AN SME STORY

Turkey 2011 | ECONOMY | GUEST SPEAKER

Ulrich Zachau, Country Director for Turkey at the World Bank, comments on the development of the country's private sector.

Ulrich Zachau
BIOGRAPHY
Ulrich Zachau worked for McKinsey & Company, and taught economics at the University of Bonn before joining the World Bank in 1988. He has held various staff and management positions, including at operations in Asia, Europe, Latin America, and the Caribbean, as well as in finance, policy, and research. In 2007 he was transferred to the Europe and Central Asia Vice-Presidency as Director for the Turkey Country Unit.

Turkey has seen remarkable economic growth and development since 2001, which has been grounded in fundamental economic reforms and sound policies. Turkey's resilience during the global crisis and post-crisis recovery owe much to these sound policies and its strong macroeconomic and structural position entering the crisis. Continued sound macroeconomic policies, the implementation of structural reforms to establish an enabling investment climate, coupled with progress in energy and advances in human development, especially education and skills, will also be the basis for Turkey's economic success in the future. Accelerating reforms in the areas of the business regulatory framework, labor market, and facilitating innovation will help enhance Turkey's competitiveness in an ever more competitive world. The World Bank is proud to be a partner with Turkey on this path of reform and growth.

Turkey's ongoing partnership with the World Bank is grounded in the country's Ninth Development Plan (2007-2013). The 2008-11 Country Partnership Strategy provides for up to $8.1 billion in new financing, of which $6.5 billion had been committed by November 2010, along with a range of analytical work, technical assistance, and international expertise and experience to inform Turkish policymaking and programs. In response to the global financial crisis the World Bank committed $3 billion in financing for Turkey between July 2009 and June 2010. A new Turkey-World Bank Strategy for 2012-15 is currently under preparation.

In 2010, Turkey experienced a robust recovery from the global economic turmoil, with real GDP growth estimated at around 8%, mainly driven by domestic consumption and investment demand from the private sector. Over the medium term, the Bank expects a potential growth rate of up to 5% relying on a combination of slowly recovering exports and private sector led domestic demand. With inflation at 6.4% in December 2010, the central bank met its inflation target in a difficult environment, with a high volume of portfolio flows coming into the Turkish economy. External imbalances remain a source of potential vulnerability over the medium term. As growth has revived, Turkey's current account deficit has grown as well and it is expected to be in the order of 6% of GDP in 2010. The authorities and the Bank are monitoring the current account deficit carefully. Indications so far suggest that it is financeable, as recently issued 10-year euro-denominated treasury bonds have yielded 4.25%, the lowest ever.

Like in many other countries, in Turkey small- and medium-sized enterprises (SMEs) constitute the backbone of the economy, playing a vital role in the welfare of the population as the main source of job creation and economic growth. In Turkey, SMEs account for 80% of employment, almost half of total investments, two-thirds of total retail sales, 25-30% of total exports, and one-quarter of bank credit. Therefore, Turkey's prosperity is inextricably linked to the fortunes of its SMEs. SMEs suffered more than their larger counterparts in the economic downturn of 2008-2009, with many of them seeing sales drop and their sources of finance dry up. With Turkey's economic recovery now well underway, SMEs will benefit as well, but the structural challenges they face remain.

In early 2010, the government and the Bank completed the study Turkey: Investment Climate Assessment—From Crisis to Private Sector Led Growth, based on a survey of 1,200 firms conducted between April 2008 and January 2009. The study examined various constraints to higher growth facing not only Turkish SMEs, but all firms in general. The study found strong indications that SMEs are disproportionately burdened by business regulations, face severe access to finance constraints, and seem to lack the ability to adopt and use the knowledge needed to make them and, ultimately, the entire Turkish economy more competitive internationally. Specifically,

•A majority of surveyed firms see themselves as held back by problems with access to finance (26% of firms cited this as their single most important constraint). Tax rates (18%) and policy instability (18%) rank second and third, while other important factors are competition from the informal sector and an inadequately educated workforce (15 and 9%, respectively).

•The survey found that the top management in enterprises spends a strikingly high amount of time (27%) dealing with red tape. Some of this “time tax" relates to frequent changes in rules and a discretionary, unpredictable implementation of rules, be it for taxes, for licenses, for procurement, or other transactions. This is much more than in comparator countries such as Brazil (19%), Hungary (13%), Poland (13%), Bulgaria (11%), Czech Republic (10%), and Romania and Chile (both 9%).

•Finally, nearly a quarter of Turkish large firms surveyed rated the education and skill levels of the workforce as a “major" or “very severe" constraint on operations and growth.

The results of the study and the underlying survey identify the business regulatory environment and the innovation policy framework as key areas for further improving the Turkish investment climate, economic growth, and employment generation. To be sure, over the past decade, Turkey has made significant investment climate reforms, including easing business registration. But red tape still seems to impose significant costs on businesses, especially SMEs. For instance, the progress that has been made in the granting of operating licenses to manufacturing firms—from 66 days in 2005 to 62 days in 2008—is still not sufficient to match comparator countries, including Bulgaria (21 days) and Romania (24 days). The government and the Bank are currently preparing a regulatory reform strategy with the goal of simplifying business regulations, including improved horizontal and vertical coordination among levels of government, and enhanced consultation with the private sector. In addition, long-term economic growth will benefit critically from concerted efforts to stimulate—and protect—knowledge and innovation. This “silent" engine of prosperity will be key in spurring sustained wealth and growth in Turkey and lead to the expansion of an internationally competitive SME sector that can complement its already successful and globally integrated large corporations.

Turkey has also made considerable progress in other key policy areas critical for achieving equitable and sustainable growth, including in energy, and health and education, although challenges remain there as well.

The World Bank has been assisting Turkey in developing its renewable energy capacity through policy advisory work, development policy lending, as well as through investment lending. Advisory work has included support for the modernization of the transmission grid to enable the integration of large-scale renewable capacity, plus initially in developing the renewable energy legislation. A series of policy-based loans supporting the energy sector and environmental sustainability also buttress the establishment of market-friendly policies in renewable energy. Finally, the Bank is also helping through financing private sector investment for renewable energy development. Under the Renewable Energy Project, for example, a $200 million Bank loan leveraged an additional $555 million in private investment to finance 618.5 MW of new renewable energy capacity. Thereafter, under the Private Sector Renewable Energy and Energy Efficiency Project, a $500 million Bank loan and $100 million from the Clean Technology Fund (CTF) was used to continue financing renewable energy and energy efficiency projects. Turkey was the first country to utilize CTF funds. As of end-September 2010, this project had financed 2,118 MW of renewable capacity under construction.

Turkey has achieved much in establishing universal health service provision, taking measures to put social security on a sustainable path, and to broaden pre-school and basic education, which benefit all Turkish people across the country and different groups in society. Life expectancy at birth in 2008 at 73.6 years stood at 92.8% of the OECD average, compared with 71% in 1960. Considerable progress has been made in reducing the maternal mortality ratio (maternal deaths per 100,000 live births), which fell from 29 deaths in 2005 to 23 deaths in 2008, thus meeting its Millennium Development Goals target for 2015. The infant mortality rate (IMR) has declined from 150 per 1,000 live births in 1970 to 19.9 per 1,000 live births in 2008. With 87% health insurance coverage of the population and low out-of-pocket payments for health (2.2% of total household spending), Turkey already provides affordable health care to nearly all its population. As health expenditures by the Social Security Institution grew by 30% in 2006, 11% in 2007, 27% in 2008, and 13.6% in 2009, keeping health spending affordable, though maintaining high-quality health services for the Turkish people will be a challenge.

The recent Program for International Student Assessment scores show significant education gains in Turkey between 2006 and 2009. Turkey has almost universal primary school enrollment (net enrollment of 98.2% in 2009-10) and has significantly improved secondary school enrollment (65% net enrollment rate in 2009-10), although enrollment varies by region and by gender within certain regions. Nevertheless, enrollment rates in pre-school and tertiary education (around 27%) remain low by international standards and vary by region and by gender within certain regions. Moreover, a high proportion of 15-year-olds in Turkey continue to perform below the most basic proficiency level in reading, math, and science (25%, 30%, and 42%, respectively), with significant differences by region, socioeconomic status, and school type. Increasing educational attainment while reducing disparities and providing quality educational services are key challenges for Turkey.

Turkey's extraordinarily dynamic entrepreneur class is a major comparative advantage, along with its geographical position. In our day-to-day work in Turkey, we come across many examples of companies and entrepreneurs in Turkey that, provided with the right policy framework (and some modest medium-term financing), can help enhance Turkey's global competitiveness and move it into the next stage of development. One of them is Altes Aluminium in Ankara. Its founders—best friends and partners for 30 years—are passing the torch to their children who, in search of injecting dynamism and innovation into the company, obtained a loan through one of the Bank-supported credit lines. There are many “Altes Aluminiums" in Turkey, and much can be done to improve their growth and innovative capacity, especially by eliminating regulatory barriers to growth and higher employment and in improving the quality of education and level of skills of the labor force they require.