On the Road to EU Membership? : The Economic Transformation of Turkey [1 ed.] 9789054878612

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On_the_Road_to_EU_Membership.book Page 1 Friday, August 26, 2011 7:33 AM

On the Road to EU Membership The Economic Transformation of Turkey

On_the_Road_to_EU_Membership.book Page 2 Friday, August 26, 2011 7:33 AM

On_the_Road_to_EU_Membership.book Page 3 Friday, August 26, 2011 7:33 AM

Selen Sarisoy Guerin and Yannis A. Stivachtis (eds.)

On the Road to EU Membership The Economic Transformation of Turkey

Brussels University Press

On_the_Road_to_EU_Membership.book Page 4 Friday, August 26, 2011 7:33 AM

Institute for European Studies – publication series, nr. 17 The Institute for European Studies is a Jean Monnet Centre of Excellence. It promulgates European Studies in general, and studies of European and Comparative Law, Environment, Media, Migration and Regional (European) Integration specifically. The IES is an education and research centre, carrying out research on various European issues relating to the EU in international affairs, and responsible for the Masters of European Integration and Development, and for the internationally renowned LL.M of International and European Law (formerly PILC programme). Institute for European Studies (IES) Vrije Universiteit Brussel Pleinlaan 2 B-1050 Brussels [email protected] http://www.ies.be Copy editor: Jacqueline Kay Cessou Cover design: Koloriet, Leefdaal Book design: Crius Group, Hulshout Print: Flin Graphic Group, Oostkamp © 2011 VUBPRESS Brussels University Press VUBPRESS is an imprint of ASP nv (Academic and Scientific Publishers nv) Ravensteingalerij 28 B-1000 Brussels Tel. + 32 (0)2 289 26 50 Fax + 32 (0)2 289 26 59 E-mail [email protected] www.vubpress.be ISBN 978 90 5487 861 2 NUR 754 / 784 Legal Deposit D/2011/11.161/024 All rights reserved. No parts of this book may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher.

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Table of Contents

Introduction Selen Sarisoy Guerin and Yannis A. Stivachtis 1.

2.

3.

4.

5.

6.

7

From Association to Accession Negotiations: EU-Turkish Economic Relations, 1959-2009 Yannis A. Stivachtis

17

Integrating the EU and Turkish Economies: The Customs Union and the Accession Partnership Yannis A. Stivachtis

35

Current Turkish Economic Policies and the Target of EU Membership Ìlke Civelekoğlu

63

Public Sector Governance in Turkey: Evaluating a Reform Agenda Yakup Beriş, Aslı Gürkan and Fuat Andıç

87

Prospects of Foreign Direct Investment in Turkey during the Negotiation Process Selen Sarisoy Guerin

123

EU-Turkish Enlargement Negotiations and Implications for Turkish Labour Market Feray Erselcan

157

7.

Turkish SMEs Competitiveness within EU Negotiation Senem Besler and H. Zümrüt Tonus

8.

Turkish Agriculture at the Crossroads: Structural Change and EU Membership Mahmut Tekçe

187

203

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9.

The Role of Energy in the EU-Turkey Relations Sema Kalaycıoğlu

231

10. EU-Turkey Negotiations on Information Society and Media Andrea Renda, Selen Sarisoy Guerin & Emrah Arbak

247

Conclusion Selen Sarisoy Guerin and Yannis A. Stivachtis

281

List of Contributors

295

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Introduction Selen Sarisoy Guerin and Yannis A. Stivachtis

The European Union has recently undergone one of its most turbulent periods, not only economically but also politically and institutionally, following the aftershocks of the 2004 and 2007 enlargements, the Constitutional crisis and the subsequent Lisbon Treaty, and, finally the 2008 financial crisis. Given the visibility of the European Union in the world economy, and the strength of the Union as a model of economic integration, the recent crisis has been critical in shaping both the EU’s future and its attractiveness as a magnet for non-EU European countries. At the time of writing, it is commonly agreed that we are now experiencing the most severe global financial crisis, coupled with increasing energy and food prices, since the Great Depression. The 2010 euro crisis with the Greek, Irish and now the Portuguese bail-outs has spurred strong negative reactions from the public in many countries, such as Germany and the Netherlands, as tax payers living in EU countries with strong economies fail to see why they must share the less fortunate countries’ burden. The severity of the economic crisis has been a significant test of the European Union: the manner in which the EU has responded to the crisis highlights the fact that while the EU might be a successful model for economic integration, its lack of political union has restricted its options in terms of its response to the crisis. Great uncertainty as to how the EU is going to overcome the crises of other countries as well as its own still remain. It is against this background that Turkey has been negotiating its accession to the European Union since October 2005. The European Commission sees enlargement as one of the most established policies of the EU, given the success of the past five waves of enlargement. Turkey is part of the current wave, along with Croatia and Iceland. Many European countries have traditionally sought membership in the European Union (EU) largely due to the economic advantages of its large and wealthy market. The enlargement of the EU is therefore motivated, among other things, by material interests both for the EU Member States and the candidate countries. This at least seemed to be the case before the 2008 financial crisis and the 2010 euro crisis. Indeed, when Turkey’s application to join the newly established European Economic Community (EEC) was received as a ‘possibility’ more than forty years ago,

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On the Road to EU Membership

the aim of the ensuing Turkey-EEC relations was based on economics as stated in Article 2 of the Ankara Agreement, signed in 1963: ‘to promote the continuous and balanced strengthening of trade and economic relations between the Parties while taking full account of the need to ensure an accelerated development of the Turkish economy and to improve the level of employment and living conditions of the Turkish people’. Since then, due to several waves of successful enlargement, the EEC has evolved over the years into an economic union, with a single market and currency that is larger than that of US in terms of its income and global trade. As for each candidate country, Turkey’s accession to the EU has economic implications for both parties. But what material benefits would Turkey’s accession bring to the EU and what would the possible material costs be? Inversely, what would the costs and benefits of Turkey’s accession be to Turkey itself? Concerns over the economic costs of ‘absorption’ of each candidate country have been publicly debated by national governments before and Turkey is no exception. One needs to understand that adoption of the EU acquis has real economic costs and that financial assistance from the EU exists to support the candidate country. In return, when the candidate country becomes a EU member, it must contribute to its resources, i.e., to the EU budget, but also to its output, diversity and competitiveness. For example, the eastern enlargement could not have been motivated by material gains from the perspective of the EU15: even though the new member states increased the EU population by one-fifth, the increase in output was only 5 percent of EU total, and the cost to the EU was negligible. Nevertheless, this did not prevent lengthy debates both at the EU and in national parliaments, especially concerning the shifting of powers and the future of decision-making in the enlarged EU. Hence, Turkey’s enlargement will not only bring economic costs to the EU but also will have significant political implications, specifically with regard to the efficiency of decision- making and the distribution of power in the EU’s leading decision-making body, the Council of Ministers. However, neither such political concerns, nor the economic costs of Turkey’s accession to the EU will be addressed in this book. Our aim is instead to map the progress made to date in the economic transformation of Turkey since the start of the negotiations with the EU in October 2005. Turkish economy is unarguably going through a significant reform process, much of it away from media coverage. The successful economic transformation of Turkey is only one part of its membership obligations, as fulfilment of the EU political criteria is a more treacherous task for Turkey. However, the success of economic transformation of Turkey has significant implications for political reform. Successful outcome of economic reforms can impact

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Introduction

political reform in two distinct ways: first success in economic reform can increase credibility and trust in the ruling elite and hence make it easier for them to implement political reform. Second, economic reforms, especially those that bring more transparency and increase competition in Turkey, may help not only reduce corruption but also discourage further politicization of economic decisions. More than five years after the launch of Intergovernmental Conference on 3 October 2005, out of 35 negotiating chapters, 13 chapters have been opened and one has been provisionally closed. Negotiations have been progressing slowly, to say the least. There are several reasons for the current impasse. First, due to the Cyprus problem, in December 2006 the EU decided not to open negotiations in eight chapters and not to close provisionally any chapters until Turkey fulfils its obligations under the Additional Agreement, i.e. extending the customs union to the Republic of Cyprus. Second, there have been increasingly ambiguous messages from the EU regarding Turkey’s membership since the start of the financial crisis. These political concerns are based on fears of the Union fragmenting as a result of Turkey’s accession, as well as apprehension of a different type– that of a massive migration that would result in job losses, among other things. Finally, Turkey itself has been going through a series of internal problems. Part of the slowdown in progress is due to reform fatigue given the significant number of modifications Turkey has undertaken. Together with the EU’s approach, there has also been a decline in EU support among Turkish citizens. However, despite all these issues the reform process in Turkey is still moving ahead. Turkish membership to the European Union has generated significant debate among politicians, policy-makers and academics. Most debates have focused on issues related to both economic and political factors such as Turkey’s population size, economic poverty, structure of the economy, human rights and democracy – linked closely to the Kurdish question, the Armenian question, the Cyprus issue; conflicts with the EU member neighbour, Greece – and the geopolitical importance of Turkey.1 In most cases, economic issues are inextricably linked to political ones. Turkish membership is a highly political issue over which the EU members have remained divided, despite the fact that accession negotiations between Turkey and the EU began on October 3, 2005 with a unanimous decision by the European Council. It is often believed that the Turkish membership 1.

See Senem Aydin Duzgit, Discursive Construction of European Identity in the EU’s Relations with Turkey, Unpublished PhD Dissertation, Vrije Universiteit Brussel, October 2008.

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carries more significant challenges for EU policy-making and integration than for other countries. This volume therefore comes at a time when there is a particular need to better understand the Turkish accession to the EU and the economic issues surrounding it. This volume is also timely in its consideration of the possible role that the Turkish economy could play in the EU, providing new momentum for the economically turbulent and crisis ridden integration process. The purpose of this volume is threefold. First, it seeks to examine the economic dimension of the EU-Turkey enlargement negotiations process. Second, it aims to assess the current strengths and weaknesses of the Turkish candidature by investigating how well Turkey has responded to the EU’s economic conditionality. Third, it purports to discuss the implications of the accession negotiations for various sectors of the Turkish economy. These are all daunting tasks, and ones which are particularly important in the view of the economic developments in the European markets since 2008. It is also worth mentioning that the Turkish economy is doing comparatively well, having become the 16th largest economy in the world despite some structural problems in terms of regional development, rigid labour markets a large informal sector, Turkey has displayed a dynamic market and steadily growing economy. According to a 2011 OECD report, even though Turkey was directly affected by the global financial crisis it has still shown considerable resilience due to the reforms implemented after the 2001 banking crisis. According to Gonenc (2011) Turkey is in fact the only OECD country whose credit rating was actually upgraded during the crisis. Because this volume’s primary purpose is to reveal the economic dimensions of the Turkish-EU relations, it could be seen as complementary to the abundance of rigorous literature on the political dimensions of Turkey’s relations with the EU and the on-going accession process already circulating in academic circles.2 It is important to point out here that the 2.

See Meltem Muftuler-Bac and Yannis A. Stivachtis (eds.), Turkey-European Union Relations: Dilemmas, Opportunities and Constraints (Lanham, MD: Lexington Books, 2008); Esra LaGro and Knud Eric Jorgensen (eds.), Turkey and the European Union: Prospects for a Difficult Encounter (New York: Palgrave, 2007); Harun Arikan, Turkey and the EU: An Awkward Candidate for EU Membership? (Aldershor: Ashgate, 2003); Meltem Muftuler-Bac, Turkey’s Relations with a Changing Europe (Manchester: Manchester University press, 1997); Ali Carkoglu, Turkey and the European Union: Domestic Politics, Economic Integration and International Dynamics (London: Routledge, 2003); and Roland Dannreuther (ed.), European Union Foreign and Foreign and Security Policy: Towards a Neighbourhood Strategy (London: Routledge, 2004).

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Introduction

on-going negotiations process is highly political with both the media and policy-makers’ attention directed towards the implementation of political reforms and the protection of individual rights and liberties. This political dimension is, of course, essential in enabling Turkey’s accession to the European Union. Equally important, however, are the economic implications of Turkey’s accession, as a newly acceding country must have a fully functioning market economy. This seems to be the case with Turkey, as the European Commission in its 2006 Progress Report clearly stated that “Turkey has a fully functioning liberal market economy”.3 The question that needs to be addressed, then, is the degree to which this fully functioning economy in Turkey would fit into the EU’s economic dynamics. As noted above, the Turkish economy is highly competitive and ranks as the 16th largest economy in the world. Its relative importance in the region where it is located is rapidly increasing with its extensive trade and investment ties in the Middle East and Caucasus countries. It has become the largest trading partner for some of its neighbours. The Turkish economy has the highest economic growth among all OECD countries as well as a young population that boosts its labour force. Nevertheless, it must be noted that there are still wide regional disparities and an inefficient agricultural sector. Even though it is a large, dynamic economy, the distribution of that wealth is problematic, with significant variation in its regions. The economic implications of Turkey’s membership of the EU need to be evaluated in terms of its possible material benefits to the EU, on the one hand, and to Turkey itself, on the other, in terms of its possible material costs for both sides. There are several studies that examine the costs and benefits of Turkey’s membership to the EU.4 However, there are no studies to the best of our knowledge that examine the costs and benefits for Turkey. This is precisely why this volume has been assembled at this time: in order to examine Turkey’s accession to the EU from Turkey’s perspective and to assess the main challenges ahead. The major downturn of the global economy experienced in 2008 makes this study all the more timely. The European economy’s very ability to sustain growth and competitiveness might now be at stake. Moreover, as we have mentioned above, the fact that Turkey was not affected by the global economic crisis to the extent that some EU members were, is in itself quite revealing. 3. 4.

Commission of the European Community (CEC), 2006 Annual Progress Report on Turkey, p. 4. See Kemal Dervis, Michael Emerson, Daniel Gros, Sinan Ulgen,The European Transformation of Modern Turkey, 2004, Center for European Policy Studies.

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It is during the negotiations process itself that the economic implications of Turkey’s accession emerge and therefore need to be addressed. That is why this volume addresses some areas that are crucial to the outcome of the EU-Turkish accession negotiations. While not all economic obstacles and challenges can be taken on here the volume is nevertheless designed to provide a clear picture of what lies ahead, making a number of key contributions to the field. First, the analysis provided in the book enables the readers to grasp the economic impact of the EU in transforming the Turkish economy and in doing so contributes to the literature on conditionality. Since one of the main aims of the integration process has been to foster economic growth, interdependence, and dynamism among its members as well as with its associated countries, the volume gives a glimpse as to how this goal has been achieved in the case of Turkey. Second, the volume contributes to the literature on Turkish economy from the perspective of integration.

The Structure of the Book The book is divided into ten chapters. In Chapter 1, Yannis A. Stivachtis provides an historical account of the development of EU-Turkish economic relations from the time of Turkey’s application to the thenEuropean Economic Community in 1959 until 2009. In Chapter 2, Stivachtis examines the efficacy of the two mechanisms that have been devised to assist the integration of the EU and Turkish economies, namely the Customs Union and the Accession Partnership, both of which enabled Turkey to make significant progress towards economic integration into the EU. He shows that Turkey has undertaken significant measures in reforming structural policy following the EU guidelines. Consequently, Turkey is regarded as a functioning market economy with all the hallmarks necessary for coping with competitive pressure and market forces within the Union. However, despite its overall success, the Customs Union has faced a number of problems stemming from the unfulfilled commitments on both Turkish and the EU side. In Chapter 3, Ìlke Civelekoğlu investigates the extent to which current Turkish economic policies support and advance the target of EU membership. In so doing, the author looks at the economic policies of the Adalet ve Kalkinma Partisi – Justice and Development Party (AKP) to assess the prospects and constraints Turkey faces in meeting the EU’s economic criteria. Civelekoğlu claims that coupled with the tutelage of the IMF, the EU’s Copenhagen economic criteria have significantly influenced 12

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Introduction

the Turkish polity in the 2000s. She points out that although the EU’s economic criteria have fallen short of fully eliminating discretionary allocations they have nevertheless substantially reduced opportunities for patronage politics in Turkey. In Chapter 4, Yakup Beriş, Aslı Gürkan and Fuat Andıç analyze how the recent law and regulatory changes in the EU affect Turkey in terms of how the latter is able to provide greater public sector transparency, its relationship within the market, and the way in which it interacts with its citizens. In this chapter, the authors examine the public sector governance reforms in Turkey and propose a set of criteria that could be used to evaluate further and more comprehensively the progress that Turkey has made in this direction. They argue that the EU acquis and relevant progress reports provide only a fragmented approach to tracking public sector reforms, thereby falling short of providing them with strategic guidance. In Chapter 5, Selen Sarısoy Guerin examines the prospects of Foreign Direct Investment (FDI) in Turkey during the accession negotiations process. She examines Turkey’s FDI performance in comparison with the most recently admitted EU member states, particularly Poland, due to its comparable size of both in population and economy. She demonstrates that FDI in Turkey was characterized by chronic underperformance throughout the 1980s and 1990s despite an overall increase of FDI in other developing countries throughout the latter period. However, she argues that Turkey’s poor FDI performance has improved dramatically since the early 2000s, having recently caught up to its Eastern European competitors in many respects within the past few years and explains the major causes of this turnaround. The author attributes this millennial turnaround to three major factors: first, the election of a new political regime committed to FDI-favourable legislative reform (the most important piece of which has been a new FDI law); second, the support of large supranational organizations, especially the IMF and the EU; and lastly a major wave of privatization. In Chapter 6, Feray Erselcan examines specific challenges facing Turkey during the on-going process of EU accession, particularly focusing on issues pertaining to Turkey’s labour market. Erselcan begins by giving a brief account of the history of EU-Turkish integration, particularly focusing on the relationship between their respective labour markets. The author next identifies several recent trends that present unique challenges for Turkey in the accession process. These include a rise in the working age population, which has surpassed job growth, leading to high unemployment and high levels of informal/undeclared work, a low rate of

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female participation in the labour market and a sectoral shift from agricultural activities to manufacturing which has resulted in high rates of urbanization. Erselcan then discusses critically the policy recommendations made by the OECD and World Bank, who have suggested that Turkey relax government employment protections that raise the cost of labour, and also provide education and training programs to tackle issues of unemployment and informal employment. In Chapter 7, Senem Besler and H. Zümrüt Tonuş investigate the competitiveness of Turkish Small and Medium size Enterprises (SMEs) during the EU-Turkey accession negotiations and suggest that Turkey has made considerable progress in harmonizing with the relevant EU acquis. The authors explain the historical and present significance of SMEs within the Turkish economy, providing justification for investing in their efficiency and prosperity. They argue that with the Customs Union process begun in 1996, Turkish SMEs entered an intense competitive environment after funds and customs in practice were abolished in the industry sector. They point out that a comparison between the Turkish SMEs and the SMEs in EU countries reveals important differences in terms of competitive strength, scale, capital size, technical infrastructure, training and entrepreneurial spirit. In Chapter 8, Mahmut Tekçe examines the implications of Turkey’s integration into the EU for Turkish agriculture, which is a sector of vital importance for Turkey given its economic size and social importance. He argues that because Turkish agriculture has been neglected for a long time and most governments consider agricultural policies to be tools of populism instead of leaning on long-term structural reforms, this sector is not competitive vis-à-vis the European Union. As a result, it is very difficult to bring Turkish agricultural policies in line with the EU acquis. The author therefore calls for a new approach to addressing the problem of competitiveness by introducing structural changes accompanied by a largescale, stabilized rural development policy which aims to increase the competitiveness of economic activities in rural areas, to create alternative employment opportunities these areas, and to protect the environment and the rural inheritance. In Chapter 9, Sema Kalaycioğlu seeks to analyze the role energy plays with regard to Turkey and its relationship with the European Union. Kalaycioğlu argues that energy constitutes a significant security issue and that the dependency of many countries on energy is crucial to the continuity of economic activities. Thus, securing energy transports for the EU makes it a crucial matter because the EU imports most of its electricity

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Introduction

elsewhere. Kalaycioğlu points out that Turkey’s enhanced strategic location enables the country to provide the EU countries with abundance of energy at lower prices, and at the same time enhance its relationship with the European Union. Finally in Chapter 10, Andrea Renda, Emrah Arbak and Selen Sarisoy Guerin argue that because of its large and young population, Turkey’s communication sector represents an area that could aid the country’s growth. They further claim that by modernizing Turkey’s telecommunications sector, there could be improvements in consumer welfare as well as lower prices and increased innovation. The authors explore the current state of development of the Turkish telecoms market, comment on the best strategies for Turkey to align with the EU acquis, and look at the regulatory options available in the audio-visual services sector. Finally, they point out possible reforms for Turkey to help with issues that were highlighted, such as: streamlining of primary legislation, proactive approach towards liberalization, bringing the regulatory framework in line with the EU, reducing taxes in the area of mobile and internet services, and, finally, calling for better regulation. The chapters in the volume all address critical elements of Turkish-EU relations and the accession process from different angles, thus contributing to the emergence of an integrative picture. Equally important, the chapters provide important empirical data and doing so, enable the theoretical propositions to be tested and verified. In addition, a deeper understanding of the EU’s impact on the Turkish economy on the one hand, and the Turkish economic challenges on the other, are important in assessing the possible role that Turkey might play in the European economy for the future. These are critical contributions especially if one considers the longterm implications of the financial crisis on the European integration process. The volume does not directly address the question of the impact of Turkey’s accession on European economy but prepares the background against which these questions could be addressed in future studies.

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1. From Association to Accession Negotiations: EU-Turkish Economic Relations, 1959-2009 Yannis A. Stivachtis

Turkey’s economic relations with the EU have had a long, tumultuous history. To understand why, this chapter provides a historical account of the development of EU-Turkish economic relations over the last fifty years. To do so, the chapter is divided into four sections. The first section covers EC-Turkish economic relations from the time of Ankara’s application for Associate Membership in the European Community (EC) in 1959 to the end of the 1960s. This period coincides with the ‘preparatory stage’ of the Association Agreement. The second part discusses developments in ECTurkish relations from the signing of the Additional Protocol (1970), which signifies the beginning of the ‘transitional stage’ of the Association Agreement, to the resumption of formal relations between the two sides in 1986. The third section focuses on the development of EC/EU-Turkish relations from the time of Ankara’s application for EC/EU membership in 1987 until 1998, while the last section is devoted to EU-Turkish relations from the time of Turkey’s acceptance as a candidate country in 1999 to the end of 2009.

EC-Turkey Economic Relations, 1959-1969 Relations between the EU and Turkey officially began on 31 July 1959 when Turkey applied for an Associate Membership in the European Community. In response to this request, the Ankara Agreement was signed

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on 12 September 1963 and came into force on 1 December 1964.1 The strengthening of EC-Turkish relations can be viewed as part of a political strategy aimed at ensuring that Turkey remains within the Western community of states. This political strategy fit the interests of both the Turkish and Western political and economic elites during of the Cold War. Thus, after having become a member of the Council of Europe in 1949 and of NATO in 1952, membership in the EC was another step towards strengthening relations between Turkey and the West relations. Article 28, the Ankara Agreement stated that “when both parties are ready to assume the obligations arising from membership, Turkey would become a member”,2 thus establishing the legal basis for Turkey’s eligibility for EC/ EU accession. In order to prepare both Turkey and the EU for the former’s accession, the Ankara Agreement specified the steps that should be undertaken in order to promote collaboration between the two parties.3 These steps included, first, the future establishment of a Customs Union (CU); second, the provision for financial assistance in order to promote stability within the Turkish economy; and third, the establishment of three institutions, namely the Association Committee, the Association Council, and the Joint Parliamentary Assembly. These institutions were created as the necessary tools for managing this process and for making decisions based on the Ankara Agreement. The Association Council was to meet regularly and discuss the work of the Association. This institutional framework was later expanded with the implementation of the final phase of the Association Agreement and the signing of the CU Agreement (CUA) in 1995. 1.

2.

3.

For the historical development of Turkey-EU relations see Meltem Muftuler-Bac and Yannis A. Stivachtis (eds.), Turkey-European Union Relations: Dilemmas, Opportunities and Constraints (Lanham, MD: Lexington Books, 2008); Esra LaGro and Knud Eric Jorgensen (eds.), Turkey and the European Union: Prospects for a Difficult Encounter (New York: Palgrave, 2007); Erdem Basci, Subidey Togan, and Jürgen von Hagen, Macroeconomic Policies for EU Accession (Cheltenham: Edward Elgen Publishing, 2007); Joseph Joseph (ed.), Turkey and the European Union (New York: Palgrave, 2007); Bernard Hoekman and Subidey Togan (eds.), Turkey: Economic Reform and Accession to the European Union (Washington D.C.: World Bank, 2005); Harun Arikan, Turkey and the EU: An Awkward Candidate for EU Membership? (Aldershor: Ashgate, 2003); Ali Carkoglu, Turkey and the European Union: Domestic Politics, Economic Integration and International Dynamics (London: Routledge, 2003); and Roland Dannreuther (ed.), European Union Foreign and Security Policy: Towards a Neighbourhood Strategy (London: Routledge, 2004). Ankara Agreement, “EU-Turkey Relations”, Euractiv.com, September 23, 2004, [http://www.euractiv.com/en/enlargement/eu-turkey-relations/article-129678] accessed on 4 March 2008. Ibid, p. 7.

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From Association to Accession Negotiations: EU-Turkish Economic Relations, 1959-2009

The Association Agreement sought to achieve two major objectives: first, to boost Turkey’s economy; and, second, to regulate the free movement of goods and services between Turkey and EC Member States, the free movement of Turkish workers, and to oversee the financial aid provided to Turkey by the European Community. The cornerstone of the Association Agreement was the establishment of a CU for industrial products in three stages. The CU would align Turkish economic policies with the EC’s, thereby facilitating its becoming an EC Member State. The CU meant that when it was completed, there would be no customs tariffs between the two parties, and a Common Customs Tariff (CCT) for third parties wishing to trade with Turkey or the EC/EU would be established. Turkey would then have acquired a reliable, stable trading partner through the partnership. The process was to happen through three phases, a preparatory stage, a transitional stage, and a final stage.4 However, the CU did not come to full fruition until 1995, a time when Turkey’s economic status was at best unstable. The preparatory stage would allow Turkey to prepare its economy to start the process of adjusting to being in accordance with the European Community. This stage began in 1964 and was completed in 1970. The transitional stage, beginning with the signing of the Additional Protocol in 1970 and was concluded with the CUA of 1995, would implement the policies of conforming to EC standards and measures. The transitional stage began with anticipating the establishment of a gradual CU that would be built upon the progress Turkey made. This CU would cut across all the sectors of the Turkish economy with the exception of agriculture, which had and still has many structural changes to overcome until it would be more in line with EC policies and procedures.5 The final stage began when the CUA was signed on 6 March 1995. The Association Agreement foresaw that with the realization of the CU, the final stage of the Association would be entered once Turkey had completed its preparation for accession, and end with Turkish accession. The Ankara Agreement also looked into other areas to bring Turkey onto the path toward integration. Since the Rome Treaty of 1957 established the notion of four freedoms (freedom of movement of goods, services, capital and labour), the Ankara Agreement naturally envisioned similar freedoms. The Additional Protocol, signed in 1970 between the EC and Turkey, 4. 5.

Ankara Agreement, p. 5. Allison M. Burrell and Arie J. Oskam, Turkey in the European Union: Implications for Agriculture, Food and Structural Policy, Cambridge, MA: CABI Publishing, 2005, p. 154.

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included a clause for the freedom of movement for labour to be realized on 1 December 1986. This clause shows how far the EC saw Turkish integration at the time.6 It was agreed that in order to be a part of this Agreement, all Member States would be required to maintain a proper balance of payments and a strong currency, and to implement nonprotectionist policies within their boundaries. It also encouraged investment in Turkey by EC Member States, thereby inferring the need for Turkey’s shift towards liberalization and integration into the world economy.7 Finally, the Association Agreement set up financial support for Turkey through Financial Protocols. It established the loan process for projects Turkey hoped to undertake prior to the transitional stage. These loans would be granted on the basis of potential for economic growth, and all loans would be subject to special interest rates, payments, and timetables for repayment. Throughout the 1960s the Turkish Government felt that the state should invest in private industries that the corporations involved did not have the means to support fully. Contradicting the nonprotectionist policies that the Ankara Agreement stipulated, the Turkish Government had prepared many Five Year Plans in order to set goals and have a planned economy that would identify which private industries state would receive investments. The Turkish Government saw no contradiction between the freedom of the private sector and the intervention of the public sector, as it was seen as a way of allocating scarce resources as well as supporting industries that could not be sustained through private enterprise alone. The Third and Fourth Planning Periods constituted proof of this mixed economy, as the state gave the private sector major incentives for reaching unattainable goals set by the state. Once a plan was established, state enterprises were required to meet the goals, while the goals were seen as a guide for the private sector. This caused a completely inward-looking economic policy that included import substitutions in order to prop up markets within the state. While this did spur economic growth, it also caused serious inefficiencies in many sectors of the economy such as agriculture and industry. The plans were contradictory in that they attempted to reduce foreign dependence while at the same time require growth that could not be supported by internal enterprises alone. As Turkey encouraged self-sufficiency, foreign investment was also low, leading to a lack of technology and resources. Inflation increased 6. 7.

Ankara Agreement, p. 9. Ankara Agreement, p. 21.

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throughout the 1960s and 1970s, leading to monetary and economic stress.8 One of the challenges facing the Turkish Government was the intervention of the International Monetary Fund (IMF) with the purpose of devaluing the Turkish Lira. Inflation had caused the Lira to be overvalued, making exports expensive and imports cheap, furthering an already imbalanced balance of payments. Even with this corrective measure, inward-looking policies continued, causing even greater inefficiency. With so much support from the state, private industries felt no need to improve technology or increase competitiveness with the rest of the world, causing a spiral affect that was doomed to fail. As Turkey started to default on its debt payments, a financial and economic crisis began.9

EC-Turkey Economic Relations, 1970-1986 To confront this economic crisis, Turkey and the EC agreed on the nature of the new measures that needed to be taken in order to enable Turkey to adhere to the targets of the Ankara Agreement. As a result, the Association Agreement was supplemented by an Additional Protocol, which was signed on 23 November 1970 and came into force on 1 January 1973. The Additional Protocol provided practical guidelines for the implementation of the Ankara Agreement and established a timetable of technical measures to be taken in order to attain the objectives of the Customs Union within a period of twenty-two years.10 In this way, the Additional Protocol emphasized the financial aspects of Turkey’s economy and infrastructure. Meanwhile, on 1 January 1971, the Additional Protocol’s commercial adjudications entered into force with a ‘Temporary Agreement’. As a result, the Additional Protocol abolished the tariffs and duties on Turkish imports to the EC, while at the same time establishing the gradual abolishment of the same tariffs and duties for EEC imports into Turkey by the time the CU was set up. The Additional Protocol also established the parameters for the IMF’s involvement in regulating Turkish currency in relation to those of the EC Member States’, establishing an austerity program, and re-evaluating some 8.

Zulkuf Aydin, The Political Economy of Turkey, Ann Arbor: Pluto Press, 2005, pp. 3536. 9. Aydin, The Political Economy of Turkey, p. 37. 10. “Agreement Establishing an Association between the EEC and Turkey”, Official Journal of the European Communities (OJEC), No C 113/2.24.12.1973, 1973, pp. 2-8.

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of Turkey’s debts. As Turkey defaulted on some of its payments, its debt had to be rescheduled and some short-term debt was transformed into long-term debt. Moreover, the Additional Protocol allowed Turkey to expand on the list of liberalized products that it would be able to export to the EEC by 1976. The purpose of the new policies was to spur growth in Turkey’s markets, infrastructures, and banking practices in order for Turkey to be ready to enter the customs union when it came to the final stage.11 On 21 May 1973, negotiations between the EC and Turkey related to the EC enlargement were concluded and on 30 June 1973 the ‘Complementary Protocol’ of the Enlargement Agreement was signed in Ankara. On 1 January 1974, the 1971 ‘Temporary Agreement’ came into force, which was directly related to the Complementary Protocol. The oil crisis of 1973, in conjunction with the world-wide recession, created significant problems with the Turkish economy. Consequently, during the first years of the transitional phase there were concerns that the Turkish industry was not ready to commence reducing custom duties. In 1978 Ankara therefore decided to present a plan whose purpose was to revise the Association Agreement. This plan asked for a five-year period during which Turkey could meet its tariff obligations. While Ankara had taken this decision to protect the Turkish economy, the EC instead saw it as a conscious choice to decelerate progress towards full membership.12 Moreover, the inability of Turkish coalition governments to cooperate, and the political pressures stemming from the Turkish military intervention in Cyprus in 1974, led the Turkish Government to use the ‘Self-Protection Clause’ in the Ankara Agreement to unilaterally freeze its association with the EC in 1978. As a result, EC-Turkish relations entered into a rather difficult phase. The Turkish political and economic instability during the 1970s culminated in a military coup d’état in 1980. Following the military coup, the Association Council decided to cancel the customs duties applied to almost the entire agricultural productions in Turkey until 1987, as well as block the Fourth Financial Protocol. In response to the European Parliament’s request, the relations between the EC and Turkey were de facto suspended on 22 January 1982.

11. Aydin, The Political Economy of Turkey, p. 40. 12. H. Saduman Okumus, Economic Aspects of Turkish-European Union (EU) Relations, p. 65.

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In the early 1980s, Turkey faced significant economic problems including heavy foreign debt, which had been accumulating since the 1960s. It is for this reason that Turkey lagged behind other Mediterranean countries in its relations with the European Community. During this period, the World Bank and the IMF sought to intervene further in order to stabilize the Turkish economy and the monetary system. A restructuring of the monetary and economic policies led to a far stricter monetary system as well as a shift in economic thinking. Because of the failure of the planned economy, liberalization seemed the only way to spur the economy forward. The walls that kept Turkey looking inward for growth were dismantled, as tariffs were lowered and the state started the process of reducing investment in the private realm. As the Lira continued to be devalued and, as a result, wages dropped, the export market improved. However, this just further encouraged private investors to not improve technology nor correct the infrastructure in place, making long-term strategies impossible to plan for. The ambitious goals of the 24 January 1980 economic reforms, of transforming the Turkish economy from an inward looking one to an externally-oriented one, thus spurred a wave of economic liberalization that same year. The policies of the Turkish Government brought the country back on track towards liberalization, but this was a long road, and as soon as relations resumed with the EC, it became even more important that Turkey be further integrated into the European market.13 In fact, relations with the EC were gradually normalized after the restoration of a civilian government in 1983. The normalization of the relations and resumption of the Association Agreement took place on 16 September 1986 when the ECTurkey Association Council convened. It is worth noting that during these critical years, Greece became a full member of the EC in 1981, as did Spain and Portugal in 1986. Therefore, the EEC Mediterranean enlargement was completed without Turkey being part of it. However, the situation would change quickly as Turkish political and economic issues acquired increasing weight within EEC circles. For example, there were significant concerns regarding constraints on Turkish exports, the free movement of Turkish workers within EC Member States, and the decline in trade volume between EC and Turkey.

13. Aydin, The Political Economy of Turkey, p. 44.

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EC/EU-Turkey Economic Relations, 1987-1999 In 1986, Ankara called for the reactivation of the Association Agreement. However, judging that the Association Agreement was not fulfilling the goal of bringing Turkey closer to the European economies, the Turkish Government decided to apply for full membership on 14 April 1987. On 21 December 1988, Ankara submitted an accelerated schedule to the EC in order to demonstrate how Turkey would implement its obligations, which had been suspended back in 1978. The European Commission examined the Turkish application and adopted its opinion on 18 December 1989.14 The Commission concluded that “it would not be useful to open accession negotiations with Turkey straight away”. The reasons for rejecting Turkey’s application were both political and economic. Nonetheless, the Commission noted Turkey’s eligibility for full membership in line with the 1963 Ankara Agreement. Economically speaking, there were many legitimate reasons for the Commission to reach such a decision. While the Turkish infrastructure had improved, and exports had increased and diversified, there was still much to be done to bring Turkey up to the level of even the newest members of the Community. In the Commission’s opinion, Four kinds of difficulties will have to be overcome: Very major structural disparities, in both agriculture and industry; Macro-economic imbalances, which have worsened this year; High levels of industrial protectionism; A low level of social protection.

Data showed that per capita GDP in Turkey was at a third of the Community average, with over 50 per cent of the population still employed in an unproductive agricultural sector. The rate of inflation continued to remain very high, along with an elevated high rate of unemployment. These factors combined led to a low average of income levels, making it difficult for liberalization, privatization, and investment to occur. In this way, state-supported markets continued to run contrary to the values and policies of the Community. Since these challenges constituted long term issues, the Community could not in good faith put Turkey on the path towards membership while it continued to be too far askew from the Community’s platform. However, in its Opinion, the European Commission mentioned that further developments should be encouraged and that they would continue to support Turkey’s path of economic 14. Commission of the European Communities. “Commission Opinion of Turkey’s Request for Accession to the Community”, Brussels, December 20, 1989.

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development. On the political level, the Commission also noted “the negative effects’ of the dispute between Greece and Turkey and “the situation in Cyprus”. Nevertheless, the Opinion stated that the Commission “does believe, however, that the Community should pursue its cooperation with Turkey, given that country’s general opening towards Europe.” The Commission also considered that “the Community has a fundamental interest in intensifying its relations with Turkey and helping it to complete as soon as possible the process of political and economic modernization.”15 Thus, even though it rejected the Turkish application for EEC membership at the time, the Commission agreed that further cooperation was needed in order for Turkey to be able to become a member in the future. On 5 February 1990, the European Council adopted the general content of the Commission’s Opinion and asked it to make detailed proposals developing the ideas expressed in the Opinion on the need to strengthen EEC-Turkey relations. In response to the Council’s request, on 7 June 1990 the Commission adopted a set of proposals (the ‘Matutes Package’) including completion of the CU, the resumption and intensification of financial cooperation, the promotion of industrial and technological cooperation, and the strengthening of political and cultural ties. Although some parts of this package were not approved by the European Council due to Greece’s veto of the financial protocols, the road to the CU, was finally opened. On 30 July 1994, the European Commission ascertained the principles of the CU as stated in the Ankara Agreement, while on 6 March 1995 the ECTurkey Association Council decided to move onto the final stage of the Turkish Association with the EU through the realization of a Customs Union. The creation of a CU for industrial products prior to a country’s accession to the EU was a novelty for the European Union. By being the sole country with a CU prior to its accession, strong hopes that Turkey’s accession would be only a few steps away were raised. Nevertheless, the developments in the EU’s enlargement process in 1997 quickly shattered this illusion. The CU, however, not only decreased the tariffs for industrial products in Turkey that originated from the EU members but also enabled the adoption of the EU’s Common External Tariff by Turkey for products originating from third parties. Therefore, the CUA was not only important for its

15. Ibid.

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economic ramifications but also had significant political implications for Turkey’s relations with the European Union. In line with the CU, the European Council also decided to step up cooperation in several sectors, to strengthen institutional cooperation and to intensify political dialogue. This was particularly important since with the Maastricht Treaty, the European Parliament (EP) acquired new powers. Under the assent procedure, all economic agreements finalized with third parties had to be approved by the European Parliament. This, in turn, increased the EP’s role in countries such as Turkey, and increased the relevance of the political concerns for economic agreements. On 13 December 1995, the EP gave its assent to the CU, and consequently, the decision on the final phase of the Association came into force on 31 December 1995 following Decision 1/95 of the EC-Turkey Association Council. Even though Decision 1/95 essentially covered manufactured products, discussions also began between the Commission and Turkey in order to extend the Decision’s scope to services and procurement. On the institutional front, the CUA set up a consultation body, the Customs Union Joint Committee, which had begun to meet regularly to discuss bilateral trade issues. This new institution added to the already existing institutions for the Association between the EC and Turkey that had been established with the Ankara Agreement in 1963, the Association Committee, the Association Council and the Joint Parliamentary Commission. The 1963 Association Agreement had set as its objective the future accession of Turkey to EC/EU. Article 28 of the Ankara Agreement clearly stated that “When both parties are ready to assume the obligations arising from membership, Turkey will accede to the EC.” The final stage of the Association Agreement cut across all markets, excluding basic agriculture products, which were eventually included in 1998. The CU abolished tariffs between the EU and Turkey, and ensured that Turkey was in the process of establishing a common external tariff to third party countries as well as standardizing, testing, and ensuring that legislation was more in line with EU legislation. A financial package was also attached to the CU to help support Turkish liberalization and continue building its infrastructures. While the financial package never fully materialized, the EU encouraged this process in order to further deepen the ties between Turkey and the European Union. Although the CU did help further liberalize the Turkish economy, more economic and political reforms were needed in order to fulfil the political and economic conditions set by the Copenhagen Summit of 1993.

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According to the Copenhagen economic criteria, in order to become an EU Member, the candidate country must have a functioning market economy and the ability to cope with the competitiveness and standards of the EU markets. Turkey’s reforms to meet these qualifications were minimalist at best, mere attempts at just scraping by without actually undertaking a significant overhaul in the political and economic structures within the country. Economically, Turkey’s protectionist policies had not been fully eradicated, and the heavy government support hindered its ability to have a fully functioning market economy.16 On 15 July 1996 the General Affairs Council adopted the Regulation on the MEDA Programme for twelve non-EU Mediterranean countries, including Turkey. However, the European Parliament Resolution of 19 September 1996 called upon the Commission to “block, with immediate effect, all appropriations set aside under the MEDA Programme for projects in Turkey, except those concerning the promotion of democracy, human rights and civil society.” This resolution was primarily motivated by the human rights situation in Turkey. Following a meeting of the Conference of Presidents on 28 November 1996, a specific procedure was adopted by which the EP would provide its opinion on projects the Commission wished to finance under the MEDA Programme (at a cost of ECU 375 million for Turkey over the period 1996-99). Despite this procedure, by the end of 1997 commitments came to ECU 103 million. ECU 272 million programmed for the period 1998-1999. Following an incident between Greece and Turkey in January 1996 over a set of islets in the Aegean Sea, relations between the two countries became increasingly tense. As a result, the Association Council was unable to achieve unanimous agreement on the 1995 “Customs Union” financial regulation. Greece and Turkey agreed, however, to set up a “Committee of Wisemen” to examine the problems concerning the Aegean Sea. In the wake of the informal Foreign Affairs Council in Apeldoorn on 16 March 1997, the European Council, speaking at the meeting of the EUTurkey Association Council on 29 April 1997, reaffirmed Turkey’s eligibility for membership in the European Union. At the same time, the EU also stated that Turkey’s application would be judged according to the same criteria as the other applicant countries, and the Commission was called upon to draw up a communication on the future development of relations between the EU and Turkey in the context of the Customs Union. In addition, in line with the European Council’s decision of December 16. Aydin, The Political Economy of Turkey, p. 104.

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1997, the Commission was requested to provide Progress Reports assessing, along with the political criteria and the EU’s acquis communautaire, the state of the Turkish economy in light of the Copenhagen economic criteria. The European Commission’s Agenda 2000, adopted on 15 July 1997, provided an evaluation of the Turkish economic and political situation. This document stated that Turkey should make “a firm commitment to resolve a number of problems in the region and contribute actively to a just and lasting settlement of the Cypriot question.” Agenda 2000 considered that “the European Union should continue to support Turkey’s efforts to resolve its problems and to forge closer links with the EU”, referring on this point to the communication on the further development of relations with Turkey adopted by the Commission on 15 July 1997. The latter proposed a series of measures designed to consolidate the CU and to extend it to new fields (services and agriculture) and, finally, to step up cooperation in several sectors (environment, energy, telecommunications etc.), some of which came under the EU’s second and third pillars. The Commission also proposed helping Turkey in its efforts to improve the human rights situation. To do so, the Commission prepared a preliminary draft program proposing cooperation between the NGOs and Turkish authorities in support of the latter’s efforts to increase respect for human rights and the rule of law. The European Commission’s recommendation to the Council for the next wave of enlargement came with the adoption of Agenda 2000 of 15 July 1997, which provided an evaluation of all the then-current applicants’ economic and political situations along with Turkey. At the time, the EU was facing some thirteen applications from Central and Eastern European countries, including Turkey and Cyprus. Agenda 2000 recommended candidacy status for twelve of the applicants and noted Turkey’s eligibility for membership, but still maintained its status as an applicant country. This decision was due to Turkey’s poor relations with Greece over Cyprus, the state of human rights in the country, the lack of political reforms, and the quality of the Turkish economy. As the document stated, Turkey still needed to make “a firm commitment to resolve a number of problems in the region and contribute actively to a just and lasting settlement of the Cypriot question.”17 Agenda 2000 also indicated that “the European Union

17. Commission of the European Communities (CEC). Regular Report on Turkey’s Progress towards Accession. Brussels: CEC, 1998, p. 6.

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should continue to support Turkey’s efforts to resolve its problems and to forge closer links with the EU.”18 Thus, despite noting Turkey’s eligibility for membership, the fact that Turkey possessed the oldest Association Agreement with the EU, had already established a CU with the EU, and had submitted its membership application far before any other candidate country, Agenda 2000 did not recommend candidacy status for Turkey while it did do so for all the other applicant countries. In December 1997, the Luxembourg European Council confirmed at the highest level “Turkey’s eligibility for accession to the European Union.”19 As a result, the Council decided to draw up a strategy to prepare Turkey for accession by bringing it closer to the European Union in every field. This strategy should consist in development of the possibilities afforded by the Ankara Agreement, intensification of the Customs Union, implementation of financial cooperation, approximation of laws and adoption of the Union acquis; participation, to be decided case by case, in certain programmes and certain agencies.20

The European Council added that “the strategy will be reviewed by the Association Council in particular on the basis of Article 28 of the Association Agreement in the light of the Copenhagen criteria and the Council’s position of 29 April 1997.” In addition, the European Council listed a number of principles which would help strengthen ties with Turkey.21 Finally, the European Council also indicated that Turkey would be invited to participate in the European Conference on the same basis as the other applicant countries. At the Luxembourg Summit of 1997, Turkey was not granted the candidate status that other states were. As one would have expected, Turkey reacted negatively to the results of the European Council, considering that it had received discriminatory treatment compared with the other applicant countries.22 This was partly due to the fact that the CU had created the illusion for the Turks that membership was a few steps away. In response, Ankara stated that Turkey would not participate in the European Conference, would suspend political dialogue with the Union, and no 18. Ibid. p. 6. 19. Ibid. p. 7. 20. “Presidency Conclusions-Luxembourg European Council, 12-13 December 1997”, April 16, 2004, [http://ue.eu.int/en/info/eurocouncil/] accessed on 1 April 2008. 21. Paragraph 35 of the conclusions. 22. Jürgen Gerhards, Cultural Overstretch? Differences Between Old and New Member States of the EU and Turkey, London: Routledge, 2007.

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longer wished to discuss issues such as relations between Greece and Turkey, Cyprus, or human rights with the EU. According to Ankara, EUTurkey relations would henceforth be based on existing texts (the Association Agreement, the Additional Protocol and the Customs Union).23 In terms of strategy, Turkey eventually responded with its own document, entitled “A strategy for developing relations between Turkey and the European Union – Turkey’s proposals”, in which Turkey mostly reaffirmed what the EU had said in order to reach a consensus on how to move forward.24 As requested by the Luxembourg European Council, the Commission adopted on 4 March 1998 the initial operational proposals of the “European Strategy for Turkey”. Specifically, the Commission adopted a work programme to add substance to the CU and extend it to other sectors (services and agriculture) and to step up cooperation in the other areas referred to in its July 1997 communication on the further development of relations with Turkey. The Cardiff European Council of June 1998 welcomed the Commission’s communication of 4 March 1998 on taking forward the European strategy to prepare Turkey for membership. It agrees that, taken as a package, this provides the platform for developing our relationship on a sound and evolutionary basis. The European Council invites the Commission to carry forward this strategy, including the tabling of any proposals necessary for its effective implementation. The strategy can be enriched over time, taking into account Turkey’s own ideas. The European Council further invites the Presidency and the Commission and the appropriate Turkish authorities to pursue the objective of harmonising Turkey’s legislation and practice with the acquis, and asks the Commission to report to an early Association Council on progress made. Recalling the need for financial support for the European Strategy, the European Council notes the Commission’s intention to reflect on ways and means of underpinning the implementation of the European strategy, and to table appropriate proposals to this effect.

The Cardiff European Council also welcomed the Commission’s confirmation that it would submit its first Regular Annual Reports on each candidate’s progress towards accession at the end of 1998. In the case of Turkey, the European Council noted that “the report would be based on

23. “Turkey and EU”, Embassy of the Republic of Turkey, 2004, [http:// www.turkishembassy.org/index.php?option=com_content&task=view&id=57&Itemid=235] accessed on 4 March 4 2008. 24. “Turkey’s Pre-Accession Strategy”, Europa: Gateway to the European Union, Jan 6, 2005, [http://europa.eu/legislation_summaries/enlargement/ongoing_enlargement/ e40113_en.htm] accessed on 4 March 4 2008.

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Article 28 of the Association Agreement and the conclusions of the Luxembourg European Council”.25 In response to the Cardiff European Council’s request on 21 October 1998, the Commission adopted a communication on financial support for the European strategy. This communication included a regulation regarding the implementation of measures to intensify the EC-Turkey Customs Union (ECU 15 million for 1999-2001), as well as a regulation on measures to promote economic and social development in Turkey (ECU 135 million for 1999-2001). Meanwhile, Turkey continued to implement the Association Agreement and the CUA and contributed to the smooth functioning of the various joint institutions. In September 1998 the first technical discussions took place between the Commission and the Turkish authorities to decide on a work schedule and the arrangements for implementing the ‘European strategy’. These discussions confirmed the Turkish side’s willingness to cooperate on the proposals included in the ‘European strategy’.

EU-Turkey Economic Relations, 1999-2009 A turning point for Turkey’s relations with the EU occurred when, in its 1999 Progress Report, the European Commission recommended that Turkey’s status be transformed into a candidacy status since Turkey was now closer to meeting the political aspects of the Copenhagen criteria. The Commission’s recommendation to the Council was that Turkey be included in the enlargement process along with the other candidates and its accession be made based on the same objective criteria. The European Council in Helsinki that took place on 10-11 December 1999 welcomed “recent positive developments in Turkey as noted in the 1999 Commission’s Annual Progress Report, as well as its intention to continue its reform towards complying with the Copenhagen criteria. Turkey is a candidate State destined to join the Union on the basis of the same criteria as applied to the other candidate States.26

The decisions taken at Helsinki were an important watershed in EUTurkey relations as they highlighted the need for a pre-accession strategy 25. Article 28 states that “as soon as the operation of the Agreement has advanced far enough to justify envisaging full acceptance by Turkey of the obligations arising out of the Treaty establishing the Community, the Contracting Parties shall examine the possibility of the accession of Turkey to the Community”. 26. Regular Report on Turkey’s Progress towards Accession. Brussels: CEC, 2000, p. 7.

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in joining the EU.27 Building upon the existing European strategy, Turkey, like other candidate countries, was now benefiting from a pre-accession plan to stimulate and support its reforms. However, compliance with the Copenhagen political criteria was considered to be a prerequisite for the opening of accession negotiations. In March 2001, the EU Council of Ministers adopted the EU-Turkey Accession Partnership while at the same time the Turkish Government adopted a “National Programme” aiming at incorporating the EU laws into the Turkish legal system. In September 2001, the Turkish parliament adopted over thirty amendments to the Constitution in order to meet the Copenhagen political criteria for EU membership. On 16 June 2001, The Gothenburg European Council concluded that “good progress has been made in implementing the pre-accession strategy for Turkey” while the European Council of Laeken of December 2001 confirmed that Turkey had indeed moved towards complying with the Copenhagen criteria. In August 2002, in response to European demands to address the human rights situation in the country, the Turkish Parliament passed sweeping reforms to meet the EU’s human rights criteria. On 13 December 2002, the Copenhagen European Council resolved that if, on the basis of a report and a recommendation from the Commission in December 2002 the European Council decided that Turkey fulfilled the Copenhagen political criteria, the EU would commence accession negotiations with Turkey. In the meantime, EU leaders agreed to extend and deepen co-operation on the EC-Turkey Customs Union and to provide Turkey with increased preaccession financial assistance. In May 2003, the EU Council of Ministers decided on the principles, priorities, intermediate objectives and conditions of the Accession Partnership with Turkey, while in January 2004, Turkey signed a protocol banning the death penalty in all circumstances. In October 2004, the Commission issued its positive Progress Report on Turkey, recommending the opening of accession negotiations.28 As a result, on 17 December 2004, the European Council declared that Turkey was in fulfilment of the political aspects of the Copenhagen Criteria and decided to open Accession Negotiations with Turkey, which were officially commenced on 3 October 2005.

27. Meltem Muftuler-Bac and Lauren McLaren, “Enlargement preferences and Policy making in the EU: Impacts on Turkey”, Journal of European Integration, vol.25, 2003, pp. 17-30. 28. Regular Report on Turkey’s Progress towards Accession. Brussels: CEC, 2004, p. 2.

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The opening of accession negotiations automatically meant the starting of the screening process. Consequently, the analytical examination of the Turkish structure with respect to EU’s acquis began. The first chapter that was opened for negotiations, the Chapter on Science and Research, was provisionally closed in June 2006. Meanwhile, on 26 January 2006 the Commission revised the principles, priorities and conditions contained in the Accession Partnership with Turkey, a document that was revised once again on 26 February 2008 to take account of the new economic realities pertaining to Turkish accession. A turning point in the EU-Turkish relations occurred in December 2006, when the European Council decided that negotiations would not be opened on eight chapters relevant to Turkey’s restrictions regarding the Republic of Cyprus and that no chapter would be provisionally closed until the Commission confirmed that Turkey had fully implemented the Additional Protocol to the Association Agreement. Up to the end of 2009, negotiations were opened on eleven chapters (Science and Research, Enterprise and Industry, Statistics, Financial Control, Consumer and Health Protection, TransEuropean Networks, Company Law, Intellectual Property Law, Free Movement of Capital, Taxation, and Information Society and Media) one of which (Science and Research) was provisionally closed.29 One of the most important recent developments was Ankara’s acceptance to resume formal negotiations on an EU-Turkey readmission agreement. Meanwhile, the Council’s decision of December 2006 remains in force.

29. Regular Report on Turkey’s Progress towards Accession. Brussels: CEC, 2010, p. 5.

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2. Integrating the EU and Turkish Economies: The Customs Union and the Accession Partnership Yannis A. Stivachtis1

The purpose of this chapter is to examine the steps undertaken by both the European Union (EU) and the Turkish Government to integrate their economies to help facilitate Turkey’s accession to the European Union.2 To do so, this chapter is divided into three sections. The first section discusses the purpose, contents, and results of the Customs Union Agreement (CUA). The second section examines the effectiveness of the pre-accession strategy as a means for integrating the EU and Turkish economies, while the last part provides an assessment of the Accession Partnership.

The Customs Union Agreement On 6 March 1995, the EU-Turkey Association Council decided to move onto the final stage of the Association Agreement. The Association Council Decision came into force on 31 December 1995 with the realization of the Customs Union (CU).3 On the institutional front, the Decision set up a consultation body, the Customs Union Joint Committee, which was charged with overseeing the CU in order to ensure its stability and prosperity. A striking feature of the EU-Turkey Customs Union is that it has gone well beyond the standard definition of a customs union. Specifically, this CU 1. 2.

3.

The author would like to thank the anonymous reviewers for their invaluable suggestions regarding the material to be included in this chapter. On the issue of economic integration, see Ali Carkoglu and Barry M. Rubin (eds.), Turkey and the European Union: Domestic Politics, Economic Integration, and International Dynamics (London: Frank Cass 2003); Mehmet Ugur, The European Union and Turkey: An Anchor/Credibility Dilemma (Aldershot: Ashgate 1999); and Ziya Onis and Caner Bakir, “Turkey’s Political Economy in the Age of Financial Globalization: The Significance of the EU Anchor”, South European Society and Politics, 12(2), June 2007, pp. 147-64. See Alison Burrell and A.J. Oskam (eds.), Turkey in European Union: Implications for Agriculture, Food, and Structural Policy, Cambridge, MA: CABI Publishing 2005.

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not only involves the abolition of all customs duties and charges, prohibition of all quantitative restrictions between the parties, and implementation of a common customs tariff to the outside world, it also requires Turkey to harmonize its commercial and competition policies, including intellectual property laws, with those of the EU and, further, extends most of the EU’s trade and competition rules to the Turkish economy.4 The CU has also represented the culmination of Turkey’s liberalization efforts to catch up with the world economy, a process that started in early 1980s, since EU rules have great parallels with those of the World Trade Organization (WTO) and various other international regimes.5 According to the CUA, all industrial goods (except for products of the European Coal and Steel Community – ECSC) complying with the European Community (EC) norms could circulate freely between Turkey and the EU as of 1 January 1996. For ECSC products, Turkey signed a Free Trade Agreement (FTA) with the EU in July 1996, and, as a result, ECSC products have received duty-free treatment from the parties since 1999. As it was mentioned previously, the CU also required Turkey to implement the EC’s Common Customs Tariffs (CCT) on imports of industrial goods from third countries as of 1 January 1996, to adopt by 2001 all of the preferential trade agreements the EU had concluded by that time, and to apply commercial policy measures similar to those of the EU’s. As a result, Turkey was able to implement the EU’s CCT, and to sign Free Trade Agreements with the European Free Trade Association (EFTA) countries as well as with Israel, Macedonia, Croatia, Bosnia-Herzegovina, the Palestinian Authority, Tunisia, Morocco, Syria, Egypt, Albania and Georgia.6 Under these agreements, bilateral trade in industrial goods was to be liberalized at the end of a transition period, and mutual concessions were granted on selected agricultural and processed agricultural goods. As 4.

5.

6.

On the issue of Customs Union, and its implications for Turkey and its accession to the European Union, see Subidey Togan, “Effects of Turkey-EU Customs Union and Prospects for the Future”, Russian & East European Finance and Trade, vol. 36, 2000. See also Kemal Dervis, Michael Emerson, Daniel Gros and Sinan Ulgen, “The Economics of the Turkish Candidacy”, in European Transformation of Modern Turkey, Brussels: CEPS Publications 2004. On the issue of the Turkish economy liberalization see Subidey Togan, “Economic Aspects of the Accession of Turkey to the EU”, Intereconomics: Review of European Economic Policy, vol. 39, 2004. See also Nataliya Ulchenko, “Turkey-EU Economic Relations: Problems and Prospects”, in The Turkish Yearbook, vol. 18, pp. 139-51; and H. Saduman Okumus, Economic Aspects of Turkish-European Union Relations, Istanbul: Istanbul Commerce University. Subidey Togan, “Turkey: Towards EU Accession”, The World Economy, 2004.

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part of the CU, Turkey based its Generalized System of Preferences on those of the European Union. Finally, on the commercial policy side, Turkey adopted the EU competition law, established the Competition Board, adopted the EU rules on protection of intellectual and industrial property rights, and established the Patent Office. Turkey also took up the EU customs procedures (customs valuations, customs declaration, release for free circulation and duty-suspension arrangements).7 One especially important aspect of Turkey’s integration into European markets was its accession to the Pan-European Agreement on Cumulation of the Rules of Origin (PACO) in 1999. The objective of PACO, currently referred to as the pan-Euro-Mediterranean cumulation of origin, is to encourage Europewide industrial cooperation in diagonal cumulation, which allows parties in the agreement to treat imports from parties as local inputs.8 Thus, the EU-Turkey Customs Union has been a major instrument of Turkey’s integration into the EU and global markets, offering powerful tools for reforming the Turkish economy. The CU has credibly locked Turkey into a liberal foreign trade regime for industrial goods and holds a promise of Turkey’s participation in the EU internal market for industrial products. As a result, Turkish producers of industrial goods have become exposed to competition from imports and operate in one of the largest, if not the largest, free trade areas for industrial products in the world. In return, Turkish industrial producers have duty-free market access, unrestrained by the rules of origins and tariffs, to the European Economic Area, which has itself been extended to Mediterranean countries that signed the Barcelona Declaration, namely Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia and the Palestinian Authority of the West Bank and Gaza Strip. Parallel to the accession negotiations, the EU’s relations with Turkey under the Customs Union also deepened. From the beginning of the accession negotiations, the Customs Co-operation Committee met several times to discuss the practical implementation of the Customs Union. Initial negotiations for the extension of the EC-Turkey Customs Union to services, and the mutual opening of procurements markets, took place in October 2001 but the meeting did not produce any concrete results. In view of deepening the CU, the Commission invited Turkey to work 7.

8.

See S. Togan and V.N. Balasubramanyam, Turkey and Central and Eastern European Countries in Transition: Towards Membership of the EU, Houndmills: Palgrave Macmillan Ltd, 2001. On the issue of Turkey’s integration into the European market see Subidey Togan, “Opening up the Turkish Economy in the Context of the Customs Union with EU”, Journal of Economic Integration, vol. 12(2), 1997.

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together on an action plan in order to achieve the complete free circulation of goods. The Customs Union Joint Committee subsequently met in Brussels in December 2002 but, once again, the meeting did not produce any tangible results. Slow changes began to occur from 2003 onwards, and by the end of 2004, certain improvements in the functioning of the CU had finally taken place, and cooperation between the Commission and Turkey had progressed further, particularly in the area of technical regulation of products. However, the level of litigation remained significant, due to Turkey’s failure to honour several commitments made under Decision 1/95. As a result, an action plan for the widening and the deepening of the Customs Union could not be agreed upon. The negotiations on services and public procurement continued throughout 2003 and 2004, albeit at a slower pace. Turkey’s failure to align its government procurement legislation constituted, according to the European Commission, a significant hurdle for these negotiations. Similarly, there were some problems with respect to competition as was illustrated by the example the Association Council Decision on the implementation of competition rules: it could not be signed because the Turkish State Aids Monitoring Authority was not yet established. However, in the context of the CU, Turkey has managed to adopt a considerable amount of relevant European Community legislation, establish necessary institutions, and take strides to implement them properly.9 Specifically, Ankara has, thus far, managed to harmonize Turkish legislation and institutional framework with that of the EU in the following areas:10 앫 Elimination of all customs duties and equivalent charges on industrial imports from the EU, as well as all quantitative restrictions; 앫 Adoption of the Community’s common external tariff in trade with third countries; 앫 Adoption of measures that are substantially similar to those of the EU’s Common Commercial Policy, which include: common rules on imports and exports, management of quotas, protection against ‘dumped’ or subsidised imports, new commercial policy instruments, officially supported export credits, autonomous arrangements on textile imports, 9.

See B. Hoekman and S. Togan, Turkey: Economic Reform and Accession to the European Union (World Bank and Centre for Economic Policy Research, 2005). See also Dervis, Emerson, Gros and Ulgen, “The Economics of the Turkish Candidacy.” 10. “Harmonisation of Turkish Legislation and Practice with that of the European Union”, [http://www.tbmm.gov.tr/ul_kom/kpk/pre1.doc], pp. 2-3.

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앫 앫

앫

앫

앫

앫

technical barriers to trade and standardisation of foreign trade, preferential trade regimes of the Community, and inward and outward processing regimes; Progressive alignment of the Turkish agriculture sector with the principles of the Community’s Common Agricultural Policy (CAP); Adoption of customs provisions in line with those in force in the European Union. The new Turkish customs code, which has been in effect since early 2000, provided a completely revised and reinforced version of the previous one; Enactment of the EU competition rules and relevant legislation. Remarkable progress has been achieved since laws on protection of competition and consumers, as well as decree laws on patents, copyrights, trademarks and industrial designs have come into force. A competition board was established in 1997 to enforce the new set of laws, and to monitor the functioning of markets; Enactment of new rules governing state aid. A decree law has introduced new rules that are compatible with the system in force in the EU and with the relevant provisions of the WTO agreement on subsidies and countervailing duties. Subsidies through state resources in any form whatsoever which distort or threaten to distort competition are banned; Progressive adjustment of any state monopoly of a commercial character so as to ensure that no discrimination between EU and Turkish nationals exists in the conditions under which goods are produced or marketed; Establishment of effective cooperation between Turkey and the EU in the fields of standardisation, calibration, quality, accreditation, testing and certification. New rules parallel to EU’s industrial standards and conformity assessments have been enacted in addition to an accreditation institute which was already established in 2000.

Apart from these rather technical provisions related to the establishment and proper functioning of the CU, the package also comprised an Association Council Resolution providing for the intensification of cooperation between Turkey and the EU in such areas not covered by the CU as industrial cooperation, Trans-European networks, energy, transport, telecommunications, agriculture, environment, science, statistics, as well as matters relating to justice and home affairs, consumer protection, cultural cooperation, information, etc. These provisions also aimed at ensuring that the higher degree of integration achieved between Turkey and the EU through the CU not be solely limited to economic/trade matters and that the CU serve its purpose under the Ankara Agreement,

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namely constituting an important cornerstone towards Turkey’s accession to the EU. The third element of the CU package was the statement on financial cooperation which the EU delivered at the Association Council meeting at which Decision 1/95 was adopted. This financial cooperation, which amounted to 2.22 billion ECU over a five-year period, aimed at alleviating the burden which the opening up of the economy to EU competition would bring to Turkish economic operators on the one hand, and improving Turkey’s infrastructure and reducing the economic disparities between the parties on the other. However, the transfers envisaged within this framework have thus far failed to materialize due to the lack of political will on the part of the EU. In sum, the CU has concretised Turkey’s capacity to cope with tremendous competitive pressure, not only from the EU but also from third countries, as a result of considerable tariff reductions due to the Common Customs Tariff and Preferential Trade Agreements. In addition, Turkish State institutions have proven themselves administratively capable of developing drafts and enforcing newly adopted legislation. The great impetus gained during this process has also paved the way for further involvement in the acquis communautaire, which made it possible for Turkish authorities – indeed, compelled them – to study and classify Community instruments in other fields of integration. This has surely facilitated the work undertaken after the Helsinki Summit in the context of the requirement of the complete adoption and implementation of the acquis.

EU-Turkish Trade Relations The EC-Turkey Customs Union has contributed to a significant increase in bilateral EU-Turkey trade, which exceeded € 100 billion in 2008, thereby making Turkey the European Union’s seventh largest trading partner.11 Almost half of Turkey’s total trade is with the European Union. Ninety per cent (90 %) of Turkish imports consist of investment goods, semi-finished products or raw materials. The main categories of imports from the EU are appliances and machinery, transport equipment and chemicals. Turkey’s main exports to the EU are finished goods: textiles, agricultural products and foodstuffs.12 11. Commission of the European Communities (CEC), Regular Report on Turkey’s Progress towards Accession. Brussels: CEC, 2009, p. 5. 12. On the issue of EU-Turkey trade relations see Subidey Togan, “Turkey: Trade Policy Review”, The World Economy, 2005.

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However, despite the overall success of the CU, there have been a number of unfulfilled commitments on the Turkish side. The development of free trade between the EU and Turkey has been hindered mainly by nonelimination of Technical Barriers to Trade (TBT). Although almost fifteen years have passed since the formation of the EU-Turkey Customs Union, Turkey has still been unable, in spite of considerable effort, to eliminate TBTs between itself and the EU. Market access for foreign producers in several sectors, including alcoholic beverages has been prevented through non-tariff barriers and discriminatory treatment. Consequently, the EU has asked Ankara to remove all remaining restrictions on the free movement of goods, including restrictions on means of transport to and from Cyprus. A number of Turkey’s commitments to removing technical barriers to trade, such as import licenses, restrictions on import of goods from third countries, in free circulation in the EU, state aid, enforcement of intellectual property rights, and the use of safeguard measures still remain unfulfilled. In September 2002 the EU adopted definitive safeguard measures on imports of certain steel products, with erga omnes effect. These measures were the absolute minimum necessary to protect EU steel producers from serious harm due to surging imports resulting from US protectionism, culminating in the US safeguard measures on certain steel products in March 2002. In October 2002, a new anti-dumping investigation was initiated on imports of hollow sections and provisional measures were adopted in July 2003. On the EU front, here currently two anti-dumping measures in place against products originating in Turkey, specifically on the imports of steel ropes and cables, and of welded tubes and pipes.13 No new anti-dumping or anti-subsidy measures against Turkey have been imposed nor have new investigations been initiated since 2004. However, Turkey continued to operate its long-standing ban on imports of live bovine animals, beef and other animal products, an act which, in the view of the Community is not in line with Turkey’s international obligations, and which deprives EU exporters of important trade concessions granted under Decision No 1/98 of the EC-Turkey Association Council. In April 2005, Turkey decided to offer compensations to the EU for the market disruptions caused by the Turkish beef ban that remains in place. Discussions about adapting Decision 1/98, following the accession of the ten new Member States were concluded at the technical level, but were still subject to procedural delays on the Turkish side. As of 2009, no progress has been made on Turkey’s longstanding ban on imports of live 13. Turkey’s Progress towards Accession, CEC, 2004, p. 7.

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bovine animals, beef meat and other animal products.14 On the other hand, the ECSC-Turkey Free Trade Agreement (Decision 1/97 of the Association Council) has been implemented smoothly. Moreover, as of 2009 there has been free movement of industrial products between the EU and Turkey – with the exception of contingent protectionism measures and technical legislation. While both the EU and Turkey have been active users of contingent protection measures, this has been more the case for the EU. The formation of the CU has not provided protection from EC anti-dumping measures, and the EU has continued to protect its sensitive sectors through contingent protection measures. Negotiations to extend the CU in the area of public procurement and services therefore seem to have lost their momentum, and none have taken place since 2003. Turkey’s public procurement law needs to be aligned with the acquis with a view to ensuring non-discriminatory treatment of EU bidders. Some of the required legislative changes include extending its scope of application, removing a large number of exemptions, avoiding discrimination against EU goods and suppliers, lifting the restrictions in competition, and full transparency. On services side, the main unsolved issues are the scope of the agreement, the type of service providers to be included, and the timetable for liberalization. One could thus conclude that the experience of the CU worked in two distinctly different ways: first, it enabled significant economic integration between Turkey and the EU prior to accession. Equally important, however, was the fact that this experience highlighted the potentially problematic areas for Turkey’s adoption of the acquis. Some of Turkey’s failures to fulfil the customs union obligations began to emerge as benchmarks for opening of chapters. Thus, while the CU contributed significantly to the Turkish economy to accession, it also highlighted the possible problem areas for the future.15 On the other hand, the Accession Partnership extends liberal commitments of reforms to other spheres. In contrast to the CU, which imposes legally binding commitments on Turkey, the Accession Partnership provides merely a venue for cooperation and assisting Turkey to adopt the acquis communautaire. The extent of its use will hinge upon the political will of both sides.

14. Turkey’s Progress towards Accession, CEC, 2009, p. 5. 15. Togan, “Effects of Turkey-EU Customs Union and Prospects for the Future.”

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Pre-accession Strategy: Assisting Turkey’s Economic Integration The pre-accession strategy combines the various frameworks and instruments relating to the accession process of a new Member State, offering Turkey a coherent accession programme and enabling it to familiarize itself with the EU’s procedures and policies, notably by giving it the opportunity to participate in Community programmes. In order to assist Turkey in fulfilling the Copenhagen economic criteria, the EU uses two inter-related instruments: economic aid and the twinning exercise.

Financial Aid Initially, Turkey received financial support for its economy into ways. First, as a member of the Euro-Mediterranean Partnership, Turkey received € 376 million (the equivalent of an annual average over € 90 million) through the MEDA programme. Turkey was also eligible for European Investment Bank (EIB) loans, which under the New Mediterranean Policy totalled € 920 million from 1992 to 1999. Specifically, from 1999 on, Turkey benefited from five different EIB mandates and facilities: the EuroMed II Lending Mandate for Mediterranean countries, the EuroMediterranean Partnership Facility, the Special Action Mandate for Turkey, the Turkey Earthquake Reconstruction and Rehabilitation Assistance Facility and the Pre-Accession Facility. As requested by the European Councils of Helsinki and Feira, a single framework for coordinating all sources of EU pre-accession financial assistance for Turkey was adopted by the Commission in July 2000. This regulation also provided the legal basis for the Accession Partnership for Turkey. According to the Commission decision, from 2000 onwards the yearly allocation to Turkey was set at 15 % of the MEDA bilateral envelope, in addition to the € 50 million annual average allocation foreseen in the framework of the two pre-accession strategy regulations. The first regulation provided € 5 million per year for three years, while the second foresaw € 45 million per year for 3 years. Overall, the annual allocation to Turkey for the year 2000 amounted to € 177 million. As far as the preaccession financial assistance to Turkey is concerned, in 2000, a total of € 209 million grant assistance was committed. In the same year, ECHO provided a further € 30 million for emergency assistance. In the year 2000, € 575 million was provided by the EIB for various projects in Turkey.16 16. Turkey’s Progress towards Accession, CEC, 2001, p. 7.

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All these funds were pre-accession oriented with 50 % of the appropriations being allocated for structural and sector reforms focussed on to harmonizing Turkish legislation and practices with the EC acquis. The programme was established in close co-ordination with the IMF and the World Bank. The other 50 % of the appropriations were to finance measures promoting Turkey’s integration into the EU, namely to help the Turkish administration and institutions to develop the capacity to implement the Community acquis (through institution building); to assist Turkey in mobilizing investments needed to align its industry and infrastructure with Community standards (through investment support and regional/rural development); and to support Turkey’s participation in Community programmes and agencies. In anticipation of the adoption of new regulations to bring the management of financial assistance into line with the practices of other candidate countries, the Commission asked the Turkish Government to create new management structures for EU financial assistance. On 26 February 2001, the European Council adopted a regulation which provided for the coordination of EU pre-accession financial assistance to Turkey. A further regulation was proposed by the Commission in April 2001 to simplify procedures and to ensure that financial assistance focused on priorities established prior to ascension.17 Preparations for Turkey’s participation in Community programmes and agencies also moved ahead. The Council decided on 5 June 2001 to authorize the Commission to negotiate a framework agreement with Turkey which would simplify the legal procedures that would allow Turkey to participate in individual Community programmes. In response, on 18 July 2001, the Turkish Government adopted a circular entrusting the tasks of National Aid Coordinator to the Minister of State and Deputy Prime Minister responsible for EU Affairs, and that of National Authorizing Officer to the Minister of State responsible for the Economy. The National Fund was to be established and directed by the Undersecretariat of the Treasury, and the Prime Minister’s office would be responsible for the Central Financing and Contracting Unit (CFCU). To facilitate an effective distribution of community aid, the EU Delegation in Ankara was reinforced. 17. The proposed regulation recalled that: “in the financial perspective 2000-2006, the pre-accession financial assistance was doubled for the candidate countries; in the light of the Helsinki European Council, subject to the normal budgetary procedures the aim should be that this principle be applied for Turkey and continue to apply during the remaining period of the current financial perspective.” Turkey’s Progress towards Accession, CEC, 2001, p. 9.

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In programming aid, 2001 was a transition year for bringing assistance into line with the Accession Partnership and National Programme priorities. Turkey continued receiving a significant allocation from the new EIB mandate for the Mediterranean countries (the EuroMed II Lending Mandate). This assistance was to amount to a total of € 6.425 billion for the period of January 2000-January 2007.18 Moreover, Turkey was accepted by the EIB as eligible to benefit from the EIB pre-accession facility, which amounted in total to € 8.5 billion for the 13 candidate countries. The EIB also approved the Special Action Mandate for Turkey (€ 450 million), and the Turkey Earthquake Reconstruction and Rehabilitation Assistance Facility (TERRA: € 600 million) became also available as well. In addition, the EIB adopted a new “Mediterranean Partnership Facility” of € l billion, covering the region, from which Turkey also benefited. In 2001, around € 375 million was granted to Turkey by the BIB for four major investment projects. By the end of 2001, Turkey started participating in the LIFE III programme and the Fifth Framework Programme for Research and Development, while negotiations for Turkey’s participation in the European Environment Agency and in the European Information and Observation Network (EIONET) were concluded. The new regulation concerning pre-accession financial assistance for Turkey entered into force in December 2001. The purpose of this framework was to simplify procedures and to ensure an accession-driven approach to financial assistance to Turkey while placing, at the same time, greater responsibilities on the Turkish Government. In 2002, the total Community allocation for Turkey was € 149 million.19 Resources were devoted to various efforts. For example, following the economic crisis in Turkey, special financial support was provided for Small and Medium Enterprises (SMEs). Assistance in meeting the obligations of the acquis was also provided in areas such as justice and home affairs, internal market, agriculture, energy, telecommunications, employment and active labour market policy, health and safety at work, environment, competition and state aid, and maritime safety. The 2002 national allocation for Turkey was also devoted to economic and social cohesion. Turkey further benefited from the multi-country programme TAIEX (Technical Assistance and Information Exchange) while being a major beneficiary of assistance from the EIB. In 2002 around the EIB granted 18. Ibid, p. 9. 19. Turkey’s Progress towards Accession, CEC, 2003, p. 8.

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Turkey € 560 million for major investment projects, Turkey’s first loan under the Pre-Accession Facility. Throughout 2002, the EU provided significant resources in a number of important areas such as basic education, training, environmental infrastructure, reproductive health, and macroeconomic adjustment. The transfer of know-how, equipment and financial resources was also initiated in a number of significant fields, including the reform of local administrations, statistics, and investments in the poorest regions of Turkey. Community support in 2002 for institution building in a wide range of acquis-related areas succeeded in focusing efforts on the legislative and institutional requirements for adoption and implementation of the acquis. Support consisted of co-financing for technical assistance, twinning and investment-support projects to help Turkey with its efforts to adopt the acquis, strengthening the institutions necessary for implementing and enforcing them. In 2003, the pre-accession Community assistance to Turkey totalled € 144 million, toward20 the approximation to the acquis with regards to twinning in a number of ways: providing technical assistance and investment to improve market surveillance and conformity assessment systems, adopting EU environmental standards in the fields of drinking water, air quality, chemicals and waste management. Community assistance was further used for approximating insurance legislation and financial control practices with EU standards, strengthening the public procurement system and, finally, offering twinning in technical assistance and investment in the field of justice and home affairs in order improve visa policies and practices, strengthen police forensic capacity and help the fight against money laundering and trafficking in people. Moreover, the Commission sought a high degree of coordination between the preaccession financial assistance programme and the ongoing reform programmes supported by the international financial institutions, particularly the World Bank, in areas such as education, regulatory reform and public procurement. The Joint Monitoring Committee met for the first time in December 2003 to consider an independent evaluation report which had concluded that the pre-accession programmes generally displayed an adequate ability to meet their intended purpose. However, the report also stated that the efficiency and effectiveness of the measures taken could be improved with

20. Turkey’s Progress towards Accession, CEC, 2004, p. 9.

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better organization of responsibilities among ministries and increased availability of staff in the respective beneficiaries. To facilitate Turkey’s fulfilment of the Copenhagen criteria, the Commission proposed a substantial increase in financial assistance for the period 2004-2006. The Commission Communication also proposed enhanced cooperation in other areas such as political and economic dialogue, justice and home affairs, maritime safety, the process of legislative scrutiny, extending the scope of the customs union, and deepening trade relations. The decentralized implementation system that was agreed upon between the EU and Turkey was formally accredited by a Commission Decision in October 2003. However, the process was delayed until June 2004 whilst the authorities gathered the necessary human resources for the management of grant schemes. The system finally became fully operational for all pre-accession programmes in 2004. A number of MEDA projects remained ongoing in Turkey but were managed by the Commission through its Delegation in Ankara. The 2004 Community assistance for Turkey consisted of an allocation of € 235.6 million.21 The 2004 programme focused on the approximation to the acquis with significant continuing efforts made to improve market surveillance and conformity assessment systems, adopt EU standards in the fields of good laboratory practice, harmonize legislation in the field of biocides and water, and improve the regime for special waste and noise management. Support was also provided to align Turkey’s legislative frameworks on intellectual property rights, consumer protection, and capital markets with those of the EU. Initial steps were taken to prepare for assimilation of the agriculture acquis in a way which was complementary to the ongoing World Bank agricultural reform implementation programme in Turkey (€ 31.8 million). The 2004 National Programme also focused on strengthening public administration by including projects to strengthen the capacity of the customs administration, tax administration, food safety and control, epidemiological surveillance, management of road transport and control of the frequency performance of the Turkish electrical system. In addition, projects in the social field sought to facilitate social dialogue in Turkey, improve the fight against child labour, and provide a second phase for an ongoing cancer screening programme (€ 56.5 million).

21. Turkey’s Progress towards Accession, CEC, 2005, p. 10.

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The final focus of the 2004 National Programme was to gain further economic and social cohesion and thus targeted the under-developed provisional NUTS II regions of Konya (provinces of Konya and Karaman), Kayseri (provinces of Kayseri, Sivas and Yozgat), Malatya (provinces of Malatya, Bingol, Elazig and Tunceli) and Ari (provinces of Agri, Igdir, Kars and Ardahan). Funding was also provided through the National Programme for the Turkish Contribution to the Cross-Border Cooperation Programmes with Greece and Bulgaria – PHARE (€ 77.5 million). The programme included a capacity for building the National Aid Coordinator Secretariat (primarily in project preparation, to improve their capacity for designing pre-accession assistance programmes) and co-financing Turkey’s contribution to participation in the Sixth Framework Programme and the Community education programmes (Socrates, Leonardo and Youth). Although Turkey has not been a beneficiary under PHARE regulation, the country’s participation in PHARE multi-country programmes, such as TAIEX, was pursued as much as possible through its own pre-accession financial assistance envelope. TAIEX activities significantly increased in Turkey in 2004. Seminars, workshops and bilateral meetings took place in support of legislative scrutiny and the overall pre-accession process. The 2005 pre-accession financial assistance programme totalled € 300 million.22 The key priorities for the 2005 Programme reflected the Commission recommendations of October 2004 and the conclusions of the Brussels European Council meeting in December 2004, which identified the following priorities: political criteria (including some closely-related subjects in the areas of justice, liberty and security); economic and social cohesion (targeting the poorest regions in Turkey and focusing on strategic planning, support for the establishment of Regional Development Agencies in the priority NUTS II regions, and project preparation); implementation of the acquis (with projects being developed in the sectors of internal market, agriculture, environment, as well as the ‘network’ sectors of energy, transport and telecommunications); Social Policy; Statistics; and EU-Turkey Political and Social Dialogue. The 2005 programme also addressed a number of cross-cutting themes such as gender issues, civil society development, strategic planning and project preparation, in order to ensure adequate absorption in future programmes. By the end of 2005, Turkey had become an active participant in many Community programmes, such as Enterprise & SMEs, the 6th Framework Programme on Research, Combating Discrimination, Combating Social 22. Turkey’s Progress towards Accession, CEC, 2006, p. 11.

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Exclusion, Gender Equality, Incentive Measures in the field of Employment, Community Action in the field of Public Health, eContent, Fiscals 2007, Customs 2007 and IDA (Interchange of Data between Administrations). Turkey also continued its participation in the European Environment Agency (EEA), as well as in the Socrates, Leonardo da Vinci and Youth education programmes. Cooperation with the European Monitoring Centre for Drugs and Drug Addiction continued as well. In the light of the increased assistance budget, the European Commission argued that Turkey needed to further improve its capacity to manage and use these funds effectively. To this end, the EC encouraged the Turkish Government to establish the institutions needed for the implementation of the IPA (Instrument for Pre-Accession Assistance), which was scheduled to come into force in 2007. The Commission also indicated that Turkey should make further progress towards extended decentralization: this would necessitate paying close attention to good governance, and the introduction of an adequate system of Public Internal Financial Control. In order to avoid absorption capacity limitations in the coming years, Turkey was also required to make improvements in strategic planning. The Commission, therefore, suggested that Turkey enhance the staffing and the institutional anchoring of the Turkish implementing agency (CFCU), as well as the coordination among the ministries involved in programming and implementation. The Commission recalled the linkage between project financing and progress made in the harmonization with the corresponding elements of the acquis. The Commission further welcomed the fact that the new Framework Agreement had been ratified, and urged Turkey to bring all the necessary secondary legislation needed for its implementation into force. At its meeting in January 2005, The Joint Monitoring Committee reviewed the status of the implementation of the Community assistance in Turkey on the basis of an independent evaluation report. This report concluded with an average rating and highlighted the general relevance of Community assistance and the expected positive impact of the programmes. It also underlined shortcomings in relation to the efficiency and effectiveness of programme implementation, shortcomings due primarily to delays and contracting backlogs. In 2005, total EIB lending in Turkey stood at € 3.6 billion, confirming the Bank’s commitment to supporting the country’s economic development and European integration through suitable long term finance.23 Although 23. Turkey’s Progress towards Accession, CEC, 2006, p. 9.

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Turkey had now ceased to be eligible for EuroMed II support, it became a full participant in the EIB’s Facility for Euro-Mediterranean Investment and Partnership, which provided technical assistance for the design of projects and reforms in different economic sectors. Overall lending to Turkey was projected to increase significantly over the following years. The EU called upon to Turkey to assist in the identification and development of viable project proposals in order to enhance the planned increase in resources. Regarding financial assistance, some € 500 million were earmarked for Turkey from the new Instrument for Pre-accession Assistance (IPA) in 2007. The Multi-Annual Indicative Planning Document 2007-2009, which provides the strategic multi-annual framework for all programmes at the national level, was adopted by the Commission on 30 April 2007. In addition, Turkey has further benefitted from a series of regional and horizontal programmes under IPA. Two financing agreements were signed in 2007, releasing some € 370 million for EU funded projects under the Turkey’s 2006 National Programme (NP). The amount of € 21.5 million from the 2006 NP was provided to support civil society dialogue between the EU and Turkey through grants to projects selected in September 2007. The European Commission allocated € 62 million in 2007 to co-finance Turkey’s participation in Community Programmes and Agencies. It is worth noting that absorption of pre-accession funds has slowly shown signs of improvement. This has been facilitated by the setting of intermediate contracting deadlines. However, Turkey’s key decentralized implementation system (DIS) institutions remain weak. Turkey needs to make further efforts to strengthen them, and to continue to improve the quality and efficiency of the project and programme cycles. Since of 2009 Turkey has received financial assistance under the Instrument for Pre-Accession Assistance (IPA) for the period 2007-2013. The Multi-annual Indicative Financial Framework for the period 20092011 (MIIF) determines the amount of assistance allocated to Turkey under the IPA, approximately € 3,037.9 million (including 2007 and 2008).24 Community assistance is subject to compliance with the essential elements governing bilateral relations between Turkey and the EU, the Copenhagen criteria and the priorities defined by the partnership. If these elements are not complied with, the financial assistance may be suspended

24. Turkey’s Progress towards Accession, CEC, 2009, p. 5.

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by the Council. Turkey is also eligible for funding from the EIB under its external lending mandate for the EU’s South Eastern neighbours.

Twinning One of the main challenges still facing the candidate countries is the need to strengthen their administrative capacity to implement and enforce the acquis. As of 1998, the European Commission had already begun to mobilize significant human and financial resources to help them with this process, using the mechanism of twinning administrations and agencies. Thus, twinning represents a very important collaborative endeavour between the European Union and the candidate countries, making the vast body of Member States’ expertise available to candidate countries through the long-term secondment of civil servants and accompanying short-term expert missions and training. In reference to Turkey, the 1999 Helsinki European Council invited the Commission “to prepare a process of analytical examination of the acquis.”25 To this end, eight sub-committees were established through a decision of the EC-Turkey Association Council. These sub-committees fulfilled a two-fold task: to prepare a process of analytical examination of the acquis with a view to intensifying the harmonization of Turkey’s legislation and practices with the Community’s rules and regulations, and to monitor the implementation of the Accession Partnership priorities. The meetings of those sub-committees revealed that Turkey had already taken an internal inventory of the state of harmonization of its legislation with the Community acquis. This inventory would be further expanded and updated using different tools made available to Turkey by the TAIEX office. The results would allow both the Commission and Turkey to acquire/obtain a fuller and more precise picture of the state of harmonization. Between 1998 and 2000, the twinning projects primarily targeted the main priority sectors identified in the Accession Partnerships: agriculture, the environment, public finance, justice and home affairs, and preparation for the management of Structural Funds. Since 2000, other important sectors of the acquis have also been addressed through twinning, such as social policy, the fight against drugs, transport and telecommunications regulation. Twinning now covers all areas pursuant to the acquis. Until 2003, Turkey had not benefited to a maximum extent from twinning. 25. Turkey’s Progress towards Accession, CEC, 2000, p. 9.

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However, this trend began changing when the twinning exercise became an important element under the 2004 programme.

The EU-Turkey Accession Partnership The Accession Partnership, which is based on the pre-accession strategy, is the main instrument providing Turkey with guidance in its preparations for accession.26 The objective of the Accession Partnership is to incorporate a number of elements into a single legal framework: the priorities for reform with a view to preparing for accession, the guidelines for financial assistance for action in these priority areas, and the principles and conditions governing implementation of the Partnership. The Accession Partnership with Turkey was established in 2001 and has subsequently been revised three times (in 2003, 2006 and 2008) evolving as the country progresses and continuing its efforts to prepare for accession.27 With a view to achieving the objectives identified in the Accession Partnership, Turkey adopted a ‘National Programme’ for transposing the Community acquis (NPAA) in 2008, in which it established procedures and a programme for implementing action in the priority areas. The document distinguishes between short-term priorities, which are expected to be achieved within one to two years, and medium-term priorities, which are expected to be achieved within three to four years.28 Both are based primarily on Turkey’s ability to comply with the 1993 Copenhagen Criteria and the negotiation framework adopted on 3 October 2005. The short and medium-term priorities are market liberalization, combating the underground economy, completion of the privatization programme, improvement of the business climate, competitiveness, sustainability of public finances, budgetary and monetary policies guaranteeing macroeconomic stability, a coordinated economic policy, and improvement of health and education levels and infrastructures and the correction of labour market imbalances, ability to fulfil the membership obligations, namely the adoption and implementation of the acquis (both 26. See Mehmet Ugur and Nergis Canefe (eds.), Turkey and European Integration: Accession Prospects and Issues, London; Routledge, 2004. 27. For more information regarding how the Accession Partnership works see [http:// europa.eu/legislation_summaries/enlargement/ongoing_enlargement/ e40111_en.htm] 28. Ibid.

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primary and secondary EU policies and legislation). The Commission evaluates the progress made by Turkey on the priorities set by the Accession Partnership and the areas in which greater efforts have to be made annually. Such evaluation covers compliance with the accession criteria, including adoption and enforcement of the acquis. The Accession Partnership is monitored and its implementation evaluated under the Association Agreement between the EU and Turkey.

Pre-Accession Negotiations In order to prepare for the accession negotiations, the European Commission and Turkey worked on the Turkish National Programme and the Accession Partnership for Turkey. The Accession Partnership (AP) was formally adopted by the European Council on 8 March 2001. Its purpose was to set out in a single framework the priority areas for further work, identified in the Commission’s 2000 Regular Report, the financial means available to help Turkey implement these priorities and the conditions applying to that assistance. In order to realize these objectives, the Accession Partnership established a series of bilateral bodies that would facilitate communication between the EU and Turkey, as well as the accession process itself. The Accession Partnership priorities were reflected in Turkey’s National Programme for the Adoption of the Acquis (NPAA), which set out the policy framework, the schedule for adopting new legislation, policies and practices, and the administrative and budgetary requirements Turkey need to meet in order to adopt the Community acquis. Specifically, the Turkish Government adopted its National Programme for the Adoption of the Acquis (NPAA) on 19 March 2001. The programme provided a wideranging agenda of economic reforms. At the same time, a Government Decree was adopted on the implementation, co-ordination and monitoring of the NPAA. The Gothenburg European Council of 15 and 16 June 2001 saw the National Programme as a welcome development and “urged Turkey at the same time to take concrete measures to implement the priorities of the Accession Partnership, which is the cornerstone of the preaccession strategy.”29 Following the 1997 Luxembourg decision and the subsequent crisis, the EU-Turkey Association Council met in April 2000 for the first time in three years and was chaired by Turkey. It adopted two important political 29. Turkey’s Progress towards Accession, CEC, 2001, p. 8.

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decisions. The first decision concerned the establishment of eight subcommittees of the Association Committee which were to meet regularly and discuss ways to facilitate Turkey’s accession to the European Union. The second decision initiated the first negotiations for an agreement on the liberalization of services and the mutual opening of procurement markets between the EC and Turkey. The EU-Turkey Joint Parliamentary Committee, which was established under the Accession Partnership Agreement, met in Antalya on 2122 November 2000 and in Brussels on 26-27 June 2001. Discussions focused on the Turkish NPAA, constitutional reforms, and the new economic plan. Financial cooperation, visa requirements for Turkish businesspeople and the conclusion of free-trade agreements with third countries in the context of the EC-Turkey Customs Union were also among the topics discussed. Since its establishment, the Joint Parliamentary Committee has met several times and has played a critical role in assessing Turkey’s eligibility for EU membership. The impact of the CUA on Turkey’s accession talks became increasingly apparent as both parties readied themselves for the upcoming negotiations. A number of issues raised under the CUA would then act as benchmarks for Turkish talks once the actual negotiations began. A meeting of the EUTurkey Joint Consultative Committee under the Economic and Social Committee took place on 19 April 2001 in Ankara. The Committee expressed its desire to see greater priority given to the adoption of legislation guaranteeing stronger trade union rights and emphasized the importance of social dialogue in the reform process. A report on the liberalization of services was also accepted. In addition, the Court of First Instance issued a ruling on the import of television sets from Turkey. They asked both the Commission and Turkey to ensure the correct implementation of mutual contractual obligations under the Association Agreement and its related decisions. A number of crucial transitional arrangements under the CU expired on 31 December 2000. There was thus an urgent need for Turkey to remove technical barriers to trade, to adopt rules for carrying out competition, to enforce the implementation of intellectual property rights and to adjust state monopolies of a commercial character to ensure non-discrimination in market access between EU and Turkish operators. As a result, a regular informal consultation mechanism on areas of relevance for the CU was established. The Commission also provided for Turkey’s participation in technical committees in line with established policies for candidate countries.

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The eight subcommittees of the Association Committee – established under the Association Agreement – began the process of the preparation of the analytical examination of the acquis in two rounds, in the period of June 2000 to July 2001. This process involved more than 500 officials on both sides from a wide range of Commission departments, ministries and public agencies. This was an important step as the Turkish ability to absorb the EU’s acquis communataire was at this time being thoroughly analyzed prior to the actual negotiations. In 2002, the emphasis had been on the implementation of the new phase of the pre-accession strategy for Turkey. A process of detailed legislative scrutiny began in the first half of 2002 within the eight sub-committees of the Association Committee. In January 2000 the latter settled on the subjects and schedules of meetings, the first series of meetings were subsequently completed in July 2002. This process allowed for a more detailed dialogue on the requirements for the transposition, implementation and enforcement of assorted aspects of the acquis. Differences in Turkish legislation and the acquis in various sectors were identified. The sub-committees monitored the implementation by Turkey of the Accession Partnership priorities and discussed various trade issues. The pre-accession strategy continued to be implemented through the early 2000s. A revised Accession Partnership was adopted by the European Council on 19 May 2003. In addition to specifying what Turkey should do in various economic sectors in order to enable itself to assume the obligations of membership, the 2003 Accession Partnership invited Ankara to effectively address the following economic criteria:30 앫 Ensure the implementation of disinflation and structural reform programme agreed upon with the IMF and the World Bank, particularly in bringing public expenditure under control; 앫 Continue the swift implementation of the financial sector reform, in particular the alignment of prudential and transparency regulations and their surveillance with international standards; 앫 Safeguard the independence of market regulatory authorities; 앫 Proceed with agricultural reforms; 앫 Accelerate the privatization of state-owned entities; 앫 Continue with market liberalization, especially in the areas of tobacco and sugar; 앫 Facilitate and promote the inflow of foreign direct investments;

30. Republic of Turkey, Accession Partnership with Turkey, State Planning Organization, Ankara 2003, p. 12.

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앫 Enhance economic dialogue with the EU, in particular in the framework of the Pre-accession Fiscal Surveillance procedures, with emphasis on appropriate measures to achieve macroeconomic stability and predictability and the implementation of structural reforms; 앫 Implement measures to address the problem of the informal economy. The revised Turkish National Programme for the Adoption of the Acquis was agreed to on 24 July 2003. This document established how Turkey envisioned dealing with the Accession Partnership, the timetable for implementing the Partnership’s priorities, and the implications in terms of human and financial resources. Both the Accession Partnership and the National Programme for the Adoption of the Acquis have been revised on a regular basis to take account of progress made and to allow for new priorities to be set. Finally, a first meeting of the enhanced economic dialogue took place in September 2003. This meeting was particularly useful in exchanging information about the economic situation and the pace of economic reforms in Turkey. Despite the smooth running of technical affairs due to the Turkish ability to fulfil the economic aspects of the acquis, problems arose for the country’s accession to the EU when ten (10) new member states acceded to the EU on 1 May 1 2004, one of which was Cyprus. Under the Association Agreement and the Customs Union Agreement, Turkey was expected to extend its obligations to these new member states. This is why the European Council of 17-18 June 2004 invited Turkey to conclude negotiations with the Commission on behalf of the EU and its 25 Member States on the adaptation of the Ankara Agreement to take account of the accession of the new Member States. The Commission subsequently transmitted the draft protocol required for the adaptation of this agreement to the Turkish authorities. This effectively meant that Turkey needed to extend its customs union to the Republic of Cyprus. Thus, this was a first instance demonstrating the possible ramifications of the Cyprus dispute within the European Union. It must be noted that Turkey had initially refrained from extending the CU to the Republic of Cyprus in response to events in April 2004, when the Annan Plan was put into a referendum in both parts of Cyprus, the Greek Cypriots rejected the Plan for reunification with 75 % and the Turkish Cypriots accepted the Plan with 65 % of the votes. The European Council in response to the Greek Cypriots’ rejection decided to lift the economic isolations on Northern Cyprus on 26 April 2004 but did not implement this decision. Thus, the Turkish argument was that since the EU did not fulfil its own decision, Turkey would not extend the CU to Cyprus. It has

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now become obvious that the Cyprus issue would act as a major obstacle to Turkey’s accession even if Turkey fulfils the EU’s accession criteria on other issues. Nevertheless, in 2004 Turkey signed the Protocol regarding the adaptation of the Ankara Agreement, taking the accession of the ten new Member States into account without once mentioning Cyprus. In this light, it welcomed the declaration of Turkey that “the Turkish Government confirms that it is ready to sign the Protocol on the adaptation of the Ankara Agreement prior to the actual start of accession negotiations and after reaching agreement on and finalizing the adaptations which are necessary in view of the current membership of the European Union.”31 A breakthrough came in October 2004 when the European Commission in its Progress Report recommended accession negotiations to begin with Turkey based on the assessment that Turkey was now fulfilling the political aspects of the Copenhagen criteria. As a result, the European Council decided to open accession negotiations with Turkey on 3 October 2005 and subsequently established the framework and the requirements to begin the process. Prior to the opening of accession negotiations, the Commission presented the draft Protocol for the extension of the Customs Union to the new member states in May 2005 and, after agreement on the text within the European Council, the Protocol was signed in July. The Turkish authorities attached a declaration concerning relations with Cyprus to this Protocol. The EU adopted this declaration on 21 September, but the European Parliament decided to postpone the vote concerning its assent to the Protocol in September 2005. Parallel to these developments on the Cyprus front, the preparations for the Negotiation Framework were underway in summer 2005 with the Commission presenting draft framework for accession negotiations, determining the method and the guiding principles of the negotiations in line with the October 2004 European Commission Recommendation and the December 2004 European Council conclusions.

Accession Negotiations The accession negotiations between Turkey and the EU were opened on 3 October 2005, when the EU-Turkey Intergovernmental Conference met for the first time. The framework of bilateral relations was adopted by the 31. Turkey’s Progress towards Accession, CEC, 2005, p. 5.

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Council of Ministers on this same day. In parallel, the Commission launched the analytical examination of the acquis (screening), which forms the first phase of accession negotiations. On 23 January 2006, the European Commission submitted a revised Accession Partnership requesting the Turkish Government to undertake the following measures in order to address the Copenhagen economic criteria:32 앫 Continue to implement the current structural reform programme agreed with the IMF and the World Bank, in particular to ensure the control of public expenditure; 앫 Complete the implementation of the financial sector reform, in particular the alignment of prudential and transparency regulations and their surveillance on international standards; 앫 Safeguard the independence of market regulatory authorities; 앫 Accelerate the privatization of state-owned entities, in particular of state-owned banks; 앫 Continue with market liberalization, in particular in the areas of energy and agriculture, with special emphasis on tobacco and sugar; 앫 Continue the economic dialogue with the EU, in particular in the framework of the Pre-accession Fiscal Surveillance procedures, with emphasis on appropriate measures to achieve macroeconomic stability and predictability and the implementation of structural reforms; 앫 Implement measures to address the problem of the informal economy; 앫 Improve professional training efforts, in particular for the younger population; 앫 Address labour market imbalances; 앫 Improve the business climate and in particular the functioning of commercial courts. To this end, improve the functioning of commercial judiciary, paying close attention to the independence of the judiciary and appropriate use of expert witness system; 앫 Continue reforms in the agriculture sector; 앫 Ensure general improvements in education and health, paying particular attention to the younger generation and disadvantaged regions; 앫 Facilitate and promote the inflow of foreign direct investments.

32. Official Journal of the European Union, Council Decision of 23 January 2006 on the Principles, Priorities and Conditions Contained in the Accession Partnership with Turkey, p. 6.

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The accession negotiations with Turkey continued throughout 2005 and 2006 with the preparatory analytical phase reaching its final stage when the screening process was completed in October 2006.33 The acquis is divided into 35 Chapters for Turkey’s negotiations; the screening process assesses Turkey’s ability to meet the EU’s acquis communataire. At this stage, the level of preparedness to start negotiations on individual chapters is assessed on the basis of screening reports. The first chapter that was opened for negotiations, the Chapter on Science and Research, closed provisionally in June 2006. However, a turning point occurred in December 2006, when the Council decided that negotiations would not be opened on eight of the chapters relevant to Turkey’s restrictions regarding the Republic of Cyprus, and that no chapter would be provisionally closed until the Commission confirmed that Turkey had fully implemented the Additional Protocol to the Association Agreement. At the same time, the Council emphasized that the screening process would continue, and that chapters for which technical preparations had been completed would be opened in accordance with established procedures in line with the Negotiating Framework. This decision effectively meant that all chapters relating to the CU including agriculture would remain frozen and that none of the chapters – with the exception of Science and Research – would be provisionally closed. On 18 February 2008, the European Commission submitted a new revised Accession Partnership indicating the areas in which Turkey needed improvement in order to effectively address the EU’s economic criteria:34 앫 Continue to implement appropriate fiscal and monetary policies in view of taking adequate measures to preserve macroeconomic stability and predictability; 앫 Implement a sustainable and effective social security system; 앫 Further strengthen economic policy coordination across different institutions and policy areas in order to provide a consistent and sustainable policy framework for the economy; 앫 Continue the privatization of state-owned entities; 앫 Continue with market liberalization and price reforms, in particular in the areas energy and agriculture;

33. For more details on this issue see E. Basci, S. Togan and J. von Hagen, Macroeconomic Policies for EU Accession, London: Edward Elgar, 2007. 34. Official Journal of the European Union, Council Decision of 28 February 2008 on the Principles, Priorities and Conditions Contained in the Accession Partnership with Turkey, p. 7.

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앫 Identify and implement means to address the problem of the informal economy; 앫 Address labour market imbalances. To this end, improve incentive structures and flexibility in the labour market in order to increase participation and employment rates; improve education and professional training efforts, thereby encouraging the shift from agriculture to a service-based economy; 앫 Improve the business climate. To this end, improve the functioning of the judiciary and safeguard the independence of market regulatory authorities; improve bankruptcy procedures to address impediments to market exit. Despite the challenges that the 2008 financial crisis has brought about, “consensus on Turkish economic policy essentials has been preserved.”35 The Turkish economy has been significantly affected by the global crisis due to “a combined and severe drop in domestic and mainly external demand.”36 However, as the Commission noted in its 2009 Progress Report, external imbalances were reduced significantly, and access to external finance remained open for both the public and private sectors. According to the Commission, “labour market conditions became increasingly challenging and the unemployment rate increased sharply with the sharp contraction in economic activity.”37 On the other hand, the Commission found that “price stability improved significantly, despite the considerable depreciation of the Turkish Lira, mainly because pressures stemming from energy inputs eased drastically.”38 What is important to note in the Turkish case is that measures aimed at increasing fiscal transparency “were put on hold or even reversed.”39 In terms of macroeconomic stability, the overall assessment of the Commission was that the Turkish economic policy has been effective but that the economy remained vulnerable primarily due to “the absence of strong fiscal anchors.”40 With reference to the functioning of a market economy, some progress was reported in improving the interplay of market forces. Despite the global financial crisis, privatization has advanced, while new legislation has further encouraged market entry. However, certain obstacles in market exit continue to exist. According to the Commission, “restrictions on foreign 35. 36. 37. 38. 39. 40.

Turkey’s Progress towards Accession, CEC, 2009, p. 33. Ibid, p. 34. Ibid, p. 34. Ibid, p. 35. Ibid, p. 35. Ibid, p. 35.

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ownership do persist in some economic sectors, while the legal environment, and in particular court procedures, pose practical challenges and create obstacles to a better and more effective business environment.”41 Finally, due to the earlier reform efforts of the Turkish Government, the financial sector demonstrated significant resilience to the effects of the global economic crisis. In terms of Turkey’s capacity to cope with competitive pressure and market forces within the Union, one could argue that the unfolding of the crisis has not jeopardized the functioning of market mechanisms and that Turkey continues to be a functioning economy. Some progress has been made in upgrading the country’s human and physical capital, although the economic crisis represents a new challenge to this process. Despite the efforts of the Turkish Government, the global financial crisis has complicated the access of Small And Medium Enterprises to capital, thereby preventing a faster sectoral transformation of the Turkish economy. In its 2009 Progress Report, the Commission expressed its fears that the lack of transparency in state intervention would have significant implications for competition. Trade and economic integration with the EU, however, remained high. The Commission noted in particular that Turkey “showed remarkable flexibility and diversified its trade towards new markets, thereby partly alleviating the impact of crisis” and that the country made “significant gains to price and cost competitiveness vis-a-vis its main trading partner”, namely the European Union.42

41. Ibid, p. 36. 42. Ibid, p. 39.

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3. Current Turkish Economic Policies and the Target of EU Membership Ìlke Civelekoğlu

This chapter examines the economic policies of the Adalet ve Kalkinma Partisi – Justice and Development Party (AKP) throughout the 2002-2009 era in order to assess the prospects and constraints Turkey faces in meeting the European Union’s economic criteria for accession, established by the Copenhagen Meeting of the European Council in 1993. This chapter addresses which the question of the extent to which the AKP government succeeded in adhering to the EU’s economic criteria. In response to this question, the chapter argues that the AKP was partially successful in fulfilling the EU’s economic criteria insofar as the government displayed a better performance in achieving macroeconomic stability and providing a climate of predictability to market participants than in tackling the deeper and more structural problems of the Turkish economy, such as unemployment, income inequality, and reduction of the informal economy. The chapter will assert that the 2001 crisis, which became a landmark in Turkey’s economic development trajectory, provided the AKP with the opportunity to establish its hegemony in the political realm by discrediting its major political competitors. The ideological belief of the AKP in economic liberalism, coupled with the extensive involvement of the IMF in the Turkish economy in the aftermath of the 2001 crisis, paved the way for the implementation of large-scale structural economic reforms that had been long delayed. As the Stand-By Program required reforms that overlapped with the EU’s demands for membership, Turkey converged a lot more quickly with the EU-style market economy under the “Islam-sensitive” AKP than any of its secular predecessors.1 Nevertheless, the closure of the gap between the EU countries and Turkey mainly existed in macroeconomic indicators as socioeconomic indicators remained far from convergence due to poor 1.

I have borrowed the term, Islam-sensitive, from Marcie Patton. Given the AKP`s discontent with being referred to as an Islamist party, an alternative term that denotes the religious connotation of the party is necessary and Patton`s term successfully captures it.

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human capital development and the worsening of income distribution in Turkey. The chapter will conclude by arguing that for accession purposes the AKP needs to pay greater attention to social policies while continuing to implement appropriate economic policies which preserve macroeconomic stability and sustain economic growth. In order to explain these points, the chapter is divided into three sections. The first section will address the EU requirements of candidate states by highlighting the Copenhagen economic criteria that aspirant states need to fulfill for accession. The second part will focus on the economic agenda of the ruling AKP. I will address the AKP’s economic stance in light of the Party’s relations with its cross-class electoral coalition. Finally, the third section will provide a critical analysis of the AKP’s success in meeting the EU economic criteria, with a focus on the policies the Party enacted during their 2002-2009 term.

Understanding the Copenhagen Economic Criteria: What Does the EU Really Want From the Candidate States? In assessing the economic development of candidate countries and their progress in conforming to EU standards, The European Commission is guided by the June 1993 conclusions of the Copenhagen European Council, which state the two following conditions for membership: 앫 The existence of a functioning market economy; 앫 The capacity to cope with competitive pressure and market forces within the Union. To ease and clarify the assessment of what it means to have a “functioning market economy”, and when candidate states actually possess the “capacity to cope”, the Commission adopted a clear methodology and employed it rigorously in its observation of candidate states’ progress over the years.2 As is apparent in the Commission’s annual progress reports, in measuring whether a market economy “exists”, the Commission considers two factors: the liberalization of both prices and trade in an economy, and the presence of an enforceable legal system (including property rights). This condition is 2.

To address criticisms to the Copenhagen economic conditions as being very broad and open to considerable interpretation, the EU tried to clarify the content first in 1997 in the Commission`s formal “opinions” on each candidate’s readiness for membership and later in the subsequent annual reports on their progress. The Union, however, never provided an explicit definition of these concepts.

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usually the least problematic part of the EU’s economic criteria as most of the candidate states that gain candidacy status have already undertaken extensive liberalization in their economies. Turkey is no exception to the rule. The beginnings of its economic liberalization date back to as early as January 1980, when the country decided to replace its ISI-based development with an open, liberal economy in line with the requirements of an IMF program that called for the elimination of price controls and as well as the external liberalization of the economy. Thus, although it had a long experience with economic liberalization, what proved to be difficult for Turkey in the accession process, as was the case in many other candidate states, was ensuring that its market economy was stable and running smoothly. In order to assess whether the existing market economy in a candidate state is “functioning”, the Commission considers two factors: first, the prevailing macroeconomic stability – broadly evaluated by rates of economic growth, inflation, budget deficits and employment growth – and, secondly, whether there is political consensus about the goals of economic policy at the government level, which is assessed by whether the current government follows sound macroeconomic policies diligently. It should be noted here that the Commission also looks favourably upon efforts that aim to improve the “efficiency” of the existing market economy. Accordingly, improving efficiency necessitates, above all, a well-developed financial sector and the elimination of barriers to entering and exiting the market. In this way, any efforts of governments to institutionalize autonomous regulatory agencies as well as to enact laws to establish a proper legal framework for market participation have been highly praised in the Commission’s reports that assess the candidate state’s yearly progress. Needless to say, the dual conditions of establishing a functioning market economy and increasing its efficiency have proven to be difficult for candidate states insofar as these conditions require politicians to be willing to subscribe to market discipline rather than opportunist politicians who seek to derive parochial gains from an under-institutionalized system by exchanging favours for votes. As for the latter condition for membership, namely, the capacity to cope with competitive pressure and market forces within the Union, the Commission emphasizes the development of two assets in the economy; physical and human capital. While the former calls for infrastructure development and growth of capital stocks, mainly through the privatization of state enterprises and foreign investment, human capital is expected to develop through education policies. The emphasis of the EU on education policies stems from the Union’s assumption that any mismatch between the content of education, especially between vocational 65

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education and the skills requirements of the economic sectors aggregates the problem of unemployment in the economy. Moreover, it should be noted that the EU also calls attention to labor market rigidities prevailing in an economy and the need to address these imbalances through deregulation in order to alleviate problems such as youth unemployment and low female participation which particularly afflict the Turkish economy. As is evident in the definition and measurement of its economic criteria, the EU favours a neoliberal approach to the economy for accession candidates, necessitating decisive steps on their part to implement stabilization policies as well as extensive structural reforms. In addition, the Union calls for institutional reforms to eliminate the mechanisms of populism in candidate states. Because populism disfavours autonomous state institutions, which tip the balance of power in ruling politicians’ favour, the EU advocated the creation and protection of non-elected and specialized public bodies of oversight that would exist independently of politicians’ discretion. According to the EU, such public bodies, through regulating economic sectors, first and foremost that of finance, would not only constrain and monitor government actions, but also help reduce the vulnerability of the economy to external shocks. In the light of the Copenhagen economic criteria explained above and the economic reforms the EU requires from aspiring states, it might be argued that in the Turkish context, the EU is asking for a total transformation of the way the economy is governed. Compliance with the EU criteria in fact obliges Turkish politicians to replace their electoral strategy, based on the formation and maintenance of patronage-based electoral coalitions through irresponsible fiscal spending, with sound economic policies, a solid development strategy and an enhanced institutional framework in which the autonomous regulatory and supervision agencies act as a mechanism for checking the power of ruling politicians. In this way, what the EU demands from Turkey for accession goes beyond simple policy changes insofar as the Union emphasizes the elimination of lingering patronage politics that have long dominated the Turkish polity, thus and obliging the ruling politicians to engage in extensive reforms that have short-term costs but long-term benefits.3

3.

For a good discussion of the causes of instability prevailing in the Turkish economy throughout the 1990s, see Erinc Yeldan, “Politics, Society and Financial Liberalization: Turkey in the 1990s” Development and Change, 31(2): 481-508, 2000. (with Umit Cizre-Sakallioglu).; Ziya Onis, “Varieties and Crises of Neo-liberal Globalization: Argentina, Turkey and the IMF”, Third World Quarterly, Vol. 27, No. 2, 2006, pp. 239-263.

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An overlap between the organizations of EU and the IMF is at stake: the EU’s insistence on a “functioning” market economy, assessed by robust growth rates, disinflation, fiscal consolidation and structural adjustments coincides with the requirements of IMF Stand-By Programs. As in the case of Turkey the overlap between the demands of these two institutions helps increase the pressure on governments to comply by making these two organizations act as “double anchors” on the economy.4 Consequently, the readiness of a candidate country to implement the Fund’s Program rigorously helps enhance its credibility among the EU ranks as the country successfully communicates to the Union that it is committed to converge towards the EU-style economy. Having laid out what the EU requires in economic terms for accession, it is now time to turn to the question of whether aspirant governments in power can meet the Union’s criteria thoroughly. To what extent do governments of candidate states comply with the Union’s terms? More specifically, in what areas does compliance become more problematic? The remainder of this chapter will address these questions by highlighting the economic performance of the AKP, ruling the country since the late 2002.

Devoted Reformers or Pragmatic Rulers? Understanding the AKP’s Economic Agenda When the November 2002 elections replaced the ruling tripartite coalition government with the single-party government of the AKP, the immediate question on everybody’s mind was what the AKP planned to do about the economy once they were in office. Appeasing the fears of the time which stemmed from the Party’s pro-Islamic posture, the AKP immediately signaled its approval of the 2001 Stand-By Agreement with the Fund and declared that it would continue to adhere to the 2001 Stand-By agreement without reservation. In the words of the Minister of State for Economic Affairs, Ali Babacan, the AKP government’s objective was that of “unleashing

4.

For a detailed analysis of what double anchors means in the Turkish context and how they help increase the compliance of ruling politicians, see Mehmet Ugur, The European Union and Turkey: An Anchor/Credibility Dilemma (Aldershot: Ashgate, 1999), and Ziya Onis, “Beyond the 2001 Financial Crisis: The Political Economy of The New Phase of Neoliberal Re-Structuring in Turkey”, paper presented at International Studies Association Annual Convention, San Diego/California, USA, March 22-25, 2006.

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Turkey’s potential by providing a stable macroeconomic environment and implementing fundamental structural reforms for recovery”.5 In fact, the Party had never really had the option of being antagonistic towards a market economy nor towards its requirements insofar as the Turkish economy was already highly dependent on the loans of the IMF at that time: the ruling politicians had lost all room to maneuver vis-à-vis the IMF in the aftermath of the February 2001 crisis.6 The latest crisis hit the country hard as the Turkish lira lost almost 40 per cent of its value in the presence of rapid capital outflows, and the country witnessed the worst recession and deepest decline in economic growth of the past sixty years. With a severe financial crunch settling into the economy, the tripartite coalition government, led by the social democrat Prime Minister Bulent Ecevit, was left with no option but to knock on the door of the IMF and ask for help. In exchange for the $ US 11 billion loan facility, the government could then proceed to the implementation of a stabilization program, involving substantial disinflation via tight monetary and fiscal policies and structural reforms that would require the privatization of majority stakes in key state-owned enterprises above all. As the IMF gained control of the economy, the crisis quickly became a critical turning point in Turkish politics by pressuring the government to embark on an extensive stabilization program that they could no longer postpone.7 As many scholars of Turkish politics have argued, the crisis also had political repercussions as it provided a window of opportunity for the newly established AKP by discrediting the Party’s major political 5. 6.

7.

See “Turkey: Letter of Intent”, submitted to the IMF on April 5, 2003 available at http://www.imf.org/external/np/loi/2003/tur/01/index.htm On the causes of the 2001 financial crisis in Turkey and why it has been so devastating for the economy, see Ziya Onis, “Domestic Politics vs. Global Dynamics: Towards A Political Economy of the 2000 and 2001 Financial Crises in Turkey”, in Ziya Onis and Berry Rubin (eds.), The Turkish Economy in Crisis, London: Frank Cass, 2003:1-31. For a detailed discussion on the role of populism and patronage in Turkish politics in the 1990s, see Mine Eder, “Implementing the Economic Criteria of the EU Membership: How Difficult Is It For Turkey?” in Ali Carkoglu and Berry Rubin (eds.), Turkey and the European Union: Domestic Politics, Economic Integration and International Dynamics, (London: Frank Cass, 2003: 219-243) and “Populism As a Barrier to Integration with the EU”, in Mehmet Ugur (ed), Turkey and European Integration: Accession Prospects and Issues, (London: Routledge, 2004: 219-245). See also Emre Alper & Ziya Onis, “Financial Globalization, the Democratic Deficit and Recurrent Crises in Emerging Markets: The Turkish Experience in the Aftermath of Capital Account Liberalization”, Emerging Markets, Finance and Trade, Vol. 39, No. 3, 2003, pp. 42-65

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competitors and enabling the Party to present itself as an alternative to Turkish voters, who were dissatisfied with the economic performance of the established parties.8 Prior to the November 2002 national election campaign, the economy constituted the central issue for all voters. During its campaign, the AKP was able to capitalize successfully on the social and distributive injustice and corruption stemming from the practices of established secular political parties. Prior to the elections, the Party emphasized the need to reform the role of state in the economy by making the state retreat from the production sphere and take on a regulatory role in order to reduce the vulnerability of the Turkish economy to crises and instability.9 It is worth noting that, although the AKP was severely critical of the prevailing economic system, it did not present a coherent strategy about how it would steer the country towards strong economic recovery, nor did it come up with an alternative to the IMF-generated economic policies during its election campaign. Once in office, the AKP officials quickly became aware that they needed to walk a fine line between expectations and realities. However, this was easier said than done. In order to come to power, the AKP needed to build a cross-class alliance. In electoral terms this meant that the Party was not only required to harness the support of the poor and working class but also to induce the bourgeoisie to support its position. The dilemma of the AKP government was how to reconcile the demands of the lower classes, who called for redistributive policies and social justice, with the economic preferences of big business, which prioritized predictability and stability through low inflation, low deficit and sustainable debt. Moreover, the heterogeneous structure of the bourgeoisie posed another challenge to the Party. The “culturally conservative” and “economically liberal” Anatolian bourgeoisie, which constituted the backbone of the Party, differed from their big and secular counterparts in terms of their position towards strict fiscal discipline endorsed by the IMF Program. As Ziya Onis argues, in contrast to their counterparts, the petite bourgeoisie looked more favourably upon social policies and moreover, since they were more concerned with needs of the real economy, prioritized growth and competitiveness over excessively tight fiscal policies. This is why the petite 8.

9.

On this issue, see Ziya Onis, “The Political Economy of Turkey`s Justice and Development Party”, in Hakan Yavuz (ed), The Emergence of a New Turkey: Democracy and the AK Parti, (Salt Lake City: University of Utah Press, 2006: 217220); Ali Carkoglu, “The Rise of New Generation of Pro-Islamists in Turkey: The Justice and Development Party Phenomenon in the November 2002 Elections in Turkey”, South European Society & Politics, Vol. 7, No. 3 (Winter 2002: 123-156). Onis, pp. 212-215.

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bourgeoisie defended an alternative stabilization program, independent of the IMF.10 The IMF, on the other hand, with its long unresponsiveness to distribution concerns and its emphasis on budget balance was the sword of Damocles hanging over the government, making it almost impossible for the AKP to be responsive to the demands of the lower classes and petite bourgeoisie. Faced with the incompatibility and irreconcilability of such disparate demands, the AKP needed either to oscillate between tight and loose policies or risk the loss of the electoral support of some segments in its encompassing electoral coalition. With the economic policies it set out to pursue in office, the AKP chose to side with the bourgeoisie at home, and international financial institutions and market participants at the global level during its first term in office. While these policies appeased the IMF, they fell short of thoroughly fulfilling the EU criteria. By its second term (beginning in July 2007), the AKP government took a more balanced stance towards the IMF when this government refused to renew the Stand-By Agreement in 2008. However, the outbreak of the global crisis in 2008, which slowed down the economy considerably, worked to the disadvantage of the Party as the greater economic hardship made it more difficult for the AKP to maintain the economic achievements gained by the previously enacted stabilization policies, let alone improve the deficiencies of which the EU had been critical. Nevertheless, to be fair to the ruling AKP government, it should be mentioned that the outbreak of the global crisis in 2008, which constituted a major test of the resilience of Turkish economy to external shocks, attested to the fact that the Turkish economy under AKP rule had made progress and hence, it had become strong enough to withstand such pressures.

The AKP at Work: Its Economic Policies and Partial Successes in Meeting the EU Target Upon taking office on November 28, 2002 the AKP declared its main economic goals to be disinflation, debt reduction and lasting rapid growth. To achieve these goals, the AKP called for increasing the role of private sector in the economy in reflection of its belief that a well-functioning market mechanism and an economy led by the private sector are the main

10. Ibid. pp. 222-224.

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pillars of economic growth.11 In addition to this economic motive, the AKP had a political incentive for boosting the private sector as doing so would help the Party to consolidate its legitimacy in the eyes of secular, big businesses at home, and those of market participants and the IMF at international level, by demonstrating its ability to run the economy responsibly and reliability. In its attempt to receive the blessing of domestic and global capital holders, the government undertook extensive privatization policies and supported measures to attract foreign direct investment (FDI). Determined to reduce the state influence in the economy, the government opened up the protected markets of sugar, tobacco, telecommunication and electricity to the private sector more boldly than any preceding government had. In less than two years in office, the AKP government’s privatization scheme managed to downscale the role of state economic enterprises to the remarkably low level of 5 % in the non-agricultural sector, allowing the private sector to account for 80 % of Turkey’s economy (EU Commission Report on Turkey, 2005). Moreover, under AKP rule, the country generated more FDI than in the previous 20 years. As the Party encouraged the auctioning off of public assets to transnationals, the amount of foreign investment reached unprecedented levels. In year 2004, FDI increased by 240 per cent in comparison to the 1990-2004 era, reaching its peak in 2006, when Turkey attracted US$ 20.2 billion, the highest amount ever in history of the country.12 Needless to say, the policies of the AKP were mostly welcomed by domestic business elites insofar as both privatization and the encouragement of FDI strengthened their economic position. Threatened by the severity of the 2001 crisis, the Turkish conglomerates had every reason to welcome FDI, which would allow them to enter joint venture partnerships with European manufacturers.13 The sale of Turkey’s major oil refining company, TUPRAS and leading steel manufacturer, ERDEMIR to local domestic groups, on the other hand, helped enhance the incipient alliance between big business and 11. “59. Hukumet Programi: Erdogan Hukumeti, 2002”, The 59th Government Program: The Erdogan Government, March 2002 [http://www.belgenet.com/hukumet/ program/59-1.html] 12. For a good account of the AKP`s positive attitude toward the FDI from a comparative perspective, see Ioannis N. Grigoriadis and Antonis Kamaras, “Foreign Direct Investment in Turkey: Historical Constraints and the AKP success Story”, Middle Eastern Studies, Vol. 44 No. 1, January 2008, pp. 53-68. On FDI-EU accession linkage in Turkish context, see Assia Hadjit and Edward M. Browne, “Foreign Direct Investment in Turkey: The Implications of EU Accession”, Turkish Studies, Vol. 6, No. 3, September 2005, pp. 321-340 13. Grigoriadis and Kamaras, pp. 59-62.

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the government. Another policy area, in which the government appeased both domestic and external pro-market forces involved amendments the AKP made to legal frameworks to eliminate barriers to market entry. In 2006, for instance, the AKP streamlined the business registration by facilitating the opening of a business in Turkey, which now takes only nine days on average, one of the fastest in world. In terms of fiscal policies, the new government’s economic stance during its first term in office was congruent with the IMF demands insofar as the government displayed a strict commitment to fiscal discipline. This commitment constituted a sharp contrast with what the Turkish economy had experienced in the previous decade during which severe fiscal instability had been associated with a substantial domestic and external debt burden and successive economic crises. Once in office, the government adopted the main pillar of the 2001 IMF Programme as its policy goal, namely, an austerity that targeted 6.5 percent surplus for the public sector in its primary budget.14 The strong commitment to IMFsteered policies helped the AKP to improve the fiscal indicators of the economy rapidly as the budget deficit declined from 14.3 % of GNP in 2002 first to 7.1 % by the end of 2004 and later to 0.6 % in 2006.15 In addition, the AKP government managed to lower inflation to nearly single digit levels for the first time in three decades after only two years after coming to power. The reduction in inflation was remarkable: the government lowered it from 45 % in 2002 to 10.6 % by the end of 2004 (see Table 1.1). Moreover, the government managed to accompany the dramatic fall in inflation rates and budget deficits with robust economic growth rates. Throughout the 2002-2007 era, the annual growth rate of GDP remained on average at a high level of 6.81 % in the country. As we have seen, the government’s efforts to follow the IMF Program to rebalance public finances and bring down the chronically high inflation rate helped the AKP to kill two birds with one stone: at home, the Party was able to increase its legitimacy among the secular business elite, which was satisfied with the government’s commitment to the fiscal discipline they 14. Turkey: Letter of Intent, April 5, 2003; October 31, 2003 and April 2, 2004 15. The EU requires its member states to comply with the Maastricht criteria. Hence, the closer a candidate state to the fiscal indicators of the criteria, the less problematic its accession is viewed by the EU states. The fiscal convergence criteria of Maastricht (one of the three criteria) does not allow a government to have budget deficit higher than 3 % of GDP or a government debt ratio of more than 60 per cent of GDP. In fiscal terms, Turkish economy fit the Maastricht criteria as of 2005, when the AKP managed to bring both the budget deficit and the government debt in line with the required conditions.

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considered to be a key ingredient of stability. As Erinc Yeldan reports, the AKP was able to turn its alliance with global finance capital and Turkish businesses into an enduring one by assuring that budgetary discipline would continue through 2008 along the course set by the IMF. As for the EU, with its strict commitment to the IMF stabilization program, the AKP was able to signal to the Union that a consensus on neoliberal policy reforms at the government level was in place.16 Table 1: Changes in Key Macroeconomic Indicators of Turkey under the first AKP rule, (%) IMF-led Crisis disinflation program 2000 2001 GDP rate

Under Three- party AKP coalition gov’t

AKP

AKP

AKP

AKP

2002

2004

2005

2006

2007

2003

6.8

-5.7

6.2

5.3

9.4

8.4

6.9

4.7

Inflation – CPI (%)

54.9

54.4

44.9

25.3

10.6

8.2

9.6

8.8

Unemployment (%)

6.5

8.4

10.3

10.5

10.3

10.3

9.9

10.3

Budget balance/ GDP (%)

–

-33.0

-12.9

-11.3

-4.5

-0.6

-0.1

-1.2

Central Adm. Domestic debt/ GDP (%)

42.9

-77.6

73.7

67.3

59.2

52.3

46.1

39.4

Source: Turkey 2009 Progress Report, prepared by the Commission of the European Communities, available at: [http://ec.europa.eu/enlargement/pdf/key_documents/ 2009/tr_rapport_2009_en.pdf]

In addition to displaying fiscal discipline and undertaking extensive structural reforms in economy, the AKP carried out significant institutional reforms in pursuit of strengthening the regulatory and supervisory framework of the Turkish economy. In 2003, for instance, the AKP passed the Execution and Bankruptcy Act to create an effective system for market exit. That same year, the government enacted a legal amendment to strengthen the power of the Banking Regulation and Supervision Agency (BRSA) in line with EU standards.17 In 2005, the government continued its 16. EU Commission, Regular Report from the Commission on Turkey`s Progress Towards Accession, Brussels: CEC, 2004; 2005 and 2006 [http://ec.europa.eu/enlargement/key_documents/reports_nov_2006_en.htm] 17. The amendments included measures, such as direct submission of the BRSA budget to the Parliament, instead of to the Prime Minister. A detailed content of these amendments can be seen in “Turkey: Letter of Intent”, October 31, 2003.

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regulatory reforms by transferring non-bank financial institutions from the Treasury to the BRSA. Because the agenda of the AKP government was determined by three considerations in mind – stabilization (through disinflation policies), structural reforms (i.e. large-scale privatization of state economic enterprises and an increase in FDI), and institutional reforms (for better supervision of finance sector and easement of market barriers) – the AKP aimed to compensate for the failure of earlier governments by combining economic liberalization with the necessary institutional and legal framework and broader investment opportunities so as to achieve a stable market economy experience in Turkey. From the EU perspective, the government’s economic agenda meant that the government had set itself the task of establishing a “functioning” market economy and taking crucial steps to increase its “efficiency”. The success of the AKP in conforming the Turkish economy to a EU-style one is evident in the EU Commission reports. This marked a change from 2002. In its 2002 Progress Report, the European Commission had held the opinion that: Turkey’s economic and political situation … does not convince it [the EU] that the adjustment problems that would confront Turkey if it were to accede to the Community could be overcome in the medium term. (p. 60)

As is evident in this statement, at this time, the EU was highly critical of Turkey’s economic development given the volatility in growth rates, high inflation and imbalances in budget deficits that had characterized the Turkish economy throughout the 1990s and early 2000s. Shortly after coming to power, however, the AKP succeeded in revising the negative opinion of the EU Commission, as is apparent in the 2004 Progress Report: Turkey has made considerable progress towards being a functioning market economy, in particular by reducing its macroeconomic imbalances … economic stability and predictability have been substantially improved since the 2001 economic crisis. High inflation has come down to historic lows, political interference in economy has been reduced and the institutional and regulatory framework has been brought closer to international standards. Thus, an important change towards a stable and rule-based economy has taken place. (p. 70)

Indeed, a robust economic performance underpinned by strong fiscal consolidation was affirmed constantly in the annual EU Commission Reports, which held the opinion that as long as the country maintained its recent stabilization and reform achievements firmly, Turkey could catch up with the EU economies quickly.18 In the 2009 Progress Report, the 18. EU Commission, Regular Report from the Commission on Turkey`s Progress Towards Accession, Brussels: CEC, 2005, p. 54.

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Commission once again expressed its confidence in the government’s economic policy stance and appraised the success of the AKP government in maintaining the consensus on economic policy essentials, despite the severe effects of the global crisis that had broken out in 2008. It goes without saying that the Turkish economy had been severely affected by the latest crisis as the economy grew by only 0.9 % in 2008, down from 4.7 % in 2007, and private investment fell by 4 % in 2008, accompanied by a sharp rise in unemployment, which rose from 9.5 % in mid-2008 to 13 % by mid-2009. Nevertheless, despite all these negative repercussions of the crisis and of challenging circumstances, the Commission expressed the opinion that the Turkish economy was capable of withstanding the global crisis thanks to a successfully implemented stabilization program, which had thus far prevented a full-fledged financial crisis. In the words of the Commission: Macroeconomic stability has been tested and has been broadly preserved in spite of harsh economic recession … underlying the economy’s improved shock resilience. Overall, the unfolding of the crisis did not jeopardize the functioning of market mechanisms and Turkey continues to be a functioning market economy. (p. 37)

However, despite the remarkable performance of the AKP in sustaining good macroeconomic indicators, as evidenced in the Commission Reports, it would be wrong to assume that the AKP displayed a flawless performance in complying with the EU’s conditions for establishing a functioning market economy. After all, the Party was not immune from political calculations and clientelist thinking in the formulation of its economic policies while in office. Like its predecessors, the AKP was also subject to non-technocratic thinking as it still needed to consider the demands of its electoral constituencies in order to maintain its hegemony in center-rightto-right of the political spectrum. One area in which the government fell short of fulfilling expectations concerned its reluctance to launch a serious combat against patronage politics. The unwillingness of the AKP government to tackle the corruption problem became apparent in the enactment of the Public Procurement Law, scheduled to go into effect in early 2003. Originally, the law was drafted in line with EU standards with the aim of introducing transparency into the process of bidding and awarding contracts. As the system of public procurements had generally been used by the governments to reward their loyal constituencies, it had led to plenty of opportunities for corruption. Both the EU and the IMF were therefore eager to see the new law passed in the Parliament. The AKP, however, did not share their enthusiasm. Given that construction services and related subcontracting are big business in Turkey, the AKP chose first to postpone and later to alter the Procurement Law as the new law would 75

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prevent the AKP from rewarding and providing preferential treatment for those Anatolian-based companies who had offered their political support. As Marcie J. Patton argues, the reluctance of the government to implement the law stemmed from the unstated objective of issuing state tenders to the party’s domestic supporters as opposed to the “usual” participants in the existing tender process, dominated by Istanbul-based and state protected companies.19 The delay in passing the law led to accusations of secular domestic business groups that the government was back-paddling on institutional reforms in favour of populist spending. Although the government enacted the law, the revisions it has made on the law over the years have enabled the AKP to selectively distribute benefits by discriminating among the bidders, and reward its backers. For instance, one of the revisions that the AKP has carried out made those projects related to petroleum and gas sectors exempt from complying with the terms of the Procurement Law. Accordingly, contracts regarding oil pipelines and refineries could be distributed to any companies or firms on any terms approved by the government.20 Indeed, one can cite here the rather controversial initiative of the AKP government that occurred in year 2005, when the government decided to remove the law that required capital or property owners to account for the acquisition of their wealth as another incident of preferential treatment of the Party to its supportive groups (Hurriyet, 22 September 2005). Despite the criticisms of such exemptions coming from the IMF, the government did not relent at this time. In response to allegations from the opposition, the AKP justified its acts on the grounds that the law prevented economic growth by causing capital outflow. Nevertheless, the AKP’s stance served the interests of capital holders in general, and the Anatolian petite bourgeoisie in particular, as it was this group that underreported their revenues in order to escape the tax burden, rather than big business, who faced more difficulties in tax evasion due to their international trade activities, which included bureaucratic procedures and thus required greater exposure of their business details and revenues.21 Another instance where the AKP favoured its key constituency group of the Anatolian bourgeoisie – this time at the cost of a clash with autonomous 19. Marcie J. Patton, “The Economic Policies of Turkey`s AKP Government: Rabbits from a Hat?”, Middle East Journal, Vol. 60 No. 3, summer 2006, pp. 513-536. 20. Milliyet, 23 May 2008. 21. The law was initially enacted to prevent tax fraud in 1998, annoying businessmen in the process, who stated that the law was a reflection of hatred of wealth. For details on the this law and particularly on the political reasons of the AKP in removing it, see Demiralp (2006).

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institutions of the state – occurred when the AKP called for greater political control and accountability of the Central Bank of the Republic of Turkey, one of the key regulatory institutions in the economy. This particular stance of the AKP towards the Central Bank was a reflection of its targeted clientelism. After all, small business groups, who wanted to borrow from banks at cheaper rates, were highly critical of the strict monetary policies of the Central Bank which raised their costs of borrowing. In contrast to the financial privileges big businesses enjoy, small and medium-size enterprises in Turkey do not have their own banks and moreover, they lack the kind of reputation necessary to borrow from external sources without complications.22 Given their constraints in borrowing options, the small business is dependent on domestic commercial banks for financing. In return for their efforts to boost a real economy, the petite bourgeoisie demanded a more balanced approach that would forego tight monetary policies for continued growth. As the Central Bank of Turkey refused to yield to the demands of lower interest rates, the Bank’s relations with the government cooled down as the latter sided with small business and criticized the Bank’s stance openly. Given significant improvement in fiscal indicators, since 2004 the government had been requesting the Bank to re-adjust its interest rates. In late 2006, the conflict between the two actors reached a peak, when the Central Bank’s new Governor, Durmus Yilmaz, stated explicitly that the Bank would not lower interest rates for another year.23 In return, the government struck back by attacking the Bank’s decision in the press, openly accusing the Central Bank of Turkey of acting like “an autonomous republic, instead of an institution subject to the monetary targets set by the government”.24 The Bank, in return, defended its stance by stating that: The Central Bank of Turkey has to take a longer view as opposed to ruling politicians, who have only short-term considerations and hence, tend to be populist for electoral purposes.25

The conflict the AKP had with the Central Bank resembles the tension it had in its relations with the Banking and Regulation Supervision Agency (BRSA) in its early days in office when the government displayed a 22. For a discussion of petit bourgeoisie’s financial constraints and complaints about autonomous regulatory institutions, see Ziya Onis, “The Political Economy of Turkey`s Justice and Development Party”, pp. 220-224. 23. Milliyet, 3 January 2007. 24. Ibid. 25. Ibid.

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lukewarm attitude toward the Agency. Faced with the petite bourgeoisie’s demands for a special treatment giving this Anatolian-based business group access to domestic bank credits on more favourable terms, the AKP positioned itself against any change that would increase the political independence of the BRSA. After all, the BRSA was responsible for the implementation of tight sets of regulations on bank lending and determined to safeguard the financial sector’s stability at any cost. Nevertheless, once AKP encountered IMF pressure for furthering the institutional power of the BRSA, the government stepped down and made the necessary legal amendments in 2003. As for the Central Bank, the government refrained from any legal attacks on the Bank’s institutionalized power, which was strengthened with the 2001 Central Bank Act. The exchange of criticisms between the Bank officials and the government reveals the constraints the AKP government has faced in meeting the EU criteria. As is apparent in the examples stated above, the AKP is hesitant to commit itself to reforms when such reforms are likely to alienate its key domestic constituency, the Anatolian-based business groups. Although the EU has largely removed the opportunities for populism by requiring institutional changes, structural reforms and the establishment of a legal framework for accession, the Turkish polity is still subject to clientelist networks, which facilitate the access of specific electoral constituencies to state resources in exchange for their electoral support, whenever possible. Indeed, the 2009 Progress Report of the EU Commission reveals this deficiency by underscoring the limited progress in eliminating corruption in the Turkish polity and the half-hearted commitment of the AKP government to anti-corruption policies: The legislative framework designed to prevent corruption has been improved. However, corruption remains prevalent in many areas. Turkey needs to finalize an anti-corruption strategy and develop a track record of investigations, indictments, prosecutions and convictions. (p. 13)

Having discussed the policies of the AKP in the economic sphere, how can we assess the AKP’s performance vis-à-vis its overall success in complying with the EU economic criteria? It is safe to argue that the AKP manifested goodwill in establishing a “functioning market economy” in line with the EU criteria since coming to power in 2002. However, with regard to the latter condition of having the “capacity to cope with competitive pressures and market forces within the EU”, the performance of the ruling AKP has thus far lagged behind its success in fulfilling the former condition. While the development of physical capital and the growing involvement of foreign actors in the economy have progressed reasonably according economic indicators, the same cannot be said of development of human 78

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capital. When the AKP took control of the Turkish economy, prospects for human development were dim and the EU Commission was quite pessimistic about overcoming its obstacles. In its 2002 Report, the Commission stated the opinion that: Turkey’s human capital development has been characterized by strong population growth and very limited budgetary allocations for meeting the increasing need for education and health care … In addition, access to education and health care is unevenly distributed among the provinces … Given the high importance of human capital for sustaining competition and improving potential growth, a continuation of the present situation would be a threat to Turkey’s prospects for catching up … Labour market policies are underdeveloped. Little attention has been paid to labour market issues, such as high unemployment rates. (p. 57)

After seven years in office, the AKP still, unfortunately, has not displayed any significant improvements in the problematic issue areas mentioned above and the picture remains rather bleak. Although the government achieved robust growth rates in the economy in the period of 2002-2006, averaging higher than 7 % per year, the rapid increases in growth rates were not transformed into jobs and employment opportunities during the AKP rule, but instead led to, what Yeldan calls, a jobless-growth pattern in the Turkish context.26 The rate of unemployment, which rose to above 10 % after the 2001 crisis did not fall back throughout the AKP rule.27 In the realm of labour markets, the AKP was caught in a dilemma: On the one hand, the AKP was supposed to deregulate labour markets according to the desires of the IMF as well as the recommendations of the EU, a deregulation which would increase unemployment in the short-run but help the country achieve competitiveness in international markets thus boosting both growth and employment in the medium-run. On the other hand, the AKP was squeezed by the pressure for greater employment opportunities from the lower income groups it also attempted to represent. The AKP ultimately chose to resolve this dilemma by undertaking measures that addressed the needs and interests of capital-holders, mainly the IMF and domestic business groups, at the expense of the welfare of low-income segments. In 2003, the government passed new legislation on 26. Erinc Yeldan, “Patterns of Adjustment Under The Age of Finance: The Case of Turkey As a Peripheral Agent of Neoliberal Globalization”, paper presented at Union for Radical Political Economics (URPE), Chicago, 5-7 January, 2007. 27. As Yeldan points out in his paper, according to TURKSTAT data, people not actively looking for a job, but ready for employment if offered one increased from 1,060 thousand persons in 2001 to 1,936 thousands by 2006, bringing the total (open+ hidden) unemployment ratio to 15 %.

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labour which reduced the coverage of job security (in particular the prevention of the dismissal of workers on the basis of trade union activities, pregnancy and legal actions) now extending it solely to those enterprises employing more than thirty workers. Given that small and medium-sized firms account for 77 % of total employment in the Turkish economy, this new legislation simply offered small businesses extensive flexibility to dismiss their workers at will.28 From the AKP perspective, the new law served two critical purposes. First, by empowering small capitalists against Labour, the Labour Law allowed the AKP to appease its key electoral constituency. Secondly, since the law strengthened the hands of the business to resist wage increase demands, it helped the government’s efforts at sustaining moderate wage growth in the economy. Needless to say, the new law was detrimental to the interests of labour as workers would not only now face greater risks at keeping their jobs but also lose whatever room they had in their negotiations with their employers for wage increases. The expectation of those who supported this law, including the EU was that flexibility in the labour market would help the Turkish economy recover from high unemployment problems, particularly severe among youth, by providing non-contract and part-time working opportunities.29 Contrary to expectations, however, the formal job market has not been able to absorb the supply of labour so far. The problem will become even more acute in years ahead with an expected acceleration of the labour force transition out of agriculture.30 Moreover, the outbreak of the global economic crisis in 2008 worsened the unemployment rate, which rose to 13 % by mid-2009. The challenge of the AKP, therefore, remains in place, as the Party must improve conditions for job creation in formal sector.

28. For a detailed discussion of the content and repercussions of the 2003 Labour Law, see Engin Yildirim, “Labour Pains or Achilles` Heel: The Justice and Development Party and Labour in Turkey” in Hakan Yavuz (ed), The Emergence of a New Turkey: Democracy and the AK Parti, (Salt Lake City: University of Utah Press, 2006: 235-258). 29. In 2006 the EU Commission stated in its annual progress report on Turkey that unemployment among the young, which was then standing at around 18 % as a severe problem that needs immediate attention from Turkish officials on the rocky road to the EU accession. 30. A recent OECD report (2006) argued that a significant reduction in social security contribution rates is necessary to boost job creation in formal sector. Accordingly, cuts in pension contribution rates would make it cheaper to employ labour in the formal sector, and the cut can be partly funded by a package of other reforms including a reduction in early retirement incentives. See [http://www.oecd.org/ dataoecd/50/53/37529636.pdf] pp. 6-7.

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Given the budgetary constraints accompanied by the economic slowdown in the wake of the global crisis, it is hard for the AKP to solve the unemployment problem in the short-term. This being the case, the government has been required to take steps to change the current taxation laws as the existence of high non-wage costs of hiring labour stemming from high social security contributions and labour tax wedges creates incentives for employers to remain in the informal part of the economy, which represents between 30 and 50 % of GDP.31 Besides the problem of low labour participation in the economy, the poor record of human development in Turkey poses another challenge for the ruling AKP government on the rocky road to the EU accession. The heart of the problem lies in the Turkish public education system. In addition to financial strains, Turkish primary and secondary school education suffers from poor quality relative to those in other OECD countries. A recent OECD report on Turkey found that the education system in Turkey focuses on providing a good education to the most able students, who are admitted into the best schools (Anatolian and science high schools) and then channeled towards university and work in the formal sector. As a result, the most binding human capital shortages arise in the middle and low-end of the labour market. Accordingly, overcoming this education duality, which is mirrored in the economy as a whole, requires a reorientation of education sector priorities and a reallocation of educational resources so that higher quality education opportunities can be offered to a majority of young people to allow them to gain the basic literacy and numeric skills necessary for the current workforce. Achieving this, however, presents a challenge for the government. After all, the government should not only increase educational resources whenever a higher budget allocation is available, but also ensure that increased spending is allocated in a way that spreads resources more equitably across schools and regions.32 As the annual EU Commission reports constantly point out, substantial regional differences in Turkey hinder the development of human capital, and thus adversely affect the country’s ability to catch up with the EU average. In

31. According to the Turkish Employers’ Confederation, the monthly hiring cost of one worker is about 3.101 YTL. While 1.704 YTL of this amount is paid to the labourer as his wage, the rest (1.397), comprising 45 % of the total amount, goes to the state as tax and social security contributions. 32. See OECD Report, 2006, p. 9 for details. Regarding the regional disparities, the problem is acute in the sense that as the 2009 EU Commission Report recounts, there is a difference of more than 10 % between some western and eastern parts of the country.

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addition to regional disparities, a gender gap persists in education. As the 2009 progress Report underscores, women’s access to education in Turkey is the lowest among the EU member states and OECD countries. Moreover, the content of education is also problematic as reports on the Turkish educational and vocational education system indicate that the current system does not seem to meet the expectations of international investors (see Chapter 5).33 This problem concerns the EU as in its 2007 report, the EU Commission pointed at the skill-mismatch between labour supply and demand in Turkey, thus hampering job creation in Turkey, which grew by only 1.3 % in 2006.34 In its 2009 report, the quality of education was again underlined as a problem hindering human capital development in Turkey, signaling that the AKP government has done little to correct the mismatch between supply and demand of skill in labour markets. It should be noted here that the AKP government can only partially be held responsible for its shortcomings in the human capital development realm insofar as the government faced serious budgetary constraints until the completion of the Stand-By Agreement with the Fund in 2008. Moreover, the subsequent outbreak of the global crisis hampered any further improvement by slowing down the economy. Given these factors, We could raise criticisms against the EU for its attitudes in that while it underscores the importance of social issues and the need to invest in human capital, the Union does not specify how the government can tackle these problems and still, maintain a consolidated budget. In the words of Heather Grabbe, this problem is not specific to Turkey but is inherent in inconsistencies embedded in the Copenhagen criteria themselves: Effectiveness of the EU conditionality is reduced by inconsistencies in the EU’s advice to applicants. At a general level, applicants are encouraged to maintain fiscal and monetary discipline and the Union stresses the need to control budget deficits … but at the same time, the Union also demands major investments in infrastructure and a whole range of other sectors … the room for additional public spending is reduced if it is to be accompanied by tight fiscal and monetary policies aimed at macroeconomic stability.35

The government, however, is not immune from criticisms either in that it failed to revise the speculative nature of growth in the economy since it has 33. OECD Report, 2006, p. 8. 34. In 2007, the government designed a new educational reform program as part of the five year long National Development Plan that attempts to increase the responsiveness of education to the demand and enhance the educational system, the benefits of which are to be seen in coming years. 35. Heather Grabbe, “European Union Conditionality and the Acquis Communautaire”, International Political Science Review, Vol. 23, No. 3, July 2002, p. 263

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been in office.36 As Yeldan argues, in the presence of high interest rates in the economy, a transfer of surplus occurred away from wage earners towards capital holders while the labour witnessed a squeeze of their wages by the government to curb inflation, in line with the IMF-led stabilization program, insistent on a prudent income policy. While the high profile groups continued to take advantage of the interest rate arbitraging activities, labour saw its real income levels deteriorate. In addition, the government lowered the share of the budget allocated to health, education and social protection in order to facilitate its payment on interest. In 2004, the total payment made to rentiers constituted 40 % of the whole budget, while the share of the budget for social spending remained at 26.8 % and in 2007 the ratio was almost the same, 25.5 %, despite the reduction in interest payment, comprising 23 % of the government budget. The deterioration in income levels is apparent in figures; in Turkey the GDP per capita in purchasing power standards stood at only 30 % of the EU-27 average in 2007. Because the AKP failed to revise the development strategy of “arbitrageseeking” capital-based strategy and adjust the burden that fell on the lower and middle income groups, it was unable to address the problems of poverty and inequalities in income distribution.37 It is the challenge of the AKP government to combine economic policies that target macroeconomic and financial stability with social policies to eliminate poverty. The problem, however, is the lack of a uniform model for governments to adopt in order to reach these broader goals. As Dani Rodrik suggests, since policy packages associated with high growth rates in one country – particularly the nonstandard elements therein – fail to deliver similar results in another setting, attempts to emulate successful policies elsewhere often fail. This is why, as Rodrik reminds us, the AKP should design the development trajectory of a country in a way that will consist of both standard and, especially, nonstandard policies, base its development on policy innovations and country-specific institutional arrangements rather than on a conventional recipe endorsed by international institutions and market

36. In the presence of need for capital, the AKP government had to operate under high interest rates in economy to attract short-term finance capital from abroad, which continued to subject the economy to inflows of short-term capital and speculative gains. 37. For a definition of the term “arbitrage-seeking” capital based growth and what it means in Turkish context, see Erinc Yeldan “Patterns of Adjustment Under The Age of Finance: The Case of Turkey As a Peripheral Agent of Neoliberal Globalization”.

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participants38. In its challenge to increase the country’s capacity to cope with the competitive and advanced market structure of the EU in a context of substantial regional discrepancies, income-level differences and high unemployment, the AKP government might need to diverge from its adherence neoliberalism and IMF-steered policy recommendations and seek genuine institutional arrangements and economic models for robust growth. This unconventional path could eventually generate the necessary resources for job creation and a high level of human capital in the economy.

Conclusion Coupled with the tutelage of the IMF, the EU’s conditionality for accession, known as the Copenhagen criteria have significantly influenced the Turkish polity in the 2000s. The AKP’s economic performance since 2002 illustrates that the AKP took substantial steps to converge towards the EUcriteria in terms of establishing an market economy and strengthening its efficiency through structural and institutional reforms in the economy as well as through changes in the country’s legal framework. It can rightly be argued that the Turkish economy in the 2000s became a modern one thanks to a full-fledged stabilization program and strong economic institutions – developed above all in the finance sector through supervisory and regulatory agencies – that generated resilience to external shocks. Indeed, the lack of a financial meltdown in Turkey in the context of the global crisis is a good indicator of the strength of Turkish economy. However, a modern economy also requires institutions that extend beyond the standard list of antitrust, financial supervision, securities regulation 38. In his book Dani Rodrik discusses the experience of developing countries that attained high growth, closer to those enjoyed in advanced world in detail. He argues that the success of these countries lie in their determined attempt to combine conventional policies, outlined in the Washington Consensus and advocated by the IMF, with nonstandard policies well attuned to the local particularities a country. He gives the example of cooperative property rights in China as opposed to conventional public or private rights, where formal ownership rights in village enterprises were given to local governments as opposed to central government or private individuals. As the equity stake of these enterprises generated revenues directly to local governments, they ensured their smooth functioning. According to Rodrik, this nonstandard property rights regime is responsible for the remarkable boom in investment and entrepreneurship generated by these enterprises. See Chapter.1 for details in his book, One Economics, Many Recipes: Globalization, Institutions and Economic Growth, Princeton University Press: New Jersey, 2007.

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and so on. Given the pervasiveness of risks to employment and income, there is a definite need for institutional innovations in the areas of social security, unemployment, and legislation regarding unions. These institutions are safety nets that legitimize a market economy by rendering it compatible with stability and social cohesion. The AKP initially declared that its interest in the social dimension of the economy. In its attempt to gather the support of groups that are most vulnerable to the externalities of market forces, the government announced its will to establish adequate safety nets to prevent their exclusion. However, the government has far failed to keep its promise. According to the 2007 EU Commission Report, the percentage of population at risk of poverty was 18.56 % in Turkey, a figure among the highest of member states and candidate countries. In 2009, the EU Commission Report underlined this danger once again. As the latest Poverty Survey indicates, the poverty rate of children in Turkey under the age of fifteen years stands at 26.1 % and in rural areas the number goes up to even 42 %.39 As this chapter has argued, the AKP has been partially successful in adhering to the EU criteria and the Party needs to further enhance the capacity of Turkish economy to take on the challenges posed by growing global competition in order to reduce the country’s costs of absorption by the EU. On the rocky road to the EU accession, the AKP must formulate and implement policies, targeting the lowest end of the income scale, and develop strategies to translate the growth rates in the economy into higher employment prospects. Given the popularity of such policies in the eyes of the masses, and the support of the small and medium bourgeoisie of these policies, the AKP possesses the grass root support necessary for tackling the deeper problems of the Turkish economy. Failure to solve these problems will prove to be costly for the AKP government as this will not only alienate the lower classes from the Party but also interrupt the country’s progress on its EU trajectory.

39. On p. 25 of the 2009 EU Commission Report it is stated that the poverty rate increased by 0.9 % to 26.1 % in year 2007. Unfortunately, the Report does not give the current numbers regarding the prevailing poverty rate of children in rural and urban areas of the country.

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4. Public Sector Governance in Turkey: Evaluating a Reform Agenda Yakup Beriş, Aslı Gürkan and Fuat Andıç

Turkey has recently adopted many changes to revamp its public sector. The success of these changes associated with public sector reforms is important for many well-grounded, substantial reasons. First of all, these reforms are indispensable for promoting a public sector, which is capable and able to implement the EU Acquis. Second, the public sector plays an active role in enabling an environment which allows democratic standards in public life to flourish. It can hinder or promote the advancement of the rule of law, freedom of speech, and civic values in the country. It can support or prevent the development of civil society. Third, the Turkish public sector has always played a strong role in the economy and will continue to do so in the foreseeable future. The public sector delivers the most important social services and has significant regulatory powers over other sectors. Therefore, the nature of the public sector presence in the economy is crucial in reaching and maintaining a functional market economy in the country. Such a presence, if not well managed, leads to inefficiency and corruption in the public sector, distorting its relations with the private sector and with its citizens. Many of Turkey’s public sector reforms are driven by the desire and necessity to adapt to EU laws, regulations, and institutional structures, which are generally guided by the EU Acquis Communautaire. In this sense, the role of the EU as a catalyst to the Turkish public sector reform process is undeniable. However, there is a real need to better evaluate the extent to which these reforms have been effective in bringing about institutional changes in the public sector. This paper certainly does not provide the kind of research that could verify whether these changes provided such institutional changes. Our goal is a more modest one: to provide an analytical framework that could help determine to what ultimate outcome the large number of legal changes in the country could contribute. This perspective requires evaluating Turkish reforms through a broader scope rather than simply focusing on the adaptation of Turkish laws and regulations coexisting with the EU Acquis: It means that each

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reform should be guided by the ultimate goal of making the Turkish public sector transparent, accountable, and responsive. While the EU does contribute to public sector reforms it does so merely as a catalyzer – the EU process cannot replace a locally driven agenda on the reforms. The EU Acquis and related reform monitoring mechanisms lack a comprehensive and systematic focus on public sector reforms that could provide Turkey with holistic guidance. In this sense, the reforms need a better strategic approach, one based on the political ownership in the country that is not always present. Such transformation requires a solid implementation, strong political ownership, and behavioral changes in bureaucracy, accompanied by real changes in the incentive structures within the public administration. It stands to reason that legal and regulatory changes alone, even to the great extent that Turkey has pursued them in the last few years usually remain insufficient for bringing about real changes in the way governance structures are shaped. Through country ownership and strategic approaches, the gap between the legal reforms and their implementation could be narrowed faster. Otherwise, legal and regulatory reforms, instead of changing the end results (better governance), only induce a new process, in all likelihood an informal political market, in which political figures and bureaucracies seek ways to establish practices that bypass or evade the formal structures (such as new laws) and therefore keep their old ways of conducting business. Against this background, we will try to evaluate recent laws and regulatory changes in terms of how they could improve transparency in the public sector, its market relations, and its interactions with citizens. From this perspective this article intends to provide an overview of the reforms that have taken place during the last decade and provide a framework that could be further developed to assess their effectiveness. Close attention is paid to reforms which enhance transparency and reduce corruption, decentralization, and the participation of civil society in the decisionmaking processes.

Turkey’s Reform Efforts: Driving Factors and Limitations The 1980s and 1990s: Economic Liberalization with Limited Public Sector Reform The public sector reform efforts in Turkey date back to the 1960s and continued through the Five-year development plans prepared by the Public

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Administration Institute of Turkey and the Middle East (TODAIE).1 However, despite these attempts, these past public sector reform efforts have not produced many results. With the robust liberalization process in place since the 1980s, the Turkish foreign trade regime relaxed considerably, exchange controls were essentially scrapped, and foreign direct investment actively encouraged. However, while the new, liberalized Turkish economy was successful in generating growth it did not bring about corresponding reforms in the public sector. Economic measures fell short of lightening the burden on the public sector caused by the demands of the rapidly growing urban centers due to the massive population movement from the rural to the urban sectors, which exerted pressure on the financing of basic public services provided by the central and local governments.2 Turkey’s public sector failed to generate an appropriate response to this changing environment. The public sector’s strong presence in the market, especially through stateowned enterprises (SOEs), combined with the absence of effective institutions of transparency and accountability as well as the centralist and top-down response to growing urban and local demands for better services limited the ability of the government to properly address emerging new and different local conditions. Although civil society had been expanding, especially since the 1990s, the wariness of the government to engage with the newly emerging civil society actors more closely only produced populist and rent-seeking policies. In short, instead of working together with civil society actors, the public sector continued to play a dominant role in the markets through SOEs and state banks, and preferred to bypass them. While some efforts were made to assign additional responsibilities and resources to the municipalities to finance and manage basic urban services the Turkish public sector nevertheless preserved its traditional centralized administrative control measures over local governments. For example, public decision making remained centralist and top-down, devoid of the flexibility needed to adapt to a changing economy and society.

1. 2.

Yakup Beris and Ebru Dicle. “Reforming Public Management and Managing Reform in Turkey.” TUSIAD Working Paper. Turkey in Focus. Issue 4, March 2004, p. 1. Fuat Canan, “Reform Efforts for Better Governance in Turkey.”, 2002, p. 1. [http://unpan1.un.org/intradoc/groups/public/documents/UN/UNPAN016602.pdf]

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External Factors: The IMF, EU, and A New Push for Reforms Turkey’s recent reform efforts, especially since 2001, have been a product of the dynamic interaction between domestic and external elements. In Turkey, the impetus for public sector reforms in recent years appear to be closely linked to IMF’s insistence on expenditure control as well as Turkey’s desire to conform to the requirements for joining the EU. These factors, combined with the public sector crises of November 2000 and February 20013 made drastic measures and radical reforms indispensable. With the renewed political leadership and high-level willingness to pursue IMF, World Bank, and EU-backed programme recommendations, political and economic reforms came into being. The IMF conditionality has especially focused on fiscal transparency and on Turkey’s compliance with internationally-accepted public sector budgeting standards, while Turkey’s accession process to the EU in particular has had a significant impact on the operating environment of its public sector: the process of reforms is catalyzing change in the economy, allowing for a more active presence by the private sector in the market. It is also fostering civil society growth, increasing vigilance about and demand for better governance. Since the 1990s, the EU has had an influence on the Turkish public sector reforms and has established mechanisms to monitoring these reforms. The European Commission has regularly prepared progress reports on Turkey following the Luxembourg European Council in December 1997. Following Turkey’s candidacy in 1999, the EU became yet more directly involved, requiring, guiding and monitoring public sector reforms, albeit in a fragmented way, under several different headings through its preaccession strategies. The European Council has also established Accession Partnerships with Turkey.4 The real turning point in terms of EU’s impact on Turkish public sector reforms came in December 2004 when the European Council decided to open accession negotiations with Turkey beginning 3 October 2005 and establish the corresponding framework and the requirements. Since the beginning of accession negotiations, Turkey’s reform efforts have been linked more closely than ever to its relations with the European Union. The negotiating framework (article 17, p. 6) as adopted by the European Council in 2004 clearly relates public administration reforms to the successful adoption of the Acquis: In all areas of the acquis, Turkey must bring its institutions, management capacity, and administrative and judicial 3.

4.

To obtain more information on the crises of November 2000 and February 2001, see the OECD Economic Surveys: Turkey 2000/2001. http://www.oecd.org/dataoecd/16/ 39/1886247.pdf The first Accession Partnership was created in 2001 and updated in 2003 and 2006.

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systems up to Union standards, both at national and regional level, with a view to implementing the acquis effectively or, as the case may be, being able to implement it effectively in good time before accession. At the general level, this requires a wellfunctioning and stable public administration built on an efficient and impartial civil service, and an independent and efficient judicial system.5

Accordingly, the advancement of the negotiations are monitored by the European Commission and reported to the Council through yearly reports.6 These reports assess Turkey’s situation and prospects with respect to the Copenhagen political and economic criteria, capacity to assume the obligations of membership (EU acquis, secondary legislations, and policies), and compliance with Accession Partnership priorities. The reports measure “progress” on the basis of decisions taken, legislation adopted, and measures implemented. These structures are important insofar as they allow Turkey to respond to these partnership documents through its National Plans. Most of the ongoing reforms in Turkey have been undertaken as part of these national plans. These progress reports echoing each other from year to year, have taken the same line as the Negotiating Framework Document, which has called for Turkey’s increased attention to good governance in general, and decentralization and public internal financial control in particular. Indeed, many suggestions made in these progress reports are specifically related to public sector governance. The reforms recommended with respect to the Acquis redefine the role of the Turkish public sector in its relation with the private sector and civil society. The progress reports do not specifically focus on public sector reforms; nevertheless, many of their headings closely reflect public sector reform, implying changes in the internal processes and structures of the public sector. For example, under the ‘Democracy and Rule of Law’ headings in the “Criteria for Membership” section, the 2006 report evaluates the Turkish legislation and its enforcement with respect to public administration and anti-corruption policy. Similarly, under the ‘economic criteria’ heading of the same section, the report focuses on progress related to the functioning of the market economy and also assessed the role of the state. The progress in reforms with EU impetus has been quite significant, especially in the last few years. However, just as the EU has been an 5. 6.

European Commission website on enlargement. [http://ec.europa.eu/enlargement/ turkey/key_documents_en.htm] Nine reports have between 1998 and 2006 have been made available to the public

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incentive in Turkey’s progress, it has also had some impact on its recent slowdown, demonstrating how fragile the process can be before all the achievements have been consolidated. The latest report of the Independent Commission on Turkey,7 released in September 2009, emphasizes this aspect and indicates that the reforms have been stagnating for the last two years.8 The report acknowledges that the discriminatory attitudes of EU political leaders who succeeded in diluting the earlier cooperative spirit, has clearly undermined the motivation of Turkish leaders to go ahead with reforms. The negative attitudes of EU leaders have contributed to a backlash and a decline among Turkish public support for EU membership. Consequently, the promised reform of the constitution has not taken place, the impartiality of the judiciary has yet to be established, and Article 301 of the penal code has not been revised in a satisfactory manner.9 The slowing-down of reforms in turn plays into the hands of Turkey-skeptics in Europe and Euro-skeptics in Turkey. Continued partnership between the EU and Turkey is even more important in light of the obstacles that are encouraged by opposing forces in Turkey and EU. The public sector reforms that in a sense serve as benchmarks of progress in the EU accession process make it necessary for both the EU and Turkish leaders to make a renewed effort to maintain the momentum of the 2000s. Echoing this view, the September 2009 Commission report cautions the EU to stand firm behind its own commitment and promises that it made to Turkey. On the other hand, it encourages the Turkish leaders to move 7. 8.

9.

Second Report of the Independent Commission on Turkey. “Turkey in Europe: Breaking the Vicious Cycle”, September 2009. In addition, two factors cloud the Aquis negotiations as highlighted in the September 2009 EU Progress Report. One is Turkey’s refusal to open its ports to ships of Greek Cypriots. The EU suspended eight negotiation chapters with Turkey due to its refusal to open its ports and airports to Greek Cypriot traffic. The other is growing hostility among EU leaders to Turkey’s EU accession on religious, economic and geographical grounds. The flooding of the European market with Turkish workers is a genuine concern for the EU. France and Greek Cyprus have unilaterally blocked the opening of talks on a total of 10 other chapters. Article 301 made insulting ‘Turkishness’ a criminal offence and allowed prosecutors to initiate the criminal procedure. The recent revision enacted on May 1, 2008, replaced the nebulous term of ‘Turkishness’ with insults to the Turkish nation, the Turkish state, the Turkish Parliament, Turkish judiciary, Turkish military and security forces. The penalty varies between six months and three years. The revision also states that the prosecutors are not free to initiate the criminal procedure without prior permission of the Ministry of Justice. Some argue that such a revision might lead to violation of the principle of separation of powers, subjugating judicial power to administrative power. The penalty for such offences has not been changed drastically, except reducing the maximum penalty to two years.

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ahead with public sector reform in a number of areas. It states that Turkey needs to establish a functioning ombudsman and to adapt to EU standards on procurement in order to promote full transparency and reduce corruption. Alongside Turkey’s EU candidacy and the accession process to it, the IMFbacked economic reform program and closer working relations with the World Bank have contributed to the acceleration of indigenous reform efforts. Particularly with respect to the public management of the economy, Turkish authorities have succeeded in bolstering economic policy efforts through agreements with international financial institutions, in particular through the Stand-By Arrangement with the International Monetary Fund (IMF) and the Programmatic Public Sector Development Policy Loan with the World Bank. Overall, Turkey maintained an average of 7 % GDP growth in the period of 2002-2007, although the growth rate fell to 1.1 % in 2008 as a result of the global economic crisis. The resilience of the Turkish economy to the global financial crisis points to the considerable achievement of previous reform efforts in this area. The banking sector, for example, has remained particularly strong during the crisis, thanks to dramatic overhauls in the aftermath of the economic crisis of 2000-2001 and the Banking Act of 2005.10 These efforts were supported by Turkey’s Pre-Accession Economic Programme (PEP) submitted to the EU Commission in December 2005. Also attesting to the successful efforts since the economic crisis, an IMF program was successfully concluded in May 2008. Considering the many failed economic programs backed by the IMF, the completion of this programme should be considered a significant achievement in and of itself. As a result, in 2009 preliminary negotiations began to sign another program with IMF ending in 2011. Turkey is now in the process of discussing whether or not it actually needs such an IMFbacked programme, which indicates the increased confidence in its economy.

A New Public Sector Reform Agenda In parallel with these externally supported mechanisms through the EU accession process as well as the IMF and World Bank support programs, Turkey has in recent years finally begun to transform the management of its public sector from one of “traditional public administration” to a “public management” approach. This transformation, at least on paper, 10. Second Report of the Independent Commission on Turkey, p. 42.

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could lead to a more participatory, transparent, accountable public sector that respects human rights and freedom, and provides high quality public services in a timely, efficient and equitable manner. As described in the previous section, both the EU accession process and the IMF-backed economic reform programme have given impetus to this change of approach. In recent years, domestic leadership has also shown signs of countryownership for public sector reforms. The Justice and Development Party (AKP) government included Public Sector Reform in its Urgent Action Plan in 2002, in addition to its government programme.11 The Turkish Prime Ministry, which is the leading and coordinating agency in this reform process, established the objectives and principles of the reform in a report entitled “Change of Management in Public Administrations.” The report identifies the main elements required for an effective restructuring of the public sector: a new public administration framework, a better central administration, more effective local administrations, and other new arrangements, the main component of which is civil service reform.12 Since 2003, the Parliament has adopted a number of EU-required legal reforms, which adhere to both the Copenhagen political criteria and to the European Community Acquis.13 These legislations are very much on par with worldwide trends in public sector reforms. The legislations encompass elements such as redefining the state’s role in the banking sector, the privatization of major state-owned enterprises and banks, the deregulation (or amending the regulations) of key markets such as energy 11. Fuat Canan, “Reform Efforts for Better Governance in Turkey.” 2002, p. 2. 12. World Bank, “Programmatic Public Sector Development Policy Loan Document, 2006, p. 49. [http://www.wds.worldbank.org/external/default/WDSContentServer/ WDSP/IB/2006/06/08/000160016_20060608120652/Rendered/PDF/36274.pdf] 13. Major legislations include the Law on the Right to Information (October 9, 2003); the Law on the abolition of some of the articles contained in the Law on National Security Council and its General Secretariat (December 10, 2003); the Law on Public Financial Management and Control (December 10, 2003); the Law amending the Law on Banking (December12, 2003); the Law amending the Law on the Establishment, Duties and Trial Procedures of Juvenile Courts (January 7, 2004); the Eighth Harmonization Package implementing the Constitutional Amendments of May 2004 (June 2004); the amendments to the Law on Public Employees’ Trade Unions and the Law on Social Insurance (June 2004); the Law on Associations (July 2004); the legislative package Reforming Public Administration (July 2004); the Law on Compensation of Losses Resulting from Terrorist Acts (July 2004); the new Penal Code (September 2004); and the Law establishing the Intermediate Courts of Appeal (September 2004). All new laws or amendments mentioned in this study are taken from Public Expenditure Review of 2005 and 2006 of the World Bank and counterchecked with Resmî Gazete (Official Gazette) of Turkey. [http://rega.basbakanlik.gov.tr]

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and telecommunications, the establishment of various independent oversight bodies, the introduction of initial steps for decentralization and local government reforms and, last but not least, financial management and control reforms. The public sector reform agenda in the last decade has also included measures for restructuring intergovernmental fiscal and political power-sharing mechanisms, decentralization, freedom of association and participation, a fair and reliable judicial system, freedom of information, and anti-corruption measures. This article will therefore review reforms associated with this new public sector agenda under 4 sub-headings: i) State-market relations (deregulation and oversight, privatization, banking); ii) Decentralization; iii) Civil society participation; and iv) Anti-corruption measures and transparency.

State-Market Relations: Deregulation and Establishment of Independent Regulatory Bodies An increasing number of independent regulatory agencies have been recently established in Turkey. They were set up with the aim of improving the public sector’s regulatory powers while keeping its relations with markets in check. Because the economy was moving towards a private sector-driven structure, regulation policies needed to acquire greater importance. With a view to separating ownership, policy making and routine supervision functions in the liberalized sectors, such as telecommunications, electricity and natural gas, Turkey has opted for the independent sectoral regulation model. The agricultural sector was included in the general regulation policy. Boards for regulating tobacco and alcoholic beverages and sugar markets were established alongside an entirely new, direct income support policy replacing the old system of agricultural subsidies. Currently in Turkey the following independent regulatory agencies exist: the Competition Agency (CA); the Capital Markets Board (CMB); the Banking Regulation and Supervision Agency (BRSA); the Public Procurement Agency (PPA); the Telecommunications Agency (TA); the Energy Markets Regulatory Agency (EMRA); Sugar Agency (SA); and the Tobacco, Tobacco Products, and Alcoholic Beverages Markets Regulation Agency (TTAMRA). In addition, the supervision and regulation of the financial sector have been further strengthened by the Banking Law of October 2005 and the introduction of secondary regulations in 2006, which transferred the regulatory and supervisory powers over financial 95

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holdings, leasing, and factoring and consumer finance companies to the Banking Regulation and Supervision Agency (BRSA). The banking reforms were supplemented by measures to strengthen the independence of the Central Bank.14 The key question here is whether these agencies are truly independent and whether they can change the way government interacts with markets. According to Gul Sosay and Unal Zenginobuz, the following five questions could be considered in this assessment:15 (i) Can any minister interfere with and overrule the decisions made by the regulatory agency in specific cases? (ii) Can any minister make strategic decisions regarding a regulation? (iii) Do the same personnel policy and management rules apply to in the central administration in general? (iv) Can the minister formulate policy independently of the regulatory agency? (v) Is the regulatory agency financed through the regular state budget? In addition to these five questions concerning the relationship between the independent regulator and the government, it is also important to pay attention to the relationship between the regulatory agency and the regulated industry. The independence of the regulators can be defined as consisting of the following three elements:16 (i) an arm’s length relationship with regulated firms, consumers and other interests; (ii) an arm’s length relationship with political authorities; (iii) organizational autonomy, such as earmarked funding and exemption from restrictive civil service salary rules, necessary for establishing the requisite expertise and maintaining the above arm’s length relationships. The experience in establishing independent regulatory bodies in Turkey has thus far yielded mixed results. While the regulatory reforms appear to be well thought-out and meticulously designed, their implementation remains to be seen. Nevertheless, initial signs of positive impact should be recognized as a reflection of the resilience of the Turkish economy. The 14. OECD, “Regulatory Reform in Turkey: Government Capacity To Ensure High Quality Regulation. OECD Reviews of Regulatory Reform, p. 3. [http://www.oecd.org/ dataoecd/40/28/1840711.pdf] 15. Gul Sosay and Unal Zenginobuz, “Independence and Accountability of Regulatory Agencies in Turkey”, Paper prepared for University of Bath, p. 8. [http://www.bath.ac.uk/cri/pdf/ecpr_pdf/20_SosayandZenginobuz.pdf] 16. See Sosay and Zenginobuz, op.cit.

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relatively low impact of the current global financial crisis could be partially attributed to the newly strengthened banking sector that now included establishing independent commissions with regulatory powers.

Decentralization In the last decades of the twentieth century Turkey followed a half-hearted local government strategy (especially in urban areas) when assigning larger responsibilities and resources to municipalities. This approach was not sustainable since it relied on heavy budgetary transfers and borrowing through the Treasury. Moreover, the strategy remained a limited one due to the absence of strong central monitoring, the pressure exerted by the growing urban sector, and inadequate private financing for the delivery of basic services in a context of rapid urbanization.17 The EU, in its reports, and other donors have viewed decentralization as a tool of good governance in terms of their increasing the involvement of local administrations in decision-making, addressing the shortages in delivery of basic services to citizens. Along these lines, Turkey has introduced a number of decentralization initiatives in recent years. Several pieces of legislation have been enacted for the devolution of authority from central agencies to the local ones. These were: the Metropolitan Municipalities law (No. 5216, July 2004); the Special Provincial Administration Act (No. 5302, 2005); the Local Administration Unions Law (No. 5355, May 2005); and the Municipalities Law (No. 5393, July 2005).18 Nevertheless, these reforms have not been adopted in their entirety. The most important piece among these reforms, The Framework Law on Public Administration, enacted in 2004, was vetoed by the President in July 2004 on the grounds that it conflicted with the constitutional clauses on the unitary character of the state. The Framework Law was to have been the centerpiece of the reform process. In particular, it was intended to foresee a new distribution of duties and powers between local and central government, a rationalization of administrative bodies, and an increased responsiveness and transparency vis-à-vis the citizens. Since the veto, no further legislative action has been taken.

17. World Bank, “Programmatic Public Sector Development Policy Loan, 2006, p. 19. [http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/ 2006/06/08/000160016_20060608120652/Rendered/PDF/36274.pdf] 18. Ibid, p. 19.

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Certain other legislations within the realm of decentralization are worth mentioning. These laws aimed at introducing modern public management systems to create efficient, result-oriented and transparent local governments. In June 2005, the Law on Association of Local Governments was enacted (amended in January 2006) enabling villages, municipalities and special provincial administrations to undertake joint projects.19 Another piece of legislation was the Law on Municipalities, enacted in June 2004, was vetoed by the president but ultimately signed into law in July 2005 with minor amendments. The Law on Special Provincial Administrations aimed at strengthening the capacity of local governments to deal with the challenges of rapid urbanization and mass immigration from rural areas. It was first enacted in 2004 but vetoed by the President. This law finally entered into force in March 2005. With the enactment of the Law of Metropolitan Municipalities (2004) four basic local government reform laws are now in force. The fact that all these laws were passed at approximately the same time presented significant challenges for the government: in order for the intended objectives to be met, the implementation of these laws had to be planned and executed effectively.20 In particular, the necessary secondary legislation and/or regulations were needed. These relate, but are not limited to stronger access to information for interested parties, human resource requirements, the strengthening of financial control and auditing systems, and the assessment of financial and fiscal implications.21 The above legislations require the existence of city councils whose members are drawn from civil societies which promote participation and a consultation process. There have been no substantive efforts to form such councils until now. The absence of city councils is a serious impediment for the laws to adhere to the overall concept of local governance. The conspicuous absence of women and of labour union participation within local representation is the other major impediment in the efficient functioning of local governments. The current overall decentralization efforts, including fiscal decentralization, thus fall short of the establishment local governance with its full ramifications.22 19. 20. 21. 22.

EU Commission Progress Report, 2007, p. 12. Ibid, p. 12. Ibid, p. 12. Clashes in December 2009, between sympathizers of PKK (Kurdish separatist movement) and the police, and the subsequent banning of pro-Kurdish DTP (Democratic Society Party) may dampen the intentions of the government for decentralization due to the fears of political backlash and separatism in the southEast.

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Civil Society Participation It is axiomatic that one of the indispensable requirements of good governance is the existence of a body of civil society organizations (CSOs). In this respect, Turkey is a newcomer, perhaps not in terms of the existence of CSOs, but certainly with regard to their recognition by the central authorities as an important actor in public life. The first meaningful attempt to recognize their importance was made in September 2005 prior to the passage of Freedom of Information laws. The Prime Minister and the chief negotiator of EU accession met with eighty-five non-governmental organizations (NGOs) to discuss the ways and means for improving the dialogue with civil society. The Freedom of Association law of November 2004 had a positive impact on the functioning of CSOs and also helped improve relations between CSOs and the state. The Turkish government also ratified a number of other provisions to promote cooperation and dialogue with civil society, such as encouraging CSO participation in city councils, cooperation in service delivery, taking part in a joint human rights commission and a social policy commission. Such initiatives in the past few years have led to a significant rise in the number of CSO networks and platforms. Two successful examples are the environmental movement and the women’s movement. Human rights groups and other organizations have been following a similar commendable path. However, CSOs continue to remain concerned about cooperation and communication among their fellow organizations, as well as ongoing gaps between legal frameworks and their effective implementation to protect the rights of CSOs.23

Freedom of Association Turkey’s current legal framework concerning freedom of association is generally in line with international standards. Freedom of association is guaranteed in article 12 of the Charter of Fundamental Rights of the European Union, which ensures the right to freedom of peaceful assembly and freedom of association at all levels. This article also states that political parties contribute to expressing the political will of the citizens.24 The impact of legislative reforms has been positive, especially that of the adoption of the Law on Associations in November 2004.25 This law has played a significant 23. Civicus, “Civil Society in Turkey: An Era of Transition.” Executive Summary. TÜSEV – Third Sector Foundation of Turkey, 2005, pp. 8-9. 24. European Union-Legislation Online, p. 1. [http://www.legislationonline.org] 25. EU Commission 2006 Progress Report, p. 16.

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role in abating state interference with the activities of associations and has already brought them practical benefits and generally facilitated the further development of civil society in Turkey. The recent reform environment has also led to positive developments in civil society organizations, which now have become relatively more vocal and better organized. There has been is an increasing variety of organizations in Turkey including approximately 80,000 registered associations several hundred unions, and chambers of vocational and professional associations.26 However, the requirement to notify the authorities when foreign funds are received creates difficulties and causes cumbersome procedures for these NGOs.27 Furthermore, unlike associations, foundations need permission to apply for projects outside of Turkey that are funded by international organizations. The regulation of March 2005 details the rules of implementation of this law, imposes restrictions on the registration of associations whose name and/or objectives are considered to run contrary to the Turkish Constitution.28 This regulation is of particular concern, since the Constitution contains clauses that refer to the integrity of the state, clauses which involve the interpretation of the principle of secularism.29 In practice, this means that limitations are imposed on those entities whose objective may include the promotion of a certain cultural identity or a particular religion, an act which contradicts the article referring to freedom of assembly and association.30 Indeed, there have already been reports of such associations encountering difficulties when seeking to register officially.31 Moreover, a key development which has further intensified the political debate regarding freedom of association has been the decision of Turkey's constitutional court to close the pro-Kurdish Democratic Society Party (DTP), on the grounds that it had links to the outlawed Kurdistan Workers' Party (PKK). The verdict has received criticism from the EU, which urged Turkey to bring its legislation on political parties in line with the recommendations of the Venice Commission of the Council of Europe and relevant provisions of the European Convention on Human Rights. The closure of political parties is likely to be widely discussed in upcoming Turkey-EU negotiations. 26. Ibid, p. 15. 27. Ibid, p. 16. 28. After winning the July 2007 election the political party in power has initiated efforts to drastically revise the constitution. The final decision on the new constitution has yet to be made. 29. EU Commission Progress Report, 2005, p. 109. 30. Ibid, p. 27. 31. Ibid, p. 27.

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Access to Information Freedom of information is an indispensable component of good governance in that it allows citizens to gain access to critical information on public sector practices both at national and local levels. Nearly all OECD countries have adopted laws on freedom of and access to information. The Article 42 of EU Charter of Fundamental Rights provides access to documents of the European Parliament, Council and Commission. A crucial step in Turkey in this regard has been the amendment on the law on Right to Information in April 2004 that “regulates the procedure and the basis of the right to information according to the principles of equality, impartiality and openness that are the necessities of a democratic and transparent government”. The law is applied to public institutions and follows the amendment made in Art. 40 of the Constitution of Turkish Republic concerning the protection of the fundamental rights and freedoms, dated 1 October 2001 Act No: 4709.32 After the law took effect, a considerable number of public institutions established their own freedom of information units and began to accept access to information requests including those made through the Internet. More importantly, the members of the Right to Information Assessment (Review) Council were identified as the Council was established.33 One alarming development, however, which brought issues of freedom of expression and access to information to the forefront, has been the “Ergenekon case”. Since 2007, 300 people, including authors, generals, journalists, and professors, have been detained during the investigation of an underground group known as Ergenekon. Their trial, generally referred to by the group’s name, has become one of the most controversial cases in Turkey’s recent history. By November 2009, 194 people had been charged, accused of trying to overthrow the government. Prosecutors contend that these individuals planned to engage in civil unrest, in actions that included assassinations to create chaos and undermine the stability of Turkey and to prepare for a coup. In a New York Times account Proponents of the investigation argue that the trial is a long-overdue historical reckoning aimed at bringing to account “the deep state”: a murky group of operatives, linked to the military, thought to have battled perceived enemies of the state since the cold war. On the other hand, critics accuse investigators of overreaching in their pursuit of the perpetrators.34 32. Circular 2004/12 of the Prime Ministry, Official Gazette, No. 25356, 24 January 2004. 33. [http://bilgiedinmehakki.org] 34. New York Times. “In Turkey, Trial Casts Wide Net of Mistrust” November 21, 2009.

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Thus far, the EU has not taken a clear stance on the controversial case and instead called for a fair legal due process. The EU Progress report, released in October 2009, states: Overall, the investigation of the alleged criminal network Ergenekon has led to serious criminal charges, involving military officers. This case is an opportunity for Turkey to strengthen confidence in the proper functioning of its democratic institutions and the rule of law. It is important that proceedings in this context fully respect the due process of law, in particular the rights of the defendants.35

Freedom of Press A free press is often a primary source of information on public sector practices and may at times be critical in uncovering information about corrupt practices. Turkey has had a long history of control of the press since nearly the inception of the Republic in 1923. In recent years, this control has been somewhat relaxed. In fact, the new Press Law enacted in June 2004 represents a significant step towards increasing freedom of the press. Under the new law, the right of journalists not to disclose their sources has been strengthened; the right to reply and correction has been reinforced; previous prison sentences for violations of the law have been replaced by fines; sanctions such as closing publications or halting distribution and confiscating printing machines have ceased, and the possibility of confiscating printed materials, such as books and periodicals, has been reduced. Foreigners now are allowed to own Turkish publishing houses. However, Article 19 of the new law, which states that those who publish information concerning ongoing court proceedings may be punished with a heavy fine, has been criticized for being excessive. A recent issue, which has raised extensive debate in Turkey, has been a $3.3 billion tax dispute between Turkish government and media group DoganYayin, which controls roughly half of Turkey's television and newspaper markets, The government in October 2009 put a lien on some of the company's assets after rejecting collateral it offered to put up while fighting the tax charges. The EU has released statements cautioning that high fines imposed by the revenue authority potentially undermine the economic viability of the group and therefore affect freedom of the press in practice.36

35. Commission of the European Communities Turkey 2009 Progress Report. October 14, 2009, p. 7 36. Wall Street Journal, “Update: EU: Turkey Case Against Dogan Hurts Press Freedoms”. October 14, 2009.

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Creation of Ombudsman Office The Turkish Parliament in 2005 adopted a law establishing an Ombudsman’s office. The Ombudsman could be responsible for handling petitions in public administration. This was a critical step for the country, as it fulfilled one of the requirements for the Accession Partnership, and contributed to the monitoring of public administration by the Turkish citizens.37 Nevertheless, the latest report of the Independent Commission on Turkey, released in September 2009, states that to in order to align with the EU law, Turkey must proceed with establishing a functioning ombudsman, pointing out the law has yet be effectively implemented.

Anti-Corruption Measures and Transparency As we have seen, the most important attempt of the Turkish government to promote transparency in the public sector has concerned freedom of information. This section will now analyze procurement practices and public finance management from the standpoint of transparency, after reviewing overall anti-corruption measures, analyzes procurement practices and public finance management.

Anti-Corruption Fighting corruption has been a key issue in EU’s progress reports on Turkey: the gap between adopting new legislation and implementation has been systematically addressed. Similarly, the news of corruption appeared quite frequently in the media during the nineties, particularly through a number of disclosed scandals involving the connection of high-level public officials to law enforcement and mafia figures.38 The preoccupation with corruption also coincided with the eruption of a financial crisis in February 2001 and fueled the public’s frustration with the government’s anticorruption policies. Since that time, Turkey has ratified major international and European conventions in this field. Several anti-corruption measures have been promulgated (e.g., the Public Procurement Law, No. 5018). A national strategy to enhance transparency and good governance in the public sector was published under the title of “A Transparent and Clean Turkey: 37. EU Commission Turkey Progress Report, 2006, p. 6. 38. The Susurluk scandal is one of the primary examples.

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Together Hand in Hand” in January 2002. The objective of the strategy was to provide a comprehensive framework for improving governance and reducing political influence.39 In July 2003, a parliamentary report on corruption cases involving former members of the government was also published. In addition, Turkey ratified the OECD Convention on Combating Bribery, the UN Convention against Corruption, Council of Europe Civil Law and the Criminal Law Conventions on Corruption and the Convention on Money Laundering. Since January 1, 2004, Turkey has been a member of the Council of Europe’s Group of States against Corruption (GRECO).40 A number of anti-corruption measures establishing ethical rules for public servants in particular have been adopted.. However, surveys continue to indicate that corruption remains a very serious problem in Turkey.41 Over the years, a number of executive bodies to fight corruption have been established, including the Prime Minister’s Inspection Board, Ministry of Finance Inspection Board, Ministry of Justice, Ministry of Interior, State Planning Office and the State Supervision Institute in the President’s Office. Nevertheless, the leadership and distribution of roles and responsibilities among these bodies have remained ambiguous.42 The efficiency and effectiveness of the government and its agencies, and of legislative and other bodies that combat corruption remains a matter of concern. Policies are inconsistent and the level of co-ordination and cooperation is weak. Institutions relevant to the fight against corruption need to be strengthened and the inspection system in particular needs to be overhauled. An effective leadership and coordination function must therefore be established. The implementation of anti-corruption legislation is particularly questionable at the local level. Moreover, the prevalence of corruption in the non-governmental sector is not as effectively targeted as some other EU accession countries. The dialogue between the government, public administration and civil society appears to be weak and needs to be strengthened. More action may be taken, preferably in the coordination with and the assistance of the civil society to raise public awareness of corruption as a serious criminal offence. Despite the fact that the 39. Programmatic Public Sector Development Policy Loan Document, World Bank, p. 57. [http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/ 2006/06/08/000160016_20060608120652/Rendered/PDF/36274.pdf] 40. Ibid, p. 58. 41. According to Transparency International the corruption perception index for 2007, Turkey ranks 64th out of 179 countries. [http://www.transparency.org] 42. Bryane Michael, “Anti-Corruption in the Turkey’s EU Accession”, Turkish Policy Quarterly. Volume Three, Winter 2004, p. 8. [http://www.turkishpolicy.com/]

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parliament enacted a law to establish the Office of the Ombudsman, progress in establishing such an office has yet to be seen. Nevertheless, this is an important step forward, as it creates an institutional framework for the monitoring of public administration by the Turkish citizens, thereby contributing to the abatement of corruption and enhancing transparency in government deeds. Continuous support at the highest political level to fight against corruption is indispensable. The parliamentary commission reports on gasoline smuggling and illegal public offerings reveal a wide range of corrupt activities in which several ministers were involved.43 They were tried before the High Tribunal. A perception of corruption among people in the Turkish public sector and judiciary remains high, despite all the efforts in recent years to curb corruption. Legislation on financing and auditing of political parties needs to be improved. All these problems have been aggravated by the wide scope of parliamentary immunity that has been identified as and remains a significant problem in the context of corruption in Turkish public life and its perception. In spite of intensive debate in the media, no development can be reported concerning parliamentary immunity as the majority of the members of parliament continue to circumvent the issue. Moreover, corruption investigations carried out by the Inspection Boards leave very much to be desired, since prior authorization from the hierarchy to investigate some categories of public officials is required, which, in turn, hampers the effectiveness of the investigations.44 Another area of corruption is money laundering. Turkey has made some progress in the fight against this crime. Legislation was aligned with the Acquis, including the revised Financial Action Task Force standard. However, alignment has still only been partial.45 For example, professions such as law practice, external accounting and tax advising have not been included in the scope of the law, and government transactions have been exempted from the anti-money laundering legislation.46 The transparency of the finances of political parties remains weak since auditing these accounts has left very much to be desired. In addition, because public officials are required to declare their assets, the scope and frequency of these declarations will have to be extended. The new Criminal Code that took effect in June 2005 widened the scope of predicate offences, covering all misdeeds punishable by more than one year imprisonment and 43. 44. 45. 46.

EU Commission Progress Report, 2006, p. 10. Ibid., p. 10. EU Commission Progress Report, 2005, p. 62. Ibid., p. 62.

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introducing more extensive provisions concerning confiscation of property obtained through money laundering.47 The Code on Criminal Trial Procedures, which also took effect in June 2005, introduced special investigation methods for the fight against money laundering such as the interception of communications and other surveillance techniques.48

Procurement Procurement has received much attention in many countries as it has served as a main interface between the public and the private sector and is, moreover, considered to be one of areas in the public sector most conducive to corruption. Turkey thus far has lagged behind in reforming the procurement procedures. According to EU progress reports, by introducing certain derogations from the Acquis, Turkey had previously amended the Public Financial Management and Control Law and exempted certain contract award procedures for the Turkish Petroleum Corporation. Moreover, the Law Establishing the Regional Development Agencies exempts any acquisition of goods and services from the scope of the Public Procurement Law.49 Similarly, the Support and Promotion Agency is also exempted. In addition, foreign bidders are subject to certain discriminatory elements, which discourage foreign bidders from applying. Furthermore, complicated and expensive qualification procedures create bureaucratic obstacles in public tenders. The Turkish procurement system is still not in line with the EU.50 The European Commission’s Progress Reports indicate that despite advancements in anti-trust/mergers, there was no notable progress in Turkey in the awarding of public contracts compared to previous years. Discrepancies still exist between the Turkish public procurement legislation and the Acquis. Some of the basic definitions of terms, such as that of contracting entity and procurement contracts, are not in line with EU directives.51 The Public Procurement Agency has updated the thresholds and financial limits for procurement, which have remained above EU levels.52 The overall weakness of the system therefore stems from the introduction of sectoral exemptions, as well as the lack of capacity in

47. 48. 49. 50. 51. 52.

EU Commission Progress Report, 2005, p. 113. Ibid., p. 113. EU Commission Progress Report, 2006, p. 36. Various EU Progress Reports give examples: ‘various’ is vague and sloppy! EU Commission 2006 Turkey Progress Report, p. 36. Ibid, p. 36.

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procurement administrative structures.53 No clear legislative framework for concessions is available; the Public Procurement Law (PPL) does not specify clearly the concessions to be authorized. The administrative capacity of the Public Procurement Authority suffers from the weak coordination at the policy making level. Moreover, review procedures are not in line with the Acquis.54

Public Financial Management The Constitution was amended in November 2005 along the lines of the Public Financial Management and Control (PFMC)’s broader definition of the state budget, which includes general agencies, special agencies, regulatory agencies and social security agencies.55 In addition, performance measures and financial management reforms were introduced. The better definition and comprehensive coverage of the budget represents a milestone in the government program.56 The government has taken several measures to increase fiscal transparency. A number of coordinating and controlling bodies have been created within the Ministry of Finance to enhance the greater efficiency and transparency that have resulted in the improvement of the preparation of the budget. It can therefore, be said that fiscal transparency has improved, as can be observed from the 2006 budget. As of 2004, the introduction of accrualbased accounting led to a more analytical budget code structure.57 It is expected that the implementation of the Public Financial Management and Financial Control Law, enacted in December 2003 to be implemented in January 2008, will enhance transparency and improve the management system of preparing and implementing the budget. In short, the transparency of public sector accounting and the efficiency of tax administration have improved considerably. In the past five years, important progress has been made in aligning the legislation of public procurement (as explained above), while financial management and 53. EU Commission Progress Reports, 2005, p. 64 and 2006, p. 36. 54. According to EU commission, complaints submitted to the Public Procurement Board amounted to 2,135 out of 115,639 tenders announced in 2005. In comparison to the previous year, the number of complaints increased by 47 %. 55. EU Commission Progress Report, 2006, p. 7. 56. It should be noted that most procurement projects are funded separately from extrabudgetary funds and parliamentary overseeing of the military budget remains to be weak. 57. EU Commission Progress Report, 2005, p. 48.

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financial control have been aligned with international standards. The establishment of a public procurement agency and an office for debt and risk management has further strengthened financial management. Integrating extra-budgetary funds and previously unrecorded financial transactions into the general budget has enhanced the budget transparency.58 The implementation of the new Budget Management and Control law concerning public internal financial control, enacted in December 2003 and taking effect in January 2005, is very likely to improve budgetary management. Nevertheless, lax rules and practices are still present in the overall financial management. The lack of comprehensive and useful information on the programs financed by the government has made ex-ante decision-making and ex-post evaluation of policy very difficult. For example, despite the emphasis placed on preventive health care activities in the plan and in policy statements, the budget does not provide policy makers with information on the relative share of financing for preventive programs in total health sector financing. As a result, ostensibly priority programs such as maternal and child health receive less than one percent of public spending on health. In the absence of information highlighting the underfunding of such programs, no corrective action can be taken to address the failure of budgeting to support stated priorities.59 Furthermore, the budget is not perceived as an instrument to achieve discretionary policy objectives. Policy formulation in and of itself has been neglected by Line Ministries, which have generally the effects of frequent government changes and reshuffling in the cabinet. When a policy has strong political support and is deemed a priority, as in the case of the Basic Education program (see Appendix), special budgetary regulations are required to ensure the effective implementation of such programs. In this way, it might be argued that the rigidity of the budget remains an obstacle to the achievement of policy objectives.60

Evaluative Framework for Public Sector Governance As can be surmised from the above, Turkey has endeavored to enhance public sector governance. These efforts have gained particular impetus 58. During recent years, more than 60 extra-budgetary funds dealing with quasi-fiscal activities, such as the support price fund, have been reduced to only five. 59. World Bank, Turkey Public Expenditure and Institutional Review, 2001, p. iii. 60. Ibid, p. iii.

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especially after the Justice and Development Party (AKP) came into power in 2002 and made membership in EU one of the pillars of its programme. Turkish reforms need to be evaluated through a broader scope than one that simply focuses on the adaptation of Turkish laws and regulations to the EU Acquis. The reforms should be judged by whether or not they represent a complete shift in the way public decisions are made and services are delivered. Adoption of the EU Acquis may be seen as one of the contributors to such a shift, but the lack of its holistic focus on public sector reforms leaves little opportunity for the comprehensive monitoring and evaluation of the implementation of these reforms. In this sense, the EU Acquis and relevant progress reports offer only a fragmented approach to tracking public sector reforms, falling short of providing them with a strategic guidance. A strategic evaluation mechanism would require not only looking into the implementation of each reform item separately, but also examining its contributions to and alignment with broader reform categories, such as the four above: state-market relations, decentralization, state-civil society relations, and anti-corruption and transparency agenda. Turkey has undergone significant changes that have redefined governments’ operating environment along these broad categories. These changes need to accompany new accountability relationships between governments and markets, parliaments, and citizens. According to the new agenda that accompanied these changes, good governance is produced through a virtuous cycle of interactions between active citizens, civil society organizations, and strong government, based on the representation of people’s needs and aspirations in policy making and its implementation processes. Turkey could assess recent changes by establishing a series of governance indicators – Actionable Indicators – to monitor and guide reforms in line with this agenda.61 These indicators would contribute to the effective assessment of outcomes and enable policy makers to further strengthen the public sector reforms. This would ultimately serve Turkey’s efforts to adapt to the EU Acquis as well. This paper attempts to describe a preliminary evaluative framework that could be useful in examining whether Turkish reforms truly define a new 61. Actionable Indicators refers to country-specific indicators to measure whether reforms have reached their objectives. Examples include Country Financial Accountability Assessment (CFAA), public Expenditure and Financial Accountability (PEFA), Country Procurement Assessment Report (CPAR).

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role for the government in its relationship with the markets and with citizens through more flexible and deregulated decision making structures. This kind of change is possible when the incentive structures within the public sector, and the way the public sector reads the signals about citizens’ preferences, shift an organizational culture based on hierarchies and efficiency to a culture based on flexibility, effectiveness, responsiveness and desired outcomes.62 According to this new agenda, Turkish reforms would be expected to make a positive impact on resource allocation (allocative efficiency reflecting citizen preferences), managerial and administrative efficiency (getting the highest value for the tax dollar at lowest cost), results-oriented budget policies and expenditure management (shifting the focus from input to results to outputs and outcomes in budgeting and policy making), quality of civil service, transparency and accountability. The outcome of the reforms should be evaluated periodically in order to ascertain that the expected outcomes have in fact been realized. Doing so first requires the establishment of a Monitoring and Evaluation (M&E) Unit at the cabinet level. The unit should exist totally independent of cabinet interference and political pressure. There may be several M&E units in various ministries or administrative bodies; however, these cannot have a holistic view, nor should they be required to establish the internal consistency of the overall reform package. Turkey is in need of an additional unit that to carry out such a task. The unit will first have to establish the benchmarks. Determining these benchmarks or baselines would be a relatively straightforward task. However, setting up the indicators on the basis of which reform outcomes would be measured and carrying out the actual evaluation is a task that requires considerable deliberation and capacity.

62. The will EU clearly assess the reforms in Turkey from the standpoint of the Copenhagen criteria as discussed in this paper. However, if Turkey is indeed serious about the reforms not just for the sake of joining EU, but to bring the Country to the 21st century it must assess the outcome of the reforms for internal reasons. For that purpose it must institute a clear process of evaluation of the outcomes. Outcomes can only be assessed on the basis of pre-established indicators. These indicators should be clear, i.e. precise and unambiguous, relevant and appropriate to the subject, available at a reasonable cost, adequate to carry out assessment, and amenable to independent evaluation. Ten Steps to a Result-Based Monitoring and Evaluation System, Washington, DC: The World Bank, 2004.

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This article does not claim to determine all the indicators and assess the reform results accordingly. Moreover, such an assessment would require a reasonable amount of time to have elapsed since the undertaking of the reforms in order to be able to judge the validity of the outcomes and impact independently. At this stage, only few indicators that would conform to the established rules of evaluation can be suggested. In general terms, the best indicators to assess the outcomes of establishing and reforming regulatory bodies would be the frequency in the changes of rules and in the regulations being overruled by the cabinet and/or by higher authorities. The discrepancy between the mandate of local authorities and their resources would be a good indicator in the case of decentralization. The ratio between centrally transferred funds and locally raised funds and its change in favor of locally raised ones would be another indicator. With respect to procurement, the best indicator would be the degree of transparency, reduction of the threshold and open competition and decline in the number of disputes. In the realm of public finance management, the change in the proportion of budgetary expenditures compared to extrabudgetary expenditures, decline in discretionary spending and divulgation of ex-ante and ex-post spending constitute a set of good indicators. With respect to citizen access to information, a good indicator could be the responsiveness of freedom of information units in each ministry and each municipality to citizen requests. Similarly, applications made to the new ombudsman office and their responsiveness to dealing with cases need to be monitored. A Freedom of information review council could provide the required information to monitor progress. Finally, with respect to anticorruption, the index of Transparency International, featured below, could be supplemented with the frequency/infrequency of changes in formal rules. Above all, the evaluation of the overall success of the M&E unit is of utmost importance. The best indicator in this case would be the number of legal and administrative changes made as a result of the findings of the M&E unit. These specific monitoring indicators – to be followed by such a unit regarding the performance of reforms on independent regulatory agencies, decentralization, citizen access to information, and anti-corruption and transparency – require extensive effort and research based on accurate and timely data. Several credible governance indicators are readily available for monitoring and evaluating the progress of Turkish reforms in a broader sense that could guide more specified monitoring and evaluation efforts as such. Two 111

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most commonly used ones are: a) Kaufmann Kraay Mastruzzi (KKM) Governance Indicators and b) Transparency International-Corruption Perception Index (CPI).63 These indicators could be useful in identifying the general trend since the start of the reforms in the overall success of the efforts to transform Turkish public sector. KKM governance indicators are composed of following components: (1) Voice and accountability, (2) Political stability and absence of violence, (3) government effectiveness, (4) regulatory quality, (5) rule of law, and (6) control of corruption. Figure 1.1 shows Turkey’s governance performance in six KKM components. The highest ranked component is control of corruption while the lowest ranked component is. Nevertheless, when Turkey performance on control of corruption is examined in comparison to Eastern European countries, as demonstrated by Figure 2.1, Turkey is found in the second half of the list, ranking 7th out of 10 countries listed. Similarly, government effectiveness, while scoring highly compared to other in-country governance components, is still below OECD standards, as shown in Figure 3.1.

63. Country Policy and Institutional Assessment (CPIA) is used for low-income countries, thus may not be applicable to a middle-income country such as Turkey. CPIA evaluates a country’s policies and institutions by analyzing 16 dimensions. Governance-related dimensions are: property rights and rules-based governance, quality of budgetary management, quality of public administration, transparency, accountability & corruption in the public sector (Also serves as one of the sources for the KK and CPI). See Table 1 for a more extensive list of indicators and Turkey’s performance.

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Figure 1: Turkey: KKM Governance Components – 2008 Turkey Voice and Accountability

Political Stability

Government Effectiveness

Regulatory Quality

Rule of Law

Control of Corruption 0

25 50 75 Country’s Percentile Rank (0-100)

100

Source: Kaufman D., A. Kraay, and M. Mastruzzi 2009: Governance Matters VIII: Governance Indicators for 1996-2008 Note: The governance indicators presented here aggregate the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey insitutes, think tanks, non-governmental organizations, and international organizations. The WGI do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resourses.

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Figure 2: Control of Corruption: Eastern Europe & Baltics Region – 2008 Control of Corruption (2008) Slovenia Hungary Slovakia Poland Czech Republic Turkey Romania Bulgaria 0

25

50

75

100

Country’s Percentile Rank (0-100) Source: Kaufman D., A. Kraay, and M. Mastruzzi 2009: Governance Matters VIII: Governance Indicators for 1996-2008 Note: The governance indicators presented here aggregate the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey insitutes, think tanks, non-governmental organizations, and international organizations. The WGI do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resourses.

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Figure 3: Government Effectiveness: Turkey vs. OECD – 2008 Government Effectiveness (2008)

Oecd

Turkey

0

25

50 Country’s Percentile Rank (0-100)

75

100

Source: Kaufman D., A. Kraay, and M. Mastruzzi 2009: Governance Matters VIII: Governance Indicators for 1996-2008 Note: The governance indicators presented here aggregate the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey insitutes, think tanks, non-governmental organizations, and international organizations. The WGI do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resourses.

Transparency International-Corruption Perception Index (CPI) is a composite index that of business people’s and country analysts’ perceptions of the degree of corruption, and ranges between 10 (highly clean) and 0 (highly corrupt). In terms of the way public sector defines its relations with the markets (and business environment), the World Bank Group’s Doing Business Indicators64 might prove helpful. These indicators evaluate the ease of doing business by monitoring ten categories: (1) Starting a business, (2) dealing with licenses, (3) employing workers, (4) registering property, (5) getting credit, (6) protecting investors, (7) paying taxes, (8) trading across borders, (9) enforcing contracts, (10) closing a business. Many of these processes are directly or indirectly affected by the public sector’s attitude towards the market. Overall, Turkey is ranked 57th out of 178 economies, yet it is ranked 112th concerning the ease of closing a business, whereas the

64. “Doing Business 2008”: report on Documents/CountryProfiles/TUR.pdf]

Turkey

[http://www.doingbusiness.org/

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ease for registering property is ranked 31st. Dissecting evaluation into different components, as in the case of Doing Business Indicators, would allow for a more detailed understanding of shortcomings in legislation and implementation. The business environment could also be evaluated through investment climate assessment (ICA) tools. These tools conduct surveys of private sector firms and employees to evaluate the overall business environment. The recent ICA conducted in 2007 showed, for example, that 8.8 % of senior management working time is spent on bureaucratic red tape.65 A strong government involvement is required to reflect this transformation in a high profile strategy document so that every public official and actor outside the public sector clearly understands where the intended reforms are moving, which is only possible with well-established transparency instruments. This kind of strategic approach appears to be missing in Turkish efforts and, at the same time, legal changes seem to be moving in directions which do not necessarily support or complement each other. Anchoring the reforms with the EU accession agenda and the IMF-backed economic reform program may be valuable in setting benchmarks for the standards to be achieved. Nevertheless, domestic support and in-country ownership of these reforms will ultimately be a decisive factor in translating the reforms into sustainable outcomes.

65. For more information, see World Bank’s Turkey Country office external website. http://www.worldbank.org.tr

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Table 1: Governance Indicators and Turkey’s performance66 Indicators

Definition/Explanation

Aggregate Governance Indicators

Latest Year Turkey’s Performance Available 2006 Percentile ranks: 1. 43.3 2. 25.5 3. 64.0 4. 57.6 5. 55.7 6. 58.7 2007 64th out of 179 countries

Business Environment Indicators

Six composite governance indicators: Kaufmann Kraay Mastruzzi 1. Voice and accountability 2. Political stability and absence of violence (KKM) 3. Government effectiveness 4. Regulatory quality 5. Rule of law 6. Control of corruption A composite index that of business people’s Transparency and country analysts’ perceptions of the Internationaldegree of corruption, ranging between 10 Corruption (highly clean) and 0 (highly corrupt). Perception Index (CPI) Doing Business Evaluates ease of doing business by 2008 (DB) monitoring ten categories: (1) Starting a business, (2) dealing with licenses, (3) employing workers, (4) registering property, (5) getting credit, (6) protecting investors, (7) paying taxes, (8) trading across borders, (9) enforcing contracts, (10) closing a business. Investment Survey of private sector firms and employees 2007 Climate to evaluate the overall business environment. Assessment (ICA)

Political and press freedom

Polity IV Records annual information on political 2003 Country Report regime and authority characteristics. Includes indicator on executive constraints, defined as the extent of institutionalized constraints on the decision-making powers of chief executives. Freedom House Status of civil liberties Reporters Press freedom index without Borders

Country-Specific Assessments

Country Financial Accountability Assessment (CFAA) Country Procurement Assessment Report (CPAR)

2006 2007

Principle diagnostic tool in public financial 2000 management designed to help the borrowing country and the Bank assess financial accountability arrangements in the public and private sectors. Main instrument of the World Bank for 2001 analyzing the member countries’ present procurement policies, organization, and procedures.

Ease of Doing Business- 57th out of 178 countries 1) 43, 2) 128; 3) 136, 4). 31; 5) 68, 6) 64; 7) 54, 8) 56, 9) 34; 10) 112 8.8 % of senior management working time is spent on dealing with bureaucracy On a scale of 10, Competitive Elections (8), Executive Parity or Subordination (7) Political Participation: Factional/Restricted Competition (6) “Partly free” 101st out of 169 countries (declined from last year) The budget and audit system is seriously fragmented and reporting relationships are ambiguous. Legislative deficiencies in the public sector procurement practices.

66. Adapted from Mauritania Anti-Corruption study prepared by World Bank Africa region.

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Appendix Public Sector Governance Sectoral Example: Education Improving human development indicators is a crucial component of Turkey’s EU accession process and a key target for strengthening public sector effectiveness. The political leadership in Turkey became particularly concerned with reforming the education system prior to launching the accession negotiations, taking into account EU practices and experiences. In 1997, it passed a crucial law “8-year Basic Education Program”, increasing compulsory basic education from 5 to 8 grades. In 1997, less than 76 percent of children completed 8 years of schooling. Net enrollment was 76.6 percent in grades 1-5 and 51 percent in grades 6-8. In 2005, net enrollment in basic education rose to 89 percent. Nevertheless, the educational attainment of the Turkish population is still the lowest of all OECD countries.67 Despite the increase in spending on education and enhancement of access to and quality of education, limitations still exist in the implementation of the new education reforms. The income-, gender-, and regional disparities in educational attainment are still crucial shortcomings. The average knowledge level for students in secondary education is still low, even though it has shown an upward trend since 2000.68 These limitations are largely affected by two key factors: (1) Government policymakers still operate under the assumption that providing more educational input and enacting and enforcing laws are sufficient for improving the quality of educational. That is why the past they have underestimated the need for effective monitoring and evaluation mechanisms for education. (2) The government has not placed enough emphasis on developing a broad, consultative process to engage stakeholders such as teacher associations, NGOs, the media, parents, and the private sector in the formulation of education policy. The country needs stronger institutional frameworks in order to secure sustainable education reforms. Effectively addressing the above-mentioned key obstacles and their repercussions would be an important step in meeting and implementing the EU benchmarks. There is a need to replace input67. See OECD’s “Education at a Glance: OECD Indicators – 2006 Edition” for all relevant statistics. [http://www.oecd.org/dataoecd/32/0/37393408.pdf] 68. EU Progress Report 2006, p. 29.

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based approaches in the management of national education system with output-based approaches that take into account access, equality, quality issues and learning targets. Turkey’s experience shows that additional efforts to enhance social inclusion and to involve not only state officials but all stakeholders are crucial for the public ownership of these reforms. One of the strategic objectives in Turkey’s reform path in education is to establish effective and modern governance arrangements. In light of the EU accession criteria, Turkey has acknowledged the need to adopt a new paradigm that focuses on high-quality education and learning outcome for all students. As mentioned above, Turkey has made unprecedented strides in the basic education program by enacting the “8-year Basic Education Program.” Under this initiative, the Government promoted “The Rapid Coverage for Compulsory Education Program” as its largest poverty reduction initiative in the past decade. It was also seen as a way to reduce social and economic inequalities in the country. This law brought many changes to the way the education system had been run and thus required installation of new capacities within the system. The need to construct new classrooms and to expand school resources sharpened the focus on the supply of teachers and additional complementary resources, such as textbooks, furniture and other educational materials and utilities. Classroom construction has been particularly emphasized to accommodate the expansion in enrolment in grades 1 through 8. Between 1997 and 2004, almost 104,000 new primary schools were built to fulfill the needs of additional 3 million students, and over 70,000 teachers were recruited. Nevertheless, public officials have been focusing on filling these needs without any systemic evaluation of their outcome. Despite the considerable increase in the number of teachers appointed by the Ministry of National Education (MONE), their quality remains low. Teacher training programs are very weak. The professional teacher development programmes organized by the In-Service Training Department of MONE are considered ineffective by the teachers insofar as the programmes have little practical use nor do they provide follow-up or feedback mechanisms exist. Little attention is paid to impact evaluation, monitoring of the results or outcomes. Teachers consider their largeconference trainings to be ineffective and are not involved in the schools’ decision making processes.69 Human resource management and 69. World Bank, “Turkey: Education Sector Study- Sustainable Pathways to an Effective, Equitable, and Efficient Education System for Preschool through Secondary School Education”, Executive Summary, 2006, p. 8. Full report is available at [http:// www.worldbank.org]

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decentralization are crucial public sector reform areas in addressing teacher quality issues. MONE and the Higher Education Council (HEC) are the two entities responsible for policy oversight over the education sector in Turkey. MONE is the largest institution in the education system, and its responsibilities include (a) the hiring and firing of principals and teachers; (b) the selection and distribution of textbooks and other educational materials; (c) school renovation and construction and (d) determining the salary and profile of the teaching and administrative staff of each school in the system, as well as the term of each teacher’s contract. In this coordination role, MONE is assisted by HEC, the National Education Council, the Supreme Advisory Board for Vocational and Technical Education, and the Apprenticeship and Vocational Education Board. (PEIA) The State Planning Organization (SPO) prepares a master plan for evaluating the viability of universal eight-year education. At the same time, MONE has played a critical role in bringing the reform initiative to the attention of the Prime Minister, who in turn was able to receive the support from the full cabinet. Ultimately, however the education reform program was designed and implemented in a top-down manner. Civil society, the private sector and NGOs have mobilized efforts towards the expansion of basic education. Various actors and organizations have become spoken out about reforms, keen to express their support. Local administrations, for example, have collaborated with village heads (muhtars) to encourage families to send their children to school. MONE also has carried out a number of coordination seminars targeting the involvement and training of local administrators in these reforms. MONE has also sought to increase access to information and to mobilize the local communities by publicly announcing the names of provinces and subprovinces that advance more rapidly than others.70 Radio and television networks also voluntarily became a part of the process by devoting free airtime for discussions on the issue and reform of universal primary education with national and local figures. Several NGO campaigns also have been instrumental in the promotion of the 8-year basic education programs. The initiative, entitled “Off to School, Girls!” (“Haydi Kızlar Okula!”) was launched in 2003 by MONE with the support of UNICEF, in order to reduce the gender gap in basic education. This initiative enabled the enrolment of 62,000 girls in primary schools in 2005. By 2006, the campaign had reached all the 81 provinces in the 70. 1 Dülger, İlhan, Turkey, Rapid Coverage for Compulsory Education, 2005, p. 14.

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country. In addition, the private sector, particularly the Istanbul Stock Exchange, contributed hundreds of millions of dollars to the education initiative, initially without tax incentives, with the aim to increase school enrolment and to improve the physical condition of schools. Nevertheless, many other stakeholders such as teachers, administrators, students, families, and community leaders were not consulted in a systematic manner. Local education authorities and families lack authority and autonomous decision-making. Local authorities are appointed to their posts by MONE and have limited authority and autonomy. MONE centrally decides and implements nearly all in-service training for teachers and principals. This selection and training process and control of teacher management issues (such as recruitment, evaluation, transfer, salary, and bonuses) leaves little opportunities for families to have their voices heard in their own children’s learning. The most common interlocutor between MONE and individual schools are the School Inspectorates, who are often more concerned with administrative issues than the quality of education, such as curriculum development, teaching/ learning procedures, school atmosphere, students’ pedagogical development etc. They have little connection to new policies or realities. The coordination between central authorities and schools is weak. Individual schools possess neither their own resources nor authority over how expenses ought to be spent. The centralized structure of the Turkish education system has had some grave repercussions for the equal and efficient distribution of resources: According to the OECD, 94 percent of all education decisions in Turkey are made at the central level. After the 1997 reforms, the budget of MONE was expanded to meet new needs, including but not limited to salaries, but also expenditures, such as bussing, boarding, etc. Despite the centralized structure, Turkey’s schools vary considerably in quality across cities and regions. The disparity among regions seems to stem not from lack capacity of the Turkish government or other state institutions, but from “lack of clear technical criteria for determining resource distribution”,71 according to the World Bank. Thus, groups with the weakest voice in the country exert the least influence in the distribution of resources. Greater local discretion in budgeting and determination of needs by local school authorities is indispensable. 71. World Bank, “Turkey: Education Sector Study- Sustainable Pathways to an Effective, Equitable, and Efficient Education System for Preschool throughSecondary School Education”, 2006, p. 28.

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One promising step towards this goal was the 2003 launch of an ambitious plan by the Board of Education to revise the basic education curriculum via an inclusive process of consultations and discussion with the teachers, faculties of education and civil society representatives.72 What is important is to link these initiatives with strengthening accountability mechanisms at the national and local levels. 73

Box 1: Impact of the Basic Education Reform73 In August 1997, the Government of Turkey introduced broad reforms to its education system. These reforms were supported by legislation that extended the duration of compulsory education from five to eight years and launched a major expansion and upgrading in the quality of eight-year basic education schools. In just six years, these reforms have contributed to children’s achievements in learning by dramatically raising the conditions of schooling for millions of children: 앫 Enrolling over 10 million students (including 4.8 million girls) in compulsory education an increase of1.3 million children since the program started. 앫 Increasing overall enrollment in 1st through 8th grades from 76 % in 1996 to nearly 100 % today. 앫 Employing over 390,000 teachers (of whom more than 218,000 are women). 앫 Providing professional development and training to 370,000 teachers, principals, and inspectors. 앫 Providing books, other didactic materials, and computers and education software to tens of thousands of schools. 앫 Bussing over 660,000 poor students from small village schools to central village schools, and providing free school uniforms and lunches. 앫 Building more than 30,000 new schools. 앫 Attaining the Government’s goal of a maximum 30 students per classroom in 65 of 81 provinces. 앫 Upholding the Government's commitment to the provision of education for all by: 앩 Protecting education expenditures (4.25 % of GDP) 앩 Introducing a fine for non-attendance in schools.

72. World Bank, “Turkey: Education Sector Study- Sustainable Pathways to an Effective, Equitable, and Efficient Education System for Preschool through Secondary School Education”, Executive Summary 2006, p. 8. 73. World Bank, “Memorandum of the President of the International Bank for Reconstruction and Development and the International Finance Corporation to the Executive Directors on a Country Assistance Strategy”, 2003, p. 15.

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5. Prospects of Foreign Direct Investment in Turkey during the Negotiation Process Selen Sarisoy Guerin

The recent wave of globalization has seen not only developed countries but also developing ones rapidly integrating into the global economy. Large trade and capital flows have been pouring into developing countries from developed ones. As the international capital flows grow faster than trade flows, foreign direct investment (FDI) among other types of capital flows has become host countries’ most favoured type of capital flow. Many emerging countries have been successful in attracting FDI inflows as an increasing number of them believe that FDI is more stable than other types of capital, such as portfolio equity flows, which could leave the country at the first sign of instability. Starting as early as the 1990s, many Latin American and Asian countries received the majority of the first surge in FDI inflows while Central and Eastern European (CEEs) countries joined this group of emerging countries towards the end of the 1990s. Despite its close proximity to the European Union (the world’s biggest economy on the whole) and the customs union signed in 1995 with the EU, Turkey’s FDI performance has been poor until very recently. The aim of this chapter is to examine Turkey’s past and present FDI performance in comparison with its competitor countries, i.e., the CEEs. It is important to understand the factors that caused Turkey to be excluded from this market for a long time while other emerging countries were receiving large sums of FDI. This comparison will allow us to better assess whether the recent surge of FDI inflows to Turkey is based on permanent structural reforms and macroeconomic factors or on one-off and transitory factors such as privatization. The favourable investment environment that has been observed in Turkey in the last years is undoubtedly due to a number of factors. First, while Turkey had been slower to privatize in comparison with other emerging countries and CEEs, large scale privatization projects carried out in 20042009 provided foreign investors with attractive investment projects and thus attracted large FDI inflows. Second, the start of the EU membership negotiations not only added to the positive business environment that had 123

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begun to develop but also provided an anchor for democratic and economic reforms. Although these factors are not the only ones that helped Turkey to turn a new page and become an attractive FDI host economy, they have nonetheless marked the start of a new era. The question that needs to be addressed is whether Turkey’s new FDI success is sustainable. Will FDI dry up when all is privatized? As Turkey’s EU membership negotiations may take a long and unpredictable path, will setbacks in negotiations negatively affect FDI inflows? In order to answer these questions, in the remainder of this chapter we will first examine Turkey’s FDI performance to date. In section 3, we will take a close look at the details of the geographical and sectoral breakdown of FDI in Turkey. In section 4, we will explore the factors that affect the current positive FDI climate in the country. Section 5 will focus on the outlook for FDI inflows into Turkey by concentrating on the macroeconomic effects of the IMF’s stabilization policies and the new business environment. Section 6 will provide a conclusion.

Turkey’s FDI Performance Turkey’s recent FDI performance shows a sharp contrast with its past. During the period 1998-2000 The World Investment Report by UNCTAD (2002) categorized Turkey as an “under-performer” among countries that had both low FDI potential and low FDI performance along with Albania, Algeria, Ethiopia, Haiti, and India. According to the same report, there were 42 “front-runners” between the years 1998 and 2000. The group of countries that combined both strong potential and strong performance included places like Hungary and Poland among other industrialized nations. These findings illustrate the sharp contrast between Turkey and some of the new members of the EU. Even though these countries started their reforms towards market economy and transition to democracy as late as the early 1990s, they were already among the best FDI performers by 2000. In comparison with its poor past, the World Investment Report (2007) categorized Turkey among countries that had a “below potential” performance in 2005. This already indicates considerable improvement over its previous record: Turkey is now categorized as having “high potential” but “low performance” along with many industrialized countries, including the United States. On UNCTAD’s Inward FDI Performance Index Turkey ranked 84 out of 141 countries in 2007 (UNCTAD, 2009), again below its potential. In comparison, the new 124

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member states that joined the EU in 2004, with the exception of Slovenia and Bulgaria, have shown both high performance and high potential and hence all are categorized as front-runners. We can examine Turkey’s FDI performance over the years in three distinct periods: the 1980s, 1990s, and the 2000s. Following a brief period of authoritarian rule in the beginning of 1980s, Turkey underwent a series of reforms to liberalize its economy. The reforms of 1980 included the abolition of subsidies and price controls, and more flexible exchange and interest rates. As Figure 1 below shows, FDI inflows to Turkey during the 1980s were steadily below 1 billion USD. This was a period of relatively low FDI flow overall, and developing countries received especially little foreign financing in the form of FDI. International capital flows that were directed towards developing countries were mostly public flows in the form of debt and not private flows. Nevertheless, world FDI flows increased from around 59 billion USD in 1984 to 193 billion USD in 1989, and from 113 million USD to 663 million USD in Turkey. The new liberal policies had an immediate impact on Turkey’s trade but little on its FDI records. However, the more important economic reforms came about towards the end of this period. The decision to move to full convertibility and to open up the capital accounts completely in August 1989 was a turning point in Turkey’s experience with liberalization.1 It is much less Turkey’s FDI performance during the 1980s than its lack of FDI during the 1990s that stands out in comparison with other developing countries (Figure 1). Towards the end of the 1980s, many developing countries underwent credible structural reforms following the Latin American debt crises in 1982. Many developing countries were cut off from international capital markets when they defaulted on their debts to commercial banks, to such an extent that few could have predicted that these countries could regain access to foreign finance. One of the distinct characteristics of the 1990s was the rise of private capital, and especially FDI, to the developing countries. Against this background, Turkey’s poor performance becomes more comprehensible. While many Latin American and Asian countries became major locations for FDI, Turkey’s economic performance remained weak due to an unfavourable political environment. Despite positive developments, such as the signing of the Customs Union agreement in 1995 with the EU, FDI inflows stayed well below the 1 billion USD threshold during the 1990s. Basically, Turkey failed to capitalize on 1.

Onis, Z. and C. Bakir, “Turkey’s Political Economy in the Age of Financial Globalization: The significance of the EU anchor”, South European Society and Politics, 2007, p. 12.

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the liberalization of its capital account and the Customs Union due to a string of weak coalition governments that lacked commitment to reform.2 After the capital account liberalization, Turkey attracted large amounts of short-term capital flows, which are highly volatile. In fact, the premature opening up of the current account has been detrimental to economic growth at this time, a period in which Turkey experienced three crises. During this same period, Central Eastern European countries started their transition to democracy and the liberalization of their economies. Through widespread privatization projects, they successfully attracted large sums of FDI. As can be seen from Figure 2, Hungary, the Czech Republic, Bulgaria, Poland, and Romania accumulated large inflows of FDI when measured as a percent of their GDP over 1980-2005. Figure 1: FDI Inflows to Turkey 6%

25000

5%

4% 15000 3%

percent

millions of USD

20000

10000 2% 5000

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

1%

Inflows

2.

0%

FDI/GDP

“Turkey’s Political Economy in the Age of Financial Globalization: The significance of the EU anchor”, South European Society and Politics, 2007, 12.

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Figure 2: Cumulative FDI Inflows per GDP (1980-2005) 140% 120%

Percent

100% 80% 60% 40% 20%

Chile Hungary Malaysia Czech Republic China,P.R.: Mainland Colombia Bulgaria Poland Mexico Argentina Thailand Romania Morocco Brazil Egypt Philippines Slovak Republic South Africa Turkey Slovenia Russia Korea Indonesia India

0%

Turkey’s break from its poor past FDI performance began in 2001, following the ‘twin crises’ of November 2000 and February 2001. Until the 2001 crisis, the coalition governments had been reluctant partners in the implementation reforms recommended by the IMF. However, the impact of the 2001 crisis was so deep and pervasive on all levels of society, the coalition governments did not have any choice but to cooperate with the reform programs of the IMF. In addition, because of its geopolitical importance, Turkey was able to secure a large rescue package from the IMF, a package much larger than the sum allocated to Argentina, which had also experienced a crisis in 2001. Another positive development for Turkey was the landslide election of the Justice and Development Party (AKP) in 2002, after many weak coalition governments. AKP has since proven its commitment to economic reforms and EU membership. The period after 2001 was marked by the successful implementation of many previously established regulatory bodies, especially in the banking sector. For example, the Bank Regulatory and Supervisory Agency (BRSA) was created in 1999 following the ratification of the IMF-sponsored Banks

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Act No. 4389. However, due to resistance from banking lobbies and lack of political support, the BRSA did not have any regulatory power. This agency became responsible for banking supervision and regulation of both banks and non-bank financial institutions, a task which had previously been the responsibility of the Treasury and the Central Bank.3 As can be seen in Figure 1, there was a surge in FDI inflows to Turkey in 2001. Turkey received 3.3 billion USD in 2001, an increase of over 200 percent from the previous year. This sharply contrasts the slump in global FDI inflows that followed the dot.com bubble in 2001. However, this kind of surge in FDI inflows in crisis countries is common. Similar increases in FDI inflows also occurred following the Asian crisis in 1997 in Thailand and South Korea. Contrary to short-term portfolio and debt flows that escape a host country at the first sign of trouble, FDI tends to be stable. A possible general explanation for this is that in case of a collapse of the stock market and the exchange rate, profitable assets become cheaper for foreign investors. In the years leading up to 2005, FDI inflows again fell to around one percent of GDP. This drop was consistent with global developments on FDI inflows where inflows were less than half in 2002 from their peak of 1,411 billion USD in 2000, and down to only 40 percent of the peak in 2003 (UNCTAD). During this time period, the evolution of FDI inflows to Turkey was dramatic. FDI inflows to Turkey in 2000 were close to zero percent of global FDI inflows. However, the amount of FDI inflows to Turkey reached 1.1 percent in 2005 and 1.5 percent of global FDI inflows in 2006. The World Investment Report (2007) ranked Turkey among the more successful countries to attract FDI in 2006, due to a few cross-border M&As and privatization of the financial services with gross FDI inflows reaching 20 billion USD. In 2008, inflows declined by 17 % to $ 18 billion, after reaching an exceptionally high level of 22 billion USD in 2007 due to a number of cross-border M&A mega deals in the financial industry (UNCTAD, 2009). In 2007, Turkey managed to attract FDI inflows larger than that of many of the EU new member states. FDI inflows in terms of gross fixed capital formation in Turkey were higher than Poland and the Czech Republic in 2005. Even though there had been a slight decline in inflows, Turkey still attracted 17 billion USD in FDI inflows in 2008, more than Poland, who

3.

“Turkey’s Political Economy in the Age of Financial Globalization: The significance of the EU Anchor”, South European Society and Politics, 2007, Volume 12.

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received 14 billion USD the same year. Estimates by UNCTAD indicate that FDI inflows to Turkey in 2009 fell as low as 7.1 billion USD due to the ongoing global financial crisis. Table 1: A comparison of Turkey and some of the EU new member states

Turkey Cyprus Czech Republic Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

FDI Inflows as Inward FDI Stocks Inward Stocks as a Gross Fixed capital percent of GDP Formation 12.3 70 001 9.06 42.5 20 706 84.9 20.6 114 369 52.7 24.8 81 760 73.0 12.3 11 447 34.2 15.4 12 847 27.2 66.2 9 142 108.4 14.4 161 406 30.7 11.9 45 933 48.4 3.8 15 782 28.1

Source: UNCTAD, World Investment Report Database, 2009 (data are for 2008)

However, in terms of FDI inward stocks, Poland accumulated 161 billion USD, reaching 30 percent of its GDP in comparison to 70 billion USD in Turkey reaching only 9 percent of GDP by the end of 2008. This disparity reflects the fact that Poland began attracting significant sums of FDI several years before Turkey and could also be said to illustrate Turkey’s high, yet unfulfilled, potential. Among the new member states Poland is the best choice for comparison with Turkey given Poland’s large size and the fact that the two countries are similar in terms of growth rate and R&D expenditure as well, even though Poland has higher per capita income, is more open to trade, and has a larger pool of skilled labour force, thus decreasing the country’s risk (Table 2).

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Table 2: A selection of comparators

Turkey Argentina Brazil Bulgaria Chile China Cyprus Czech Republic Hungary Poland Slovakia Slovenia

Real GDP per Total R&D Students in Country GDP capita exports expenditures tertiary risk Growth education 3.2 4 173.8 27.9 0.7 2.73 66.5 0.7 4 047.1 25.1 0.4 5.53 71.8 2.1 3 460.2 17.0 1.0 2.20 69.3 2.9 3 020.0 58.4 0.5 2.94 71.3 3.6 5 969.4 39.8 0.6 3.60 82.3 8.8 1 318.3 34.7 1.4 1.48 78.8 3.6 18 557.8 47.9 0.4 2.52 82.3 2.3 10 449.0 69.3 1.3 3.12 79.3 4.3 3.7 3.9 3.9

9 652.0 6 407.0 7 416.0 15 975.0

64.4 37.6 77.8 60.8

0.9 0.6 0.6 1.6

4.17 5.30 3.05 5.31

73.8 76.0 74.0 78.3

Source: UNCTAD, World Investment Report Database, 2007 (data are for 2005)

One of the implications of large FDI inflows is the greater investment income to be paid in the future. This is one of the negative effects of FDI inflows on the current account. In fact, as we can see from Figure 3, as FDI inflows have increased since 2001, FDI investment income that needs to be paid has also increased. In conjunction with increasing income payments, a return to direct investment in Turkey has also risen. However, when we compare Turkey with its competitors, we can see that Turkey has been a lot less profitable than Hungary, the Czech Republic, Bulgaria, Romania and Poland (Figure 4). One of the policy implications of this is that the cost of FDI to Turkey is relatively low. Although FDI income payments in 2005 exceeded 1 billion USD and reached 2.7 billion USD in 2008, this represents a rate of return of 3.63 percent. On average, rate of return in Turkey to FDI (3.2 percent) exceeds only the rate of return in Mexico (2.2 percent). This could be an incentive for future governments to justify promoting Turkey as an FDI location.

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Figure 3: Returns on FDI in Turkey 3.63

3.50

2.83

1000

4.00

3.19

in millions of USD

3.00 800

2.50

1.93 600

2.00

1.61

1.50

400

1.00 200

Return on FDI in Turkey (percent)

1200

0.50

0

0.00 2001

2002

2003

2004

2005

FDI Investment income payments Return on direct investment in Turkey Source: Author’s own calculations, IMF Balance of Payments

Figure 4: Average Rates of Return to FDI Inflows (1984-2004) 25.0

22.1 20.0

percent

15.0

10.2 10.3

10.0

8.7

8.4

8.2

5.7 5.0

5.5

4.2

5.8 3.2

2.2

Source: Author’s own calculations, IMF Balance of Payments

131

Turkey

South Africa

Romania

Poland

Mexico

India

Hungary

Czech Republic

Chile

Bulgaria

Brazil

Argentina

0.0

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Geographical and Sectoral Allocation of FDI Inflows to Turkey In order to assess the sustainability of the FDI inflows to Turkey, we will examine both the geographical and sectoral allocation of these flows. First, we must focus on the geographical distribution of the source countries that invest in Turkey. The analysis in this section aims to reveal whether the large inflows of the last two years come from countries that have a longterm interest in investing in Turkey or whether they are one-off investors. There is now a growing literature that supports gravity models of FDI flows that have been shown to be successful to predict patterns of bilateral FDI flows. Gravity models have been widely used since 1960s in the analysis of bilateral trade flows and generally have a very high explanatory power. These models predict that countries will trade more in goods with countries that have large economic sizes (generally measured by GDP) and less with countries that are geographically distant. Although relatively recent, the use of gravity models has been successful in explaining the patterns of trade in assets, including the FDI.4 According to gravity models, we would expect countries with large economies and in close proximity to invest more in Turkey. Some studies also show when both host and source countries are in a trade agreement, they also tend to invest more in each other. Thus, it is accurate to expect the EU member states to be the main investors in Turkey. Indeed, eighty-three percent of FDI inflows in 2006 originated within the EU-27, followed by eleven percent by Middle East, five percent by the US, one percent each by Canada and Australia (Balance of Payments Statistics, TCMB). Within the EU, the top five investors were Netherlands, Belgium, Greece, Austria, and the UK in 2006 (Table 3). As inflows fluctuate from year to year, the relative importance of investors also changes. For example, the share of EU 27 in FDI inflows to Turkey declined to 75 percent in 2008, whereas the inflows from the US or Middle East (mainly GCC) remained stable.

4.

Guerin, Selen S., The Role Of Geography In Financial Integration: Foreign Direct Investment, LUISS working paper 36, 2005; Guerin, S. and S. Manzocchi, “When FDI flows from Rich to Poor Countries: Does Democracy Matter?”, LUISS Working Paper, No. 38, 2006; Loungani, P., A. Mody and A. Razin, “The Global Disconnect: The Role of Transactional Distance and Scale Economies in Gravity Equations”, Scottish Journal of Political Economy Vol. 49, No. 5, 2002, pp. 526-543.

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Table 3: Main FDI Investors In Turkey in terms of Gross FDI inflows (millions of USD) – 2006-2008 2006 EU-27 UK Netherlands Germany France Italy Asia Middle East America US Canada Total

2008 14,645 628 5,134 357 439 189 1,926 1,909 1,002 848 121 17,709

11,051 2,294 1,738 1,217 685 222 2,292 1,911 887 863 24 14,733

Source: International Investment Positions, Central Bank of Turkey Note: These figures do not include intra-company loans.

Table 4: Main FDI Investors in Turkey in terms of Inward FDI stocks (millions of USD) – 2006-2008 2006 The Netherlands UK France Germany Belgium Finland Italy Greece Luxembourg Spain

2007 19,546 7,101 7,464 6,577 5,831 7,913 4,325 2,608 2,095 1,356

2008 33,376 13,008 12,881 10,058 8,249 9,363 3,370 5,778 7,712 3,399

13,514 5,397 5,582 4,840 3,267 4,960 1,189 4,118 2,784 1,603

Source: International Investment Positions, Central Bank of Turkey Note: These figures do not include intra-company loans.

Gross FDI inflows indicate the yearly acquisitions of foreign investors, and the main investors may change from year to year. For example, although Turkey and Greece are neighbouring countries, Greece was never an important direct investor in Turkey until 2006. Due to the increased interest of Greek banking sector in Turkey, Greece has become the third largest FDI 133

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investor in Turkey (Table 3). Examining FDI stocks will provide a better idea of which source countries have been investing in Turkey and have accumulated investment over the years. Table 4 shows that over the years the Netherlands had accumulated FDI stocks as high as 33 billion USD by the end of 2007 but the stocks fell to 13 billion USD in 2008. Nevertheless, the Netherlands is still the major investor in Turkey. Although they were not among the top five investors in 2006 in terms of gross FDI inflows, the UK, France and Germany have been the main investors in terms of FDI stocks. Germany, the Netherlands, and the UK also have the highest number of companies with international capital (Table 5). However, it is also known that the FDI inflows that originate in the Netherlands do not always indicate the ultimate origin of the flows as Netherlands is home to large financing TNCs. Table 5: Breakdown of Companies with International Capital by Country (number of companies) Countries European Union Germany The Netherlands United Kingdom Other European Countries Other European Countries (Excluding EU) African Countries North America U.S.A. Canada Central-South America And Caribbean Near And Middle Eastern Countries Azerbaijan Iraq Iran Other Other Asian Countries China South Korea Other Other Countries Total

2008 1,770 584 277 251 658 528 50 142 124 18 12 564 131 86 140 207 229 44 13 172 42 3,337

Provisional Data, Source: Undersecretariat of Treasury

134

2009 1.359 490 140 195 534 416 69 142 110 32 15 611 161 101 161 188 230 39 21 170 24 2,866

(1954-2009) Total 12,777 4,038 1,764 2,168 4,807 3,063 407 1,176 1,015 161 126 4,095 723 669 1,166 1,537 1,626 369 160 1,097 281 23,551

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In terms of the sectoral allocation of FDI inflows, foreign investment heavily targeted the services sector rather than the manufacturing sector (Table 6). This choice may indicate that foreign companies do not target Turkey for its cheap labour. Increasing investment in the financial services sector in Turkey, for example, indicates that Turkey attracts FDI because of its large market. Within the services sector, and overall, transport, warehousing and communications services is the second largest sector to receive FDI inflows in 2007. In the manufacturing sector, chemicals and the other manufacturing industries account for the majority of FDI. Table 6: Sectoral Allocation of FDI Inflows to Turkey (millions of USD) – 2007 Manufactures Food, beverages and tobacco Chemicals Other manufacturing Services Financial Intermediation Transport, Warehousing, Communication Real Estate TOTAL

4,211 766 1,109 1,869

18 % 26 % 44 %

14,012 11,662 1,117 560 19137

83 % 8% 4%

When we examine the sectoral breakdown of the number of companies, we can see that wholesale and retail trade, both in the last two years and over the past fifty years has been the most significant sector to attract FDI with 6,990 companies (Table 7). This sector has also attracted the largest number of companies that invested more than 500,000 USD in equity (Undersecretariat of Treasury). This is followed by 3,767 companies that invested in the real estate, rental and business activities sector. In the manufacturing sector, chemicals has attracted the largest number of FDI investors, followed by textiles and food and beverages.

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Table 7: Breakdown of Companies with International Capital by Sector Sectors

2008

2009

Agriculture, hunting, fishing and forestry Mining and quarrying Manufacturing Manufacture of food products and beverages Manufacture of textiles Manufacture of chemicals and chemical products Manufacture of machinery and equipment n.e.c. Manufacture of motor vehicles, trailers and semi-trailers Other Manufacturing Electricity, gas and water supply Construction Wholesale and retail trade Hotels and restaurants Transport, storage and communications Financial intermediation Real estate, renting and business activities Other community, social and personal service activities Total

53 58 91 67 471 373 38 44 21 17 48 40 46 24 21 21 297 227 117 132 372 294 791 883 220 173 292 255 46 16 675 459 209 156 3,337 2,866

(1954-2009) General Total 367 476 4,119 420 445 454 342 244 2,214 464 2,197 6,990 1,666 2,010 293 3,767 1,202 23,551

Source: Undersecretariat of Treasury

The early theoretical models divided FDI into two groups. It was believed that the multinationals often undertook FDI in countries where labour was cheaper compared to the source country standards. This type of FDI, known as vertical FDI, is motivated by cost-cutting. Given the low transaction costs, multinationals undertake the labour-intensive stage of the production in a host location with the ultimate aim of exporting the final goods back home or to a third country. Most FDI flows from developed to developing countries were thought to be of this type. However, there is very little empirical evidence of ‘pure’ vertical FDI. In fact, most FDI flows in the world are horizontal. Although early theoretical models predicted that FDI would flow from rich to poor countries, as in vertical FDI models, the stylized facts indicated that the majority of FDI flows in fact moved from developed countries to developed countries. Hence, the theoretical models predicted that FDI could also rise between developed countries where there are economies of scale. In other words, horizontal FDI seeks large markets where transaction costs are so high that the host market cannot be served by exports. Recent theoretical models of

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FDI incorporate both vertical and horizontal FDI where both can rise simultaneously, such as the FDI in the automobile sector in Turkey.5 Overall the services sector has attracted more than three times the amount received by the manufactures in USD terms in 2007 (Table 6). This difference has a few implications. The sectoral allocation of FDI shows that the majority of inflows to Turkey are of horizontal FDI. Since it is safe to assume that investment in the services sectors of Turkey is not carried out with the aim of outsourcing, they are therefore intended solely for the domestic market, and not for re-exports. This also means that Turkey is not attracting FDI for its cheap labour. It is particularly interesting that the EU did not see Turkey as a base for vertical FDI, especially since Turkey and the EU have a customs union agreement.

Sources of Change in Turkey In this section we will discuss the impact of three important events that were the catalyst behind the change in the investment environment in Turkey after 2001. As mentioned briefly, it was the ‘twin crisis’ of 2000 and 2001 that set the stage for these three developments to lead to positive results. Although a stand-by agreement with the IMF was signed before the crisis, the general public did not blame the IMF for its failure to avert the crisis, as is often the case in Latin American countries. On the contrary, the crisis was seen as the outright fault of the political establishment of the time. Hence, the public voted out the coalition members of the crisis period and elected by majority a new party, the Justice and Development Party. With a majority power in parliament, AKP has shown that it is both committed and able to carry out reform and EU membership negotiations. The enactment of the new FDI law, the initiation of both the EU membership negotiations, a serious privatization program are the most important steps taken by AKP that changed the image of the investment environment in Turkey.

5.

Carr, D.L., J.R. Markusen and K.E. Maskus, “Estimating the Knowledge-capital Model of the Multinational Enterprise”, American Economic Review, vol. 91, 2001, pp. 693-708.

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New FDI Law The new FDI Law 4875 was enacted in June 2003, replacing the old FDI law 6224 of 1954.6 The objective and scope of the new law was defined as follows: The objective of this Law is to regulate the principles to encourage foreign direct investments; to protect the rights of foreign investors; to define investment and investor in line with international standards; to establish a notification-based system for foreign direct investments rather than screening and approval; and to increase foreign direct investments through established policies. This Law establishes the treatment to be applied to foreign direct investments. This law brought Turkish law in line with internationally accepted definitions of FDI. The most important points of this law are discussed in Box 1 below. Box 1 PRINCIPLES CONCERNING FOREIGN DIRECT INVESTMENTS a) Freedom to Invest and National Treatment Unless stipulated by international agreements and other special laws: 1. Foreign investors are free to make foreign direct investments in Turkey, 2. Foreign investors shall be subject to equal treatment with domestic investors. b) Expropriation and Nationalisation Foreign direct investments shall not be expropriated or nationalised, except for a public purpose and upon compensation in accordance with due process of law. c) Transfers Foreign investors can freely transfer abroad: profits, dividends, proceeds from the sale or liquidation of all or any part of an investment, compensation payments, amounts arising from license, management and similar agreements, and reimbursements and interest payments arising from foreign loans through banks or special financial institutions. d) Access to Real Estate Companies may freely acquire real estate or limited rights in rem through a legal entity established or participated by foreign investors in Turkey, provided such acquisitions are permitted for Turkish citizens.

6.

Erdilek, A., “A comparative analysis of inward and outward FDI in Turkey”, Transnational Corporations, 2003.

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e) Dispute Settlement For the settlement of disputes arising from investment agreements subject to private law and investment disputes arising from public service concessions agreements which are concluded with foreign investors, foreign investors can apply either to the authorised local courts, or to national or international arbitration or other means of dispute settlement, provided that the conditions in the related regulations are fulfilled and the parties agree thereon. f) Valuation of Non-Cash Capital Non-cash capital is valued within the regulations of Turkish Commercial Law. In case that stocks and bonds of companies residing abroad are used as foreign capital share of foreign investors, the values determined by the relevant authorities in the home country, or by the experts designated by the courts of the home country, or any other international institutions performing valuations will be accepted. g) Employment of Expatriates Foreign personnel working permits are issued by Ministry of Labour and Social Security for foreign personnel to be employed in the companies, branches and entities established within the scope of this Law. In a Regulation to be prepared jointly by the Undersecretariat of Treasury and the Ministry of Labour and Social Security, according to Article 23 of the Law on Foreign Personnel Working Permits No. 4817 dated 27 February 2003, the companies and entities with foreign capital which shall be in the context of the Regulation, the definition of the key personnel within the scope of the Regulation and other special procedures and principles concerning the work permits of key personnel will be determined. Provisions stipulated in Article 14, paragraph 1, sub-paragraph (b) of Law No. 4817 will not be applicable to personnel to be employed within the context of this Regulation. The conditions under which the provisions stipulated in paragraph 1 of Article 13 of Law No. 4817 are to be applied to key foreign personnel employed will be specified in the Regulation. h) Liaison Offices The Undersecretariat is authorised to permit foreign companies established under the laws of foreign countries to open liaison offices, provided that they do not engage in commercial activities in Turkey. Source: Official Gazette, 2003

In addition to the new law, the government established an Investment Advisory Council in 2004. This council was comprised of twenty top-level executives of multinational companies who possessed decision-making power in the location of investments. The aim of this council was to provide a platform to exchange ideas between policy makers and investors

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in order to make Turkey more competitive. During their first meeting, the council identified some priority areas to be improved. In order to follow up on progress, the Coordination Council for the Improvement of the Investment Environment (YOIKK) was established. Overall, the Declaration highlighted how far Turkey was behind its FDI competitors. By 2004 Turkey did not even have an investment agency to promote direct investment in Turkey. The new law and other initiatives provided the necessary infrastructure for making Turkey competitive, but the main concern at this time was the effective implementation of these laws and regulations. Erdilek (2003) argues that the mindset of Turkey’s bureaucrats is the biggest hurdle that Turkey must overcome. He further argues that mistrust in foreign capital dates back to the late 19th century when the Ottoman Empire signed privileged economic rights to foreigners under the Capitulations. The Capitulations allowed foreign governments to exercise extraterritorial jurisdiction over their nationals living in the Ottoman Empire. Erdilek (2003) argues that such actions in the past have been regarded as humiliating derogations from national sovereignty and have consequently created a fear of economic domination and control in the minds of the Turkish civilian and military elite. This attitude seems to be changing with AKP’s pro-FDI policies.

EU and IMF Anchors As discussed above, the stand-by agreement signed with the IMF and the start of the membership negotiations with the EU in October 2005 had a profound impact on the new investment environment in Turkey. While the role of the IMF was to aid Turkey through its macroeconomic stabilization program, the EU’s role was secondary and somewhat in the background until, with the start of the negotiations, membership became a reality. The stand-by agreement that was signed with the IMF in 1999 involved a combination of measures aimed at fiscal adjustment and medium-term structural reforms. This agreement was not signed in the aftermath of a financial or balance-of-payments crisis, yet the presence of the IMF could not avert the twin crisis of 2000 and 2001. However, one of the positive outcomes of the crisis was to the strengthening of the pro-reform movement. Indeed, Turkey has made considerable progress since the 20002002 period. Inflation rate dropped from 44.7 percent from its annual average in 2000-2002 to 7.7 percent in 2007, and the budget deficit was reduced to -2.5 in 2007 from around 14 percent in 2000-2002 (Table 8). 140

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However, although the effect of the IMF-led program was almost immediate, FDI inflows did not react to these macroeconomic results. Clearly, this was the shortcoming of the IMF as an anchor: it was perceived to be short-term and temporary. Table 8: Macroeconomic indicators Indicator GNP Growth Inflation Current Account Balance/GNP Treasury Interest Rate Budget Deficit/GNP

Average of 2000-2002 1.6 44.7 -1.2 49.9 -13.7

2007 5.3 7.7 -7.6 6.07 -2.5

Source: Central Bank of Turkey, Economist Intelligence Unit

In fact, the surge of FDI inflows to Turkey coincides with the official start of the membership negotiations with the EU in 2005. A few important milestones in the relationship between Turkey and the EU had already been reached, but none of these had the impact of the decision to start negotiations with Turkey in October 2005. One such example of a milestone prior to the agreements was the Customs Unions agreement of 1995. The customs union was seen as a step toward EU membership, and the agreement did generate greater interest in Turkey among European direct investors. However, the government spectacularly failed to meet the expectations of the investors at this time. As Figure 5 shows, immediately after the CU came into effect in 1996, authorized FDI inflows in Turkey reached nearly 4 billion USD but the realized inflows did not even reach 1 billion USD. The Helsinki decision of 1999 also made the EU exert a powerful force on Turkey’s reform path but the focus at that time was more on political reform process, i.e., civil and human rights. The problem with these milestones was that none of them sent the signal that Turkey’s reforms were on a permanent path. The start of the membership negotiations, however, finally signalled that the EU would be a long-term and permanent factor in Turkey’s democratization and economic reforms process. Below in Figure 6, we can see the effect that the start of the negotiations had on FDI inflows in Poland and Turkey. In both countries, FDI inflows surged almost immediately.

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Figure 5: Authorized and Realized FDI Inflows before the New FDI Law 4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00

0.00

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

500.00

Authorized FDI (millions USD)

Realized FDI (millions USD)

Figure 6: The Effect of Accession Negotiations on FDI inflows 6

FDI/GDP (percent)

5 4 3 2 1 0

t-8

t-7

t-6

t-5

t-4 t-3 t-2 t-1 T t+1 T=Start of accession negotiations Turkey

142

Poland

t+2

t+3

t+4

t+5

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Onis and Bakir (2006) argue that Turkey has benefited greatly from the presence of double external anchor in the development of an environment conducive to reform. Turkey had gone through other crisis periods before, even as early as the beginning of the 1980s; the IMF was involved in Turkey’s liberalization process back then as well. Turkey had applied for EU membership as early as 1963 so the EU has always been involved in Turkish politics. What was different this time? Onis and Bakir claim that the external anchors were more credible this time because both IMF and the EU were committed. While external anchors can be helpful throughout the reform process in that they take the domestic pressure off the governments, if their support is not perceived to be ‘committed’ by the public, they may fail. In other words, if the IMF support had not been accompanied by a large rescue package, or the EU conditionality had not been accompanied by the prospect of full membership, this would have been interpreted as a sign of a weak commitment.7 Another difference between the period prior to 2001 and following it was that although the regulatory institutions were set up in the 1990s, there was a lack of effective implementation.

Privatization Another factor that contributed to Turkey’s success in attracting large FDI inflows after 2001 was the large-scale privatization program. Although there had been some early attempts at privatization, the program itself did not start until 2004 (Figure 7): Privatization proceeds in both 2005 and 2006 exceeded 8 billion USD due to increased M&A activities. Some of these included the privatization of important State Owned Enterprises (SOE) such as Turk Telecom, Tupras, and Erdemir. Oger Telecom of Saudi Arabia bought fifty-five percent of Turk Telecom for 6.65 billion USD. In September 2005, Koc Holding A.S & Shell Co. paid US $ 4.14 billion to TUPRAS. In October 2005, the country’s biggest state owned producer of flat steel, Eregli Iron & Steel Works Co., was sold to OYAK with a bid of US $ 2.77 billion. It was recently announced publicly that OYAK has established a partnership with French Arcelor, in order to run Erdemir.8 In addition to the SOE’s, other privatization activities included the Fortis 7.

8.

Onis, Z. and C. Bakir, “Turkey’s Political Economy in the Age of Financial Globalization: The significance of the EU anchor”, South European Society and Politics, 2006, p. 12. Karaegem, M., Development and Determinants of Foreign Direct Investment In Turkey: A Comparative Analysis with the EU Countries, mimeo, Unpublished, Sabanci University, Istanbul, 2006.

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Bank of Belgium acquiring 89.34 percent of Disbank shares for $ 1.14 billion. Another major deal in 2005 was between Sekerbank and Dutch Radobank, where Radobank paid $ 92 million for 36.5 percent ownership in Sekerbank. In 2007, the privatization program included sales of TCDD Izmir Port (for sale value of 1.3 billion USD), TEKEL real estates (3 million USD), 51 percent shares of PETKIM (Turkish Petroleum Refinery) (2 billion USD), and TCDD Derince Port (195 million USD). The privatization process continued in 2008-2009. The overall privatization proceeds of the Turkish Privatization Administration (TPA) amounted to 38.2 billion USD in July 2009, of which 30 billion related to the period 2004-July 2009 (UNCTAD, 2009). Figure 7: Turkey’s Privatization Process (millions of USD) 9000 8000 7000

billions of USD

6000 5000 4000 3000 2000 1000

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1999

1998

1997

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0

Privatization proceeds (USD)

Source: Central Bank of Turkey

Although FDI inflows do not finance 100 percent of the proceeds from privatized assets, there is still a strong correlation between FDI inflows and privatization in Turkey, as in other developing countries. In fact, when an asset is privatized, it can be bought by both domestic and foreign investors.

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The privatization process can have a positive impact on FDI inflows in two ways: first, by undertaking privatization the government signals the investors that it is opening up the market for competition and/or that the particular market in question will be deregulated. As the proponents of privatization argue, the changing of hands of previously public enterprises to private market actors increases the efficiency with which the business is run and hence increases growth.9 Second, privatization provides foreign investors with potentially profitable assets. Most of the CEEs’ early success in attracting FDI is closely tied to privatization. These countries started their privatization program soon after their democratization process in the early part of the 1990s and also attracted large sums of FDI inflows during the same years. One of the questions that comes to mind is whether FDI inflows will dry up once the assets are privatized. If the aim of the privatization programs is to make the host country more efficient and competitive and hence boost growth, the effect of the privatization process will last longer insofar as FDI inflows are attracted to countries where growth potential is high. It can be seen from the example of the new EU member states that although the privatization process has slowed down, all of these countries with the exception of Slovenia were among high potential and high performance countries according to the World Investment Report (2007).

9.

Barnett, Steven A., “Evidence on the Fiscal and Macroeconomic Impact of Privatisation”, IMF Working Paper, July, Washington D.C.: IMF, 2006.

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Figure 8: Privatizations Proceeds vs FDI Bulgaria

Czech Republic

2500

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0

Source: World Bank (privatization data), IMF (FDI data)

Figure 8 shows a simple exercise to support the idea that a in a host country that has been committed to economic reforms and used privatization as a means to this end, FDI inflows continue to grow. Indeed, the experience of both Hungary and the Czech Republic over the period 1993-2003 have been impressive, with average FDI inflows of 6.40 and 5.58 percent of GDP respectively. As can be seen, Hungary, Czech Republic, and Romania especially stand out having attracted large FDI inflows during the years where privatization proceeds were low. Bulgaria, in contrast, seems to have attracted FDI inflows due to privatization until 2000, but that trend was

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then broken as Bulgaria continued to attract large FDI inflows afterwards even though privatization proceeds were low. Poland and Turkey are similar insofar as their experience during this period shows that FDI inflows to both countries were motivated by privatization activities. However, both Poland and Turkey are among the top twenty-five countries listed as favourite destinations for FDI by AT Kearney’s FDI Confidence Index (2010).

Outlook The investment environment in Turkey has improved greatly since 2001 thanks to the double external anchors of the IMF and the EU and the privatization process that finally began. It is important to acknowledge that many secondary factors aided this process. For example, both the timing of the “twin crisis” and the election of the AKP, a majority party which is committed to reform, helped in the smooth functioning of this transformation. The stability of the new investment environment is dependent on many factors. Macroeconomic stability is arguably the most important factor that supports an investment climate conducive to growth, hence continued FDI inflows. Basar and Tosunoglu (2006) analyze Turkey’s performance in attracting FDI and highlight the key obstacles for FDI in Turkey in an empirical paper.10 Their results indicate that macroeconomic instability is the major factor behind Turkey’s earlier low performance. They further find that current account deficits and inflation seem to have a negative effect on FDI inflows, based on their sample of the EU’s twelve new member states. At this stage, it is difficult to predict whether Turkey has left its boom-and-bust periods in the past or if another financial crisis is still a risk. Onis and Bakir (2006) argue that there has been strong evidence in recent years that Turkey is moving strongly in the direction of achieving high rates of growth not on a sporadic but on a sustained basis. However, they add that there are also danger signals in the recovery process. It is even more difficult to predict the effect that political changes might have on the macroeconomic stability. The business environment has improved in Turkey in the last few years due to the positive effect of the IMF and the EU as external anchors. AT Kearney’s FDI Confidence Index ranked Turkey among the top ten 10. Basar, M. and S. Tosunoglu, “EU Integration Process: Will Turkey Overcome the FDI obstacles?”, Managing Global Transitions, Vol. 4, No. 2, 2006, pp. 115-128.

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destinations for FDI in 2005 and among the top 25 in 2010. Below is a table that compares the results of the Investment Climate Survey of the World Bank in 2005 for Turkey and Poland. In terms of its geographic location, the new EU member states are Turkey’s competitors for FDI, especially Poland, comparable in size. This survey groups indicators of investment climate under seven headings. Below is a selection of some of these indicators. When infrastructure in Turkey is compared with Poland, Turkey seems to be better in terms of electricity and telephone connection. Nevertheless, the percent of firms that identify poor infrastructure as a major constraint is higher for Turkey than Poland. In terms of finance as an indicator for investment climate, the percent of firms identifying finance and the cost of finance as a major constraint are higher in Poland. More firms have had to rely on internal funds in Poland, but more firms also receive financing from the banks. Labour market regulations are perceived to be a major constraint by more firms in Poland than Turkey. However, Poland clearly has more skilled workers. This is one of the most important shortcomings of Turkey: lower education levels compared to CEEs. Corruption seems to be a problem at a similar level for both countries. While it seems to be a more pervasive problem to bribe tax inspectors in Poland, the licensing procedure is a major constraint in Turkey. In terms of trade indicators, Poland seems to be more efficient in customs clearance. Again, import licenses seem to be the problem in Turkey.

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Table 9: Investment Climate Survey, 2005 Turkey

Poland

6.7 9.2 5.7 7.5

4.5 4.1 11 12.7

14.1 20.9 55.1 5.8

34 43.8 75.7 9.3

12.1 24.2 11.3 49.5 14.9

17.8 23.7 5.8 63.8 6.7

16.8 1.1 12.4 8.9 7.2

16.7 0.6 20.9 6.9 6.5

52.1 0.3

61.3 0.3

14.3

17

5.6 4.2 5.8 7.2

3.5 3.2 6.3 6.5

Infrastructure Indicators % of firms identifying transportation as a major constraint % of firms identifying electricity as a major constraint Delays in obtaining electricity connection (days/year) Delays in obtaining telephone connection (days/year) Finance indicators % of firms identifying finance as a major constraint % of firms identifying cost of finance as a major constraint % of investments financed by internal funds % of investments financed by banks Labor market indicators % of firms identifying labor regulations as a major constraint Managers/professionals (as a percent of total workforce) Non-production workers (as a percent of total workforce) Skilled production workers (as a percent of total workforce) Unskilled production workers (as a percent of total workforce) Regulatory Burden and Corruption Indicators % of firms identifying corruption as a major constraint Unofficial Payments to Get Things Done (% of sales) % of Firms Expected to Give Gifts in Meetings with tax inspectors % of Firms Expected to Give Gifts to Obtain Operating Licenses % of Firms Expected to Give Gifts to Obtain Import Licenses Innovation and Technology Indicators % of firms undertaking innovation R&D expenditures (% of sales) Trade Indicators % of Firms That Trade Identifying Customs & Trade Regulations as a Major Constraint Days on Average to Claim Imports From Customs Days on Average to Clear Customs for Exports % of Inputs Which Firms Import Directly % of Firms Expected to Give Gifts to Obtain Import Licenses Source: Investment Climate Survey, World Bank 2005

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Although the above table reveals that Turkey has caught up with Poland in terms of investment climate, there are still many shortcomings in the business environment. One of the conclusions of the recent World Bank report on Turkey in 2006 was that Turkey needed to reduce administrative barriers in order to strengthen the business environment.11 This in turn would increase investment levels and bring Turkey in alignment with EU requirements on enterprise and industrial policy. In another econometric study, Sayek (2005) shows that the key determinants of FDI include large market size, openness to foreign trade and institutional quality, controlling for corruption, administrative barriers and contract enforcement.12 The report mentions that the new FDI law established a liberal FDI regime by eliminating additional permits and procedures required for foreign investors. However, to improve the FDI regime, Turkey needs to make sure the FDI laws are implemented and to reduce existing restrictions in some sectors (e.g., radio and TV broadcasting). One of the major improvements in the last two years has been the creation of an efficiently functioning investment promotion agency (Invest in Turkey). According to the Global Investment Promotion Benchmarking Report (2009) by the World Bank, Invest in Turkey agencies have performed well even under tight budgets, and it is among the top 25 best performing investment promotion agencies. Inefficient government bureaucracy, tax regulation, policy instability, tax rates, and access to financing are the top five obstacles to doing business in Turkey (GCR, 2007). Another source of information on the FDI investment climate in countries is AT Kearney’s FDI Confidence Index. According to their 2007 report, Turkey ranked 20th among investors’ most favoured locations, down from 13th place from 2005. The same report also indicates that Poland is ranked 22nd in 2007, down from 5th place in 2005. Finally, the report ranks the top fifteen destinations for European investors does not include Turkey on this list (Table 10). In summary, the macroeconomic and the business environment in Turkey have improved greatly but there remain some risks and steps to be taken. In 2010, Turkey was still among the top 25 countries (Figure 9).

11. World Bank, Country Economic Memorandum: Turkey, Washington DC, 2006. 12. Sayek, S., FDI in Turkey: The Investment Climate and EU effects, Background paper prepared for the Country Economic Memorandum Turkey 2006, World Bank.

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Table 10: FDI Confidence Index (2007) FDI Confidence Index 2007 by Investor Region (Top 15) Asian Investors European Investors North American Investors 1 China 1 India 1 United States 2 India 2 China 2 China 3 Vietnam 3 Russia 3 India 4 Brazil 4 United States 4 Canada 5 UAE 5 Poland 5 Hong Kong 6 Singapore 6 Romania 6 United Kingdom 7 United States 7 Ukraine 7 Brazil 8 United Kingdom 8 Brazil 8 Australia 9 Malaysia 9 France 9 Singapore 10 Hong Kong 10 UAE 10 Mexico 11 Indonesia 11 Germany 11 France 12 Thailand 12 Czech Republic 12 Japan 13 Australia 13 Bulgaria 13 Germany 14 Russia 14 Hong Kong 14 South Korea 15 Germany 15 Australia 15 Argentina Source: AT Kearney, 2007.

Figure 9 (1) (3) (2) (6) (10) (22) (11) (19) (14) (4) (8) (12) (13) (5) (17) (*) (25) (9) (*) (21) (16) (*) (20) (7) (*)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

China United States India Brazil Germany Poland Australia Mexico Canada United Kingdom United Arab Emirates Vietnam France Hong Kong Other Gulf states Romania Czech Republic Russia Saudi Arabia Indonesia Malaysia Chile Turkey Singapore Egypt

1.93 + – + + + + + + – –

– + + + – + + – + – – +

Low confidence

1.67 1.64 1.53 1.43 1.35 1.33 1.32 1.32 1.32 1.29 1.29 1.29 1.28 1.26 1.26 1.25 1.24 Maintained ranking + Moved up 1.23 – Moved down 1.22 1.22 (#) 2007 ranking 1.22 (*) Not among top 25 1.21 in 2007 Index 1.19 1.19 Values calculated on a 0 to 3 scale

High confidence

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The EU Membership Negotiation Process and the Future Path of FDI The official start of the negotiations for full membership with the EU in October 2005 was a historic moment for Turkey in its long relationship with Europe. However, Turkey’s overall progress has thus far been modest. According to the EU Progress Report (2009) on Turkey, negotiations with this country continued in the 2006-2007 period, finalizing the preparatory analytical phase. Basically, this stage is a screening process to assess whether Turkey is prepared in each individual chapter to start negotiating. Up to now, the negotiations have been opened on eleven chapters (science and research, industrial policy, statistics, financial control, trans-European networks, consumer and health protection, intellectual property law, company law, information society and media, free movement of capital and taxation) and provisionally closed on one (science and research).13 There was a setback in December 2006 when the Council decided that “negotiations will not be opened on eight chapters relevant to Turkey’s restrictions regarding Cyprus and that no chapter will be provisionally closed until the Commission confirms that Turkey has fully implemented the Additional Protocol to the Association Agreement”.14 However, the Council emphasized that the screening process would continue and “chapters for which technical preparations have been completed would be opened”. This development, as can be expected, provoked immediate concern over the EU’s willingness to negotiate membership talks among the general public in Turkey and was perceived as the “collapse” of the negotiations. However, to the more informed, this sort of setback was to be expected explains why the negotiating period with Turkey would most likely take 10 years or more. The eight chapters that were suspended include free movement of goods, right of establishment and freedom to provide services, financial services, agriculture, fisheries, transport policy, customs union and external relations. At first glance, many of these chapters would have an indirect impact on FDI inflows to Turkey. For example, since FDI in financial services constitute the majority of FDI inflows to Turkey, any policy change under this chapter would be relevant. Issues related to the customs union might also be relevant to the extent that FDI and trade are complementary. It is not possible to predict how and when the Cyprus 13. Commission Staff Working Document, Turkey 2007 Progress Report {COM(2007) 663 final}. 14. Commission Staff Working Document, Turkey 2007 Progress Report {COM(2007) 663 final}.

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deadlock will be resolved. Hence, these chapters would not be opened for some time. Despite these potentially serious political problems, the impact on FDI is likely to be minor. First, soon after the Council decided to put an embargo on the eight chapters, it also emphasized that the screening process would continue and that they expected to see progress from Turkey’s side. Indeed, only a few months later, Turkey made its Programme for Alignment with the Acquis (2007-2013) public, which included many steps to bring all 35 chapters in line with the aquis. Table 11 below shows some of the legislation that Turkey is planning to implement during 2007-2008 under Chapter 29 of the Customs Union. There have already been many steps taken in chapters that are relevant for FDI. There are two chapters that directly relate to FDI.15 Chapter 4: Free Movement of Capital, states that Turkey made progress in i) abolishing the prior approval requirement previously applied to foreign companies in order to transfer profits, sale and liquidation proceeds and payments related to licences, and ii) abolishing the authorisation requirement on outward FDI exceeding 3.7 million Euros. Some sectors remain closed to FDI such as radio and television broadcasting, electricity, tourism, defence, air and road transfer, etc. The acquisition of real estate by foreigners is also another area in which restrictions exist. Furthermore, under Chapter 20: Enterprise and Industrial policy it was indicated that Turkey made progress in that the Investment Support and Promotion Agency became operational and achieved a boost in FDI inflows. To summarize, progress under each chapter towards alignment with the acquis is to continue even before a chapter is opened. As long as the macroeconomic environment is stable, the convergence process will increase Turkey’s competitiveness in FDI, even with setbacks like the Cyprus case. The peak of 22 billion USD worth of FDI inflows reached in 2007 is proof of this.

15. There are also other chapters that affect FDI indirectly, such as Chapter 7: Intellectual Property Law, Chapter 9: Financial services, etc.

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Table 11: Legislation considered beneficial to be enacted in period 2007-2013 Reference No.

Name of the Legislation to be Amended/Enacted

Objective/Scope

Stage

EU Legislation Envisaged to Comply with

Institution Responsible for the Preparation of the Legislation

29.0007.1.01 Law on Amendment of Certain Laws and Decrees Having the Force of Law in order for Affiliation of the General Directorate of Liquidation Works and Circulating Capital Enterprises to the Undersecretariat of Customs

At the Improvement of the administrative GNAT capacities so as to ensure that the Undersecretariat of Customs fulfill its functions more effectively and efficiently

Improvement of the administrative capacity

Ministry of Finance Undersecretariat of Customs

29.0708.1.02 Law on Amendment and Adoption of the Decree Having the Force of Law No. 485 on the Organization and Functions of the Undersecretariat of Customs

Strengthening of At the the administrative Prime Ministry capacity, and thus, improvement of the effectiveness and efficiency in customs services

Improvement of the administrative capacity

Undersecretariat of Customs

29.0913.1.02 New Customs Law

Harmonization with the Modernized Customs Code

Draft Resolution Undersecretariat of Customs on the Modernized Customs Code, which was adopted by the European Commission on 30 November 2007 and which will enter into force following its approval by the European Council and the Parliament

Technical studies are in progress within the institution

Source: Secretariat General for EU Affairs. Turkey’s Programme for Alignment with the Acquis (2007-2013).

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Conclusion This chapter has thus examined Turkey’s experience in attracting FDI inflows in detail over time, across sectors and in comparison to its main competitors, i.e. the CEEs. Turkey has had both low FDI potential and performance according to an UNCTAD report (2002), but this has recently changed. Turkey attracted 50 percent more FDI inflows in 2005-2008 than in the 20 years prior to it. Turkey’s recent success in increasing the attractiveness of FDI is due to the presence of double external anchors, i.e. the IMF and the EU, the new FDI law and the start of the large-scale privatization program. These three factors benefited from the pro-reform environment that followed the ‘twin crisis’ of 2000-2001 and the election of a single party, AKP. Although the macroeconomic structural reforms have brought down both inflation and the fiscal deficit to single digits, it is nonetheless difficult to predict whether or not Turkey is still prone to financial crises. In addition, although a better macroeconomic environment and the new FDI law have had a positive impact on the investment climate in Turkey, there are still obstacles to doing business in Turkey. Many of these obstacles are administrative barriers to investment, and some restrictions to FDI exist in certain industries, e.g. radio and TV broadcasting. Since 2001, Turkey has narrowed its institutional gap with other CEE’s, however; appropriate implementation of regulation and functioning of institutions is imperative for sustained FDI inflows. In many aspects, Turkey is comparable or better than its comparator country Poland, for example. This can be encouraging since it means that Turkey has not yet reached its full potential in attracting FDI. One of the most significant shortcomings of Turkey is its small pool of skilled labour. The education levels are considerably higher in all CEEs. This can be a potential problem for Turkey since empirical studies indicate that FDI is only growth-promoting if the human capital is taken into account.16 One of the policy recommendations of this chapter is that Turkey needs to invest in education not only to attract more FDI but also to benefit from it. Another policy recommendation is that the bureaucratic elite needs to realize that FDI, among other types of capital flows, is more stable since it provides risk-sharing unlike short-term portfolio flows or other debtcreating capital flows. For this reason, a current account deficit financed more by FDI than portfolio flows, as in Turkey, is not necessarily 16. Wheeler, D. and A. Mody, ‘International Investment Location Decisions: The Case of US Firms’, Journal of International Economics, No. 1-2, 2002, pp. 57-76.

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unsustainable. The outlook on global FDI flows is positive and Turkey is moving in the right direction to become more competitive. There are two potential stumbling blocks in the way to stable FDI competitiveness of Turkey: a possible breakdown in the negotiations with the EU for full-membership and a slowdown or end of the privatization process. The end of the privatization process does not necessarily mean the drying up of FDI inflows. As can be seen from the experience of the CEEs, FDI attractiveness of a country does not depend on the sale of assets. Privatization is in fact a means to an end: if the aim of the privatization process is to make the home country more competitive and efficient, this would have a positive effect on growth. In turn, a country with high growth potential and efficient domestic sector will continue to attract more FDI inflows. The path to Turkey’s membership to the EU is expected to be long (10 years or more) and full of both economic and political challenges. As the deadlock over Cyprus in December 2006 showed, an embargo on the opening of a number of chapters will not deter FDI. In fact, FDI inflows reached a new peak of 22 billion USD in 2007. First, in this particular case, the two chapters that are directly related to FDI legislation (i.e. Chapter 4: Free Movement of Capital and Chapter 20: Enterprise and Industrial Policy) were not among those eight chapters embargoed. Second, progress in convergence towards the EU Acquis still continues whether a chapter is opened or not. In fact, it is the screening process, during which a candidate country brings its legislation in line with the Acquis. In summary any progress under the relevant chapters would increase Turkey’s FDI competitiveness. Therefore, it is the process, not the membership that matters most.

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6. EU-Turkish Enlargement Negotiations and Implications for Turkish Labour Market Feray Erselcan

The main purpose of this chapter is to shed light on major policy challenges for Turkey in the field of employment and social policy in light of its on-going EU accession negotiations. The overall process of EU accession, which requires the adoption and implementation of the Community Acquis, is expected to have a significant impact on the Turkish labour market. The process is expected to bring about significant changes for employers, employees and the unemployed, including those who had previously been excluded from the labour market. Certain priorities on employment and social affairs have by now been identified by the Accession Partnership, and the two sides have already undergone the screening process on this subject. In addition to the direct impact of aligning employment regulations with the acquis, Turkey’s overall membership process is expected to make significant changes in economic and social life. Overall, policy harmonization is a prerequisite for successful full integration: the objective is to ensure equal conditions in the markets of member countries, each then forming a piece of the integrated whole. The idea is to align legislation in order to apply uniform rules and regulations so that factors can move freely in a single integrated market. Within this framework we begin with a brief account of the background information of the integration process between Turkey and EU. We then look at trends in the Turkish labour market in light of recent economic developments, and examine the existing regulatory framework in an attempt to gain a deeper understanding of important features and problems connected with its structure. This is then followed by policy choices recommended by expert organizations like the OECD and the World Bank, to take on certain problems, such as employment generation and the informal economy. Using records of the bilateral screening process and progress reports by the EU, we next attempt to highlight the legislative changes which have already been made in the pre-accession period and

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those that are still to be done. Finally we evaluate the implications for the labour market, of these specific changes and of the overall accession process.

From the Association Agreement to Accession Negotiations Turkey’s economic and social integration with the EU was initiated long ago with the Ankara Agreement of 1963. Since that time, Turkey has been an associate member of the Union. Because economic integration implies free movement of goods and services as well as free movement of factors of production (capital and labour). An important part of the process of economic integration was completed once the Customs Union was established by the Association Council Decision of 1/1995. Since 1996, most of the trade between the parties has already been liberalized and Turkey has adopted the Common External Tariff of the EU. The ECTurkey customs union has given a further push to the bilateral trade, which exceeded € 100 billion in 2008, thereby making Turkey the EU's seventh biggest trading partner, while trade with EU constitutes almost half of Turkey's total trade with the world On the other hand, with respect to the integration of factor markets, both parties have already eased the free movement of capital to a great extent, which is also in line with the global trends of financial liberalization. However, free movement of labour seems to be a much more difficult area, although it is the most crucial one, especially for the realization of the “social” integration. The preamble of the Ankara Agreement, states that the agreement seeks to bring about “closer bounds between the Turkish people and the people brought together in the EEC”. Articles 12 and 14 of the Ankara Agreement foresee the gradual introduction of the “free movement of workers, professionals and entrepreneurs” which would in turn bring about this social and cultural integration in addition to fulfilling its basic role of fostering labour market integration. Currently, Turkish nationals constitute by far the largest group of thirdcountry nationals in the EU (about 25 % of all third-country nationals). The status which Turkish workers presently enjoy under Community law lies between that of European Union citizens and third-country nationals. Their status is determined in large part by the decisions taken by the ECTurkey Association Council following the 1963 Association Agreement between the EC and Turkey, and their interpretation given by the 158

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European Court of Justice. The Agreement provides for the parties to progressively establish the free movement of workers; however, the relevant provisions of the Agreement have not yet made a direct impact. Thus far, the Association Council has not adopted all the measures necessary to facilitate free movement. As a result, Turkish nationals do not have the right to move to an EU Member State or between the EU Member States in order to take up employment. However, once duly registered as belonging to the labour force of a particular Member State, Turkish workers enjoy a considerable number of individual rights in a host Member State under Decision No. 1/80. Almost four decades after the signature of Ankara Agreement, Turkey was officially recognized as a candidate for full membership in Helsinki Summit in 1999; and the accession negotiations were finally underway in October 2005. Turkey is expected to adopt the Acquis Communautaire of the EU during the negotiation process. Thus far, negotiations have been opened on eleven chapters.

Managing the Free Movement of Labour Free movement of labour is one of the main principles embodied in the rules of the Single European Market. Particularly following the establishment of the single European market in 1993, the right to move freely and work in any of the EU countries without being subject to any discrimination has gained importance as one of the fundamental rights of being a “European citizen”. However, in the last wave of EU enlargement, the application of free movement of labour has become subject to a five to seven year time lag, which Turkey might also face when it becomes a full member, given the prevailing demographic trends and existing labour market indicators. Turkey’s population is quite high compared to the existing and new members of the Union. Once a member, Turkey would be the second largest country in the EU in terms of population after Germany. Following the membership, if there is sizeable labour mobility from Turkey to the EU, this could create disturbances in the EU labour market. That being said, if Turkey takes the steps necessary step for creating jobs and developing skills, this scenario might change in both parties’ favour and Turkey could make best use of its young labour force potential in an aging EU labour market. In this respect, if the appropriate labour market policies integrating the young population into the labour market are implemented, the migration potential in Turkey will most likely decrease. In particular, sustained 159

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progress by Turkey in areas such as social policy, employment, health and education could reduce the pressure for migration. In short, this point increases the significance of negotiations under Chapter 19 on “social policy and employment”.

Overview of the Labour Market in Turkey Demographic trends Like many other countries in the developing world, Turkey has been undergoing a demographic transition, especially since the 1950s. Based on United Nation’s medium projection, population growth, which was 2.7 % in 1950-1955, has currently slowed to 1.6 %, will continue to decline, dropping to nearly zero in 2050.1 The most important aspect of the transition is its impact on age distribution. The age structure becomes skewed toward younger ranges and youth dependency rate which peaked at around 0.7 in 1960s, will fall progressively below 0.3 over the next 50 years. As stated in the Labour Market Study by the World Bank (2006), the elderly dependency rate, less costly that of youth dependency will increase sharply toward the end of the period. Higher rates of youth dependency represent additional claims on household expenditure, lowering savings. Fewer saving means less investment and a lower level of output growth. The dependency rate2 peaked at around 0.88 in 1965; today, it is around 0.55 and is predicted to 0.45 in 2020. The decline is driven by a steeper fall in youth dependency. The early part of the transition is characterized as a “demographic burden” when youth dependency rates are high and is followed by a “demographic gift” when working age population growth is high and the dependency rate falls. Although there are transitional difficulties in absorbing a sudden influx of young workers, Turkey has yet to take advantage of the potential demographic gift.3 These long-term population dynamics can provide a favourable environment and opportunity for Turkey to achieve economic growth.

1. 2. 3.

World Bank 2006 – Turkey Labor Market Study, April 14, 2006. Report No. 33254TR. Defined as the ratio of people under 15 and people over 65 to the working age population. Bloom, D.E., and Williamson, J.G. 1998 “Demographic Transitions and Economic Miracles in Emerging Asia” The World Bank Economic Review, 12 (3): 419-55. (quoted in World Bank 2006, p. 6)

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Demographic transition has been accompanied by an increase in urbanization: Turkey’s urban population has been on the rise during the same period. In 1950 only 20 % of total population lived in cities while this rate has increased to 64 % today, and is projected to reach around 80 % by 2050. Beginning in the 1950s, an accompanying trend has been the structural change in the economy, as agriculture is displaced by more urban-based manufacturing and services. Women, who were predominantly employed in the agricultural sector, have not been able to find employment in the urban areas like men.4 This has resulted in lower employment in agriculture and lower participation rates for female workers. Sociological, cultural, and institutional factors all play a role in lower female participation, which will be discussed below. On the other hand, urbanization has also had an effect on those in the younger age groups. Greater access to education in urban areas has further lowered participation in the labour force.

Recent Economic Developments and Implications for Employment Generation Having successfully recovered from a deep economic crisis in 2001, with relatively high growth rates averaging around 7 % in the follow-up period (from 2002 to 2007), Turkey’s economy is among the world’s 20 largest, with a GDP in 2008 of over US $ 740 billion. This was contributed to by a favourable international environment and by the opening of accession negotiations with the EU. In the same period, a fiscal surplus of around 6 % was achieved, public debt was brought down, and the inflation rate declined. The persistence of high levels of unemployment despite high levels of GDP growth points to the weakness of Turkish economy in generating new jobs and therefore requires our attention. In general, Turkey’s growth performance from 1980 to 2007 was reasonably good but employment generation still remained slow. In recent years, there have been large international flows to the country given the relatively high interest rates. A broad exposure of foreign investors in Turkish assets has made the economy more vulnerable to overall risks. Turkey has therefore experienced a series of economic and financial crises. The Turkish economy was the worst hit by the February 4.

World Bank, 2006

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2001 crisis: per capita GNP declined by 9.6 %. Negative consequences for the labour market were inevitable. The unemployment rate in 2001 was recorded at 16.8 percent for females, 10.3 for males, and 11.5 overall, an increase of nearly 3 percentage points from the previous year in each case.5 The economic reform programme adopted just after the 2001 crisis addressed the fundamental weaknesses in the economy. This was a fiscal, monetary, and institutional reform package that included measures for the restructuring of the financial sector, a restructuring which had been decisively implemented by progressive governments, and had helped improve the resilience of the economy to external shocks. The reform measures strongly emphasized public sector reform, building a sound banking system and liberalizing markets for private sector–led growth.6 This was probably one of the reasons why Turkish financial markets recovered relatively faster from the volatility in the global markets originating from US sub-prime mortgage losses beginning in late 2007 and surged through 2008 and 2009. However, recent data on industrial production and employment tell a different story. The GDP growth recorded in 2008 was only 1.1 %, with the Turkish economy contracting by 6.2 % in the last quarter compared to the year before. Yeldan7 rightly argues that the major impact of the recent global crisis on Turkey was felt through the “real” (i.e. production) side of the economy, the industrial sector, rather than being experienced through financial and banking sector as it was the case back in 1994 and 2001 crisis. Of course, doing business in a globally connected world market involves many risks, especially when the innovation capabilities to deal with global competition are limited. According to the World Competitiveness Yearbook,8 in 2008 Turkey ranked 45th with a 20.3 % share of fixed capital investments in GDP. Investments fell by 4.64 % in 2008, performing only better than a few countries like Lithuania, Estonia, Taiwan, Greece and

5.

6. 7.

8.

Tunalı, I., ‘Background Study on Employment and Labor Market in Turkey’, Report prepared for the European Training Foundation, on behalf of İŞKUR, the Employment Agency in Turkey, 2003 [http://statik.iskur.gov.tr/tr/dis_iliskiler/BST-final%20report%20_27%5B1%5D.June. 2003_.pdf] OECD 2003. ‘Assessment and Recommendations’, downloaded from OECD website on 6.11.2003: [http://www.oecd.org/dataoecd/47/4/2765864.pdf]. Yeldan, E. 2009. “Küresel krizin üçüncü yılına girerken”, TİSK İşveren Dergisi, Ekim 2009. Downloaded from TİSK website on 10.02.2010: [http://www.tisk.org.tr/ isveren_sayfa.asp?yazi_id=2549&id]. IMD 2009. World Competitiveness Yearbook 2009.

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Ireland. Countries like Germany and France, said to be worst affected by the crisis, seem to reverse the trend into increases in investments, taking timely measures to tackle the recession. Turkey is currently in the difficult transition period between the successful exit from “post-crisis recovery” to sustainable path of high growth;9 however, this is taking place in very instable business conditions with domestic and global tensions in the background.

Some Indicators of the Labour Market: Turkey vs. EU As can be seen in Table 1 below, the employment rate has been low, especially among women, and unemployment high, especially among youth. The official unemployment rate is recorded at a level of 11 % in 2008 (which probably does not fully capture the substantial underemployment in the informal sector.) Only 50.8 % of the working age population had a job or was seeking work in 2008; 24.3 % of Turkish women were employed. EU averages were 71.4 % and 59.4, respectively. While the male employment rate is lower than that of the EU, the difference is relatively small, especially in comparison with female employment rates. Current youth unemployment is 20.5 % higher than the EU average. The gap between the employment rates in the EU and Turkey presents a particular challenge on the road toward EU accession. The European Council meeting in Lisbon in 2000 adopted an employment rate target of 70 % to be met by 2010. The employment rate in Turkey, which stood at 45.9 %, is far from this target. The targets for female employment rate and employment for workers over 55 are even more difficult because women and older workers are particularly likely to not to find employment in Turkey.

9.

OECD 2008. Economic survey of Turkey 2008. Paris: OECD.

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Table 1: Employment and labour force participation rates (%)

LFPR Women Men Employment Women Men Unemployment Rate (UR) UR exc. agric. Youth UR

2005 51.4 26.5 76.2

Turkey 2006 2007 50.2 50.2 26.1 26.1 74.4 74.4

2008 50.8 26.9 74.8

2005 70.3 62.8 77.9

EU-25 2006 2007 70.7 70.9 63.4 63.7 78.0 78.1

2008 71.4 64.3 78.4

46.0 23.7 68.2 10.6

45.9 23.9 68.1 10.2

45.8 23.8 68.0 10.3

45.9 24.3 67.7 11.0

64.0 56.6 71.4 9.0

64.8 57.6 72.1 8.2

65.8 58.6 73.0 7.2

66.3 59.4 73.2 7.0

13.5 19.9

12.7 19.1

12.6 20.0

13.6 20.5

18.5

17.1

15.3

15.5

Source: TUIK, EUROSTAT10

Situation of Turkish Women in the Labour Market The participation of Turkish women in the labour force is very low when compared with that of the OECD and EU countries. Turkish women are marginalized in the labour market, which lacks mechanisms facilitating women’s easier access, including those designed to enhance their qualifications. As a result, a significant fraction of women stay out of the labour force during their productive years. The labour force participation rate (LFPR) of Turkish women, currently around 27 %, and employment rate, around 24 %, are the lowest of all the new members in the EU, a fact which is often the basis for arguing against Turkish membership. The transition from an agrarian to an industrial and service-sector oriented economy has had a series of consequences, one of which is the drop in female employment rates as women seek jobs in urban areas and are often unable to find them. Traditionally, Turkish women have worked in the agricultural labour force, usually as unpaid workers. A wave of rural to urban migration in the second half of the twentieth century resulted in an unavoidable decline in the LFPR of Turkish women. Possessing poor qualifications, women either stay out of the labour force or can only find low-status jobs, usually in the informal market, and are therefore uncovered by social security schemes. 10. KEP 2009 Yılı Katılım Öncesi Ekonomik Programmeı, (Pre-Accession Economic Programme for 2009), Ankara, Dec. 2009 p. 74

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The lack of employment opportunities due to major shocks in the Turkish economy in the last decade has certainly had a negative impact on female LFPRs. In light of empirical evidence from Turkey, Tansel concluded that unemployment had a considerable discouraging effect on female labour force participation while the rate of economic growth and education were both found to have a strong positive effect.11 According to a background study on employment, the effect of education is strongest for women in their early productive years (ages 20-44).12 Another survey by State Institute of Statistics (SIS) showed that 13 percent of workers in the informal market are illiterate and 72.6 percent of this group is women.13 Traditionally, women in Turkey have lagged behind men in terms of educational attainment. The employment background study has also proven that because of the presence of a breadwinning husband, as well as the child care responsibilities, the marital status of women restrains their participation in the work force.14 Moreover, the labour market in Turkey does not offer the flexible working arrangements which would help to increase the number of women in the workforce by facilitating work-life balance as it is in the case of EU labour markets. Easier access to child care facilities can increase women’s participation in the labour market, which is accessible to every woman in Turkey.15 Concerning the cultural factors on the other hand, we can generalize that majority of husbands are opposed to their wives’ working outside the 11. Tansel, A., “Economic Development and Female Labor Force Participation in Turkey: Time-Series Evidence and Cross-Province Estimates”, ERC Working Papers in Economics 01/05 May 2002. Economic Research Center, Middle East Technical University, 2002. [http://www.erc.metu.edu.tr] 12. Tunalı, 2003, p. 39. 13. Dereli, et al. 2005, p. 19. Dereli, Sengers and Donders, ‘Esnekleştirme ve Formel ve Enformel İşgücü Piyasası’ (Flexibilization and Formal and Informal Labour Markets), in Pennings, F. and Süral, N. (eds.), 2005; OECD, Economic Survey of Turkey 2004, Paris: OECD, 2004. 14. Tunalı, 2003, p. 34. 15. KSSGM, 2006; Dereli, et al. 2005. KSSGM – Kadının Statüsü ve Sorunları Genel Md., TC Başbakanlık (Turkish Republic Prime Ministry, General Directorate of the Status and Problems of Women), website ‘Türkiye’de Kadınların Çalışma Yaşamına Katılımı ve Avrupa Birliği’ne Uyum Sürecinde Gerçekleştirilen Çalışmalar’ (Women’s Labour Force Participation in Turkey and Work done in the EU Adaptation Process) Kadın İstihdamı – Female Employment page [http://www.kssgm.gov.tr/] (home page), accessed 30 Sept 2006.

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home, which is evidenced by the fact that until two decades ago, a married woman could work outside the home only with the permission of her husband. The Constitutional Court annulled this article in 1992, on the grounds that it violated the Constitution.

Skills and Education Labour force participation rates and employment rates increase with education level. However it is obvious that the general level of education of the labour force is quite low. In 2008, 63.2 % of the labour force, 63.6 % of the employed, and 60.1 % of unemployed people had an education level lower than secondary school education. Table 2: Education levels of the labour force – 2008 (%) Labour Employed Unemployed LFPR Employment Unemployment Force rate rate Total 100 100 100 46.9 41.7 11.0 Illiterate 4.3 4.5 2.4 18.1 17.0 6.3 Primary 58.9 59.1 57.7 44.9 40.1 10.7 Secondary* 22.1 21.6 26.0 56.1 48.8 12.9 Occup&Techn. 10.5 10.4 11.2 65.0 57.4 11.7 University** 14.7 14.8 13.9 77.6 69.6 10.3

Source: TUIK (KEP, 2009)16 * Graduates of High Schools including Occupational and Technical Schools. ** 2 year programme included.

The quality of education remains an important problem in Turkey, although it has recently improved. The net enrolment rate in compulsory education (8 years) increased by almost 10 % to over 97 % in the last years. The net enrolment rate in secondary education also increased, from 56 % to 58 %. The net enrolment rate in universities increased from 19 % to 20 % but remains low by international standards. Little progress has been made in correcting the mismatch between supply and demand of skills on the labour markets, which largely stems from inadequate education and training.17

16. KEP, 2009, p. 76 17. CEC-Commission of the European Communities (2009). “Turkey 2009 Progress Report” (Commission Staff Working Document – COM (2009) 533) Brussels, 14.10.2009, SEC(2009)1334/3.

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Informal Economy/Undeclared Work (UW) As mentioned above, the Turkish economy has suffered from several major shocks in the last years, in 1994, the end of 1999 and early 2001. These resulted in loss of jobs and created substantial fluctuations in the standard of living. It is said that high non-wage labour costs (severance payments,18 social security charges) and stringent regulations may be contributing to the maintenance of the informal economy.19 Although we can only make estimates due to the difficulties in compiling reliable data on the informal market, it has been found that more than half of total employment is undeclared or informal,20 with low productivity and poor wages, and a low level of social protection. Based on recent data from Household Labour Surveys, the level of informal employment which was 47.1 % in 2006 decreased to a level of 43.4 % in 2007. “Undeclared work” has become a significant problem for almost all countries in the world. The concept of “undeclared work” is taken to mean any paid activities whose nature is legal but not declared to the public authorities.21 The factors encouraging UW are usually economic: to avoid tax or social security contributions the economic activity is simply not declared. There are also institutional and/or cultural factors influencing UW, such as tax pressure, or the lack of recognition for atypical work, especially by small or medium sized enterprises with low competitiveness. UW is also associated with high inflation rates as in the case of Turkey. Actors in the market choose informal relations so as to compensate for losses caused by high inflation: consumers with fixed incomes do so in order to make up for a loss in purchasing power while producers do so in order to compensate for rising costs of production. Wages are not lower and there are no non-wage costs in the informal market. Three contributing factors to UW can also be highlighted: a growing demand for “personalized services”; the re-organization of industry into long lines of vertical disintegration and chains of sub-contracting; and the spread of more accessible technology which opens up new working opportunities and new areas of service activities. UW can be observed more in sectors which are labour-intensive and with low profits (agriculture, construction, retail trade, catering or domestic services); in sectors where 18. World Bank, 2006. 19. Dereli, Sengers and Donders 2005; OECD 2004; Tunalı 2003; OECD, Economic Survey of Turkey 2004, Paris: OECD, 2004. 20. OECD, Economic Survey of Turkey 2006, Paris: OECD, 2006. 21. COM (98) – 219- Communication of the Commission on Undeclared Work.

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cost is the major factor of competition (manufacturing and business services); and in modern innovative sectors. Undeclared work can be viewed as a situation in which individuals take advantage of the system, undermining solidarity in the process. In such a case, intervention should be oriented towards sanctions and awareness campaigns. Sometimes, however, UW can be viewed as the outcome of greater flexibility in the labour market and the slower adaptation of existing legislation, thus bringing to light the necessity for a policy change to be made to reflect new labour market realities.22 Turkey’s labour market regulations, especially the rules concerning flexible work contracting are said to be more restrictive than in the rest of OECD countries. Strict employment protection discourages formal sector job creation by raising the cost of labour.23 Small firms are particularly prone to avoiding compliance with social security contributions and labour market regulations. They either choose to operate informally or else require existing workers to work longer hours, rather than hiring new workers. Examining the scales of establishments in Turkey, we can observe that the majority (roughly 99 %) is made up of small and medium sized companies. This alone is an evidence for the high probability of the emergence of an economy half of which is informal. As it is concluded in the Labour Market Study carried out by the World Bank (2006), well-intentioned labour regulations are currently hindering job creation. Labour market regulations should be more flexible in order to benefit from the opportunities that globalization brings. At the same time, these regulations should offer better support and social protection through unemployment insurance, active labour market programmes or skills development should be offered to workers to enhance their employability and ability to better cope with the new conditions of a dynamic economy. More flexible job security rules as can be found in Europe may well be useful in bringing “outsiders” (women and young people) into the formal economy. On the other hand, there is a need for programmes designed to develop skills in order to achieve a more competitive and higher productive economy.

22. COM 98. 23. World Bank, 2006.

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Labour Market Regulations and Institutions Although the primary objective pursued by labour market regulations is to provide social protection and industrial justice to workers, policy makers also see the regulations as a tool for encouraging job growth and productivity. In this way, the establishment of regulations which affect the performance of the labour market in such a way as to create new jobs, but at the same time provide sufficient social protection to workers, is the most important challenge faced by governments.24 Social protection for workers refers to arrangements to help workers manage labour market-related risks, including unemployment, underemployment, low income, disability and threats to health. Policy makers can provide risk management instruments to workers in two ways: “within the firm”, through statutory regulations (labour laws); and “outside the firm”, through State-sponsored employment programmes (active and passive).25

Protection inside the Firm Protection within the firm is based on the notion of “protecting jobs” through employment protection laws (EPL). Employment protection rules provide job security by making dismissal costly to the employer. These rules can either restrict the ability of employers to hire workers on an explicitly non-permanent basis and/or limit them to terminating regular workers for economic reasons.26 Among the OECD members, southern European countries rely heavily on employment protection regulations. Turkey’s employment protection legislation (EPL) is found to be one of the strictest in the OECD area, even after the enactment of new Labour Code in 200327 (which can also be interpreted as stricter than that of EU countries). This high EPL score for Turkey comes from the restrictions on the use of temporary and fixed-term workers and the requirements for severance payments for regular workers. There are different views about costs and benefits of these regulations: some think they provide important protection for workers. Others believe

24. 25. 26. 27.

World Bank 2006, p. 75. WB 2006, p. 62. WB 2006, p. 76. OECD Employment Outlook 1999 and 2004.

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they raise the cost of labour and thus discourage job creation and favour more privileged “insiders”.28 In the Labour Market Study on Turkey by World Bank (2006), it is argued that the particularly high severance payments in Turkey required by EPL adversely affect employment. The increasing number of hours in Turkey is highlighted as evidence suggesting that to increase production, instead of employing new workers; employers prefer to maintain their existing workforce by increasing the number of hours worked. This also creates incentives for partial or non-compliance and thus contributes to further “informalization.” The study also criticizes the high level of severance pay: the actual level of protection offered is lower than these requirements suggest, since employers find many ways to avoid making full payments, or they may induce resignations rather than formally lay off workers. For this reason, the World Bank recommends reduction in severance payments. The World Bank also recommends more flexible types of contracting, such as fixed-term contracting, to shift workers from informal into more formal contracted positions. However, there is a risk that employers would make use of this new opportunity to avoid offering permanent contracts.

Social Dialogue in Turkey Social dialogue is weak and union density is estimated to comprise 10-15 % of the workforce in Turkey. There are two types of labour unions, the first of which organizes primarily blue-collar workers under the jurisdiction of the Labour Act of 2003, and two acts, The Trade Unions Act, and the Collective Bargaining, Strike and Lockout Act. These acts date back to 1983 and belong to a less democratic period following the coup d’état of 1980. The other type of union organizes public servants under the jurisdiction of the Public Servants Act of 1965 and Public Servants Trade Unions Act of 2001. Public servants in Turkey have neither the right to conclude collective agreements nor the right to strike. For a long period of time, the state’s dominant role as a major employer put it at the centre of industrial relations. This domination had its roots in the early Turkish Republic, who had itself inherited the bureaucraticauthoritarian nature of the Ottoman political tradition, during which time all major industrial establishments were set up and directed by state and no labour organizations existed at all. State corporatism based on the denial of 28. Freeman 1993; Betcherman, Luinstra and Ogawa 2001 (quoted in WB 2006 p. 76).

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class differentiation in the early period was superseded by state-initiated societal corporatism during the period of 1961-1980. The September 1980 coup d’état facilitated the implementation of new export-oriented liberal economic policies through the suppression of worker movements. Once again, the State was actively involved in industrial relations to control and weaken the trade unions and collective bargaining.29 Unfortunately, the legislation enacted in 1983 under the shadow of a military rule, still dominated industrial relations in Turkey. Collective bargaining remained restricted in the sense that in order that in order for a union be recognized as a bargaining agent, it needed to represent more than half of the employees in an enterprise and 10 % of all employees in the sector. Strikes were prohibited in many sectors not considered essential under ILO standards. According to Yildirim and Calis (2008), the ‘deep structure’ of Turkish industrial relations involves restrictive labour laws, employer hostility to unionization, a large informal economy and labour market, and strong intervention.30

Institutions and Administration Even without reducing taxes, governments can increase compliance through various institutional and administrative means. The most direct way is to strengthen enforcement capabilities through workplace inspections. However, the effectiveness of these services in Turkey has been limited by insufficient capacity and other factors. The Turkish Ministry of Labour and Social Security (MOLSS) carries out inspections on occupational health and safety and on social aspects of workplaces. Under the category of “social aspects of workplaces”, inspectors are responsible for a number of labour laws, including the Labour Code, the Trade Union Act and the Collective Bargaining Act. When we examine the data on social inspections from 2002 Activity Report of the Labour Inspection, we can easily understand that the resources allocated to this facility are very limited and that inspections therefore seem unlikely to reach each and every region of the country. On the other hand, although inspections can be conducted randomly, the majority are carried out in response to complaints, mainly concerning wage-payment 29. Yildirim, E. and Calis, S., 2008. The impact of EU accession on Turkish industrial relations and social dialogue. Industrial Relations Journal, 39: 3, 212-228. 30. Yildirim and Calis 2008, p. 214

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problems, overtime and working hours. Moreover, there is a need to double the number of workplace inspectors so that this task can be effectively carried out. Protection outside the Firm In its labour market report on Turkey, the World Bank recommends scaling down protection inside the firm along with improved protection involving enhancing the effectiveness of passive and active programming outside the firm. However, Turkey’s existing system does not provide sufficient protection outside the firm either. The Unemployment Insurance (UI) system was established in 1999 by Law 4447, which actually follows the standard OECD blueprint. However, its limited coverage and the UI fund surplus once again brought to light concerns about the system. The coverage is more limited when compared with other OECD countries because the work history condition for being a beneficiary of the system is much stricter. Moreover, because of its large informal sector and limited capacity of employment offices, Turkey has been obliged to simplify monitoring of eligibility. Unlike other countries, continuing eligibility does not require recipients to be available for and actively seeking work insofar it is almost impossible to monitor effectively the job search behaviour of the recipient. When compared with countries in transition (or new members of EU), Turkey ranks behind with the lowest level in unemployment benefit levels The coverage rate of the Turkish UI system, less than 4 % of the unemployed workers, is far below the coverage in OECD countries which range from 25 to 75 %, and even lower than countries like Korea (14 %) and Hong Kong (8 %). The low level of coverage can be explained by the high costs of being registered (high contribution rates) with social security institutions, and of course, by lack of enforcement mechanisms. Moreover, workers may not even be aware of unemployment benefits, or they may not have sufficient incentive to register as unemployed because they may be actually working in the informal sector. Active labour market programmes usually target the quality of labour supply, increase labour demand, or improve the worker-job match. These programmes may include various forms of self-employment support (e.g. micro-credit), wage and employment subsidies, training programmes, job placement, counselling, labour market information services, etc. Compared to OECD countries, Turkey has had limited experience with such programmes, having begun only a decade ago with some projects funded by the World Bank. These include the establishment of a new

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national employment agency (ISKUR) in 2000, with new tasks of providing a wider range of employment services other than job brokering, such as training, improving employment prospects for excluded groups, compiling and disseminating data and regulating private employment agencies. However, as of today, ISKUR’s capacity to design and implement an active labour market policy is quite limited. Moreover, private employment agencies do not yet have an important function in the labour market. It is important to note here that in order to enhance the institutional capacity of ISKUR and to support Turkey’s ability to implement policies and services aligned with the European Employment Strategy, the EU has introduced a technical assistance programme for an Active Labour Market Policy (ALMP) strategy in Turkey. This programme includes institution building through policy development and improving ISKUR’s operational performance, a grant scheme to finance ALMPs, and developing model employment offices.

Turkey-EU Accession Negotiations Turkey’s Preparation for Membership: Accession Partnership The EU provides guidance to the authorities on reform priorities through the Accession Partnership (AP). The Accession Partnership provides the basis for a number of policy instruments which are used to assist the candidate States in their preparations for membership. The purpose is to determine the priority areas for further work identified in the Commission’s regular reports on the progress made by Turkey towards accession, the financial means available to help Turkey implement these priorities and the conditions which will apply to that assistance in a single framework. The first Ascension Partnership for Turkey was adopted in 2001 and was later revised later in the years following. The candidate country is expected to adopt its national programme for the adoption of the acquis on the basis of these APs. In the Accession Partnership, adopted in February 2008, progress on reform priorities was encouraged and monitored through the bodies set up under the Association Agreement. The Association Committee met in March 2009 and the Association Council in May 2009. Eight sectoral subcommittees have been held since November 2008. In December 2008

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the government adopted the national programme for the adoption of the acquis (NPAA), as required by the Accession Partnership.31 The acquis in the social field include minimum standards in the areas of labour law, equality in employment and social security, health and safety at work. There are also specific binding rules of anti-discrimination, under which any kind of discrimination on the grounds of racial or ethnic origin, religion or belief, disability, age or sexual orientation is prohibited. There are differing traditions of industrial relations in the EU member countries. However, although there is not one single, unified, mechanism in the Union, the existence of strong social dialogue mechanisms in the candidate countries is a precondition for accession.32 The Member States participate in social dialogue at European level and in EU policy processes in the areas of employment policy, social inclusion and social protection. European Social Policy (ESP) had remained a rather marginal part of European integration until the Treaties of Maastricht and Amsterdam. Later, with the introduction of European Employment Strategy (EES) in 1997, the social policy of the EU was subject to alterations in line with the requirements of the transforming economic relations in the market as a result of rapid improvements, particularly in information technologies. Labour market “regulation”, once a priority issue, was now been replaced by more flexible ways of achieving commonly agreed goals through the promotion of policy coordination among member countries. Candidates were also expected to work with the EU to develop and implement a national action plan that would achieve the objectives of the European Employment Strategy (EES). The EES was intended to support member countries in creating the conditions for full employment, higher quality and productivity at work, and social cohesion and inclusion. The three objectives of the EES are first, full employment, second, quality and productivity at work, which also includes the availability of flexible work organization, and finally, cohesion and an inclusive labour market. The Lisbon European Council (March 2000) then set long-term targets for employment rates for 2010: 70 percent for overall employment, and 60 percent for female employment. The Stockholm mid-term targets (2001) to be reached in 2005 were 67 percent for the total and 57 percent for the female employment rate. Undeclared work is also a concern in the EU, since it distorts competitiveness, erodes financing of welfare states, worsens prospects of 31. CEC, 2009. 32. Yildirim and Calis 2008.

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workers involved and conflicts with the goals of solidarity/social justice.33 That is why combating undeclared work is defined as one of the targets of the EES.34 In fact, globalization has generated new work patterns in Europe's labour markets as well, the so-called ‘atypical’ forms of employment. Today, 21 million people work part-time, 14 million under fixed-time contracts, and 10 million from home. In this new flexible labour force, women’s share exceeds 80 percent.35 However, there is also a potential risk with these new types of working arrangements insofar as they allow for a lower level of worker security.36 The AP for Turkey also foresees the adoption of EU legislation in the fields of labour law, effective implementation and enforcement of the social policy and employment acquis. In addition, preparation of a national employment strategy with a view to later participate in EES has been stated as a medium term priority for Turkey.

What has Turkey done to comply with EU rules? Turkey has decisively started to change its laws and regulations, with the perspective given in 1999 Helsinki Summit for accession. In this context, the new Labour Law #4857, enacted in 2003, was in compliance with most of the EU directives.37 There have been a number of changes in legislation concerning anti-discrimination and equal opportunities. 33. Matteo Governatori, DG EMPL/A1, Screening Chapter 19 – Employment and Social Policy. (Slides of the Explanatory meeting on the acquis communautaire on 9 February 2006) 34. European Commission (2006a), (Governatori, M., DG EMPL/A1) Screening ch19 – employment and social policy agenda item “undeclared work”- explanatory meeting on the acquis communautaire on 9 February 2006, downloaded from: [http://www.abgs.gov.tr/tarama/tarama_files/19/ SC19EXP_Undeclared%20Work.pdf]. 35. Süral, N. and Pennings, F. (2005) ‘Introduction’, in Pennings, F. and Süral, N. (eds) (2005), Türk İşgücü Piyasasının Esnekleştirilmesi ve Modernleştirilmesi. – Flexing and Modernization of Turkish Labour Market. (A Project under Matra Pre-Accession Projects Programme financed by the Dutch Ministry of Foreign Affairs), [http:// www.calisma.gov.tr/kitap/tipem.pdf]. 36. Social Agenda, European Commission’s Magazine on Employment and Social Affairs, Issue No. 13, March 2006, p. 16, downloaded from: [http://ec.europa.eu/employment_social/publications/2006/keaf05013_en.pdf]. 37. For a comprehensive comparison of EU Directives and the Turkish Labour Law, see Taymaz and Ozler, 2004; Taymaz E. and Ozler S., “Labour Market Policies and EU Accession: Problems and Prospects for Turkey”, ERC Working Paper in Economics 04/ 05. Economic Research Center, Middle East Technical University, 2006 [http:// www.erc.metu.edu.tr].

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Preparations of a national employment strategy with a view to participate in the EES have been also underway. These changes are expected to enhance Turkey’s capacity to develop and implement similar strategies with the member states and the EC. With respect to measures taken to address the problem of undeclared work, Turkey has taken measures such as the simplification of bureaucracy and awareness raising activities; and along with some other amendments in the existing laws (Laws #4447 and 5198). The inclusion in the New Labour Law No. 4857 of the provision for flexible employment practices is expected to constitute a step forward in contending with informal employment. The new law provides a legal basis for flexible employment practices such as part time work, on call work, temporary work contract, compensatory work, fixed term work and short period work. “Social policy and employment” is a difficult chapter (Chapter 19) in the formal accession negotiations between Turkey and the EU which began in October 2005. Both sides had already undergone the screening process early in 2006, with a view to find out how the Turkish legislation fit with the basic EU directives in this field. Progress in the Alignment with the Acquis The screening report on social policy and employment reported that Turkey had reached a generally satisfactory level of alignment.38 The report further contended that in order to prepare for the full application of the acquis, further measures to apply legislation were necessary, with the establishment of full trade union rights as a prerequisite. The report also suggested the extension of the coverage of the labour law and health and safety at work legislation in order to ensure a wider coverage of the protection given by the acquis to both private and public employees. Gender equality and the fight against child labour were highlighted as specific areas to be improved. The report underlined the necessity for a strengthened administrative capacity in all areas as well as the importance of combating undeclared work.

The Labour Law The Turkish Labour Law, revised in May 2003 and complemented by bylaws, provides for rights and obligations regarding working conditions and the work environment of employers and workers. Revisions aimed at 38. Screening Report Turkey, Chapter 19: Social Policy and Employment. 4 Sept 2006. [http://ec.europa.eu/enlargement/pdf/turkey/screening_reports/ screening_report_19_tr_internet_en.pdf]

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introducing provisions inspired by the acquis in the fields of working time and working conditions. The EU side had already drawn attention to the restricted scope of application of the Labour Law in the screening process: The law does not apply, inter alia, to businesses or enterprises in the field of agriculture and forestry which employ less than 50 workers, apprentices, and tradesmen and craftsmen businesses employing less than three people. The screen report further mentioned other transpositions of acquis required to be made in the field of Labour Law, particularly those regarding the sectoral working time directives and directives on the posting of workers, European Works Councils, information and consultation of workers, the European Company and the European Cooperative Society statutes. The report also highlighted several shortcomings with regard to the transfer of enterprises, collective redundancies and information on individual employment conditions. Finally, the Report also stressed the need for further efforts to combat child labour. Naturally, all of these efforts called for a strengthened administrative capacity. The limited scope of the Labour Law and transposition of a number of directives still remained to be addressed in 2010. The administrative capacity of the Ministry of Labour and Social Security is not still insufficient. Even though some efforts have been made to combat child labour, further resources are still needed to address this persistent problem. On the other hand, the new Labour Code allows part-time work. The ban on the employment of women in night shifts of manufacturing companies has also been lifted. However, it is worth bearing in mind that although the new provisions extending maternity leave and requiring child care facilities in big firms were designed to encourage women to work, they could have the adverse effect of discouraging employers from hiring women. Temporary employment through private employment agencies is an extensively used system in EU countries. EU members generate jobs through temporary employment. Turkish Parliament passed legislation (Law #5920) in June 2009, concerning private employment agencies, although this law is presently subject to certain amendments so that it fully complies with the related EU directive, as recommended by the President. The new legislation is expected to pave the way for participation of the new entrants (youth and women) in the labour market and serve as an institutional stepping stone to permanent employment. Again, with this law, it would be possible to better control the informal relations in the labour market.

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Health and Safety at Work Turkey has ratified ILO Conventions 155 and 161 on occupational health. The screening process has shown that a good degree of alignment was reached in the field of health and safety at work, while the need for further harmonization and for the extension of the scope were noted; for example, employees in the public sector are not covered by the health and safety legislation. Moreover, concerning the Directive on health and safety at work for fixed term workers or those on a temporary employment relationship (91/383/EEC), temporary employment agencies still do not exist and are not regulated by law. In the period after the screening, it was reported that expertise on the acquis improved as a result of training and awareness-raising activities. However, the lack of legislation to transpose Framework Directive (89/391/ EC) on the safety and health of workers at work has been a major shortcoming. Accidents in the informal sector go unreported. The system for collecting data on occupational diseases and accidents needs to be further strengthened. Although the Labour Inspection Board was indeed strengthened, the inspector per employee ratio is still inadequate to guarantee the effective monitoring of implementation of the legislation, and preparations in this area are therefore continuing.39

Social Dialogue Social dialogue in Turkey is weak. Overall, the percentage of workers benefiting from collective labour agreements has been low since Trade union rights were curtailed in Turkey following the 1980 military coup. In 2008, 1 May was reinstated as ‘Labour and Solidarity Day’ and a public holiday. However, the current legal framework – including the constitutional provisions on trade union rights – is still not in line with EU standards and ILO Conventions, particularly regarding the right to organize, the right to strike and the right to bargain collectively, for either the private or public sectors. It was suggested in the screening report that full trade union rights needed to be established in alliance with the ILO Conventions 87 and 98 that Turkey has signed and ratified. There were significant constraints on the right to organize and the right to collective bargaining, including the right to strike. There have been reports of workers being fired, or public sector 39. CEC, 2009.

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employees moved to different jobs, because of their trade union activities. There is a particular need to alleviate the double threshold of representativeness allowing trade unions to sign a collective agreement in companies, the restrictions imposed on affiliation to trade unions and those imposed on some categories of civil servants to become members of trade unions. Moreover, the right to strike as well as the organization of trade union meetings and demonstrations needs to be facilitated. The channels for tripartite social dialogue, in particular with the Economic and Social Council, need to be strengthened.

Employment Policy Both the screening report and almost all of the progress reports on Turkey have drawn attention to the very low labour force participation and employment rates, especially of women, the high level of youth unemployment, the large size of the informal economy and the strong rural/urban labour market divide as the main challenges. There is a need for an urgent action to fight against undeclared work and to find a comprehensive approach to addressing informality. Important efforts are needed to increase labour supply and ensure an inclusive labour market as well as to improve public employment services at all levels. The government has taken a number of individual measures to stimulate employment, in particular to reduce the negative effects of the economic and financial crisis of 2008. The extension of the definition of short-term work by six months was adopted in August 2009, complementing the incentives for employment creation already adopted in 2008 under the "Employment package". In the absence of an overall employment strategy, the impact has yet to be seen. Informality remains widespread throughout all corporate sectors, particularly amongst SMEs. To combat the informal economy, Turkey adopted a comprehensive action plan which combines a series of incentives and legal sanctions. However, the action plan lacks measurable targets and indicators and the method of measuring undeclared work must still be further developed.40 With respect to the implementation of the European Employment Strategy guidelines, the Turkish government and the European Commission have been conducting an Employment Policy Review in view of formulating an employment policy in line with the European Employment Strategy. The 40. CEC, 2009.

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JAP (Joint Assessment of Employment Policy Priorities) process was launched between the EU and Turkey in February 2004, with the JAP document to be finalized in the second half of 2006. However, as of 2009 there was still no progress towards the finalization of the JAP. Nevertheless, the law on Turkey’s participation in the PROGRESS Community Programme had entered into force and there has thus been good progress on the preparations for the European Social Fund (ESF).

Social Inclusion The percentage of the population at risk of poverty is very high in Turkey. According to the latest (2007) Poverty Survey, 18.56 % of Turkey’s population live below the poverty line, a slight increase since 2006. People living in rural areas are at considerably greater risk of poverty than urban dwellers. Poverty is also high among the working population, especially among casual/ seasonal workers, unpaid family workers, the self-employed and those in subsistence agriculture. Because social transfers are lacking, children are at a disproportionately high risk of poverty. The national mechanisms for monitoring poverty and social inclusion are weak. Progress in the field of social inclusion has been very slow. The screening report highlights the need for a more specific analysis of social exclusion and poverty concerning the most vulnerable groups in the Turkish society.41 The need for policy- relevant qualitative and quantitative indicators, including regional data, was emphasized as a basis for future programmes for vulnerable groups. A national integrated strategy on promoting social inclusion needed to be developed. Although work under the Joint Social Protection and Social Inclusion Memorandum (JIM) process had been required to be finalized in early 2007, no progress was reported in this direction. Substantial work is still necessary in order to improve the situation of vulnerable groups, including people with disabilities. Turkey ratified the UN Convention on the Rights of Persons with Disabilities in December 2008. Several publicly funded projects to address the problems of persons with disabilities have also been initiated.42

41. Screening Report Turkey, Chapter 19: Social Policy and Employment. 4 Sept 2006. (screening_report_19_tr_internet_en.pdf) 42. CEC, 2009.

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Social Protection The Turkish social security system has been undergoing important changes through the recent adoption of the law on social security reform. The need for improvement with respect to social security coverage was a point made during the screening. However, as in other fields of alignment there has been no progress in the area of social protection, either. The percentage of people covered by social security is slightly below 80 % and has been declining. Efficient planning, coordination and provision of social protection, social assistance and social services are still lacking. The draft law on social assistance and payments without premiums is expected to address these issues, but has still not been adopted.

Anti-discrimination The principle of anti-discrimination is enshrined in the Constitution and upheld in several laws. However, there is only a partial alignment of Turkish legislation with the acquis in this field. There is no legal definition of direct and indirect discrimination. The acquis concerning discrimination on grounds of racial or ethnic origin, religion or belief, disability, age and sexual orientation have not yet been transposed. Therefore, further efforts are necessary to ensure full conformity with the anti-discrimination acquis, including the establishment of an independent Equality body. Other points raised in the Progress Reports have been as follows: Public awareness on anti-discrimination needs to be raised, dialogue with nongovernmental operators in this area needs to be improved, and statistical data concerning anti-discrimination should be available.

Equal Opportunities While the Penal Code, which entered into force in June 2005 has improved women’s basic rights in Turkey, full transposition of the gender equality acquis is still required. Further alignment was called for in the screening report of 2006, in particular concerning parental leave, equal pay, access to employment, burden of proof, access to and supply of goods and services as well as statutory and occupational social security schemes. Legal adjustments regarding the removal of the overprotection of women in relation to night work, strenuous physical work, underground and underwater work were seen as necessary. On the other hand, a pregnant worker needed to be protected against dismissal in broader circumstances. 181

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With respect to different retirement ages for women and men in the civil service, further adaptations were necessary. The report asked for the availability of gender-segregated statistical indicators and the establishment of an independent Equality body. The most recent progress report (2009) stated that the legal framework guaranteeing women’s rights and gender equality was generally in place. However, further significant efforts are needed to turn the legal framework into reality and to narrow the gap between men and women in economic participation and opportunity, political empowerment and access to education. The report pointed to the need for an effective dialogue of civil society organizations with the government on gender-related issues. Progress in the field of equal opportunities has been limited since the negotiations were launched. A Parliamentary Commission on Equal Opportunities for Men and Women was established to monitor developments in the field of gender equality, to give opinions on draft laws and to determine the legislative work needed to align with the international agreements to which Turkey is a party. It would also examine claims of violations of equality between women and men and gender-based discrimination, which are referred to by the Presidency of Parliament. Turkey also adopted a national action plan for gender equality for 20082013 (though it contains no information on human or financial resources). However, women’s participation in the labour market remains the lowest among EU Member States and OECD countries. The gender pay gap persists. There is still no Equality body in Turkey, as required by the acquis. Unfortunately, no progress was reported on combating child labour as of 2009, as the capacity of the responsible national institutions was weak and the inspection system was ineffective. The EU side requested an integrated approach with well-established structures and adequate resources to eradicate child labour.

What Is still to be Done? Reviewing the period which started in December 1999 with the Helsinki Summit, one recognizes that in the first years (especially before the negotiations were launched) Turkey took important steps towards alignment with the acquis. However, especially after 2007, there has been a slowdown of the reform process due to a loss of interest on the part of the government, most likely due to some political tensions within the country. This has also led to limited progress in the field of social policy and employment. 182

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One of the few steps taken in this period was the establishment of a Parliamentary Commission on Equal Opportunities for Men and Women, and the other the acceleration of preparations for participation in the European Social Fund. The legislation on labour law, health and safety at work and on anti-discrimination is still not in line with EU standards. There has been no progress towards achieving full trade union rights in line with EU standards and ILO Conventions. Women’s participation in the labour market is very low. Efforts to combat undeclared work need to be stepped up. The administrative capacity for effective implementation of the acquis in the area of social policy and employment needs to be improved.

Conclusion Low labour force participation and employment rates, in particular of women, high levels of youth unemployment, the large size of the informal economy and the strong rural/urban labour market divide are thus seen as Turkey’s main challenges. It is true that despite high growth rates, the Turkish economy has been weak in generating jobs. Targeting problems of employment generation and the informal economy are important for a successful economic and social integration. On the other hand, it is also true that negotiations toward full membership will also help Turkey to tackle these problems. In addition to transposing the EU directives in the area of Social Policy and Employment, pursuing the objectives of EES will necessarily require a wide range of reforms involving social security, labour legislation, employment programmes, industrial relations, and education and training. Turkey has already introduced some important changes in the areas of both labour market regulations and social security. With this perspective, important constitutional reforms and legal amendments have been introduced since 1999, though the greatest challenge for Turkey remains the implementation of these laws. The problem with the existing regulatory framework (employment protection legislation) is its strictness, which does not allow for the creation of new jobs and therefore leads to informality. Another major problem is its limited regulatory coverage, or, in other words, limited access of workers to formal protection including labour laws, collective bargaining, and social security. Many workers are not members of social security institutions, and are thus unlikely to receive severance pay benefits, even though social security membership does not provide an 183

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absolute guarantee of receiving it, either Workers employed in large firms or belonging to a trade union are more likely to receive severance pay. A sustainable macro-economic framework, improvements to the investment climate, and investment in physical and human capital are all building blocks for the sustained growth which is necessary for job creation. Turkey is trying to achieve a sustainable path of high growth. Within this perspective, Turkey’s most recent development plan (Ninth Development Plan) for 2007-2013 contains five economic and social development axes: increasing competitiveness, increasing employment, strengthening human development and social solidarity, ensuring regional development, increasing quality and effectiveness in public services. Almost all of these axes are related to labour, having implications for the working life, in one way or another, and hence are likely to affect the labour market directly or indirectly. Objectives directly targeting the labour market are, improving the labour market, increasing the sensitivity of education to labour demand and developing active labour policies. Human development and social solidarity objectives in the plan are also related to labour: Increasing the effectiveness of the social security system and making the health care system more effective, enhancing the educational system and improving income distribution, social inclusion and fighting poverty. On the other hand, the plan highlights the importance of “increasing the competitiveness of the economy through ensuring the macroeconomic stability, improving the business environment, reducing the informal economy, improving the financial system … and ensuring the shift to high value-added production structure in industry and services”.43 Job creation and convergence to EU living standards will require education and training reforms that lead to more a skilled workforce. Skills are of critical importance to improving competitiveness and employment. In view of its role in reducing inequalities, education is an important element of the development process. An active and ambitious approach, particularly in human resources development, would also contribute to faster economic convergence. Turkey must take measures to develop a skill-building system especially for the young, new labour market entrants, in addition to paying attention to other special education needs, such as education programmes for the handicapped, early childhood development, gender equality and entrepreneurship programmes for women. 43. SPO, State Planning Organization 2006. Dokuzuncu Kalkınma Planı: 2007-2013 (Ninth Development Plan: 2007-2013) Ankara: DPT.

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Activation of the labour market, through facilitating the full participation of disadvantaged groups such as women, young, older and disabled, is also important. In this respect, increasing the working opportunities which are flexible but also secure, would be of help. In order to remain competitive, social partners should decide on a suitable combination of flexibility and job security. Moreover, Turkey should make every effort to progress in the field of equal opportunities to increase awareness in gender equality. Tackling social and cultural obstacles to female participation in labour force seems to be the most difficult of all, since this necessitates a longer process of cultural and social transformation, in which education plays an important role. In addition, the civil society development under the Civil Society Facility which is supported by the EU, to enhance civil society organizations administrative and communication skills, social dialogue and inclusion, culture, gender, children and regional issues will be helpful. On the other hand, the EU also supports, in the framework of the IPA operational programme on human resources development, actions on promotion of female, youth and registered employment, on lifelong learning activities and on increasing girls’ school enrolment rates. Turkey should make effective use of all of these financial programmes supported in the accession period, which will contribute to raising awareness. Reducing undeclared work should be a priority, otherwise it would be impossible to implement and fully benefit from EU standards. Therefore, administrative capacity should be strengthened in all areas. In conclusion, materializing the objectives set out in the development plan, together with decisiveness in implementing the new legislation that is fully aligned with both with the acquis and ILO conventions will certainly pave the way to a successful accession process. Progress along these lines is of key importance for the overall success of the accession period, since arguments in opposition to Turkey’s membership are usually voiced out on the basis of employment concerns. Thus, progress especially in this area will reduce such opposition. Above all, by strengthening the investment climate, EU accession will create more employment opportunities for Turkey’s rapidly growing labour force, while labour mobility will eventually deliver further welfare gains. With prospects of EU accession and favourable long-term population dynamics, Turkey has now been provided with a historic opportunity to achieve both sustained high income growth and better lives for the Turkish people and, over the medium term, approach the levels of income and development in the EU. 185

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7. Turkish SMEs Competitiveness within EU Negotiation Senem Besler and H. Zümrüt Tonus

Small and Medium Size Enterprises (SMEs) play a very important role in the EU and the Turkish economy. They add dynamism and a competitive dimension to economic life by undertaking certain important functions such as increasing the effectiveness of the market mechanism, ensuring sustainable growth, creating new employment opportunities, eliminating socio-economic instability among regions, and ensuring development throughout the country. This study first aims to assess the effects of EU negotiation on Turkish SMEs. It then seeks to explain Turkish SMEs’ competitive powers such as innovation, qualified manpower, research & development and technology within EU negotiations. In both the existing member states and the candidate countries, the competitiveness of the SMEs must be strengthened in due consideration of their existing needs and problems. Moreover, the administrative, regulatory, financial and fiscal environments within which the SMEs continue their existence must be improved. Finally, the harmonization of the SMEs with the EU acquis communautaire and their capability to operate in international markets must be supported and encouraged.

Turkey-EU Relations and SMEs Relations between Turkey and the European Union surrounding SMEs have continued since the Customs Union in 1995. Following the Customs Union, the SME action plan was prepared as a result of a widespread working process with the aim of improving SMEs in Turkey. However, this plan could not be implemented due to inadequate resources. Following the Customs Union, EU’s European Strategy for Turkey was enacted at the Cardiff Summit of June 1998. Within the framework of this strategy, an Industrial Strategy was also formulated by both parties to address issues related to the Turkish industries’ and SMEs’ situation with 187

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respect to the Customs Union and harmonization with the EU. This was followed by the establishment of a Contact Group for Industrial Cooperation between Turkey and the EU, although this strategy was not put into action by the EU.1 When Turkey was accepted as a candidate country for EU accession during the 1999 Helsinki summit, it was decided to give priority to the following areas of EU.2 앫 Increasing scientific and research activities and the production of technology, 앫 Improving, renewing and spreading vocational training, 앫 Developing and supporting SMEs, 앫 Placing emphasis on regional development. Following Turkey’s acceptance as a candidate to the EU, work commenced to coordinate the Turkish policies with those of EU in order to enable Turkish SMEs to compete with those of the EU member states and of the candidate countries. The first job was to conform to the standards set in CC BEST,3 that had been designed for the unifying of the SME policies of the member states. This work gained more substance with the EU SME Charter adopted at the Feira Summit of June 19-20, 2000. With this development, the CC BEST process came to an end, and the process of preparing the EU SME Charter Reports was initiated. Turkey’s report for 2002 in relation to the EU SME Charter was prepared under the coordination of KOSGEB4 and, with the participation of relevant institutions, was submitted at the European Council meeting in February 2003. The SME Strategy and Action Plan was formed in order to develop and implement a national SME Strategy which would be compatible with the European Charter for Small Enterprises and Multiannual Programme for Enterprise and Entrepreneurship (MAP) concerning SMEs in the Accession Partnership Document, published in 2003. This strategy, addressed the improvement of the business environment for SMEs especially when there was a need for financing. In the 2006 Accession Partnership Document, continued emphasis was placed on the improvement of business environment related to SMEs. The beginning of 1. 2. 3. 4.

SPO: State Planning Organization, KOBİ Stratejisi Eylem Planı, 2004. SPO: State Planning Organization, KOBİ Stratejisi Eylem Planı, 2004. CC BEST: The Business Environment Simplification Task Force. KOSGEB: Small and Medium Industry Development Organization.

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EU negotiation process was seen as necessary to make some revisions in the SME Strategy and Action Plan document. The aim of the SME Strategy and Action Plan is to develop and implement a national SME Strategy which is compatible with the goals stated in the EU Multiannual Programme for Enterprise and Entrepreneurship (MAP) and the principles laid out in the European Charter for Small Enterprises. This plan, a document that is related to the national SME policy that we will follow in our discussion of the EU membership process, expresses the approach compatible with EU policies that Turkey will follow in SME area as well as the measures that must be taken for enhancing SMEs competitive strength. This action plan comprises the acts directed towards SMEs between years 2007-2009.5 The main purpose is to create SMEs that are adaptable to changing conditions with competitive strength in national and international markets. In order to do so SMEs need both technical ability and a qualified workforce. Five strategy areas have been developed to support the SMEs achieve this action plan. These areas are 1) development of entrepreneurship, 2) development of enterprises, 3) integration with international markets, 4) improvement of business environment, 5) improvement of technology, and innovation capacity. In the section of “Enterprise and Industry Policy” in Turkey’s 2006 Progress Report of the European Commission addressed the following: 앫 A common SME definition was made for all Turkish establishments and conformity with EU acquis was maintained, 앫 Additional arrangements would be, needed especially in the matters such as decreasing unnecessary bureaucracy for the development of the business environment, 앫 In the area of enterprise and industry policy instruments, good progress had been made and Turkey has taken part in Multiannual Programme for SMEs, 앫 Even in sectors without specific strategies, there was still slight progress, 앫 The necessity for improvement in Turkey’s capacity to assess competition and the impact of political precautions. Briefly put, the progress report emphasized that generally Turkey had progressed well at this stage, and maintaining conformity with the EU acquis at a reasonable level.6 5. 6.

SPO: State Planning Organization, KOBİ Stratejisi ve Eylem Planı, 2007-2009. SPO: State Planning Organization, KOBİ Stratejisi ve Eylem Planı, 2007-2009.

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SMEs in EU and Turkey Taking into consideration the socio-economic functions within the EU the SMEs undoubtedly represent the most dynamic sector of the economy and the fundamental constituents of economic development. In the February 2006 European Commission report on SMEs, their current status in Europe was outlined as follows: of the total enterprises operating in Europe in 2002, 91.3 % consisted of very small enterprises; 7.3 % of small enterprises; 1.2 % of medium size enterprises, and 0.2 % of large enterprises. The subsidization of the SMEs and the encouragement of their establishment occupy an important place in the industrial policies of EU. In both existing member states and candidate countries, the competitiveness of the SMEs have been strengthened by taking into account current needs and problems, the administrative, regulatory, financial and fiscal environments within which the SMEs exist have been improved, the harmonization of the SMEs with the EU Acquis Communitaire and their ability to operate in international markets have been supported and encouraged.7 According to the 2005 data of the EU, there are around 19 million SMEs, comprising 99.8 % in of EU enterprises, contribute 81 % of the added value and constitute one of the major areas of employment within the EU. In the EU, 62 % of those working in the manufacturing sector are employed by SMEs. In terms of capacity utilization, on the other hand, EU enterprises operate at 80 % of their capacities and use 45 % of the loans utilized in the EU.8 Erzan and Filiztekin’s made the important finding that unlike large firms which could insulate themselves from adverse macroeconomic conditions and fluctuations, SMEs suffered from economic instability. Particularly, it had a depressing effect on small firms’ employment and value added growth. Hence SMEs managed to maintain their productivity by labour reduction. Hence, the ‘flexibilityadvantage attributed to the SMSEs seems to originate from the leaner impact of labour regulations and union activity on smaller establishments. An implication of this also appeared to be that adverse economic conditions would lead to employment and production losses in the SMSEs rather than firm closure.9

7. 8. 9.

[http://www.europa.eu.int/comm/enterprise/enterprisepolicy/smedefinitation] Karluk, R., Türkiye Ekonomisinde Yapısal Dönüşüm, Istanbul: Beta Basım, 2005. Erzan, R., and Filiztekin, A., “Competitiveness of Turkish SMSEs in the Customs Union” in European Economic Review, Volume 41, Issues 3-5, April 1997, pp. 881892

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When examining Turkey closely, we find that the number of enterprises in Turkey in 2002 is 1,720,598. While micro-sized (1-9) enterprises comprise 89.12 % of all enterprises, small (10-49) and medium-sized (50-250) enterprises account for 8.24 % and 1.66 %, respectively (see Table 1). Table 1: Percentage of Micro, Small and Medium Size Enterprises in EU and Turkey, 2002 Micro EU Turkey

Small

91,3 % 89,12 %

Medium

7,3 % 8,24 %

1,2 % 1,66 %

Source: http://www.kosgeb.gov.tr/KOSGEB/KOBIsletmeler.asp

SMEs in Turkey receive 4.4 % of the utilized loans. In terms of capacity utilization, however, it has been observed that they operate at only 25 % of their capacities.10 As could be seen in these figures, Turkish SMEs are different from EU SMEs in terms of their contributions to the economy. Although the quantitative distributions of the SMEs in Turkey resemble their counterparts in the developed countries, there are also certain significant differences in terms of foreign trade of the SMEs. As is noted in Table 2, while the share of the SMEs in foreign trade in Turkey is only 8 %, this same share is around 31.1 % in Germany, 23.0 % in France and 22.2 % in the UK. This result shows us that the SMEs in Turkey are facing certain difficulties in gaining access to foreign markets. These difficulties include inadequacy of capital, shortage of qualified manpower, lack of qualified managers and work experience, and inadequate technological levels. Table 2: Small and Medium Size Enterprises in Turkey and Some EU Countries (%) Country

Germany France UK Italy Turkey

SME’s in Share in Share in Total Total Total Enterprises Employment Investment 99.8 99.9 96.0 97.0 99.5

64.0 49.4 36.0 56.0 76.7

44.0 45.0 29.5 36.9 26.5

Share in Total Valueadded 49.0 54.0 25.1 53.0 38.0

Share in Total Export

Share in Total Credit

31.1 23.0 22.2 --* 8.0

35 48.0 27.2 --* 4.0

Source: http://www.kosgeb.gov.tr/KOSGEB/KOBIsletmeler.asp 10.

Karluk, R., Türkiye Ekonomisinde Yapısal Dönüşüm, Istanbul: Beta Basım, 2005.

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As is noted from Table 2, irrespective of the level of economic development, SMEs in all countries constitute the foundation of the economic and social order in both quantitative terms and in terms of employment potential. In most of the countries, nearly all enterprises consist of SMEs.11 In the European Union, SMEs are defined according to the number of workers and annual gross income, or their balance sheet. Steps to create legal regulations which aim to use a definition compatible with the EU in all applications related to SMEs have been taken by the Ministry of Industry and Commerce. These regulations were published in officials on 18 November 2005 and brought into force on 18 May 2006. Thus, defining SMEs and then upholding this definition as the basis for the application of all institutions and establishments maintained the conformity of SME definition to the EU definition, an act that figured prominently among the priorities of SMEs in the EU process.12 Table 3: Definition of SME’s in Turkey Criterion for Definition EU

Small

Medium

< 10 workers

< 50 workers

< 250 workers

< 2,000,000 EUR

< 10,000,000 EUR

< 500,00,000 EUR

< 2000000 EUR

< 10000000 EUR

< 43000000 EUR

0-9 workers

10-49 workers

50- 250 workers

Annual turnover

< 1000000 YTL (606000 EUR)

< 5000000 YTL (3000000 EUR)

< 25000000 YTL (15150000 EUR)

Annual balance sheet

< 1000000 YTL (606000 EUR)

< 5000000 YTL (3000000 EUR)

< 25000000 YTL (15150000 EUR)

Number of workers Annual turnover Annual balance sheet

Turkey Number of workers

Micro

Source: www.europa.eu.int/comm/enterprise/enterprisepolicy/smedefinitation

Competitiveness of EU Countries and Turkey The World Economic Forum defines competitiveness as an economic power that is necessary for increasing the economic welfare and the living standards of a country and on the basis of this definition makes evaluations on a worldwide scale of the level of competitiveness of the countries of the world. According to the Growth Competitiveness Index of the Global 11. Yılmaz, B., “Turkey’s Competıtıveness In The European Unıon: A Comparıson With Five Candidate Countries – Bulgaria, The Czech Republic, Hungary, Poland, Romania – And The Eu15”, Ezoneplus Working Paper No. 12, February 2005. 12. SPO: State Planning Organization, KOBİ Stratejisi ve Eylem Planı, 2007-2009.

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Competitiveness Report published for the year 2006, Turkey is in the 59th place on the list.13 According to this list, Switzerland is in first place, followed by Finland. Taking into consideration Turkey’s place among the 105 countries that are included in the list, it becomes evident that Turkey should try harder to improve its position. Meanwhile, Turkey is in the 46th place in the Business Competitiveness Index for the year 2006. The first country on this list is the USA, followed by Germany. Management activities and strategies as well as the quality of the business environment are taken as the basic criteria in this index. With management activities and strategies, Turkey is in the 41st place; in terms of the quality of the business environment, Turkey is in 46th place.14 If we examine the business competition index in terms of the EU member countries, Germany comes in the lead while France is ranked second. Tables 4 and 5 show the business competition index rating of the EU member and candidate countries. Table 4: Business Competitiveness Index of European Union Countries 2006 Germany Finland Denmark Netherlands Sweden United Kingdom Austria France Belgium &Luxemburg Ireland Estonia Portugal

2 3 5 6 7 8 12 16 17 22 24 28

Spain Czech Republic Slovenia Italy Hungary Slovakia Malta Lithuania Cyprus Latvia Greece Poland

30 32 36 38 39 40 41 43 45 47 49 53

13. [http://www.weforum.org/pdf/Gcr/GrowthCompetitiveness_Index_2006_Comparisons] 14. [http://www.weforum.org/pdf/Gcr/Business_Competitiveness_Index_Porter]

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Table 5: Business Competitiveness Index of New Member States and Candidate Countries to EU 2006 New Member States Romania Bulgaria

74 83 Candidate Countries

Turkey Macedonia Croatia

46 87 56

Criteria of Competitiveness The new conditions for competitiveness that have emerged concurrently with globalization are much more challenging and harsh than in the past. Such factors such as the abundance of cheap labour and raw materials, traditionally determinant in the development of the production activities and in international trends, have been replaced by other elements, such as qualified manpower, technology development, and the satisfaction of the changing and growing expectations of the consumers. A brief retrospective review will highlight the occurrence of continuous changes in the basic criteria for defining competitive power. While the basic prerequisite for competitive power was superiority in production in the 1960s, with the growing awareness of the fact that productivity alone cannot be a determinant of competitiveness, this criterion was replaced by the ‘cost’ factor in 1970s. According to this criterion, those enterprises that could achieve cost-effectiveness in production were considered to have acquired cost advantage in competition. During the decades that followed, when market satiety was achieved for the supply of low-cost products in abundant supply, the main factor for competitiveness became ‘quality’. This criterion was subsequently followed by the criteria of speed and services. At present, and in the foreseeable future, the factors of ‘innovativeness’ and ‘creativity’ have emerged as the most important criteria for competitive power. In an environment characterized by the growing uncertainty of environmental conditions, elimination of industrial borders, continuous changes in the demands and expectations of consumers and employees, and an increasing focus on the process of lifelong learning, enterprises need a greater diversity of approaches and even other criteria in order to gain a competitive edge. However, we should 194

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keep in mind that the present level of competitiveness has been achieved through the adding of a new dimension to the requisites of competitiveness during every phase of development in the past. More precisely, an enterprise cannot acquire a competitive edge if it is only focused on the criterion of speed, yet lacks creativity. All types of economic, political, technological, and cultural changes occurring in the outside world encourage enterprises to achieve innovative actions that allow them to distinguish themselves from their competitors. New products and services, new processes, new technologies, new markets, new management and organizational structures, and new strategies have become the integral elements of today’s competitive environment. Enterprises should assess such changes that occur in the outside world as opportunities and challenges, and should formulate new strategies for innovations in light of these assessments. Consequently, it is possible to add numerous other competitiveness criteria to those enumerated above. These factors would include, for example, the establishment of continuous communication among SMEs and the entities that provide them with technological and R&D support, possession of a dynamic and simple organizational structure, and having a management that is open to innovations. Such factors vary from one country to another and among the different sectors. However, in any case, it is invariably noted that these factors are increasing both in intensity and in numbers. The subjects of technology, research & development, qualified human force and innovation are examined in this study.

Technology and Research & Development Technology is one of the most important factors that enhance competitiveness. International competition obliges enterprises to upgrade their technological infrastructure and to achieve innovation. The production of goods and services that fulfil consumers’ needs and demands is closely associated with new technologies. The manufacturing industry in developing countries is transforming orientation from raw material and labour-based production to technologyintensive production. However, the high concentration of labour-intensive sectors, such as food, textile and clothing, steel and iron in the manufacturing industry production and exports still exists in Turkey today. Thus, the share of high technology products within the total exports of Turkey was 2.25 % in 2004; the EU average share of the same products 195

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was 18.37 %,15 revealing how low the level of technology product exports of Turkey is compared to that of the EU. Turkey must change its industrial base and produce goods with higher added value by investing more in human resources and high technology fields. Table 6: Exports of High Technology Products as a Share of Total Exports 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 EU (25)

-

-

-

-

-

EU (15)

15.1

15.1

15.6

15.6

17.2

18.3

- 20.37 21.37 21.14 18.79 18.43 18.37 19.5

20.6

20.4

18.2

17.7

17.7

Turkey

-

-

-

-

-

-

3.55

4.3

3.57

1.86

2.11

2.25

Source: Eurostat

R&D activities are important tools that enable the SMEs to be competitive and open to the outside world. Enterprises which aspire to gain and sustain competitive advantages in the domestic and international markets are obliged to choose the appropriate technologies for ensuring the production of goods and services with higher quality within a shorter period of time than their competitors. Irrespective of the sector within which they operate, in order to survive in the highly competitive market economy, all SMEs are obliged to perform certain activities for quality improvement. The achievement/realization of production at a level that fulfils the changing needs and demands of the consumers, the continuation of the production activities at the desired level of efficiency, and the continuous improvement of quality can only be made possible through investments in technology and R&D activities. By taking this fact as a starting point, SMEs with low levels of R&D activities may be recommended to increase these SMEs with medium or high levels of R&D activities may be recommended to establish their own R&D departments and assign them a corporate identity.

15. [http://epp.eurostat.ec.europa.eu/portal/ page_pageid=1996,39140985&_dad=portal&_schema=PORTAL&screen=detailref&l anguage=en&product=STRIND_INNORE&root=STRIND_INNORE/innore/ir140]

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Table 7: Gross Domestic Expenditure on R&D (GERD) as a Percentage of GDP 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 EU(25)

-

1.81

1.79

1.79

1.8

1.86

1.86

1.89

1.9

1.9

1.86

-

EU(15)

-

1.85

1.83

1.83

1.84

1.9

1.91

1.94

1.95

1.95

1.92

-

Turkey

0.36

0.38

0.45

0.49

0.5

0.63

0.64

0.72

0.66

-

-

-

Source: Eurostat

An increasingly competitive context makes it obligatory for enterprises in Turkey to adapt to this environment as well. In brief, research and development activities should be emphasized in order for Turkish industry to transform itself into a technology-intensive structure. According to the table featuring R&D expenditures and the share of such expenditures within the GNP,16 while the share of R&D expenditures in the GNP was 2 % in the EU in 2002; within the scope of the Lisbon strategy, this figure was projected to rise to 3 % in 2010 – structured in such a way that two thirds is financed by the private sector. The country with the highest rate of R&D expenditures is Sweden with 4.3 %, followed by Finland at 3.5 % and Denmark at 2.6 %. in Turkey, however, R&D expenditures is 0.66 %. At the same time, the importance of the cooperation between the universities and the industry to help advance technology and R&D activities should not be overlooked. It is a well-known fact that universities provide substantial contributions which are particularly useful in eliminating the need for qualified personnel, and to increase productivity and quality. So far the SMEs have acquired a certain potential for exporting with little technological innovation of their own, instead they rely merely on transfer of technology provided via partnerships with foreign enterprises. However, they are now required to prioritize technological development and must therefore cooperate with the universities in order to exploit SMEs’ existing potential and achieve further growth.

Innovation EU attaches great importance to innovativeness in building competitive power. There are many reasons underlying this attitude. The most important motive behind this priority is the desire to catch up with the innovative 16. Eurostat, Statistic in focus, science and technology 2/2005, R&D Expenditure in the European Union.

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performance of other world leaders such as the USA and Japan. In order to help reach the Lisbon objectives, the EU is adding impetus to its studies on innovation, and is exerting efforts to put these studies into practice. Increases in productivity in Europe depend directly on the increases in innovation. The existing gap in terms of efficiency between EU and Europe has created a major challenge for the EU. Therefore, in order to eliminate this gap, the EU has been obliged to invest in innovation. In order to strengthen its competitiveness and its capacity for innovation, to contribute to the building of an information society, and to ensure a sustainable development based on stable economic growth, the EU has emphasized the development of a ‘Competition and Innovation Programme’. In line with this policy, adopted by the EU, Turkey must be open to all policies and implementations relating to the attainment of innovativeness throughout the negotiation process. The same sensitive attitude must be adopted from both the standpoint of increasing Turkey’s competitiveness and from the perspective of the Turkey-EU economic relations. Figure 1: Innovation Index 2006 0.80 CH

SE

0.70

FI JP

2005 Summary Innovation Index

DK US

DE

0.60 0.50

BE

UK FR

NO EE

0.30

IS

LU

IE

0.40

ES

RO

IT CY

BG PL 0.20

AT

NL

MT

SK

SI

PT CZ EL

HU

LT LV

0.10 TR 0.00 –5.0

–4.0

–3.0

–2.0

–1.0

0.0

1.0

2.0

Average growth rate of SII Dotted lines show EU25 mean performance. Source: European Innovation Scoreboard 2006

198

3.0

4.0

5.0

6.0

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Figure 1 shows the Summary Innovation Index (SII) on the vertical axis and the average growth rate of the SII on the horizontal axis. Countries above the horizontal dotted line currently have an innovation performance above the EU25. Countries to the right of the vertical dotted line had a faster average increase in the SII than the EU25 in 2006. Based on the SII score and the growth rate of the SII, European countries can be divided in four groups:17 앫 Switzerland, Finland, Sweden, Denmark and Germany make up the group of ‘Leading countries’. 앫 France, Luxembourg, Ireland, United Kingdom, Netherlands, Belgium, Austria, Norway, Italy and Iceland all belong to the group of countries showing ‘Average performance’. 앫 Countries ‘Catching up’ are Slovenia, Hungary, Portugal, Czech Republic, Lithuania, Latvia, Greece, Cyprus and Malta. 앫 Countries ‘Losing ground’ are Estonia, Spain, Bulgaria, Poland, Slovakia, Romania and Turkey. Benefitting from the newly emerging markets, creating new ideas, developing new working methods that create added value, enhancing the quality of services, and adding an impetus to the changes at the corporate level can only be possible for the SMEs through the increase of the capability of learning faster than their competitors in a conscientious and determined manner. Innovation and organizational learning that is highly relevant to innovation therefore lie in the heart of this strategy. Innovations might involve certain radical changes, or they might simply consist of certain very minor and superficial changes. The important issue is the market value of the innovation rather than its technical characteristic. The value of an innovation from the standpoint of an enterprise is measured on the basis of its market value. This market can be understood as the number of customers. In this way, all support should be provided to help SMEs in Turkey increase innovation and take necessary actions to ensure progress in the process of harmonization with the EU Acquis Communitaire. Turkey is a very valuable country for EU, given its political, economic, social, geographical, and cultural characteristics. Therefore, in order to ensure that Turkey retains its competitive power, the SMEs in Turkey need to be supported from the standpoint of innovation. In order to ensure the integration of the Turkish firms in EU markets, innovation carries a vital significance, providing both a competitive advantage to enterprises and 17.

European Innovation Scoreboard 2009.

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creating the best value for consumers. Obviously, innovation by itself is not sufficient for success: entrepreneurs themselves should also receive full support. The viability of innovation depends on the entrepreneurs and the enterprises.

Qualified Manpower International competition entails the presence of skilled and educated work force as a determinant factor of competitive power. Competitiveness is highly relevant to qualified manpower. Global competition entails the participation of a skilled and educated labour force within competitiveness as a determinant factor. In the implementation of the new technologies, new processes or new methods within the everyday life, the most important role befalls on the work force. Accordingly, ensuring that the SMEs acquire the capability to attract or train qualified manpower in the short run is a top priority. If we focus on the type of activities that serve this purpose, the importance of education will occupy the highest priority. Within this framework, one of the most significant objectives of the SMEs must be focused on the personal growth of their employees, both within a context of cooperation among universities and the industry, through participation in fairs and other organizations, and through the offering of on-the-job and general training programmes to all employees. It should be kept in mind that finding qualified manpower is much more difficult than training of human resources departments in how to acquire the required skills: this is one of key elements of innovation. The subject of education constitutes one of the most important headings within the negotiation process, which began on October 3, 2005, in line with Turkey’s full EU membership objectives. Quite significant deficiencies attracted attention in Turkey, when compared with the EU averages. For instance, Turkey is well behind the EU averages with regard to the rate of literacy and schooling, the number of students per classroom and the share allocated from the budget for education. This, in turn, constitutes an obstacle in terms of meeting the qualified workforce requirement of SMEs. The fact that Turkey has a much younger population compared to that of other countries requires the allocation of still more resources to education and therefore to the training of a qualified workforce. A well-educated and well-equipped young population will make a great contribution to the country’s economy.

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Conclusion In a given country, the development and growth of SMEs, which are the driving force of an economy, must be maintained and their competitive strength must be increased in order to attain a sustainable development model and an economy with high competitive strength. When the Customs Union process started in 1996, SMEs entered an intense competitive environment after funds and customs in practice were abolished in Turkey's industrial sector. When SMEs in Turkey are compared with the SMEs in EU countries, important differences in terms of competitive strength, scale, capital size, technical infrastructure, training and entrepreneurial spirit stand out. For SMEs that are open to external competition with the Customs Union, it is very important to provide access to market information like competitors’ situations, consumer demand, product price and marketing activities as well as information such as product development, product design, technology, production and investment planning, modernization, renewal, standards and scale economies, in addition to financing information such as self- financing, external financing, leasing, factoring, risk capital and credits and to perfect institutional capacity to assess this information accurately. This situation is necessary for the integration of Turkey with the EU both economically and commercially. Turkey has made satisfactory progress in harmonizing with EU acquis with regard to SMEs. The formation of SME Definition Regulations and SME Strategy and Action Plans are the best and most concrete examples of this. In addition, the Progress Report of European Commission on Turkey emphasized that Turkey had made progress and maintained conformity with the Acquis at a reasonable level. EU’s entrepreneurial policy aims to create a knowledge-based, competitive and dynamic economy. Turkey has enough work force and entrepreneurial potential to serve to this aim. The principal attribute among the strengths of the Turkish Manufacturing Industry is wide entrepreneurial capacity and work force level that has important qualities and industrial experience. It is obvious that both the young population and this entrepreneurial capacity will play a crucial role in Turkey’s competitiveness. Turkey, which is currently in the stage of negotiations for full EU accession, must continue to take important steps regarding the government policies on the SMEs. The advantages created by the SMEs, particularly the provision of new services, creation of employment 201

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opportunities, and the increase in social development and regional progress are undeniable. On the other hand, negative factors such as the decline in domestic demand, the high cost of energy, inadequate operating capital, and high interest rates continue to impose serious restrictions on SMEs in Turkey.

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8. Turkish Agriculture at the Crossroads: Structural Change and EU Membership Mahmut Tekçe

Agriculture is one of the most important sectors in the Turkish economy, in terms of its contribution to the GDP and exports, and its large share in employment. However, despite the key role it plays in the nation’s economy, the sector’s problems have long been neglected and a wide-based agricultural and rural reform has not been implemented. Turkish agriculture has serious structural problems, which poses a major challenge to Turkey’s process of integration into the European Union. Considerations of this process paid special attention to this sector. Agricultural products were excluded from the Customs Union between the EU and Turkey, and it is evident that throughout Turkey’s on-going negotiations for full membership to the EU, Agriculture and Rural Development will be one of the most problematic chapters to conclude. This is particularly true insofar as the large size and unique structure of the Turkish agricultural sector raises concerns about the pressure on the EU budget when Turkey becomes a part of the Union. In addition to Turkey’s obligation to bring its agricultural sector in harmony with the EU’s agricultural policies, there is another challenge that the sector faces: reforming agricultural policies in order to comply with the WTO rules. Discussions of how to harmonizing the agriculture with the Common Agricultural Policy of the EU and the rules of the WTO as discussed in Turkey have two aspects: these developments could be an unprecedented opportunity for the sector in terms of efficiency and modernization, or they could weaken the already problematic sector and increase Turkey’s dependence on import markets in agricultural products. This chapter explores the possible social and economic changes in the Turkish agricultural sector within the process of full economic integration into the EU. After a general review of the situation of Turkish agriculture, we provide an outline of policies that have brought the sector to its current problematic situation. The future of the sector is discussed in the context of Turkey’s twin challenges: transforming the sector to be compatible with the WTO rules, and harmonization with the CAP. 203

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Role of Agriculture in Turkish Economy Agriculture plays a crucial role in the Turkish economy, both in social and economic terms. Before the 1980s, the sector was Turkey's largest employer and a major contributor to the country’s Gross Domestic Product (GDP), exports and industrial growth. However, in the last three decades the value added of agriculture fell behind that of industry and services, and the share of agriculture in the GDP fell from 24 percent in 1980 to 9 percent in 2008. Nevertheless, the role of agriculture in the Turkish economy is considered high when compared to the figures of the EU-27 states, in which the EU share of agriculture in GDP is just under 3 percent. Although the contribution of the agricultural sector to Turkey’s GDP is gradually decreasing, the employment in agriculture remains very high. As seen in Table 1, about 24 percent of total employment, which accounts for more than 5 million people, is in agriculture. In the EU-27, on the other hand, the share of the combined agricultural and food sectors in employment is about 8 percent. Thus, agriculture is still a very important provider of employment in the Turkish economy and the magnitude of the people depending on the sector makes it a fragile piece of the socioeconomic structure. Moreover, Turkish agriculture is still characterized by hidden unemployment, which is an enormous challenge to the economic development of Turkey. Table 1: Role of Agriculture in Turkish Economy

Share of agriculture in GDP (%) Employment in agriculture (thousand) Share of agriculture in employment (%)

1990 16.4 8,735 45.9

2000 11.9 7,769 36.0

2008 8.9 5,016 23.7

Source: TURKSTAT

With its large land available for farming, varied climate conditions and ecology, Turkey has a great potential for producing a wide range of agricultural products. However, most of the arable land and the greater part of the farm population have traditionally been devoted to producing grain, especially wheat and barley. As of 2008, grain occupied about 76 percent of the arable land. Turkey is among the biggest agricultural producers of the world, Turkey ranking among the top three producers for several commodities, including figs, walnuts, poppy seeds, watermelons, apples, beans, chickpeas, lentils, pistachios, honey and sheep milk. In 2007, Turkey was the world’s largest 204

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producer of apricots, quinces, cherries and hazelnuts.1 Nevertheless, in terms of the yields of agricultural commodities, Turkey generally lags behind the EU. In grain, especially in wheat and barley, Turkish production is relatively inefficient, where the yield of most grain in Turkey is almost half its value in the EU. On the other hand, in certain commodities, like citrus fruit, Turkey has a significantly higher yield than its European competitors in exports. The structure and average size of farms in Turkey is another aspect of Turkish agriculture that differs from the EU. According to the latest agricultural census, there are more than three million farms in Turkey, which have an average size of 6.1 hectares.2 In the EU-27, farms are relatively larger, with an average size of 11.5 hectares. Turkey’s average farm size is only larger than those of Hungary, Greece, Bulgaria, Cyprus, Romania and Malta. In Turkey, about 65 percent of agricultural holdings have less than 5 hectares of land, which occupy 21 percent of the total agricultural area. On the other hand, only 5.8 percent of agricultural holdings have more than 20 hectares of land, but these holdings occupy only 34.2 percent of the agricultural area. More than half of the farms are concentrated between 2 and 10 hectares; and the share of relatively smaller farms, with areas less than 2hectares, was 33.4 percent in 2001. Regarding the farm sizes and the farmers’ access to markets, a dual structure has been observed in Turkish agriculture. On one hand, there are market-oriented producers, who have the power to apply modern methods of production and technology. On the other hand, the majority of farmers own small lands which generally fit the profile of subsistence and semisubsistence farms; these farmers produce for household consumption without investment in technology and with low yields. In the process of accession to the EU and adoption of the sector to the CAP, the existence of this dual structure would be one of the major concerns.

Agricultural Trade Turkey is an important actor in world agricultural trade, one of the leading exporters of fruits and vegetables, cotton lint, olives and olive oil and tobacco 1. 2.

FAOSTAT Agricultural Production Database, [http://faostat.fao.org/site/339/ default.aspx]. According to the 1991 agricultural census, there were about 4 million farms of an average size of 5.91 hectares.

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leaves and the world’s biggest exporter of raisins, hazelnuts, dry apricots and figs, ranking in the top three exporters in poppy seed and lentils. More than half of Turkey’s agricultural exports are comprised of fruits and vegetables. In terms of agricultural imports, Turkey mainly imports non-food agricultural products like tobacco products and textile fibres. With the exception for 2008, Turkey has been a net exporter of agricultural products. In the 1990s, Turkey’s agricultural exports accounted for about $ 4.2 billion on average, with a ten-year average trade surplus of $ 1.2 billion. Agricultural trade of Turkey has been volatile since 2000: where agricultural trade surplus fell to $ 228 million in 2000, increased to a record value of $ 2.6 billion in 2005, but rapidly fell to a trade deficit of $ 46 million in 2008. Table 2: Turkey's Trade in Agricultural Products ($ million)3

Exports Imports

199094* 3,680 2,211

19951999* 4,772 3,844

20002004* 4,613 3,781

2005 7,994 5,375

2006 8,251 5,928

2007 9,377 8,068

2008 11,082 11,128

Source: UN COMTRADE database; *: Five-year average values

The Customs Union between Turkey and the EU, which has been operational since the beginning of 1996, did not include unprocessed agricultural products. In this agreement, Turkey adopted the EU’s common external tariff and removed tariffs and quotas for non-agricultural products. However, Turkey and the EU had already given each other certain trade preferences in many agricultural products since the Ankara association agreement in 1963; for example, most ad valorem agricultural tariffs on agricultural imports from Turkey were removed in 1987. More than 60 percent of the EU’s agricultural imports from Turkey face no tariff and quota barriers. Still, there are high specific tariffs for many of the core CAP products (grain, sugar, and olive oil), substantial tariffs for many processed products, an entry price system and seasonal tariffs for some fruits and vegetables, and high above-quota tariffs on Tariff Rate Quotas.4 3.

4.

Different definitions are used for agricultural products. Here, we prefer the product grouping definition that the European Commission uses. Agricultural products are defined as the total of commodities with the SITC Rev.3 codes of 0, 1, 21, 22, 231, 24, 261 to 265, 268, 29 and 4. Burrell, Alison, “Turkey’s Foreign Trade Position” in A. Burrell and A. Oskam (eds.), Turkey in the European Union: Implications for Agriculture, Food and Structural Policy, CABI Publishing, UK, 2005a.

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The EU has been the biggest trade partner of Turkey in agricultural products, with more than 40 percent of Turkish agricultural products exported to EU countries. Turkey has a high trade surplus with the EU27 mainly due to exports of edible fruits and nuts, preparations of fruit and vegetables as well as tobacco and tobacco products. However, we cannot claim that the preferential trade agreements in agricultural products were what led to this situation, as the share of the EU in Turkey’s agricultural trade remained nearly the same as in the 1990s. On the basis of individual countries, Germany has traditionally been the highest importer from Turkey, both in total and agricultural products. In 2008, agricultural exports to Germany accounted for 30 percent of Turkey’s agricultural exports to the EU, and 10 percent of total agricultural exports. Other important trade partners from the EU for Turkish agricultural products are Italy, France, Netherlands, UK, Romania and Bulgaria. Turkish agriculture is experiencing a period of transformation, in which the sector faces two challenges: the extension of the Customs Union between Turkey and the EU to agricultural products and integration of the sector into the EU agricultural markets, and the harmonization of Turkish agricultural policies with the WTO rules in agriculture. The following section thus analyses the WTO Agreement on Agriculture and the Common Agricultural Policy of the EU, and then examines the agricultural policies in Turkey in line with these challenges.

World Trade Organization Rules in Agriculture One major factor shaping the on-going transformation in the Turkish agriculture has been the WTO Agreement on Agriculture, which aims to bring global agricultural trade within world trade rules and was concluded as part of the Uruguay Round of multilateral trade negotiations in 1994. The agreement also included an agreement on sanitary and phytosanitary (SPS) measures. The Uruguay Round Agreement on Agriculture was considered to be the beginning of the process of trade liberalization in agriculture while the Doha Round aimed to further reduce agricultural support and protection. However, disagreement about opening up agricultural markets, reducing farm subsidies and import taxes led to the suspension of the negotiations in July 2006, and subsequent attempts at revival in 2007 and 2008 failed. The Uruguay Round Agreement on Agriculture provided for global trade rules governing three areas of national agricultural policy: market access

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(tariffs, quotas, and other trade barriers), domestic support, and export subsidies.

Market access Before the Uruguay Round, trade liberalization negotiations did not cover border protection on agricultural products for which there were often no bound tariffs or for which tariffs were supplemented by non-tariff barriers, such as import quotas, variable border levies and the monopoly purchase power of state-owned entities. The Agreement on Agriculture sought to reduce barriers to agricultural trade and to make them more transparent. In this sense, with the market access reform, non-tariff barriers against agri-food imports were converted to tariffs or to tariff rate quotas. According to the Agreement, tariffs were also reduced and were bound, preventing a country from increasing them unilaterally. Developed countries were required to reduce their bound tariffs on the average of all agricultural products by approximately 36 percent over a six-year period beginning in 1995, with a minimum cut in any one tariff line of 15 percent. Developing countries, on the other hand, agreed to reduce their tariffs by an average of 24 percent, with a minimum cut of 10 percent, to be implemented over ten years. Finally, least-developed countries did not undertake any tariff reductions but were required to convert all nontariff barriers to bound tariffs.5

Domestic Support According to the Agreement on Agriculture, domestic support to farmers was classified according to their impact on production; support with little or no distortive effect on trade, production, input use or prices were referred to as “Green Box” measures, and trade-distorting supports as “Amber Box” measures. Subsidies classified in the Green Box, like direct payments to farmers that do not depend on current production decisions or prices, disaster assistance, and government programmes on research and training, are not subject to reduction. Other subsidies, including market price supports and input and output subsidies, which were classified in the Amber Box, are subject to reduction commitments, expressed in terms of the Aggregate Measurement of Support (AMS), which includes all productspecific support and non-product-specific support in one single figure. The

5.

[http://www.wto.org/english/tratop_e/agric_e/ag_intro02_access_e.htm].

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AMS was obliged to be reduced by 20 percent over six years for developed countries, and by 13 percent by ten years for developing countries. The Agreement defines two other categories that are not classified in the Green Box, but are exempt from reduction commitments: Blue Box measures and de minimis exemptions. Certain developmental measures in developing countries and specific direct payments that were linked to quantities produced but subject to output controls were classified in the Blue Box. As for de minimis exemptions, support for a particular product was allowed if that support was no greater than 5 percent of its total value of production.

Export Subsidies The Agreement on Agriculture did not ban export subsidies, but limited the use of these subsidies to four situations: (i) if the subsidies subject to product-specific reduction commitments were within the limits specified in the schedule of the WTO Member concerned; (ii) if any excess of budgetary outlays for export subsidies or subsidized export volume were over the limits specified in the Agreement on Agriculture; (iii) if the export subsidies are consistent with the special and differential treatment provision for developing countries; and (iv) if export subsidies other than those subject to reduction commitments were provided, that they be in conformity with the anti-circumvention disciplines of the Agreement on Agriculture. In all other cases, the use of export subsidies for agricultural products was prohibited.6 In this way, developed countries were required to reduce the base-period volume of subsidized exports by 21 percent and the corresponding budgetary outlays for export subsidies by 36 percent over 6 years. Developing countries, on the other hand, were required to cut the volume of export subsidies by 14 percent and their budgetary outlays by 24 percent over 10 years.

Agreement on Sanitary and Phytosanitary Measures WTO rules on agriculture were not limited to the Agreement on Agriculture. Another important agreement regulating the measures in the agricultural sector and trade in agri-food products is the Agreement on Sanitary and Phytosanitary Measures (the SPS Agreement).

6.

[http://www.wto.org/english/tratop_e/agric_e/ag_intro04_export_e.htm].

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The SPS Agreement aimed to regulate protection measures on unsafe and unhealthy imported agri-food products. With this agreement, countries would be able to set their own standards, but these standards would have scientific bases and not make unjust discrimination between countries where identical or similar conditions prevailed. As long as countries conformed to international standards, such as Codex Alimentarius, they could not be accused of using the SPS measures as non-tariff barriers to trade. The SPS Agreement included provisions on control, inspection and approval procedures, where governments would have to provide sufficient and transparent information about national sanitary and phytosanitary regulations. Negotiations on the WTO rules on agriculture continued after the Agreement on Agriculture, aiming at further liberalization in agricultural trade. The 2001 Doha mandate called for reforms in the above mentioned areas of agricultural policies, with further reductions in tariffs and improvements in market access, substantial reductions in domestic support and total elimination of all export subsidies. However, a broad consensus was not reached during the negotiations, and disagreement on the agricultural sector between developing and developed countries paved the way to the suspension of the Doha Round.

EU’s Common Agricultural Policy The other important issue in the transformation of Turkish agriculture is the challenge of the EU accession. With the prospective full membership of Turkey to the EU, Turkish agriculture will be a part of the EU’s Common Agricultural Policy (CAP). CAP came into effect in 1962, and was designed to secure Europe’s self-sufficiency in food production and to strengthen the economic integration among the member states. The objectives of the CAP were defined by the Rome Treaty as (i) to increase agricultural productivity by prompting technical progress and ensuring the rational development of agricultural production and the optimum utilization of the factors of production, in particular labour, (ii) to ensure a fair standard of living for the agricultural community, (iii) to stabilize markets, (iv) to assure the availability of supplies, and (v) to ensure that supplies reached consumers at reasonable prices.7 CAP aimed at increasing productivity in agriculture and providing incentives with guaranteed prices above world price levels.

7.

Treaty of Rome, Article 39.

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This policy succeeded in meeting its objective of self-sufficiency, but the inevitable result was over-production in major agricultural commodities and rising budgetary costs. The CAP had been reformed in 1972 by the Mansholt Plan and in 1988 by the Delors Package, but the first major reform only took place in 1992. This reform, known as the MacSharry Reform, reduced support prices and compensated farmers for lower prices with direct payments based on historical entitlements, and introduced new measures limiting the use of means of production. This reform not only aimed at decreasing over-production in agriculture, but also addressed the need to design the CAP according to the GATT principles. Nevertheless, this reform was limited to certain commodities and farmers were required to produce the commodity to receive the payments. The enlargement of the EU to Central and Eastern Europe, the prospect of a new round of trade negotiations within the WTO, the desire for a more environment-friendly and quality-oriented agriculture, and the interest of the consumer for lower prices and safer food products made a new wave of reform of the CAP necessary.8 The Agenda 2000 reform, documented in 1997, included proposals for the reform of the CAP by establishing a coherent policy framework for the period 2000-2006 in the field of EU agricultural policy, regional policy and the EU budget. The priorities of the Agenda 2000 reform were (i) to ensure the competitiveness of the EU agricultural sector, both within the Community market and on growing export markets; (ii) to promote ways of farming that contributed to the maintenance and enhancement of rural environment and landscapes; and (iii) to contribute to sustaining the livelihood of farmers while promoting the economic development of the wider rural economy.9 Similar to the MacSharry Reform, Agenda 2000 used direct payments to compensate a certain part of the farmers’ loss from the cuts in the price supports, and these payments depended on production. With further cuts in intervention prices, the Agenda 2000 reform was a step towards liberalization in agriculture, but further reforms in the support structure of the CAP were still required in order to harmonize the policies with the WTO rules and to strengthen the EU’s hand in the forthcoming Doha Round of the WTO. CAP payments were linked to agricultural production, which was seen as distorting markets and encouraging over-production, thus bringing about negative consequences 8. 9.

Moussis, Nicolas, Access to European Union: Law, Economics, Policies (17th ed.), European Study Service, Brussels, 2009. European Commission (1999), CAP reform: a policy for the future, DG Agriculture, Brussels

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for the landscape and the environment. Consequently, the CAP was reformed again. With the 2003 CAP reform, which took effect in January 2005, direct payments to the farmers have been decoupled from production. These direct payments, known as single farm payments, had been completely based on historical entitlements. Moreover, with this reform, more funds were channelled into rural development programs. In the CAP, production and trade of agricultural commodities are governed by the common market organization (CMOs), aiming at reaching the CAP objectives, stabilizing the market, increasing agricultural productivity and guaranteeing a stable income for farmers. The first CMOs were introduced in 1962 and over time the number of CMOs as expanded to 21. In 2008, a part of the CAP simplification process, a single CMO for all agricultural products replaced the existing CMOs. The single CMO combined and harmonized different acts in areas of market policy covering rules on intervention, private storage, marketing and quality standards, import and export rules, safeguard measures, competition, state aid and the reporting of data.10 Incorporating the single CMO and producer support, common rules were established for single farm payments and support schemes for producers of certain crops (durum wheat, protein crops, rice, nuts, energy crops, starch potatoes, milk, seeds, arable crops, sheep meat and goat meat, beef and veal, and grain legumes). Direct payments to farmers would be determined on the basis of previous entitlements and contingent upon crosscompliance with rules related to the environment, public, animal and plant health, food security, and the maintenance of agricultural land in good agricultural and environmental conditions. Financing of the CAP budget is governed by two pillars established by the 2003 reform: Pillar 1 for direct payments and other support policies, and Pillar 2 for rural development policies. Pillar 1 represents around 80 percent of the CAP budget for 2007-2013, whereas Pillar 2 funding levels are set to increase during the budget period. However, Pillar 1 levels would remain at level of the 2000-2006 allocations. As a financial discipline mechanism, a ceiling was imposed on Pillar 1 spending, starting at € 45.75 billion in 2007 and increasing by only 1 percent per year. In addition, two agricultural funds were founded for the financing of the CAP: the European Agricultural Guarantee Fund (EAGF) for the financing of

10. Council Regulation (EC) No: 1234/2007, [http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=consleg:2007R1234:20081001:en:pdf].

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Pillar 1 measures of direct payments and market supports, and the European Agricultural Fund for Rural Development (EAFRD) for the financing of rural development programs of the Member States.11 Table 3: European Commission’s Expenditures for the CAP Pillars (E billion)

Pillar 1 Direct Payments Market Support Measures Pillar 2

2007 43.5 35.1

2008 43.7 36.1

2009 43.4 36.3

2010 43 37

2011 42.7 37.5

2012 42.5 38.1

2013 42.3 38.7

8.4

7.6

8

6

5.2

4.4

3.6

11.7

12.2

12.7

12.8

12.9

13.1

13.2

Source: Future Financing of the Common Agricultural Policy Evidence: House of Lords Paper 7, London, 2005

The relatively recent reforms of the CAP also brought about a mechanism called modulation, which reallocated funds from Pillar 1 to Pillar 2 by reducing a certain amount of direct payments for large farms in order to finance rural development policy. It was agreed that direct payments greater than € 5,000 would be reduced by 3 percent in 2005, 4 percent in 2006 and 5 percent from 2007 to 2012 and these funds would be used to finance rural development measures.12 An important policy tool of the CAP is the use of border measures, whereby through import quotas and minimum import price requirements, European agricultural producers are protected against low price imports. In this manner, a threshold price is set for certain products, and imported agricultural products must exceed that price in order to access the EU market. If the world price falls below the threshold price, this gap is closed by applying tariffs on the product. The second pillar on which the Common Agricultural Policy of the EU stands is rural development policy. Greater emphasis has been placed on this pillar after the latest reforms in the CAP. According to the European Commission, more than 91 percent of the territory of the EU is defined as 11. These funds were created in 2005, replacing the European Agricultural Guidance and Guarantee Fund (EAGGF). 12. [http://ec.europa.eu/agriculture/capreform/infosheets/modul_en.pdf].

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“rural”, with more than 56 percent of the EU's population living in this area.13 The main concerns of the EU’s rural development policy are increasing the productivity and competitiveness of the agricultural sector while protecting biodiversity, the environment, food safety, animal welfare and rural heritage, improving the quality of life in rural areas, increasing the multi-functionality of agriculture, and creating alternative sources of income and employment in these areas. Rural development programs of the EU are financed by the EAFRD, in a complementary manner to the direct payments and market support policies. In order to benefit from EAFRD assistance, each Member State prepares a seven-year rural development national strategy plan in consultation with the European Commission. If found eligible, the Fund finances up to 4 percent of the total amount for each programme, where the amount of support to rural development, its annual breakdown and the minimum amount to be concentrated in regions eligible under the Convergence Objective14 are determined by the European Council as € 78.46 billion for the period 2007-2013.15 The rural development policy of the EU for the period 2007-2013 is built around three thematic axes, which are: (i) improving the competitiveness of agriculture and forestry; (ii) improving the environment and the countryside by protecting and enhancing natural resources and cultural landscapes; (iii) improving the quality of life in rural areas and diversification of the rural economy through measures created to help develop local infrastructure and human capital in rural areas in order to improve the conditions for growth and job creation in all sectors as well as the diversification of economic activities.16

13. [http://ec.europa.eu/agriculture/rurdev/index_en.htm]. 14. The objective of the action for the least developed Member States and regions according to the Community legislation governing the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion Fund (CF) for the period from 1 January 2007 to 31 December 2013. 15. [http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CONSLEG:2006D0493:20080101:EN:PDF]. 16. [http://ec.europa.eu/agriculture/rurdev/index_en.htm].

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Agricultural Policies in Turkey Characteristics of Agricultural Policies in Turkey From the first years of the formation of the Turkish Republic, governments have aimed to revive and improve the productivity of the agricultural sector, and intervened in this market with several support policies; first on grain, rice and opium, then on tobacco, tea, sugar beet and hazelnuts. However, structural transformation of the sector began after the Marshall Plan, where rapid mechanization created by the aid from the Plan led to a parallel rapid rise in agricultural productivity. Following the Marshall Plan years, in the period of planned economy of the 1960s, investments for further mechanization and irrigation, accompanied by an accelerated consumption of agricultural inputs, increased productivity significantly. However, in the absence of widespread structural reforms especially in land and employment structure, this sudden change led to new problems: the inclusion of modern technology to the sector caused a surplus of agricultural labour while the rising demand for inputs with this modern technology and expensive production techniques increased the cash needs of the farms. Huge differences in power structures on the rural side directly affected access to this new production technology and caused differences in utilization. Above all, paid mechanization in the sector and the increased use of tractors to capacity led to the dismissal of tenants, and farmers with small lands were now obliged to rent their land to wealthy large land owners who owned these tractors, or else lose access to irrigation activities.17 Until the early 1980s, the main agricultural policy concern of the governments was self-sufficiency. This policy aim was achieved by several market intervention and pricing policies, and highly restricted imports of agricultural products. However, after the economic policy shift in the early 1980s, when Turkey shifted from a growth strategy based on import substitution to a market-based and export-oriented approach, the government focused on agricultural policies to maximize the sector’s net contribution to the balance of trade rather than promoting self-sufficiency in food and agriculture. During this period, the price support system changed significantly; the number of supported crops was reduced, and

17. Kuhnen, Frithjof, “The issue of agrarian reform at the current stage of Turkey's socioeconomic development”, Paper presented at the International Congress on Agrarian Reform and Rural Development, Ankara, 1992.

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priorities shifted from traditional to industrial crops.18 In addition, on the foreign trade side, the elimination of export licenses, minimum export prices and monopolies, along with high currency devaluation, encouraged agricultural exports. Finally, a wider range of agricultural imports was permitted, thus providing competition for domestic agricultural products. However, despite export-oriented policies, the rise in agricultural exports did not materialize as expected. Even with the turn toward relatively liberal agricultural policies, Turkish agricultural policies have generally been characterized by heavy government support. Traditionally, support for Turkish agriculture has mainly been channelled through market price support and payments based on input use. Though with a limited use, supply controls have also been used as a support tool in agriculture for crops such as tobacco, hazelnuts and tea. The government has also been involved in the purchasing, processing and marketing of crops (often by supplying financial support to farmer cooperatives), and also in exporting agricultural products. In addition, the Agricultural Bank of Turkey has provided farmers and cooperatives, mostly the market-oriented producers, with interest subsidies.

Agricultural Support As mentioned above, Turkish agriculture has generally been perceived to be characterized by heavy government support. This seems to be true when we look at the 3 percent share of agricultural support in the GDP, compared to 1 percent in OECD and the EU. However, according to the OECD estimates, the support for agriculture in Turkey is lower on perhectare and per-capita basis than in the EU and in the OECD countries on average. For example, producer support per hectare in Turkey is less than one-third of the EU value and total support per capita in Turkey is half the value of the EU and OECD average.

18. Dogruel Fatma, A. Suut Dogruel and Erinc Yeldan, “Macroeconomics of Turkey’s agricultural reforms: an intertemporal computable general equilibrium analysis”, Journal of Policy Modeling, Vol. 25, 2003, pp. 617-637.

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Table 4: Indicators of Agricultural Support in Turkey ($ million) 19861989

19901994

19951999

20002004

2005

2006

2007

2008

Producer Support Estimate

3,383

6,855

7,124

7,823 12,400 10,093 11,736 16,342

Market price support

2,405

5,286

5,061

6,089

9,460

6,305

7,021 11,662

13

140

146

310

800

1,012

1,402

1,508

965

1,428

1,917

282

400

864

1,026

997

Direct income support*

0

0

0

1,041

1,747

1,870

1,255

876

Compensation payments**

0

0

0

0

35

49

1,030

1,297

Payments based on output based on input use

Fertilizer subsidy

323

301

424

41

0

0

0

0

General services support

407

1,118

2,985

2,045

1,715

1,775

610

1,057

R&D Marketing and promo. Consumer Support Estimate Total Support Estimate

55

68

42

30

27

22

29

38

187

718

2,793

1,920

1,548

1,496

517

965

-2,608

-5,253

-4,982

-5,374

-8,800

-6,024

3,789

7,973 10,108

-5,238 -11,586

9,238 14,158 12,306 12,346 17,400

% PSE

17

23

20

20

25

20

19

25

% CSE

-17

-22

-18

-18

-21

-14

-10

-18

GSSE/TSE (%)

10.6

12.9

29.8

30.4

12.1

14.4

4.9

6

R&D/TSE (%)

1.5

0.9

0.5

0.4

0.2

0.2

0.2

0.2

Source: OECD PSE/TSE database, USD conversion author’s calculations, exchange rate data from CentralBank of Turkey. *: production not required; **: production required.

Total Support Estimate (TSE) consists of Producer Support Estimate (PSE), and the General Services Support Estimate (GSSE). PSE, which measures assistance from direct support to agriculture, accounted for around 20 percent of the total gross farm receipts in the last decade. GSSE, includes research and development (R&D), agricultural schools, inspection services, infrastructure, marketing and promotion; the share of GSSE in the TSE has recently decreased from 30 percent average in the first half of the 2000s to 6 percent in 2008. Within this support tool, research and development, important for the sustainability and competitiveness of agriculture, is quite low. R&D support fell from 1.5 percent of the TSE in the late 1980s to 0.2 percent in the late 2000s. R&D support is valued at about $ 38 million. In the EU, on the other hand, R&D support has been over 1 percent of the TSE since the 1980s, which recently increased in share to 1.85 percent. The value of R&D support in the EU has exceeded $ 2 billion recently. Another item supporting agriculture is the Consumer Support Estimate (CSE), which indicates the value of transfers to consumers of agricultural products arising from support policies. When the value is negative, it means that there has been a transfer from consumers, which implies

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implicit taxes on the consumption of agricultural products. In Turkey, the value of the CSE has remained negative and in 2008, this value was recorded at $ – 11.6 million. Percentage CSE, which shows the ratio of the CSE to the total value of consumption, has remained at around 20 percent in the last decade, which is similar to the rate in the EU and the OECD. Table 5 shows the distribution of the producer support in Turkey, revealing that market price support still takes the highest share in producer support. According to the 2008 figures, market price support is 71 percent of the producer support in Turkey. In the EU, on the other hand, the share of market price support in producer support is in a continuous decline; fell from 85 percent in the 1980s to 35 percent in recent years. Table 5: Distribution of Producer Support in Turkey (%) 1986 1989

1990 1994

1995 1999

2000 2004

2005

2006

2007

2008

Market price support

71.1

77.12

71.05

77.83

76.04

62.02

59.82

71.34

Payments based on output

0.37

2.04

2.04

3.97

6.43

11.37

11.95

9.23

Decoupled direct payments

0

0

0

13.31

14.04

17.76

10.70

5.36

Direct payments based on production

0

0

0

0

0.3

0.5

8.8

7.9

28.53

20.84

26.91

3.6

3.21

8.38

8.75

6.10

Payments based on input use

Sources: Author’s calculations from OECD PSE/TSE database

The most radical changes in the distribution of the producer support in Turkey have been in payments based on historical entitlements and on those based on input use. Following the adoption of the direct income support system after 2001, payment based on historical entitlements, an item that did not exist in the 1980s and the 1990s, took a significant share in producer support, reaching 18 percent in 2006, but falling to 5 percent of the producer support with the recent changes in policies mentioned below. Input subsidies, on the other hand, fell significantly. The support system in Turkey in the 1990s mostly focused on price support, according to which it distorted the price signals to the agricultural sector by deviating it from the world trends. Nevertheless support for the elements to the competitiveness of agriculture, such as research and development, agricultural schools, and infrastructure has been ignored. In addition, the support policies pursued in the 1990s were fiscally expensive and unsustainable. These types of interventionist policies on agriculture led to price distortions instead of the desired long-term effect on general competitiveness. Moreover, as mentioned above, the support mainly benefitted larger, wealthier farmers. Shortly thereafter, the support system 218

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failed to enhance productivity growth despite its heavy burden on taxpayers and consumers. According to Erol Cakmak, “Turkey has missed the train by not supporting its agriculture while its competitors did so and by trying to support it while its competitors reached a stage to decrease and force the world to decrease the transfers.”19

Recent Developments in Agricultural Policies In the last decade, agricultural policies of Turkey have been steered primarily by internal and external factors. Internally, the increasing burden on government budget caused by ineffective policies of the 1990s forced Turkey to implement a structural adjustment and stabilization program at the end of 1999. Externally, Turkey had to both harmonize its agricultural policies with the WTO Agreement on Agriculture and make the necessary reforms to bring the sector in line with the Common Agricultural Policy of the EU. These factors inevitably added a new dimension to the reformation of agricultural policies, and the issue of alternative policy tools in agriculture is and will remain as a major item in the agenda of multilateral trade negotiations and hence in the domestic policy debates in the coming years.20 The structural adjustment program was implemented in harmony with the World Bank project, the Agricultural Reform Implementation Project (ARIP) for the period 2001-2007, which … aimed to help the government’s agricultural reform program and focuses on reducing artificial incentives and government subsidies, and substituting a support system that will give agricultural producers and agricultural industry incentives to increase comparative advantage.21

Both the adjustment program in agriculture and the ARIP targeted diminishing heavy involvement of the state in the agricultural sector. The major objectives were to eliminate the ‘trade-distorting’ support policies, (the “Amber Box” measures,) and to decrease the gap between domestic prices and world prices. In addition, the privatization of the state economic enterprises in the agricultural sector and restructuring of the sales cooperatives were pursued. This reform basically intended to increase the

19. Cakmak, Erol, “Evaluation of the past and future agricultural policies of Turkey: are they capable to achieve sustainability?”, Options Méditerranéenne*s, ser.A, No. 52, 2003, p. 4. 20. Cakmak, 2003, p. 8. 21. World Bank, 2003.

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efficiency and competitiveness of the agricultural sector through further liberalization in the sector. The key tool for the new agricultural policy was the introduction of a programme of direct income support. Direct support, which is decoupled from production and based on land size, is considered to be a policy tool that has no distortive effect on trade, production, input use or prices, thus falling into the “Green Box”. In WTO literature, direct income support is intended to provide farmers with a safety net by eliminating the current mechanisms of support. Furthermore, in the CAP of the EU, decoupled direct payments became the primary support tool in agriculture following the recent reforms. Thus, in addition to the WTO requirements, within the process of accession to the EU, Turkey has been obliged to increase the share of decoupled direct payments in its agricultural support structure. Turkey began using direct income support as an agricultural policy tool in 2001, first with 8 percent of producer support, then rose to 15 percent on average until 2007. However, the implementation of direct income support in Turkey was widely criticized, mainly because Turkish agricultural had a different structure and thus different problems than those of the developed countries, as in the EU. The EU had adopted this policy in order to contend with over-production of crop and animal products; the policy aimed at supporting the sector without creating further product surplus. Moreover, the application in Turkey was based on the payments to historical entitlements, in which the declaration of land was sufficient for qualifying for support, with the sole stipulation that that the land not be used for nonagricultural uses, whereas the direct payments system in the EU was directly linked to the rural development policy of the EU, in which payments were contingent upon cross-compliance with rules related to rural and environment conditions. In addition, in the EU, payments based on historical entitlements were less than 1 percent of the producer support before the latest CAP reform came into effect in 2005, with direct payments requiring production for about 30 percent of the producer support. In other words, Turkey, a country that had not made limiting agricultural production a priority, was using decoupled direct income support policy while even the EU was not implementing it. Moreover, land cadastre is still incomplete in Turkey and land property relations are ambiguous. In this sense, direct income support system has been criticized for increasing the dual structure of the sector by decreasing production level, increasing unemployment there. It was observed after 2001 that the majority of the support payments went to large land owners, affecting production and employment in the sector negatively. After this

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system was proven to be insufficient, the government decreased the share of direct payments in agricultural support in 2007 and 2008 and shifted to direct payments that require production, commodity premiums and market price support. Bearing in mind that the EU has shifted its agricultural policy focus to decoupled direct payments, this recent change in the support system of Turkey will no doubt be subject to further discussion within the accession negotiation process. Turkish agriculture is now at a crossroads. On one hand, Turkey needs to ensure a certain level of agricultural production for its large and increasing population in spite of the fact that the support system implemented before the reforms has become unsustainable, costly, and inefficient. On the other hand, Turkey has to fulfil the requirements of the WTO Agreement on Agriculture and bring its agricultural sector in harmony with the CAP, even though both requirements necessitate the use of a decoupled direct income support policy, which has the risk of decreasing production and employment in agriculture and could possibly trigger various socioeconomic problems. The discussions in the coming decade will mainly focus on how the agricultural sector will evolve in the light of new policy tendencies.

Implications of Turkey’s Accession to the EU on the Agricultural Sectors of Turkey and the EU Turkey’s long journey for the EU membership began in 1963 with the Ankara Association Agreement yet it was only, in 2004, the European Council started the calendar of official negotiations, with the requirement to complete 35 chapters,22 with the future full membership of Turkey to the EU not expected to take place before 2015. In 1995, Turkey and the EU signed a Customs Union agreement which covered industrial and processed agricultural goods. As mentioned above, agricultural products remained outside the Customs Union, but over time some agricultural products had become subject to preferential trade agreements. Still, there have been significant tariff barriers in the trade of agricultural products between Turkey and the EU, especially on the Turkish side; with the preferential trade agreements, Turkey has gained tariff-free access to more than 60 percent of its agricultural products, even though it has granted relatively lower preferences on agricultural products. In addition, Turkey 22. The screening on the chapter on agriculture and rural development (Chapter 11) was conducted between December 2005 and January 2006.

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has maintained an import ban on most live animals and animal products. Turkey’s future membership in the EU will lead to full liberalization of agricultural trade with the removal these tariffs and import bans, and the adoption of a common external tariff against third countries. This section aims to discuss the possible consequences of the transformation related to Turkey’s accession process on different aspects of the agricultural sectors of Turkey and the EU.

Agricultural Policies As stated above, since 2001 Turkey’s agricultural policies have heavily relied on the ARIP program, which was harmonious with the requirements of the adoption of the CAP. In this way, although the early experiences of the decoupled direct income support system failed in some aspects and the government consequently decided to remove this system and to link the support to production levels, the requirements of the WTO and the CAP will force the government to introduce decoupled direct payments system again. It is therefore expected that the government will gradually increase its share in the total support to agriculture throughout the negotiation process. Moreover, the on-going reform process in the CAP of the EU and the proposals of the European Commission for the period 2007-2013 state that over time the CAP payments will concentrate largely on decoupled payments and rural development funds.

Agricultural Production In Cakmak and Eruygur’s project prepared for the European Commission23 explores the levels and changes of production volumes for selected agricultural products in the case of Turkey’s accession to the EU in the year 2015. The report shows that the volume of crop production would fall by 6.5 percent in the case of membership, with the most significant falls in production expected to be in corn, with a decline of 41.6 percent, and in wheat, with a decline of 28.3 percent. Industrial crops, especially cotton, are expected to benefit most from the membership, with a 3 percent increase in production volume. The production of pulses is expected to increase by 2 percent, and the production of fruits and nuts is expected to 23. Cakmak, Erol and Ozan Eruygur, “Impacts of EU integration on Turkish Agriculture”, FP6 Project prepared for the European Commission, Project no: SSPE-CT-2004502457, 2006.

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grow by 0.7 percent. The authors have calculated that oil seeds will have the highest production decline in all cases, and that the production of the livestock products will decline by 4.2 percent. On the other hand, according to Oskam and others, EU commodity regimes will also be affected by Turkey’s accession, mainly in fruits, vegetables, tobacco, cotton and sugar beet as Turkey will bring about a considerable increase in EU-based production.24

Agricultural Producers and Consumers Studies conducted on Turkey’s accession to the EU have generally shown that, as a result of reduced tariffs and increased competition, prices are likely to fall in many agricultural products, leading to a drop in the income of producers and a rise in the welfare of consumers. Grethe, for example, shows that as a result of the full liberalization of Turkish agriculture and its inclusion to the customs union, there will be a loss in producers’ surplus and a gain in consumers’ welfare, resulting in a net welfare gain.25 Similarly, Cakmak and Kasnakoglu expect that with the decrease in producer protection and agricultural prices, consumers will gain significantly.26 At this point, we should bear in mind that Turkey has a very high percentage of the population working in agriculture; and that they, and their families constitute a vast percentage of the number of consumers. Thus, the fall in the incomes of agricultural producers carries the risk of a general drop in the welfare of these rural populations. Although a certain amount of this welfare loss in agricultural producers would be compensated for with direct payments, policy makers should focus on alternative precautions against the risk of a direct income support system stemming from the problems in the land ownership structure. It is evident that the flexibility of producer support tools is becoming increasingly limited as a result of WTO commitments and EU accession process. Thus, focusing on rural development policies, mainly through the formation of 24. Oskam, Arie, Natasha Longworth and Irena M. Vilchez, “Consequences for the EU27 Enlargement to Turkey”, in A. Burrell and A. Oskam (eds.), Turkey in the European Union: Implications for Agriculture, Food and Structural Policy, CABI Publishing, UK, 2005. 25. Grethe, Harald*, Effects of Including Agricultural Products in the Customs Union between Turkey and the EU, Peter Lang Publishing, Frankfurt/Main, 2004. 26. Cakmak, Erol and Haluk Kasnakoglu, The impact of EU membership on agriculture in Turkey, paper presented at the Conference on “Euro-Med. Association Agreements and the EU’s New Neighbourhood Policy Vision”, Marseilles, 6 December 2003.

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alternative income sources for agricultural employees in order to offset the fall in the income stemming from agricultural production will become inevitable in Turkey’s case.

Agricultural Trade As an effect of the removal of existing tariffs between Turkey and the EU, in addition to the decrease in Turkey’s agricultural tariffs against third countries as a result of the adoption of the EU’s common external tariff,27 Turkey’s integration into the EU would lead to several changes in the trade situation and the prices of agricultural products. According to Temel,28 the largest price falls in Turkey resulting from reduced tariffs and increased imports will be experienced in the livestock sector, where current prices for meat products, eggs, and butter, are considerably higher in Turkey than in the EU. The study by Eruygur and Cakmak, analysing the trade diversion and creation effects of Turkey’s membership in agricultural trade show that once a member, Turkey’s agricultural imports from the EU will increase significantly.29 Following the inclusion of a significant number of consumers after Turkey’s membership, the EU’s exports of agri-food products to Turkey will increase, especially in grain, beef, and dairy products. Moreover, the EU will benefit from Turkey’s agricultural trade diversion from third countries to the EU. For example, Turkey’s imports of grain and oilseeds are expected to shift from North America to the EU countries.30 The degree and direction of the potential change in Turkish agricultural products are explored in Grethe.31 According to this study, in the case of full liberalization, not only will Turkey’s exports of agricultural products with high levels of comparative advantage, especially of fruits and vegetables, will increase, but also its imports of grain, livestock and meat

27. As shown in Eruygur, Ozan and Erol Cakmak (2005), “Trade Implications of Extending Turkey-EU Customs Union to Agricultural Products”, Paper presented at the Conference of “Middle East and North African Economies: Past Perspectives and Future Challenges”, June 2-4, Brussels, Turkey’s applied agricultural tariffs are higher than the EU’s common external tariffs except for a few products. 28. Temel, Tugrul, “Expected Consequences for Turkey of EU Entry in 2015”, in A. Burrell and A. Oskam (eds.), Turkey in the European Union: Implications for Agriculture, Food and Structural Policy, CABI Publishing, UK, 2005. 29. Eruygur and Cakmak, 2005. 30. Temel 2005, p. 256. 31. Grethe, 2004.

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products and processed food. Overall, it is expected that Turkey will be a net importer of agricultural products in the case of EU accession.

Regulations and Institutions Throughout the negotiation process, one of the most significant changes in the structure of Turkish agriculture will be that of the terms of the reforms of the relevant regulations, legislations and institutions. Currently, the agricultural sector is governed by a very large number of institutions, affiliates to these institutions,32 authorities, and state monopolies for certain products. This complex and heavy legal and administrative structure makes Turkish agricultural sector rigid and difficult to reform. Moreover, regulations concerning different aspects of the sector are usually below the standards set by the EU. Until the date of accession, Turkey must align its institutional framework to the EU, adopting the legislative requirements of the acquis. The EU accession process will speed up the pace of privatization. The privatization programme applied in Turkey mainly targets turning the quasi-governmental sales cooperative unions, which are used to determine support prices, into organizations dedicated to restructuring and privatization.33 However, thus far, “the manner in which privatization has been achieved has not always been transparent or above suspicion of bias”.34 It is evident that some privatization practices in agriculture have led to higher prices for farmers and consumers as well as lower production and employment in the sector. For example, after the privatization of the Milk Industry Board (SEK) in 1995, the number of workers employed in SEK and the annual production level fell drastically.35 Significant progress in the reform of the regulations and institutions will take place in land and water property rights, agricultural research and development, food sanity and quality, environment and sanitary and 32. The main political actors in the agricultural sector are the Ministry of Agriculture and Rural Affairs, State Planning Organization (including the High Planning Council Money-Credit Coordination Council), Undersecretariat for Foreign Trade, Undersecretariat of Treasury, Committee on Restructuring and Support in Agriculture. Affiliated to the Ministry of Agriculture and Rural Affairs are the Turkish Grain Board, Directorate General of Agricultural Enterprises, Meat and Fish Company, Tea Company, Agricultural Credit Cooperatives and Agricultural Development Cooperatives. 33. World Bank, Agricultural Reform Implementation Project, Tranche Release Document Vol. 1, 18 June 2003. 34. Temel, 2005. 35. See Privatization Board of Turkey for further information on practices. SEK example is on: [http://www.oib.gov.tr/program/uygulamalar/seksut1.htm].

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phytosanitary (SPS) issues. Turkey’s adaptation to the EU’s SPS regulations, for example, will be lengthy and require considerable effort. According to Burrell, much institutional change is needed before Turkey can effectively implement the veterinary and phytosanitary acquis of the EU, and moreover, particularly in the animal sector, further time is needed after the acquis is adopted.36 Temel (2005) distinguishes three phases in Turkey’s adoption of the SPS acquis: (i) assessing the appropriate legislation and setting up the required administrative infrastructure and frameworks, (ii) implementation of the regulations, and (iii) convergence of the levels of animal and plant health to the EU levels. Burrell (2005b) points out that Turkey took significant steps with the first phase, but the second and third phases need a long transition period.

Budgetary Implications to the EU Budgetary implications of Turkey’s accession to the EU in terms of agricultural sector, or specifically, the possible CAP cost of Turkey’s accession has been widely examined in various studies. In general, the cost of Turkey to the EU budget is a serious concern for the EU policy makers, and a bulk part of these costs will source from the CAP costs. There are two main aspects of the costs of the accession of Turkish agriculture for the EU budget: pre-accession costs and possible costs after full membership. The pre-accession process of Turkey, as well as the other candidate and potential candidate countries in Western Balkans is supported by the Instrument for Pre-accession Assistance (IPA).37 The IPA consists of five components: Transition Assistance and Institution Building, Cross-Border Cooperation, Regional, Human Resources and Rural Development components.38 As a candidate country, Turkey is eligible for all five of these components and will receive € 2,256 million for them over the period 2007-2010.

36. Burrell, Alison, “Animal and Plant Health in Turkey”, in A. Burrell and A. Oskam (eds.), Turkey in the European Union: Implications for Agriculture, Food and Structural Policy, CABI Publishing, UK, 2005b. 37. From 1 January 2007, the IPA replaced the previous programmes for candidate countries, namely PHARE, SAPARD and ISPA, PHARE Cross-Border Cooperation (CBC) and Coordination, pre-accession financial assistance for Turkey, and the programmes for potential candidate countries, namely CARDS. 38. [http://europa.eu/legislation_summaries/enlargement/ongoing_enlargement/e50020_ en.htm].

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The agricultural and rural development aspects of Turkey’s accession are covered in two important components, which are: (i) Transition Assistance and Institution Building Component, which represents € 947 million (42 percent of total budget) and targets mostly the alignment with the acquis and the building up of administrative capacity by the public sector. Agriculture and rural development is one of the priority sectors of this component. (ii) the Rural Development Component, which represents € 290 million (13 percent of the total budget) and targets mostly the rural areas and private sector in agriculture. The measures of this component concern investments in agricultural holdings, investments in processing and marketing, support for producer groups, preparation for agrienvironment measures, and diversification and development of rural economic activities. In order to acquire the funds related to the rural development component of the IPA, Turkey established the IPARD (Instrument for Pre-Accession Assistance Rural Development) Agency in 2007 and adopted legislation that specified the tasks of the service units and human resources policies of the IPARD Agency. However, as stated in the 2009 Progress Report of Turkey,39 limited efforts regarding recruitment and training of personnel have made thus far. After Turkey joins the EU, the funds to Turkish agriculture from the CAP budget will stem from two pillars of the CAP; first, pillar payments with market and price support, direct income support, and, second, pillar payments of rural development funds. Regarding the first pillar of the CAP, it is evident from recent trends of both European and Turkish agricultural policies that most of the support will come from direct payments. Assuming Turkey adopts the cross compliance rules of the EU associated with fully decoupled direct payments, the budgetary costs of these direct payments will entirely shift to the EU. According to the European Commission, if Turkey becomes a full member in 2015, the cost of the direct income support to it will be € 5.3 billion.40 Grethe calculates the cost of the same component as € 5.2 billion.41 Finally, as Oskam and others show, the cost of the direct payments for Turkey in 2015 is calculated at € 3.4 billion.42

39. [http://ec.europa.eu/enlargement/pdf/key_documents/2009/tr_rapport_2009_en.pdf]. 40. European Commission, Issues arising from Turkey’s membership perspective, SEC (2004) 1202, Brussels, 2004. 41. Grethe, 2004. 42. Oskam et al., 2005. Note: Values in 2004 prices.

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For the second pillar payments, estimating the future costs to the EU budget is more difficult insofar as the payments mainly depend on the proper rural projects and programmes prepared by Turkey. Nevertheless, the European Commission (2004) expects the second pillar cost to be around € 2.3 billion, while Grethe (2004) and Oskam (2005) both expect these costs to be at around € 1.6 billion. In a recent study, Cakmak and Eruygur estimated the total CAP support to Turkey as € 5.9 billion, with € 2.1 billion are paid for compensatory area payments, € 2.3 billion for other crop payments, and € 1.5 billion for livestock products.43 Similarly Grethe estimates the total cost of implementing the CAP in Turkey would be in € 3.5 and 6.3 billion range.44 In short, the integration of Turkish agriculture into the EU will have a certain cost for the EU budget, both during the process of accession and after Turkey’s membership. We should nonetheless bear two facts in mind. First, the CAP has gone through a series of significant reforms in order to reduce the budgetary costs of CAP payments, and further reforms are yet to come. Thus, once Turkey is a full member, the costs of the inclusion of Turkish agriculture to the CAP will be relatively less than the EU’s previous enlargements. Second, while it is true that the structure of Turkish agriculture is different from that of the EU, in terms of institutions, policies and rural problems, Turkey’s membership is not expected before 2015, while Turkish agriculture continues to undergo a transformation process that stemmed from the internal motive of the need to reform the unsustainable policies of the past and the external motives of the WTO Agreement of Agriculture and harmonization with the CAP. Until the date of accession, Turkey is expected to complete this transformation and converge its national agricultural policies to the EU standards. Thus, inclusion of Turkish agriculture to the CAP system would not lead to unbearable budgetary costs for the EU.

Conclusion: Risks and Opportunities With its economic size and social importance, agriculture is a sector of vital importance for Turkey. However, Turkish agriculture has been neglected for a long time and most governments considered agricultural policies a 43. Cakmak and Eruygur, 2006. 44. Grethe, Harald, “The challenge of integrating EU and Turkish agricultural markets and policies”, International Journal of Agricultural Resources, Governance and Ecology, Vol. 6, No. 4/5, 2007.

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tool of populism instead of leaning on long-term structural reforms. The dual structure of Turkish agriculture has deepened in years; the problem in the sharp inequality in the land sizes cannot be resolved. Productivity still remains an enormous problem in Turkish agriculture for many important products, which largely reduces the competitive power of the sector vis-à-vis the EU. The relatively low level of mechanization, lack of infrastructure and investment in agriculture, and insufficient levels of irrigation have emerged as barriers to increasing productivity. Common market arrangements could not be established nor could the problems in organization and marketing in certain areas be resolved. Currently, about one-third of employment in Turkey is in agriculture. The WTO and the EU have suggested that Turkey gradually reduce this rate to around 10 percent in order to achieve a more productive and less costly agricultural sector. However, we should bear in mind that in the current situation of the sector, agriculture is the primary source of income for the rural population, most agricultural workers are uneducated, and the shift of this large number of people from agriculture to other sectors would be extremely difficult. Recent shrinkage in agricultural labour mainly caused rural-to-urban migration; and since it is very challenging for these workers to find jobs in urban areas, it has led to a rise in the number of discouraged workers. Regarding this fact, the process of the EU accession should be very carefully assessed by Turkish policy makers. As explained above, the current trend of the agricultural direct income support regime, imposed by the WTO and also required by the EU, poses certain risks for the sector, but this policy change seems inevitable. In addition, as we have shown, Turkey’s membership to the EU will lead to a fall in producer prices and Turkey will also become a net importer of agricultural goods. The fall in agricultural prices will benefit consumers, but given the large share of population working in agriculture and living in rural areas, the cumulative effect of this fall could lead to a welfare loss. Thus, precautions should be taken in order to avoid deprivation of the masses; within the EU accession process some solutions could be found. What Turkish agriculture needs urgently is a large scale, stabilized rural development policy which aims to increase the competitiveness of economic activities in rural areas, to create alternative employment opportunities in rural areas, and to protect the environment and the rural inheritance. The second pillar of the CAP, rural development programmes, would be a valuable tool for such a reform, thereby minimizing the negative consequences. In the absence of a structural rural reform, an increase in rural unemployment carries the risk

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of creating negative socio-economic consequences in both rural and urban areas. Apart from that, the target of membership to the EU has created a solid anchor for the structural reforms in the agricultural sector. Alignment of the institutional structure of the sector to the acquis requires serious reforms in a wide range of issues such as the reorganization of institutions and legislations, land property, employment, research and education, more integration of agricultural related industries with the farms, sanitary issues in the food industry, veterinary issues, animal welfare and plant health. If Turkey is willing to materialize the EU membership, necessary adjustments in the regulatory framework and implementation should be made as soon as possible. If the necessary steps towards a structural and rural reform, which had been neglected for a long time, could be swept along with the wind of the accession process, Turkish agriculture could derive certain benefits from EU membership. The most important gain is expected on the side of consumers, where decreasing prices in various products and increased food safety and health would be beneficial. On the side of producers, competitive sectors like fruits and vegetables and tobacco will generally gain, while livestock, meat products and grain sectors are likely to experience losses from the project. Throughout the process, Turkish policy makers should determine the fragile points of the sector and prepare solid programmes to benefit from the structural and rural policy funds of the European Union. In this way, full integration into the EU could be transformed into an opportunity for the Turkish agriculture.

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9. The Role of Energy in the EU-Turkey Relations Sema Kalaycıoğlu

Energy is one of the most important security issues in the world today. Dependency on some countries on source countries make many countries vulnerable to the supply of uninterrupted oil, natural gas, and electricity in their struggle to ensure price stability in their markets as well as the smooth flow of economic activity. The security and safety of energy transfer routes are important for the energy-dependent markets of the EU. The recent developments concerning the availability of the Turkish territory for safe energy transfers seem to provide a new opportunity for both the EU and Turkey. Turkey has emerged as a transfer route for oil and natural gas pipelines. This study examines the issues surrounding the gas and oil pipeline projects in which Turkey takes part. The main objective of this study is to discover the role energy plays in EUTurkey relations. Whether or not Turkey’s enhanced strategic position due to the regional energy projects is sufficient for bringing the country to an ever closer relationship with the EU or not is investigated in what follows. The study focuses on the energy needs and primary energy sources of the EU as well as the objectives of the common EU energy policy regarding Trans-European energy networks (TEENs). Turkey’s role in meeting and securing the energy needs of the EU will also be discussed in. To do so, the main energy issues in the EU-Turkey relations, what Turkey means for the EU regarding energy projects, and what the expectations of Turkey from energy corridors, will be examined in the study.

EU Energy Needs With its 27 members, the EU is not terribly poor in energy sources given the production of primary energy sources as well as renewable energy within the EU territories. However, despite the fact that there are producers such as the UK, Italy, Denmark, Germany and Netherlands, which contribute to the energy supply, the EU still displays a high dependency on imported energy in the form of oil and natural gas mainly from Ukraine, Russia and the Middle East. 231

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The EU 27 claim approximately 17 % of the total world energy consumption. The EU constitutes 18 % of the world natural gas consumption.1 It has committed itself to reducing carbon emissions by 20 % and increasing the consumption of energy from renewable sources by 20 % by 2020. However, due to the need for an approximately $ 1.5 trillion investment to achieve these targets, it must still depend on fossil fuels. The financial crisis, which severely slowed down the EU economies, has also made it extremely difficult for national governments to allocate the necessary amounts for low carbon technologies.

Main Suppliers of Energy to the EU Despite the efforts of reducing energy use and increasing cost efficiency, the overall rate of dependency of the EU on foreign energy producers is as high as 70-90 %. Poland (97 %), Germany (97 %) and France (95 %) display the highest dependency on imported energy sources. While the two former countries are dependent on the Russian source, France mainly relies on MENA countries.2 The EU faces the gradual depletion of the North Sea oil and gas resources.3 Aside from Norway,4 which is not an EU member, the main suppliers of energy to the EU are the oil and natural gas producers of the MENA, the Caspian Basin and Central Asian countries, Russia and the Ukraine. Nearly 1/3 of the EU oil imports come from the Russian Federation as do as many from OPEC sources. Approximately 16 % of the EU’s oil requirement is provided by Norway, and 5-6 % by Kazakhstan, while the remaining needs are met by other oil producing countries. With the exception of Norway, the EU’s main energy providers are almost always exposed to regional and/or sub-regional conflicts between themselves and/or with their immediate neighbours. Furthermore, Russia 1. 2.

3.

4.

“The European Union’s Energy Challenges” (January 30, 2008), CRC Report for Congress, [http://www.fas.org/sgp/crs/row/RL33636.pdf]. Geden, O, Marcelis,C, Maurer, A.(2006), Perspectives for the European Union’s External Energy Policy:Ideas and Interests in Germany, the UK and France, SWP Working Paper, FG1, Berlin, p. 6, [http://www.swp-berlin.org/fileadmin/contents/ products/arbeitspapiere/External_KS_Energy_Policy__Dez_OG_.pdf]. “EU-Turkey relations in the field of energy” (20.4.2006), Directorate General External Policies of the Union, European Parliament, [http:// www.europarl.europa.eu/meetdocs/2004_2009/documents/fd/d-tr20060425_06/dtr20060425_06en.pdf]. Norway is a Schengen and a European Economic Area (EEA) country.

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has been playing a manipulative game with the EU or with EU members such as Germany on a bilateral basis on energy transfer and trade since 2005.5 The frequent disputes between Russia, Ukraine and Belarus have also generated undesirable consequences for the EU dependence on the Russian sources and threatened EU energy security. Thus, the continuity of an uninterrupted energy supply is at the mercy of unstable, unpredictable, and authoritarian political figures or policymakers of source countries.

Trans-European Energy Networks (TEENs) as an Objective of the EU The EU has been increasingly linked to the oil and natural gas pipeline networks in order to meet its growing energy needs. The natural gas pipelines connect the supply sources to consumption destinations. The following are the existing, operating, and projected pipeline systems in this order: The Baku-Tbilisi-Ceyhan (BTC or the Trans Caspian Pipelines), the Blue Stream (BS I and BS II), the Nord Stream, the South Stream (SS), the Nabucco (or the Southern Corridor), and the Northern Continental pipelines. Others are as follows:6 앫 UK-Northern Continental Europe, Netherlands, Belgium, Denmark, Sweden, Germany-Poland, Lithuania, Latvia, Estonia, FinlandNorthern Trans Gas and Yamal, natural gas pipeline linking Denmark, Germany, Sweden. There is an increase in the transmission capacity on the Germany-Belgium-UK axis. 앫 Algeria-Spain-Italy France Northern continental Europe; AlgeriaTunisia-Italy; Algeria-Italy (via Sardinia, Corsica and a branch to France) 앫 The East and the West Middle East (Med Gas) pipelines: Algeria-SpainFrance, Continental Europe; East Mediterranean Gas Ring Libya-EgyptJordan-Syria-Turkey; 앫 Extension of Trans Caspian Gas line, Turkey-Greece-Italy; TurkeyAustria-Greece; Slovenia-Austria (Via Western Balkans)

5. 6.

“The European Union’s Energy Challenges” (January 30, 2008), CRC Reoprt for Congress, [http://www.fas.org/sgp/crs/row/RL33636.pdf]. “Trans-European Energy Networks ('TEENS)” (December 30, 2008) The International Network for Sustainable Energy, [http://www.inforse.org/europe/euten-e.html].

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The EU common energy policy7 aims to transform the EU territories into a low-energy economy8 by ensuring cheap, high quality, and uninterrupted energy sources to consumers. While at the same time aiming to increase energy self-sufficiency through the diversification of energy sources, the common policy also aims to make TEENs operational for oil, natural gas, electricity and even for transferrable renewable energy.9 This objective particularly requires the full political, economic and technological commitments of national governments. However, at times of severe economic downturns each member tends to emphasize its own national priorities, preferring bilateral relations with source countries to supranational objectives. In addition to systems which mainly connect the EU members to one another, systems that connect the EU with the non-EU territories are strategically important for the EU. Turkey is located in the centre of such systems, which connect the Caspian, the Eastern Mediterranean and the Balkans to the EU territories. Those systems therefore either include or plan to include Turkey in the TEENs. Turkey as a transit country may offer alternative pipeline belts and regional electricity grids to the EU. However, the question of whether it offers energy security to the EU area is the object of the inquiry of the following section.

7.

8. 9.

The concept of having a mandatory and comprehensive energy policy was approved at the meeting of the European Council October 27, 2005 in London. The EU has an ambitious energy policy framework, which covers issues of energy sources from fossil fuels (oil, gas and coal) to nuclear and renewable energy (solar, wind, biomass, geothermal, hydro-electric and tidal), energy security and safety. It aims to increase energy effiency in production, consumption, and transportation, and enforce energy conservation. It also aspires to ensuring the highest safety standards for nuclear energy, and the safe disposal of radioactive waste, to increase the share of renewable energy sources in consumption (to create a reliable single natural gas market),to reduce greenhouse gas emissions and comply with the Kyoto protocol targets in the reduction of greenhouse gases.The EU umbrella is binding for every member for a regional commitment to clean energy acts and to having a set target to increase the usage of renewable energy sources by 20 % and reduce carbon emmissions by 20 % in 2020. “European strategies EU’s various energy-related strategies”, European Commission [http://ec.europa.eu/energy/strategies/index_en.htm]. “The EU and Energy Security”(November 2009), eufocus, European Union Delegation to the US. Unless member countries make joint investments large enough to produce renewables to substitute increasingly of the imported energy.

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Energy Issues in the EU-Turkey Relations Energy issues have two separate but interrelated dimensions in EU-Turkey relations. The first dimension concerns where Turkey stands with respect to meeting the increasing energy needs of the EU; the second dimension relates to Turkey as a prospective member who is assumed to comply with the common energy policy of the Union and become a part of the single European energy market. As a non-member, Turkey, with its energy pipelines, connecting routes and grid systems, is connected to the EU in terms of energy economics and energy trade. With energy economics and trade, ruled by rationality, the relationship involves energy extraction, infrastructure, transport and trade investment and finance. At bilateral and regional levels, financial institutions and companies of both the EU member states and Turkey follow the same set of objectives of maximizing economic gains and benefits, and securing the continuity of energy supply. Because of its strategic location between main energy suppliers and the EU markets, Turkey may offer opportunities for regional cooperation in energy sectors and energy trade if it becomes more than just a transit country, playing the role of an energy hub or a key player at the very least.

Turkey: Energy Hub or Key Player Since 2005, Turkey has seemingly emerged as a quasi-energy hub, with the completion of the BTC oil pipeline, transferring the Caspian oil to the Western markets. In 2005, the BS natural gas pipeline also began operations.10 Both the BTC and the BS 1 and BS 2 offer alternative routes to meet the energy needs of Western markets. However, the Russia -Georgia conflict of 2008, and the perpetual disputes between Russia and Ukraine over gas, have fuelled the debate of the European Energy Security beyond issues concerning the BS projects. This is the time when Turkey started to show increasing interest in consolidating its strategic position, turning itself into a pivotal power that would offer energy and wider security for the Eurasian land mass, and benefit politically and economically from its role as a transit country. For this purpose Turkey started to make political, technological and economic commitments to energy projects. 10. The BS transfers natural gas from Russia to Turkey. The gas flow actually first started in 2003 but stopped over price disputes until 2005. The BS is expected to be fully operable in 2010.

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Turkey’s role as an energy hub may only be consolidated if the volume of oil and gas transit through the country continues to grow. In an area of extreme political volatility, with intensive competition over massive reserves of oil and gas, this is not an easy game to play. However, Turkey contends that it can culturally and economically connect peoples of the region, influence them politically, and guarantee the uninterrupted flow of oil and gas to the EU territories. However, to bring clarity to its prospective role, we need examine how Turkey is viewed by the EU and Russia, and what Turkey’s expectations of the energy projects are.

Perceptions of Turkey’s Role Although Turkey’s contributions to the BS and the BTC has received recognition in EU circles, the EU does not have a unified view on the role Turkey is likely to play in the establishment of the South East Europe Regional Energy Markets. Moreover, it does not possess a clear perspective on Turkey’s role as an energy hub nor as a transit country which could secure an uninterrupted flow of gas and oil to the EU markets. Despite the efforts of a single energy market and the common energy policy and, due to the financial crisis, member states follow their own energy policies and their relations with non-member source countries on a bilateral basis. It is therefore not unusual to see each individual member possess its own particular view of the role Turkey plays, or aspires to play, on energy issues as a hub or transit country. Moreover, member country views may vary according to their interests in a particular project. Some of the stronger views are reflected in the EU agenda and shape the EU view of projects, if not the EU’s overall view of Turkey. One of the most interesting opinions of the EU, dating back to March 2009, actually eliminated the Nabucco pipeline,11 which aimed to decrease the EU's dependence on Russian imports, from a list of projects to be financed by a five-billion euro EU stimulus plan. The view was officially declared12 and although it did not 11. The Nabucco project is worth 7.9 billion euros and will deliver Azerbaijani and Central Asian gas to the EU by 2014. The pipeline's construction is expected to begin in 2011. Its maximum capacity will be 31 billion cubic meters per year. Nabucco shareholders are the Austrian OMV, Hungarian MOL, Bulgarian Bulgargaz, Romanian Transgaz, Turkish Botas and German RWE with 16.7 percent each. See, “GDF Suez may bring extra gas to Nabucco” [http://en.trend.az/capital/pengineering/1576884.html]. 12. “Nabucco removed from EU energy project list” (17 March 2009). [http://www.euractiv.com/en/priorities/nabucco-removed-eu-energy-project-list/ article-180336]

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explicitly take a stand against Turkey, the new EU approach undermined Turkey’s role as an energy hub and transit country by leaving the construction of the Nabucco to the decision of the member states who favoured it.13 The name of the project was subsequently changed to the “Southern Corridor Project”. However, despite the opposition of Germany, EU countries on a bilateral basis maintained their avid interest in the project and therefore signed it into law as the Nabucco project on July 13, 2009.14 However, private finance was favoured over public allocations for the project. Business circles in France urged the government of President Nicolas Sarkozy to crack the iceberg between France and Turkey in order to ensure the participation of French companies in pipeline constructions.15 Turkey has thus played a key role in the pipeline projects. Countries taking part in energy projects now favour Turkey’s role as an energy hub. There is a generally positive view of Turkey’s contribution to the energy projects. However, in response to the EU’s dismissal of the Nabucco project from its stimulus package, Turkey became a signatory to the highly controversial SS project, which openly challenged the Nabucco or the Southern Corridor projects, favoured by the EU. Although the Southern Corridor project of the EU did not include the Gazprom-favoured SS, Turkey’s participation in the SS did not attract any criticism from the EU either. On the contrary, France16 and Italy immediately followed Turkey and signed agreements with Russia to participate in the SS, too. This may be due to the fading faith of individual counties in the Southern Corridor.

13. The decision reflects the request of Germany which opposes to any public spending on Nabucco. The opposition of Germany is not necessarily against Turkey but to the project itself, in which Germany plays no part. There is still no consensus among members over whether Nabucco will be re included in the EU energy stimulus package or not. 14. The agreement was signed in Ankara to connect the Caspian region, Middle East and Egypt via Turkey, Bulgaria, Romania, and Hungary with Austria and further on with the Central and Western European gas markets. 15. Benmayor, Gila(11 Ocober 2009), “Sarkozy Gönülsüz ama İşin Ucunda Nükleer ve Nabucco var”, Hürriyet also French companies were not able to join the project in 2008. Turkey vetoed the French participation in Nabucco due to France’s contrasting views on "Armenian Genocide" and France's position on Turkey joining the EU. See “GDF Suez may bring extra gas to Nabucco” (10.11.09) “http://en.trend.az/capital/ pengineering/1576884.html 16. “French firm to join Nabucco rival project” (September 15,2009), Hürriyet Daily news, [http://www.hurriyetdailynews.com/n.php?n=french-firm-to-join-nabuccorival-project-2009-09-15].

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Turkey may indeed become a key player in the pipeline projects if it overcomes various challenges. It may contribute to the steady flow of natural gas from the Caspian basin, if it can help settle the Caspian seabed17 issue among the Caspian littoral states,18 realign Iran to alternative projects,19 and make sure that Azerbaijan is not alienated because of the potential improvement in the Turkish–Armenian relations without having settled the Nagorno-Karabakh problem. To ensure energy security through alternative TEENs, Turkey must therefore respond to an overwhelming number of conditions. The potential for overt or disguised disputes has always existed in the Caspian-Trans Caucasus and the Central Asia regions. There is no sign of any comprehensive settlement on the Caspian Seabed issue. Iran has shown increasing interest in collaboration with Turkey on energy issues. However, general distrust of Iran continues in the West. Concerning Azerbaijan, Turkey created its own problem of confidence with that country during the planning stages of Nabucco. It is, moreover, important at this point to recall Azerbaijan’s reaction to the Armenian opening of Turkey during the summer of 2009. Having been particularly displeased by the Turkish-Armenian rapprochement, Azerbaijan signed a deal in June 2009 to sell natural gas to Russia. By doing so, Azerbaijan implied that it would constitute a potential impediment to the Nabucco project. Any possibility of reduction in the gas supply without an alternative source to replace it is likely to cripple the prospects of the Nabucco in any case. Azerbaijan’s action has been a manifestation of one of the unavoidable regional political dynamics in the Caspian basin and serious enough an example to lower expectations about Turkey’s role as a country capable of ensuring the EU’s energy security. On the other hand, Turkey has always been expected to play a constructive role in the Euro-Med Energy Cooperation and to be part of an integrated market. Unless unforeseen political and violent events occur, Turkey is

17. The problem has been argued over by the Caspian littoral states – Russia, Iran, Kazakhstan, Azerbaijan, and Turkmenistan – ever since the fall of the USSR. See “The integration and the division of the Caspian Sea” (April 20, 2009), CU Issue 30, [http:/ /cria-online.org/CU_-_file_-_article_-_sid_-_35.html]. 18. Supplementary Turkmen gas is essential for the Nabucco or the Southern Corridor to be a feasible project and currently Turkmenistan’s only export venue is through Russia, and unless connecting pipelines between Uzbekistan-Kazakhstan and Turkmenistan (which will connect to China) are completed with the suspended Caspian Sea bed agreement settled, the future of Nabucco or the Southern Corridor is uncertain. However with Russia being part of it, the SS may easily be realized and utilize the Turkmen and the Caspian gas. 19. Iran’s participation is questionable because of its ongoing conflict with the USA.

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most likely to fulfil what is expected of it in the Euro-Med projects, still appearing as a key player and/or as a contributor to all prospective or existing projects. However, even under normal circumstances, the contribution of the Middle East as a supplier to the oil and natural gas projects depends at the very least upon the upgrading of pipeline infrastructures.

Turkey’s Expectations of Energy Corridors Turkey’s political expectations of energy corridors are higher than its economic ones. Turkey hopes to increase its political role through energy corridors in both the region and in the world. However, some consider the empowerment of Turkey to be as dangerous as the empowerment of any other transit gas country. Such views contend: “if Turkey’s own energy needs are not properly met a bottleneck would inevitably leave Europe at the mercy of Turkey’s political whims”.20 Pipeline projects in the region constitute overt challenges to the Russian dominance over a land mass which had been politically under Soviet control until the 1990s. Russia has therefore made strong attempts to undermine any project that is likely to challenge its role in and around the Caucasus and Balkans.21 Turkey does not necessarily intend to challenge Russia’s political clout over regional countries but rather balance it. Nevertheless, Russia has frequently warned Turkey not to use energy in its EU relations.22

20. Ram, Vidya ( 1 September, 2009), “Out of the Frying Pan Into Turkey- Empowering Turkey could be just as dangereous an energy decision for Europe”, [http://www.forbes.com/2009/01/09/nabucco-ukraine-update-markets-equitycx_vr_0108markets29.html]. 21. To prove this point Russia made two attempts: 1. It signed a deal with Azerbaijan in June 2009 to buy gas from that country so as to reduce the gas supply to Nabucco; 2. In August 2009 it made an agreement with Turkey for the SS project, which challenged Nabucco. With the agreement, Turkey grants access to Russia through the Turkish Black Sea territorial waters. The SS cuts the Ukrainian part of gas transit, and it also bypasses Turkey, and, despite the Turkish claims to the contrary, the SS is not complementary but a rival to Nabucco 22. “Putin may warn Turkey not to rely on energy in its EU relations” (5August 2009), [http://www.todayszaman.com/news-183047-putin-may-warn-turkey-not-to-rely-onenergy-in-its-eu-relations.html].

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Others contend that Turkey is playing a double political game with the EU by simultaneously promoting the SS and undermining the Nabucco.23 In fact, while planning for Nabucco, Turkey concomitantly took a major step towards granting access to Russia’s SS gas pipeline through the Turkish maritime economic area of the Black Sea, even though the SS also bypasses Turkey.24 This may indicate its increasing political and economic expectations of Russia. Both Russia and Turkey claim that the SS does not constitute any rivalry to the Nabucco. However, the Nabucco was designed to bypass Russian energy dominance over natural gas supply by allowing the access of the Caspian natural gas to the EU market without Russian intervention, whereas the SS mainly depends on the Russian gas going under the Black Sea to reach the shores of Italy through Bulgaria. This is another sign of Turkey’s preference of Russia over the EU. However, Turkey’s manoeuvres to reduce its political role as a key player in the region and uncertainties over clouding pipelines further undermine its role as an energy hub. Nevertheless, Turkey has received greater international and regional political recognition due to its energy projects, and the Turkish government has gained far stronger leverage over regional governments and domestic, regional and international business firms than ever before, given that it now has the ultimate say on who to grant tenders to. In signing deals with Russia, Iran, Italy or any other country the highly pragmatic AKP government has been in the global agenda more frequently than before and used this position to help consolidate its role in domestic politics. Although secondary to the political expectations, economic gains also matter. Turkey does indeed aim primarily to ensure its growing national energy needs through energy projects. It furthermore anticipates benefitting from the large scale economic activities the projects would generate. Energy projects are venues for sectoral cooperation and partnerships for regional countries, generating positive externalities in terms of economies of scale, and minimizing energy transport costs. Joint ventures investments in energy infrastructure, which are required for projects, offer tremendous economic, technological and financial opportunities for Turkish, European and other regional construction companies, material providers, engineering and geological survey services,

23. “Turkey plays double game on EU energy security (7.0.2009), [http:// www.euobserver.com]. 24. Ibid.

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domestic and international banks and credit corporations, and employment opportunities for both skilled and unskilled workers. Turkey has considered the role of an energy hub to be an opportunity to enhance its relations with the EU, and to become a member to the European Energy Community (EEC).25 It is interesting to observe that unlike its accession negotiations for an EU membership, its membership negotiations for the EEC, launched in September 2009, have been advancing smoothly. The first round of negotiations was devoted to the screening of the reforms Turkey had thus far made in the energy sectors, and especially in its reforms concerning the electricity markets. The odds seem to be surprisingly on Turkey’s side for EEC membership, as the EU energy commissioner spoke favourably about the enormous challenges Turkey had faced in energy sectors and reforms the country has so far carried out.26 However, as Turkey moves swiftly towards EEC membership, the answer to the question of what kind of role would it play in the EEC when it does become a member has yet to be determined. Why Turkey’s policymakers want Turkey to become a member of another supranational EU entity27 without having a role granted to it in the decision-making process also remains unclear. If Turkey’s membership to the EU were to be ultimately guaranteed, then becoming a member of the EEC might facilitate the process of harmonization and convergence to the common energy policy and its requirements. This includes Turkey’s linking itself to the as yet incomplete European internal electricity markets, adapting to the Environmental Acquis for cooperation in clean technologies and energy efficiency, and opening its energy markets to competition. Turkey might then become a member to the EEC sometime in the early months of the 2010. However, it is obvious Turkey’s ultimate objective is not simply to become a member of the EEC alone. Nevertheless, Turkey is fully aware of the fact that the power it would gain by being at the crossroads of energy routes does not necessarily mean easy approval of its membership to the 25. The treaty of the Energy Community, also known as Energy Community South East Europe Treaty-ECSEE was signed in Athens in 2005 and entered into force in July 2006. The treaty covers electicity, natural gas and oil sectors. It aims to enforce single market regulations regarding energy and relevant issues like environment and competition. With Moldova, Norway and Ukraine, Turkey joined the Energy Community as an observer in 2006 and has been trying to become a member to the EEC since then. 26. “Turkey and European Union have started negotiations on Thursday for Turkey’s accession to the Energy Community” (12 September 2009), Today’s Zaman. 27. Turkey has been a member of the European customs union since 1996.

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EU. It may not even help the country to open and successfully close the energy chapter in the EU-Turkey membership negotiations.

Energy Issues on Turkey’s EU Membership Path Turkey’s membership prospects for the EU are by no means clear, and its hopes of becoming a member seem to fade with each new declaration from a different EU source,28 whether or not it becomes an energy hub. If it winds up partaking in the EEC, without becoming an EU member, then Turkey will have to comply with common rules and market conditions without actually participating in the decision-making process. Theoretically, this includes its relations with the source countries as well. However, if EU membership is not even guaranteed at the end of the road then its relations with source countries must continue on a bilateral basis determined by Turkey’s national interests and priorities. At this point, the objective of EEC membership for Turkey becomes incomprehensible. That is why Turkey has tried to consolidate its relations with regional energy suppliers while pursuing membership negotiations for the EEC. By signing the SS project partnership, Turkey has shown a clear preference for a partnership with Russia in energy projects. It has furthermore surrendered its ambitions of being an energy hub by leaving very little room for the Central Asian gas providers to reduce the Russian hegemony over the pipelines. Turkey has strengthened the Russian domination of the Ukraine and may even continue to promote the Azerbaijan-Russia cooperation at the expense of that with Georgia. In return, Turkey has guaranteed a long list of projects waiting for implementation: an oil pipeline from Samsun to Ceyhan, and at least one nuclear power plant in the country. Turkey’s effort to play a safe game with Russia reflects its diminishing hopes of diversifying energy sources without the Russian patronage over energy pipelines. The future of the Nabucco project has been made uncertain because of the SS. However the Turkish government contends that having a hand in both the SS and the Nabucco strengthens its dealings with the EU in general.29 The Turkish government thus continues its energy diplomacy game with 28. Rompuy, Van (18.11.2009), “Turkey will never be part of Europe”, [http:// euobserver.com/9/29016]. 29. “Putin may warn Turkey not to rely on energy in its EU relations”(5.08.2009) [http://www.todayszaman.com/news-183047-putin-may-warn-turkey-not-to-rely-onenergy-in-its-eu-relations.html].

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regional countries in general and with Iran in particular. However, it is uncertain whether this strategy will provide mediation or assistance between Iran and EU countries, given the extent to which US-Iranian relations overshadow this situation. The second issue regarding Turkey’s EEC membership is related to whether or not Turkey is technologically, economically, and socially ready for the low-carbon energy strategies of the EU. As a prospective member to both EEC and the EU, Turkey must comply with the EU energy standards, which also relate energy to the environment. Turkey has been forming the legal and institutional framework for environmentally friendly energy strategies for over a decade since the early 1990s and may also possess the necessary technological endowment. However, it is not yet economically and, even more importantly, sociologically ready to adapt to the low carbon energy strategies of the EU.30 In order to comply with the 20-20-20 strategies of the EU, Turkey included the Environmental Acquis in its EU reform agenda. Nevertheless, Turkey is not likely to meet the EU standards by the designated date for economic and social reasons. Therefore, from the perspective of membership, environment friendly energy issues will continue to have rough edges in EU-Turkey relations.

Conclusion At supranational levels, the EU has failed to provide solution to its energy puzzle even with the presence of the European Economic Community (EEC). This is because national governments prefer bilateral relations with source countries in meeting their growing energy needs. Despite the established targets it does not seem plausible for EU members to replace their gas and oil consumption with renewable energy sources given the capacity building and investment requirements of the near future. Therefore, the primary objective of the EU is the diversification of TEENs to reduce dependence on a single source. Although the TEEN projects appear financially feasible, there are still differences of opinion in this matter. For example, Germany is opposed to committing funding through public means of the alternative energy projects, while other member states promote their national private investors. The EU supranational authority has thus failed to take common action in the construction of alternative TEENs. One project, removed from the list of the EU stimulus packages in March 2009 and renamed as the Southern 30. Turkey signed and ratified the Kyoto protocol in 2008.

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Corridor was eventually signed as the Nabucco project with the participation of Turkey, Azerbaijan and some Middle East partners in July 2009. In this way, Turkey has appeared at the epicentre of another European energy transit route, and has become a transit corridor between the source countries of the Caspian Sea, Central Asia, and the Middle East, a moved which has augmented the strategic importance of the Turkish land mass and territorial waters. Its potential for being an energy hub or at least a key player have already been proven by the BTC. However, its reliability to function as a hub depends on the willingness of the source countries to ensure the uninterrupted supply of gas and oil to the projected pipelines. Turkey may indeed become vitally important for both Western markets and the energy suppliers if it can respond to the multiple complicated political parameters of the region. Unless Azerbaijan is aligned to the above-mentioned projects, without giving up on the Armenia-Turkey rapprochement, Turkey may fail to play a role beyond that being a mere transit route. It is beyond Turkey’s control to resolve the Caspian seabed problems and ensure the safe and reliable transfer of Turkmen or Kazakh gas to the pipelines of the southern corridor. However, Turkey may still gain the confidence of the Iranian regime even if it is not up to Turkey to involve Iran in the project either. In the meantime, other European countries have frequently expressed anxiety over the possibility of Russia turning the tap off. Unless the EU supports Turkey economically and politically, Turkey simply cannot risk jeopardizing its relations with Russia as one of its main energy suppliers by either ignoring the Russian presence in the region or through bypassing the Russian interests in energy politics and economics entirely. Fully aware of all these facts, Turkey has been playing a double policy game in order to remain on the safe side, and thus become a signatory to both of the rival projects of the Nabucco and the SS. Regarding the diversification of supply routes of the EU, it seems logical to promote projects such as the South Stream gas pipeline (which crosses through Turkey, Greece, and Italy) simultaneously with the Nabucco project, as long as the supply sources are guaranteed for both. If it becomes possible for Turkey to improve its political cooperation with Iran and Uzbekistan, its double game is likely to reach its goal even if the SS bypasses Turkey. With uncertainties concerning energy suppliers, Europe may find itself dependent on Turkey as a transit country if not as an energy hub. However, this may not necessarily facilitate Turkey’s prospects for an early entry into the EU, a fact it is fully aware of. Turkey may become a member of the European Energy Community by 2012. Whether or not Turkey will be

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content with the membership to the EEC remains unclear. The role Turkey would play in the Community is also uncertain. Furthermore, Turkey’s obligations to the Community may outweigh the benefits that the country might accrue from membership in the EEC. It is my contention that despite the significance of its energy projects, Turkey possesses limited leverage over the source countries of the Caspian and the Central Asian regions to provide uninterrupted energy supply to Europe, unless it cooperates with Russia. Turkey may only use energy projects to improve its relations with the EU insofar as the latter allows Turkey to do so. It definitely cannot use its role as a transit or a hub country for an easier entry to the EU since the negotiation process has become extremely complicated with eight negotiation chapters being suspended by the EU, five chapters being obstructed by France, and six chapters most likely to be blocked by the Republic of Cyprus. Turkey had expected its strategic position to have helped open a long delayed and problematic energy chapter in the membership negotiations. However, the energy chapter is just one among six, all of which are likely to be blocked by the Republic of Cyprus.31 Thus, in reality energy corridors only mean regionalsectoral cooperation with other countries for Turkey and a guarantee of fulfilling its own energy needs. In the meantime, energy corridors and what they offer are only venues for promoting international ties for the Turkish government to consolidate its political power domestically and enhance its leverage over tenders rather than any strategic venue for strengthening EUTurkish relations.

31. “Rumların vetosundan sonra açılabilecek sadece 5 başlık var”(9.12.2009), [http://www.abhaber.com/ozelhaber.php?id=4944].

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10. EU-Turkey Negotiations on Information Society and Media Andrea Renda, Selen Sarisoy Guerin & Emrah Arbak

With 70 million inhabitants and a sizeable youth population, Turkey’s telecommunications sector represents an immense prospect for assisting the country’s growth in the years to come. In earlier studies,1 scholars have observed that modernising Turkey’s telecommunications sector could lower prices, thereby enhancing consumer welfare, while at the same time boosting innovation. In particular, it is estimated that when all the interindustry linkages are accounted for, Turkey’s alignment with the EU acquis could lower prices by one-third and improve the country’s annual GDP growth by 0.4 %.2 In this chapter, we focus on the key areas in which further policy action is needed in Turkey’s telecommunications sector, assessing the current stateof-play and paying close attention to the ongoing negotiations with the EU in the context of Chapter 10, on information society and media, which was opened in late 2008. In its common position of 18 December 2008, the European Commission set several benchmarks, which serve to complement the provisions already establishedin the Additional Protocol to the Association Agreement. These benchmarks range from a broader aligment of the legislation with the acquis to more specific requirements for safeguarding against operators with market power, ensuring effective enforcement of laws and enhancing independence of the competent 1.

2.

See Burnham, J.L. (2006), Telecommunications Policy in Turkey: Restructuring for Economic Growth, European Studies Center University of Pittsburgh, Policy Paper # 11, November; Akdemir, E., E. Basci and S. Togan (2007), "Telecommunications Policy Reform in Turkey", World Economy, Vol. 30, # 7, pp. 1114-1138; Atiyas, I. and A. Renda (2007), “Telecommunications”, in S. Ulgen (Ed.), Second Generation Structural Reforms, CEPS-EDAM, November; and, Renda, A., S. Guerin and E. Arbak (2009), EU-Turkey Accession Negotiations: Impact assessment of Chapter 10 on information society and media, Centre for European Policies (CEPS) Special Report, July. The estimate is from Akdemir, E., E. Basci and S. Togan (2007), "Telecommunications Policy Reform in Turkey", World Economy, Vol. 30, # 7, pp. 1114-1138.

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regulatory bodies. At the same time, Turkey has been in the process of implementing a new law on electronic communications, which addresses only some of these issues. The chapter highlights any shortcomings in details, paying close attention to the regulatory and strategic options available to the Turkish government. In the following sections, we explore the current state of the development of the Turkish telecoms market, specific reference to its regulatory framework. We then comment on the best strategy for Turkey’s alignment with the EU acquis, emphasizing the benchmarks. Section 3 looks briefly at the regulatory options available in the audiovisual services sector, and Section 4 provides a conclusion.

Turkey’s Telecom Market and Regulations The key features of Turkey’s e-communications market include: 앫 Low fixed-line penetration: The penetration rate for the classical fixedline phone networks is low at 23.7 lines per 100 inhabitants in 2008 compared with the EU-27 average of 40. Moreover, the rates have been decreasing over the last few years. 앫 Market power of incumbent: The fixed-line incumbent, Türk Telekomunikasyon A.Ş. (hereafter, “Türk Telekom”), has a monopoly over the fixed-line local calls, cable TV and internet services. Even when long-distance calls are factored in, the incumbent’s market share in the fixed-line phone market remains at 81 % in terms of retail revenue and 91 % in minutes of telephone traffic.3 앫 Growing mobile penetration and competition. In turn, the total number of mobile subscribers has reached 63.6 million, corresponding to a penetration ratio of 90 % in 2008 – up from 60 % in 2005. These figures indicate a quick convergence with the EU-27 averages, where mobile penetration stood at 119 %. 앫 Internet penetration slowly increasing. The number of internet subscribers has increased from 14.2 in 2005 to 34.7 percent in 2008. Nevertheless, broadband penetration remains below the EU-27 standards. Service-based and infrastructure-based competition has been very limited to date, mostly because Türk Telekom also owns the country’s sole and mostly under-developed cable infrastructure. 3.

In 2007, there were 32 operators using carrier selection CS/CPS calls licensed under Type 2 licenses providing long distance services but local call services are provided by the incumbent, Türk Telekomunikasyon A.Ş. (hereinafter, “Türk Telekom” or TT). Among long distance service providers, none provides cable TV services.

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앫 In terms of prices, the figures provided by the regulator can be compared to the figures summarized in the 14th Report on the Implementation of the Telecommunications Regulatory Package – 2008, published by the European Commission on 24 March 2009.4 앫 In narrowband voice services, the reference rates determined by regulators would put the country above EU averages and close to average rates in Poland. A number of services are also virtually nonexistent, including the capacity-based interconnectivity offer, alternative providers (other than the incumbent) that offer telephone services, wholesale line rental (WLR), etc. The extent of local loop unbundling (LLU) is extremely meagre, with only 75 fixed lines on the basis of LLU. While these point to deficiencies, a number of providers provide voice-over-broadband (VoB) services for long-distance services. Moreover, the value of services provided to residential and business customers is relatively high, with the retail price basket falling among the lowest-third of the distribution, leading to a high score. 앫 The mobile market, which is more competitive, scores slightly better than other markets. In particular, the rates for fixed to mobile termination charges (5 cent/min) are among the lowest in the survey. In other measures, the country’s mobile market fares worse than other countries included in the survey. In particular, the market is relatively concentrated, with one company accounting for about two-thirds of revenues and more than half of all subscribers. Moreover, the mobile retail services remain relatively expensive. Until 2009, no Mobile Virtual Network Operators (MVNOs) were authorized to provide their services through incumbents’ networks, which could have hampered competition in this sector. 앫 In business services, the country has no Partial Private Circuit (PPC), which prohibits access to a variety of wholesale cost-saving opportunities. Due to the unavailability of wholesale services, the pricing of leased lines is quite high when compared with EU member states. 앫 Lastly, in broadband services, the country fares quite badly, mostly due to the entry barriers. The key issues include (i) the low number of unbundled loops; (ii) an under-developed network system due to the unavailability of fibre optic lines and (iii) the wholesale naked bit stream access, which allows fixed-line incumbents to retain control of

4.

See the 14th Implementation Report, Staff Working Document, Vol. 2, at [http:// ec.europa.eu/information_society/policy/ecomm/doc/implementation_enforcement/ annualreports/14threport/annex2.pdf].

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high-speed access to its network. Despite these issues, however, the setup and recurrent tariffs for shared access are relatively low.

The Regulatory Framework for E-Communications Primary legislation Until the end of 2008, the Turkey’s telecommunications regulatory framework was comprised of various pieces of legislation, mostly based on Law # 4502 of 2000, which amended the previous Telecommunications and Telegraph law (# 406) and the Wireless Law (Law # 2183, originally dated April 1983). Law # 4502 planned for the monopoly rights of the state owned incumbent, Türk Telekom A. Ş, to be terminated on 31 December 2003. However, the termination of monopoly rights did not mean full liberalization, as new entry was indeed hampered by a restrictive licensing regime. Law N. 4502 also established the Telecommunications Authority (TA) as an independent administrative agency with the power to design and implement secondary legislation. After years of delay and extensive discussions, the new Turkish Law on electronic communications (Law No. 5809) was finally adopted in November 2008. In addition to consolidating regulations, one of the main purposes of the new law is the alignment of the Turkish regulatory framework with the EU acquis. However, this objective has only been partially achieved, even though the law clearly improves upon its predecessors. The key features of the new law are as follows: 앫 The creation of the Information Technologies and Communication Authority (ITCA), which replaces the previous Telecommunications Authority. The law improves regulatory transparency by mandating that every board decision be “publicly available with its rationale and processes”. 앫 A broader definition of “Electronic Communication” services, which expands the law’s coverage to mobile, satellite, and internet communications, data transmission over landlines, cable platform and infrastructure operations. 앫 A new, simpler, authorisation regime for electronic communication service providers, which discontinues the different authorisation types, such as concession agreements, telecom licence and general authorizations (see Section 3.1.2 below). With the new law, companies wishing to operate electronic communication services, networks or infrastructures must

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simply notify the ITCA before starting their activities. For services that require specific resources, such as a number, frequency or satellite position, the law requires the operators to obtain a usage right. 앫 New provisions on operators' obligations, tariffs on telecommunication services, access and interconnection, right of way, spectrum management, consumer rights and market surveillance. Due to its ambitious and almost ground-breaking nature, it is no surprise that the implementation period of the new law has been quite slow. For example, regarding the new authorization regime, the new provisions entered into force in May 2009, six months after the adoption of the law.5 A total of 49 supporting regulations would be enacted in 2009 and 2010.

Problems Posed by Specific Provisions in New Law There is no doubt that the new law will bring the Turkish regulatory framework more in line with the EU acquis. However, a number of issues remain ambiguous and at odds with the EU regulatory framework and the benchmarks set by the European Commission at the end of 2008. These can be outlined as the following:6 앫 The provisions on tariffs stand in contrast with those in the Universal Service Directive (2002/22/EC). In particular, there is no clear determination of whether regulatory control will be applicable to both wholesale and retail tariffs. Moreover, the obligation to justify and apply the proportionality principle is completely absent. 앫 The provisions on the Authorization Regime aim at simplifying the regulatory framework but may give the authorities excessive discretion in granting authorization. Moreover, there are legal ambiguities in the extent to which the new law will be applicable to the fixed-line incumbent and the three mobile operators. 앫 Perhaps most importantly, the powers attributed to ITCA are at times too broad and ambiguously defined. Under the new law, the regulator has the power to “create and protect competition”, which overlaps with the competencies of the national competition authority.

5.

6.

Operators who were previously awarded authorisations (such as telecom licence or general permit) shall be deemed to have duly acquired the necessary usage right or to have made the necessary notification in line with the Law. For a more detailed discussion of the short-comings of the new Law # 5809, see Renda, A., Guerin, S; and Arbak, E. (2009), EU-Turkey Accession Negotiations: Impact assessment of Chapter 10 on information society and media, Centre for European Policies (CEPS) Special Report, July 2009.

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The current law also gives the regulator broad powers in the approval of tariffs, independently from the results of relevant market analyses. Similar issues also remain in the imposition of sanctions and remedies, where the regulator is afforded excessive lenience in providing justifications and timely warnings. For example, the new law allows the regulator to impose on any operator the obligation to perform carrier selection and preselection (CS and CPS). In all of these cases, the Universal Service Directive (2002/22/EC) clearly limits any sanctions and remedies to operators that are found to have a significant market power (SMP) in relevant market analyses. Lastly, the new law contains ambiguities with respect to the conditions, criteria and procedures that can be imposed after an authorisation is awarded, procedures which run against the provisions of the Authorisation Directive (2002/20/EC).

Secondary Legislation The original framework laid out in secondary legislation, Law # 4502, was mainly inspired by the 1998 regulatory framework in the European Union (EU) and was therefore broadly in line with the ONP provisions. As such, it did fully align with the competition-law notions enshrined in the EU’s 2003 regulatory framework. Over the years the Turkish secondary legislation has become increasingly similar to the 2003 package. The initial approach was cautious, however, which resulted in a sluggish process of liberalization, notably in the fixed-line sector.7 In the mobile sector, in which three strong players currently operate, delays in issuing 3G licences and other wireless broadband wireless licenses have slowed the growth of Turkey’s information society.8

Alignment with the EU Acquis The EU acquis on electronic communications was significantly revised in 2002 with the launch of a comprehensive package of directives and one decision (on radio spectrum). The package was made fully technologyneutral and is based on a clear division of competencies between the EU level and the role of national regulatory authorities (NRAs). Under the 7. 8.

See Atiyas, I. and Renda, A. (2007), “Telecommunications”, in S. Ulgen (Ed.), Second Generation Structural Reforms, CEPS-EDAM, November 2007. 3G licences were only awarded at the end of 2008, which was significantly later than the EU countries. In comparison, for almost all European countries, including most new member states, 3G licenses were awarded between 2000 and 2001.

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2002 package, the EU would pre-define, in a Recommendation, the relevant markets that NRAs had to determine, following a similar methodology to the one used by competition authorities in implementing antitrust laws. The pre-defined markets would be the ones that, in principle, are expected to satisfy a set of three cumulative criteria that determine, in the Commission’s view, the need for ex ante regulation as opposed to mere reliance on ex post competition law. The three criteria were: (i) the existence of significant barriers to entry in the relevant market, be they of a legal, economic or administrative nature; (ii) the absence of a clear longterm tendency towards more competition in the relevant market at hand; and (iii) evidence that ex post competition law would be in and of itself insufficient to ensure the development of sufficient competition. The first Recommendation, adopted in 2003, listed as many as 18 relevant markets – including retail fixed-line markets, wholesale fixed-line markets, wholesale mobile markets and a market for broadcasting services. The markets were then reduced to seven in 2007 to reflect an overall tendency towards more competitive retail markets and a growing competition in the market for wholesale call origination. Once they define markets on the basis of the Commission’s list, NRAs must identify players in those markets that hold significant market power (i.e. a dominant position defined as it is in antitrust law); if this is the case, they must apply proportionate remedies to ensure more competition in the market at hand – the list of available remedies having already been established by the Access Directive that forms part of the 2002 package. To ensure consistency in national practices, the package also included a review mechanism which would allow the Commission to scrutinise and challenge NRA decisions regarding the definition of markets and the identification of dominance, but could not veto the choice of remedies, which was left to the discretion of national regulators. The 2002 package also contained i.a. a directive on universal service, and important rules on authorisations, which led to the transition from individual licensing for each service regime to a general authorisation regime for ecommunications. In 2009, after years of debate, the package was reformed by i.a. awarding the Commission powers to challenge the NRAs’ decisions on the remedies to be imposed as well, requiring that number portability take place within a maximum of one working day and creating a new body at EU level (called BEREC) to help the Commission analyse NRA decisions and achieve consistency in the implementation of remedies. Since then, the Commission has also adopted non-binding recommendations to reduce the differential between fixed and mobile termination rates, to stimulate 253

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investment in next-generation high-speed networks, and to efficiently use the radio frequencies that had been freed up by the transition to digital television (so-called “digital dividend”). Against this backdrop, to achieve full alignment, the updated primary legislation in Turkey (Law # 5809) must be significantly improved, especially concerning the current ambiguities and excessive powers given to the regulator. Provisions on universal service, spectrum planning, tariff regulation and general provisions on competencies give the impression that the ICTA may act as a market regulator, planner and supervisor, even taking over the responsibilities of the competitive authorities in scrutinizing operators’ conduct ex post. Provisions on tariff regulation are sometimes not linked to the performance of a market analysis, and some articles suggest that a justification of market power is not necessary for the regulator to apply a plethora of rather intrusive remedies. Legal certainty is hampered by other provisions, including provisions on the revocation of spectrum. As for secondary legislation, significant divergences do exist, especially in the area of authorizations. In short, the Turkish regulatory environment fails to enhance competition and provide a simplified and streamlined framework. In its country progress report in November 2008, after acknowledging that Turkey is progressing in its gradual alignment, the European Commission pointed to its remaining concerns in the areas of universal service, licensing and authorisations, spectrum policy, number portability, mobile termination rates and communications taxes. In addition, a strategy was needed to promote competition in the fixed-line sector, especially among internet service providers (ISP) market where the incumbent’s operator enjoys an almost complete monopoly. These shortcomings are confirmed by the results of the ECTA Scorecard 2008. The findings show that Turkey lags significantly behind the EU member states, especially in the regulatory environment and application of regulations. The report also highlighted the fact that uncertainties and deficiencies resulting from rights of way and frequency allotment procedures needed to be addressed. The Turkish authorities would be required to ensure that adequate mechanisms would be in place in order to prevent incumbents from using their positional advantage to gain artificial benefits with the use of non-price strategies.

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Meeting the Benchmarks: Challenges for the Turkish Regulator Promoting Competition in the Fixed-Line Sector As emphasized above, one key area in which Turkey lags behind other EU member states is the sluggish development of a competitive environment in the fixed-line telecommunications segment. There are various obstacles to entry, ranging from difficulties in entering the local calls market9 to bit stream access and slow progress in local loop unbundling.10 There is an absence of policy changes, and the prospect of seeing players climbing the “rungs of the investment ladder” currently appears as a remote possibility. Currently, the incumbent’s reference offer for the provision of access to its local loop has been agreed upon by the ITCA, and co-location at the incumbent’s exchanges started officially in January 2007. However, no specific target date for opening up all of the incumbent’s approximately 1,000 exchanges has been set,11 and the whole local access market seems very far from real liberalization. In the broadband market, the consequences of the current situation are fairly obvious: Turkey currently has relatively high prices for broadband access and the lowest speed in OECD countries, as shown in Section 2 above. Discussing available regulatory options in this domain is far from straightforward. This is primarily due to the fact that the lack of liberalization is mostly results from an incomplete application of existing rules rather than the need to enact new regulations. Once the authorization 9.

A major change impacting competition in the fixed line market came in March 2006, when Türk Telekom’s network was upgraded to allow for carrier preselection (CPS) and call by call selection (CS) to comply with regulatory requirements dating back to 2005. Since then seven CS agreements and eight CPS agreements have been signed. See Cullen International (2008), Monitoring regulatory and market developments for electronic communications and information society services in Enlargement countries, Report I, First report prepared for the study funded by the European Commission, September. 10. During 2008 and 2009, there was a migration to bitstream access. See Cullen International (2009), “Supply of services in monitoring regulatory and market developments for electronic communications and information society services in Enlargement countries”, Report II, Second report for the study funded by the European Commission, June 2009. 11. Cullen International (2008), Monitoring regulatory and market developments for electronic communications and information society services in Enlargement countries, Report I, First report prepared for the study funded by the European Commission, September.

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process has been streamlined, it is likely that licenses for the provision of local calls services will finally be issued, with no further possibility for courts to overturn the regulator’s decisions.12 Moreover, the possibility for an alternative provider to offer all services, including local calls and internet access will create a more competitive environment. Replicability of the incumbent offer, coupled with efficient, cost-based, interconnection pricing, will certainly reduce the risk of price squeezing in both the narrowband and broadband markets. Once these basic conditions have been met, there are still several options available to the regulator and the government to effectively liberalise the fixed-line and broadband sectors. These include the adoption of a “ladder of investment” model, in which new entrants emerge gradually by first using the incumbent’s facilities and then building their own networks, the awarding of “regulatory holidays” for those investing in high-speed networks, the adoption of a functional separation model in which all broadband providers have access to a common infrastructure, and several hybrid models.13 The choice of the policy strategy to be adopted is very sensitive to the regulatory, geographic, and demographic context of a country. Countries like the UK reportedly profited from functional separation, whereas countries where more than one platform is available may profit from regulatory holidays, as in the case of the US. Other countries, such as France, have successfully encouraged investment though effective LLU pricing, which led to several thousand local loops, unbundled in a very 12. In August 2007 the NRA introduced a licence for Fixed Telecommunications Services which covered the provision of voice telephony, data, payphones and value added services at the local level over the fixed network. This was seen as an important measure that would enable new participants to enter the market for local voice telephony services (including both carrier selection codes and the assignment of E.164 numbers). However, on 23 January 2008 the 13th Chamber of the Council of State issued an injunction against the decision on the grounds that a single licence was used to enable the provision of more than one telecommunications service (i.e. voice and Internet). Thus far, no licences for the provision of local telephone services have been issued and Türk Telekom remains the only provider. For more, see Cullen International (2008), op.cit. First report prepared for the study funded by the European Commission, September. 13. The “ladder of investment” model aims at reconciling short-term service-based competition with long-term infrastructure-based competition, by ensuring the access of new entrants without requiring significant investment in infrastructure, and later providing incentives for them to gradually build their own infrastructure. See Martin Cave (2005), Making the Ladder of Investment Operational, Mimeo, available at [http://www.ictregulationtoolkit.org/en/Document.2916.pdf].

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short time during 2005 and 2006. In this respect, Turkey cannot count on any alternative infrastructure, as the cable network is highly underdeveloped and fibre-optic investments have been limited. Prospects for mobile broadband to complement fixed-lines are real, but not in the short-term. As a result, we consider that the investment ladder model remains the most feasible one at this stage, and that functional separation may become an option in the future, once entry has been stimulated through other viable alternatives. However, it is important to emphasize that the investment ladder model is very difficult to implement in practice, and that many countries have failed to apply it effectively in the past years, leading to cases of arbitrage and players moving up and down on the ladder. For these reasons, attention should be given to setting prices for different access points and refraining from micromanaging the market for too long.

Focus: Promoting Competition in the ISP Market While examining Turkey’s fixed-line sector, perhaps the most striking feature is the very low degree of liberalization of the broadband market, where Türk Telekom’s internet operator, TTNet, holds a quasi-monopoly in local access. An effective liberalization of the ISP market should then be targeted by the regulator as a key priority for the development of Turkey’s information society. In Turkey, most of the 1,000 exchanges held by the TTNet have not been opened up to competition, despite the first attempts to launch bit stream access and the few local loops that have been unbundled.14 This, in turn, implies that most players are still located on the first rung of the investment ladder and that the wide-spread infrastructure-based competition is still distant. In addition, there are limited prospects for the development of alternative infrastructures, such as cable, fibre and satellite networks, especially since the available infrastructures also remain under the control of the partly state-owned incumbent. In short, a careful strategic review of broadband competition in Turkey would be highly advisable. Without this important development (possibly coupled with the removal of public ownership and the full separation of cable from xDSL infrastructure owners), the Turkish market may end up 14. TTNet had approximately 5 million subscribers as of July 2008 while the alternative operators possessed approximately 250,000 subscribers, acquired by the resale method.

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stagnating in a situation in which the fixed-line incumbent is de facto the only provider of local access, and, accordingly, a real dominator of the ISP market.

Universal Service Universal service legislation in Turkey has long been considered inadequate for the development of a modern telecommunications regulatory framework. Notable issues were (i) the exclusive attribution of universal service obligations (USO) to Türk Telekom; (ii) the fact that the Ministry was responsible for operating the universal service fund (USF); and, (iii) the lack of transparency on how the universal service fund was used. In 2005, Law # 5369 and the subsequent Universal Service Ordinance # 26 of 29 June 2006 partly improved the situation. After the enactment of this law, and also as part of the concessions in 2005, Türk Telekom was now obliged to provide a set of ‘minimum services’ (i.e. emergency services, directory services, payphones and basic internet services) for free to the entire population. Despite the incorporation of a full range of services, a geographic universal service obligation has not been set. This could allow Türk Telekom to connect new customers only if they were deemed commercially viable. Indeed, the fixed line penetration rates (both in number of subscribers and lines per inhabitant) have recently stagnated, as shown in Table 1 below, which could be a reflection of the fact that the universal service provision is not working. Table 1: Fixed-line penetration in Turkey, 1997-2008

Subscribers (millions) Lines per 100 inhabitants

1997 2000 2003 2004 2005 2006 2007 2008 15.58 18.40 18.92 19.13 18.98 18.83 18.20 17.50 24.60

27.68

27.29

27.22

26.67

26.12

24.93

23.68

Source: International Telecommunication Union (ITU), ICT Statistics, 2010

The reported number of subscribers leads to a rather low penetration rate (approximately 23.7 %), lower than most other EU members except the Czech Republic or Romania. It should be highlighted that the reduction in the number of connected customers also means depriving a growing number of households of basic (dial-up) internet service, especially 258

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alternative mobile services, such as 3G and WiMAX coverage are unlikely to cover most rural areas.15 Finally, the current management of the universal service fund (USF) has been a concern, especially since control over the USF is allocated to the Ministry of Transport and Communications.16 In this respect, since the adoption of the assessment criteria for national schemes for costing and financing of universal services in 1996, (COM(96) 608), the EU has constantly stated that these funds, where they exist, must be administered by an independent body responsible for collecting contributions and overseeing transfers to universal service providers. Moreover, leaving aside some related initiatives,17 there is no clear indication on how the fund is to be allocated. This is due to the fact that the funding methodology of universal service is not explicitly stated in the law. Instead of clarifying how the funds can be deployed, the secondary legislation (Law n. 4502) implicitly allows “cross-subsidisation” as a solution. Needless to say, the use of cross-subsidies instead of a transparently, efficiently designed, and independently managed fund is considered to be undesirable in many respects. For example, several studies conclude that such an approach is: (i) inherently inefficient, since “by separating price from cost they distort consumption and investment decisions”; (ii) typically not transparent, as they make it “difficult to determine who receives subsidies and who funds them”; (iii) unable to encourage service to high-cost regions or to the poor since the existence of 15. It was estimated that WiMAX deployment in the 3.5GHz band, besides exhibiting poor building penetration potential, would be four times more costly than deployment in the 700 MHz band. However, no plans exist in Turkey for the reallocation of that portion of the digital dividend to BWA services such as WiMAX. 16. Contributions to the USF are as follows: 2 % of the authorisation fees collected by the Telecommunications Authority; 1 % of net sales revenues of all operators, except for GSM operators; 10 % of payments by GSM operators to the Treasury; 20 % of administrative fines collected by the Telecommunications Authority; 20 % of what remains in the budget of the Telecommunications Authority budget after all expenditures are deducted. These can be increased by up to 20 % by the Council of Ministers. See page 91 of Cullen International (2008), Monitoring regulatory and market developments for electronic communications and information society services in Enlargement countries, Report I. 17. The Ministry of Transport and Communication, which is in charge of the universal service policy, has completed a universal service project by awarding a tender to TurkSat whereby all schools (approximately 40,000) in Turkey are provided with broadband access The Ministry of Transport and Communication is initiating several universal service projects, including an up-coming tender to connect the remaining rural areas (approximately 1,000 villages) which have thus far been not covered by basic telephony services.

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monopoly profits from one group does not induce the firm to provide service to another group;18 and, (iv) most often badly designed to meet expansion goals in the first place, and have therefore been “largely ineffective”. In sum, universal service is still under the control of the incumbent operator, which relies entirely on cross-subsidisation. Money contributed by all operators to the USF does not significantly contribute to the provision of minimum services, but instead to other unrelated and marginal uses. This situation invites problems in heralding competition in the fixed-line sector, due to the impossibility of linking prices to underlying costs. It will be virtually impossible to introduce any competition in local fixed-line calls until this issue is properly fixed. For these reasons, it is very important that Turkey progress in the reform of its universal service policy. Given that its use is improperly managed at the moment, the best option is to abolish the USF altogether and fund universal service through other means. However, this option requires substantial changes to be implemented in a relatively short timeframe, including; (i) abolishing cross-subsidies as a means for financing universal services; (ii) transferring the fund to the regulator for proper liquidation; (iii) designing cost-based models to enable the regulator to identify areas and services in which universal services need to be funded; and, (iv) opening up the competitive selection of universal service providers to all operators.

Authorisations and Licensing Prior to 2008, there were four different types of authorisations available to the operators in Turkey, consisting of (i) authorisation agreements issued to operators where state ownership is more than 50 %; (ii) concession agreements issued to companies providing telecommunications services; (iii) type 1 licences for the provision of local telecommunication services; and, (iv) type 2 licences for the provision of other services, i.e., long-

18. For studies that assess the impact of the independence regulatory authorities, see Clarke, G. and S. Wallsten (2002), “Universal(ly Bad) Service: Providing Infrastructure Services to Rural and Poor Urban Consumers in Developing Countries”, World Bank Policy Research Paper # 2868. July and Brook, P. and W. Smith (2001), "Improving Access to Infrastructure Services by Low-Income Households: Institutional and Policy Responses." World Bank Working Paper Series, # 37559.

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distance calls, cable television, satellite, public phones, etc. For the first three types of licences, the number of operators were restricted either by default (i.e. where state ownership exceeded a specified threshold) or by law (for concessions and type 1 licences). At present, Türk Telekom (which also holds an authorisation agreement), Turkcell, Vodafone and Avea provide their services under concession agreements. The provision for domestic long-distance and international telecommunications networks and services was liberalised from 1 January 2004, and the liberalisation of local services was formally introduced in July 2005. In August 2007, the Telecommunications Authority had introduced a licence for Fixed Telecommunications Services, which covered the provision of voice telephony, data, payphones and value added services at the local level over the fixed network. This was seen as an important measure that would enable new entrants to enter the market for local voice telephony services. However, on 23 January 2008 the 13th Chamber of the Council of State issued an injunction against this decision on the grounds that a single licence was used to enable the provision of more than one telecommunications service (i.e., voice and Internet). Thus far, no licences for the provision of local telephone services have been issued and Türk Telekom remains the sole provider. Between 12 and 28 August 2008 the regulator ran a consultation on a draft amendment to the authorization ordinance that introduced a new annex for the authorization of fixed telephone services.19 Entry into force of Law # 5809 has finally laid a legal basis for the simplification of the authorization and licensing regime, allowing the issuance of licenses to alternative operators in all segments, including the local call services. Under the new regime, the provision of electronic communications networks or services may only be subject to general authorization: the enterprise in question is required to submit a notification without having to first obtain an explicit decision before exercising its rights. A clear distinction is made between the conditions applicable under the general authorisation and those linked to the rights to use radio frequencies and phone numbers. Despite these reforms, the definition of compliance with the conditions of the Authorization Regime is still ambiguous. In particular, the regulator may reject an authorization and abort operations of existing companies for 19. The Telecommunications Authority should issue a special annex to the Authorisation Regulation to grant licences for a particular type of service. These annexes define the scope of the service and, in doing so, they are generally adopting the narrowest possible definition. An operator cannot obtain an authorisation from the Telecommunications Authority that is not included in these annexes.

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reasons related to national security, public order, public health and other matters of public interest. These provisions are unclear and may leave authorisations at the discretion of the ITCA and the Ministry, which is indeed in violation of the basic principles enshrined in the Authorisation Directive (2002/20/EC). The simplification in the authorization and licensing process is an essential step towards the encouragement of entry and should be achieved rapidly with the enactment of secondary legislation. In the EU, the transition towards a general authorizations regime has been hailed as a major step towards the creation of a more competitive business environment in the telecommunications sector. The same is likely to happen in Turkey once entry restrictions (either formally or informally) have been rescinded. In order to align the authorisation framework with the EU acquis, the regulator should ensure that the provisions allowing the authorities to reject or abort operations are not too broad. The regulator may also consider that the general authorization regime be extended to spectrum allotment, as was suggested in the on-going review of EU’s 2002 authorisations framework.20

Spectrum Policy In Turkey, spectrum policy has progressed very slowly over the past few years, especially as regards market-based approaches, unlicensed spectrum and the issuance of 3G licenses. The main current issues at hand in the reform of Turkey’s spectrum policy are the following: 앫 3G licenses: After significant delay, 3G licenses have finally been awarded in December 2008.21 Turkcell submitted the winning bid of € 358 million for the highest frequency 3G licence on offer (“A” band, 20. This would make it easier to achieve technology and service neutrality, as well as to enable spectrum trading in the medium-term. However, this proposal has faced significant resistance in the EU debate, and is currently unlikely to be endorsed in the final text. This resistance is mostly due to the risks of increased interference in spectrum usage, and to issues raised by the broadcasting sector, especially regarding the need to protect providers of services of general interest. 21. An auction for 4 UMTS licenses had been launched in May 2007, but was later cancelled. On June 16, 2007 the TA had announced an auction for 4 IMT-2000/ UMTS licenses to be held on September 7, 2007: only one player participated in this tender (mostly due to disputes as regards number portability) and won one license on a bid of € 311 million, whereas the rest of the licenses were not sold. The license awarded was then withdrawn.

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40Mhz block), whereas Vodafone has submitted the winning bid of € 250 million for the second highest frequency on offer (“B”, 35Mhz block) and Turkey's Avea, owned by fixed-line operator Turk Telekom, won the bid for the third highest frequency with a bid of € 214 million (“C”, 30 MHz). The fourth licence was cancelled due to a lack of bids. 3G network services were now expected to start in the summer of 2009. With this, Turkey will align with EU member states regarding the availability of mobile broadband services. 앫 WiMAX licenses: The next step announced by the government is the auctioning of WiMAX licenses, probably in the 3.5GHz band. This is likely to represent an important step forward in Turkey, and occurs with little or no delay compared to EU member states. However, the choice of the band is likely to lead to WiMAX deployment only in very densely populated areas, whereas bridging the digital divide with WiMAX will remain almost impossible to achieve. 앫 Digital dividend: The switchover from analogue to digital TV (expected to materialise in the EU by 2012) will free up an unprecedented amount of spectrum due to the relative efficiency of the new transmission system. This side-benefit, i.e., the so-called “digital dividend”, represents a one-time opportunity, especially when it comes to encouraging the development of alternative ways of providing content (e.g., mobile TV) and bridging the digital divide through the wider availability of wireless broadband (e.g. LTE, WiMAX) at a more affordable cost. This opportunity can only be reaped if sufficient flexibility and coordination is introduced in the spectrum allocation policy. In terms of available regulatory options, then, Turkey seems to have solved most of the previous pending problems (in particular, the awarding of 3G licenses). New initiatives should instead focus on introducing neutrality principles and proactively pursuing the efficient allocation of the digital dividend. Accordingly, the main policy alternatives at hand are: (i) no policy change; (ii) the introduction of service and technology neutrality in specific bands; and (iii) the organisation of the digital dividend in line with the European Commission’s 2007 Communication, (COM(2007) 700), which recommends that member states identify common spectrum bands that can be optimised by the application clusters. The latter opportunity is perhaps better suited for Turkey, as the mere introduction of service and technology neutrality in spectrum management may not be sufficient to taking advantage of this unique opportunity. On the other hand, Turkey could align itself with other EU members if it

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introduced a more forward-thinking spectrum allocation policy within a reasonably short timeframe, possibly by 2014.

Number Portability Number portability has been heavily debated in Turkey over the past few years. This facility allows customers who wish to switch operators to keep the numbers originally assigned to them, thereby avoiding the costs of switching to new numbers. Both fixed and mobile number portability have become possible only very recently in Turkey. Until now, customers wishing to switch mobile operators could only keep what remained of their mobile number after the three-digit prefix: prefixes remained assigned to individual operators, due to the particular wording of the concession agreements awarded to the mobile operators.22 Despite this issue, the legal framework ensures that switching transactions be completed within six days or less. For fixed number portability, the impact has been quite limited insofar as the incumbent operator, Türk Telekom, has a near monopoly in the market. The impact of number portability on competition is widely recognized in the economic literature, although the extent to which introducing portability contributes to customer churn is still heavily debated. For example, in the UK within 63 months after its launch, only 5 % of customers had used mobile number portability; in Portugal, after 27 months from launch of mobile number portability, only 0.28 % of customers had used this option. On the other hand, in Hong Kong, within 60 months after its service launch, 85 % of customers had switched mobile operator. And in Finland, after only 8 months, 16 % of customers had switched. The recent experience shows that the effectiveness of portability appears heavily dependent on whether switching can be achieved in a very short timeframe. In Hong Kong, numbers are ported normally within 48 hours. In France, since the new system shortening the delay of two months to ten days has been implemented, the number of portings has increased significantly. In Spain a five day period for porting a number appears to benefit the overall usage of this facility. Likewise, the UK regulator, Ofcom, decided to reduce the maximum porting time for mobile numbers to two working days as of April 2008, and planned to further reduce this time to 22. It is worth recalling that concession agreements are not affected by Law # 5809, which introduced a general authorisation regime. See supra, Section 2.5.1.

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just two hours in 2009. In contrast, lengthy and often cumbersome porting procedures in Poland (14-30 days) and Slovakia (up to 20 days) appear to undermine the full potential benefit for end-users. A good benchmark for Turkey is Spain, where number portability is achieved in five working days. There, fixed number portability has worked very well since March 2000, leading to over four million ported fixed numbers in 2008 (approx. 20 % of total lines). At the same time, mobile number portability has been effectively implemented alongside extensive MVNO entry, leading to 35 % of mobile numbers being ported in just a few years. Several authors have attempted to assess the costs and benefits of mobile number portability.23 The benefits range from direct benefits to consumers who shift to indirect gains to others due to increased competition. Naturally, for both types of benefits, the willingness to switch is a key factor, which depends closely on the perceived cost of switching for consumers, i.e. waiting time, necessary paperwork, etc. Number portability also entails significant costs, accrued from network investments, process changes and operating expenses incurred to make mobile numbers portable. In line with these observations, there is evidence that significant net benefits of number portability can be expected only in countries where porting occurs within five working days or less.24 For those countries where switching occurs relatively quickly, a significant short-run reduction in average prices of around 7 % and increase in churn rates of 14 % can be expected; in the long run, the consumers’ gains could be even greater, with the prices dropping up to 12 % and churn rates climbing by 35 %. Against this background, Turkey faces two alternatives in the short term: (i) continuing with the status quo (implement current plans on number portability); or (ii) reducing the time needed for switching operator. In the longer term, Turkey could also consider implementing cross-platform portability, including fixed-mobile number portability (FMNP) as in the US, Canada, UK, Ireland. However, this option is viable only if there is a sufficient amount of substitution between mobile and fixed-line services. 23. Several cost-benefit analyses (CBAs) are available in published form, notably Oftel (1997), Economic evaluation of number portability on the UK mobile telephony market; NERA-Smith (1998), Feasibility Study & Cost Benefit Analysis of Number Portability for Mobile Services in Hong Kong. Final Report for OFTA, National Economic Research Associates and Smith System Engineering; and, Ovum (2000), Mobile Numbering and Number Portability in Ireland, A Report to the ODTR. 24. Lyons, S. (2006), "Measuring the Benefits of Mobile Number Portability", Trinity Economics Papers # 9, Trinity College Dublin, Department of Economics.

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A further reduction in switching time in under five days appears could be suitable for the country, since it would ensure that the country’s quickly growing mobile generation benefit from lower prices and higher quality products. However, it should not be forgotten that the waiting time is comparable to most EU members. We therefore suggest that: (i) the costs and benefits of the current regime be monitored and assessed overtime; and (ii) a careful impact assessment be carried out in the medium-term before the porting time is further reduced. The effectiveness of this option heavily depends on the complementary policy measures aimed at facilitating entry in wire line and wireless sectors, most notably entry DSL and cable operators.

Mobile Termination Turkey remains below the EU averages regarding mobile termination rates. However, there are differences in the termination rates according to the operators, despite the fact that all of them have been identified by the regulator as having a significant market power (SMP).25 The NRA has thus far conserved the asymmetries in pricing, a persistent feature of the Turkish market. Figure 1 below shows the current level of termination rates applicable from May 2009, indicating the asymmetries between termination rates.

25. See market analyses conducted by the telecommunication authority on 2005 and 2008 (2005.T.3.16.1 and 2008.T.1.16.1, both in Turkish). For more details, see Renda, A., S. Guerin and E. Arbak (2009), EU-Turkey Accession Negotiations: Impact assessment of Chapter 10 on information society and media, Centre for European Policies (CEPS) Special Report, July.

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Figure 1: Old vs. New Termination Rates (as of May 1, 2009) OLD

NEW

Change (%)

MTR (YKr)

Asymmetry

MTR (YKr)

Asymmetry

TURKCELL

9,1

–

6,55

–

–28%

VODAFONE

9,5

4%

6,75

3%

–29%

AVEA

11,2

23%

7,75

18%

–31%

Double T.

1,71

–

1,71

–

0%

Single T.

2,70

–

2,70

–

0%

–

–

1,39

–

–

TURK TELEKOM

Local

In the EU27, symmetric rates are in place in seven Member States.26 In a further twelve Member States, a glide path has been set to achieve symmetry over the next few years.27 In Italy, Portugal, Spain and the UK, by exception, a single market player with SMP is permitted to charge a higher rate. In addition, six other member states announced national policies is in favour of symmetry; in some of these cases, explicit preconditions for asymmetry were set forth.28 Finally, in Belgium and the Netherlands the situation appears to be moving in the direction of symmetry.29

26. Czech Republic, Estonia, Lithuania, Malta, Poland, Slovakia, Sweden. 27. Bulgaria, Denmark, Finland, Greece, Hungary, Ireland, Italy, Luxembourg, Portugal, Slovenia, Spain, UK. 28. Austria, Cyprus, France, Germany, Norway, Romania. 29. As reported by the European Regulatory Group (ERG), in Belgium BIPT made a Decision to achieve symmetry by the end of a glide path. However, this principle was overturned on appeal to the national courts. In Netherlands, OPTA plans to make a decision on its next Market Analysis by mid 2010.

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In Turkey, there is no specific announcement or policy statement in favour of symmetry for mobile termination rates. This is not in line with the current orientation at the EU level, in which the European Commission has indicated its preference to end the practice except in a number of cases with “adequate justification.”30 The Commission has recognised that asymmetry might be justified by objective cost differences that are beyond the control of the operators concerned, such as different network topologies due to the use of specific frequency bands.31 Such justifications are unlikely to hold in the case of Turkey, where differences in costs and network usage appear negligible.32 Even in the case of different market shares between SMP operators in the mobile call termination market, the European Commission clarified that “the fact that an [operator] entered the market later and has therefore a smaller market share can only justify higher termination rates for a limited transitory period.”33 Accordingly, in Turkey there seems to be no basis for maintaining the asymmetry of termination rates in the future. A glide path should thus be established to reduce and eventually eliminate differences between termination rates. This would in turn end the distortion effect of asymmetric termination rates, which is commonly acknowledged in economic literature.34 The European Commission has clearly endorsed this view in the recent explanatory note to the consultation on termination rates.35 Against this backdrop, Turkey has offered a number of (incremental) regulatory alternatives: (i) no policy change, which means maintaining the asymmetries in termination rates; (ii) establishing a glide path to eliminate the asymmetry of termination rates in a reasonable timeframe; (iii) establishing a glide path and an overall reduction of rates towards a single efficient rate in line with the Commission’s recent recommendation on termination (2009/396/EC); (iv) achieving the glide path plus the removal 30. Case BE/2006/0433, Case FR/2006/0461, Case FR/2007/0596, Case LV/2006/0464, Case LV/2007/0574 31. Case IT/2007/0659 32. The operator that has the highest termination rate, Avea, uses both 1800 Mhz band channels and some 900 Mhz band channels, which helps decreasing unit cost. 33. Case BE/2006/0433, Case FR/2006/0461. 34. See Peitz, M. (2005), “Asymmetric regulation of access and price discrimination in telecommunications”, International University in Germany, School of Business Administration, Working Paper 28/2005, January and Valletti, T. (2006), “Asymmetric regulation of mobile termination rates”, Imperial College London and University of Rome, December. 35. See [http://ec.europa.eu/information_society/policy/ecomm/doc/library/public_consult / termination_rates/explanatory.pdf] (section 4.2.).

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of the proposed obligation not to engage in internal price discrimination for the largest of the three SMP operators. On the one hand, it would be highly advisable to establish a glide path towards removing the asymmetry between current rates, as well as removing the internal non-discrimination obligation for only one of the SMP players. On the other hand, imposing a drastic reduction of mobile termination rates in favour of a “single efficient termination rate” in a country where the termination rate is already half of the EU average would seem highly premature. In addition, a further reduction in rates could significantly lower the incentive of operators to invest into the modernisation of their networks, due to limited foreseeable benefits. The preferred method is then to commit to a glide path without highlighting a downward pressure on prices, i.e., by allowing the prices to adjust to a common average and not necessarily to a low base.

MVNOs One of the features of the e-communications sector in Turkey (and in other EU countries) is the absence of regulatory provisions on the authorisation of Mobile Virtual Network Operators (MVNOs). ITCA and Turkish authorities have long been in the process of preparing a regulation on MVNOs, which is expected to be adopted in the early part of 2010.36 The eventual entry of MVNOs would take place through voluntary commercial agreements between facilities-based mobile operators (MNOs) and the entrants (MVNOs). The impact of such entry would depend on many different factors, including the business model adopted by the MVNOs (full MVNO, intermediate MVNO, thin MVNO, etc.), the regulated licensing terms, the availability of complementary provisions (i.e., an effective number portability system); and, an effective general authorisation regime in place. Overall, MVNO entry has its pros and cons emanating from potential opportunities and threats. On the one hand, MVNOs can enhance consumer choice and service differentiation, as they can serve to capture consumer demand for niche services and provide appealing content platforms. Similarly, increased competitive pressures exerted by MVNOs 36. Two of the country’s leading soccer clubs have introduced mobile services under their own brand names in 2009 with access to Avea’s mobile network; however, these providers can only be classified as commercial re-sellers at the moment due to the unavailability of legal provisions applicable for MVNOs.

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on existing network operators can create a disciplining effect, leading to lower prices. On the other hand, however, the entry of MVNOs may hamper incentives to invest in Turkey’s network infrastructure at a time when the operators are introducing new products, i.e., 3G networks, which could necessitate improvements. For these reasons, it is expected that a forced MVNO entry would bring few prospects of enhancing consumer welfare in Turkey. Instead, it is more important to devote regulatory resources to a careful application of the competition law in order to ensure that operators do not deny interconnection to potential entrants. It is more preferable to leave MVNO entry to commercial agreements between operators and potential entrants, with careful and effective antitrust ex post scrutiny of the conduct of dominant operators.

Communications Taxes One of the most evident features of the Turkish telecoms market is the high level of taxes imposed on communications services. In particular, mobile operators are subject to an impressive conundrum of taxes, including a Special Communication Tax, the Treasury Share Premium, the Stamp Duty, the TGM Handset License Fee and TGM Handset Usage Fee. As a result, Turkey exhibits the highest tax rate on telecommunication services worldwide, as shown in Figure 2 below. Such a high tax rate inevitably exerts a restrictive effect on penetration. With lower rates, a much higher market penetration could have been achieved instead of the current 90 %, which hardly compares to 112 % in the EU. A similar concern for high tax rates was expressed by the World Bank in its March 2004 “Turkey Knowledge Economy Assessment Study”, whose key recommendation was to “reduce the tax and regulatory burden on ICT”. GSM Association also published a study on the impact of taxation on mobile market growth, highlighting that “the degree to which taxation acts as a barrier for users, preventing potentially hundreds of millions people from affording mobile communications and holding back economic growth and social development in many countries”, and showing the magnitude of the Turkish “anomaly”.37

37. GSMA (2005), Tax and the digital divide: How new approaches to mobile taxation can connect the unconnected, GSM Association (GSMA) Mobile Tax Report.

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Similar conclusions were reported by Deloitte’s Global Mobile Tax Review 2006-2007, and are reported below in Figure 3. Mobile value added services (VAS) such as purchasing musical contents over mobile handsets are still struggling due to high tax burden, though a reduction of the special communications tax from 15 % to 5 % (for internet services only) was announced in November 2008. Most significantly, the tax burden has the worst effect on low-user group, since fixed taxes have higher weight on overall usage. Figure 2: Impact of taxation on mobile users in Turkey Sector-specific taxes and levies • Special Communications Tax

25%

• Special Communications Tax at subscription

31.10 TL (approx. € 14.46)

• Wireless License Fee

12.00 TL (approx. € 6)

• Wireless Usage Fee

12.00 TL (approx. € 6) p.a.

• Treasury Share

15%

• Contribution to NRA expenses

0.35%

In addition to: • VAT

18%

Share of tax burden on customer bill At subscription year

After subscription year

80%

63%

Source: author38

Fixed-line telecom services are also characterized by high taxation, although to a lesser extent, with a 15 % special communication tax (against the 25 % imposed on mobile services) and no Treasury share.

38. The figure is based on findings of CEPS (2008), Achieving the Internal Market for Ecommunications, Centre for European Policy Studies Task Force Report, June.

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In this respect, the following measures could be conceived of:39 앫 fixed taxes should be lifted immediately; 앫 the special communications tax should be immediately decreased to the same level of fixed telephony (15 %), and ultimately lifted altogether; 앫 Value added services should be exempted from any kind of tax (apart from the VAT); 앫 One type of standard tax should be applied and aligned with the average EU level. 앫 The effect of a tax reduction for mobile services is likely to be make a strong impact, given the high demand elasticity normally associated with 2G and (even more) 3G services.40 Figure 3: Tax as a share of total cost of mobile ownership (TCMO)

50.00%

45.00%

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

Turkey Tanzania Uganda Brazil Greece Denmark Sweden Italy Rwanda Morocco Uzbekistan Bulgaria UK Average Germany India China Myanmar Swaziland

39. See CEPS (2008), Achieving the Internal Market for E-communications, Centre for European Policy Studies Task Force Report, June 2008. 40. See Gao, M., Hyytinen, A; and Toivanen, O. (2005), “Demand for Mobile Internet: Evidence from a Real-World Pricing Experiment”, Helsinki Centre for Economic Research, Discussion Paper # 43, January and Hausman, J. (2002), “From 2G to 3G: Wireless competition for internet-related services” in Crandall, R. and J. H. Alleman (Eds.), Broadband: Should we regulate high-speed internet access, AEI-Brookings Joint Center for Regulatory Studies, Brookings Institution Press, Washington, D.C.

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Strengthening Administrative Capacity and Independence of Regulator In the previous sections, we have analysed the pending issues in the alignment of the Turkish regulatory framework with the EU acquis. As we have seen, there are some areas in which significant efforts are required in order to realise full alignment. However, in many other areas, even if legislation is broadly in line with the EU framework, the implementation and enforcement of legal and regulatory provisions is weak. This problem mostly relates to secondary legslation and the actual implementation and enforcement of remedies identified by the regulator after finding SMP in the analysed markets, as well as the availability of licenses for fixed-line telecommunications services. In a nutshell, without effective enforcement, Turkey will never fully align with the EU framework in practice. Effective enforcement requires an independent, powerful, accountable and transparent regulator. The importance of independence has always been emphasized at the EU level, and is even more in the spotlight in the debate on the review of the current regulatory framework. The European Commission recalled in its 14th Implementation Report on the regulatory framework for e-communications that [e]ffective and independent national regulatory authorities are a prerequisite for ensuring fair and effective regulation of the electronic communications markets. Regulators should be independent from any organisation providing electronic communications networks and services. Moreover, the authorities should be able to exercise their powers impartially and transparently.41

Countries like Belgium, Bulgaria, Hungary, Latvia, Poland and others have been constantly pressured by the Commission over the past few months to strenghten the independence of their regulators. Of particular concern in many member states is the “delineation of responsibilities and competences in the broadcasting sector”. The Commission recently pointed out the lack of clarity in the division of responsibilities between the regulator and the national broadcasting authorities in Malta, Belgium and Bulgaria, especially concerning the allocation of frequencies for analogue services and the assignment of licences for broadcasters. 41. See Commission Staff Working Document accompanying the Communication from the Commission to the Council, the European Parliament, the European economic and social Committee and the Committee of the Regions, SEC(2009) 376 dated 24.3.2009.

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The effectiveness of the regulator is important not only for the alignment with the EU acquis, but for the performance of the overall sectoral regulation. In previous studies, the presence of an independent regulator was found to make a positive impact on fixed-line penetration.42 Moreover, the privatization of the incumbent operator is beneficial only in the presence of an independent regulator,43 while establishing a regulatory authority prior to privatizing the telecommunications incumbent is correlated with increased fixed-line penetration, telecom investments and subscriptions to mobile telephony.44 Based on other studies, we can assess the independence of the ICTA aaccording to various aspects, including its stability, scope of authority, financial independence, movement of staff to and from the industry, ownership of incumbent, representativeness of consumers’ concerns, internal governance, expertise, transparency and legitimacy.45 The ICTA has performed rather well in some of these areas. For example, it has possesses a rather stable leadership, reasonable financial independence and sufficient human resources (as far as the number is concerned, totalling 594 staff members in 2008). However, the following concerns could be expressed: 앫 The delineation of responsibilities and competences is not clear in a number of areas, most notably in spectrum policy and for broadcasting services in general. 앫 There seems to be poor cooperation between the regulator and the competition authorities. In principle, the two authorities should seek each other’s opinion in matters related to the e-communications sector (after Law # 2813). 앫 The independence of the regulator is jeopardised by the role of the Communications High Council or Haberleşme Yüksek Kurulu (HYK),

42. Ros, A. (2003), “The Impact of the Regulatory Process and Price Cap Regulation in Latin American Telecommunications Markets”, Review of Network Economics, Vol. 2, # 3, pp. 270-286. 43. Wallsten, S. (2001), “An Econometric Analysis of Telecom Competition, Privatization, and Regulation in Africa and Latin America”, The Journal of Industrial Economics, Vol. 49, # 1, pp. 1-19. 44. Wallsten, S. (2003), “Of Carts and Horses: Regulation and Privatization in Telecommunications.” Journal of Policy Reform, Vol. 6, # 4. 45. For an extensive look into the various dimensions of independence, see Wu, I. (2004), Traits of an Independent Communications Regulator: Search for Indicators, FCC International Bureau, Working Paper Series, # 1. Also, see Grzybowski, L. (2008), “The Impact of Regulation on the Retail Prices in Fixed-Line Telephony across the European Union", Telecommunications Policy, 2008, 32(2), pp. 131-144.

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앫

앫

앫

앫

especially regarding the approval of the national frequency allocation table. The skills and expertise available to the regulator could be improved: board members are chosen from career civil servants who may have little background in current technology and market issues, and the recruitment of qualified staff is “hampered by civil service salary caps”.46 In terms of ownership of incumbents, the Turkish Treasury performs the ownership function of the the state’s remaining shareholding in Türk Telekom, while the Ministry of Transportation is responsible for Türk Telekom’s operational activities (“golden share” function). The Turkish government has an interest of 24.3 % in Avea Telecommunications, a mobile operator that is 81 % owned by Türk Telekom. In addition, Turksat Satellite Communication and Cable TV Operation AS (Turksat) is wholly owned by the government.47 Concerning the transparency of decision-making, with the new Law # 5809, the regulator has a formal obligation to publish all its decisions. Draft legislation prepared by ITCA usually involves the participation of operators through joint committees. A consultation mechanism has been established and documents on issues that have an effect on the sector are published on the ITCA’s web site and also sent to the relevant operators, industry NGOs, etc. The responses are published and taken into consideration by the ITCA. Finally, increased legitimacy and transparency could be achieved by the recurrent use of regulatory impact assessments (RIAs) on primary and secondary legislation. These studies are not regularly conducted by ITCA. Use of RIAs could strengthen the credibility and the accountability of the regulator in the industry.

Overall, there seems to be room for improving the independence, transparency, accountability and effectiveness of the Turkish regulator. As regards Chapter 10 negotiations, the highest priority should be given to provisions on universal service obligations, the delineation of competences in broadcasting, spectrum policy and licensing, whereas other issues – such as the drafting of a cooperation agreement between the regulatory and 46. For a discussion of questions on the skills and expertise of board members of the Turkish regulator, see p. 205 of Burnham, J.L. (2006), Telecommunications Policy in Turkey: Restructuring for Economic Growth, European Studies Center University of Pittsburgh, Policy Paper # 11, November 2006. 47. Board members of Turk Telekom and Avea include the Undersecretary of Ministry of Transport, the Undersecratary of the Prime Ministry, the General Manager of Turkish Radio and Television channel (TRT). Such situation hurts transparency and independency of the NRA in the decision making process.

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competition authorities, increased transparency, broader use of better regulation principles and the reduction of state ownership of incumbents and other industry players can probably be implemented at a later stage. Thus, we can now identify three main regulatory options: (i) no policy change; (ii) a better delieation of competences in broadcasting, spectrum policy and licensing; (iii) cooperation agreements with the competition authority, increased transparency, broader use of better regulation principles and reduction of state ownership of incumbents. We suggest the Turkish government adopt the latter option and establish a long-term plan in view of concluding a cooperation agreement with the competition authority, increasing transparency, adopting RIA and reducing state ownership of incumbents.

Audio-visual services The area of audio-visual services is certainly an area in which discrepancies exist between the EU acquis and the Turkish framework. These services were initially regulated by Law # 2954 regulating the principles and procedures regarding the duties, authorities and responsibilities of the Turkish Radio and Television Corporation (TRT). Later, Broadcasting Act, Law # 3984 of 20 April 1994 provided a more comprehensive set of rules on the provision of broadcast services in Turkey. The 1994 reform envisaged the establishment of Radyo Televizyon Üst Kurulu (Radio and Television Supreme Council – RTÜK) as the regulatory authority for broadcasting. A key problem continues to be the allocation of broadcast frequencies. All radio and television broadcasters must officially obtain a broadcast licence and a broadcasting permit but due to the frequency allocation deadlocks all broadcasts are carried out without any licence or official allocation. In mid-2005, the government announced that it did not have any interest in pursuing these allocations and chose a switchover to digital broadcasting as the next step. 18 commercial broadcasters and the public-service broadcaster TRT set up a consortium (Anten A.Ş) in April 2007 to carry out the initial planning for the switchover. The targeted date for the digital switchover is 2014. With over 14 million television-owning households and over 200 television channels, the Turkish broadcasting market is one of the largest in Europe. The number of players now sharing the already small advertising income has driven them into dependency on non-media revenue sources. This poses one of the key challenges to media 276

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independence in the country. TRT’s main source of income is based on revenues from tax levied on electricity bills as well as allocations from the general budget and income from sales tax collected from television and radio receivers. The European Commission’s 2008 progress report noted “some progress” in media independence. Turkey’s level of alignment with the EC acquis on audio-visual policy remains limited to provisions concerning advertising and the protection of minors. The amended Law #3984 on the establishment of radio and television broadcasts still poses problems. The main areas of concern are the following: 앫 Freedom of expression. Despite some recent improvements in broadcasting programmes in different languages and dialects, the European Commission has highligthed in several of its reports that the Turkish legal framework still does not guarantee freedom of expression. These limitations are obvious from recent instances of website blocking (e.g. access to the media sharing website Youtube has been limited since 2007). Apart from this, the amendment of the broadcasting act in 2008 lays down principles that any broadcasting activity must comply with, including a ban on broadcasts that are said to threaten the existence and independence of the Turkish Republic, the territorial and national integrity of the State, or the reforms and principles of Atatürk, or which encourage violence, terror or ethnic discrimination. In many cases, this provision is interpreted in a rather broad manner. Part of the concerns raised in these area overlap with concerns in the field of human rights and protection of minorities. 앫 Competitive environment. The main problem here relates to the need to introduce a general authorisation regime as opposed to the current individual licensing regime. With the amendment of the Broadcasting Act in 2002, the task of frequency planning for radio and television was transferred from the RTÜK to the Telecommunications Authorit; however, regulatory competencies remain split. Moreover, as noted above, all terrestrial radio and television broadcasts are carried out without any licence or official allocation of frequencies. These issues call for a market analysis to assess the need for competitive safeguard measures against operators with significant market power (SMP). 앫 Independence and administrative capacity of the regulator. A number of sanctions imposed by RTÜK on private media raise the question of its independence. In terms of administrative capacity, the composition of the Radio and Television Supreme Council makes it vulnerable to political pressures. The HYK is a board consisting of the Minister of Internal Affairs, the Minister of Transport, the Under-Secretary of the

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National Intelligence Organisation and the Head of Electronic Communications of the General Staff, meeting under the presidency of the Prime Minister (or a State Minister authorised by the Prime Minister). 앫 Promotion of European and independent works. The new regulation on licensing and authorisation of cabled transmissions obliges cable operators not to transmit programmes of foreign origin that are deemed inappropriate by RTÜK. This obligation is clearly not compatible with the Television Without Frontiers Directive (89/552/EEC). Alignment with the acquis in the audio-visual sector will not come without costs and shortcomings, although most of these costs are hard to express in economic terms. Government control over content has clear advantages in terms of political stability, and the current protection and funding of Turkish content over foreign content has succeeded in protecting the national content industry against to global formats and international content. However, the Television Without Frontiers Directive was conceived precisely for the purpose of lifting barriers to the circulation of content and capital throughout the Union and as such contains provisions that favour European content overall, not national content. In fact, before the Directive was adopted in 1989, many countries had rules that hindered the transmission of programmes originating in other countries. Needless to say, the application of provisions on European programmes and the elimination of restrictions on the circulation of content would dramatically change the landscape of Turkish television as it stands today. Despite the possibility of a negative impact on local television producers, an independently regulated audiovisual market could give citizens access to a more diverse and higher-quality content. Such reforms would thereby contribute to the dissemination of information, culture, and educational content, reinforcing a pluralistic democracy. Moreover, a competitive environment could lead to positive externalities due to higher demand for audiovisual services, including speedier broadband rollout,48 which could in turn favour the development of new content-delivery technologies. In sum, a modern regulatory framework for audio-visual services is the necessary complement to the telecoms framework that would allow Turkey to fully embrace to the digital era. The direct and indirect benefits of aligning with the EU acquis are significant, and include benefits to users, to advertisers, to content producers as well as society as a whole. 48. Among other publications, see Marsden, C., J. Cave, E. Nason, A. Parkinson, C. Blackman, and J. Rutter (2006), Assessing Indirect Impacts of the EC Proposals for Video Regulation, study funded by Ofcom and conducted by RAND Europe.

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Conclusion In this report, we have analysed the current state of advancement of Turkey’s regulatory reform in this sector, and formulated suggestions for reform on the basis of a complex and articulated impact assessment exercise. Our final conclusion is that Turkey may benefit significantly from a set of targeted reforms aimed at solving existing problems that have been highlighted, i.e., by the European Commission and also by the recent ECTA Scorecard 2008. These include, very briefly: 앫 The streamlining of primary legislation – possibly through a consolidated text, this clarifies the currently confusing framework created by the enactment of a law (# 5809) that overlaps and co-exists with previous laws and by-laws. 앫 A more proactive approach to the liberalization of the fixed-line and broadband sectors, possibly by implementing the investment ladder model (due to lack of alternative infrastructure) and, in the mediumterm, by addressing the problems of limited access to the local loops, concentration of all infrastructures in the hands of the same player, spectrum liberalization, and the optimal choice of the band to be used for WiMAX. 앫 Efforts to bring the regulatory framework in line with the EU framework, especially in the areas of Universal Service, spectrum policy and mobile termination rates. 앫 A clear and reliable plan to drastically reduce taxation in the area of mobile and internet services, thus boosting usage (also in terms of MoU) and penetration. 앫 Striving for “better regulation”, by prioritizing the clear delineation of roles and responsibilities between the various authorities active in the field, from ITCA to RTÜK, the Competition Authority, the Ministry of Transport, etc.; and also by providing for systematic use of impact assessment and public consultation. 앫 For each of the goals identified, it is very important that the Turkish government specify the indicators it plans to use to monitor the effectiveness of its regulatory and legislative measures, with what frequency it plans to review such indicators, and what would happens if indicators are not clearly met. In short, the use of a “review clause”, coupled with constant and measurable monitoring of market development, would facilitate the dialogue between the regulator and stakeholders, as well as with the European Commission within accession negotiations.

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Conclusion Selen Sarisoy Guerin and Yannis A. Stivachtis

When Turkey applied for EU membership in 1987, few could have predicted that EU would one day accept negotiating with Turkey to become a member of the world’s largest economic bloc. The EU model of economic integration has proven highly successful, as the new member states enjoy convergence to higher incomes and quality of life. Enlargement today is therefore one of the EU’s most successful external policies. In 2004, the EU underwent its most ambitious enlargement process by integrating 10 new member states, as eight Central and Eastern European countries and two Mediterranean countries joined the EU. This was soon followed by the 2007 enlargement of Bulgaria and Romania. Undeniably, each enlargement process has its costs and benefits to the EU too. Turkey started its membership negotiations right after the Eastern enlargement when there were concerns over how much the EU could absorb. The process of negotiations to become an EU member state is different for each candidate country, depending on how integrated the parties already are, and any outstanding political issues the country might have with the EU. When negotiations started with Turkey, it was expected that the negotiations would take much longer than the recent enlargement process, with several stumbling blocks along the way. Indeed, after five years the progress in negotiations has been slow. So far out of the 35 chapters of the acquis, 13 are opened to negotiations and only one is provisionally closed. By contrast, the negotiations for Eastern enlargement lasted four years. However, Turkey was more integrated with the EU before the start of its negotiations than any other new member state when they joined the EU. For example, when Poland concluded its negotiations, its GDP per capita was 39 percent of the EU-15 average, GDP growth rate was 1.4 percent, and inflation was 0.8 percent. According to the 2010 Progress Report, Turkey’s GDP per capita is 46 percent of EU average, GDP growth rate before the crisis was 4.7 percent and inflation stands at 6.3 percent. Similarly, prior to the start of the negotiations with the EU, the new member states had signed free trade agreements but did not have a fully functioning customs union with the EU. According to several statistics presented in the 2010 Progress Report Turkey’s economic indicators are

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comparable to indicators of the new member states when they became EU members. All this indicates that Turkey’s path to EU membership is going to be different than any other country in the past. At this point it must be emphasized that slow progress does not mean no progress. On the contrary, as is argued in this volume, Turkey needs to take stock of all the legislative reforms that have taken place so far. This volume clearly shows that there is a significant transformation underway in Turkey’s economy, be it in its public sector, labour or energy market or its investment policy. The purpose of this volume has thus been threefold. First, it sought to examine the economic dimension of the EU-Turkey enlargement negotiations process; second, it aimed at assessing the current strengths and weaknesses of the Turkish candidature by investigating how well Turkey has responded to the European Union’s economic conditionality; and third, it purported to discuss the implications of the accession negotiations for various sectors of the Turkish economy and its economy in general. Turkey has undertaken significant measures in regards to reforming structural policy and in following the guidelines the EU has placed before them. Due to the determination of the Turkish authorities and with considerable EU financial and technical assistance, Turkey has made significant progress towards economic integration into the European Union. Despite certain shortcomings and the impact of the recent financial crisis, Turkey has displayed a very dynamic economy and great potential for developing even further. The country possesses a functioning market economy with all the necessary hallmarks for coping with competitive pressure and market forces within the Union. Specifically, despite the challenges that the 2008 financial crisis has brought about, the Turkish economic policy has remained largely on course. Nevertheless, confidence in the Turkish economic policy would increase if the Turkish Government undertook significant improvements in its planning, coordination, and communication. In terms of macroeconomics stability, the global financial crisis has had a considerable effect upon the Turkish economy, mainly due to the sharp decrease both in domestic and external demand. However, it should be noted that the Turkish Government managed to keep access to external finance open to both the public and private sectors. As far as the labor market is concerned, the global financial crisis worsened the pre-existing conditions resulting in increased unemployment and sharp decline of economic activity. Unemployment rate increased to 282

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Conclusion

14 percent in 2009, while long-term unemployment stood at 3.5 percent in the same period. On the other hand, price stability improved significantly due to the softening of pressures stemming from energy inputs.1 Despite the fact that the measures taken by the Turkish Government to ease the pressures stemming from the global financial crisis worked, the Commission expressed its fear that these measures could “put benefits from previous years of fiscal consolidation and fiscal sustainability at risk.”2 Of particular importance is the fact that previous plans of the Turkish Government to improve fiscal transparency were put on hold, while the Commission continued to argue that that some of these measures were “even reversed.” Despite the global economic crisis, it could be concluded that the Turkish economic policy proved to be quite effective but as in other European economies macroeconomic stability remains vulnerable. With reference to the functioning of a market economy, some progress has been made in improving the interplay of market forces. Due to the unfavorable international economic environment, privatization has been slowly but steadily advancing. As the Commission mentions in its 2009 Progress Report, new legislation eased obstacles to market entry but they still continue to exist in market exit and must therefore be addressed by Ankara. Another area that has displeased the Commission is related to the business environment in Turkey. According to the Commission, “the legal environment, and in particular court procedures, pose practical challenges and create obstacles to a better and more effective business environment”3 in some sectors. Finally, due to the earlier reform efforts of the Turkish Government, the financial sector demonstrated significant resilience to the effects of the global economic crisis. In terms of Turkey’s capacity to cope with competitive pressure and market forces within the Union, it might be argued that the global economic crisis did not jeopardize the functioning of market mechanisms and that Turkey’s economy continues to operate relatively smoothly. Some progress has been reported in upgrading the country’s human and physical capital, although the economic crisis represents a new challenge to this process.4 Overall, it is acknowledged that both increased spending and reforms in education are showing positive impact, despite some persistent problems 1. 2. 3. 4.

Commission of the European Communities (CEC), Regular Report on Turkey’s Progress towards Accession. Brussels: CEC, 2009, p. 35. Ibid., p. 35. Ibid., p. 37. Ibid., p. 38.

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in the skills mismatch. Although there has been a contraction in both gross fixed capital formation and inflows of foreign direct investment, such as the 2010 GDP growth rate, resumption is expected in the growth rates of physical capital. One area that has not been much affected by the crisis and has continued to lag behind EU averages has been the rate in R&D investment in Turkey. This indicator is crucial in so far as explaining why Turkey is falling behind in the area of innovation. Despite the efforts of the Turkish Government, the global financial crisis has complicated the access of SMEs to capital, thereby preventing a faster sectoral transformation of the Turkish economy. Due to the crisis the share of SMEs in total bank loans decreased from 23 percent to 21.4 percent. Despite the new guarantee fund for SMEs, the earmarked funds were underutilized as few SMEs gained access to credit.5 One particular sector that is lagging behind market liberalization is agriculture. Even though Turkey has undergone a significant transformation of the sectoral structure of its economy and reduced the share of agriculture in GDP from 24 percent in 1980 to 9 percent in 2009, this share is much higher than the 3 percent EU average. The 2010 OECD report indicates that the main weakness in the Turkish economy is strict labour market that is coupled with a large informal sector. These two factors also remain the main weakness of the economy in membership negotiations. On the other hand, trade and economic integration with the EU have remained high. The Commission noted in particular that Turkey “showed remarkable flexibility and diversified its trade towards new markets, thereby partly alleviating the impact of crisis” and that the country made “significant gains to price and cost competitiveness” vis-a-vis the European Union.6 Overall, certain economic sectors do better than others in responding to accession pressures and meeting the demands of the EU acquis. However, this situation has not been unique to Turkey. In the past, other candidate countries have found themselves in a similar position. It is worth noting that the Turkish economy today displays a greater dynamism and more potential than that of Bulgaria and Romania at the time of their accession to the European Union. The EU-Turkey Customs Union contributed to a considerable increase in bilateral trade. It is worth noting that almost half of Turkey’s total trade is with the European Union. The latter has asked Ankara to remove all remaining restrictions on the free movement of goods, including 5. 6.

2010 Turkey Progress Report. Ibid., p. 39.

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restrictions on means of transport with Cyprus. A number of Turkey’s commitments in removing technical barriers to trade, such as import licenses, restrictions on import of goods from third countries, constraints on free circulation in the EU, state aid, enforcement of intellectual property rights, and the use of safeguard measures remain unfulfilled.7 Finally, no progress has been made on Turkey’s ban on imports of “live bovine animals, beef meat and other animal products.”8 Nevertheless, despite the existing weaknesses, the EU-Turkey Customs Union has contributed to a significant increase in bilateral EU-Turkey trade and has made Turkey one of the largest trade partners of the European Union, and still continues to provide significant guidance to the Turkish authorities on reform priorities through the Accession Partnership. The convergence of Turkey’s economy to that of the EU is one of the vital preconditions for full membership. This can be achieved by attaining a higher growth rate than the EU averages. To do so, Turkey has to increase her innovative performance. On the other hand, a persistent gap still remains between EU countries and Turkey in terms of knowledge production. More specifically, there is also a technology gap between Turkey and EU countries. According to the 2010 Progress Report spending on human resources (i.e., education) increased from 2.6 percent in 2000 to 3.0 percent of GDP in 2009, whereas gross domestic expenditure on R&D as a percent of GDP remained 0.7 percent throughout the last decade. Thus, the performance of Turkey is not up to the mark in terms of its knowledge production, and it will be very difficult to achieve real convergence to EU countries unless the policies necessary for increasing the rate of technological progress are implemented. Coupled with the tutelage of the IMF the EU’s Copenhagen economic criteria have significantly influenced the Turkish polity in the 2000s. Although the EU’s economic criteria have fallen short of eliminating discretionary allocations fully, they have nevertheless substantially reduced the opportunities for patronage politics in the Turkish context. On the rocky road to the EU accession, the Turkish government has been required to formulate and implement social policies which target the lowest end of the income scale, as well as strategies to translate growth in the economy into higher employment prospects. The AKP was partially successful in fulfilling the EU’s economic criteria as the government displayed a better performance in achieving macroeconomic stability and providing a climate of predictability to market participants than in tackling 7. 8.

Ibid., p. 5. Ibid., p. 5.

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the deeper and more structural problems of the Turkish economy, such as unemployment, income inequality, and the reduction of the informal economy. The AKP has not fully adhered to EU criteria given the difficulty of balancing its neoliberal policies with socioeconomic strategies in order to enhance the capacity of the Turkish economy to tackle the challenges posed by growing global competition and thus reduce the country’s costs of absorption by the European Union. Failure to solve any social and economic problems arising from accession pressures will prove costly for the AKP government as this will not only alienate the lower classes from the party but also interrupt the country’s progress on its EU trajectory. Turkey has endeavored to enhance public sector governance. Adoption of the EU Acquis is one of the contributors to such a shift, but the lack of its holistic focus on public sector reforms leaves little opportunity for the monitoring and evaluation of the implementation of these reforms in a comprehensive manner. Consequently, there is a real need for a new strategic evaluation mechanism to consider not only the implementation of each reform item separately, but also to examine its contributions to and alignment with broader reform categories, such as state-market relations, decentralization, state-civil society relations, and anti-corruption and transparency agendas. Turkey has undergone significant changes redefining the government’s operating environment according to these broad categories. These changes need to accompany new accountability relationships between the government, the parliament, the citizens and the market. Turkey has also made great progress with the other reforms. Therefore, good governance is produced through a vigorous relationship between active citizens, civil society organizations, and strong government based on the representation of people’s needs and aspirations in policy making and in the implementation processes. Turkey could assess recent changes by establishing a series of governance indicators to monitor and guide reforms in line with this agenda. These indicators would contribute to the effective assessment of outcomes and enable policy makers to further strengthen the public sector reforms. This would ultimately serve Turkey’s efforts to adapt to the EU acquis as well. Access to external finance is especially important for developing countries like Turkey that need to undertake large infrastructure projects. One source of such finance is foreign direct investment. Even though the financial crisis caused external finance to dry up globally, foreign direct investment has shown reasonable degree of resilience in emerging market economies. Even though direct investment policy is not one of the chapters of the acquis, it is part of the process of economic integration with the EU. Historically, foreign direct investment (FDI) in Turkey has been 286

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characterized by chronic underperformance, as was the case throughout the 1980s and 1990s despite a global increase of FDI in other developing countries throughout this latter period. However, Turkey’s poor FDI performance has improved dramatically since the early 2000s, having recently caught up to its Eastern European competitors in many respects within the past few years. This turnaround can be attributed to three major factors: first, the election of a new political regime committed to FDIfavourable legislative reform (the most important piece of which has been a new FDI law); second, the support of large supranational organizations, most importantly the IMF and the EU; and, finally, a major wave of privatization. These three factors benefited from the pro-reform environment that followed after the ‘twin crisis’ of 2000-2001 and the election of AKP. It is worth noting that since 2001, Turkey has narrowed its institutional gap with the Central and Eastern European Countries (CEECs), which became EU Member States in 2004. However, the sustainability of this turnaround remains uncertain. For Turkey, after peaking at 16 million euro in 2006-2007, direct investment flows diminished to 5 million euro in 2009. The structural reforms of the economy have brought down both inflation and the fiscal deficit to single digits, and the experience of the late financial crisis showed that Turkey has a stronger economy now than it did in 2001. Although the current collapse in FDI inflows is global and a better macroeconomic environment and the new FDI law have had a positive impact on the investment climate in Turkey, there are still obstacles to doing business in this country. Many of these are administrative barriers to investment, the level of corruption, and some restrictions to FDI exist in certain industries. The appropriate implementation of regulations and the functioning of institutions are therefore imperative for sustained FDI inflows. One of Turkey’s most significant shortcomings in its FDI attractiveness is its small pool of skilled labour. Education levels are considerably higher in all CEECs, especially in non-professional sectors. This could be a potential problem for Turkey since empirical studies indicate that FDI is only growth-promoting if human capital is taken into account. One of the policy recommendations is that Turkey should invest in education not only to attract more FDI but also to benefit from it in and of itself. Another policy recommendation is that the bureaucratic elite realize that FDI, among other types of capital flows, is more stable insofar as it provides risksharing, unlike short-term portfolio flows or other debt-creating capital flows. The outlook on global FDI flows is negative, according to the 2010 A.T. Kearney’s FDI confidence index and Turkey has become less competitive vis a vis several other emerging market economies, most 287

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notably the Gulf Corporation Countries. While the current slump in FDI is transient, other factors may have a more permanent effect on Turkey. One such factor is a possible breakdown in the negotiations with the EU for full membership and a slowdown or end of the privatization process. In terms of the EU accession process, little negative impact on FDI performance is expected despite several setbacks in negotiations due to Turkey’s political situation with Cyprus. This is because Turkey has made progress in two particular chapters of the acquis, which relate directly to FDI. In summary, any progress under the relevant EU Chapters would increase Turkey’s FDI competitiveness. Therefore, it is the process, not the membership that matters most. As indicated in several reports, the rigid labour market is one of the weaknesses of the Turkish economy. As such several recent trends present unique challenges for Turkey in the accession process. These include a rise in the working age population which has surpassed job growth and has led to high unemployment and high levels of informal/undeclared work, a low rate of female participation in the labor market and a sectoral shift from agricultural activities to manufacturing which has resulted in high rates of urbanization. The OECD and World Bank policy recommendations have suggested that Turkey relax government employment protections which raise the cost of labor and also provide education and training programs to tackle issues of unemployment and informal employment. Although the European Commission’s Annual Progress Reports see progress in the legislative changes made to tackle the aforementioned problems, cite several areas which must be addressed further, including health and safety at work, the strengthening of labor unions, employment policies, policies protecting populations at risk, and finally anti-discrimination and equal opportunity laws, particularly for women in the workplace. Turkey must improve its system of social security and education, relax rigid labor laws in order to generate employment and decrease informal labor, work towards increased female participation in the labor market, and decide on a suitable combination of flexibility and job security in order to remain competitive, as well as continue to support foreign investment in an effort to encourage job creation. Given the overall picture concerning the legal and policy framework in the areas of employment and gender equality in Turkey, it could be concluded that although the legal framework is in place, further efforts are required to translate it into social reality. There still exist wide regional, local, and gender-related gaps to be narrowed. To arrive at a more egalitarian society there must also be a fundamental change in the attitudes of men toward the position of women in society and within the family. Thus, there is a need 288

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for a change of mentality, which we are convinced that increased public awareness could bring about, thus internalizing the legal changes related to gender equality in the Turkish society at large. This necessitates a coordinated and an overall social transformation process in which gender equality is mainstreamed into all areas, so that the legislative changes can be reflected in the private sphere. In order to be able to cope with competitive pressures of joining the EU, a healthy enterprise structure is essential. To this effect, small and medium size enterprises play a significant role in the EU. In terms of the competitiveness of Turkish small and medium size enterprises (SMEs), Turkey has made considerable progress in harmonizing with the relevant EU acquis. SMEs constitute the driving force of a country’s economy. Therefore, the development and growth of the Turkish SMEs must be maintained and their competitive strength increased in order to produce a sustainable development model and an economy that has high competitive strength. With the Customs Union process that began in 1996, Turkish SMEs entered into an intense competitive environment after funds and customs were abolished in the Turkish industrial sector. When comparing Turkish SMEs with those in EU countries, important differences in terms of competitive strength, scale, capital size, technical infrastructure, training and entrepreneurial spirit emerge. To remain competitive, Turkish SMEs need to have access to market information (competitors’ situation, demand, product price and marketing activities), product information (product development, product design, technology, production and investment planning), and financial information (external financing, leasing, factoring, risk capital and credits). At the same time, Turkish SMEs need to strengthen their institutional capacity for assessing this information accurately. This situation is necessary for the integration of Turkey into the EU both economically and commercially and Turkey has made considerable progress in harmonizing with the relevant EU acquis. The young population in Turkey in conjunction with the country’s entrepreneurial capacity plays a crucial role in Turkey’s competitiveness. If supported appropriately, SMEs can contribute to a more sustainable and efficient Turkish economy. The advantages created by the SMEs, particularly the provision of new services, creation of employment opportunities, and the increase of social development and regional progress are undeniable. On the other hand, negative factors such as the decline in domestic demands, high cost of energy, inadequacy of operating capital, and high interest rates continue to impose serious restrictions on the SMEs in Turkey. The Turkish Government must therefore continue to take important steps regarding policies on the SMEs. Government289

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sponsored programmes, whose intentions include educating SME managers, supporting companies within infant industries at the outset of trade-liberalization, and fostering efficient and equitable practices within and among SMEs, are some of the strategies that the Turkish Government could use to enhance the competitiveness of the Turkish SMEs. Another challenge in negotiations with Turkey is the agriculture sector. Due to its economic size and social importance, agriculture constitutes an economic sector of vital importance for Turkey. Because Turkish agriculture has long been neglected and most governments consider agricultural policies a tool of populism instead of an instrument of longterm structural reforms, this sector has not been very competitive vis-à-vis the European Union. Productivity still remains a huge problem in Turkish agriculture for many important products, which largely reduces the competitive power of the sector. The relatively low level of mechanization, lack of infrastructure and investment in agriculture, and insufficient levels of irrigation have emerged as barriers to increasing productivity. Common market arrangements have not been able to be established and in certain areas the problems in organization and marketing have been left unresolved. As a result, it is very difficult to bring Turkish agricultural policies in line with the EU acquis. Currently, about one-third of workforce in Turkey is employed in agriculture. The WTO and the EU have suggested that Turkey gradually reduce this rate to around ten percent in order to achieve a more productive and less costly agricultural sector. One thing that Turkish agriculture needs urgently is a large-scale, stabilized rural development policy which would increase the competitiveness of economic activities, create alternative employment opportunities, and to protect the environment and the rural inheritance in such areas. The second pillar of the CAP, rural development programmes, would be a valuable tool for such a reform and thus the negative consequences could be minimized. In the absence of a structural rural reform, an increase in rural unemployment carries the risk of creating negative socio-economic consequences in both rural and urban areas. Apart from that, the target of membership to the EU creates a solid anchor for the structural reforms in the agricultural sector. Alignment of the institutional structure of the sector to the acquis requires serious reforms in a wide range of issues such as the reorganization of institutions and legislations, land property, employment, research and education, more integration of agricultural related industries with the farms, sanitary issues in the food industry, veterinary issues, animal welfare and plant health. If

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Turkey is willing to materialize the EU membership, necessary adjustments in the regulatory framework and implementation should be made undertaken as soon as possible. If the necessary steps towards a structural and rural reform, which had been neglected for a long time, could be swept up in the wind of the accession process, Turkish agriculture could obtain certain gains from membership in the EU. The most important gain would be for consumers, where decreasing prices in various products and increased food safety and health would be beneficial. On the side of producers, competitive sectors like fruits and vegetables and tobacco will generally gain, while livestock, meat products and cereals sectors are likely to experience losses from the project. Throughout the process, Turkish policy makers should determine the vulnerable points of the sector and prepare solid programs benefit from the structural and rural policy funds of the European Union. In this way, full integration into the EU would turn into an opportunity for the Turkish agriculture. Because the agriculture industry is such an enormous part of Turkey’s economy, opening up trade to EU Member States contains a considerable amount of risk and is thus highly controversial. A cost-benefit analysis of the accession of Turkey to the EU reveals that Turkey will become a netimporter of agricultural goods. Consequently, prices will fall, and consumers will benefit. However, since one-third of the Turkish population is currently employed in agriculture, considerable problems in the short-term would arise once Turkey has completely adopted EU and WTO policies. Turkish policy-makers must therefore take precautions which take into account these potential obstacles. Accession to the EU will be profitable to Turkey’s economy, but only if Turkey focuses between now and its accession date (likely 2015) on enhancing and preparing its comparatively disadvantageous agricultural sector through investment in mechanization and more efficient and value-adding farming practices. In this volume, we have also included discussions on two sectors as case studies: energy and the telecommunication sectors. Both are vital in the economic transformation of Turkey and present both an opportunity and a challenge for the EU. As of June 2010, the chapter of the acquis on energy (chapter 15) was not opened for negotiations, whereas negotiations under Chapter 10 – Information Society and Media – started in 2008. Even though Chapter 15 has not yet been opened to negotiations, the 2010 Progress Report indicates good advances in the area of energy supply security and also in electricity, renewable energy and energy efficiency. Because dependency of many countries on energy is crucial to the

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continuity of economic activities, securing energy transports for the EU makes it a crucial matter. Turkey’s enhanced strategic location enables the country to provide the EU countries with an abundance of energy at lower prices, and at the same time enhance its relationship with the European Union. However, the EU has currently failed to meet any solutions for its energy dilemma. Nevertheless, Turkey has almost no leverage over the energy source countries in Central Asia and the Caspian Sea that would provide Europe with a greater energy supply, and moreover, any chance it has to do so would rely solely on agreements with Russia. We should therefore, not expect that Ankara’s use of Turkey’s strategic location as an energy hub to the EU would necessarily enhance the country’s entry into the European Union. Instead, it can only improve its relations with the EU if they allow it to. Nonetheless, Turkey must engage in a multitude of agreements with surrounding countries that control and dictate the energy routes and pipelines if it wishes to pursue its role as an energy hub to the West. Due to its large and young population Turkey’s communication sector represents an area that could aid the country’s growth. By modernizing Turkey’s telecommunications sector there could be improvements to consumer welfare as well as lower prices and increased innovation. Currently, most of the legislation and implementation are generally in accordance with EU legislation and practices. Following its establishment, the Telecommunications Authority (TA) has dealt with many dispute resolutions related to access and interconnection issues. In terms of licensing regime, some extra harmonization work needs to be undertaken in the medium term in order to simplify market entry process. Furthermore, although some small differences exist between Turkey and EU in the context of administration and direction of the universal services and its funding, the scope of the universal services in Turkey is same as in EU Member States. In this category, telephone services, public pay phones, emergency telecommunications services, telephone directory, and most notably basic internet services are included in the scope of universal service in Turkey. Since Turkey is a developing country and must increase her growth rate to catch up with other EU countries, universal service policies in the context of broadband and internet services should be more actively assisted by the government. The EU should also support these policies to decrease digital divide in the EU. Despite some drawbacks, there is no doubt that the launching of accession negotiations in the telecommunications sector has given an impetus to both government authorities and to the sector itself in terms of more growth and more consumer satisfaction both from the adaptation of 292

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relevant EU legislation and increasing competition. In this context, in parallel with the objectives of the information society program, both the development and use of broadband services should be more actively supported by devising support mechanisms in the form of tax reductions, co-funded projects and public courses for computer literacy. There is little doubt that the financial crisis of 2008 has affected the Turkish economy but has not severely complicated the Turkish accession prospects. This is partly due to the country’s dynamic economy but is mainly the result of the Turkish Government’s determination to introduce the necessary structural changes that would keep Turkey firmly on the path to EU membership.

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List of Contributors

Fuat Andıç, Economic Expert, The World Bank, Washington, D.C., USA. Emrah Arbak, Researcher, Centre for European Policy Studies (CEPS), Brussels, Belgium. Yakup Beriş, Economic Expert, The World Bank, Washington, D.C., USA Senem Besler, Associate Professor, Faculty of Administrative Sciences, Anadolu University, Turkey.

Economics and

Ìlke Civelekoğlu, Lecturer, Department of International Relations, Dogus University, Istanbul, Turkey. Feray Erselcan, Head of Department of International Trade and Marketing, Gediz University, Izmir, Turkey. Selen Sarisoy Guerin, Assistant Professor and Senior Researcher, Institute of European Studies, Vrije Universiteit Brussel. Aslı Gürkan, External Affairs Department, The World Bank, Washington, D.C., USA. Sema Kalaycıoğlu, Professor of Economics and Regional Development, Isık University, Turkey. Andrea Renda, Senior Research Fellow, Centre for European Policy Studies (CEPS), Brussels, Belgium Yannis A. Stivachtis, Associate Professor of International Relations and Director of the International Studies Program, Virginia Polytechnic Institute & State University, USA. Mahmut Tekçe, Lecturer, Department of Economics, Marmara University, Istanbul, Turkey. H. Zümrüt Tonuş, Associate Professor, Faculty of Economics and Administrative Sciences, Anadolu University, Turkey.

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