RETURN TO REPORTS DESK RESTRICTED WITHIN ReportNo. EMA-30a ONE WEEK Public Disclosure Authorized This report is for official use only by the BankiGroup and specificallyauthorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. TIhe Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONALBANK FOR RECONSTRUCTIONAND DEVELOPMENT INTERNATIONAL DEVELOPMENTASSOCIATION Public Disclosure Authorized THE DEVELOPMENT PROSPECTS OF 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 (consul- tant, 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 nation- al 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 produc- tion 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 manufac- tured 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 man- ufactured 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 dura- ble 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,includ- ing steel, fertilizers, auchinery,motor vehicles, tractors,etc. today account for roughly te seameproportion of the total value added