Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 42026-TR INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY Public Disclosure Authorized COUNTRY PARTNERSHIP STRATEGY WITH THE REPUBLIC OF TURKEY FOR THE PERIOD FY 2008-2011 January 25,2008 Public Disclosure Authorized Turkey Country Management Unit Europe and Central Asia Region International Finance Corporation Central and Eastern Europe Department Multilateral Investment Guarantee Agency This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Public Disclosure Authorized authorization. DATE OF LAST CAS - PROGRESS REPORT (November 8,2005) CURRENCY EQUIVALENTS (Exchange rate as ofDecember 3 1,2007) Currency Unit = YTL US$l.OO = YTL 1.16 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities IPARD Instrument for Pre-Accession for BEEP EBRDiWorld Bank Business Rural Development Environment and Enterprise IPO Initial Public Offerings Performance Survey JPPR Joint Portfolio Performance Review CAD Current Account Deficit LI Local Initiative CAP Common Agricultural Policy M&E Monitoring & Evaluation CAE Country Assistance Evaluation MDG Millennium Development Goal CAS Country Assistance Strategy MIC Middle Income Country CAS CR Country Assistance Strategy MIGA Multilateral Investment Guarantee Completion Report Agency CCT Conditional Cash Transfer OECD Organization for Economic Co- CEDPL Programmatic Competitiveness and operation and Development Employment Development Policy PFMC Public Financial Management and Loan Control Law CPI Consumer Price Index PISA Assessment: Program for CPS Country Partnership Strategy International Student Assessment DPL Development Policy Loan PIU Project Implementation Unit DOD Disbursed and Outstanding Debt PPA Public Private Partnership EBRD European Bank for Reconstruction PPDPL Programmatic Public Sector and Development Development Policy Loan EU European Union R&D Research and Development FDI Foreign Direct Investment RDA Regional Development Agency GDP Gross Domestic Product SBA Stand-by Agreement GNP Gross National Product SME Small and Medium Enterprise GRECO Group of States against Corruption SWAP Sector-wide Approach IBRD International Bank for Reconstruction TEMAD Turkish Emergency Management and Development Agency IEG Independent Evaluation Group UMR Under-Five Mortality Rate IFC International Finance Corporation WBI World Bank Institute IMF International Monetary Fund WBG World Bank Group IMR Infant Mortality Rate YTL New Turkish Lira (Yeni Turk Lira) IPA Investment Promotion Agency IBRD IFC 1 Vice President Shigeo Katsu Lars Thunell Director Ulrich Zachau Shahbaz Mavaddat Team Leader Ina-Marlene Ruthenberg George Konda FOR OFFICIAL USE ONLY TABLE OF CONTENTS Executive Summary ................................................................................................................... i I. Country Context ........................................................................................................... 1 A . Political and Social Context ................................................................................ 1 B. Recent Economic Developments ........................................................................ 2 C . Medium-term Prospects ...................................................................................... 4 I1. Turkey’s Vision and Key Development Challenges .................................................... 6 A . Improved Competitiveness and Employment Opportunities .............................. 6 B. Equitable Human and Social Development ...................................................... 10 C . Efficient Provision of High Quality Public Services ........................................ 14 I11. Turkey-World Bank Group Partnership ..................................................................... 20 A . Past Bank Group Assistance ............................................................................. 20 B. Lessons Learned................................................................................................ 21 C . Strategic Objectives and Results Framework ofthe New Country Partnership Strategy (CPS) .................................................................................................. 23 D. Overall Approach.............................................................................................. 25 E. Areas of Engagement ........................................................................................ 26 a) Improved Competitiveness and Employment Opportunities................ 26 b) Equitable Human and Social Development .......................................... 31 c) Efficient Provision ofHigh Quality Public Services ............................ 34 F. Working with Other Development Partners ...................................................... 37 G. Bank Financing ................................................................................................. 38 H. External Debt Sustainability and Bank Exposure ............................................. 41 IV. Risks ........................................................................................................................... 42 V . Conclusion .................................................................................................................. 45 This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not be otherwise disclosed without World Bank authorization . Tables and Boxes Table 1: Selected Medium-tern Macroeconomic Indicators .. .. .. .. .. .. .. .. .. ., .. , , ., .. .. .. 4 Table 2: Baseline Debt Dynamics ........................................................................................... 5 Table 3 : Poverty and Inequality, 1994-2005,... .. .. .. , .. ,. , .. , , , , , , .. , , ,. , , , , , , , ,. , , , .. , , ,. ,, ,, ,. , ., . , . .. 11 Table 4: Strategic Goals and FY04-06 CAS Framework ...................................................... 22 Table 5: Turkey’s Ninth Development Plan Shapes the World Bank Group CPS ................ 27 Table 6: Indicative Turkey CPS Program FY 08-11 ............................................................ 28 Figure 1 : Distribution of 15 Yr. Old Students by Proficiency Level, Turkey, EU & OECD . 13 Figure 2: Changes in Infant Mortality Rates in Turkey Between 1970 and 2007 .................. 14 Figure 3: Legal and Judicial Issues ......................................................................................... 17 Figure 4: Turkey Portfolio Indicators vs. Bank and ECA (FY07) .......................................... 20 Figure 5: Gross External Debt to GNP Ratio.......................................................................... 41 Figure 6: Gross External Debt to GNP Ratio.......................................................................... 41 Figure 7: Share of Short-term External Debt in Total Private Sector External Debt Stock ... 42 Box 1: Government Program ................................................................................................ 6 Box 2: Joint Portfolio Performance Review (JPPR) Lessons Learned ...... ..... .. ..... .. ...... ... 24 Box 3: WBI in Turkey: An Integrated Multi-Year Capacity-Building Program ................ 34 Box 4: CPS - Civil Society Consultations .......................................................................... 38 Annexes: Annex 1 : Results Matrix Annex 2: Major Development Partners Annex 3: World Bank Group Private Sector Strategy Annex 4: CAS Completion Report (FY04-07) Annex A2: At a Glance Table Annex B2: Selected Indicators ofBank Portfolio and Management Annex B3: IBRD/IDA Program Summary Annex B3: IFC Investment Operations Program and MIGA Annex B4: Summary ofNon-lending Services Annex B5: Social Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Committed and Disbursed Outstanding Investment Portfolio Annex B8: Operations Portfolio (IBRDADA and Grants) EXECUTIVE SUMMARY 1. Turkey’s economic development has global significance, given its size, role as a regional power, and strategic location, bridging East and West. Turkey is a member of the Organization for Economic Co-operation and Development (OECD), and the prospect of European Union (EU) accession remains a key anchor of political and economic reforms. Turkey, with a population of 70.6 million, is one of the large middle-income partners of the World Bank Group (WBG).’ ii. Turkey has one of the world’s 20 largest economies. Gross Domestic Product (GDP) reached US$400 billion, and GDP per capita reached around US$5,500 in 2006, following a spectacular recovery from a deep economic crisis in 2001.2 Turkey has succeeded in reducing poverty, from about 28 percent of the population in 2003, to about 18 percent in 2006, pulling more than 7 million people out of p~verty.~Fewer than 10,000 people, or less than 0.0 1 percent ofthe population, are extremely poor, living on US$l or less a day. At the same time, some social indicators lag behind those of countries with similar incomes. ... 111. Turkey’s vision for development, set out in its Ninth Development Plan 2007- 2013, is “a country with an information society, growing in stability, sharing more equitably, globally