor equipment, insufficientseasoning, erratic - 35 - grading, etc. Tle State sawmills produce ltmber of good quality but the quality of their sleepers leaves much to be desired. Turkish beech plywood is not yet of internationalquality, and the situation is even worse for particleboard;of all the wood-based panels, only the fibreboardwould seem up to European standards.

74. As we shall see presently, Turkish forest resources could form the basis for a flourishingexport trade. The main reasons why no such trade has developed is that the industry has been squeezed between an overvalued exchange rate and artificiallyhigh prices for industrialwood. Various industrial inefficienciesnoted in the previous paragraph could be removed. While typical for isolated and protected markets, they also reflect the lack of competitionfostered by the General Directorateof Forests (GDF) allocationpolicies for industrialwood and the monopoly granted SEKA in pulp and paper as well as other institutionalimpediments.

75. The vast majority of the forests belong to the State. Forest policies bear the mark of an extreme conservation-mindedness.Partly justified perhaps by overcuttingand goat depradationsin the past, such policies are now an obstacle to the economic exploitationof one of the country'smajor resources.

76. A second obstacle is the extent to which social and political objectives,in particular social welfare and employment creation for the forest population,have become enmeshed with commercialoperations. The results are three-fold:

(a) the cost of industrial wood reflects high costs of forest administration(protection of the forest, various social services) and subsidies to forest villagers;

(b) the system of moving the wood to the forest industries has been frozen in inefficientpatterns;

(c) past Governments,trapped in the political and social servitudes of the State forest enterprises,have been reluctant to cede cutting rights or concessions to private wood-using industries.

77. The ultimate consequencesare even more far-reaching. Under- exploitationhas caused the forests to become overmature,with a conse- quent subnormal growth in the forest capital and a lop-sided age composition which presents real obstacles to economic exploitation. (Giant trees are difficult and expensive to fell, transport,and saw with existing techniques and equipment; saw and "peeler" logs from overiraturetrees give poor yields.) There is a similar mutual relationshipbetween the underexploitedforest and (a) the lack of a decent forest inventory (this is being taken but far too slowly), (b) a poor forest infrastructure, particularly in terms of forest roads, and (c) the lower than optimum capacities of the three new paper mills. - 36 -

78. In fact, the forest situation combined with Government policies have disturbed the whole growth and structure of the forest industries. The following traits characterize the efficient and competitive forest industries of Northern Europe:

- substantial vertical integration of forestry with forest industries;

- substantial lhorizontal integration permitting optimum economic utilization of the log, e.g. sawmill waste for kraft pulp or fibreboard production;

- several independent concerns competing in cost reduction and product development but cooperating, to a substantial extent, in export marketing and technological research.

In contrast, many Turkish forest industries, uncertain about local wood supplies, have clustered in the Istanbul area, sawmill waste is poorly utilized, mills are generally of less than optimum size, and there is no organization for export marketing.

79. Two recent UNDP/FAO reports 1/ address themselves to targets and policies for a vigorous development of the Turkish forest resource. The overall targets for industrial wood removals are shown below together with earlier projections made by the General Directorate of Forests:

Table 18: TARGETS FOR WOODREMOVAL (million m3 roundwood o.b.)

1962 1968 1972 1977 1982

FAO 2.8 4.1 6.3 10.3 14.6

GDF 2.8 4.1 5.7 7.7 8.9

At the expected rate of increase in Turkish consumption of forest products, only one million m3 of the 1982 total of 14.6 million m3 would be available for export. After the preparation of the FAO plan but before its publication, the Turkish Government published a decree entitled "Encouragement and Development of Forestry and the Export of Forest Products" (July 1969) which advanced the target date for attaining

1/ Respectively: - Report by the UNDP/FAO Consultancy Mission, August 1969 (referred to below as the "Osara Report") - Forest Industries Preliminary Development Plan to 1982. FAO/UNDP/SF 293. October 1969 (referred to below as the "Preliminary Develop- ment Plan"). - 37 - the 14.6 million m3 cut to 1977, as contrastedwith the 1982 date set by FAO. FAO has questionedthe feasibilityof such telescoping. According to FAO, even the implementationof its more modest plan would require "immediate and massive action". Nevertheless, the possibility is admitted that "action on the removal of present problems andl restraints could lead to an early revision of the program in which higher levels of exports could be considered."

80. The overall targets are translatedin the Preliminary Develop-ment Plan into the following individual targets for major forest indus-tries:

Table 19: DEVELOPMENTTARGETS FOR FOREST INDUSTRIES, 1972-1982

1962 1968, 1972 1977 1982

Million in m3 of roundwood equivalent

Sawnwood 1.7 3.6 4.4 5.8 7.6 Woodpulp .2 .l 1.2 3.7 5.9 Plywood. .1 .2 .3 .6 Other .9 .6 .5 .5 .5

Total 2.9 4.6 6.3 10.3 14.6

Millions of end product measures

Sawnwood,m 3 (s) 1.2 2.5 3.1 3.9 5.0 Woodpulp, tons .06 .10 .33 .90 1.41 Plywood m3 solid .04 .05 .08 .12 .24 Particle board, tons .00 .03 .06 .25 .33 Fibreboard, tons .03 .03 .07 .10 .16

Net value of production

Production,TL billion 1.62 2.06(1967) 4.35 7.09 10.09 Share of GDP, at 1965 prices 2.6 2.4 (1967) 3.6 4.2 4.2 Investments 1968-72 1973-77 1977-82 Annual average (TL million at 1965 prices and exch. rate) /1 (550) 806 770

/1 The Preliminary DevelopmentPlan provides no breakdown of investments as between local and foreign exchange expenditure. Pulp and paper mill investmentswould predominate,and judging by recent investment cost breakdowns,the foreign exchange componentin these investmentsmight be 35-40 percent. - 38 -

81. According to the above totals, the contribution of forestry and forest industries to the GNP would increase five-fold between 1967 and 1982. The relative importance of pulp and paper production would rise dramatically, with a corresponding relative decline in sawnilling.

Table 20: STIARES OF MAJOR SECTORS IN FORESTRY AND FOREST INDUSTRIES CONTRIBUTION TO GNP (%)

1967 1982

Forestry and logging 70.8 64.7

Sawmilling 17.5 10.9

Pulp and paper production 8.5 20.8

Other 3.2 3.6

100.0 100.0

In consequence, it is expected that 75-80 percent of all investments 1973-1982 would be for pulp and paper production.

82. Under present working techniques and degrees of mechanization, it is estimated in the Osara Report, that the 14.6 million m3 cut would be associated with an increase in forest work from 27 to 63 million man- days. The total work force would not increase in proportion to the cut since (a) a greater number of workers would be employed all year round rather than just seasonally and (b) there would be more mechanization. While the employment and social effects of the program require continuous study, the high rate of expansion envisaged should make any transitional problems manageable.

83. For the program to succeed, an extensive, closely coordinated set of measures is envisaged in the FAO reports:

(a) Forest Mlanagement - A modern type national forest inventory must be completed within very short time limits. (The Government last year decreed that this work should be completed in 1970 but progress has not been satisfactory). Studies must be made of the location and size of major industries, and the feasibility and cost of road construction, logging and extraction within each forest region. Suitable management units must be defined, and management plans must be drawn up taking into account the findings of the forest inventory, the existing and planned infrastructure, and the proposed location of forest industries. - 39 -

(b) Supply and price of logs - Better use must be made of the log harvest (reservationof good-grade logs for sawmilling,utilization of sawmill waste, protection of beech logs against fungal attack). Log harvesting methods must be improved sc as to speed the flow of logs from forest to mills. (The Proposed Canadian and Swedish credits for the purchase of logging equipmentwould be combined with technologicalassistance in this area). Current log prices must not be burdened with costs of non-commercial activities (e.g. rehabilitationof degraded forests) or social welfare activities (e.g. provision of fuelwood to forest villages at nominal cost). Most important, forest industries must have guarantees regarding a steady supply of logs at reasonable prices (see point (d) below).

(c) Structure - Much more thought will need to be given to the future structure of the industry taking into account logist:ics, economics of scale, and utilization of sawmill waste. The sub-sector review suggests that recently built SEKA mills are too small for economic operations and badly located in relation to their raw material supplies. In an epoch when Canadian sawmills sell chipped sawmill waste to Japan (32 percent of all pulp-making raaterials entering world trade are in the form of residues or chips), SK,A relies entirely on pulpwood logs, mainly of sawlog size.

(d) Organizationof Industry - The Osara Report recommends the creation of a State Forest Indust:riesCorporation to include SEKA, the industrial activities of the Ministry of Forests, and all other State-controlledforest: industries. To attract private capital into the industry, the Government in July 1969 passed Resolution 6/11976 for the encouragementand development of forestry and export of forest products. Perhaps its most importantprovision was that raw material guarantees (both as to supplies and prices should be given potential investors). The Preliminary Development Plan, notes that the accelerated program envisagedby SPO could only be achieved through the attraction of internationalforestry concerns, and recommends that selected investorsbe granted (a) "designatedsupply areas" and (b) cuttings rights on a pilot venture basis. 1/

84. The FAO is right in stressing the formidable nature of the task to be undertaken. If it is at all to be accomplished, the administrative burden must he eased through decentralizatiLon, and massive doses of know- how and experience must be injected. The growing fibre gap and the high prices of wood in Western Europe have induced a number of large paper companies to invest in pulp mills outside their regular supply areas, sometimes with a view to growing and protected local markets (e.g. Brazil) btutother times with a view to stupplying, their traditional European customers. There are at least 20-25 European companies with the technical

1/ The details of these proposals have not been spelled out. - 40 - capability and generally also the financial resources which could make them potential partners in a major Turkish integrated forest induistries complex. Yet all those approached until now have insisted that raw materials guarantees are not enough; they want forest concessions in wllich they would apply modern commercial forestry practices. The mission recommends that Turkey be divided into a series of major forest concessions each large enough to feed an economic-size integrated forest complex. If, as a start say, four major concessions were granted, two of these could be retained for two mutually independent State Forest Industries Corporations while the other two might be reserved for large private integrated forest industry complexes grouping Turkish and foreign investors.

85. The necessity of a solution along some such lines may perhaps be granted. It does raise, however, the question what will happen to existing industries. In part, this would depend upon the proportion of the total Turkish forest area covered by major concessions. In some cases, existing enterprises may be successfully integrated with the new major industrial complexes. But there is clearly a need for a study to define the effect upon existing industry of major new schemes and to recommend measures to ease the transition.

C. Fertilizers

86. Fertilizer production valued at world market prices has been about $12.5 million equivalent in recent years, divided more or less equally between phosphate and nitrogen fertilizers. The industry accounts for about 1 percent of the value added in manufacturing, prices are very high, and phosphate fertilizer production has a high import content. Not only does Turkey lack phosphate rock deposits; its pyrites production is also insufficient to meet all the demand for sulphuric acid (needed to digest the rock).

87. From a slow build-up prior to 1960, fertilizer consumption has increased considerably in recent years, as shown by the following table:

Table 21: FERTILIZER CONSUMPTION, 1964-1969 (thousand tons of plant nutrients per year)

1950 1960 1964 1969

N 6 15 43 235

P205 2 11 42 220

Turkey's 1969 fertilizer use (N + P205 + K2 0), at 13 kg per capita, is well above the consumption in most developing countries as is the spectacular rate of growth in consumption in recent years. - 41 -

88. Until recently, the foreign exchange expenditurefor fertilizer imports was quite moderate, averaging$7.7 million per year in 1964-67. Reflectingrecent sharp increases in consumption,the average for 1968 and 1969 was $43 million equivalent; in addition Turkey, in 1969, spent about $2 million equivalentfor imports of rock phosphate. The consumption of potash is still very low.

89. Nitrogen fertilizers are produced mainly in a lignite-based plant, by Azot Sanayii, a State Enterprise;phosphate fertilizersare manufacturedby Gubre Fabrikalariat Iskenderunand Yarimca; main shareholdersare the Agriculturaland Credil:Cooperatives, Azot Sanayii and the AgriculturalSupply Office (anotherState Enterprise). There were only marginal increasesin the productLon of these plants between 1963 and 1968; the annual outputs reached about 35,000 tons of N and 50,000 tons of P205 in 1968. Productionwas exclusivelyin fertilizers of relatively low concentration: ammonium sulfate, calcium-aumonium nitrate and simple superhopsphate. GUbre's Iskenderun plant was converted to triple superphosphatein 1968; plans for a similar conversionof the Yarimca plant are in a preliminarystage. Production costs fcr all the above plants have been extremelyhigh, reflectingsmall plant scales, managerial difficulties,procurement under tied aid, intrinsicallyhigh cost of lignite-basedammonia, etc. At Iskenderun the imported raw material alone, in the recent past, has been more expensive than it would have cost to import the complete fertilizer.

90. Further rapid increases in fertilizer consumptionare projected in the Sub-sectorReview as shown below:

Table 22: PROJECTED FERTILIZER CONSUMPTION (thousandtons of plant nutrient)

1969 1972 1977

N 235 384 683

P205 220 355 600 The Sub-sector Review spells out the specif'icassumptions undierlying these targets (croppingpattern, price relationshipsbetween crops and fertilizers,distributor's margins, promotion of fertilizer use, etc.).

91. Production plans and foreign tradiebalances are summarized below. 1/ However, the effect of the receritdevaluation upon the fertilizer/cropprice relationship,and thereforeupon the demand for fertilizer,has not yet been taken into consideration.

I/ The figures refer to expected product:lonfrom each plant; design capacities,in most cases, would be higher. - 42 -

Table 23: DEbLAND-SUPPLYOUTLOOK FOR FERTILIZERS, 1969-1977 (thousand tons of plant nutrient)

1969 1972 1977

Nitrogen, Total Demand 235 384 683

Existing plants 60.6 102.4 102.4 lpras /a - - 400.0 Mersin (based on ammonia from Kuwait) 146.4 146.4 Additional import requirements /b 174.4 135.2 34.2

Phosphate, Total Demand 220 355 600

Existing plants 78.3 117.6 129.6 Mersin - 55.2 55.2 Marmara/Gemlik or equivalent project - - 55.2 Azot Sanayii, Samsun I and II - 73.6 133.6 Azot Sanayii, Ergani/Elazig - 41.6 41.6 Import requirements 141.7 60.6 184.8

/a Ipras may have to supply 30,000 tons of N for the Petkim caprolactam project most of wh:ichwould be recovered for fertilizer use in the form of by-product ammonium sulphate.

/b No consideration has been given here to the Afsin-Elbistan project for the large-scale production of power combined with a large ammonia/urea complex. The economics of this project remain to be demonstrated. According to the above estimates, Turkey's import requirements through 1977 could be covered through other more economical projects.

92. The Mersin and Marmara/Gemlik plants would produce a similar mix of fertilizers (each 180,000 tons of N and 70,000 tons of P2 05). For the phosphate rock conversion both would obtain their sulphuric acid from local pyrites which, however, is not yet secured. M4ersin, a mixed company grouping Kuwait Petrochemical Industries (40 percent), Azot Sanayii (40 percent), and private Turkish investors (20 percent) would obtain its ammonia from Kuwait while Marmara/Gemlik would obtain its requirements from Ipras. The Ipras ammonia/urea complex sponsored by the State Petro- letm Company (TPAO) would be the largest fertilizer plant built in Turkey using naphta and off-gases from the Ipras refinery as well as other feedstocks. The likely first-stage c:apacitywould be 750 t/d, i.e. about 200,000 t/y; planned second stage expansion, if completed by 1977, would be roughly sufficient to cover the expected nitrogen deficit by that time. If the Marmara/Gemlik project is implemented, most of the added ammonia would be needed for its production but the erection of additional facilities for the conversion of ammonia into urea and other types of nitrogen fertilizers should present no major difficulty. - 43 -

93. The total investments in the five new plants alone would exceed $200 million equivalent 1/, with Ipras, Mersin and Gemlik each costing about $50 million equivalent. Mersin is under coQstruction; Ipras is being appraised by IBRD; the Gemlik project (intended as a "mixed" public-private company with a private majority) is in a preparatory stage, and at the moment a doubtful proposition. One problem in finalizing this project is a guaranteed supply of local pyrites for sulphuric acid production; the alternatives would be to import sulphur, or possibly phosphoric acid with considerable saving in investment costs.

94. The total demand for sulphuric acid would increase fErom less than 100,000 tons in 1969 to 750,000 tons by 1972 and over 1.4 million tons by 1974. This demand would be approximately met if all acid plants under construction or projected were implemented on schedule 2/, and if the pyrite requirements (estimated at 720-775,000 tons by 1974) can be met. At the present moment, only 455,000 t:onsderived as a flotation by-product of the copping mining operations can be counted upon.

95. The Sub-sector Review concludes that, under proper management, the Mersin and Ipras plants as well as the smaller superphosphate operations at Samsun and Ergani would be profitable and economical operations. For Ipras this conclusion is subject to a Favorable outcome with respect to the Gemlik plant which would absorb a major portion of Ipras ammonia output - or the finding of an acceptable aLternate outlet. Many financial and technicalpoints remain to be clarifiedwith respect to Gemlik.

96. In meeting the productionschedule for fertilizers,the organization of construction,raw materials supply and financing, important though they are, will most likely take second place to problems of management and marketing. Devaluation,to the extent it changes the ratio of farm prices to fertilizerprices could cause a retardationof the assumed increase in fertilizerconsumption. An evaluation of-the efficiency of the present Turkish system of fertilizerdistributiLon has yet to be made. Forceful management in the fertilizerplants might, of course, find its own ways for reaching the farmer and streamliningdLstribution. But with the exception of Ipras, the responsibilityfor the construction and operation of major new fertilizerplants will be under thlecontrol of companieswhose past performancerecord, in all objectivity,is poor.

1/ Total investmentsin the fertilizer industry would be substantially larger, allowancemade for expansion of existing plants, production of sulphuric acid, port terminals,warehousing facilities,etc. 2/ Samsun, Mersin, Ergani, and Bandirma (Etibank) are under construction. Iskenderun, Marmara/Gemlik, and the B:Lack Sea Copper Smelter plants are in the project stage. Ergani and the Black Sea smelter plant would use smelter gases; the other plants would use pyrites. - 44 -

D. Petrochemicals and Plastics 1!

97. The petrochemical and plastics industry in Turkey todav is represented mainly by Petkim. As from early 1970, Petkim, a government- owned corporation, produces polyethylene, PVC, and dodecyl benzene in newly constructed plants. In a broader sense, the petrochemical and plastics industry also includes minor plants owned and operated by private entrepreneurs for plasticizer raw materials (phthalic anhydride), paints and lacquers, urea-formaldehyde resins and others. There is no substantial vertical or horizontal integration in this industry. 98. Petrochemicals and plastics imports, as defined here, grew to about $45 million in 1969/70, roughly the same amount as for fertilizer imports. An additional $8-10 million may have been spent for imports of resins and solvents. 99. The following table gives details on plants recently completed or under construction (intermediates such as ethylene, vinyl chloride monomer, and chlorine are not listed): Table 24: PETROCHEMICALS SECTOR: RECENT ADDITIONS TO CAPACITY

Initial Capacity Company Product (tons per year) Status Petkim, Yarimca PVC 26,000 in operation LD-Polyethylene 13,500 (+15 exp.) " " DDB 10,000 startup SBR (Rubber) 35,000 under construction DBR (Rubber) 13,500 " i Plastifay Phthalic anhydride 6,000-7,000 starts 70/71

Kimas Phthalic anhydride 6,000 " 1971 Three producers Plasticizers 18,000 " end of 1970

100 Petkim is owned by the Turkish Petroleum Company -- TPAO (55 percent) and two State Retirement Funds. Its Yarimca plant adjacent to the Ipras Refinery started up in early 1970. It uses naphta from Ipras as its basic feedstock, and has a naphta cracker of 30,000 tons per year ethylene capacity. Neither this cracker nor the associated PVC-complex, low density polyethylene plant, or dodecylbenzene unit are of competitive size (except possibly for PVC), and this handicap is not offset by othier favorable factors such as low material costs. Hence they can live only under high protection; the same applies to the unit which produces tetramer, a basic intermediate.

1/ Our definition does not include items converted from petrochemicals Uc2 as synthetic fibres, plastic pipe, moldings, film, or tire, etc. In the Five-Year Plan, the "chemical industry" sector includes the following subsectors: Basic Chemicals, Other Chemicals for Industrial Use, Fertilizers, Dyes, Plastics and Synthetic Rubber, Synthetic Yarn and Fibers, Industrial Oils, Paints and Varnishes, Soaps and Detergents, anc Other Commodities. Though our definition of "Petrochemical and Plastics Industry" may be somewhat arbitrary, this subsector and the fertilizer subsector together cover the vast bulk of chemical products, especially those relevant for future development. - 45 -

101. Dodecyl-benzene(DDB) obtained from propylene is a mnainraw material for non-biodegradabledetergents. It is doubtful whether productionof these types should have been initiatedat all; future laws on effluent purificationin Turkey may call for biodegradable detergents. 102. The synthetic rubber plant makes the two major types of styrene- butadiene-andcis-butadiene rubber (SBR and CBR)o It is of a reasonable size as is the connectedbutadiene unit. The latter is to be fed by imported C4-fractions-- a very unusual undertakingand not proven to be profitableor even technicallyfeasible due to possible plugging of C4 componentsduring shipments. 103. The two phthalic anhydride (PA) plants scheduled to start in 1970 or 1971 have reasonablecapacities based on imported o-xylene. The Plastifayworks include units for the conversionof their total output of phthalic anhydridewith imported 2-Ethylhexanole,butanole, and iso- decanole, into plasticizers (DOP, DIOP, DBIP,DIBP), and also dioctyladi- pate; all of these products are used as plasticizersin PVC, polyethylene and other plastics-convertingindustries. 104. The attached table 25 suggests a sizeable and rapidly growing market for petrochemicalsin Turkey. The projectionsare based primarily on studies made by Petkim, SPO and Badger, and no in-depth evaluationby the mission has been attemptedat this time. The column to the right indicates the year when there would be enough of a market to build a competitivelysized plant. Most of these estimatesassume fairly sizeable exports predicatedupon cooperationwith foreign companies (who might be willing to arrange such exports in order to make proposed early investmentsviable) and/or preferentialexport outlets within the RCD area. 105. On these market assumptions,the Turkish Government:drew the followingplans: (a) expansion of the Yarimca complex; (b) constructionof a new large complex at Aliaga; (c) "downstream"plants to convert basic intermediatesfrom the above complexesinto other intermediatesor end products. 106. The following illustrativealternative prepared by the mission is predicated upon some scaling down of Petkim's plans for both Yarimca and Aliaga. Specifically,piecemeal additionsof new undersized units to those already existing (e.g. in polyethyleneor PVC) have been avoided. Except as indicated,the followingYarimca units would become operational in 1973: tons/year

LD-Polyethylene 54,000 SyntheticRubber, SBR 35:,000 (1971) CBR 13,500 PVC 26,000 DDB l0,000 (1971) - 45A -

Table 25: DLUiD FOR PETROCHHICALS AND.PLASTIcs IN TUK!17 (in million tons per year) Market Size Justifies Pro- Intermediates 1967 1968 1970 1972 1977 duction Irom. .. on (aM-ual) 2 more plants1973 Phthalic Anhydride 2,i35 4,500 (4,900) 7-8,000 15,690 and 1977 2-Ethylhexanole (9,0002-2,000) Ethylene oxide and 6,670. 10,000 19,000 after 1977 Glycoles DDB 5,716 7,48 1B/ 16,000 (26,000) 1971 DOP Plasticizers 3,602 7,000 (7,900) 12,000 (11,000) now Carbon Black 8,272 l4,320 (11,000) 16,800 (18,000/14,500) 30,000 1973 (first stage) Triethanoleamine - 1,815 Benzoic Acid (2,000-3000) Maleic Acid 5,000 19727 Benszene 10,304 11,000 13,000 (40,000) Xylenes 4,108 4,600 5,500 ( 8,400) Polyrinylacetate 5,921 7,800 9,300 ( 6,500) Ethanole 18,000 - 22,000 Phenole 1,000 - ( 3,500)

Plastics

PVC 16,751 31,i50 3/ 64,445 3/ 134,225 now HD-Polyethylene 20,o85 3,725 6,060 20,420 1975 LD-Polyethylene 19,000 20,900 33,700 65,980 Polypropylene 6,065 9,105 24,935 1977 but two small plants exist or ., ~~~~~~~~~~~~~underconstructicti Polystyrene 5,c46 8,260(10,500) 11$000 (18,200) (18,000) 1977 Thermosets (13,000) now ABS-Resin 6,000 1972? Urea-formol 15,000 (30,000) around 1972 Formaldehyde Plastics ( 3,000) ( 5,500)

Syrthetic Fiber Raw Materials

D;IT 8,2902/ 16,200 29,370 not before 1976 Acr;-lo.. triie 1.,500 7j30u ( 3,900) 16,300 alter 1977 C;apro-l4tau: 2,491 13,100 (11,000) 17,920 (19,500) 30,200 not before 1977

Other Products

SBR-Rubber 31s,645 20,400 25,000 (1973) 35,000 1972/73 CBR-Rubber 7,500 (1973) 11,500 Detergents 29,000 I&,00oo 4/ 56,oo0 Polyester Varnish 8,000- now

1/ Figures for 1970, 1972 and 1977 are based on estimates made by Bedger and Petkim.

2/ Figures for 1969 (actual).

3/ Plastifay's estimate is 22,000 t/y in :1970, and 44,000 t/y in 1972 (half of it flexible PVC). The Five Year Plan says 27,200 tons in 1970, and 39.000 tons in 1972 (or even 31,000 tons only).

4/ Fbr furniture; include lacquer.

Note: All figures in parentheses: estimates from Five-Year Plan ("Chemical Industry," page 470). - 46 -

The total additionalinvestment would be about $100 million, of which about $47 million in foreign exchange. Co-products (pyrolysisgasoline and LPG) could be processed into other chemicals,but it would probably be preferable to await the completionof the Aliaga complex so as to have enough intermediatesfor competitivelysized processingplants.

107. For the Aliaga complex, the alternativescheme proposed also deviates from Petkim's Plan, since units are not included for:

- Phtalic Anhydride (privateplants exist or are under construction)

- DMT (a private project is being considered)

- LD-Polyethylene(this was included in the Yarimca complex instead).

Aliaga would then consist of the followingunits and capacitiesat a total estimated cost of about $300 million, about half of which would be in foreign exchange:

108. Over 100,000 tons of co-products (C4-fractions,vinyl chloride monomer, styrene monomer) would become available for-Yarivica. But there would still be a substantialsurplus estimated X 400,000 tons, of various intermediateslike propylene,ethylene, raEfinate for aromaticsproduction, etc., and careful market and engineeringstudies would be needed to achieve a good balance of additional processingfaicilities.

109. In addition to Aliaga, other new petrochemicalunits may become relevant:

- DMT or PTA; a joint venture with Teijin of Japan is under discussionwhich might include exports to EEC countries, with a capacity of 30 - 40,000 t/y becoming operational in 1975 or later.

- Caprolactam: an earlier BASF project seems to be much delayed, or cancelled;other European and Japanese proposals are under discussion.

- Carbon black might be produced at a rate of about 20,000 t/y in 1973 and 30,000 t/y in 1977, based on "ethylene tar," a hydrocarbonby-product from the cracker operation.

- 2-Ethylhexanolemight be produced in quantitiesreqjuired for plasticizermanufacturing, probably 11 - 13,000 t/y in the mid-seventies;whether this is a competitiveventure remains to be evaluated.

- A polyvinyl acetate plant might be justified about 1975; it would have to be based on imported vinyl acetate monomer, since producing the latter competitivelyfrom ethylene in Turkey would require a much larger demand. I - 47 -

Table 26: ALIAGACOMPLEX - ALTERMrATIVEPROPOSAL

Fixed Investment CapAacity Local F.E. Total Plant, Product (T000 tty) TU.S.TMlilionT)

Cracker, ethylene output 200 27.8 27.3 55.1

HD Polyethylene 30 8.1 13.1 21.2

Ethylene oxide and glycols, TEA 55 6.8 13.0 19.8

VCM 95 11.0 12.2 23.2 PVC 65 12.4 18 0 30.4

Polypropylene 35 11.5 17.7 29.2

LPG (Treatment only) 110 3.4 2.0 5.4

Electrolysis/Chlorine 63 13.0 12.4 25.4

Styrene 34 .6 4. 8.°

Polystyrene 25 7.6 6.4 14.0

Cyclohexane 31 1.3 1.1 2.4

Aromatics Plant (with transal- kylation, xylene isomerization, etc) 7.6 12.7

Total Plants 115.1 140.2 255.3

Offsites, utilities, storage (LFG, C , C5, caustic, xylenes3 raffinaUe) 27.0 14.0 41.0

GRANDTOTAL 142.1 154.2 296.3

Based on Petkim's pre-devaluation estimates, April 1970. - 48 -

110. The plants just mentionedwould probably require a total investment of about $60 mill:Lonof which $35 million foreign exchange. Total investmentsin the petro-chemicalsindustry would be on the order of $460 million equivalentabout one half of which would be foreign exclhange.1/ Whether or not such theoreticalexport opportunitiescould be realized would depend upon (a) the nature of future cooperationwith international companies and (b) cooperationwithin the RCD area. Virtually all these products are under severe competitionon the world market, and Turkey has no special advantage in this line of manufacture. Participationby international companies in some of the projects pending would be highly desirable. If no exports are made, capacity utilizationwould fall, with a resulting further increase in prices which would already be high by international standards.

111. If these plans are implemented,import requirementsfor petrochemicals and intermediatesmight grow somewhat as follows:

Table 27: DIPORT REQUIREMENTSFOR PETRO-CIIEMICALS (figuresin million $ equivalent)

1970 1972 1977

I. Products; for which import substitutionis planned 45 39 20

II. Products for which no import substitutionplans exist 10 13 20

The Sub-sectorReview proposes an evaluationof productionpossibilities for Group II products which include e.g. 2-Ethylhexanole(for plasticizer manufacturing),acrylonitrile, polyvinyl acetate, ethyl alcohol, phenols, maleic anhydride (used in plastics manufacturing),etc. This evaluation should be undertakenin the context of the RCD - agreement with a view to earlier implementationand other advantages.

112. On the assumption (almost certainlyoveroptimistic) that any surplus of domestic production (estimatedas 90 percent of capacity) over dJlme ic demand would be exported, total exports would be as follows (figures in million $ equivalent):

1970 1972 1977

5.0 7.0 14.0

1/ In addition, about $70 million equivalent (including$30 million equivalent in foreign exchange)would probably be required for the plastics conversionindustry (calanders,injection moulders, extruders,film- stretch plants, plants for making plastics machinery,etc.). - 49 -

113. The above analysis was made on the followingpremise: accepting the Turkish desire for a substantialincrease in the production of petrochemicals,how can such expansion be achieved in the most economicalway? The unfavorablestarting point at Yarimca (with its undersized units for the productionof basic intermediates)was accepted as an historical fact and the focus of our analytical frame (expansionalternative) was on the phasing-in of new units of economic size as markets are developedat home or for export.

114. Economic-sizedplants, however, is a necessary but not a sufficient condition for viable operations. A set of other conditions must also be met. First, raw materials must be available at competitiveprices. Secondly,petro-chemical production being highly capital-intensive,the economics are extremely sensitive to the cost of constructingthe plant (given its size), the ability of the entrepreneurto get the plant into full operationwithin a reasonableperiod (consideringalso the high rate of technologicalobsolesence in this industry)and finally, the availability of investment funds at a reasonablecost. Thirdly, even where the above conditions are met, production costs must be competitivewith the probable import cost (which might, for some products, be below the cost of production of reasonably efficient plants).

115. A preliminaryreview suggests that Turkey would be at a competitive disadvantagein petro-chemicalsproduction. It is true that at the present moment, there is surplus naphtha in Turkey; and the true cost of naphtha for immediate use would be its export price. But this surplus would change into a shortage with the implementationof the proposed petro-chemicaland fertilizercomplexes. ilence,the value of naphtha would have to be based upon the import cost (probablyabout 11/4higher than the present export value). Secondly, recent experience from Turkey and other developing countriessuggests that a new petro-chemicalscomplex would cost considerablymore and would take a longer time to build and bring into full production than a similar complex in an industrializedcountry. M4oreover,if 12 percent is regarded as a normal cost of capital in industrialized countries, the correspondingequilibrium price in Turkey would be at least 15 percent, probably higher. Thirdly, there is some indication that many petro-chemicalshave been sold in recent years at prices which, on an average, have been below the long-run cost of production. Otherwise stated, world market prices are based, at least in part, upoIl marginal costing. (Whether this would be true, inside the Common Market, is a matter for further study).

116. In conclusion,the time has come for a thorough reappraisalof planning in the petrochemicalsector to determinewhether the expenditures of huge sums in this sector would be economicallyjustified. - 50 -

E. Steel

117. The Turkish steel industry today produces roughly eight percent of the value added in manufacturing. The industry's importance is enhanced by the fact that the bulk of its raw materials (in particular coking coal, iron ore, and limestone) which account for about one-third of the present selling price for steel are procured locally. In 1967, there were about 20,000 insured workers in the basic metals industries (including non-ferrous metallurgy). The total employment (including salaried personnel and therefore not comparable to the figure for insured workers) at the two integrated steel mills at Karabuk and Eregli at that time was respectively about 11,000 and 4,000.

118. In 1967, Turkey consumed about one million tons of steel, of which slightly over 20 percent was imported at a total foreign exchange cost of about $30 million equivalent. In recent years, the country has been plagued with a persistent stee]. shortage reflecting the steady expansion in construction and manufacturing activities coupled with rigid import controls and, particularly in 1969, a world market scarcity of steel. In 1970, about 500,000 tons of steel and pig iron may be imported at an estimated cost of about $70 million equivalent. The two State steel mills, Karabuk and Erdemir, have a monopoly on imports of iron and steel, excepting only large users who obtain individual import licenses.

119. The State-ownied Turkish Iron and Steel Corporation at Karabuk (see map) was founded in 1937. It is an integrated producer, (three blast furnaces, six open-hearth furnaces) of primarily bars, rods, shapes, billets, sheet bars and cast iron pipe. Steel ingot production passed the 100,000 ton mark in 1948, the 200,000 ton mark in 1959, the 400,000 ton mark in 1964, and is expected to attain 600,000 tons this year. Karabuk is badly located - dependent upon railroad transportation for both coal and, at the end of a 1,000 Km rail line, iron ore. Its costs are increased by the small operating units for the metallurgical facilities and by the very low output per person employed.

120. The Eregli Iron and Steel Corporation (Erdemir) is an integrated producer of flat steel products with a present ingot steel capacity of about 525,000 tons, The company started operations on schedule in 1965 and is noYJ3p£cyating at capaclty. Its costs are high because of the small scale of operations and the high initial cost of the plant wlhich was procured, in the main, under tied a-Ld. Although the company has made progress in operational efficiency, its total manpower use is probably about 40 percent higher than an internalional standard V/. Erdemir is well located on the Black

1/ Non-ferrous metallurgy (even though it is a manufacturing activity), for reasons of convenience, is analyzed in the companion volume on "The Mineral Industry in Turkey". 2/ Expansion Program Eor Eregli Demir ve Celik, prepared by the Koppers Company, May 1969, Vol. 1, p. F-2. - 51 -

Sea near the coal fields. Nevertheless, its present iron ore costs are quite high based upon domestic ore. This ore has to travel 25-75 km by rail to the port of Samsun before transshipment by sea to the mill.

121. Apart from the two integrated mills, there are two medium-sized steel producers. The Metas Metallurgical Works at Izmir, a private company with electric steel furnaces, is reported to have produced about 60,000 tons of rolled steel in 1969, mainly reinforcing rods. The MKEK (State Machinery Corporation) Kirikkale mill, with four open hearth and electric furnaces, produced about 34,000 tons of alloyed steel bars and rods in the same year. In addition, there are a great number of re-rollers, includirLgan Istanbul establishment which produces about 20,000 tons of black and galvanized sheets from sheet bars supplied by Karabuk.

122. Turkey is in a stage of industrial development where the projection of steel consumption based upon simple statistical techniques is doomed to failure. For a proper estimate of future demand, the consumption structure, by types of steel and consuming sector, would have to be carefully catalogued, and this whole matrix projected into the future, based upon (a) an agreed macroeconomic framework and (b) detailed assumptions as to developments in major steel-consuming sectors, e.g. automobile production, shipbuilding, oil pipelines, construction activity, food canning, etc. The Mission recommends that such a study be undertaken as a matter of top priority. In the interim, the Mission has accepted the S.P.O. estimate that Turkish demand for steel would triple between 1967 and 1977.

123. The following table summarizes the projected growth in demand and present plans for meeting this demand:

Table 28: DEMAND-SUPPLY OUTLOOK FOR STEEL, 1967-1977 (figures in thou,sand tons of finished steell' excluding castings)

1967 1972 1977

Demand 1,050 1,871 3,17

Supply

Karabuk 324(437) 442(484) 484 Erdemir 267 450 935 Iskenderun - - 700(900) Other 353 451 738 Imports, finished steel 106 528 319 billets (113)) (220) (131)

124. The Mission has not taken into account Karabuk's relatively vague plans for expansion to the one-million ingot ton level but accepted only the immediate 600,000 tons target. Erdemir plans call for an expansion from the present 525,000 ingots level in four stages to about one million

1/ Figures within parentheses also include the production of billets for sale. - 52 -

tons of liquid steel equivalent by 1974 and 1.1 million tons by 1980, at an estimated cost of $345'million equivalent (slightly over $360 per additional ingot ton). These plans are presently being reviewed by consultants. A preliminary appraisal suggests that the expansion might be economically justified as an addition to existing facilities but would fall far short of international competitiveness in terms of average costs.

125. Turkey's Third Integrated Steel Mill is being constructed at the port of Iskenderun, with USSR technical and financial assistance. As of April 1970, about TL 200 million had been spent, mainly on infrastructural development, and the equipment had been ordered. In the first one-million ton stage, the mill will have two blast furnaces, three oxygen converters, and three continuous c:asting units. Production is expected to be about evenly divided between light bars and rods and medium and heavy bars and shapes. The total investment cost including all infrastructure (figured at the old exchange rate of TL 9 per dollar) is estimated at TL 4.5 billion (say, $500 per ton ingot equivalent) of which $255 million would be foreign exchange. The USSR will provide a ten-year loan of $113.7 million equivalent. The mill starts with several disadvantages. Coal would be shipped all around Turkey from Zonguldak; iron ore would come by a low-capacity railroad from the Sivats region. The mill would be located in an area where there is ]ittle skilled manpower and far from the major markets in Western Turkey_ 1 / At an investment cost of $500 per ton for the first stage as compared with a probable maximum of say about ($250) million for the first stages of new coastal integrated bar and rod mills in Western Europe, there is no hope for a reasonable return on the investment.

126. A critical review of the Turkish steel expansion program raises three major questions - Should Turkey be producing steel at all? - Should steel production be based upon domestic iron ore? - Where should production be located?

127. The combined cost of the Erdemir 1.6 million ton program plus the first stage of Iskenderun, estimated at $800 million equivalent, is an enormous sum for Turkey. The average cost of foreign exchange savings for Erdemlr has been high; there is reason to believe that the corresponding cost for Iskenderun will be even higher. In the absence of a two-price system, the export competitivEness of steel-using industries will be reduced. 'i ce i,ost steel is used for investment goods, the real value of Turkish

1/ In this context, a statement by a Canadian steel consultant to the Turkish Government is worth recording. In a competitive market, his report points out, good service to steel industry customers is very important. This is said to be the main reason why two integrated Canadian steel plants right: in the center of the market, though far away from ore and coal, are profi able whereas a third plant, at a great distance from the market, was in bankruptcy once and a fourth plant, after many financial difficulties, is now being liquidated. The latter mill never attracted any appreciable number of steel-using industries to the area, in spite of generous Government incentives. The relationship of steel mill location to regional industrial development is touched upon briefly in para. 186. - 53 - investmentswill also fall. The main argument heard by the Mission in defense of the steel policy - the shortage of steel - would have merit if it were i'mpossibleto obtain steel at any price. On the whole, this has not been true. The Turkish steel shortage has been related primarily to the country'sshortage of foreign exchange and the difficultiesof rationing that exchange in a flexible manner. Yet, ihere is another side of the coin. An objectivestudy could conceivablyshow that, in periods of shortage, major steel exporting countrieshave failed to provide their traditional customersin developing countrieswith a fair share of the total supply. Beyond doubt, the exaggeratedups and down3 of the internationalsteel market are harmful to developing countries,.Though these aspects of the internationalsupply situation do not justify higlhcost steel mills, they do induce their construction,hence are in[mical to the best interestsof industrializedand developing countriesalike.

128. Most experts have singled out the Divrigi deposits in Sivas province in Eastern Central Turkey, as those most likely to provide an economic source of iron ore. The present Divrigi mines are operated by a subsidiaryto Karabuk. liiiPc-ppers Company, in a recent study, gives total reserves (proven, probable and poSiiilbc as about 40 million tons of ore averaging 58-59 percent on a dry basis. TiheKarabuk managementmaintains that the reserves are actually about 120 million tons. The company has a prGject for increasingthe present production from 1.0 to 4.0 million tons, of which 3.0 million tons lump ore and 1.0 million tons pellets from accumulatedfines. The investment in a one million t/y pelletizingplant is estimated at TL 400 million (post-devaluiationtotal). Another TL 270 million would be invested in a blast furnace for the productionof foundry iron at Divrigi. The major reserves of Divrigi contain about 2 percent sulphur; at the present moment sulphur removal at Karabuk which is the main user of the Divrigi ores is achieved by roasting on two sinteringstrands. A central roasting, concentration,and pelletizingplant at Dlivrigito supply all three steel mills and the iron foundries would seem a rational solution. The cost of the ore loaded on train at the mine is only about TL 30 per ton but this cost increases to, say, TL 180 per ton. delivered Karabuk. At $12 per ton for 38 percent ore, or 21 U.S. cents per unit of iron, this is far above an internationally competitive price for this type of ore. The competitiveness of Divrigi ores, however, could be improved by a lowering of transportation charges 1/ and by the proposed pelletizing

I/ The railroad freight Emden-Saar (about 570 km) for iron ore was $2.45 per ton in 1969. In contrast, transportation Divrigi-Karabuk (about 1,000 kmi) cost $9.35 per ton (translated at the new exchange rate without allowances for any freight rate increase related to the cievaluation). Ltalconsult, in its recent study of Transportation Coordination Services in Turkey (Oct. 1969) recommends a railroad charge based upon the long- run marginal cost of transport of TL 111 per ton for Divrigi-Karabuk and TL 68 per ton for Divrigi-Iskenderun. Their calculation reflects a shadow exchange rate of TL 13 per dollar. - 54 - at the mine. Finalization of the Divrigi project is therefore a top priority in Turkish industrial development. 1/

129. The loci for the next steel expansion phase, bringing total Turkish finished steel production to 3-4 million tons, are now pre-determiined. Before committing itself to a subsequent phase, the Government should engage the services of first rate consultants to provide a blueprint for future development, exploring the economics of self-sufficiency versus imports and giving specific recommendations for the siting of new production.

F. Machinery and Metal Products Industries (excluding electrical machinery)

130. In 1969, the machinery and metal products industries accounted for about 11.5 percent of the total Turkish manufacturing output, with machinery production the most rapidly expanding branch of all Turkish manufacturing industries. The share of the metals products and machinery industries in total manufacturing employment was probably only slightly less than their combined share in value added (Table XI-A-). Imports of metal products and machinery totalled about $227.5 million equivalent - about 31 percent of total manufactured imports. Imports classified under metal products were of relatively minor importance; imports of machinery, on the other hand, accounted for about 43 percent of the total supply. Exports are very small, and totalled only about $1.0 million equivalent in 1969.

131. Metal products include various items used in the construction industry (steel structures, radiators, nails and screws) and in agriculture and household consumption (farm implements, hand tools, kitchen utensi .s, etc.) Domestic demand, production, and imports for major categories of machinery and parts in 1967 were estimated as follows in the Second Plan.

1/ The above discussion does not take into account recent promising discoveries of iron ore at Hasanceleb; in the same general area as Divrigi. - 55 -

Table 29: DOMESTIC DEMAND, PRODUCTION AND IMPORTS OF MACHINERY, 1967 (TL million at 1965 prices)

D P I

Steam-equipment & boilers 161 78 83

Internal combustion engines & other power generating machinery 248 17 231

Construction and mining machinery 350 86 264

Heavy industry machinery 196 41 155

Machine tools 125 49 83

Textile machinery 198 45 153

Food and beverages processing machinery 129 36 93

Compressors, pumps, turbines 186 24 163

Ball bearings, gears and transmissions, etc. 186 53 133

Farm machinery (excluding tractors) 187 154 43

Air conditioning and heating equipment 86 39 47

Consumer equipment 438 410 334

Other 851 437 414

TOTALS 3,341/ 1,469 1,896

/1 The excess of imports plus production over domestic demand (altogether TL 15 million) represents exports.

132. Structural data on the machinery' and metal products establislhments are very inadequate. The latest census covered the year 1963, and production having grown 2 1/2-3 times since then. Census figures are no guide to the present structure. Nevertheless, in 1963, over three quarters of the output of both metal products and machinery came from factories employing more than 100 persons. Most of the industry is centered around Istanbul and Ankara. In the Sub-Sector Review, three types of activity are identified: - 56 -

(a) Heavy FabricatingPlants - including the very modern Sugar Industry Workshops, the MKEK FabricatingPlants and the Turkish State Railway and the State Hydraulic Services Work jobs, all in the State sector as well as another half-dozenplants in the private sector, each converting 'i- 10,000 tons of steel per year into relativelysimple structures and equipment like cranes, rock crushers,bcl-ets-, sugar and cement mill equipment, etc.

(b) Batch-productionShops - making a range of machine tools and small metal cutting tools under license, small diesel engines and pumps, motor cycle parts, etc. This category accounts for the majority of the engineeringestablishments in Turkey; many of them produce their own castings of generally adequate quality.

(c) Flow-production- The major examples are light engineeringitems for households like refrigerators,washing machines, and vacuum cleaners. Motorcycles and small diesel engines might soon graduate into this category. Exports of refrigeratorshave been successfullyinitiated; the Turkish content is said to be 85 - 90 percent.

133. There is a sizeable number of new factorieswith modern machine tools, and products are often manufacturedto a high standard of technology and finish, i.e. the capabilityfor growth exists.

134. The price competitivenessof the engineeringindustries is difficult to evaluate,due to the wide range of products manufactured. As an illustration, however, at the new exchange rate, aluminum extrusions,small twist drills, large refrigerators,9 hp diesel engines and centrifugal and deep-wellpumps can be made competitively;common steel structures (based upon imported steel), pistons for trucks, and 6 hp diesel engines would appear to be about 10-15 percent more costly than imports. Project studies for two plants to make forgings for the motor vehicle industry indicate good competitivenessin spite of the fact that this is a typically high volume product. The same seems to hold true for castings, e.g. those incorporatedin agriculturaltractors.

135. Engineeringindustries place great demands on industrial structure, plant organization,and worker skills, and Turkey has its share of problems, as indicated below:

(a) Acute Shortage of Management and Skilled Labor - As experienced management is scarce, the entrepreneuris reluctant to delegate responsibility,and expensivemachinery is allowed to operate only one shift per day. Skilled labor often migrates to Germany, and is then normally lost to Turkish industry. Design and production met}hod engineers ar(escarce, and those of sufficient experience a rare ass-et. - 57 -

(b) Acute Shortage of Imported Materials, Parts and Components - This is particularlytrue for sub-sectorswhere imported inputs form a substantial position of the total production cost, e.g. machine tools and heavy engineeringproducts. In some cases, it has led to uneconomical favoring of producers working on a license from the Eastern Bloc since, under barter trade, materials arndcomponents from these countriesare more readily available.

(c) High Prices for Certain Domestic Inputs - At the old exchange rate, Turkish steel sections,plates, and sheets were more than twice as expensive as world market prices. In the absence of either (a) a complete revision of steel pricing policy and (b) complex arrangements to make domestic steel availableat world market prices whierevermachinery manufacturersmeet foreign competition,the growth of the sector will be both stunted and distorted.

(d) Low utilizationof Heavy EngineeringFacilities - The largest and most recent heavy engineeringplant, the Sugar CorpcrationWorks, is a public enterprise as are the fabricatingworks of M.K.E.K. and the State Railways. The private sector has installed,or is in the process of installingvirtlaally parallel facilities,and plant utilizationin the heavy enigineeringsub-sector averages only 40 percent of a single shift. In this case, low capacity utilizationwould seem to be more related to overinvestmentthan to a shortage of imported materiaLs and parts. S.P.O. approval of a new plant to make pulp and paper mill machinery would need to be preceded by very close economic evaluation.

(e) Problems of Public Sector EnterprLse - Most of the public sector enterprises with considerablesteel fabricatingand engineering facilities have difficultiesin achievingefficient operations. MKEKalone employs 16,000 and the State Railway Workshops 10,000. IIKEKmanufactures an amazing range of products, including:

- alloy steel, galvanized and barbed wire, copper and brass semi-manufactures,grey and malleable castings,gears - cement mill equipment, tea processing plant - machine tools, textile loomas - tractors, road graders, air compressors

In some of these items, (e.g. small lathes, drills, and milling machines), it duplicates the activities of the private sector. Tractor production at a rate of 300 per year is, of course not economical. A high degree of overmanningis apparent in all the MKEK shops and a lack of close supervision. - 58 -

136. On prima facie grounds it may seem reasonable for Turkey to accelerate the developmentof machinery production. Machinery and metal products account for over thirty percent of manufacturedimports, and demand for these products is expected to double during the Second Plan period. Other favorablefactors are unused heavy metal-workingcapacity, and rapidly increasingindustrial capability. Major raw material problems might soon be solved. The EngineeringSubsector Review concludes, that, on a straight cost basis, many Turkish establishmentsshould be able to competewith little or no protection.

137. There is also a wealth of project ideas. Planned new investments include facilities to produce boilers and other pressure vessels, pulp and paper machinery,textile machinery,machine tools, pumps, compressors, valves, and household appliances. Other plants would produce parts for the motor vehicle and tractor industries (diesel engines, gears and transmissions, forgings, shock absorbers,etc.) Consideringalso expansion of existing lines, the average annual growth in machinery output could approach twenty percent.

138. Yet, a word of caution is in order. Expansion must be tailored to economic feasibility,and time must be allowed for the development of managerialand design capability,adequate supplier capacities (e.g. in castings and forgings),worker skills, etc. Experience from other countries suggests that transfer of know-how and skills is quite difficult in this industry, that experience can be acquired only step by step, and that extreme market fluctuationsin developing countries (causedby the thin base of demand for specializedindustrial equipment, erratic procurement,and domestic preferencepolicies, etc.) are quite likely to play havoc with plant utilization and profits. Governmentalpolicy which has focused mainly on rapid build-up of capacity muLstbecome increasinglyconcerned with identification of those mechanicalproducts, in the production of which Turkey might have a comparativeadvantage, and to concentrateits support accordingly.

139. In conclusion,a series of measures are indicated, including the following:

-- An inventoryof metal-workingcapacity -- Selective pre-investmentstudies of subsectors and projects,with implementationsubject to rigid economic feasibility criteria Ra-ordering of priorities in the Turkish import program, deemphasizing investment goods in favor of "maintenance-of- production" imports -- a shift that could be greatly facilitated by an industrialimports loan -- Creation of an associationof Metal-workingIndustries grouping both public and private sector companies. Its functionsmight include, inter alia, (i) maintaininga register of metal-working capacity, (ii) encouraging increasedsubcontracting of specialized operations among members, (iii) promoting and advising members on new technology and new production methods, (iv) promoting - 59 -

standardization. Together with the developmentbanks, the Associationshould strive to gain a view of the opportunitiesfor Turkish engineering industriesin the European context and should sponsor such restructuring(by merger, cooperationagreements, or otherwise) as this view would dictat.e. -- Restructingof public sector industriesto permit improved use of present metal-workingfacilities and, particularlyin ithecase of TIKEK,to make separate corporateentities out of activ:Ltieswhich are not linked by any economic or managerialrationale.

G. Motor vehicles and tractors

140. Until recently,Turkish production.of motor vehicles and tractors had not gone much beyond the assembly stage. The combined value added in motor vehicle and tractor assembly in 1963 was probably about TL 80 million. While the objective of the First Plan was to reduce imports through domestic assembly combined with a certain minimum of local content (e.g. 60 percent for tractors by 1967), the Second Plan envisaged a high degree of integration of domesticallymanufactured parts, to be enforced according to a rigid time-schedule.

141. To a substantialextent, these objectivesare being :Lmplemented as witnessed by the following figures:

Table 30: MOTORVEHICLES AND TRACTORS: IMPORTS, DOMESTICPRODUCTION, AND IMPORTCONTENT OF DOMESTICPRODUCTION, 1962-69

Imports (units) 1962 1967 1968 1969

Tractors 2,574 Trucks and pick-ups 13,463 Buses and mini-buses 1,099 Passenger cars 3,173 Domestic production (units)

Tractors -- 17,200 19,200 18,500 Trucks 1,354 12,700 Buses and mini-buses 2,230 2,125 Passenger cars 877 4,200 Domestic content (%) Tractors 25/1 45 50 52 Trucks 20/1 45 50 52 Buses 30/1 65 70 70 Passenger cars --

/1 1964 - 60 -

142. In aggregate terms, the cif value of imports and the ex-factory value of domestic productionof motor vehicles (excludingtractors) developed as follows (TL million): 1/

1964 1969 (E) Domestic production 549 2,208

Imports (assembledunits only) 191 497

143. There are at present seventeen companies engaged in motor vehicle and tractor production. Of these, six manufacture tractors, (two of these are in the public sector) four make buses, and three make passenger cars and/or light pick-ups. The domestic content of 4-7 ton trucks and 45-55 hp tractors is typically 50-60 percent -- engines, transmissionsand electric equipment are imported. The only passenger car manufacturedin Turkey is the fiberglass-bodiedAnadol with a Ford engine and power train. At the old exchange rate, prices for both trucks and tractors are about twice the equivalentc.i.f. prices. At the new exchange rate (with allowance for the added cost of imported inputs,, this differencemight be reduced to about 40-50 percent for trucks and 50-70 percent for tractors. Nevertheless,at a domestic content of 50 percent, the necessary protection of the domestic value added would be 80-140 percent.

144. The market for trucks and buses may be estimated based upon the recent traffic forecastsby Italconsultin its study of Transport Coordi- nation in Turkey (October 1969). The number of cars per 1,000 inhabitants in Turkey (3 units in 1967) is low in relation to the country's per capita income and with increasedavailability of cars is likely to grow to, say, 10 units by 1977. The tractor fleet virtually doubled between mid-1965 and mid-1970 when it reached 100,000units. Though at 4.2 tractors per 11,000 ha. of cultivatedland, the market is far from saturated,the total sales of tractors, including increasesin the fleet and replacements,are not expected to much exceed 25,000 units by the mid-1970's. On these assumptions,the Turkish motor vehicle and tractor fleet and the correspondingannual demand (takinginto account replacementneeds) may grow somewhat as follows (in thousand units):

1/ Imports valued at old exchiangerate. It should be realized, of course, that domestic prices were roughly twice as high as estimated c.i.f. prices. - 61 -

Table 31: DEMAND FOR MOTOR VEHICLES AiD TRACTORS, 1967-1977

1967 1972 1977

Vehicle fleet

Trucks 91.5 116.7 149.0 Buses 27.8 35.5 45.3 Passenger cars 106.0 201.7 405.8

Tractors 75.0 -- -

Annual Demand

Trucks 12.0/1 13.0 16.0 Buses 5.0/1 3.8 5.0 Passenger cars 12.07T 32.0 63.0 Tractors 17.0 18.5 27.0

/1 Increase in vehicle population only without considering replacements which are believed to have been relatively small.

The total import value of these vehicles by 1977, if they were all imported would be on the order of $240 million equivalent.1 / The foreign exchange impact of various policies with respect to imnportsubstitution may be calculated accordingly.

145. The Turkish strategy is to push hard towards the all-Turkish car and truck (85-90 percent domestic component). This is highlighted by the approval of two major new plants to make passenger cars including, by 1977, their own engines and transmissions(Fiat and Renault). The production of passenger cars and other light vehicles would accordinglyincrease between 1969 and 1977 from 5,000 to 65,000 units. In contrast, tractor production and, in particular, truck production,would grow only moderatly. But these industrieswould need to be reorganizedto achieve desired additional integration of domestic components (engines,transmissions, auto-electric equipment, and various cast and forged parts). Thus in the tractor industry, the largest of the six plants belongs to UzeL who assemble /about7,000 Massey-Fergusontractors per year followed by Turk-Tractor-.7who assemble about 4,000 Fiat tractors. Massey-Fergusonhas a project for a new plant capable of producing 20,000 tractors per year while Turk Tractor is hoping to expand to 10,000. In both cases, this would be combined with further integrationof domestic components. Their combined output would be in excess of estimated domestic market requirements,and the other tractor manufacturers are expected to be squeezed out.

1/ Based upon the followingassumed average unit cif values: passenger vehicles and pick-up trucks $1.350, heavy and medium trucks and buses $4,400, and tractors $2,000. 2/ Fiat holds 45 percent of the shares, the rest are divided between the State and the Koc Group. I I I - 62 -

146. Reflecting this program, the vehicle and tractor industries account for about 85 percent of SP0-approvedinvestments in the engineering industries;their planned investmentswhich total about TL 1,665 million (Table 32). Large projects with an initial investmentexceeding TL 100 million include two new passenger vehicle plants (Fiat and Renault),one diesel-engineplant (Perkins),one new tractor plant (Massey-Ferguson), one plant making cylinder blocks (Koc Group), and one plant making transmissions for trucks and tractors (Eaton-Yale-Towne).

147. Although tihishas nowhere been officiallyspelled oul, it must be assumed that this new phase of motor vehicle productionwou:Ld be accompaniedby a drastic contractionin the number of factories. The SubsectorReview of the EngineeringIndustries notes that truclcsand tractors can be produced in the same plant, and that two plants could cater for Turkey's entire needs of these vehicles. Yet, even the most carefully studied and sophisticatedstructuring of the industry will not compensate for the limitations imposed by the small market. Competitivepassenger car manufacture today probably requires a minimum output of 200,000vehicles per year as compared with the 20,000 cars per year level targel:edfor 1977 by both the Fiat and Renault companies in Turkey. The Perkins diesel engine project would perhaps be viable at the targeted output of 50,000 engines per year but the market is expected to absorb only about 20,000 engines.

148. According to the subsector review, the domestic cost of foreign exchange savings in the Fiat-Tofas car productionproject is liLkelyto be on the order of TL 33 per U.S. dollar. Costs of tractor and truck engines and transmissions,at the outputs realisticallyto be expected,will also be considerablybelow an acceptablescale of production- even assuming (which is hardly realistic) that the industry can be quickly shrunk to two producers.

149. At the moment, these plans are in abeyance because oi- uncertainties about the Massey-Ferguson tractor-diesel engine projects. The main issue is the size of the project (exports would be required for economic operations) and the desire of MKEK to be represented in the Management Group. Mean- while, several projects which would supply components for the diesel engine are also held up. This would seem the appropriate time for a re-study of the whole scheme of development for the motor vehicle and tractor industries. Major guidelines might be maximum concentration of output to a few plants, limitation of the buildup of domestic content to economically defensible levels, and increased pressure on foreign companies to source some of their procurement in Turkey in return for the protected market that they are being guaranteed (a guarantee modified only by the time limitations amd other obligations included in Turkey's Association Agreement with the Common Market). 1/

1/ According to recent reports, Massey-Ferguson's original license for the manufacture of tractors and diesel engines has been cancelled, since the project could not move alhead on the scale envisaged. The SPO is negotiating with various international tractor manufacturers to find a new solution. - 62A -

Table 32: APPROVEDINVES TS IN EN7GINEEINGINDUSTRIES, APRIL 1970

'rGi tiCt-:inI} ','oT:h;2. I'or I Iu St J I,2Ve:tll(v lit (>j ! iSY Coi: anv ProductsP -3 DateD Mii11 :;fin 'I1 J;i . r'll

1. Porkins Dicscl E]n,;nes 1972 166.2 14.r2 2. Ptancar Motor S;naIl .C. .n.;ines 1972 12.5 0.66 3. .totor Saiiyi Small I.C. Flv;lines iW/2 11.0 (1-33 4. Celi. . Monitaj Not-rcycle Elwlines 1972 19.3 1.5v 5. Derir Dokum, 1 Cylinder Blocks 1973 143.5 4.5' 6. D)cliak (&,ylinder Liners 1971 21.6 1.23 I7. I, t:a n 1husl 'ajile tonsts 1972 22. U .94 o. lijia i iez;ii if as i istons 19i1 13.1 0.5., 9. Polbert. Bosch No,z1oes 1973 33.3 1.45 10. )1 zelsa n .'ozIles 1972 8.9 .39 11. Sep'naln San Pliston RPins tS172 18.0 0.95 12. Parsan No. 1 For,g1ng, s 1971 18.7 1.2 13. Oa t:as Forgings 19'71 17.3 0.93 14. 1'arsan No. 2 Forvings 1974 78.7 5.03 15. ER--1sE--PA Paper Machinery 1972 2$.5 1. 03 16. T ezFau M!achine Tools 1973 29.2 1.64 17. Isik Koll St Plant & Fabricationis 1971 10.1 0.51 18. RTona 'Iakinza Plant & Fabriciatioiis 1971 20.0 0.9a4 19. Atlas Copotu Air Compressors 1970 5.0 C.67 20. Borg Warrer P`ripDs 1971 26.0 0.83 21. labas Pressure Vessels 1971 6.6 0.9 ' 22. Telkien Pressure Vessels 1971 S.6 0.39 23. Ifassey-Ferguson Tractors 1972 143.6 10 .6;0 24. Tofas-Fiat Automobiles 1970 232 .8 14.20 25. Renault Automobiles 1972 298.0 14.50 26. Mavsan Shock Absorbers 1972 5.0 (90.3 27. Eaton,YalO,'fowne Transmdissions 1972 102.6 8.40z 28. Yilmaz A;san Trnnsmissions 1973 52.3 2.44 29. 'MagnetLi Marelli Autto Electrics 1971 45.0 2.45

32. M'k- a' Lifts a Pu.'-.; 1571 5.5 0.16 3X1. S>]t T i';:t i'C:s & Bolts 19471 32.0 1. 55 32. Kile [likina Dies 1970 3.6 0.14 33. ICA (I) Pressure Raduccrs 1971 3.7 0.23 34. I.7CA(II) Die Castings 1971 6.3 0.35 35. 7,Te.>uitekniks ClocCks 1972 5.4 0.21 36. Deriiir KokumnII Raliators (CI) 1971 12.t 0.69

36 Projects TO'IAL llillion TL "J'ilion $ 1 664. ,7 98.01 - 63 -

150. The motor vehicle and tractor industries are among those most severely hurt by the lack of foreign exchange for importingmal:erials, parts, and components. Import requirementsfor the road, vehicle and agricultural machinery industries (includingharvester combines as well as tractors) might total nearly $180 million equivalentby 1972. Admitting the large margin of error in this type of estimate, it strongly suggests the usefulness of an industrialimports loan, and the possibilityof linking :Ltwith a commitmenton the Turkish side for tailoringimport substitutionin the motor velhicleindustry to an economicallyacceptable approach. - 64 -

IV. RESOURCE ENDOWlMENT,FACTORS OF PRODUCTION AND DEVELOPMENTPROSPECTS

A. Resource EndoTwmeint

150. Turkey is well endowed with raw materials for manufacturing. It produces virtually all the agricultural rawzmaterials used for food, beverages and tobacco manufacture, and it has cotton and wool for the textile industry (though lacking the qualities needed for fine worsted fabrics). Turkey has substantial coal reserves and iron ore reserves sufficient for the immediate requiremenats of its steel industry; nevertheless, the cost of iron ore and metallurgical coking coal has generally been sonewhat above the equivalent world market level.

151. Anong the main gaps are natural gas (no resources of any consequence) and crude oil (about two-thirds of the requirements for crude oil and products are import,ed). Yet, proposed construction of crude oil and natural gas pipelines from Iran and Iraq, respectively, would, if feasible, place Turkey in a favorable position with respect to the supply of basic hydrocarbons for industrial energy or chemical feed-stocks. Of Turkey's substantial and economically exploitable hydropower potential, estimated at 57 million K1(h per year, less than five percent is currently being utilized. These resources could support electro-chemical and electro- metallurgical production where Turkey has some special advantage, e.g., in the production of ferro-chrome. Nevertheless, there are apparently no great blocks of low-cost power which would give the country an edge in, say, large-scale competitive production of aluminum.

152. Three major r,2source categories could form the basis for substantial export industries:

(a) Minerals. Turkey has substantial unexploited minerals wealth, suffic,ient to permit an initial fourfold expansion of minerals exports by 1977. Projects exist to permit a major portion of these exports to be made in manufactured form (copper, ferro-chrome, boron products, alumina, mercury). Exports of metals might then approach $100 million equivalent.

(b) Wood. Turkey is a net importer of forest products, particularly newsprint and kraft paper. Yet, the cotntry has substantial forests, most of which are mature or overmature. FAO experts have suggested a target for increasing the cut of industrial wood from about 4 million cu.m. in 1968 to 6.3 million cu.m. by 1972 and 10.3 million cu.m. by 1977, and tripling of the value added by manufacture. - 65 -

(c) Agricultural Raw Materials. The raw material basis for exports of processed food and beverages is discussed in a recent studv undertaken for SPO by foreign consultants. The major potential is in the canning of fruits and vegetables. Practicallv all kinds of temperate zone fruits and vegetables can be grown cheaply in Turkey, and the qualities are generally very gciod for processing. Yet, the canning sector is only in its infancy. Even the immediate target for exports of tomato paste and canned fruits and vegetables (about:$15 million equivalent by 1975) is quite insignificant in relation to the European market or the crops potentially available for processing.

153. The recent devaluation has created especially favorable prospects for the above industries, and Turkey must quickly ride thLs tide. Success will be largely dependent upon a range of institutional and other improvements: more effective minerals exploration and development; ac- celeration of forest invcntories, increased construction of forest roads, better logging methods, preparation of forest industry projects; improved marketing for export, and more extensive work in educating farmers and in organizing the supplies of fruits and vegetables for processing, In all three sectors, foreign investments could be a crucial condition for success.

B. Manpower

154. Although Turkey has an overabundance of manpower, there is a widespread and acute shortage of skilled labor and of many types of Drofessional personnel in both industry and government agencies dealing with industry. Most Turks working abroad (about 400,000 are at the present moment) are not in the skilled category, but some have been trained there, or at least acquired substantial industrial experience. Unfortunately, many of these remain abroad, and few take industrial jobs on their return. Hence, shortages persist. The Turkish worker is generally regarded as a high or adequate performer, though some observers feel he does not adapt easily to new methods. In-shop training has suf- fered from lack of Government support, and the small size of many estab- lishlm,entsmilitates against more ambitious training schemes. The wage cost is low by European standards; thus, the typical wage cost in the Turkish State Railway Workshop at Eskisehir, including all indirect benefits, is only about $0.65 per hour. The Government and industrial associations together should develop improved systems of worker education and in-shop training.

155. Exploitation of the low Turkish labor cost for export production has thus far been insignificant. Istanbul provides great bargains for the tourist in leather goods (jackets, handbags, etc.), but such goods make hardly a ripple in the country's export statistics. Meanwhile, responding to a fashion trend, production of such goods has been growing by - 66 -

leaps anidbounds in in:faustrialized countries. In Sweden, handbags are pro uU- an a small rural area near Gothenburg; producers employ con- tinent:a` desi--,iers or buy deslgns from Paris or Vlenna. Recently, one

-vro;.ue- _-ueue ' a subsidiary plant In Portugal (i.e. within EFTA); labor Costs Lthere in t-veuereq one-tenth of the equivalent cost of unskilled owedi4iii feuJla:Le lat^.; Si.m,ilar initiatives shotuill be possible in Turkey.

15.)wLalbor Ullias have gained importance in Turkey only since 1960; t'he y are. geiieralGJ'v o -r,nized on a plant basis. Recently, contract nego- tiatious have. been mar-red by increasing, militancy on the part of the unions ancd lack of a cormon froint aInd necessary experience and expertise on the management side to cope with this new activity. The result has been substantial escalation of wage demands and contract awards and, in some industries (e.g. tea factories, oil fields), riots have occurred. It is difficult for an outsider to evaluate this situation, since political issues are inrjecte& into ti-he industrial scene, Nevertheless, because of Turkey's limited experience in collective bargaining, technical assistance to develop suitable pi edures and institutions would probably be very useful.

C. Management: anLd ntrpreneursl:L.

159. Well-trained and experine(.k-zu na,nagezrznt is very scarce in Turkey. This applies to all aspects of manage-ient: technology, economics, finance and accounting, and acLdinistratiu:. Si.ce, at best, it takes years for a major improvement Jn the supply of talent, management is a bottletieck in industrialt.ilzati onL.

158. In the struggle between traditionalists and modern aggressive- type entrepre-eurs, the latter are in ascendancy. SoTme of them are beginning to .look towards e-xportsas the best avenue for corporate growth. Others, though- afL l jl of foreign coripetition, are so weary with the waste and inflexibility and illegalities associated with import controls that they regard i!beralization of trade as the lesser of two evils. Only in its irost higinlV orgaYnized form, in tiie Chambers of Industry, is entrepreneurial opinion sti'll highly resistant to change. This dualisriof the entrepreneurial class is not unique to Turkey; it is apparent in most industrlillz`rz e~. Youn'craasMexico, Brazil, or even Taiwan).

D. Outlook for Trade irn Manufactured Products

159. We cantnot veincure a formal projection of manufacturing production and trade. J.devertheless, it seemed useful to translate our subsector arnal- yses ilto an jm' -4tlt model giving subsector totals for trade in mar- ufactured products iln 172 and 1977, with a related set of estimates and assumptions, providing m-tiaJiaum perspective on the discussion of industrial policy.

160. The t-easotn for focussing on trade is that the strategic investment and policy decission.4 center arou-d progressive import substitution and - 67 - exports. Our projectionsare based upon assumptionsof (a) six percent per year growth in the gross national product, and (b) vigorous measures towards liberalizationof trade. They also recognize,of course, that 1972 results are mainly determinedby actions and investmentsalready initiated. The impact of new policies will be primarilydiscernible in the 1977 figures. The details of our basic assumptionsand estimates are set out in Appendix III.

161. Table 33 shows the projected imports, by categories for 1972 and 1977. The most striking aspect of the table is the very rapid increase in imRportsbetween 1969 and 1972 (over ten percent per year), followed by an actual reductionof manufacturing imports between 1972 and 1977. This may be interpretedas a result of the slow maturing of major Investmentsunder way in steel, aluminum, fertilizersand petrochemicals,machinery and transport equipmentand the coming of age of these investments in the subsequent five-year period. Reference to the industry accounts in Chapter III suggests that even the amount of import substitutionassumed for 1972 will be difficult to achieve, and that there are grave doubts about some of the contemplatedlines of development for 1977, perhaps mainly petrochemicalsand motor vehicles. 68 -

Table 33: IMPORT PROJECTIONSFOR MANUFACTUREDPRODUCTS, 1972 AND 1977

(millionU.S. $ equivalentat June 1970 prices) 1/

1967 1972 1977

Processed Foods and Beverages 2.8 5.0 15.0 lextiles, Clothing,Leather, etc. 20.6 20.0 30.0 Lumber, Pulp and Paper 21.0 22.1 10.2 Rubber and Plastics 5.9 12.0 18.0 Fertilizers 37.1 43.0 66.0 Chemicals 107.1 161.6 170.0 Petroleum Products 16.4 - Cement, glass, etc. 11.5 14.4 19.2 Misc. manufactures 5.9 12.0 24.0 Iron and Steel 36.7 140.0 85.0 Non--ferrous metals 16.4 31.0 15.0 Metal Products 16.2 43.0 72r 8 Machinery and Parts 185.0 260.0 250.0 El. machinery and equipment 50.2 77.0 80.0 Motor vehicles and tractors 55.2 58.4 45.3 Railway equipment 0.8 13.9 2.2 Ships 0.1 30.0 -- Aircraft and parts 1.1 17.0 17.0 Scient. and Techn. instruments 15.6 26.0 43.0 605.8 986.4 962.7

I/ Note: This is not a prognosis but an illustrativeprojection of how imports would develbp on the assumptionof a 6 per cent per year increase in the gross national product and possible developmentsin individualsubsectors as described and detailed in this Appendix.

162. The obstacles in the path of further import substitutionare partly compensatedby a promising potential for the growth of manufactured exports. The following figures summarize the estimates and opportunities documentedin Chapter III. - 69 -

Table 34: TURKISH EXPORTS OF MANUFACTURES

(million $ equivalent)

I'roj. 1967 1977

Foods and beverages (canned fruits and vegetables) 15.9 37 Textiles and clothing (cotton yarn and fabrics; knitwear) 3.0 108 Forest products (lumber) 1.9 66 Nonferrous metals (copper, ferro-chrome, mercury, boron products) 16.6 69 Transport equipment (auto parts, diesel locomotives for RCA area) - 27 All others _7.4 35

44.8 342

163. There is a realistic potential for increasing manufacturing exports from $45 million equivalent in 1967 to, say, $150 million equivalent by 1972, and possibly as much as $400 million equivalent by 1977. The achievement of these targets, however, is subject to a series of conditions:

- a price and incentives structure which does not, as in the recent past, penalize exports;

- institutional and organizational measures with a view to facilitating export sales and investment in export production;

- institutional reform in the forest and minerals indtLstries, as outlined in the separate reports on these industries;

- a minimum volume of desirable trade in motor vehicles, tractors, and parts within the world trading and prcduction network of those giant international corporations which, in return, may be given priority access to the Turkish market.

164. In conclusion, our illustrative projections show trade in manufactures developing as follows: - 70 --

Table 35, PROJECTED FOREIGN TRADE IN MANUFACTUREDPRODUCTS, 1967-1977

(million $ equivalent)

1967 1969 1972 1977

Manufactur-dimports 606 658 988 962 Manufactuxedexports 45 (45) 150 400

Trade gap in manufacttlures 561 613 838 562

These projectionsare too crude to have real predictivevalue. Nevertheless, they focus attentionupon a prospectiveincrease in the trade gap in manufactures in 1972 and the i)ossiblelessening of that gap in subsequentyears. In a similar way, the iindividualindustry analyses pinpoint areas of op- portunity or problems.

V. STRATEG;YAND POLICIES FOR INDUSTRIALGROWTH

A. Historical Persnective

165. Turkish industrial development during the last two decades has been determined by three constraints:

(a) Rigid autarchy. Turkish import controls (essentially quantitativerestrictions) are drastic. This has led to non-comipetitive import substitution and non-viable scales of productionin industries like steel, fertilizers, petro-chemicalsand automobiles. Meanwhile industries with a major export potential like food processing, textiles, ]sorest products and mining and minerals processing have been stunted.

(b) Predominanceof State enterprisein "dualistic"industry. The historical basis for State enterprise in Turkey was indicated in para. 7. Its State-inducedpredominance in manufacturingand its generaliyweak economic and business performance were documiented in paras. 34-41 and in relevant para;graphsof Chapter III. As will be shown sub- sequently, the division of Turkish industry in two roughly equal sectors functioningaccording to two different sys- temisof management, labor contracts, financial control, etc. is a &urmidableobstacle to industrialflexibility, co-operation, re-structuring, and growth. For related reasons, (difficultiesin co-operationbetween State enterprises and private international corporations), it is also a severe constrainton foreign direct investment. - 71 -

(c) Diffused responsibilityfor the management of industrial growth. The top agencies concernedwith industrialgrowth are the State Planning Organization,the Ministry of Indus- try (with other ministries controllingState enterprisesin e.g. mining, petroleum, forest, and food industries),the Ministry of Finance, the State Investment Bank, and the High Control Board (the parliamentarywatch-dog over State Enter- prises). The spheres of action of these agencies will be detailed in the following. Suffice it to say that unified direction and control has proved extremelydifficult and has been further complicatedby the lack of a strong and representative spokesman for the industria'Lsector in dealing with the Government (becauseof strong dualism between State and private enterprisesand, to some extent, between large enterprise and small inward-orientedand traditionaalistenterprise.)

B. The Second Plan and SPO

166. The Second (1968-1972)Plan recogn:Lzedmany of these weaknesses, and provided a program for their removal (AppendixIV). Briefly, the Plan committted the Government to (a) the reinstitutionof the market mechanism as the proper instrument for resource allocationand for dynamic growth through competition (includingthe fostering of exports) and tc (b) the shaping of new policies which would permit tne private sector to take over the developmentof manufacturingindustry in the long run.

167. The Plan did not take a clear stand on the administrationof industrial growth but the State Planning Organization, benefiting from its strategic position in the Prime Minister's office and dynamic leadership, preempted the major role. Its thrust was in two directions. First, it made a major effort at project identification and feasibility studies. Secondly, it mobilized a whole range of incentives to put the private sector on the move. The second goal tookl priority. We shall revert to a technical appraisal of these policies (paras. 175-181). Meanwhile two constraints on SPO action may be noted. First, the market mechanism was not restored, and trade in industrial projects was not freed (this would clearly require both time arLd a reasonably comfortable foreign exchange position). Instead, direct incent:iveswere given for priority investments and for industrial exports. Secondly, the SPO did not tackle the problem of State Enterprises. The finarncial frame for State Enterprises was determined mainly by the Ministry of Finance through the budget, the State Investment Bank and foreign project loans. Administra- tive reform (the Parliamentarycontribution) was bogged down. Nevertheless, by revitalizingthe private sector, SPO hoped to complete the first step towards a more effective industrial structure.

C. The New Framework for Trade

168. The main features of the pre-devaluation import and export regimes are summarized in Appendix V. Briefly, on the import side, controls were chief- ly through quotas. SPO had the main voice in establishing the annual foreign - 72 - exchange budget, by major categories of imports. Allocations to individual claimantswere made twice a year by the Chamber of Conmerce for the private sector and the Ministry of Industry for the State industrialsector. The customs tariff was no longer used as a protective instrument. Its essential role was revenue creation; customs duties provided about 20 percent of Cen- tral Government revenue. Secondly, since duties and other import charges are fairly high, exe.aptionfrom such charges in 1967-1970was an important component of the industrial incentivespackage (para. 179).

169. On the export side, the main incentiveswere drawbacl;of import duties and indirect taxes on materials and componentsfor industrial exports, export credits at subsidizedrates and, most important,the right of the exporter to dispose freely over a certain portion of his foreign exchange proceeds. The percentageallocation of foreign exchange was not the same for all products but varied in accordancewith the Government'sinterpreta- tion of the economic contributionmade by various exports and the financial need for a subsidy. On an average, pre-devaluationsubsidies for manufactured products may have added 30-50 percent to the otherwise attainable selling price.

170. Two major policy actions have laid the ground for the gradual transitionto a "market economy". These are the 66.6 percent devaluation of the Turkish Lira in August 1970 (with the dollar rate rising from TL9 to TL 15) and the Protocol governing the second stage of Turkey's Association with the Common Market, signed in November 1970.

171. Devaluationwas accompaniedby some demobilizationof both import restrictionsand special incentives. On the import side, guarantee deposits and "waiting lists" in iexchangeallocation which had held back imports on the so-called "free list" were to be first reduced and then completely eliminated. Progressivelyproducts would be moved from the quota lists to the free list. Hence, while devaluation is a necessary condition for the transitionto a free regime, its impact will depend mainly upon the speed by which quantitative restrictionsand existing duties on imports from Common Market countries are eliminated. On the export side, devaluationhas reduced the advantage of free exchange so that the main incentivehas now become the tax rebates. Previous highly differentiatedtax rebates were replaced by four product lists with rebates of respect:Lvely40, 35, 25 and 15 percent of the export price.

172. The Common Market Agreementwill expose Turkish industry to strong internationalcompetition within a 22-year transitionperiod (given the in-- dustrial strength of the Common Market Area and the prospectivedismantling of Common Market tariff barriers against EFTA and the United States), while at the same time providiingmajor new export opportunities. Thus, the agreement provides for irmediate free entry of Turkish manufactures to Common Mar- ket countries,the only exceptionbeing textiles for which a twelve-year transitionperiod is enrisaged. 73 -

173, On the Turkish side, reduction of trade barriers against Common Sarke: countries will proceed as follows:

(a) Import quotas for the EEC-area will 'beraised progressively over the 22-year transition period. As an example, they would be 50 percent higher in the 16th year after the ratifica- tion of the agreement and 110 percent higher in the 17t:hyear.

(b) Duties on imports from EEC countrieswill be eliminatedl over 12 years (by roughly ten percent per year) for products representing55 percent of present manufacturedimports from EEC countries and over 20 years (with most of the reduction coming after year 12) for the balance representing products where Turkey will need more time for competitive adjustment.

174. lThe devaluation and the Protocol provide new parameters for Turkish planning. In a swiftly changing world economy, a 12-22 year transition period is actually too wide a focus, even for perspective planning. The new plan must give priority to exploiting Turkey's comparative advantage as rapidly as possible and implementing the necessary measures and structural changes.

D. Industrial Programming and Project 'Identification

175. SPO has done a remarkable job in project stimulation aLnd identification. The main vehicle has been the "investmentcertificate", which gave incentives for priority projects (see below, para. 179). In the preparation of such projects, the SPO assisted with feasibility studies and advice. As of April 1970, SPO certificates had been granted for 187 project:s in the private sector, of which 171 were for manufacturing activity. The latter represented a combined investment of TL 5.65 billion (at the old exchange rate), with fourteen large projects with individual investments exceeding TL 100 million accounting for 2.5 billion of this total. New industries predominate in the list of investment certificates. Nevertheless,some traditional activities are also represented,e.g. textiles,cement and rolled steel. (See Table 36; further detail is shown in Table XX and XXI).

176. The large projects include one fruit juice plant, one plywood mill, three paper mills, one soda ash plant, one polyester chips-cum-DMT plant, two cotton textile mill expansions, twro cement plants, one window glass and one glass container plant, and finally one aluminum fDil mill. Outside the list there are six major projects under way or planned in the automobile an(d tractor industries (two passenger vehicle plants, one tractor plant, one diesel engine plant, one cylinder block plant, and one transmissions plant) with a combined investment of TL 1.1 billion. The reasons why no investment certificates were granted for these projects are - 74 -

Table 36: SUMMARYOF INDUSTRIALPROJECTS WITH INVESTMENTCERTIFICATES, API 20

Number of Total Projected Projected Subsector Projects Investment Turnover Exports TL million TL million TL rrilliorn

Food Processing 26 626 1172 240- Textiles 40 792 1415 241 Forest Products 15 455 481 108 Paper 6 702 799 - Printing 1 7 38 -

Chemicals and Petroleum 1/ 22 1016 1354 57 Plastics 6 134 300 - Cement 8 515 692 - Cement and Brick Products 4 34 50 - Ceramics 2 46 65 7 Glass 2 398 399 23

Iron and Steel 4 101 249 - Non-ferrousmetals primarY 2/ 6 986 1415 261 manufactures 4 326 611 9 Metal products 8 179 252 16 Machinery and Equipment 15 255 541 26 ElectricalMachinery 2 42 84 - Shipbuilding 6 22 22 -

Total 177 6636 8939 988 - , excl. primary n.f. metals (171) (5650) (7524) (727)

Source: S.P.O.

1/ One small project for the petroleum industry only. 2/ Includes related mining investments. - 75 - ncotclear. In all but one of these six projects, the major investor would be a leading internationalcompany, and the usual investmentcertificate 'roceduremay not have been well adapted to the negotiationof privileges and obligations in this case. Again, negotiationsmay have been t:hwarted by the suspensionof Law 933.

177. The mobilizationand screening of a large number of manufacturing projects representsa formidahletask which the SPO undertook with great sticcess. Further improvement would require more industrialsubsector reviews which would help in project identificationand design of incentive policies and closer associationof industrywith the planning effort (e.g. through the vehicle of industrialsub-committees). Finally, investment criteria must be sharpened and applied uniformly to all projects in both the public and the private sectors.

E. Investmentand Export Incentives

178. During the late 1960's the Turkish Governmentvigorouslyr supported private manufacturingventures. Historically,this may be viewed as a res- toration of balance; in the preceding period the State Sector was favored in financing and import allocation.

179. The main incentive granted for investmentsin the private sector was the investmentcertificate since this guaranteed foreign exchange (at the overvalued exchange rate) for the equipment: to be imported and in a modified way for necessary imports of materials and components. Invariably the investment certificate also granted deferral, generally for 2-5 years of import duties on imported equipment, and tax rebates corresponding to 50-80 per cent of the equity funds invested. (The latter favor was also extended to a substantial number of other projects.) For projects of very hiigh priority, partial or complete exemption of duties on imported equipment were granted. Information on the scope of these programs is given in Nppendix VI and Tables XXII-XXIV.

180. Inceintives for a selected number of industrial projects have served a useful purpose in expediting project preparation and in providing a "big push". Tn the longer run, such selected favors would leave too much scope for administrative discretion and political influence. Ideally, they should be replaced by the more generalized incentives such as import duties, during the transition period to the Common Market. Unfortunately, the present customs tariff, though it has become an important point of reference for the Common Market Agreement,bears little r^elationshipto development nee(ds,and is likely to prove a cumbersometool. It will need to be supple- Tnentedwith special support for clearly "infant" or "distressed"industries contingentupon plans, agreed with the industriesconcerned, for their developmentand/or restructuring. Generally,incentives will lose in importance as compared with access to industrial finance.

181, The major exception concerns exports. As shown in Appendix VI (See also Tables XXVJand1 XXVI), pre-devaluation export incentives (including - 76 - drawbacks of import duties and indirect taxes, export credits, and free exchange allocation from export proceeds) were substantial, and may have added 30-50 per cent or more to the otherwise obtainable export prices. To increase manufacturing exports from $45 million to $400 million equivalent (our very rough estimate of the immediate potential) by 1977 is a tremendous under- taking justifying the continuation of substantial export incentives even after devaluation, as well as logistic support - market study, export promotion, trade representatives abroad, new facilities for export financing, training of personnel, etc. To focus these efforts, the Turkish Government has proposed the creation of an Export Promotion, Research and Training Center, and has requested a UNDP grant to create and train a "nucleus" for this center. This is clearly a step in the right direction. It should be supplemented, however, with intensive work at the individual industry level which would merit Government financial support. As an illustration, Turkish sawmills must conlduct their own studies of export markets. They must adjust their grading standards and quality control to the requirements of foreign markets, and must organize a chain of marketing and transportation which would bring Turkish timber effectively and cheaply to these markets.

F. Small and Medium Enterprlise

182. More than many other industrializing countries, Turkey is hampered by industrial dualisms: (a) between the State and private sectors (b) between large increasingly export-oriented and small, generally inward- oriented enterprises, and (c) between Istanbul-Ankara-Izmir and "the provinces".

183. The Government is rightly concerned about insuring the viability of small- and medium-sized enterprise and about preserving and reinforcing decentralization. The Turkish geography and infrastructure (transport network and telecommunications) is less of an impediment to such policies than is true for, say, many Latin American countries. Examples from Japan and other countries suggest that small local industries can be developed into suppliers for new mass production industries or form specialist trades like took-making, contract weaving and knitting, etc.

184. More thought should be given to structural rationalization and industrial cooneration. A few examples will serve to illustrate this point. In £he textile industry, many medium-sized textile mills have their own finishing plants which are not effectively utilized. In the engineering industries, there is a need for an inventory of metal-working capacity, increased sub-contracting of specialist operations, advisory services on world industry trends and on new technology and production methods, assistance in mergers and various types of cooperation arrangements.

185. Improvements in structure will be forced by outside pressures (integration with Common Market Countries) but can also be accelerated and steered by the Government. The main agents of change would be: 777 -

(a) Structural rationalizationagreements between the Government and respectiveindustries, containing incentives conditioned upon certain structuralreform (minimnumsize of plant, specializationand standards ration, etc.)

(b) Agressive and forward looking associationsof a type whlichdoes not yet exist in Turkey, and which could undertake the work mentionedwith respect to engineeringindustries or forest products exports.

(c) A more active role by TSKB in sponsoring industry studies as a basis for its lending program. The recent textiletstudy is a step in this direction.

(d) Regional developmentpoles and industrialestates as described in para 188.

G. Location of Industry

186. A striking recent manifestationof the Government'sconcern with regional industrializationis the location of the Third Steel Mill at the Bay of Iskenderun. Location of new paper mills at Balikesir,Antalya and Afyon are inspired, in part, by similar considerations. Tax incentives for new investmentshave been graduated to permit a higher rate of exemption for underdevelopedregions, mainly in Eastern Turkey, and St:atefinan- cial aid for private industrial projects has generallybeen reserved for these regions.

187. Progress in eastern most Turkey is contingent upon social change - land reform and the establishmentof law and order. Compared to the urgency of institutionaland social change, differentialinvestment incerntivescould be of lesser importance. TSKB recently made an extensive survey of the South-East;it concluded that the best prospectswere for animal husbandry, with some opportunitiesas well for small textile and metal fabricating projects. In the larger centers, there might be scope for small industrial estates. By these indications,industrialization of easternmostTurkey would be a slow process. As education is improved,university graduates from this area might tend to emigrate to Ankara or Western Turkey, as might skilled workers. lIence,industry would hesitate locating in the East. I.xperiencefrom Southern Italy, Spain, and Northeast Brazil also suggest that partial industrializationattempts are not sufficient;only massive infusions of money and technicalassistance togetherwith energetic follow--upcan achieve decentralization. A Regional IndustrializationAuthority located at an appropriatecenter of easternmostTurkey may be helpful. Its first tasks might be to become a focal point for study and planning, to undertake various feasibilityand sector studies, and to draw up a preliminaryregional industrializationplan.

188. Another dimension of industriallocation policy is the degree of industrialagglomeration or dispersionwithin a given region. Regional development nuclei along the lines of the Spanish "polos de desarollo" (or - 78 - i"polos de decongestion", e.g. for the Istanbul area) and, in particular, industrial estates might prove of great value. The latter provide (a) rental of industrial building space (including all necessary utilities), (b) various specialist facilities and services (like accounting and marketing experts) and (c) ideal foci for Government extension work with respect to industry. In short, they help to preserve and develop a healthy medium and small business environment. Here the objectives of healthy industrial structure and regional balance meet.

H. State Enterprise

Major Problems

189. The following main weaknesses of Turkish State enterprises are the proximate causes of their unsatisfactory economic and financial progress.

(a) Lack of Clear and Strictly Enforced Investment Criteria. Physical targets are heavily emphasized; those included in the Plan are mandatory for State enterprises. In contrast, economic criteria are seldom applied rigorously by State Economic Enterprises the State Investment Bank or the High Control Board. Had criteria of minimum economic size for projects in certain industries been applied earlier, major investment decisions in steel, nitrogen fertilizers, and pulp and paper would have been made more efficiently.

(b) Managerial Problems. Managerial problems are shown in the high rate of turnover in management and top staff positions in State manufacturing enterprises. Sumerbank had 5 managers in 10 years; the record is believed to be similar for MKEK and SEKA. This reflects both the shortage of qualified personnel in Turkey and the low salaries paid by State enterprises. Qualified individuals are said to earn 2-1/2 times as much or more in top positions in the private sector compared with equivalent positions in State enterprises. The alleged excessively tight ministerial supervision of the management in the State sector could have been exaggerated. Strong managers are apparently allowed quite a free hand. On the other hand, there seems to be much red tape in the State sector, which is bound to reduce the supply of managerial talent and drain their energy.

(c) Labor Costs. State Enterprises typically provide high fringe and social welfare benefits. This is in contrast to the private sector which has a more flexible recruitment policy, and avoids some of the fringe benefits by relying more on temporary workers.

(d) Price Control. The importance of price control in pushing the earnings of public manufacturing enterprises below a reasonable level may have been exaggerated. Prices for three products only (sugar, nitrogen fertilizers, and, in a mild form, cement) are controlled by law as "basic commodities". It is true that price control, in the Turkish context, can be exercised in other ways. In the tractor industry, manufacturers agreed with the Government on maximum prices - 79 -

as a condition for Government assistance in developing the industry. And increases in steel prices would be dependent upon Government consent. Yet, in the final analysis, we found no single case among the eight largest State manufacturing enterprises where increased prices would at the time have been a commendable cure.

190. The unsatisfactory economic and financial.performance of State manufacturing enterprises has been allowed to linger because of strong vested interests in these enterprises. Another reason is that the public lacks pertinent and objective information regarding their performance. To pinpoint and evaluate this performance is not. an easy task. An international comparison was complicated in the past, by the overvalued exchange rate. A comparison with Turkish private enterprise is;clouded by the dualism between the two sectors; dual markets for managerial talent and labor, dual sources of financing, dual systems for allocation of imported materials and equipment, dual systems of protection (the relevant SEE's control the imports of steel, pulp and paper, and to some extent even fertilizers).

Attempted Reform

191. The 1964 law concerning the reorganization of State Economic Enterprises 1/ sets as its main objectives to ensure the autonomy of these enterprises, to improve their efficiency, and to make them more self-support- ing financially. Under this law, each State Economic Enterprise will be assigned to a specified ministry charged with its supervision. Each enterprise has a Board of two Managers appointed by, respectively, t'heresponsible Minister and the Minister of Finance. One of these will be the General Manager. In large enterprises only, a third member represents the labor force. Board members cannot engage in any other activity nor can they be board members of any other State Economic Enterprise.

192. According to the Law the Board of Managers would normally be free to set the prices for the goods and services provided by the enterprise. Where prices for "basic" goods and services are controlled by the Council of Ministers, any resulting losses to the enterprise will be covered through the general State budget. Salaries of the General Manager and his assistants may be determined by contract (i.e. they are not limited by civil service regulations), but they are subject to approval by the Council of Ministers. As previously indicated, the level is normally far below the corresponding rewards in private enterprise. The profits of State enterprises, in principle, belong to the Treasury.

193. Each State enterprise must prepare an annual investment program and operating budget for approval by the Council of i4inisters. By the

1/ Law 440 (lated March 12, 1964 concerning State Economic Enterprises and their establishments and participations. - 80 - end of the fourth month, following the completion of an accounting year, an annual report on the activities of the State Economic Enterprise together with the relevant financial statements must be forwarded to the Iligh Con- trol Board which is specifically charged with the "financial, administrative, and technical control" of State Economic Enterprises.

194. The law set up a special committee for the reorganization of State Economic Enterprises. This was attached to and headed by the Ministry of Finance, but included members from other interested ministries or agencies. Its functions included the creation of appropriate financial and legal structures for each enterprise, the formulation of general principles for the revaluation of assets and liabilities, the improvement and unification of accounting procedures, the definition of the field of activity for each enterprise, and finally recommendations for the liquidation or transfer of certain assets or participations. The committee was asked to complete its work within two years of its constitution; the liquidation of participations not falling within the newly defined scope of each enterprise was supposed to be completed within three years.

195. Though the aisis of the 1964 law were in the right direction, something went wrong in execution (insufficient thrust in comparison with the complex and technical nature of the task and the strong vested interests). The importance of pricing autonomy for financial viability was overstressed; the main problem is not low prices but a low level of economic performance (an area barely touched by the High Control Board). The law aimed at establishing accountability but its purpose was tlhwarted since, under the dualistic system, economic performance was difficult to evaluate (were coal miner's wages reasonable? - what proportion of the pulp company's em.ploymentcould be regarded as a welfare program? - what proportion of certain excessive investment costs were thieresult of tied aid?). Finally, for reasons already indicated, none of the three directive functions (management, board supervision, and public control) were effectively performeed. Reform might be sought along the following lines:

(a) State manufacturing enterprises can only be made accountable if they are required (and allowed) to compete under the same rules as apply to private enterprises in both the product and the sector markets. The present dualism between State and private enterprise (in terms of management, labor, basic ph-ilosophy,and investment criteria, etc.) should be gradually eliminated in favor of new forms of cooperation and division of labor.

(b) The High Control Board, in addition to formal auditing, must review the policies, and the investment, operating, and economic performance of State Manufacturing Enterprises. A new unit should be created in the Board whose function would be to supply the Turkish public with factual and significant information on the performance of these enterprises. - 81 -

(c) It has been suggested that the immedi.ateresponsibility for the administration of State Manufacturing enterprises evolve to a limited number of holding companies for each major sector, e.g., steel, engineering industries, fertilizers, pulp and paper. Recognizing the importance of viable size for individual production units and potential economices of scale in research and marketing, major new concentrations of economic power should be created only after very careful sl:udyand demonstration of really major advantages. There is always the danger (already amply demonstrated in Turkey) that they will lead to powerful vested interests.

I. Industrial Finance

196. Total industrial investments in 1969 were TL 4.4 billion at 1965 prices, of which, TL 1.7 billion for the State sector and TL 2.7 billion for the private sector (Table VII). Combined 1970 financial requirements for seven major State Manufacturing Enterprises were TL 1.44 billion (85 percent of the State manufacturing sector total) of which TL 1.2 billion for new investments and TL 0.24 billion to cover an expected deficit in the net cash flow after debt amortization, etc, (Table XXVII). These requirements were to be covered, in the main, from the State Investment Bank and the State Budget, and only to a minor extent through project credits. This is a change. In 1967-69, project credits to the State Manufacturing Sector ave!raged about TL 930 million per year.

197. No similar global data exist for the private manufacturing sector, and only rough inferences can be drawn. According to the latest appraisal report on the Turkish Industrial Development Bank and other sources, the following sums may have been available in the last two-three years (average per year) 1/.

1/ An analysis of 187 projects granted investment certificates shows total investments of TL 5.8 billion (of which TL 1.2 billion for permanent working capital), with the following projected financing (in percent of the total investment).

Medium-term local 25.8 Short-term local 6.9 Foreign credits 17.2 Equity 50.0 TOTAL 100.0

The two analyses seem reasonably consistent. - 82 -

TL Million %

TSKB 260 10.4 SYKB 200 8.0 Commercial Bank participations 50 2.0 Industrial Bonds 20 0.8 Direct foreign investment (1969) 350 14.0 Project credits to private sector 501/ 2.0 SPO financing (mainly medium-sized industry) 85 3.4 Balance (net cash Elow and commercial bank credit) 1,485 59.4

2,500 100.0

In recent years possibilities of industrial self-financing have been good, and the effective taxation of earnings quite low.

198. A share market on the Istanbul Stock Exchange exists in embryonic form only. Development of an effective market is hampered by problems common to many developing countries: (i) entrepreneurs unwilling to bring in outsiders and llmiting their sight to projects which can be financed by themselves and itheirclose associates, (ii) a public with no experience of security operations and discouraged by generally uninformative company reports, (iii) no depth in the market to provide minimum liquidity. TSKB has recently promoted industrial bonds; there has been a rapid increase in such issues which totalled TL 273 million during the first eight months of 1970.

199. The yield on industrial bonds is effectively limited to 15 percent by Govermnent regulation. For the investor, this compares very favorably with the recent time deposit rate of 6-1/2 percent (raised to 9 percent after the devaluation). Exceptionally low rates in the Turkish context have been enjoyed by borrowers from TSKB and SYKB who have been pay- ing 9 percent on foreign exchange loans (where they bear the foreign exchange risk) and 10.5 percent on local currency loans, plus a 20 percent tax in both cases.

200. The Goveirnmernt program for assisting the future flow of furnds to industry included:

1/ In 1967, project credits to the private sector were small. Over the three year 1967/69 period, project credits to the State sector averaged about TL 930 million equivalent per year (with USSR c'redits prominent) buLt project credits to the private sector ,)nl'i abhout TL 330 miillion equivalent. - 83 -

's) establishinga State Export DevelopmentBank and possibly two new private developmentcompanies for respectivelythe Aegean and Antalya regions. This reflects a view that historically the allocation of industrial funds by existing institutionshas been biassed in favor of large establishments with long industrialexperiencea and in favor of the Istanbul region.

(1) a new structureof rates and terms for industrialfinancing. These new rates would be 10.5 percent for "promoted industries" and 11.5 percent for other industries,which together with an increased 25 percent tax would yield effective rates of 13.1 and 14.2 percent respectively. The rates would be "unified" in the sense that large and small enterprises would pay the same rates. The list of "promoted industries" is very extensive; thus they are expected to account for 60-70 percent of the total TSKB loan volume.

(c) inducing commercialbanks to increase their lending to industry in general and medium-sized industry in partic:ular. These banks would recesive cash subsidies equivalent to 1-3 percentage points per annum on new industrial loans out:of their own capital or deposit funds. The twin thrust of these new arrangements is (i) to make the existing indtustrial developmentbanks focus on large projects, dropping somieof the small and nonprofitableprojects which they have been assisting (and, in fact, subsidizing)in the past and (ii) to stimulate the better placed commercialbanks to handle this type of lending.

(d) special credits for medium-sizedenterprises which may have difficultiesin finding financing through normal channels. By May 1970, TL 397 million had been advanced for projects totallingTL 1.4 billion, mainly in Anatolia.

201. The major aim of the above program Is to aid medium and small bus tiess and also to bring commercial banks more actively into industrial devfelopment. It does not provide for the larger firms on which :Whemajor rceliance for growth must be placed. These need more support for feasibility stt.udies, project credits (foreign project credits have been channelled largely into the State sector), efficient development bank aid and an organized capital market. Possibilitiesof issuing marketable shiaresand bonds would be greatly increasedafter industrial restructuring (see above paragraplhs185 and 195). The demand for such shares and bonds, in Turkey's present phase of economic development,can only be nmobilizedthrough institutions (Banks, Insurance Companies, Pension Funds). These institultions need to lbestrengthened, and their legal capabilityof investing in industrial ,iecuritiesincreased. At the same time, equity participationby industrial developmetntbanks - through direct purchase and under-writing - ,an be fuirtherpushed. Once the dualism between the State and the private sectors - 84 -

has been eliminatetd,preferential allocation of funds to the State sector (e.g. through the Army, Pension Funds or even the State Tnvestment Bank) could be gradually phased out, and all funds channelled through the market into the financially most attractive project, whether in the State or in the private sector. Foreign industrial loans could also make a major contribution while foreign direct investment could become a catalyst, increasing the security and general attractiveness of industrial shares and bonds in those companies hiere well-known international concerns would be major partners.

J. ForeigrnDirect Investment

202. Within the past three years, 62 decrees have been passed authorizing foreign manufacturing investments for a total project value of Tl. 2.9 billion equivalent. Ten of these account for 75 percent of the total, including seven in the motor vehicles, tractors, and parts industry, two in fertilizers and chemicals, and one in the paper industry (Table X).

203. In recent years, the Turkish Government has also promoted "mixed" (State-private) enterprise, often grouping a State enterprise with a foreign-private manufacturing firms. Sometimes a tripartite arrangement (Turkish State, Turkish private interests, foreign-private interests) will provide a Turkish majority in the ownership as well as a private majority. The latter formula has found favor with foreign investors. Major new "mixed ventures" include the FIA-Tofas automobile plant, a proposed ship engine plant (with Sulzer), the Pendik shipyard (with Ishikawajima), the Mersin fertilizer plant (with Kuwait Petrochemical Industries), and the BASF-Sumerbank caprolactam project.

204. Optimum scale of output and modern technology are ofteni interconnected; the Turkish market for many products is too small for a reasonably sized plant. Participation by international concerns will be helpful in several respects -- as a source of foreign exchange and of investment capital, as a vehicle for transfer of technology and manag,ement, as a market for additional sales required to reach an optimum scale of output -- and finally, as a guaranteed source of chemical intermediates necessary to the production of certain finished products. 1/ Specialization is not without its risks. The Turkish market for tire cord is not large enough to

1/ A good example is provided by the manufacture of nylon based upon imported caprolactam which was recently initiated in Turkey. A project for the production of caprolactam is under discussion whicl- would permit Turkey to export 20,000 tons of caprolacta-mlJby 1972, Together with an estimated domestic demand of the same order, such exports would permit an output of 40,000 tons which is an economic scale of operations. Production would be based upon cyclo-hexane supplied by the foreign partner. Eventually, as the Turkcishmarket grows, production of cyclo-hexane could also be taken up. - 85 -

permit economical manufacture of both nylon 6 and polyester cord (the two alternatives). The selection of nylon 6 for a new plant in partnership with a foreign investor is not necessarily the right bet. Similarly, to break into the borax market in another foreign partnership (other than the dominant firm) could leave the Turkish industry vulnerable to super- ior financial power and technology. Yet, such risks may be worth. taking in order to bring Turkey closer to the mainstream of world trade and technology.

205, The Turkisli Government's attitude towards foreign investment is, in the main, positive and realistic. The Government is fully cognizant of the benefits; it is also aware of the traditionally negative attitude towards foreign investment by influential segments of Turkish society. When authorizing foreign investments, the Government looks for a major contribution to the Turkish economy, and wants to drive a hard bargain with the foreign investor to satisfy Turkey's long-term interests -- processing of domestic agricultural and mineral riches, access to export markets, etc. Difficulties have arisen because of Turkish insistence on moderate prices and gradual increase in domestic content (e.g. pharmaceuticals) rapid progress in exports (boron products), or a high initial scale of output (diesel engines). More thought will need to be given to the dual personality of the State in relation to foreign investors: State institutes or enterprises which hold shares in joint ventures with private companies should look primarily to the commercial and financial interests of such ventures allowing other State agencies to uphold any State or public interest. Equally, a voice in management might be looked upon as a pragmatic objective in some cases rather than universal doctrine. If these guidelines are adhered to, prospects for attracting foreign investments would seem good.

K. Management of InddustrialGrowth

206. Three agencies of the Turkish Goverrment have major influence on the planning and implementation of Industrial development.

J27. The State Planning Organization is responsible for the drafting and supervision of five-year perspective plans and annual programs. In the manufacturing sector, its main recent focus has been on the private sector - particularly industrial priorities, project mobilization, and investment and export incentives. Whatever its formal competence in the field - and it is charged with the annual review of State Economic Enter- prices investment programs - it has not taken a very active part in planning and program execution for the State manufacturing sector.

208. The Ministry of Industry has three rnajor functions in the industrial field. First, it is the central authority for the semi-annual allocation of import quotas to the manufacturing sector, whether for current operating requirements or for investments. Secondly, it serves as a Board of D)irectors for the majority of state manufacturing enterprises (excluding certain agricultural, wood and minerals processing activities, - 86 -

and the State monopolies for the manufacture of alcoholic beverages and tobacco products which fall under other Minisries). Thirdly, it is responsible for the support and development of small industries and handicrafts as well as for the organization of industrial estates. Other functions include the administration of patents and the promotion of industrial research and development. In connection with its role in foreign exchange and raw materials allocation, the Ministry sends an annual questionnaire to about 1,200 industrial firms. This is used by SPO in measuring industrial growth in various sectors.

209. The State Investment Bank (S.I.B.) was created by Law 441 dated March 12, 1964, the same date as Law 440 concerning State Economic Enter- prises. Administraltivelyit falls under the Ministry of Finance. Its essential function is to supply the balance of financing needed by State Economic Enterprises after self-financing and outside financing. In 1969, S.I.B. financed altogether 37 percent of the total investments of the State producing enterprises. S.I.B. obtains about 85 percent of its funds through borrowings from the State Social Insurance and Pension Funds. The actual financial frame for S.I.B.'s activities and the credit lines available to major individual state enterprises is decided in meetings between the Ministry of Finance, S.P.O., and S.I.B. and the Ministries concerned with each group of State enterprises. S.I.B. itself is primarily concerned with disbursements and, to some extent, with end use supervision. By its statutes, it cannot grant a loan to a State Enterprise unless there is reasonable assurance of financial viability. To overcome an impasse in this respect, the Ministry of Finance will either approve price increases for a State Enterprise if its prices are controlled, or alternatively (where suchi an increase would be regarded as socially undesirable) guarantee debt repayment. S.I.B. does not go deeply into the economic justifi- cation for the projects financed.

210. Reference should also be made to the llighControl Board (or Audit Office) for t:he 120 or so State Economic Enterprises. The High Control Board prepares an annual report on each enterprise which goes first to a mixed parliamentary committee, and is then forwarded to the two Houses of ParlLament for approval. While the main emphasis is on formal auditing of accounts, the High Control Board might also make recommendations on organization and company policy. To be really useful, how- elz7r, tliis latter tyrpe of review would require far greater aggressiveness and more profound expertise than has apparently been applied in the past.

211. In the recent past, SPO has played a dynamic role in galvanizing tihe private sector into action and in enlisting the interest of foreign entrepreneurs. This aDproach is well established, and its success proven. The main tasks for the future - the programming of industrial growth, the design of a new tariff and incentives framework), the mobilization of factors of production, the creation of a new industrial structure and the reform of State Manufacturing Enterprises would seem to call for particularly close tri-partite cooperation between SPO, the Ministry of Industry and - 87 -

industrial associations. Yet, while the SPO wLll help define the overall. planning and policy design, the bricks and mortar must be increasing1v provided by the other two entities. The industrialsector might be represented at the top by a new Federation of Turkish Industries (the present Chamber of Industries freed from the administrativeand psychological chains of the import allocation function). The administrativechange which has taken place in the Ministry of Industry through the creation of a Planning and Co-ordinationDepartment must now be translated into a major substantivecontribution. As we have already noted, the "Small Industries Department"will also have an extremely importantrole to play. This leaves, for the end, the question of the future administrationof State Manufacturing Enterprises. In whatever way the SEE's are reorganized,the Ministry of Industry should be left free to make industria'Lpolicy decisions without being hampered by control of particular enterprisesand should hold a neutral position as between the public and the private sectors. I I I I APPENDIX I

STATISTICAL APPENDIX

List of Tables

I. Growth in ManufacturingOutput, 196:3-1969

II. Details of Growth in Manufacturing Output, 1963-1969

III. Importsof Manufactures, 1963-1969

IV. Import Substitution in Manufactured Products, 1963-1969 V. Exports of Mamnfactures, 1963-1969

VI. Domestic Cost of Foreign Exchange Savings for Selected Items, by IndustrialGroups

VII. Net Protection Rates for a Sample of Mamnfactured Products, 1969

VIII. Net Protection Rates Implied in Price Differences between Turkish and Imported Products

IX. Growth in Manufacturing Investments., 1963-1969 X. Approved Projects Involving Major Foreign Direct Investments, 1967-1969

XI. Production, Value Added, and Employraent in State Manufacturing Enterprises, 1954-1963

XII. Growth in Operations of State Manufacturing Enterprises, 1963-1967

XIII. Profitability and Cash Generation byrState Manufacturing Enterprises

XIV. List of 100 Largest Firms Belonging to the Chambers of Industry, Ranked According to Their 1968 Sales

XV. One Hundred Largest Industrial Firms Grouped by Activity (where identified) and Size Class

XVI. ManufacturingEmployment, by Industry Group and Size Class

XVII. Large and Small Establishmentsin Turkish Manufacturing1963

XVIII. Percentage Distributionof Total Employment in Manufacturingby Size of Business Unit, 12 Countries

XIX. Percentage Distribution of Employment and Value Added, by Regions and Industry Groups, 1963 XX. Summary of Projects Granted Investment Certificates, by Manufacturing Sector

-X31. Details of Industrial Projects with Investment Certificates, as of April 1970

xMI. Record of Investment Allowances

XXIII. Development and Encouragement Fund Performance

XlIV. Postponements Granted for Payments of Import Duties

XXV. Tax Refunds on Industrial Exports

XXVI. Calculations Illustrating the Effect of Various Export Incentives on Turkish Cost Competitiveness

XXVII. Projected Coverage of FinancialRequirements for Major State ManufactLiring Enterprises, 1970 TABLE I

Growth in Manufacturing Output, 1963-1969 1/

SUMMARY

Indices 1963 1969 1963=100

Food processing 1.27 1.75 138 Beverages .22 .3L 145 Tobacco .h3 .66 153 Textiles 1.h6 2.44 167 Clothing and footwear .04 .07 175 Wood and cork products .12 .205 171 Printing and allied .14 .20 143 Leather and rubber .10 .20 200 Misc. manufactures .04 .06 150

Sub-total 3.82 5.92 155

Pulp and paper .22 .33 148 Chemicals .46 .73 200 Petroleumand coal products .35 .59 168 Non-metallic minerals .37 .70 189 Basic metals .45 1.08 240 Metal products .41 .60 147 Machinery .18 .72 400 ELectrical machinery and equipment .18 .35 195 TransporTequipment .23 .49 213

Sub-total 2.85 5.99 192

TOTAL 6.67 11.91 173

For comparison; SPO figure 202

"Large1' establishments only.

Obtained by adding ten percent to the SPO total for 1968. (S.P.O.figure for 1969 not yet available). The difference between the SPO figure and our figure is not necessarily significant. In piecing together various sources of information, we have generally (when in doubt) made a corLserva- tive estimate of past growth. I I A Table II

Details of Grovtiinuftvturtng Outitut 963-1969 4

Value added Indi-es of OutFut Eat. Value added 1963 1_9b4 1965 19t/ A? c __ 1969 N O T E S TL Billion

Food processiE 1.27 (L38) 1.75

FLour milling .11 113 (121) .13 Sugar refinirg .68 150 167 137 .93 Olive oil processing .05 83 91 .045 Cotton seed oil .02 155 154 .03 Margarine and similar .08 125 L55 .125 Animal feeds .002 380 .01 Other .33 (145) (.48)

2evereges .22 155 .34

Raki .16 136 L46 .23 Wine .0*4 163 139 .055 Beer .02 137 166 .03 Soft drinks .01 (.02)

Tobacco manufactures .43 (153) .66

Cigaretbes .31 1146 163 .50 Other .12 (133) (.16)

TextLles 1.46 (167) 2.44

Cotton ginning .09 170 .15 Growth of outpit 1963 to 1964 not know,r. Cotton yarn and thread .12(107) 146 171 .20 and had to be roughly estinated Cotton cloth, etc. .71(107) 144 167 1.18 Woolen and worsted .35) (170) (.91) Other .19)

0-lrthjig atri Cnotwear .014 (175) (.07)

Foot,7ear .03

Wood and Cork praducts .12 (171) .205

Sawmilling .05 175 188 .095 Plywood, etc. .03 157 172 .05 Wooden containers .02 (154) (.06) Furniturre .02

Prinwting~ and al Lied . L4 ( 43 ) ( .20 )

Leather and Rubber .10 (200) (.20)

Leather .03 118 142 .05 RIbbberProducts .o6 167 (.10) Tires and tubes .01 .02 412 500 .05 Growth estimate 1964-1967 based on rubber imports. misc. manufactures .04 5150) ( 06) lloulded and extruded plastics .02 Other .02

Total Consumer- 32. (155) 5.92 orienteazn Traditional industries

*/ Because of the absence of pertinent official data, this statistical exercise was undertaken by the Mission. It provides a rough check on the reasonableness of SIS and SPO estimates. The above figures should not be used as a reference. They are shon htwee only &a a record of the deri- vation of the mission figures for comparison with an improved data which ma become available in the future. Table II page 2

Details of Growth in Manukcturlng Output. 1963-1969 (cont'd)

Value added Indices of Output Value added 'II 1963billionl 1964 1965 1966 1967 68 1969 1969 N O T E S

Pulp and paper, etc. .22 .33 Pulp, paper, and board .20 148 .30 Articles of paper .02 .03

Chemicals .46 .73

Basic chemicals (11) Sulphuric acid .07 Caustic soda .005 .013 .013 Assuming 50,000 tons were produced in 1969. Fertilizers .07 200 .14

Nitrogenous type (.10) Phosphate-type (.04) Pharmaceuticals .19 .48 Other .13

Petroleum and coal products .35 168 5 Petroleum refining .32 172 .55 Other products .03 .04 Ncn-metallic miineral products .37 189 .70 Cement .16 159 177 216 Gilass .245 .08 193 223 240 .20 Other .13 (196) .255

Basic metals .45 1.08 Steel .30 121 160 215 232 268 300 .90 copper .15 105 166 107 702.2 95 98 .147 Ferro-chrom.ium .005 150 231 256 262 287 287 .014 Other .00 Boron ccmpounds .02

Me-tal ProAD;i, .41 147 (.60) Table 'I page 3

Details of Growth in Manufacttring Output. 1963-1969 (Cont'd)

Value added Est. value added 1963 1964 1965 1966 1967 1968 1969 1969

Machinery .18 400 .72

Agricultural machinery and tractors .04 .40 Refrigerators, etc. .09 .22 Other .05 (.lo)

El. Machiner;ad Eqin t .18 195 .35

Batteries .04 134 Based on plan figures Wire and cable .03 300 Lamps .03 (1UV0) Electranics and radio .o6 144 Otner .02 200

Transport _Fuipnent .23 213 .49

Shipbuilding .o6 100 1.40 1.40 90 90 90 .05 Railroad equipment .08 143 173 2?6 .18 Based IBRD subsector study of engineering industries Motor Vehicles .o6 232 294 326 .20 Based Other .03 (.o6)

Total Pradoainantly Ind. Materials and Era lpment Ilad. 192 5 .59

Total lmanufacturing 6.67 173 116 f I I i TABLEIII

1JRKE7

IMPORTSOF MANUFACTURES (in million US$)

S:TC Ninber 1963 1964 1965 1966 1967 1968 1969

032, 053, 055, 061.2, 09, 42 Food Processing 23.7 21.0 2.8 11.2 2.6 1-39 11 Beverages .2 .2 .2 * 65 Text'les 16.5 15.5 17.1 16.5 20.6 21.7 17.6 84, 85 Clothing and Footwear 5 24, 63, 82 Wood and Wood Products .4 .4 1.3 .8 .3 .1 .7 25, 6h Paper and Pulp 11.5 6.7 11.1 10.4 20.7 21.1 1?.2 61 ' eather and Leatler Prochats .2 .1 .i .2 .1 .2 2.3 62 1ubber Products 22.2 7.5 4.9 5.8 5.7 5.8 1!.7 58 Piastic Materials 9.8 8.7 10.8 17.6 17.8 18.7 17.0 231.2, 266, 5 exc. 56 and 58, 52.8 53.9 7.2 81.9 8? 5 IC 6 Che cals 52.8 5. 12 8. 95 '13 56 Fertilizer 5.5 L.6 17.5 27.9 37.1 L7.7j 332 Petroleum Products 13.4 9.8 8.9 12.6 16.4 20.0 20.5 661 Cement 1.2 i.0 .5 1.8 1.9 L.0 662 Ceramics 1.9 2.0 3.5 14.3 3.5 3.7 6614,665 C-0lass 1.9 2.0 2.0 2.6 3.8 2.L 8 663 Non-1Metal Mineral Products 2.3 1.2 1.4 1.9 2.2 2.Ce j 67 I-on and Steel 50.3 42.1 50.3 54.5 .36.7 33-9s> 68 Xon-Ferrcas Metnl 7.L 8.6 12.2 16.D 16.4 17.a4 82 5 69, 81 Metal Products 22.8 11.8 13.8 18.5 16.2 14.91 71 Machinery 151.1 143.5 133.0 179.9 185.0 209. 9 220 4 72 Electrical Machinery 45.7 36.9 38.5 54.3 50.2 53.6 73 Road and Railway Vehicles 71.8 42.2 42.1 60.8 56.0 67.)5 734 Aircraft 5 4 .2 .8 1.1 9.0 79.2 735 S:iips .1 86 Scientific and Optical Instruments 10.8 9.0 11.9 15.3 15.6 16.4 15.C 89 ;Siscellaneous Manufactures 14.3 4.0 4.7 6.2 6.1 6.6 5.7

Total Manufactures 5_2T. 041-5 1.79h 612.7 6D 6c2.5 65c.

Minerals 55.5 60.6 51.9 47.7 43.1 52.8 L7.8 Agriculture 107.0 40.7 59.9 57.8 35.7 28.3 39.8

TOTAL 690.8 537.2 571.6 718.2 o84.6 763.6 7!5.C

Note:. The table for inmorts and Exports in Turkey is based on data given in 7T.N. CoTrnodity Trade Stat' stics (Series D) for the period of 1963 to 1963. Act=a1 figures for 1969 imports are accord:ng to statistics published by the Ministry of Comerce in "Conjoncture". The export figures were supplied *y S.P.G. *Under food processing.we have included the follow-ing products:

SITC Nrumber C12 Dried, salted and smoked meat 032 Canned fish 053 Canned fruits 055 Preserved vegetables 061 Refined sugar 09 Yiscellaneous '42 Fixed vegetable oils

Tt shallibe noted that, e.g. in the 1970 Annual Progran, SPO gives higeer figres for food processing e.ports, na-nely $1L6.3 million ecuivalent for 1968. These figures include l'zeluats, dried fruits, and feeding-stuffs (mainly oil-meat and oil-cakes) which the mission shows under agriciLtural exports.

Souirce: U.N. Co=modity Trade Statistics for 1963-1968 and for 1969 Ministry of Commerce of T:rkey ("Conjoncture"). TABLEIV

Import Substitution in Manufactured Products, 1963-1969

(figures in T.L. million, at current prices) CalceTion of 1963 1969 Import Substitution Production Imports Exports Production Imports Exports Cosucp 169 Imports Exort subst, tion tion in the absence 9 of import subst. minusCol. 6)

Food Puoesssing 6668.V 208.8 216.0 6661.2 21L.0 4.5 1448. 20004.4 6.i.6 Beverages 455.9 1.8 1.8 455.9 1164.9 1.8 9.9 1156.8 4.6 2.8 Tobacco Processing 1693.4 1693.4 3315.0 3315.0o Textiles 5082.0 76.5 24.3 5134.2 O160.0 90.0 154.8 10895.2 163.4 73.4 Clothing& Footwear 862.0 862.0 Wood & Wood Products 979.8 3.6 13.5 969.9 2753.$5 *9 35.1 2719t3 10.1 9.2 Paper & Printing 825.7 103.5 929.2 1123.6 244.8 .2 l362,*, i51.s (93.0 Leather& Leather 321.3 1.8 323.1 299.0 13.5 55.o 256,7 1.4 (12.1 Products Rubber Products 22.9 199.8 _422.7 1021.8 57.6 3.6 1075.8 508.8 Chemicals 1261.7 689.4 20.7 1930.4 4027.5 1778.4 49.5 5756.4 205.0 76.6 Petroleum Products 1057.2 120.6 81.0 1096.8 4465.7 208.8 4.5 4670.0 513.7 304.9 Non-metallic 837.0 65.7 2.7 900.0 2703.5 65.7 12.6 2756.6 201.2 135.5 fineralsProducts Basic Metal Indust. 1222.3 519.3 58.5 1683.1 4898.0 635.4 144.0 5389.4 1659.9 1024.5 Metal Produlcbs 2022.8 205.2 2228.0 2751.0 18o.O 3.6 2927.4 269.3 89.3 Machinery 524.2 1359.9 1884.1 2668.8 1969.2 2.7 4635.3 3346.7 1377.5 ElectricalMachinery 513.5 411.3 924.8 1492.0 531.9 3.6 2020.3 899.0 367.1 TransportEquipment 775.8 651.6 1427.4 2821,5 755.1 3576.6 1630,9 875.8 Miscellaneous 359.8 135.9 2.7 493.0 21)4.2 ... 214.2 ...... Manufactuires

25685.7 4754.7 421.2 30019.2 68128.0 6573.6 1928.7 72736.9 12035.9 5498.3

Imports and exports in relation Source= SPO statistics to total supply (imports plus .. detail not available; included jro&uction). under other categories

im/Iport substituition defined as difference bgtween actual 1969 imports and hypothetical 1969 imports representing the same proportion of donestic consumption as in 19 3. TABLFEV TURKEY EXPORTSCF MANUFACTURIES (in million US $)

- .--' _-¢¢z.- -, t.______~ .~~~~~~~~~~~~~~~~~~~~~~~~1 196 . 3. 1965 1966 947 95B 1969 332, 053, 051~5, C61.2, 09 zd 22 P3cd ?a ce isg 24.2 24.6 21.5 10. 15.3 .S 29.5 II ~~~~~~~~~~~~ .2 .2.6.9. ~~~ ~~~~~~~~~~~~~~~.2 Av _ - rwack v 2.7 4.2 2.3 2. 2., 7. 15.2 314, a, ^~ct<_r^ aA.a noc;v-.ear - .1 .1 .3 .5 .o 1.3 24, 63, 02 an-t'3odl Pocroc>-s 1.5 1.4 1.8 2.1 1.9 1.9 2.2 25,64 a ? .2

62 ' _iA'9t''.t'A^ ^1& -z-a-..e.2 S nsc-aWts . . .2 52 -- < 4-

c '. s 2.1 2.]1 3.0 3.5 2 .3 4 .2 8.9 v~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 v v -D 3,9 BcbeJuc e- ?^zc'czs 9.0 9.2 5.5 2.3 .4 1.3 2.6 661 C ' oS2 Cc:. is .2 .1 662, 665 f-Iacc .1 .6 .6 .1 .3 *9

67 +:^;^. .^Qd S t_ee IA .3 1.6 1.8 2.2 1.6 2.7 3.5 63 .x-C r' C.e Vtals 6.2 10.2 17.2 24 7 16-6 12,0 6.7 69, 81 -)Y.' r .1 2 .8 71 .1 .2 .3

73 .- ancd ?aa iay vec:,-Lc Is 86 ScientifiC c.d 0-otc Ca2I nsuruments .1 .1 39 *Lisce aeacsu arfaCVres .3 .2 .4 .5' .5 .6 1.1

Total "zii:f act'-es -. 44 46-E 39.9 T74

.'-wOU1^a1S 10.0 12I.2 17.8 22.1 18.7 22.2 34.0 .Agriaalt'tra1 products 311.3 342.2 384.4 416.5 458.7 432.1 428.4

TOTAL 368.1 410.8 458.9 490.4 522.2 496.4 536.8 Manufactures, excl. food processing 22.6 29.8 35.2 41.0 29.5 35.1 45.o

SOUoce: U.;N. Cjo;Tnz,od;i7.yTrade Statistics for 1963-1964 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~:

I~~~~~ TABLE VI

Domestic Cosb of Foreign Exchange Savings for some selectedItems, by Industrial Groups

Group and Product Domestic Cost Group and Product Domestic Cost of Foreign Ex- cige Savis change Savings

1. Processed Foods 2A Products of Textiles, el-. CloEhing Wheat bran 11.74 Macaroni 16.36 Lace 8.70 FKour 18.66 'Lacecurtain cloth 8.81 Wheat 18.64 Vests 9.37 Dried soup 22.30 Dants (suits) 10.71 Salt 25.00 Sweater 15.22 Powdered milk 50.00 3. Lumber and Other Wood Biscuits 13.57 iFducts Chocolate 18.44 'Lumber 14.86 Vegetable oil 15.00 Lumber for construction 15.20 Margarine 15.90 Fibre board 15.30 Cotton seed oil 16.29 Thip board 18.00 Sunflower oil 24.44

Tomato paste 21.43 TNhin paper 2. 16.94 Textiles Heavy paper 20.05 Coloured paper 21.02 c,ottonterylene cloth 8.21 Terylene viscon 15.55 5. Rubber and Plastic Products w1O0Ientervlene 23.38 Pen 12.21 Woo.en yarn of imported 'Pen 50.51 wool 8.86 ,',hildren's blanket 9.88 Plastic pipe 13.95 Blanket with design 12.29 plastic floor covering, Lar ket (large) 12.67 2 mm. 30.21 Cewing thread ( for Plasticfloor covering, embroidery) 15.70 1.6 mm. 32.43 Nylon thread 17.46 Rubber shoes 4.62 Ordinary sewing thread 18.11 Thin nylon (coloured) 19.03 Automobile tires 7.62 Thin nylon (white) 19.50 Truck and tractor tires 8.54 Woolen yarn(for rugs) 19.62 ''tabilizedpolyester yarn 6. Chemicalsand Pharmaceuticals (white) 20.52 Mohair cloth 34.78 Matches 5.77 Detonator 37.34 J*tisrseycloth 8.81 Cotton cloth 14.10 lharmaceuticalproducts 5.71 Curtain and upholstery cloth 15.75 Toilet soap 15.87 Laundry soap 16.96 Table VI page 2

Group and Product Domestic Cost Group and ?rodhuct Domestic Cost of ForeignEx- of ForeignEx- cange Savings change .Savings

7. Petroleum Products 12. (cont.)

Petroleumproducts 11.02 Cast rad:iEttors lo.57 Cooling tower 11.96 8. Cement Bathtub, small '3.08 Bathtub, >arge 14.75 Cement 16.64 Metal Con ,ainer '20 1.) 20.7? White cement 28.08 V MetaL on;aincr 1.)' 21 . Oil burner, meczium 33.60 9. Clay and Ceramic Products Oil burne-, 'arge 34. AR Oil burne-, small h2 .88 Tea set 7.96 Pressurs *0ooksr 43. ;0 Coffee cup 8.69 Plates 8.79 12A Durable A-rsumtcr 20.O,

W.ater closet 18.40 SmaLl t bT.e radio 8. 1 TWashbasin 19.75 Large t.:De ricio 8.71 Small ham.dradio O 1 15 Glazed tiles 28.46 Large por-.able radio L1.66 Harndoperated sewing 10. Glass machirne 16.44 Refrigeraz.or 29.13 Soft drink bottles 10.33 Washing machine, simple 25.94 Liquour bottles 10.72 Washing machine 28.88 Tea glass 11.08 Washing machine,auto- matic 30. 46 Glass fibre 3 cm. 12.14 Washing machim 32.09 Glass fibre 5 cm. 12.16 Gas stove 37-37 Glass fibre 2 cm. 12.19 Vacuum cleaner 64.95

11. Steel 13. Machinery

Water pipe 20.32 Diesel engine for water Galvanizedpipe 22.90 pump 11.44 Cold-drawnpipe 25.79 Elevator 11.97 Small diesel water pump 12. Metal Manufactures engine 1'.56 Large dieselwater pump Wire nails 37.00 engine 13.00 Diesel compressor 13.24 Wood drill 7.58 Sewing Machine (i3.89) Lathe drill 7.60 Buttonhole maker 13.89 Drill 5-15 mm. 7.61 Sewing machine with j 14i.50 Drill 15-25 mm. 7.62 Motorcycle 16.20 Circular saw 8.01 Water pump 16.75 Continuous saw 8.08 Boiler l8956 Hand saw 8.11 Calculator 639.80 Automaticsteam iron 10.35 Snow chains (car) 10.80 Gas tube 16.63 Gas valve 20.25 Table VI page 3

Group and Product Domestic Cost of Foreign Ex- chane Savings

14. El. Machinery

Electric motor,.25 kW 11.59 Electric motor,.22 kW 12.34 Motor for small vacuum cleaner 15.22 Dry battery V2 4.96 Dry battery V12 5.00 Electric cable 12.14 Battery 6V 12.54 Battery 12V 13.41 Bulbs 75-100W 18.64

Fluorescertlamp 4OW 21.43 Flitorescertlamp 20W 22.74 Heavy cable 33.07

15. Motor Vehicles

Bus 150 HP (41 persons) 13.31 Road sprinkler 13.54 Bus 150 HP (32) 16.61 Car 24.65 Garbage truck 23.86 Minibus 32.95 Truck 7 tons 42.46 Pickup truck 7.48 Minibus 87.76 Pickup truck 112.83 Minibus 384.86

Source: Ahmet Aker, Study of the Industrial Price Structruieof Turkey

Brief Note on Methodology

In his " Stviy of the InduLstrial Price Structuire of Turkey as a Guide to her Association with the European Economic Communlity", Mr. Ahmet Aker visited more than 130 firms in order to get comparisons between Turkish and EEC prices. The total number of the commodities sampled ( over 460) represented about TL 20.2 billion of output in 1968. The domestic cost of foreign exchange savings was derived as follows: domestic component of production cost (TL) equivalent EEC price minus import component Turkish output ($) The domestic cost component was caluclated net of indirect taxes and import duties. Below, the application oibthis method to the specific case of buses is illustrated: Table VI page 4

1/ Wholesale price for bus of 150 HP T.L. 276.000 minus duties and taxes on import component T.L. 24.794 Price, net of duties & indirect taxes 251.206 minus foreign excha;ge component T.L. 59.143 Domestic Cost -; 19.U67 EEC price for the same bus minus import componentof Turkish output $ 21.000 (59.143) 6.571 Net foreign exchange savings

The domestic cost of foreign exchange saved is therefore: 192.063:144.29=13.3

Several objectionsmay be made to the method used:

(a) The proper reference price should not be the domestic price in the EEC-area but this price translatedinto a landed cost (excludingduties) in Turkey.

(b) Indirect taxes should be deducted from the domestic cost only where these are clearly discriminatory. Sales taxes, etc. are really part of the cost structure.

(c) Apparently, the foreign exchange componentwas computed only from direct imports, omitting the import componentof domestically procured inputs. This gives a downwardbias to all the ratios, and would, of course, also affect the ranking of differentproducts.

Nevertheless,accepting the above data as a first approximation, they are thought to be of subs*ftial interest. The study was favorably cited by several Turkish industrialists.

1/ Excluding indirect taxes TABLE VI1 Not Protect) oenRateas e .9.;rt;o Eejefactauci Proubiet, -/

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Net Protection t Dur3blD Rates Foods & Lumbor Pulp & Rubber Che-r .cal & Pet,o:,eu Clay & Metal Cn'sn-r Motar Stee Mafacturil Goodta 2 Electrica Mater …_ - B…vere *-.s Textiles & Boar ar ! Pi;t. Ple;raeeeehtsal3 - - - .Pro.3ts-- O3e.-- 1_ Ce;,1'tC5______Glees______-- --~~~~~~~~M____r_ 5/ &.eal Vehicles 1111 11 Beltm -47 11 (1) 1

-4o/47111111111

-34/39 11 11 111 1 -33/28 1 11 11 -27/27 1 1 1 1 1 1 11 -20/26 11 1 111 1 1111 1 11 -13/25 1 1 1 -7/0 1 1 1

7 11 1 1 1 1 1 111

13 1 1 1 20 111 1 1 1

27 1111 1 11 33 11 1 1

40 1 1

47 1 1 53 1

6o 1 1 67

1111 73-106 1 1 1 11 1 106-133 1 1

133-172 1 1 1 172-206 1 206-234 1 1 1 111. Above 234

1/ Source: Adapted free east Aker, Setue * the lndj, trial Price Streetursof Turoey.

Note! For furth3r aaplatien, see footnote to Table The conparison is based 'jpon a llsnadowlO excheage rate of fT 15 per U.S. dollar. -/ Includes reatercyclee wift a net aforoteotlen 8 peroent. TABLE VIII

Net protection Rates Implied in Price Diff rence between

- - ~~Turkish and Imported Prodaucts±.'7

Domestic Cost /ivalen- of For. ExcH. Savings Nect etion

Foods and Beverages 15-18 0-20 Textiles 15-19 0-27 Soap 15-16 0-7 Lumber and Board 14-15 minus 7-zero

Pulp and Paper 20 33 hubber tires 7.6 minus 50 Petroleum products Nitrogen fertilizers Cement 16.6 11 Window glass Glass fibre 12 minus 20 Glass bottles 10-11 M (27-33)(us

Steel bars Flat steel *45 Steel pipe 20-26 33-73

Hand tools 7.6-8.1 minus (46-50) Radiators (cast iron) 11 mrTus 37 Pumps, compressors, small engines 12-17 minus 13-plus 13 Bath,tubs 13-15 minus 13-zero

Small electric motors 12-15 ninus 33-zero Dry batteries 5 minus 67 Storage batteries 13 minus 13

Sewing machine 16.5 10 Motorcycle 16 7 Radios 8-12 minus (20-47) Refrigerator 29 93 Wqashing machines 26-32 73-113 Oil burner 35 134 Gas stove 37 146 Vacuum cleaner 65 333

Heavy cable 33 120 Tractors, 45 hp -*\-26_69 Buses 13-17 minus 13-plus 13 Minibuses 33-88 120- l7 Heavy trucks 42-62 180-315 Fick-up trucks 113 655

1/ Data summarized from Table IV A and used in plotting Chart I.

2/ Obtained by dividing the figure in the first colum by an assumed equilibrium exchange rate of TL 15 per .$. TABLETI: ORCl.wTI N TuFAcTutINGINVEST'MRT3 (TL million a, 1965 p

1963 1966 ~~~~~ ~~~~~~965- 966 Sector Public Private Total Public Private Total P Pr_vate Total Public Private iot.-=

Food, beverages, tobacco 121 134 255 138 115 253 132 160 292 150 203 353 Textiles and clothing 80 212 292 66 247 313 21 300 321 90 392 L12 Forestry products 8 16 24 5 7 12 13 20 33 12 33 ,1 Printing 7 18 25 9 16 25 12 Lo 52 1^ 65 77 leather, rubbr and i85 pastics 2 - 118 118 - 30 30 _ 143 143 1 184 Nisc. manufactures 11 _ 11 26 _ 26 - 21 2

Sub-total 216 498 716 229 415 614 204 663 867 272 898 1.109

Pulp and paper 33 7 40 22 7 29 12 8 20 66 7 51 Chamicals 24 139 163 39 165 20) 139 90 229 275 142 617 Petroleum refining Y) Non-metallic minerals 85 65 150 119 60 159 135 115 250 166 163 33C Iron and Steel s 165 1,069 1,234 143 604 747 143 155 298 105 98 202 Yetal products 35 102 137 28 77 105 0 lC0 110 a 11 123 Knchinery 16 16 32 18 13 31 21 23 64 22 53 75 El.Eouipment - 28 28 - 66 66 2 76 78 - La 19 Vehicles 19 21 60 21 22 63 24 70 95 35 16 51

Sub-total 377 1,447 1,824 390 994 1,386 4e6 637 1,2_ 6 6L" L29 6 Total lManufacturing 593 1,945 2,538 619 1,4G9 2_ 28 690 1,3C0 3,990 92S 1.561 2.8•9

Alternative Total -

* 1967 1968 1969 _

Food, beverages, tobacco 186 226 412 209 232 661 200 253 453 Textiles and c othing 66 390 456 80 361 8611 59 3°9 6,58 forestry prodvcts 10 !83 53 28 43 ?1 61 51. 115 .Printirg 9 61 50 10 34 84. 6 Ld 54 1.9a:tier , r4%b'bor and p]astics; 2 6 123 128 2 llC 111 ^ 159 16'. b:isc. manuf~actures 7 18 25 6 9 15 6 20 26

Sub-total 284 841 1,12 335 789 1,123 335 933 1,268

P,zlo and paPer 1I 16 127 240 26 266 431 48 679 Cnemicals 626 184 608 L26 286 712 300 693 994 Petroleum refining 167 65 232 106 87 193 269 30 299 Non-.etallic minerals 201 286 687 176 34(8 524 98 157 255 Iron and Steel 52 212 263 81 173 254 63 164 227 Non-: errous nmetals 35 9 4!, 66 130 196 103 02 186 Metal products 2 131 134 9 133 163 27 131 158 Yarchinery 41 55 96 33 95 128 15 159 174 El. equiprent - 76 76 - 75 75 7 107 114 Vehicles 38 116 15 3 43 112 156 62 185 247

Sub-total 1,071 1,148 2,220 1,180 1 L65 2,645 1,375 1 -56 3,133

Total Maznufacturing 1,353 1,989 3.343 1,515 2,254 3,769 1,712 2,689 6400

Alternative Total-

-/ Investments in Eregli steel mill have been included in private sector.

-/ Plastic processing only. Manufacture of plastics is included with chemicals.

- PetroleiLm refinirg was apparantly excluded 1963-1965.

Vith Eregli investments included in public sector, (To be completed). TABLE X

Approved Projects InvolvingMajor Foreign Direct Investment 1967-19691/

(Figures in TL. million)

Industrial Sector 1967 1968 1969

Food and Beverages 35.0 36.2 Tobacco - 2.4 (6.0) Textiles 12.6 - 58.6 Pulp and Paper - - 232.0 Rubber and Tires 54.0 2.4 - Chemicals, Etc. 2.9 142.8 4.0 Pharmaceuticals 34.5 - 15.4 Fertilizers 450.0 - - ConstructionMaterials 48.0 2.0 - Metal Manufacturing 3.4 - 145.4 Electrical Engineering 131.7 23.4 69.3 Machinery 5.2 201.3 45.0 AgriculturalMachinery and Tractors - 200.1 40.0 Motor Vehicle Assembly and Manufacturing 9.9 332.9 475.0 Other Manufacturing - 4.9 -

Total Manufacturing 787.2 947.5 1,090.7

Mining and Manufacturing 14.0 17.8 25.8 Engineeringand Other Services .7 6.0 3.0 Trade 2.5 - 7.7 Tourism 3.8 4.9 440.4 Banking 15.0 - 45.5

Grand Total 823.2 976.2 1,613.1

Major Projects (Investmentsof TL 50 million and over)

Viking Paper 232.0 BASF (Caprolactam) 100.0 MediterraneanFertilizer 450.0 Eaton-Yale-Towne(gears, transmissions) 134.6 L.M. Ericsson (telephoneequipment) 53.3 Magnetos Marelli (auto-electricparts) 63.0 Perkins Diesel Engine 201.2 Massey Ferguson (tractors) 183.2 Fiat-Tofas (automobiles) 332.9 Renault 390.0 Chrysler International (automobiles) 80.0 Tekirova Tourism 300.0

Sub-total 503.3 817.3 1,199.6

1/ Figures represent total investment in the project. An analysis for 1968 and 1969 indicates that the foreign promotors would (typicallyand on an average) contribute about 50 per cent of the total investment requirements, in about equal shares of equity and credits. TABLEXI Production, value added, and erc,loye-.nt in itSte P'sr,4ct.urap rnt9ernri9scs, 1 -921963 IMex 196J 195h 1955 1956 1957 1958 1959 1960 1561 1962 1963 _le-ito) Valueof Production (TL million at 1962 prices) 379 1976 5Li 593 628 820 221 Heavy Industry- 2 / 370 920 531 4]1 Focd Proqs-nCn 300 407 1992 510 556 721 00 555 646 705 235 Texti 'l / 727 740 721 798 793 826 C96 852 10 963 1 y Cther 230 241 261 310 332 i06 995 476 5':? 7.L 312

Total 1'anufacturing 1627 1808 1955 2029 2c65 2132 2782 2776 2785 3212 19S All State Enterprise 7824 7415 7873 8834 8912 9702 9S554 9663 9919 105119 13; % IlAg 20.8 24.4 24.8 23.0 23.2 29.3 27.2 2807 28,1 30.4 -

Value Added (TJ. million at 1962 nriceo)

Heavy Industry 205 292, 334 221 214 301 325 326 297 381 185 Food processing 151 207 225 261 264 370 955 435 330 355 235 Textiles 375 373 312 419 365 1905 437 422 468 448 11I Other 130 135 142 172L 17 705 20S 239 310 376 292.

Total 1Mnsufacturing 861 959 1013 1021 1050 1282 1226 1422 1705 1560 1°1 All State Enterprise 3641 4001 4383 4874 4690 19583 5215 5096 5121 5456 150 % 2ifg 23.6 23.8 23.2 22.2 22.4 25.7 27.3 28.0 27.6 28.6 -

hrplowient (in thousands)

Heavy Industry 4.9 5-3 5.7 6,2 6,7 7.3 7.6 8.0 7.9 8.3 169 Food Procesasing 8.9 10.3 11.9 11L9 12.9 1! o3 15.5 19l.2 14.4 13.9 186 Textiles 25.5 26.0 25.9 27.2 27.7 29.5 30.2l 29.7 3000 30.9 121 Other 6.0 6.4 6.7 7.5 8.4 li-) 13 5 14.7 15.5 16,8 283

Total Manufacturing 5.24 48.1 50,2 52.8 55.6 62,7 67.2 66G6 67.7 6953 152 All State Fnterprise 218.5 229.6 299,2 2L7.9 267.19 285,8 295.3 231.6 295.1, 2v5.3 132 % 1019 20,7 21.0 20.5 21.3 22.7 21.9 22.8 23,5 24.1 24.3 -

1/ Covers three enterprises: Turlcish Iron and Steel Corporation, Machine and Chemical Industries and, fran 1960 or; Ipras Oil Refine".

2/ Includes six enterprises: Sugar Factories, Soybcan Oil Tnd'stry (4957), Aksaray Flour hilLs, Sc,th East Olive Oil Products (1959), UJlfit Food and Soap Tndustry (1959) mad Feed Industry (1956).

/ Inclubdes altogether 17 enterprises: 13 cotton Ooxtile ente.rprises (of whrich 8 started operatioes inr 1g59-1960), ttir woolen and worsted enterlrises, one hemip industry enterprise, and one viscose fibre and yarn pLant,

4/ Includes altogether 18 enterprises: one nitrogen fertilizer plant, one agricultural equipment ennufaotsiror, three cement enterprises, one leather -n'l shoe T.anufactuerxig enterprise, three erterprises in the porc-lain seed ceramics fi-ell, one factory ro'h_ng refractories, t-d six otl-er nr tufacterigZ vcr,turcs (rachi3e spare parts, vood products, rubber products, printinE, .nd tue seedworn scorn oil proc:isiC, planss). Of these eleven were oraclea in 955-i90..

Sorree: State Institute of Statistics, Economic Accoumts of Non-Financial Enterprises in Turkey (1969). TABLE III

-ovQfth in Oserat:.ons of Stat,e Manufacturing, Er-ternrises 1963-1967

1963 1967 Index

ie-.yndi-str=-,,

Iron !acaidSteel Corp. (Karabnk) 934I.3 .,r eg1 Iron a-nd Steel (Erdemir) (689) 609.6 1pras 487 .

Subtotal,excl. Erdemir 755 2,030 269

incl. Erdemir (2,719) (360)

Focd YtYocessing

Sugar Factcxnies 108h. 7 Soyb,can 011 Tnd'ustr,y 15.7 Aksaray Flolr Industry 19.5 Pouth East Olive Cil 1.4 U-fe.t Food and Soap 32.6 Feed Industry _4__2.6

Subtotal 785 1,196.5 152

Texti. les

Cotton Texti les 842. 8 Woolen and ttZrorsted 306.0 IIm-p Industry 9.0 Viscose 2.72_7

Subltotal 966.5 1,18.55 122

OtJhe- Mianifactor nc

SnKm (pulp and paper) 500, 5 cement (12 Firms ) 386.0 Porcelain and Ceramics (3 Firms) hh. 1 Agri cultural Equipment 59.8 Nitrogen 1~151.6 Leather and Shoes 85.6 Refractori es 20,6 cOther 12. <

Subtotal 715 1.260.5 169

Total, excl. Erdemir 3,251 5,673 174

incl. Erdemir (6,312) (19h)

1/' Trhe 1963 list was taken from the State Institute of Statistics study, "Economic Accounts of Non-Financial Pablic Enterprises in Turkey., Enterprises 12, 17, and. 18 in list for 15963 could not be identified in 1967. TABLEXIII

Profitability and Cash Generation by State Manufacturing Enterprises

A. ProfitsBefore Taxes

1963 1964 1965 1966 1967 1968 1969

Iron and Steel Corp. 43 22 25 51 102 148 127

MKEK(Engineering) 25 21 31 43 60 102 67

Nitrogen Corp. -58 -51 -50 -41 -48 -46 -51

SEKA (Paper) 32 41 21 38 44 80 117

Cement Cos. 20 23 20 24 39 69 22

Sumerbank 53 38 66 81. 167 110 67

Subtotal 115 114 113 196 364 463 349

Sugar Co. 24 48 56 54 61 54 56

IPRAS (Petrol. Ref. 73 126

B. Profits After Taxes Before Depreciation And Debt Amortization

Actual 1963 Program 1970

Profits Debt Balamce Profits Debt Balance Before Paymnts. Before Paynnts. Depr. _ Depr.

Iron and Steel Corp. 81 14 67 176 116 60

MKEK(Engineering) 92 344 -252 129 178 -49

Nitrogen Corp. 471 25 22 831 100 -17

SEKA (Paper) 34 15 IL9 109 8 .ZGn

Cement Corp. 41 13 28 88 u16 -28

Sumerbank 41 36 5 132 292 -140

Subtotal 336 497 -111 717 790 -72

Sugar Co. 144 327 -1832 99 390 -2912

IPRAS Petrol. Ref. Table XIII page 2

10ash flow includes subsidy (to company losses) of TL 58 million in

1963 and of unknown magnLtude for the 1970 projection;the 1969 losses were

-1,1 million

2 Both in 1963 and. 1970, the cash defecit shown by the sugar company was compensated, in the main, by short-term credits. The significance of these financial entries is not clear; the sugar industry was not specifically studied by the industriaL team. TABLE XZI

List of One Hundred Larrest Firms BelonRing to the Charnbenmof Industry, Ranked According to their iT Sa'es-

Rank Chamber Company Employment Own Camital Sales m:Lllion T .1. million'."I

1. Ankara *EreWli Iron and Steel 3.828 522 870

2. Istanbul

3. Aegean Taris Cotton & Agricultural Sales 2.3h9 72 431 Cooperative

1X. Istanbul Turkish Glass and Bottle Factories 4.727 233 293

5. Istanbul Uzel Trading and Industry, Ltd. 940 93 289

6. Adana Bossa Commercial & industrialOperations 4.226 75 275

7. Istanbul - --

8. Istanbul Uniroyal Industry (Tires) 616 1-83 247

9. Adana Guney Industrial & Comnercial Operations 4.405 80 240

10. Istanbul Rabak Electrolytic Copper and Products 669 83 228

11. Aegean B.M.C. Industry and Trading 822 49 227

12. Istanbul Mensucat Santral (textiles) 3.112 :117 222

13. Istanbul - -

L4. Istanbul ki'- Pirelli Tires 868 215 2-3

15. Aegean Tur.lsh (Edible) Oils and Product,s 1.068 48 197

16. Istanbul Th2r.Oish Iron Foundries 2.147 94 172

17. Istanbul

18. Istanbul Ak,suYarn Spinning, Dyeing & Finishing 2.055 72 129

19, Ankara Turkish Tractor & Agricultural Machinery 559 39 129

20. Aegean Eir'es-k Tndustry and Trading 350 8 29

21. Istanbul aozacibasi Pharmaceuticals Industry i 1.085 98 122 .rading 22. Aegean METAS Izmir Metallurgical Wor'ks 801 47 120 .'RoledSteel)

* Asterisk indicates State Enterprise. All State Enterprises do not belong to Chambers of Industry (Cf. Report, para 43 ). Table XIV page 2

Rank Chamber ComDany Employnent OwmnCapital Sales millioln T.L. million T.L

23. Istanbul Bozkurt Textiles Industry 1.21 42 119

24. Istanbul Profilo (refrigerators, etc.) 1.332 17 118

25. Istanbul 394 22 117

26. Istanbul 1.718 57 106

27. Ankara Nitrogen Industry 2.587 141 99

28. Aegean B.A. GolnelPartners, Vegetable Oils 319 5 98

29. Istanbul 24.468 85 95

30. Istanbul Economic & Industrial 7nstallations 526 38 95 and Operations 31. Istanbul h48 103 94

32. Istanbul Pipe Industry (Steel Pipe) 150 32 91

33. Istanbul Sumerban-kWoolen Industries 1.663 105 87

34. Istanbul Sumerbank Bakirkoy Cotton Industry 1.984 46 84

35. Istanbul 540 15 84

36. Aegean Kula Textile Factory 2.013 41 83

37. Istanbul 1.074 38 82

Istanbul Koruma Agricultural Pesticides - 82

39. Aegean Izmir Cotton Textiles 1.333 24 81

4s0. Istanbul Istanbul Beverage Industry (TISA) 461 31 79

141. Adana Cukurova Cement Industry 508 89 78

42. Istanbul Celik Montaj (Metal Manufactures) 329 33 77 (Metal Manufactures) 43. Aegean 232 12 71 hh. Istanbul Herko Y;inWool and Cotton Textile Combine 975 29 71

145. Ankara M.K.E.K. Machinery Industry 810 20 71

46. Aegean Aydin Textile Spinning and Weaving, 1.513 30 71 and Edible Oils

47. Istanbul Fruko-Tamek Fruit Juices 538 21 69

L18. Istanbul Vinyleks Industry and Trading 380 30 69

49. Istanbul D.E.V.A. Medical Instruments and 1.040 49 67 Supplies Table XIV page 3

Ran1k Chamber Comnany Employment OvmnCapital Sales i.aillion T .L. MilliOn IfT

50. Istanbul Gubre Factories (fertilizers) 575 34 66

51. Adana Toroslar Trading 387 15 64

52. Adana PaksoyTrading and Industry 501 14 63

53. Istanbul Afkil Industry and Trading 908 85 63

54. Ankara Feeding Stuffs Industry 413 33 62

55. Istanbul Altinyildiz Textile Factories 1.082 47 61

56. Aegeani Cimentas Izmir Batteries and Accessories 670 70 60

/57. Aegean DY9 and aSolin CellulosicSynthetic Dyes 420 25 59

58. Istanbul Mlutlu Bat--Ieries and Accessories 1.205 30 58 59. Istanbul Ittihat Milling Company (FlourMilling?) 159 5 57 60. Istanbul 515 28 57

61. Istanbul MI.A.N.Truck and Bus Manufacturing 303 32 57

62. Kayseri Central AnatoliaCommercial and 1.390 9 56 IndustrialOperations

63. Istanbul Ulker Biscuits,Chocolate and Sugar 529 - 55 Products,Ltd.

6h. Istanbul .Auer Manufacturing 813 15 55

Istanbul _

66. Istanbul Bus and Body Industry 376 31 5

67. Istanbul AnatolianCements 664 33

68. Istanbul CavusogluPaint Manufacturing 354 21 52

69. Istanbul -

70. Istanbul Turkish Cables 253 19 51

71. Istanbul Elektro-Metal Industry 487 25 50

72. Aegean IDurmus Yasar ve Ogullari Paint, 370 15 50 Varnishesand Resins

73. Istanbul Thrace Industryand Trading 158 5 50

74. Istanbul E.C.A. Die Castings 451 21 49

75. Aegean Manisa Cotton Textiles 1.336 65 49 Table XIV page HRank Ch2.ber Company Employment Own Carital Sales million T.L. millionI.

76. Ankara Antalya Ferrochrome and Carbide 318 30 48

77 Istanbul HIektas 'rrading 119 19 48

78. Istanbul Narin Textiles Works 738 25 47

79,o Aegean Eastern Trading 1.293 13 416

8&. Istanbul Matas Trading 132 8 46

81. Istanbul Dr. Nejat F. Eczacibasi Cerarmcs Factories 763 50 46

82, Istanbul EHAIETAS Metal Furniture and Sheet W%7orks 900 16 46

83. Aegean M4AKTASMacaroni and Paste Products 353 18 45

84. Istanbul Steel Industry Corp. 313 20 5

85. Istanbul

86. Istanbul Marshall Paints and Varnishes 262 9 43

87. Istanbul

88. Ankara Ankara Milling Company 73 7 42

89. Istanbul Auto Transport Industry Corp. 368 25 42

90. Istanbul P.I.M.A.S. Plastic Construction Materials 297 24 42

91. Istanbul Ideal St.andartHeating Industry 854 16 41

92. Istanbul Neyir Knitting Industry and Trading 650 41

93. Istanbul 278 16 41

94. Istanbul Akin Textiles 327 22 40

95. Aegean 970 38 40

96-.c Istanbul Singer Manufacturingi 645 23 40

97. istanbul Plastel Plastics and Rubber 322 21 40

98 Aegean Edible Oils Combine 250 8 40

99. Istanbul

100. Aegean Soke Cement 337 36 39

94,087 4.952 10.574 TABLE fT

One HundFrde Lrageot Lnc .Ib rnerb e c yF4.tiAm IdantiT'Led) and Size Class

Above Below 500 250-499 125-249 62 .- 124___ 31-62 _ 15-30 _15 Totals

Foods-Daverages 15, 40, 54 47, 633 83 28, 59, 88, 98 10 Textiles 12, 18, 33, 75 23, 34, 36, 55 39, 44, 46, 78 14 Glas s 4 92, 94 1 Ceramni;s 81 1 Pharmaceuti cals 21 49 2

Cemaent 41, 56 67, 100 4 Rubber tires 8 14 2 Chelmici-3, plastics, fertilizers 27 38, 50 48, 90, 97 6 Paints, dyes & varnisnes 57, 68, 72 86 4

Irmo & steel 1 22, 32 84 4 Metals 10 71, 76 3 Me tal rnaauf acteriaig 16 7 82 3 Durabi e co:asar,.r goods 42 24, 96 3 Machinery 45 1 Electrical equipmnlt 58, 70 2 Motor Yshicles & tractors 5, 11 19, 61, 66 89 6 Activity to be .deatified 3, 6, 9 30, 53 51, 77, 79, 91 20, 52, 62, 64 15 73, 80

Corpany not identified 2 7 13, 17, 29, 31 26, 37, 95 25, 35, 65, 69 43, 60, 87, 99 19 85, 93

Totals 1 1 5 18 24 36 15 100

1Nznibers refer to coca anile 3-stod in Table XO For comnpuesa 4,69 ana, #99, neiMtor name nor size of equity %eeas'supplied. We lade a roogh guess as to theLr equities based uoon their tern er f -ares. Numbers of coow anies knoun to btlorg to the State sector have bseeTrunde -lined. TABLE XVI

Manufacturing Empio~en by Industry Group and Size Class, Nov. 1, 1963

Size Class, By Employment Industry Group 1-4 77--- -- 0-49 50 Or More Persons byIrd_ stry Grop

20 Food Processing 29192 16931 9034 8781 49257 113195 21 Beverages 2179 1174 321 471 4046 8191 22 Tobacco 48 23 64 456 16533 17124 23 Textiles 19357 7589 6734 12119 90403 136202 24 Footwear and Clothing 91951 4414 346 259 2504 99474 25 Wood & Cork 25224 3421 713 733 4971 35062 26 Furniture 9620 1190 638 202 375 12025 27 Paper 612 538 215 335 7090 8790 28 Printing & Publishing 2960 2228 867 1256 3328 10639 29 Fur & Leather 7981 898 227 984 985 11125 30 RubDer 1383 590 774 1466 4153 8366 31 Chemicals 1244 1193 1067 1450 12446 17400 32 Petroleum Products 180 117 24 22 1798 2141 33 Non-MetallicMinerals 5718 3120 1029 1246 18649 29762 34 Basic Metas - 235 304 12419 12958 35 Metal Products 52667 7822 1893 2511 17841 82734 36 Machinery 2590 1077 527 956 3953 9103 37 ElectricalMachinery 5511 608 306 355 4923 11703 38 Transport Equipment 18400 3799 372 481 16855 39907 39 Miscellaneous 9040 1505 490 1108 967 13110

Totals,bySize Group 285857 58237 25926 35495 273496 679011

Source: State Institute of Statistics, Census of ManufacturingIndustries1964, Section III, Table 5 TABLE XVII

1/ Large and Small Establishments in Turkish Manufacturing, 1963

( Value of Sales and Value Added in T.L. billion )

Sales and Services Rendered Value Added Large_ _ Small TotalT Large Small)! To'al

Food 5.18 1.48 6.67' 1.27 .21 1 48 Beverages .39 .06 *45 .22 .02 .24 Tobacco 1.66 .03 1.659 .43 .00 .43 Textiles 4.14 .94 5.08 1.h6 .16 1.62 Clothing and footwear .10 .76 .86 .035 .29 .33 Wood,cork and furniture .30 .68 .98 .12 .18 .30 Printing and publishing .24 .12 .36 3/ .135 .04 ol8 Leather and rubber .31 .23 .54 .10 .o45 _4 Misc. manufactures .10 .24 .34 o04 .08 Subtotal 12.42 4.5 16.9T T 7.02513T_ MT incl. metal products (13.52) (5-46) (18.9>9) (4.22) (1.28) 550

Pulp and Paper .39 .07 .46 .22 .01 23 Chemicals 1.07 .19 1.26 .46 .03 J49 Petroleum and coal products 1.05 .00 1.06 .35 .00 Non-metallic mineral products .68 .16 .8l ,37 .045 Basic metals 1.22 - 1.22 .45 - 45, Metal products 1.10 .92 2.02 .41 .255 655 Machinery .44 .09 .52 .175 .03 -05 El.equipment .37 14 .5:Li .16 0 4 Transport equipment .58 .20 .78 .23 .09 Subtotal 6.90 1.77 T.77- a 7- *_7 excl. metal products (5-80) (.85) (6.65) (2.4'5) (.245 )-

Grand Total 19.32 6.31 25.64 6,64 1.53

1/ A large establishmentwas defined as one engaginglO or more persons( including working owners or partners as well as unpaid fanillyworkers).

2/ Value added for small establishmentswas computed by us as differencabetween

(Value of Sales and Other Services Rendered) and (Value of Machinery, Electric Energy, and Services Purchased) without regard to changes in inventories,

3/ Due to an apparent error, the total for large and small establishmenbs in the Census publication (p. 1079) does not agree with the sum of the two subtotals for respectively large and small printing establishmentsshown elsewhere in the the same publication.

Source: 1964 Census of Manufactures TABLE XVIII

Percentage Distribution of Total Employment in Manufacturing,by size of Business Unit, 12 Countries

Summary

Below 50 50 and Above Total

Austria* 29.I0 70.6 100.0 Belgium* 23.3 76.7 100.0 Denmark* 26.0 74.0 100.0 France 29.4 70.6 100.0 Germany 11.9 88.1 100.0 Japan 42.6 57.4 100.0 Norway 36.2 63.8 100.0 Portugal 36.3 63.7 100.0 Sweden* 20.9 79.1 100.0 Switzerland* 33.5 66.5 100.0 Turkey 68.3 31.7 100.0 UnitedStates 16.4 83.6 100.0

Note: The comparabilityof the data may be impaired by differencesin coverage (industryas compared with manufacturing,inclusion of handicrafts, etc.). Also, for the countriesmarked with an asterisk, the census unit is the enterprise rather than the establishment. For further detail, see Table XIIIA (next page).

For this reason, only tentativeconclus§'ns vani be drawn from the above table. Nevertheless, the unique importanceof small enterprisesin Turkey suggestedby the statisticsclearly p-o- vides an interestingstarting point for further analysis and study.

Source: Except for Turkey. Problems and Policies Relative to Small and Medium-SizedBusiness. OBOD, 1971 TABLE iTT

Relative Distribution of Total Employment in Industry Accordiniz to Number of Employed p2er Un.it*

Less than 1 10-49 50-99 100-499 500-999 1,000 and All 10 L f~over Categories

Austria 1964 - 29.4 . ( _70.6 100.0 Belgium 1967 3.5(a) 19.8(b) ( 76.7 100.0 Denmark 1965 4.0(a) 22.0(b) < 74.0 _ 100.0

Finland 1965 41.0(c) 31.0(d) - 28.0(e) 100.0 France 1966 12.0 17.4 9.4 22.9 9.3 29.0 100.0 Germany 1966 2.1 9.8 9.0 29.6 13.2 36.3 100.0

Italy 1961 , - 41(e) - 25(d) -- _ 34(e) - 100.0 Japan 1966 16.6 26.0 11.4 22.0 7.9 | 16.1 100.0 Norway 1967 11.7 24.5 13.3 14.9(f) (- _ 35.6(g) - 100.0

Portugal 1964 - - 36 .3(h) 10.2(j) 27.4(k) 13.2(1) 12.9(m) 100.0

Sweden 1965 6,7 14.2 7.9 20.2 8.5 42.5 100.0 Switzerland 1965 13.6 19.9 10.2 26.7 9.0 20.6 100.0

United Kingdom 1963 13.6 - o 15.5 7.7 63.2 100.0 United States 1963 3.3 13.1 9.8 30.9 12.4 30.5 100.0 Turkey ; .i[3 5f ______Notes and Sources: Austria: Enterprises, including handicrafts and primary production. Belgium: Enterprises, (a) less than 5 employees (b) 5-49. Denmark: Enterprises, including proprietors (a) less than 5 employees (b) 5-49. Finland: Enterprises, (c) small firms with up to 100 employees (d) 101-500 (e) more than 500. ermEanY: Local units. Extracted from the 1968 edition of the Statistiches Jahrbuch. Ltaly: Enterprises. Excluding the 1335,596 people in handicrafts. (c) small enterprises with up to 100 employees (d) 101-560 (e) more than 500. Japan: Establishments. Extracted from the 1966 Census of Manufactures, 5. : vEstabli_hmpnts. including mining, production handicraft and various service activities e.g. repair work etc. (f) 100-199 (g) 200 and over. Portu.,al. Establ.sihments excluding those with less than 3 employees, including mining, construction and utilities, (h5 3-50 (j) 51-100 (k) 101-500 (1)501-1,000 (m) l,00l and over, Sweden Enterprises. fr.4gl-:,r: - pEnte:n-PrI.seS8includinig hi-n1 sraft3. Extracted from the Recensement 4dd4ral des entrepriseos; vol., .1 Buc a.le.s ft%ddral des otatistique& 1frt-,.eini.y L:rn. tc-.teapxy~ 5. E.rt--ac f2r ccaa tVse 1963 5'.iqus of Production. 'KK.:.;O,.'' f t:;. s-:;--..1;aO v~... ) s:tf -' :i of Manufactures5

1t _ti_ ; S S E .i *:!kXL- -t i .j C .(OGtCtes--) nr Tu"'ikblL -X I I ik~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I Table EXi

Po1t1440o.- D41i00ibi. to t0r 1,1,O o 0oAd] by 01 -0,odThd-t~y G-p, 1963

00 A~~~~~~~~~~~~~~~~~~~

-PIY-- 352 5' 491 2 -T 9L*. 58 2500L.6 6 0.0 0. 2 .2 . 36 4. 1. . ~

T.1 id.d .3 6.9 5.50. a.9 920.00. 12 63 0 53 . 23 0.0 00 .6 44 .4..

Ad~ .1 2. . .4 1.0-. . 70.00- 0. -0 V0. 0-08 AO5 o. ox 84 00.0 0.0 0. I

Iot.o601 6.8 Loploy.1- Aed. 35.9 25.6 49.1) 32.71 -30.6 .7 0)166.625.7 68. 0.0 2.6 10.2 .0 3.1.13. 0.0. 1.0.0 5 .4 . 0.0

.I. 6.d48 19.0 75.3 1.6 37.0 97.5 24.4 70.1 10.5 1. 0.0 1.7 13.0 0.0 1.0 9.6 1.4. 20.5 0.0 6.5 0,0

3b1.8 OoPloYoeor 8.o 1.6 12.8 03.4 00.6I, 5.1 7.4 1. 0.0 74.8. 10.8 45 5. 0.05433. .4 16.0 5.8 13.6 10.0 30.5 90. Vo.I- Added .35 9. .9 . .2.78 . 12. 0. 56 .7 90. 6.0 0.3 53.9 11.9 9.0 69.4 100. 13.8. 0.8 dokor.0~~~~1o~~~t 4.8 6.7 7.1 18.8 0.0 0.0~~~~~ 0.0 1.5 19.0 09.0 7.1 9.2 0.0 60 00 30 00 12 1. . . ,

X-at-e= .4 tlabs dde 7.3 6.9 5.5 0.0 0. 0.0 10.9 9. 0.0 12.2 . 6.3 0.0 1.3 20.0 2. 0.0 0 .0 6 4.4 0.0 0. 6.5

Ade.0a 2.7 ~~~~~e..o dd,d 4.9 2.6 0.0 .3 12.0 0.0 3.3 0.0 0.0 2.2 0.0 0.0 0.0 03.0 3.. 0.0 0.0 1.9 0.0 0.0 0-0

31.ckS.. V.1&;e Aded 3.8 13.0 0.0 16.4 1.6 0.3 4.9 0.0 0.0 .7 0.0 0.0 0.0 34.0 4.5 05.1 3.0 0. 0.0 3.0 0.0

lola. 0dde.d 3.8 17.4 . 1. 2.7 1.2 0.0 3.2 0.0 2.0 o.7 0.0 0.0 10 8.1 10.3 04.3 0.0 0. 0.0 1.3 0.1

6atlAala1.8Eployont 6.1.n- 3. . 6 0.0 13.6 0.0 0.0 0.0 0.0 0.0 0.8 2.9 17.2 0.0 17.9 0.0 0.0 O.D 0.0 40.0 0m,

hlooe Added 7. .0 097.06 . 0.06. 0.00. 0.0 -.0.0 1.32 0.013. 0.0 0.0 0.2 0.20.0 010.0M -

A"Wlis000e .1.6 'sp1oyot 4.5 7.9 0.0T 0.0 31.1 0.0 1.7 0.0 0.0 0.0 0.0 . 0.0 20.51.9 0.0 0.01. 0 0.0 ,6 Ox'-

1a.- A22dd 5.0 7.6 0.0 10.0 7.8 0.0 . 0.0 0.0 0.0 0.0 0.0 1.1- 3.0.0 0.0 .29 0.00.0 .5 1.00

S..thU t.- 1 1.1140- Ade .8 1.4 1.4 22.7 1.7 0.0 30.2 0.0 0.0 0.0 0.0 5.8 1.2 80.4 10.3 44.3 o.5 0.0 0.0 G.i .

Islo Added 7.0 1.7 2.6 0.0 6.5 0.0 3.0 0.0 0.0 -. 0.0 1.0.0 0.0 1 0.41.3. 0. 1.1 1.0 0. 27. >

OAtorll- 70.2 Eaployo-t 4.0 8.8 0.7 .1 3.6 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.0 0.2 0.6 1;.4 0. 0 8.0 0.0 .3- 0.

V.I.. Added .06.6 221. . . 0. 0...... 0 19 1. . . .,

Oterosy3.8t29100o 0 1.1 . 980.01 1 .70.00.01- 1 0.0 1 0.0 1 0.0 0 0.0 0.0 2.6 20.4000.0 0.0 00.01.6 10. c~o10.0 0(1.O .

T.2- Idod -100.1 100.0 990.0 130.3 109.0 190.0 190.0C100.0 100.0 103.0 100.0 200.0 2100.0 102.0 100.0 203.0 901.0, 19,1.0 100.0 110,0

Sosre. Stta. 1ostituts td statiti.o, 1961, le-s of 9too-O'r.t-0 Thd,tooti-S TABLE XX

Summary of Projects Granted Investment Certificates, by Manufacturing Sector

F:ixed Working Foreign Currency Foreign Currency Exports Sales Investmer.t Capital Requirement in For Operation Investment T Sub- sector 1000 TL 1000 IL 1000 $ 1000 $ 1000 $ 1000 TL

Food Processing 438 458 187 395 8 858 1 073 26 661 1 172 951 Textiles 611 288 118 597 27 170 1 008 26 814 1 415 491 Forest Products 325 775 129 933 15 298 169 12 012 481 367 Prirting 6 000 500 307 _ - 37 500 C,hemicals 821 617 183 296 46 164 31 298 6 349 1 328 160 Flasbl-cs 75 829 58 627 3 974 2 917 - 300 273 Paper 587 291 114 364 28 662 5 779 - 798 516 Petroleum Products 11 275 283 700 - - 26 756 Cement 499 251 15 956 15 019 - - 692 500 Btaked Clay and Cei2,et Products 29 h43 4 4114 596 1 - 50 000 Ceramics 40 678 5 090 1 485 46 735 62 733 Glass 353 287 45 137 12 533 1 017 2 534 311 733 Iron and Steel 62 251 38 600 3 190 7 139 - 242 417 Non-Ferrous Metals 248 413 77 675 11 291 10 371 i 000 610 973 Metal Prodiucts 147 619 31 657 8 539 1 716 1 800 251 664 AgriculLural IMach. 10 000 7 600 156 - - 39 062 Nachiney 16h 301 72 833 8 459 2 335 2 900 502 096 Electrical Equipment 15 125 26 960 600 571 - 84 265 Shipbuilding 22 567 22 576 1 043 1 043 - 22 567

To'al 4470 468 1141 493 194 044 66 483 80 805 8431 024. TABLEXii

ndustr al prjectsItne nt Certificatess as oLflrll ]970

Number ~ Tota2l Turnover K ;Eports of InvestTnent Product projects (TL Million) (TI Million) (TL M ion Details and Comments 6 986 1,15 261

Black Sea Copper Blister copper end pyrites 932 489 261 Terk3an Zinc162 Maceo Electrolytic zinc 16 26 Kemal Ozdedeogl1i Calcined zinc 13 801 Other

Food_Proce_ssinI 26 626 1,172 240

Fdeva San Fruit juices 155 200 Vatan KonserVe Canoed fruits and juices 54 153 18 Tat Konserve Canned fruits and juices 39 54 10 Pak Tavuk Chicken slaughterhouse 38 53 Gukurova Pam&,OukurorS. Pemuk ~~~~~~~~~~~~CottonCoton3 eil 37 6516i 20,3- Other

Forest Products 15 455 481 108

Huris-Halk Plywood, etc. 135 123 30 Modern Kuntraplar Luiber 39 51 Sunta Tahta Lumber 28 24 8 Duzee Elyafli Lumber 195 197 18 Other 6 702 799 -_

Birkas Wrapping and writing papers 250 265 - 50,000 t IpeP Kagi.t Wrapping and writing papers 167 209 - 31,000 t MehmetKavelst Writing papers - 26,000t Kartonsan 137 -Vt7 Paper (imitation kraft) and board 78 107 - 13,000t paperand board with authorization 26,000t Foreign exchange portion $l.4 million -fiznanced, _ NOTE: All these paper mills would participate with Other 70 71 581(Ain Balikeshir pulp project.

21 1,005 1,328 57 Chemicals 312 Soda~~~~~~~~Sosas ~ 2140 350 - Sod DNT and polyesterchiPLs 80 20 Kimya Edustrisi Nylon6 and chips 79 8273 Sellafyan NyloT 6 7 o2 Sifas ~ an38 61i - Polylen Citric and ascorbic acids 33 25 Fursanm 233 614 ~ 6 Other 6 134 300 __ plastics5

pinias Plastik Inoaat Mei.ee87 lori Plastic tube 78 130 - 15,000 . t./y PlastOar,etal Sallayi Wa t'c, A.S, IzIn't Thin plasticthcts and 17 12 - 343 tons Oiciski.rl 5 ~~~~~~~~metallissithreaa 13 6o 6,0oo ton23 e.bcIoiTng-va OXctokl-rl P,aUkr' 5_ I pl... 10 12 .10,500;' Plasl. Yapi EIleanlariLik y~~~~~~~~~pi a ,3 ~~~~~~Pl.astic Plastic an-e 10 2,5J t. Iovst 1'.A,S5, Adnnc P16t1c "u 6 S5 Talble tWC(Ip age 2

Number Total Turnover Exports of Investnent Product Projects T M ( illion)-TLM Details and Conments

Textiles And Clothing L79240 241i5 241

Baharne. Mensucat, Istanbul Cotton thread and woven material 179 251 Bossa, Adana n ,, 11l 90 39 Bisas, Bursa 3,300 t cotton thre;ad 44 5t Bisas, Bursa 10,070t cotton thr,ead 18 22 Paktas, Adana Cotton products 41 65 4 Guney Sanayi, Adana Cotton products 51 25 23 Ssncak Tul Sanayi Ltd., Istanbul Polyester 37 282 39 Cukurova, Tarsus Cotton products 28 1L, 9 Ipsan Nayeoniplik, Bursa 1,250 stockings 22 39 - Mensucat Santral As, Istanbul Woven Material fi ,i:shed 19 43 17 Vakko, Istanbul Ready made of silk 21 61 27 Haz-Et Kuanas ve Giyim, Istanbul Ready made clothing 20 24 - Bursa Koza Tarirn Satis, Bursa Silk plant 19 21 18 Bahariye 15ensucat, Istanbul Ready made clothing 19 52 Akfil Sanayive Tic, Istanbul Cotton thread and w,oven material 20 6 4 Salihli Iplik ve Dokuma, Salihli Cotton thread and w,oven material 15 21 Orta Anadolu Tic. ve Saman Isl., Kayseri Cotton thread and w,oven material 15 47 Aksu Iplik Dokuma ve Boya, Istanbul 600 tons/y. Mohair thread 114 25 11 Kartaltepe Mensucat Fab, Istanbul Cotton thread and woven material 13 17 2 Hlall-Lex Sanayi ve Tic, Bursa Carpets 13 31 11 Birsan Sahayi ve Tic, Istanbul ve Bursa Stockings 11 26 6 Milli Mensucat Sanayi, Adana Cotton thread and w,oven matorial 10 10 10 Sarayokoy Pamukly Sanayi, Sarayokoy Cotton thread and w'oven material 10 13 - Altinyiloiz Mensucat Fab, Istanbul Cotton thread and wioven material 9 29 10 Other 33 119

Petroleum Products 1 11 26 --

Ersan Petrol Sarnayii A.S., Maras Asphalt and Fuel Oil 11 26 - 60,000 ton asphalt and 52,900 tons fuel oil

Cement 8 515 692 --

Goltes, Goller, Bolgesi, Cimento AS, Isparta 124 102 - 600,000 t. T.C. San. TAS., Adana 98 170 - 1.0 million tons Bastas Baskent Cimento San. ve Tic, Ankara 86 88 - 520,000 tons Surcan S. Turkes-Feyzi Akkaya, Bartin 65 56 330,000 t. Ak. Cimento, Istanbul 65 170 1.0 million tons Eskifehir Cimento Fabrikasi, Eskisehir 58 85 - 500,000 tons Bati Anadolu Cimenito San. A.S., Iz.mir 12 ... - 450,000 tons Other 7 21

Baked Clay an Product 4 34 50 -

Cemil Ozgur, Ankara Bricks 12 10 20,000,000 Osman Polat, Erzurum.s Calcium oxide - 10 12 - 75,000 tons Other 12 28

_Oo .!,_ic .;.. 2 . ...46 . ...65 7

Canukkealo Seraunik F rbnikkalpxi, C.aklkkale KLectroporcelan ar[it floor tiles 36 47 2 ar. llejat Eczacibas; Ser nik Fabrikk, Istanbll Household goods 10 18 5 Table XXI - nage 3

Number Total Turnover Exports of' Investment Product Projects (TL Million) (TL Million) (TL Million) Details and Coments

Glass 2 398 2 23

Anandolu Cam, Adana Window and bottle glass 281 308 18 130,000 t. Turkiye Sise Cam Fab., Istanbul Wired Glass, glass bottles and other containers, etc. 117 91 5 163,000 t.

Printing 1 1 38 -

Mabmut lizil Kaya, Istanbul Newspaper and magazine 7 38

Iron and Steel 4 101 249_

Metas Izmir Round bare 70 176 _ 6,0Oo t. Turk Demir Kokum, Istanbul Casting for radiators and heating 18 Other 13 73

Non Ferrous Metal 4 326 611 2

Kamil Yazici, Izmit Aluminum folios 200 223 9 Rabak A.S., Istanbul Electric wire 85 252 - Konaltas, Konya Aluminum profiles 25 54 - Aksan Metal San, Kaztae Aluminum profiles 16 72 -

Metal Produot 8 172 252 16

Aygaz A.S., aIzir Valves 46 . Guoum, Istanbul Nuts and Bolts 28 43 7 Meodettin Serbeta, Istanbul Compressed air 19 . Turk Demur Dokium, Istanbul Castings 18 32 9 Eabas, Istanbul Pressure vessels 14 19 - Other 54 158

Mauhinery D3 502 26

Pancar Motor, Istanbul Diesel engine pumps 47 190 14 Debak San, Bursa Cylinder Liners 23 30 - Mahle, Iznmit Pistons 22 17 5 Parsan, Istanbul Forging 21 14 - Celik Montaj, Istanbul Engines for motoroycle 20 63 - Omtas, Gebze, Istanbul Forgings 20 22 - Motor San, A.S., Istanbul Gebze Small engines 19 57 - Tersan, Istanbul Gebse Machine tools 19 38 - Iehami Tezulas, Istanbul Pistons 16 13 4 Segman San, lzmit Piston rings 15 14 3 Dizelsan, Izair Injectors for Diesel engines 10 Other 5 44

Agricultural Equipment 1 18

Celik Izabe Samayii A.S., Istanbul Heavy ploughs and harrows 18 39

Electrical Machinery 2 84

Gamak, Istanbul Electric motors 31 57 _ 160,000 S.P. Ibrahim Bodur, Istanbul Insulating porcelain 11 27 - 710 tons

Shipbuilding 6 22 22

Damizoilik Ltd., Istanbul Dockyard accessories 9 9 Other 13 13

Source: S.P.O. I TABLE gXII

RECORD OF INVESTMENT ALILOWANCES,Sept. 15, 1967 - March 30, 1970

TL Million

A P P L I C A T I O N S C E R T I F I C A T E S G I V E N R E J E C T E D

S E C T 0 R Number Total Allowances Number Total Investment Allowances Number Total Investment Requested Investment Granted Investmen

1. Agriculture 3 3 2 2 2 1 1

II. Mining 19 861 339 15 828 316 4 14

III. Manufacturing 607 11 258 6 325 403 7 425 3 480 109 573

- Textiles (80) ( 641) ( 499) (148) ( 433) ( 169) (21) ( 95) - Chemicals (4j4 (3 203) ( 978) (38j (3 083) ( 986) (7) ( 23) - Cement (17) (1 452) ( 713) (12) ( 739) ( 321) ( - ( -) - Iron and (148) ( 554) ( 324) (38) ( 254) ( 138) (73 (18)

- Others (418) (5 407) (3 810) (267) (2 916) (1 866) (74) (436) IV. Construction 3 16 13 - - _ 1

V. Energy 6 414 186 6 414 169 - -

VI. Tourism 22 .345 241 14 296 189 4 7

VII. Services 16 107 97 6 57 23 6 17

VIII. Transport 23 313 225 20 312 218 1 4

T O T A L 699 13 316 7126 466 9 334 4 397 126 616 I TABLE XXIII

DEVELOPMENT AND ENCOURAGMENTFUND PERFORMANCE- (TL million)

No. of projects Investment Credit applied for Credit granted Actual payments

AGRICULTURE

- Fresh Fruit and Vegetables 10 9.6 8 4.9 1.5

- Other Agricultural Products 3 46.6 8.5 6.3 1.9

- Livestock 499* 116.5 90.8 60.8 57.8

* TOTAL 462 172.8 107.3 71.9 61.2

INWSTRY

- Food 20 177.6 57.9 33.9 19.8

- Chemieals 2 - 28.0 28.0 13.5

- Automotive 17 65.6 50.0 43.1 15.4

- Machinery 16 35.6 18.4 15.1 9.2

- Cement 1 98.8 44.4 10.0 10.0

- Industrial Estates 2 35,9 17.3 17.3 4.7

- Small Industries 14 389,9 23.2 23.2 13.0-'

TOTAL 72 803.0 239.0 171.0 86.0

TRANSPORT AND STORAGE 27 140.5 50.3 43.5 23.2

TOURISM 74 229.9 93.3 73.4 49.3

EYPORT PROMOTION 1 7.6 1.4 .i1, 1.2

CAPITAL MARKET SUPPORT 2 _ 36.4 36.4 36.4

G It A N D T 0 T A L 638 1.354.1 52703 397,2 256.9

-/ Oredits granted cover, period up tc 0lob:i 25, 2.969 (when this activl-ty was si,r,-nded by High Court decisionllY Sources SPO ActLai payments cover period endi- . a:?l 9 1.970.

.nd-i-vi.dua fmrrn.fi for th} 1itbel i : does .7:.'-cs t,ib-got J It ½ ozTh;,-omwn tl:e o., od ti'epe individual Cigwro Axlewrong ox tOo sub-total iF. wrcnr' TABLEXXi-V Postponemezits Granted for Paymont of Customns Duties SepmberT17196- march 31,1970 (TL million)

Sector No. of firms Investment CIF Value-Postponement of Duties Allowed Manufacturing

Food processing 19 154 47 20 Beverages 8 212 39 23 Textiles 81 823 25g. 113 Forest products 5 36 10- 2 Paper 7 1,612 514 80 Printing 5 7 5 1 Tires 6 12 5 h Chemicalt 29 855 245 114 Plastics 10 73 19 10 Cement 16 592 164' 81 Baked Clay 4 22 6 3 Petroleum Products 2 3 1 1 Glass 2 79 18 10 Iron & Steel 30 264 50 22 Non-ferrous Metals 4 51 13 7 Metal Products 26 164 38 19 Machinery manufacturing 15 47 20 10 Agriculturalmachinery 3 18 2 1 Electric machinery and Equipment 5 110 13 6 Automotive 7 19 11 '5 Packaging 1

Subtotal 285 5,135 1,)479 532

Other Sector 11ining 4 18 3 1 Energy 5 385 77 41 Construction 3 8 2 1 Transport 2 17 6

TOTAL 299 5,581 126 580 TABLEXXV

TAXREFUNDS ON INDUSTRIALEEPORTS (TL in Thousands)

Exports Benefittig from Tax Refund Taxes Refunded. Exportina Sector 1967 1960 1969 19?7-7 -T9 -.

Food Processing 95,137 28,596 72,743 4,492 3,736 1' Beverages 5,310 2,149 7,355 283 364 Textilesand Clothing 14,843 51,539 10h,280 4,379 22,399 3592H Forest Products 22,073 10,181 19,529 1,589 1,0o3 2,?':j Paper 2,575 4,832 5,592 1,235 2574 3.662 LeatherProducts 420 1,325 5,885 21 565 1,366 Tires - - 4,441 - _ . 16 Chemicals 2,791 45,233 172,242 399 10,594 4.2^556 5 Glass 1,666 3,950 7,082 243 94 . Ceranics 2 481 605 0.2 69 1.21 Cement - 105 180 - 48 8 Iron and Steel - 287 10,997 - 43 Non-FerrousMetals 102,581 95,440 114,003 11,696 144O >23,9>m3 Metal Products 354 412 6,901 49 83 2322t Machinery 145 672 5,020 56 299 2, 74 Electrical Equipment 346 648 372 52 -ih Electronics 15 155 293 941 Automotive 157 - 398 24 -

Subtotal - IndustrialProducts 245,841 241,173 533,353 24,521 57,056 1 -3 Gifts 4,569 6,720 8,982 36h 756

Others - - 6,062 - -

Agricultural Products - - 38,201 -

TOTAL 250,410 247,893 585,591 24,885 57,812 139 68J TABLE XXVI

Calculationsillustrating the effect of various export incentives on Turkish cost competitiveness

Illustration1 : Cotton yarn (30-count,carded)

Export price f.o.b. $1.18 1/ TL equivalent l TL 10.67 Tax rebate (25.6%) 2.73 Other inoentives (11%) 1.17 Total export revenue TL 14.57

Export benefits 37% Corresponiding"shadow exchange 13.1 rate"

Illustration2: Refrigerator,10 ft.

Export price f.o.b. $ 230 I/ TL equivELlent- 2070 Tax rebate ) 1035 Other incentives ) Total export revenue 33105-

Export benefits 50% Corresponding "shadow exchange13.5 rate"

1/ At TI 9 per U.S. dollar -TABLE.XXVII

Projectad.Coverage of Financial Requirements .rajor State Manufacturing Enterprises, 19702/

Net Cash Total Financial P S f Flow 2/ Investments Requirements SIB

Iron and Steel Corp 70.8 130.4 59.6 24.7 -- 34.9

MKEK -86.1 46.2 132.3 36.3 10.0 86.0

Nitrogen Corp -85.5 76.5 162.0 162.0

!EKA 106.0 441.6 335.6 255.6 80.0 --

Cement Industry -10.0 95.3 105.3 75.3 -- 30.0

Sumerbank -235.0 125.8 360.8 112.8 -- 248.0

IETKIM --- 285.5 285.5 285.5 _ --

-239.8 1201.3 144l.I 790.2 90t.- 560.9

Source: Ministry of Finance

1/ Net cash flow is defined as profits after corporate taxes 2 depreciation mLnus debt retirement minus net increases in current assets and financial participations, 2/ The completanesss ad accuracy of the table is subject to some doubt. Thus, no referencn ie toa $9.29 million creclit to 'Petkim for a sythetic rubber pls,-". (, oau Agpqerx.nt dated Decembnr 19, 1969) and a United Kingdorm credit of ' . Lc fo r a paelyathylena plant, presumAbly also for Petkim (Novemmber 9 I

I APPENDIXII

BRIEF NCOTZON INDUSTRIAL STATISTICS

1. Turkish industrial statistics have the following importmnt weaknesses:

(a) the latest industrial census taken in.1964 covers the year 1963. Though this is a valuable document, it was only published in late 1968. With patrticularreference to the role of public sector enterprises there are some unexplained differencesbetween census data and information supplied from alternative sources. Secondly, the major breakdown between 'large'and 'small' establishments (the latter being defined as those employingmore than 10 people), was no doubt justified, or even inevita- ble, by the need to use a simplified form for small establishments. Yet there is a paucity of structural data in a more relevant size-of-establishments breakdown.

(b) the main weakness, however, lies in current production statistics .nciindice& -*-ro-e,ctedfroin the census benchmark. There is a wealth o£ data on each sector on manufacturingbut these have not been pulled together in a systematicand authaoritativemanner. Thus, there is no official index of manufacturingoutput. The two major sources of informationon recent changes in manu-- facturingoutput are the data on the industrial origin of national income published by the National Income Division of the State Instituteof Statistics (SIS), and figures for the gross value of industrial production, by sectors, publishedby SP0; the laLtestestimates are for 1968 and 1969. SIS and SP0 figures are difficult to re- concile, with informationon developmentsin 1964 through 1967 less complete or less easily accessible than the correspondingfigures for 1963 or 1968/1969;

(c) in the absence of a more recent industrial census which would show changes in the proportion of value added to value of output in each sector, SP0 figures for gross output values are not easily adapted to the calculation of an overall measure of industrial growth.

2. The mission had made its own rough computationof the growth of output using physical output figures for major industries in 1963 and 1969. It is suggested that a new industrial census be takernas soon as practicable,and that, in the interim, available data be pulled together to construct an official provisionalindex of manufacturingoutput. I APPENDIX III

IMPORT PROJECTTnNS T-?_.¢ T PRODUCTS1972 AND 1977

General Note

1. Imports of manufactured products in 1972 will be largely determined by the present import structure and arrangements and by t:he completion of certain investments already underway or in an advanced state of planning. Although there is always a large margin of enror in this type of projection, the order of magnitude should be approximately correct.

2. In contrast, any estimate for 1977, will be, at best, onaly educated guesswork. The overall view of where the Turkish economy is moving and the corresponding macro-economic framework does not exist. Our assumption that the gross natiornal product will grow by about 6% per year, and that there may be some increase iLn the share of gross fixed investments are only rough assuamptions for projections.

3. A second major a-.iolption is that there wfill be a considerable movement towards frfe tr... `.t has not been possible to specify the rate and tempnr si this change. in oux iro4.ections, therefore, this issumption appears mainly as a restraint on unibridled and uneconcomical 1p203 ssubstitution.

--4. Great care has been taken to analyze the factors which will determine import demand for individual products or product categories, and to spell out the key assumptions behind ot.r projections. As a minimum, they might serve (a) as a starting point for a more refined estimate, and (b) as a preliminary benchmark (suitably revised i:E necessary) against which future performance miy be judged.

5. Generally, 1967 has been taken as the year of reference for the projections. Looking at the recent past, this seems to be a fairly normal year for manufacturing imports. Besides, there is a distinct representational advantage in focussing on three benchmark years (1967, 1972 and 1977) separated by five-year intervals.

6. Our projection effort is concentrated on the more important categories (e.g. chemicals, steel, equipment). Projections for other categories are generally more summary.

7. A major potential weakness of our projections may lie in a :ailure to divorce ourselves sufficiently from the present structure J..f Turkish trade which is one of extreme autarchy: the likely scope for additional trade can he judged only by a much more intensive analysis of the Turkish potential for manufacturing exports. This might well provide the focus for a subsequent round of inquiry.

tI. A summary of our projections will be found in Table I: APPENDIX III Page 2

Table I

IMPORT PROJECTIONS FOR MANUFACTUREDPRODUCTS, 1972 AND 1977 (million U.S. $ equivalentat June 1970 prices) 1/

1967 1972 1977

ProcessedFoods and Beverages 2.8 5.0 15.0 Textiles, Clothing, Leather, etc. 20.6 20.0 30.0 Lumber, Pulp and Paper 21.0 22.1 10.2 Rubber and Plastlcs 5.9 12.0 18.0 Fertilizers 37.1 43.0 66.o Chemicals 107.1 161.6 170.0 Petroleum Products 16.4 - - Cement, glass, el-c. 11.5 14.4 19.2 Misc. manufactures 5.9 12.0 24.0 Iron and Steel 36.7 140.0 85.o Non-ferrousmetals 16.4 31.0 15.0 Metal Products 16.2 43.0 72.8 Machinery and Parts 185.0 260.0 250.0 El. machinery and.equipment 50.2 77-0 80.0 Motor vehicles and tractors 55.2 58.4 45.3 Railway equipment, o.8 13.9 2.2 Ships 0.1 30.0 - Aircraft and parts 1.1 17.0 17.0 Scient. and Techl. instru.ments 15.6 26.o 43.0 605.8 986.4 962.7

1/ Note: This is not a prognosis but an illustrativeprojection of ho; li-oorts would develop on the assumption of a 6 per cent per year increase in the gross national product and possib'ledevelopments in individual subsectorsas described and detailed in this Appendix. APPENDEXIII Page 3

A. Processed Foods and Beverages

9. Tliports'under this heading are negligible (about $2 million enuivalent today). If quantitativerestrictions were removed, and even assuming very heavy customs duties on luxury or semi-luxury items not made In Turkey (e.g. whiskey, foreign wines, gourmet foods, etc.), imports would no doubt soar. Nevertheless,import restrictionson ithis type of item (whetherquantitative or by high duties) would not be primarily protectionistbut rather aimed at sumptuary consumption.

10. It was arbitrarilyassumed that imports under this heading would rise to $5 million equivalentby 1972 and $15 million equivalent by 1977.

B. Textiles, Clothing and Leather, etc.

I1. Special yarns and fabrics (mainly of synthetic fibres) predominate in present imports. The planned developmentof the textile industry should, in principle, reduce the need for such imports, On the other hand, under the pres.entimport regime, this is one area where imports have been drasticallycurtailed. In our export projections, we have assumed a substantialincrease in Turkish textile exports par- ¾ularly-. to Common Market countries. This would assume a considerable easing of present import restrictionsin that area; a possible quid pro quo would be some easing of Turkish import restrictionson the same items.

12. By way of illustration,the followiag import pattern weasassumed ( million $ equivalent):

1967 1972 1977

Textiles, clothing and leather 15 20 30

13. The combined projected 1977 imports of ..oods, beverages, textiles, clothing and leather products agree with a tentatXve SPO estimate for the same year.

C. Lumber, Pulp and Paper

14. Imports of forest products in 1967 were as follows (millionUS$ equtvalent): APPENDIX III Page 4

SITC Nr

24 Pulpwood 1.6 24 Other wood and cork 0.2 25 Pulp 2.1 63 Wood and cork manufactures .3 641.1 Newsprint 6.2 641.3 Kraft paper and board 7.1 ex 64 Otlherpaper, board and manufacture 5.3 821 Furniture .1

22.9

15. All but $.6 million of the imports refer to paper and paper- making materials (including also $1.2 million of dissolving pulp for rayon manufacture).

16. Present available capacity of about 346,000 tons (including the three new paper mills) would barely cover estimated 1970 requirements. The planned increases in capacity beyond that date to 1977 are as follows (th. tons):

Pulp Paper

Private Sector 15 170 Public Sector 350 295

Total 365 465

17. On this basis, the demand and production of paper and pulp in 1977 would be as follows (in thousand tons): APPENDIX III Page 5

1967 1972 1977

Pulp Consumption 102 343 /2 /4 700 Production 86 343 73 7 700 Import tons 16 - - - $million /6 2.1

Paper and Board Consumption 228 485 845 Production 127 370 /1 795 /5 Imports tons 101 115 50 75 $million /6 18.6 21.1 9.2

Other Wood Products /7 2.2 1.0 1.0

/1 FAO figure. Forest IndustriesPreliminary Plan (Oct. 1969, p.31). Would correspondto full productionat new SEKA mills plus an additional 40,000 tons. /2 Op.cit. Appendix I. Excludes 60,000 tons of waste paper used for pulping. /3 Assuming full productionat all SEKA mills but without taking into account 15,000 tons of projected pulp-makingcapacity at the Viking mill. /4 Including 15,000 tons of dissolving pulp. 75 This assumes completion (and operation at rated capacities)of all presently known public and private projects. Although there are doubts about several of these projects, there is no good reason in raw material availabilityor economicswhy Turkey should not produce 795,000 tons of paper by 1977 or even become self-sufficient. The assumptionof 50,000 tons of paper Imports is, therefore, rather con- servative. 6 For the purpose of this exercise, 1967 average import prices were used, i.e. no attempt was made to evaluate quality compositionor future price situation for pulp and papierimports. /7 It was assumed that pulpwood imports ($1.6 million equivalent in 1967) would have disappearedby 1972.

1). Rubber and Plastics

18. Imports of manufacturesof rubber and plastics (SITC 62 and 893) totalled $5.9 million equivalentin 1967, including special purpose tires ($2.9 million equivalent),rubber belting ($.9 million equivalent)and materials of rubber ($1.2 million equivalent). In an industrializingand trade-liberalizingeconomy, one would assume fairly rapid growth of this type of imports. No major import-substitutingprojects have been identified. Against this background,we have assumed the following progression of imports (million $ equivalent): APPENDIX III Page 6

1967 1972 1977

Manufacturesof rubber and plastics 5.9 12 18

E. Fertilizers

19. The following figures summarize the expected supply - demand situation in 1972 and 1977 (th. tons of plant nutrient).

1972 1977

Nitrogen Demand 474 682 Domestic Production 265 411 Imports 209 271 Assumed price, $/t 130 130 $ million equiv. 27 35

Phosphates Demand 355 600 Domestic Production 349 417 Imports 6 183 Assumed price, $/t 126 126 $ million equiv. 1 23

Potash Imports th. tons 50 125 Assumed price, $/t 60 60 $ aillion equiv. 3 8

20. In addition (followingthe same study), the following industrial raw materialswould be imported for domestic fertilizerproduction.

1972 1977

Liquid ammonia - th. tons 230 (376) $ million 9 See comment

Sulphuric acid - th. tons 160 - $ million 3 -

It is assumed that, by 1977, the proposed Ipras ammonia plant with a scheduledoutput of 1,200 t/d or nearly 400,000 t/y would be in full operation.

21. On this basis, the combined import requirementsfor fertilizers and industrialmaterials used in fertilizerproduction would be as follows: APPENDIX III Page 7

1972 1977

$ million equivalent 43 66

There is a strong likelihood that new projects would be elaborated to reduce (or perhaps even completelycancel the projected 1977 deficit in nitrogen and phosphate fertilizers.

22. Imports of rock phosphate and pyrites are covered in the projections for minerals.

F. Chemicals

23. In 1967, Turkish imports of chemicals,other than fertilizers, totalled $107.2 million equivalent,with the following composition ($ million equivalent).

SITC 1967

Code 231.2 synthetic rubber 5.5 266 syntheticand regenerated 9.7 fibre 512 organic chemicals 23.4 513-4 organic chemicals 17.0 53 paints, dyes, and pigments: 11.8 541 medical and pharmaceutical 9.7 products 55 perfumes, soaps and cleaning 1.4 compounds 571 explosives, etc. .9 581 plastic materials 17.9 599 others 9.9

107.3

24. Total imports of the above items grew as follows in 1966-1969:

1966 89.5

1967 107.3

1968 120.0

1969 (124.6) /1

/1 Only combined total for chemicals and fertilizers($181.6 million) was available. Figures for chemicals i.mports derived on the assumption that fertilizer imports were $57 million. APPENDIX III Page 8

The compositionof imports within these overall totals has been remarkably static - possibly a classic example of inflexibilitiesunder quota regulations of imports,

25. The fut:ure trends of chemicals imports will be largely determined by progress in a niumberof key projects, for which investmentcertificates have been granted by SPC to the private sector, or had been previously initiated by the state sector (in particularPetkim).

26. The SubsectorReview of the PetrochemicalIndustries gives the followingprovisional import estimates ($ million equivalent):

Present 1972 1977

Plastics 17.8 21.7 1.7

Synthetic fibre 12.2 16.9 10.6

Other yetro-chemicals 7.6 9.9 14.6

Sub-total 38.2 48.5 26.7

The main remaining import needs by 1977 will be for poly-urethane foams, acrilo-nitrile,arLd caprolactam. Conceivably,self-sufficiency in caprolactamcould be achieved by 1977 but then again, other chemicals may have been developedand heavily demanded by that time, for which no provision has been made in our estimates.

27. The Turkish paint industry is hampered by a high import component and by long waiting times for foreign exchange allocations. Major import requirementsmight be as follows:

Present 1972 1977

Titanium and zinc 3.2 4.2 8.0 oxides

Resins 5.8 7.8 14.5

Solvents 4.0 6.2 10.0

13.0 18.2 32.5

Domestic productionof resins or vinyl-acetatemonomers is not envisaged. On the other hand, there may be possibilitiesof divertingpart of Petkim's aromatics for solvents production and also for local production of titantiumdioxide based upon imported ilmenite. APPENDIX III Page 9

28. Approximate import balance-sheetsfor chemicals, excluding fertilizersand syntheticrubber, might then look as follows: 1967 1972 1977

Paints, resins and solvents 11.8 18.2 32.5

Medical and pharmaceuticalproducts 9.7 16.7 23.7

Plastic materials 17.9 21.7 1.5

Synthetic rubber 5.5 12.2

Synthetic fibre 9.7 16.9 10.6

Sundry petrochemicals (6.6) 9.9 14.6

Other chemicals 44.0 /1 /2 66.0 88.0

Total 105.5 /1 161.6 170.0

/1 Excluding about 2.0 for sulphuricacid which has been covered under fertilizers (incl. industrialmaterials for fertilizer production). /2 Assumed to grow by ten percent per year non-cumulatively.

G. Petroleum Products

29. Although Turkey is nearly self-sufficientin refining capacity, imports of petroleum products have shown a rising trend from less than $10 million equivalent in 1964 and 1965 to $20 million or more, in 1968 and 1969. The compositionof 1967 imports was as follows (million $ equivalent):

Gasoline and Kerosene 1.8 Distillate Fuels 3.6 Lubricatingoils and greases, etc. 11.0

16.4

30. Chances for domestic self-sufficie:ncyin refining operations are good in view of the projected capacity expansion from presently about 7.6 million tons to 16.6 million tons. APPENDIX III Page 10

Additional Expected Name Capacity Completion

Ipras expansion 3.0 (end 1970) Izmir (new refinery) 3.3 (1975) Samsun (in planning) 3.0

31. Facilities for the production of lubricatingoils are also under construction,and from 1972 on, no imports of lubricatingoils are projected. (Inputsof additives are included in the projections for chemicals imports.)

32. While occasionalimports and exports may be desirable in order to balance domestiLcdemand and supply for particularproducts, it has been assumed that from 1972 on, on an average, Turkey will be neither a net importer nor a net exporter of petroleum products.

H. Cement, Glass, etc.

33. Imports of non-metallicminerals manufactures (SITC 66) totalled $11.5 million equivalent in 1967. The compositionof these imports was as follows (figures in $ million equivalent):

Cement 1.9

Refractories 3.4

Glass 3.4

Asbestos,mica, abra- sives, etc. 2.8

11.5

34. Investment certificatesare outstandingfor about half a dozen projects in these industries (exel. investmentcertificates for cement production).,Superficial examination does not reveal any major new efforts at import substitution. For purposes of projection,we have assumed that cement importswould disappear but that other imports would increase by 10% per year non-cumulativelyover the two five-year period analyzed. Actual imports would then be as follows:

1967 1972 1977

Cement, refractories,glass, etc. 11.5 14.4 19.2 APPENDIX III Page 11

I. MiscellaneousManufactures

35. Imports of miscellaneousmanufactured products totalled $5.9 million equivalent in 1967, distributedas follows ($ million equivalent):

Sound recorders, etc. .8

Printed matter 2.3

Office supplies 1.4

Other 1.4

5.9

36. This is clearly an area where import liberalizationwould lead to a considerableincrease in imports. High import duties (with a corresponding excise tax on domestic production)might put a brake on some of these imports, e.g. sound recorders. The same device may not be practicable (or even desirable) for the other product categoriesmentioned. Against this background, the followingprojected imports may be regarded as minimum estimates ($ million equivalent):

11967 1972 1977

Miscellaneousmanufactures 5.9 12 24

J. Steel

37. In 1967, Turkish consumptionof finLshed steel was 1.C5 million tons (not including 105,000 tons of iron castings). The general feeling in Turkey is that the country is starved of steel, and that with unlimited supplies available (either of domestic or imported origin) consumptionwould be far higher. We shall revert to this question below.

38. Total Turkish production of finished steel in 1967 was about .95 million tons (.30 flat products, .60 non-flat products, .03 special steel), originatingmainly in two integratedmills - Eregli producing about 267,000 tons of flat products and Karabuk producing 440,000 tons (in finished product equivalent)of bars, rods, hoops, and billets).

39. Imports of finished products totalled 106,000 tons valued at $20 million equivalent. In addition, 113,000 tons of billets were imported valued at $11.5 million equivalent. APPENDIX III Page 12

40. Turkey is in a stage of industrial developmentwhere the future growth of steel consumptionis highly unpredictable. Any projection based upon simple statisticalmethods is doomed to failure. Instead, the current consumption structure,by types of steel and consuming sectors, has to be careflullycatalogued, and this whole matrix projected into the future based unen (a) an agreed macro-economicframework and (b) detailed assumptionas t£ deryelopmentsin major steel-consumingsectors (e.g. automobile production, shipbuilding,oil pipelines, constructionactivity, food canning, etc.). No study of this type exists in Turkey. The mission, therefore,have simply accepted the most recent demand projections furnished by the SPO. I+-is the mission's guess that these greatly overestimatethe future growth in demand.

41. With respect to production,SPO has approved a large new Russian-financedsteel mill in Iskenderun and is considering one or more substantial projects in alloy steel production. The situation for "re-rollers"of steel has not been clarified. The implicationof availablestatistics and plans is that there would be a substantialre- rolling business, and that it is scheduled to expand, as may be seen from the followitng summary (figures in thousand tons):

1967 1972 1977

Karabuk 324 (4 37 )/b 350 (410)/b 484 Eregli 267 450 936 /b Iskenderun - - 700 (900)- Small mills 353 489 738

Productionof finished steel 944 1,299 2,858 ProjectedDemand 1,050 1,871 3,177

Imports, finished steel 106 572 319 Add billets 113 220 131

Imports, total, th. tons 219 792 450 $ million /a (32) (134) (78)

Suply of billets for sale

Large mills 113 60 200 Imports 113 220 131 Other or unexplained 130 209 407

353 489 738

/a Based upon 1967 product distribution and prices, assuming an average import price of $200 per ton for non-flat ordinary steel (including tubes), $300 for special steel and $80 for billets. /b Figures within parenthesis show total' production of finished steel plus billets. APPENDIX III Page 13

42. In addition to import requirementsfor steel, it would appear that there might be an import deficit of about 70,000 tons of pig iron by 1972 valued at, say, $4 million equivalent 1/ (assuminga price of about $60 per ton). It is further assumed that no pig iron imports wouLd be needed by 1977.

43. Imports of iron and steel products in 1967, other than pig iron and steel, were valued at about $3.6 million equivalent. These included ferro-alloys($1.3 million) and castings and forgings ($1.0 million equivalent). For purposes of projection only, we hEave assumed that these would grow to $5 million equivalent by 1972 and $7 idllionequivalent by 1977.

K. Non-FerrousMetals

44. Import projectionsfor non-ferrousmetals were made taking into account the following factors:

- rapidly increasing imports of aluminum, followed by self-sufficiencyas the new smelter and fabricating facilities swing into operation;

- continued self-sufficiency in copper;

- increased imports of lead and zinc followed by self- sufficiency as the Zamanti project is completed;

- rapidly increasing imports of tin and nickel.

45. As a result of these Various trends, it is expected that total imports of non-ferous metals would change as follows ($ million equivalent):

1967 16.4

1972 31

1977 15

L. Metal Products

46. The total consumptionof metal products in 1969 was of the order of TL 2.9 billion. According to the Sub-sectorReview of the EngineeringIndustries, the distinctionby uses of these products may have been roughly as follows:

investment goods (wire, hand tools, construction 45% steelwork, low-pressureboilers, etc.)

consumptiongoods (householditems) 33%

intermediategoods (bolts,nuts, nails, etc.) 22%

47. The supply-demandbalance in 1969 was approximatelyas follows (TL billion): APPENDIX III Page 14

Domestic production 2.46 Exports .01

Imports .23 Domestic consumption 2.93 2.69 2.94

Unexplained diff. .25

48. Imports were small in relation to domestic production. The compositionof 1967 imports was as follows:

SITC NR $ million 691 Metal structuresand parts 1.35 692 Metal, boxes, etc. .97 693 Wire products (except electric) 2.16 694 NaiLs, bolts, nuts, etc. 2.89 695 TooLs 5.05 696 CutLery .43 698 Other 2.87

15.72

It should be noted that castings and forgings have been included under "Iron and Steel" and "Non-FerrousMetals" respectivelyrather than under "Metal Products", following the conventionadopted in Turkish foreign trade statistics.

49. In view of the current restrictiveimport regime, it is fairly certain that imports of metal products are far below an economicallyde- sirable level. It:is not possible, however (withoutmuch detailed research far beyond the scope of this report) to make even a rough estimate of what would be a normal level of imports. Nor, for the same reason, can be estimate the likely, or desirable growth of imports through 1972 and 1977. Ar- bitrarily we have assumed (a) that present imports are only one-half of normally desirable imports, (b) that the differencebetween the actual import level and the normally desirable level will be eliminatedby 1977, and (c) that the reference level of "normallydesirable imports" would grow by 10% per year non-cumulativelybetween 1967 and 1977. On this basis, imports would develop as Ifollows (million $ equivalent):

1967 1972 1977

normally desirable level 31.4 57.1 72.8

projected actual level 15.7 43.0 72.8 APPENDIX III Page 15

M. Machinery and Parts

50. Demand and import projectionsfor machinery are rendered difficult by three factors:

- the extreme diversity of the products manufactured;

- the risk for double-countingsirnce some machines and parts are used in other finished machines;

- the necessity to take into account the direct import componentof domesticallyproduced items, either under heading 'M" (Machineryand Parts) or heading "L" (MetaL Products).

51. No entirely satisfactorysolution has been found for these problems. Below we have shown the structureof Turkish machinery demand 1967 based upon a re-arrangementof Plan figures (TL million at 1965 prices): APPENDIX III Page 16

Est. 1969 Annual Growth Rate Demand 1962-1967

Directly Identified Production Equipment 1234

Steam and Gazogene Equipment and Boilers 161 36%

Construction, Road, Excavating and Mining 350 5% Machinery

Agricultural Machinery (other than tractors) (200) 6%

Heavy Industry Machinery and Equipment 196 10%

Food and Beverage Processing Machinery 129 13%

Textile Machinery 198 9%

Durable Consumer E.quipment 438 10%

Intermediate and General Equipment 1682

Internal Combustion Engines and other 248 2% Power Generat:ingunits

Machine Tools, pneumatic hand tools, etc. 125 6%

Compressors, ventilators, pumps, and 186 16% turbines

Air-conditioning and heating equipment 86 27%

Ball bearings 60 21%

Gears and transmissions, etc. 126 2%

Other (e.g. m.echanicalhandling equipment) 851

3334

High growth rates for certain items reflect the growing modernization of the Turkish economy (e.g. air conditioning and heating equipment, ball bearings) or structural changes (steam power equipment complementing hydro- electric power equipment). APPENI)IXIII Page 17

52. Guided generallyby the Sub-sectorReview on the Engineering Industries, the following demand assumptions were used (TL million at 1965 prices):

1967 1972 1977

Production Equipment /a 1,234 2,060 3,620

Durable Consumer Equipment /b 438 657 1,000

Intermediateand General Equipment /c 1 682 2,800 4,700

Total /d (3,354) (5,517) (9,320)

/a Assumed to grow by about 2/3 over each five-yearperiod. T7 Assumed to grow by 50 percent over each five-yearperiod. T7 Assumed to grow by 2/3 over each five-yearperiod. Td Sub-totals cannot be added without duplication.

53. Exports of machinery are projected as follows (TL million):

1967 1968 1969 1972 1977

1.0 1.4 2.6 20.0 82.0

54. Domestic productionof machinery is projected as follows (TL billion):

1967 1968 1969 1972 1977

Excl. ag. 1.20 1.29 1.47 - - equipment

Incl. ag. - - 1.64 2.65 6.58

These projectionsassume that existing lines of productionwould expand by altogether 25 percent between 1969 and 1972 and by 12 percen;tper year non-cumulativelybetween 1972 and 1977. On top of this, a number of new projects are assumed to contribute an additionalproduction value of TL 595 million by 1972 and no less than TL 3,280 million by 1977. APPENDIX III Page 18

55. Import requirements may then be derived as follows (TL billion):

1967 1972 1977

Domestic Demand Plus Exports 3.36 5.54 9.40

Domestic Production 1.40 2.65 6.58

Import Requirements, TL billion 2.16 2.89 2.82 $ billion equivalent .19 .26 .25

56. Supply-demand sheets have been constructed only for individual end products and najor intermediate products. Indirect imports of semi-finished steel, non-ferrous metals, rubber or plastics components used in the manufacture of these end products or in major intermediate products are covered under other headings (e.g. Iron and Steel, Non- ferrous Metals, eitc.). In theory, this should cover the bulk of direct and indirect inpultsfor the machinery industries, although the possibility of some fairly important omissions cannot be ruled out, and might be separately studied.

N. Electric Machlineryand Equipment

57. In 1967, the composition of electrical machinery imports was as follows (million $; equivalent):

SITC NR

722.1 Eletctricgenerators, etc. 9.2 722.2 8.6 723.1 Insulated wire and cable 4.1 123.2 Other insulating equipment .7 724 Telecommunications equipment 6.4 725 Domestic electrical equipment .5 726 Electro-medical equipment 2.0 729.3 Auto-electric equipment 5.6 ex 729 Electrical machinery, n.e.s. 13.1

50.2

58. In the Annual Program for 1970, actual imports of "electrical machinery and electronic equipment" for 1968 are given as $44.7 and $11.1 million respectively, or altogether $55.8 million equivalent. According to the Second Five-Year Plan, these are expected to increase to $90 million equivalent by 1972, with a preliminary estimate of $175 million equivalent for 1977. APPENDIX III Page 19

59. A recent Etibank Study projects the following developmentof peak load demand and electric power generationon the interconnected system:

Power Generation Peak Load Gwh /a MW

1969 8,100 1,200

1972 10,845 2,046

1977 22,735 4,200

/a Including losses.

The total availabilityin the interconnectedsystem in December 1969 was very close to the estimatedpeak load. Hence,,increases of respectively 850 MWto 1972 and 2,150 MW 1973-77 in new generatingcapacity and associated transmissionand distributionfacilities would appear to represent minimum requirements.

60. The Power Resources Energy and AdministrationDepartment (E.I.E.) has studied investmentrequirements for this order of expansion. No less than nine different alternativeswere considered,of which alternatives8 and 9 were deemed the most economical (op. cit. pp. 7-13). The total investments correspondingto alternative 9 were projected as follows:

Foreign Exch. Total $ million TL billion

1972 (1970/72ave.)!/ 44 .99

1977 33.7 .77

61. If we assume that one-half of the sundry imports of electrical machinery (mainly under SITC headings 729.5 and 729.9) were for electric power generation,transmission, and distribution,the total imports of the Electric Power Sector in 1967 would have beeniabout $29 million equivalent which seems reasonablyin line with projected 1970-72 imports averaging $44 million equivalentannually.

1/ The ETE study shows considerableyear-to-year fluctuations in investments in the early years of the period studied. For purposes of pro- jecting Turkey's balance-of-paymentsposition, it was deemed appropriate to abstract from these fluctuations,using a three-yearavrerage to represent 1972. APPENDIX III Page 20

62. The dermandfor auto-electricequipment may be derived from the followingproject:ions of the total production of road vehicles (incl. tractors) taken i.romthe subsectorreview of Engineering Industries:

1969 39,000

1S'72 61,000

1977 111,000

If we assume that 1969 import requirementsfor auto-electricequipment were somewhat higher than 1967 imports, say $7.0 million equivalent (about $180 per vehicle unit), then total imports, in the absence of import substitution,would grow to about $11 million equivalent by 1972 and $20 million equivalentby 1977. Based upon one known project, we have assumed that gross import substitutionwould be $1.0 million equivalent in 1972 and $5.0 million equivalent by 1977.

63. For electric machinery other than the types indicatedabove, it is assumed thaltimports of finished and semi-finishedproducts would grow by $7.5 million for each five-yearperiod over the 1967 base of $15.5 million equivalent.

64. The above import projectionsare summarizedbelow ($ million equivalent):

1967 1972 1977

Electric power equipment 29.0 44 34

Auto-electricequipment 5.6 10 15

Other electric equipment 15.6 23 31

Total 50.2 77 80

0. Transport Equipment

T. Motor Vehicles and Tractors

65. In 1963, there were about 2.4 cars per 1,000 inhabitants in Turkey which would seem an abnormally low figure in relation to an estimated per capita GNP, at the official exchange rate, of about $230. In 1963 the true market potential for automobilesin Turkey (assuming unrestrictedsupply at world market prices) might have been as high as 4 cars per 1,000 inhabitants (see graph 0/1). Projectingfrom graph 0/1, based upon a 2% per year increase in per capita gross national product, one would arrive at the following potential car population for 1972 and 1977 (A is actual car population;P is potential car population). APPENrDIXIII Page 21

1962 1967 1972 1977

Inhabitants, million 28.9 32.7 37.4 42.5

Per capita income, $ equiv. 230 276 336 410 at 1962 prices

Cars per 1,000 inhabitants 2.1(A) 3.1(A) 4.8(P) 7.0(P) 10.0(P)

Car population (th.) 60.7(A) 106(A) 157(P) 262(P) 425(P)

66. On the assumption that the fleets of trucks and buses would increase pari passu with the expected growth in traffic, the growth in these vehicle fleets would be as follows (in thousands):

1962 1967 1972 1977

Trucks n.a. 50 84 140

Buses n.a. 13 19 28

67. Combining the demand for new vehicles and replacement demand, one arrives at the following total demand estimates for individual years.

Demand in Thousand Units

1967 1972 1977

Passenger vehicles, includ- 20.0 56 ing jeeps and minibuses

Pick-up Trucks 8.5 14

Heavy and medium trucks and 12.0 20 buses

Tractors (12) 18.5 27

68. The import value of the above demand may be roughly estimated as follows ($ million equivalent):

1972 1977

Passenger vehicles, pick-up trucks, etc. at $1,350 per unit 39 95

Heavy and medium trucks and buses at $4,400 per unit 53 88

Tractors at $2,000 per unit 37 54 129 237 APPENDIX III Page 22

69. The total foreign exchange requirementsfor domestic production assuming no significantimports of complete vehicles will depend entirely upon the speed of implementationof, in particular,engine and transmission plants with their sub-supplierindustries and, to a lesser extent, upon the domestic productionof deep-drawingquality of steel, particularly for the passenger vehicle bodies. The key projects are the Perkins diesel engine plant which would provide engines for the trucks and tractor industriesand the Eaton-YaleTowne project which would supply gears and transmissionsfor the truck industry and, if suitably revised, also for the tractor industry. Both projects have been held up pending reappraisal and renegotiationwith the foreign partners. Under these circumstances,very little progress in the incorporationof new domestic componentsfor truck and tractor manufacturecan be expected by 1972. The situation is different in passenger vehicles since most of the components would be produced within the automobile factories themselves. (Renaultwould move more quickly into engine manufacture importing the body stampingswhile FIAT would follow the opposite procedure.)

70. For 1977, we have assumed that an acceptablesolution will be found for the manufacture of gears and transmissions(possibly involving a lower donestic component than originallyplanned but permitting instead Turkish exports with the assistanceof the two investment concerns involved).

71. On this basis, the import componentsof motor vehicle manufacture might develop as follows (figures in percentagesof the c.i.f. prices for complete vehicles):

Percent 1972 1977

Passenger vehicles 35 45 /1 85

Buses 65 65i 80

Trucks 55 65 80

Tractors 50 50 75

af- then in its sxecondyear, would be producing at 55% domestic component,Renault just starting at 35%.

72. The correspondinggross import requirementswould be as follows (million $ equivalent): APPENfDIXIII Page 2.3

1972 1977

Passenger vehicles,pick-ups, etc. 21.4 14.2

Heavy and medium trucks and buses 18.5 17.6

Tractors 18.5 13.5

Total 58.4 45.3

II. Railway Equipment

73. The following figures show railroad traffic in 1963 and 1968 with projections for 1972 and 1977 interpolatedby us from estimates provided in the ItalconsultInterim Report (Oct. 1969) on "Transporl:Coordi- nation Services in Turkey":

1963 1c968 1972 1977

Goods Traffic /1, million 3,743 5,235 7,850 11,100 ton-km

Passenger Traffic, million 3,631 4,539 5,200 6,200 passenger-km

71 According to the ItalconsultReport, p. 144, interzonal railway traffic is expected to grow by 150 percent between 1967 and 1979. Our estimates shown above assume the same percentagegrowth factor for intrazonal traffic and a constant relationshipbetween tonnages transportedand actual transportwork in ton-km.

74. Steam traction is preponderanton the Turkish railroads, and still accounts, for 75% of the total transportwork, with diesel power accounting for 21% and electric locomotives (on Istanbul suburban lines) for 4%. A plant for the production of dieseL locomotivesis under construction,and it appears to be the firm policy of the Turkish Govern- ment (independentlyof economics) to replace steam locomotivesby diesel locomotivesonly as the latter can be produced domestically. The following sequence is provisionallyestimated: 1/

1/ It is assumed that the average c.i.f. price of an imported locomotive would be $250,000. APPENDIX III Page 24

Import Component Import Value Purchases of Locomotives Domestic Locos. Million $ equiv. Imports Domestic %

1970/71 35 10 65 11.4

1971/72 35 20 60 12.8

1972/73 35 30 55 13.9

1974/75 - 40 45 4.5

1975/76 - 50 30 3.8

1976/77 - 60 15 2.2

Total 105 210

75. Italconsultrecommended the acquisitionof 345 diesel locomotives over a ten-year period. As already stated, 108 diesel locomotives now provide 21% of the total traction work. It is not clear how the diesel locomotivesare shared between goods and passenger services. These are expected to grow in the future at very different rates - by about 112 and 38% respectivelybetween 1968 and 1977 where neverthelessthe growth rate for goods traffic would appear to be substantiallyoverestimated. If we assume a 75% increase in locomotive needs up to 1977, this would call for 75 108 abcut 380 new diesel locomotivesjust to handle the increase 21 . = in traffic without consideringthe desirabilityof additional replacement. Hence, the above estimates of import requirementsare likely to be on the conservativeside.

76. Our estimates do not include import requirementsfor equipment other than locomotives,e.g. signalling equipment.

III. Ships

77. Ship imports can be estimatedbased upon:

(a) assumed growth in transportvolume;

(b) participationof Turkish ships in transportwork;

(d) domestic ship building capacity. APPENI)IX III Page 25

78. With respect to ocean transport,the following figures were used. The Turkish plan is to increase the proportion of imports carried on Turkish ships from 29% in 1967 to 50% for the dry cargo and 100% for the Tanker shipments by 1972.

Dry Cargo and Year 1972 Bulk Carrier Tanker

Total tonnage to be carried, 11.9 9.5 million /1

Tonnage on Turkish vessels million 5.95 9.5

Ships tonnage required, th.DWT 517.5 540 /2

Existing carrying capacity, th.DWT 99 188

Required purchases, th.DWT 418.5 3.52

/1 Based upon import tonnages which far exceed exports. /2 Apparentlybased on routing around the Cape of Good Hope.

Year 1977

Total tonnage to be carried, million (18.0) 14.7

Tonnage on Turkish vessels, million 9.0 14.7

Ships tonnage required, th.DWT 615 970

Estimated 1972 carrying capacity, th DWT 517.5 540 /1

Required purchases, th DWT say 100 430

/1 Assumes routing via the Cape of Good Hope.

79. The required ships tonnages are based upon an SPO analysis of future trade patterns. Consideringthese patterns, the compositionof ships orders might be approximatelyas follows: APPENDIX III Page 26

1970/72 1973/77 Tonnage in Tonnage in Nr Thousands Nr Thousands

Dry Cargo Vessels and Bulk Carriers

3,000 ton dwt 18 54 9 27

4/6,500 ton dwt 19 100 12 67

10/12,500 ton dwt 10 112 6 64

22,000 ton dwt 3 66 2 45

32,500 ton dwt /1 3 97.5 - -

53 429.5 29 203

Tankers

175/215 ton dwt 2 400 2 430

/1 Not required for ocean shipping but for coastal transport of ore and coal. Regarding 1977 estimates, see below para. 80.

80. The above figures are in reasonable agreement with a special analysis by a private firm showing the following ship building program for the Second Plan Period (1968-1972): 1/

Size of Vessel Number Gross Tonnage th. tons 2.5-3.9 5 14 4-7.9 19 107 10-14.9 5 60 15-24.9 9 156 30-39.9 66 180 80 1 80 250 3 750 48 1,347

1/ It may be assumed that this program includes the bulk of additional ship requirements for coastal transport. APPENDIX III Page 27

81. According to the Italconsultstudy already quoted, coastal shipping would grow from 5.3 million tons in 1967 to 17.2 million tons in 1979. The main increaseswould be in iron ore and pyrites (2.4 million tons), coal (1.7 million tons) and petroleum products (5.4 million tons). At present, coast-wise traffic is handled essentiallyby two State companies and a substantialnumber of private shipowners,with the following fleets: 1/

Ships Cargo Handled Nr DWTons Th.Tons

Deniz Yollari 20 90,217 161

Deniz Yollari Urban 79 44,204 * lines

Deniz Nakliyati Cargo ships 27 160,767 1,920

Tankers 5 130,826 2,509

Private Owners 167 329,849 *

* Figures for 1964.

82. Deniz Nakliyati handles most of the bulk traffic (iron, ore, coal, etc.) while Deniz Yollari ship general merchandize on scheduled services. The private vessels plying the coastal shipping lanes are generally small; nevertheless a sizeable portion of the coal tramsport has been secured by a private shipowner.2/

83. Italconsulthas not entered into any detail on what additional ship purchaseswould be needed to meet the rapidly increasingcoastal shipping demand except for the suggestion that most of the existing 12,500 ton carriers which are obsolete should be replaced by a lesser number of 20,000 ton carriers (op. cit. p. 127). Some clue may perhaps be gleaned from the operations of Deniz Nakliyati which, in 1967, used 32 ships carrying not quite 10,000 dwt to transport 4.4 million tons of coal, ore, oil and other bulk items. If coastal traffic really grew by about one million tons per year, even assuming larger vessels and a substantial increase in efficiency,about three 20,000 vessles would need to be addeideach year.

1/ Source - StatisticalYearbook of Turkey 1968, Tables 269 and 270. For private shipowners,Italconsult op. cit. p. 43.

2/ Italconsultop. cit. p. 44. APPENDIX III Page 28

84. In conclusion, Turkish annual ship purchases 1972 and 1977 (using the averages for 1970-72 and 1973-77) might be as follows (th. dwt):

Ocean Shippiig 1972 1977

Dry cargo and bulk carriers 143 41

Tankers 133 86

Coastal Shipping

Dry cargo 10 (40) /1 40

Tankers 20 20

Total 306 189

/1 Figure reduced by 30,000 dwt to avoid double-counting. The ocean shipping total for 1970-72 includes three vessels of 32,500 dwt each for coastal transport of ore and coal.

85. The major factor in the present Turkish ship building industry is the Maritime Bank which operates five yards capable of building ships of respectively the following dwt sizes: 21,000, 5,000, 3,900, 1,500 and 750. The Turkish Navy GUIcek yards can build merchant vessels up to 12,500 tons dwt when not bookecl for naval vessels. A major new Government shipyard is under construction at Pendik for delivery initially of vessels up to 60,000 tons per year and eventually tankers up to 200,000 tons. The average production volume in successive five-year plan periods is proposed at respectively 60,000, 90,000 and 120,000 dwt per year. 11 A private shipyard to be located at Tuzla, near Pendik, is also planned with a capacity for about 50,000 dwt per year (sizes of vessels to be built not yet specified). A participation by the Japanese concern IHI in Pendik is being discussed. In this connection, ship engines are also likely to be produced in Turkey.

86. Based upon these very general indicationsone might project the following ship deliveries from Turkish yards:

1/ Allowing for considerable learning problems, these are still amazingly low figures. Swedish shipyards complete a 70,000 ton vessel in less than 3 months, and Japanese productivity is not likely to be far behind. APPENDIX III Page 29

1972 1977

Pendik - 90

Tuzla - 50

Existing yards 30 4S

Domestic 30 185 deliveries

Needed pur- 276 chases abroad

87. These figures (apart from the general shakinessof the estimates) are subject to two reservations:

- lack of financingmay force Turkey to spread ship purchases over a longer period so that 1972 purchasesmay be smaller and 1977 purchases still substantial;

- though Turkish yards may well be able to deliver 185,000dwt of ships by 1977, they would be unlikely to build 200-250,000 ton tankers, at least not economically. These would account for about 85,000 dwt out of the projected capacity of 185,000 dwt. Nevertheless,for purposes of projectionswe shall assume that a correspondingtonnage of medium-sizevessels, say, in the 20,000 ton or 30,000 ton class, would be exported.

88. In conclusion for purposes of balanc:e-of-paymentsprojections, we assume ship purposes aboard of 200,000 ton dwt in 1972 at an estimated average cost of $150 per ton with a total foreign exchange expenditureof $30 million equivalent.

89. The slower rate of ship purchases assumed here would of course be reflected, in the balance-of-payments,in a larger foreign exchange out- lay for ocean freights. It may be noted, however, that operation of Turkish ships on internationalshipping lines, would also result in considerable foreign exchange expenditure,particularly if one considers that increased ship purchaseswould be reflected, to an almost equal extent in larger foreign exchange borrowings by Turkey, and larger annual debt service payments.

IV. Aircraft and Parts

90. Imports of aircraft and parts in 1967 are shown as only $1.1 million equivalent. The preliminaryestimate for 1967 of $12.2 million equivalent shown in the Second Two-Year Plan is probably more representativeof actual requirements. APPENDIX III Page 30

91. The ItalconsultStudy of "TransportCoordination Services in Turkey" (October 11969),mnakes the followingprojections of air traffic and investment requirements for new aircraft.

Traffic growth 14 percent per year 1968-1972 12 percent per year 1973-1979

Investmentrequirements (incl. spares) $ million equivalent

1970-1974 Four big jets plus three DC-9 77

Seventeen smaller aircraft for 8 air taxi operations

1975-1979 Four DC-9 28

Big jets for internationaloperations 2.m.

Total 1969-1979 mill. 113

92. Superficiallyat least there is an anomaly (for both financial and commercialreasons) in the assumptionthat the Turkish Airlines would make larger acquisitionsof airplanes in 1969-74than in 1975-79. Procure- ment at the 1969-1974rate would raise total requirementsfor the decade to $170 million equivalentwhich could well be a more realistic figure than the $115 mill:Lonshown above. If we divide the revised total equally over the ten years, the annual foreign exchange requirementwould be $17 nillion equivalent.,

P. Scientifican(d Optical Instruments

93. Per capita use of scientificand optical instrumentsis very low in Turkey, and is bound to acceleratewith increasingindustrializa- tion and technical evolutionof the economy. As integrationwith the Common Market count:riesproceed, it may well be that Turkey will have a comparativeadvantage (due to its low labor costs) in manufacturingcer- tain types of instruments. No sector study exists, however, nor have any major projects been identified. In any case, expansionof Turkish production would be mcre likely reflected in additionalexports than in import substitution.

94. Imports grew by 50% between 1963 and 1968. We have assumed 67% growth over successivefive-year periods 1967-1972and 1973-1977. On this basis, imports would be as follows (million $ equivalent):

1967 1972 1977

Scientificand optical 15.6 26 43 instruments APPENDIX IV

INDUSTRIAL OBJECTIVES OF THE SECOND PLAN

After setting a target for industrial growth of 12 percent per annum, the Second Five-Year Plan outlined the following main policies:

(a) Market Economy. The role of the market mechanism for proper resource allocation and in achieving dynamic efficiency through competition was stressed. New industries would be given infant protection during "a pre-determined trial period", after which import restrictions and customs duties would be removed sten by step. Export development would be given the same weight as import substitution. Particular emphasis was placed upon the attainment of minimum economic capacities in new enterprises, and also in established industries, through mergers into viable units. Recognizing the high prices in Turkey of many industrial raw materials and intermediates, naterials produced by the public sector and used to manufacture industrial products for export wqould be made available for such manufacture at world market prices.

(b) State versus Private Enterprise. Tne difficulties encountered by State enterprise in the Turkish context were duly noted; these included absence of initiative and dynamism, bureaucratic re(I tape, absence of rigid criteria to evaluate the usefulness of proposed investnents, lack of proper public insight, etc. Policies were therefore to be adopted which would permi:t the private sector to take over the development of manufacturing industry "in the long run". The public sector would complete the investments already initiated and would increase and improve the efficiency of existing production units. The "mixed enterprise" formula would be given preference in new activities sponsored by the State sector. It was noted that the legal instrument for transferring existing State enterprises to private control (where convenient) existed by virtue of a 1938 law.

(c) Guidance and Support to Private Enterprise. This would be ruled by three main thoughts: (i) the Government would assist the private sector in project preparation (by generating project ideas, and by commissioning and financing feasibiLity studies); (ii) projects above a certain size would be reviewed by S.P.O. and, if found "in conformity with development targets", would be granted substantial incentives; (iii) every effort would be made towards ensuring that the private sectotrwould take advantage of available incentives. Incentive-granting powers previously scattered among various agencies would be centered in SPO, and red tape, as far as possible elininated. APPENDIX IV Page 2

(d) Import Priorities. Emphasis would be placed upon the utilization of existing capacity and the completion on schedule of ongoing and programmed investments.

(e) Motor Vehicle and Tractor Production. A special section in the Plan Document deals with the upgrading of assembly industries, particularly motor vehicles and tractors. The basic approach here would be to standardize parts (e.g. engines and auto-electric components) and for the Govern- ment to support existing assemblers in creating joint enterprises for the production of such parts. If private enterprises failed to respond to these objectives, the Govern- ment would itself create the necessary capacity.

(f) RegionaL Industrialization. Urban centers with a good growth potential would be assisted by intensified infrastructural investments. With due attention to economic feasibility, several key industrial projects would be located at these centers to seed secondary industrial growth. This would be reinforced by preferential industrial incentives to new industries locating in these areas.

(g) Foreign Direct Investment. Private foreign capital would "be given emphasis" as an additional source of savings, foreign exchange, and technology, and would, by preference, be channeled into new industries. APPENDIX V

SUMMARYOF PRE-DEVALUATION SYSTEM OF FOREIGN TRADE CONTROLS AND EXPORT INCENTIVES

General

1. The Turkish industrial structure has been shaped by the overvalued exchange rate and the rigid import controls. This combination also contains a built-in bias against exports.

2. Turkislh import controls are drastic. Once domestic production has been initiated, imports are customarily prohibited or severely curtailed. In fact, they are often curtailed in anticipation of domestic production. Essentially, imports are limited to vitally necessary industrial materials and equipment whiich are not manufactured in Turkey, or are not made in sufficient quantities. The primary aim of present import controls is rationing of scarce foreign exchange.

3. The main function of present customs duties and similar charges is nct protection (since this is achieved by quantitative restrictions) but the provision of Government revenuie, In fact, customs and similar charges average over 20 percent of the value of imports, and account for about 20 percent of the Central Government revenue.

Import Regime

4. The pre-devaluation import regime covered both (a) quantitative controls and (b) various duties and charges. The following table cata- logues 1968 imports, by types of quantitative control.

MNillion US$ equiv. %

"Free" List 360 43.1 Global Ouotas 240 28.7 Bilateral (Eastern 100 12.0 Bloc, Egypt, Israel, Yugoslavia) Project Aid Imports 100 12.0 Foreign Direct Invest- ment Imports 17 2.0 Other (NATO, infrastructure, etc.) 18 2.2

835 100.0

The State Planning Office, in consultation with the Ministries of Industry and Commerce, fixed the overall foreign exchange availability and its distribution by major categories. Detailed (luotaallocations for maintenance-of-production imports were made bi-annually by the Chambers of In- dustry for the private sector and by the MinLstry of Industry for State APPENDIX V Page 2

Enterprises. This allocation was made according to a pre-determined points system, taking into account installed capacity and raw material usage in preceding quota periods. There was little flexibility to permit A expansion by the most efficient firms.

5. The expression "Free List" is misleading. Originally this was intended to cover iteniswlhich could be freely imported, subject only to tariff and letter-of-credit formalities; it included e.g. replacement parts for machinery and vehicles, ball bearings, etc. As the foreign exchange stringency grew, foreign exchange was made available only after a long waiting period. Eaclh additional month of delay automatically added to the cost of imports since the rate of interest is high in Turkey (15-18% per year). Moreover, guarantee deposits for items on the liberalized list were particularly high: 90-170% as compared with 20-80% for items on the quota lists.

6. Since the custom tariff is not operating as a protective device, and was not conceived with a view to Turkey's present needs and requirements, no attempt will be made at a detailed analysis. A partial analysis for the machinery aad equipmetnt sector indicates that, in this area, most of the duties are in the.2>4t0% ad valorem range, with exceptional duty rates as low as 10-15% (harvester combines and earth moving equipment, neither of which are produced illTurkey) and a great miany categories in the 50-60% range (light diesel engines, pumps and compressors, refrigerators, food processing and weiglhing machinery, etc., all items manufactured in Turkey). This general description is, however, subject to two important modifications. In most cases, the standard rates have been reduced for imports fromncountries benefiting from a "most favored nation clause". Secondly, on top of normal customs duties, a series of other charges are levied as may be seen from the following illustration for an article drawing 20% customs duty:

a. C.i.f. value 100 b. Customs duty - 20 percent 20 c. Municipal tax - 15 percent of (b) 3 d. Letter-of-credit expense, stamps, storage 3

eSubtotal 126

f. Wharf dues - 5 percent of (e) 6

g. Subtotal 132

h. Expenditure tax - 10 percent of (g) 13

i. Stamp duty - 25 percent of (a) 25

170 APPENDIX V Page 3

In this particular case, the final cost is over 40 percent higher than the landed duty-paid cost.

Reduction of import duties as an investment incentive

7. One of the important investment incentivesprovided by Law 933 was reductiotnor exemption from irnportduties on equipment necessary for the realizationof the project. Various formulaewere used:

(a) Some exonerationof duties on imported equipment was granted almost universallyduring the 2-1/2-yearperiod that Law 933 was in effect (for approved projects with a total investment of TL 10.0 billicon). Details of the exeriptions granted and their distribution by industries have not been published.

(b) High duty reductions were used as an instrument to induce industrialists to plan for a competitive scale of operations.

(c) Complete exoneration of import duties was granted for somae projects deemed to be of outstanding importance to the economy, like shinbnilding, and motor vehicle production.

Export Regime

8. Promotion of manufactured exports before the devaluation included instruments:

(a) Drawback of import duties and indirect taxes. This instrument was created by Law 261. Taxes and duties rebated on "nontraditional" exports totalled about TL 250 million in 1967 and 196i and TL .585 million in 1969. Details are shown in Table XIN.

(b) Export credits. A decree under Law 933 provided that 35 percent of the funds bl}oked in the form of import deposits would be made available for the financing of exports. Credits were granted for terms of up to four yoars at 6% interest. Altogether, TL 310 million were mnade available to encourage exports with a total sales value of $48 million.

(c) Free exclange frmn proceeds of nontraditional exports. Until the recent devaluation, this was potentially the most important of all export promotion measures. Free exchange could be provjided by SPO up to 50 percent of APPENDIX V Page 4

the value of export commitments; the typical allocation was in the range of 20-35 percent. It could be applied only to imports of materials and components required in A the same type of production as the exported commodities. The potelacy of thi4sexport subsidy was therefore propor- tionate to the price difference between inputs freely imnportedand inputs only available locally. As of February 28, 1970, free exchange allocations of $5.4 million had been provided against exports totalling $104 million.

9. The percentage subsidy implied by the export incentives would vary substantially, depending upon the industry and product. The potential impact is illustrated in the following hypothetical example:

Selling price, f.o.b. 100 Tax refund 24 Interest subsidy (six months at 10 percent) 5 Value of free exchange (assuming 25 percent allocation of free exchange and 67 percent market premium on such free exchange) 17

146

10. It is not known how representative the above example may be. One aspect is worth noting. Above, the various incentives are shown as percentages of the selling price. Yet, to the extent that raw materials are available at world market prices, the incidence should really be related to the conversion margin or "value added". In the cotton textiles sector, tax refunds corresponding to 30-40 percent of the f.o.b. value of exports would represent, say, 45-60 percent of the conversion margin. APPENDIX VI

SUMMARYOF RECENT TURKISH MEASURES TO SUPPORT

INDUSTRIAL GROWTH

1. The incentive measures reviewed below have been made available primarily to the private sector. Growth of public manufacturing enterprise has been guided thirough the separate import allocations and financing mechanisms developed for the public-sector.

2. The original legal basis for all these measures may be found in Lawjs 202, 261 and 474; specific measures of erncouragementbased on this legislation were introduced in 1963. In 1967, a substantial reinforce- ment of incentives was made possible by Law 913. This law deals with the implementation of the Plan, and provides provisions for the encouragement of investments as well as exports. Some of these provisions were declared invalid by tlieHigh Court in October 1969; it seems that the objection of the Court was with respect to the procedure rather than the basic purpose of the new measures.

3. The basic tool of support was the investment certificate which provided the recipient with one or more speciiied incentives, in particular, tax allowances, partial or complete exemption from import duties, and sometimes investment financing. The extent to which these measures were applied is apparent from the following summary:

(a) Investment certificates as of April 1970 have been granted for 187 projects, of which 171 were in the manufacturing sector. The total for manufacturing investments is TL 5.6 billion; 14 large projects (with individual investments exceeding TL 100 million) account for 2.5 billion. W1hile most of the projects are of pioneering nature, others (textiles, cement and rolled steel) are doubtful qualifiers in this respect.

(b) "Investment allowances" were granted for investments in priority industries. These involve a tax rebate equal to a certain proportion of the new equity investment. Law 933 raised the rebate from the previous 30% (50% for underdeveloped regions) to 50-80% of the equity investment. In 4-1/2 years before Law 933, approved investments qualifying for this incentive were TIl 1.7 billion in the first 2-1/2 years under the new law, approvals totalled TL 8.4 billion. (Table XX).

(c) Investment financing totalling TL 171 million has been provi(ded out of the "Development and Encouragement Fund" APPENDIX VI Page 2

for 72 industrialprojects with a combined investmentof about TL 800 million. Credits granted against these investmentstotal TL 171 million. (Table XXIII). This form of assistancewas temporarilysuspended by the High Court decision of October 1969.

(d) Partial or complete exemption from import duties or grace periods for payment of duties on imported equipment. The main purpose of these incentivesis to facilitate the financingof industrialinvestments. A grace period of 2-5 years for projects conforming to the Plan was provided by Law 474. Delayed payments authorizedunder this law are shown in Table XXIV. Under Law 933 (now suspended),some exonerationof duties on imported equipmentwas granted almost universallyduring the 2-1/2-yearperiod that Law 933 was in effect for approved projects (with a total investmentof TL 10.0 billion),.High duty reductionswere used in some in- dustires as an inducement to industrialiststo plan for a more competitivescale of operations. Finally, complete exonerationof import duties on equipmentwas granted for some projects deemed to be of outstanding importanceto the ecoromy, like shipbuildingand motor vehicle production. The total value of exemptionsgranted and their distributionby industrieshas not been published.

Export incentives

4. Promotion of manufacturedexports Ls described in Appendix V. APPENDIX VII

BPTEF SU4APRY OF MAJOR STATE ENTERPRISES

IN THIE MANUFACTURINGFIELD

1. Sugar. The basic Government objective in the sugar industry is self-sufficiency. Productions in 1968, at 708,000 tons, and in 1967, at 663,000 tons, were the highest since the previous record of 643,0130 tons in 1960. The public sector accounts for about two-thirds of the output - very nearly the same proportion as in 1960. Substantial stocks of sugar have accumulated. Prices rose by 21 percent between 1964 and 1967. The 1967 prices of TL 2,900 per ton, or $193.50 converted at a rate of TL 15 per dollar, compare with a likely import price of, say at the most, $100 per ton. Profits before taxes in 1969 and 1968 were 20.5 and 51 percent, respectively, of net worth. 1/

2. Textiles. State enterprise in the textiles sector has existed for some time. But the reasons for present State production of textiles are not clear. Secondary objectives often mentioned are regional industrialization and the developmtent of textile exports. The share of the public sector in cotton fabrics production (measured in metres of cloth) declined from about 31 to about 27 percent of the total output between 1964 and 1968; the s'are of the woolen and worsted sector was about 27 percent in 1967. Profits in relation to published net worth in 1967 were 13.7% for Sumerbanks cotton textiles mills, 15.4 for Sunierbankswoolen and worsted mills, and 7.9 for other State cotton mills.

3. Cement. There are at present 14 public sector and 13 private sector ceiaent plants in Turkey. The share of thlepublic sector in total outjlut has declined froi:i about 64% in 1966 to about 50%, and is expected to decline to about 43%,by 1975. Capacity utilization has been good in the cement industry in recent years (35-100%), and the average plant size is reasonable (310,000 tons per year). Domestic selling prices hlave increased from TL 137 per ton in 1964 to TL 177 today (including TL 5 export equalization fee). At a rate of TL 15 per dollar (considering the very low inmport component of cement production), this would correspond to about $12 per ton which is roughly competitive with imports. The average return on equity for the public sector cement plants in 1967 was about 16 percent.

4. Pulp and Paper. The public sector has a near monopoly on inte-rated pulp and paper production in Turkey. Between 1958 and 1964, tlhe State--owned SEKA concern supplied an increasing proportion oi- the

1/ According to State Investment Bank Summaries. APPENDIX VII Page 2 domestic demand. Since 1964, imports have risen much more rapidly than local production. This is largely attributable to delays in the initiation and completion of SEKA's three new integrated paper mills. At a rate of TI. 15 per dollar, Turkish newsprint prices are roughly at international levels while prices for kraft paper would appear to be about 55 percent above the comparable import price. In 1967, SEKA's return on equity was about 16 percent.

5. Petroleum Refining. Ipras refinery (TPAO 51%, Caltex 49%) started operations in 1963, and increased its through-put front about one million tons of crude in 1963 to about two million tons in 1969 (roughly 31% of the total crude processed in Turkey). HIajor capacity expansion to about five million tons per year is under way. 'N7o major new refineries will be built in the State Sector whose share is therefore likely to increase two-thirds or more by 1975. Ipras has a record of successful operations. Pricing of petroleum products is based upon world parity. Operations are extremely profitable - the 1967 earnings of TL 73 million represented nearly a 40-percent return on equity. Ipras is the sponsor of a large new fertilizer project witlh a capacity of roughly 400,000 tons of ammonia equivalent per year, which would be partly used in the production of urea at Ipras, partly sold to the proposed Gemlik (C!armara) fertilizer plant.

6. Fertilizers. The main fertilizer producers in Turkey, both in the State sector, are the Nitrogen Corporation and the Fertilizer Industry Co. The latter produces phosphate fertilizers in two plants. 1/ The Nitrogen Corporation plant, built in the late 1950's, uses lignite for ammonia production, and was uneconom,ical as conceived. Moreover, the total investment and the construction period were excessive, even for a plant of the characteristics chosen. Recently, a 330 t/d ammonia plant was added to the previous 140 t/d unit, but even this new unit will not be competitive. Production at thie existing superphosphate plants is also uneconomical, and they are beset with managerial problems. In the Iskenderun plant, it is estinmated that Turkey actually loses about $1.00 per ton in foreign exchange for each ton of superphosphate produced.

7. The Nit:rogen Corporation is constructing a 300,000-ton superphosphate plant USirg roastirig gases fromn the Elazig-Maden pyrites smelter

1/ The main shareholders in the Fertilizer Industry Company are the Agricultura'l Credit Cooperatives, Agricultural Supply Office (TZDK), and the Nitrogen Corporation. The latter two are State enterprises, but we do not know what proportion they hold of the total capital of the Fertilizer Industry Co. APPENDIX VII Page 3 trie largest fertilizer plant to be constructed in Turkey, with a capacity _f abouc 750,000 tons of fertilizers (calcium ammonium nitrate and di- r-l,,ov'iui phosphate). The Nitrogen Corporation would also participate in the proposed Cemlik (':Tarmara) fertilizer plant expected to produce about `0C),O0C! tons of calcium armionium nitrate and 150,000 toIIs of di-ammonium or.osphate. This project, wihich would have a private majority, is still beinaz evaluated. Preliminary indications are that the new plants, under proper managyemcnt, would be profitable and economical operations. The gitrogen Corporation price for ammonium sulphate during 1964-1967 stayed faIrly constant at TL 460-470 per ton, which is roughly equivalent to the ilport price. The Government paid a subsidy to the Nitrogen Corporation. In 1963 (latest fi;gures available), this subsidy corresponded to about TL 34(0 per ton. Since then, production has roughly doubled, while the total annual loss has been sliglhtly reduced.

3. Steel. Thierc are two major integrated steel mills in the State sector. The Karalhuk mill's preserit ingot capacity is 0.7 million tons, which it hopes to expand to 1.0 million tons. The Eregli steel mill, on the Black Sea, is not formally a State enterprise, though the State holds the majority of the shares. It has a present ingot capacity of 0.5 million tons which are turned into flat steel products; the plans r-e to expand this capacity to 1.5 million tons. Turkish steel prices ae extremlely. The major reason for the high steel costs at Eregli is excess4.reinvestment combined with a low scale of output. The present .n-'estmentof about $650 per ton product compares with investment:s of $230 per ton product for new steel mills projected in Western Europe. Thanks to high prices, both Karabuk and Eregli have reported acceptable earnirgs in recent years, with returns on equity of 15 percent for Karabuk (1967), and 17.5 percent for Eregli (1968).

'. A thlird State steel mill is being constructed at Iskenderun, with Eussian technical and financial assistance. It will have an initial capacity of 1.2-1.4 million tons of hot metal. The investment cost, hefore the recent devaluation, was indicated as beincg about TL 5 billion.

10. Machinery. Y-1IK` (M1echanical and Chemical Industries) grew out of the old annaments induistry, and still produces a certain number of r.-ilitary items together with its civilian lines. Employing 16,000 people, its facilities include alloyed steel and nonferrous metals plants, an ifrOI fountry, a forgin, plant, and mechanical workshops. The company n,llufactures tractors on an extremely small scale (400 tractors per year), gears for the automative industry, cement mill equipment, and a :Large v-;rietvof othier iters (incliidingplywood for munitions boxes). The 1967 rnnual ttirnover was TL 60(9 million. The net return on equity was about 1 percent. APPENDIX VII Page 4

11. IIKEK plans to double its alloy steel capacity to 150,000 tons, rationalize its present primitive facilities for the production of brass sheets, initiate the manufacture of lathes, and take up the manufacture of large gears.

12. NKEK is also the chosen instrument for holding Government participations in the expanding motor vehicle industry. It is a shareholder or prospective shareholder in Turk-Tractor and Tofas-Fiat (with Fiat, Italy) and in the Perkins Diesel Engine Project.

> APPENDIX VIII

SUMNARY OF RECOMfENDATIONS

Recommendationsemerging from the assessmentof the industrial situation and prospects of Turkey are briefly listed below. The rationale and purpose of these recommendationsare explained in the relevanl:paragraphs of the report, as indicated.

Strategy

1. Three main factors should be consideredin Turkey's evolving industrialstrategy: (a) the need for a rapid change from isolationist policies to those favoring exports and competitiveimport substitution taking maximum advantage of Turkey's resource endowment and low labor costs, (b) accelerated improvementsand adjustmentsof industrialstructures, (c) elimination,as far as possible, of the present dualism between the State and private sectors.

Protection and Export Promotion Policies

2. Administrativecase-uy-case granting of investment certificates, incentives,and import quotas should be replaced, in the main, by a revised customs tariff and incentivesstructure, applying equally to all manufac- -Srers of a given product (180).

3. Unified criteria for industrialinvestments and priorities should be instituted to guide and hind all Government agencies and State enterprises and also serve as the basis for the proposed reform of the customs tariff and incentives structure. The main emphasis should be upon medium- run competitiveness,with some allowance for "external economies" and exceptional labor-intensity(177).

A program of industrial sector studies and subsector reviews shiould be initiated to form the underpinning for the Third Plan as well as for the revision of the Customs Tariff and Incentives Structure (177). rhis work should be undertaken by "vertical" committees for each major industrial sector, grouping representativesfor the Government, tWheindus- try concerned, and the general public. tMobilizationof Factors of Production

J. New approaches are needed for the exploitationof Turkey's vast uncapped minerals and forest wealth for export-orientedmetallurgical and forest industries (153). The necessarymeasures are detailed in the separate volumes on the Mining Sector (Vol. IV) and the Forest Industries (Vol. VI). Key elements are institutional change, attraction of foreign invest- mcnt to assist in specialized technologyand rarketing,and, particularly for forest products, improved infrastructure, APPENDIX VIII Page 2

6. The Government and industrial associatious together should develop improved system-s of worker education and in-slhop training (154).

7. Savings must be channelled more efficiently into private industry and the spreacdbetween borrowing and lending rates reduced. Particular importance is attached to the development of the capital market (201).

Role and OperatiorLs of State Enterprise

S. State manufacturing enterprise should, in principle, be limited to high priority ventures (a) where size and/or risks involved would deter private enterprise or (b) it is desirable to reserve, for the nation as a whole, a proper share of the yield from unique natural resources.

9. Steps should be taken to elimiiinate the present dualism between State and private enterprise in management, labor, basic philosophy, investment criteria, financing etc. (195).

10. The liigh Control Board, as Parliament's watchdog, must shift its focus to exert substantive influence ou the performiance of State Enterprises (investment, operating, and economic efficiency) rather than merely verifying their accounts. The work of the Reorganization Commit- tee for State Enterprises should be carried out with greater urgency (195).

11. A study slhouldbe made regarding optimum administration and corporate structures for State enterprises. The main objectives would include effective administration and management, eventual regrouping of some State enterprises with private companies, and maximum public insight into the operations and performance of individual State enterprises. The Ministry of Industry, to which the main responsibility for overall planning and management of industrial growth should now evolve, should gradually divorce itself from the direct administration of State manufacturing enterprises (211).

Small and medium enterprise

IIK-6e.iu-i-sJLz,r>_1 and s,aallenterprise should be aided tlhroughin- creased emphasis on regional development poles and industrial estates, through certain new activities for industrial associations, through development bank assistance in merger and joint ventures and through the ) encouragement of independent specialist establishments in various industries, e.g. engineering and textiles. The problem of finance for medium and small industry merits further study (184-185). APPENDIX VIII Page 3

Regional industrialization

13. A Regional Industrialization Authority should be locate,l at an apprcpriate center in easternmost Turkey. Its first function would be to become a focal point for study and planning; its first major task to organize various feasibility and sector studies antd to draw up a preliminary regional industrialization plan (187).

14. Regional development nuclei and industrial estates should be strongly puslhed (1128).

Forei-n investment

15, Forei-n industrial investors must be enlisted increasingly as partners to speed the transition of Turkish industry into world rarket competitiveness (204). In the forest industries, foreign investors could play a key role. Foreig,n international corporations should be pressed to provide export outlets for Turkish manufacturing establishments in return for their entry into the Turkish market (32-84, 205). The two roles of thle State in relation to forei-n investors, the State as a partner in a commercial venture and the State as a planning and regulatory agency should be clearly separated (205).

Programmian and management of industrial rowt'h

16. A closer tri-partite cooperation between SP0, the Ministry of Industry and industrial associations should be initiated. The Mi nistry of Industry should assume the main role in the planning and management of industrial growth. tMore emphasis should be placed upon the economiLc aspects of industrialization (177, 211).

17. The Chamber of Industries at the top and the various industrial associations must be induced to make more substantive contributions to industrial development (65, 84, 138, 177, 181).

Industrial statistics

13. A newY induistrial census sliould be taken as soon as feasible. In hle meantime available data should be pulled together to construct a pro- visional index of manufacturing output. The responsibility for collecting -.nd processin, inldustrial statistics should be moved from SPO and the Min- istrv of Industry to the State Institute of Statistics.

Textiles

19,. Exports of textiles to the Common Market represent a rajor npportunity for Turkey. The Covernment should (61, 63, 65): APPENDIX VIII Page 4

(a) help fi'nance a study of export markets for Turkisl-i textiles;

(b) in cooperation withi the industry,,develop a positive pro'gramfor essential restructuring;

(c) make a fiaamacialcontribution to managemenitand worker trainir ii,

(d) make artificial and synthetic fibers available to Turkish industry at world market prices where these fibers are incorporated in exported articles.

20. The textile industry should create a well-staffed trade association. One of its first tasks should be a comprehensive cost and productivity comparisons betWe'enfirms, and necessary restructuring of the indus-- try (65). Another funictionmight be intelligence with respect to exports.

Forest products

21. The underutilization of the Turkish forests and thie slow progress of the industry are in dramiatic contrast to the growing fiber gap in Western Europe (76-77, 83).

22. Studies should be pushed to complete the forest inventory, to determine thie optimaumlocation of major forest industries, to identify optimum log harvesting methods, and to plan the necessarv infrastructure (82).

23. The Government shiouldurgently consider the removal of extra- ordinary forest rehabilitation charges and social welfare charges in t'le costing of logs supplied by the Directorate of Forests (82).

24. The Covernipent should decentralize decision--making in forestry and wood processing industries by dividing the forest areas into a series of major concessions, eac7h larg,e enough to feed an economic-size integrated forest conmplex. Some of these shiould be reserved for independent State corporations, others for mnajor nex' priv.ate in(lustries. Forei;;n direct in- vcuSi :.Un.1t '6!ehn forost industry siiould be encouraged (g3).

25. A study shzould be undertakeni (Covernment together with a greatly strengr1thened industry association) to determine the effect upoIn existing industry of the structural changes recommended, to devise rKeasures to ease the transition and, more generally, to improve the structure and efficiency of existing i-ndustry (84). APPENDIX VIII Page 5

Fertilizers

26. Turkey could become an economical producer of both phosphate and nitrogen-type fertilizers. The Government should give urgent attention to the managerial problems of State enterprises in the fertilizer field (88, 95).

27. An independent evaluation should be miade of the present system of fertilizer distribution and of measures to be taken by producers and G.overnnentextension agencies to ensure that the planned outputs can be mmarketed (95).

28. A study slhouldbe made to evaluate the economiicsof alternative souirces of sulphiur, focussing on the development potential for domestic pyrites (Vol. IV - The Mining Sector, Appendix III).

Petrochemicals

29. Turk-cey's first petrochemicals complex, which started operations this year, is not of viable size. A program for further entry into the petrochemicals field would require the phasing-in of viable size units and the initiation of export sales where the domestic market is too small .or those units. Such a plan (expansion of Yarimca plus new Aliaga complex) would require investments of the order of $400 million equivalent (109). These are enormous investments by any standard. For a variety of reasons (capital-intensive nature of production, low world market prices, etc.) it is doubtful that the plannad complexes would be economically or commercially viable. A thorough reappraisal of the whole program for the petrochermlicalsector is therefore recommended (113-115).

Steel

30. The cost of steel mill investments zo the Turkish economy has been staggering (126); major policy decisions in this area must, from now on, only be taken after intensive study. The Mission recommenda an independent consultant study to provide the blue-print for future development, to explore the economics of self-sufficiency versus imports and to fix the -iting of new expansion - whether through expansion of existing facilities or througlha fourth integrated mill (128).

il. A study of the future demand for steel should be undertaken as a mattcr of top priority (121). Such a study might be done independently or included as an element of the proposed development plan for steel.

32. The project studies for the Divrigi iron ore mine, pelletizing plant, and foundry iron complex should be completed quickly. TILe advisa- bility of reduced freight rates for iron ore and pellets to reflect the Iong-run marinal costs of transport should be explored (129). APPENDIX VIII Pag,e f6

33. A realistic national strategy for coal shouldl be devised, based upon (a) withdrawal from ian-cos t mining areas and deficit-producing rmar- kets and (b) main focus on production of coking coal for the steel industry and oInmine-based power. (Staff Study of Fuels and Energy Sector in Turkey, Revised Draft, Noveniber 1970.)

34. Stee- for industries should be provided at epitivalent import prices, paitia trPwhere it is an imlportantelement in the cost structure (e.g. tinplat-L for canning).

Machinery and metal products

35. This is the rost rapidly expanding of all thle manufacturing sectors; the realization of existing investmi-ent plans would permiit production to grow by 20 per- c--nt per year over the next few years. For many metal-fabricatinig aod iiiinr operations, the Turkish industry is very competitive (133).. Paradoxically, while imports of machinery account for nearly 30 percent tof all Turkish i,nports, domestic production is held back by shortages of miaterials ond components (134).

36. It isrecoieuded (138) that:

(a) an iniveT.tCrV ojf exiStiTn metal-rworking capacity be prepared ;

(b) a study be undelrtak;en ot opportunities for Turkish engineerinlg industries in the European context, and measures required to take full advantage of suclh opportunities:

(c) selective pre-investmient studies be made of subsectors atnd projects:

(d) subcontrectiqg of specialist operations be increased;

(e) public sc.!ctor industries be restructured to perm-it improved use of existing facilities and segregation of activities wlhich are not linked by any economic or nanape zriml r..iona-le;

(f) arrangements be made to make major materials and co3- ponents available to Turkish industry at world market prices when these are incorporated in. articles for export.

37. An Nsaociation of Metal-NiorkingIndustries grouping botlhpublic and private sector coTuai)Lies should be formed; it should be eirpectedto take an important part in inMplementing the above recommendations (138). APPENDIX VIII Page 7

otor ve'iicles and tractors

J 3> The motor va:iicle ar1 tractor industries have been growing raid6ly, with imports of complete units reduced to special types Eand with rapidly increasel Tur1-i;'hcontent in domestically assembled units. Thie *ovcrnment is piuFshiLng hlard for ani 85-90 percent domestic content. Eighty- five percent of thie total value of SPO-approved investments in the engi- neerin, industries lhave been for thc motor vehicle and tractor subsectors (145). At the present momlent the industry is badly hurt by the shortage of foreign exchange for imiiportedI materials, parts, and comnponents (149).

39. The dlo;,mestic cost of foreign exchange savings for the full implementation of the above program would be extremely high. The mission recommends a restudy of tthe development of these two subsectors. Miajor -ui(elines for suchI a study might be concentrating the output to a few major plants, limiti, the buLld-up of domestic content to economically defensih1ei levels and1increasing pressure on foreign companies to source some of their interiiationial procu-tement in Turk;ey in return for the protected market they are being guaranteed (148).

Maintenance- of-production iiinp;orts

40. In recent years, riglht of way has been given to investment goods imports in preferencp to mainteriance-of--production inmports. At the same t'te structure of, in particular, assembly industries has been frozen by thie existitn. system of import allocation. An "industrial imports" loan, finincin, ii,ports of materials, parts, components, spare parts and compli- mentary production equipment mig