The Chairman's Speech at the Assembly / 25 April 2007

Mr. Chairman, Esteemed members of the assembly and of the press,

On behalf of the Board of Directors I would like to welcome you to our April meeting. We would also like to welcome our guests today, the chairman of the board, the speaker of the assembly and the members of the Sivas Chamber of Commerce and Industry.

Every year we of the Istanbul Chamber of Industry make an effort to foster relations among the chambers in Turkey by traveling at least once to other cities around the country to have a look at developments in industry outside of Istanbul. In 2005 we visited Sivas and the Sivas Chamber of Commerce and Industry. Today the Sivas Chamber's Assembly is paying a return visit to Istanbul and the Istanbul Chamber.

It gives us great pleasure to have the assembly speaker, board chairman and other distinguished members of the Sivas Chamber of Commerce and Industry with us today.

Esteemed members of the Assembly,

Distinguished guests:

I would like to start my talk by reminding you first of all of the recent developments in the economy. According to figures released on 2nd April, the Turkish economy continued to grow in the last quarter of 2006, bringing GNP growth to 6% for the year. This means that the Turkish economy has grown without interruption for five consecutive years. A very significant success! We are always saying that industry is the engine of growth! And indeed the growth figures for 2006 clearly bear this out.

When we look at the contribution of the various sectors to growth in national product, we see that 2.2% of that 6% growth derived from industry. What's more, when we consider that accelerated growth in industry also galvanizes the other branches such as commerce and transportation, and when we take into account the influence of those sectors, then our industry's contribution to national growth exceeds 3%. In other words, more than half the country's growth was due to the industrial sector.

In the last five-year period, besides growth enormous success was also achieved in the fight against inflation. As you will remember, annual inflation at the end of 2005 fell to its lowest level in the last 37 years at 7.7%. But there was a deviation from the target in 2006 under the impact of the fluctuation in May.

To compensate for that deviation, the fight against inflation must be pursued with resolve from here on out. Another success of recent years is the improvement achieved in the ratio of the net volume of public debt to GNP. This ratio, which was 70.8% in 2002, fell in 2006 to 44.8%, and at this level is even lower than in several European Union economies!

These are, of course, important successes, significant gains! But, as we never tire of saying, what is even more important is that those gains be preserved. That all uncertainty regarding the sustainability of those gains be eliminated and new ones not permitted to emerge. I would like to digress a little here: a major improvement has also been achieved in the budget deficit as a result of the resolve shown in fiscal discipline. At the end of the first two months of 2007, however, we read news to the effect that there was a rapid rise in the national budget deficit. Now we see that this imbalance was corrected at the end of the third month through the contribution of privatization proceeds. We would however like to remind you once again that fiscal discipline must continue, despite the elections, and that a public deficit problem must not be added to the existing current account deficit. Such a situation would give rise to a second form of fragility in the economy.

To return again to growth and to assess the first months of 2007 from that standpoint, our industry made a good start in 2007. In January we realized a significant increase in production of 14.9%. And following this, industrial production in February was again up by 7.1%.

At the same time, according to foreign trade figures published by the Turkish Bureau of Statistics, growth in Turkey's exports in the first two months of 2007 is at 26.5% over the same period last year. And data published by the Union of Exporters of Turkey indicate that export growth continued in March as well. Indeed, so much so that the highest monthly level of export growth in Turkish history was achieved in March at 8,935 million dollars. Based on these figures we can predict that growth too is going to continue in the first quarter of 2007.

In all probability the Turkish economy is going to continue to grow in the next quarter as well, thereby exhibiting successful growth for 21 consecutive quarters! And this too is going to break a new record since quarterly growth figures began being published back in 1987.

A look at the figures year by year shows that Turkey grew without interruption, albeit at low rates, in the 1955-1978 and 1981-1993 periods

Average annual growth was 5.5% in the 24 years from 1955 to 1987 and 5.2% in the thirteen years from 1981 to 1993.

But average annual growth in the recent five-year period of uninterrupted growth has been 7.5%. For now therefore the highest-ever rate of average annual growth appears to have been achieved in this period.

As industrialists we know that we have had a big hand in this success and we are proud of that. But besides the pride we feel, we also try, as you know, to keep the following issue always on the agenda: the economy is growing, yes, and exports are on the rise. But how is it growing? At what cost? Are we aware of the high cost that underlies this apparent success? As we so frequently point out, our industrialists are achieving this success by employing fewer workers, by using imported inputs made cheaper by the low exchange rates, by incurring exchange rate risk due to borrowing from abroad, and by sacrificing their profitability--all in the name of boosting productivity. While the economy grew by an average of 7.5% a year over the last five years, the annual average increase in employment was only 0.7%. This is known in the economic literature as 'jobless growth'.

The economy is growing on the one hand, but our foreign trade deficit is also widening on the other! Meanwhile, our domestic producers of inputs, who are unable to stand up to the pressure of cheap imports, are being virtually wiped out of the market. Furthermore, as we point out at every opportunity, the profitability of our enterprises is being steadily eroded.

According to the results of the ISO 500, an annual survey of Turkey's 500 largest industrial enterprises published every year by our Chamber, return on sales, which was 9.2% among the private enterprises surveyed in 1995, had fallen by half in 2005 to 4.7%. The same survey again shows that close to all the sub-sectors of the manufacturing industry are struggling to stay afloat with profitability ratios that are lower by half than those of ten years ago. The most dramatic fall in productivity is in the textiles sector. Taking return on sales to be 100 in 1994, this figure had fallen in 2005 to minus 8.6. I would once again like to underscore the fact that when we speak of 'profit' we are referring not to personal profit but rather to an enterprises' capacity for generating funds.

Profitability in this sense is therefore not a micro problem of concern only to enterprises but a macro problem that concerns the economy as a whole. A decline in the capacity of enterprises to generate funds has adverse repercussions for the entire economy.

How can an enterprise whose profitability is falling generate funds? How can it make investments? How can it create new jobs, or pay its workers decent wages?

The Turkish private sector, whose profitability is declining and whose capacity for generating funds is therefore gradually decreasing, is being forced to go into debt in order to make investments and, literally, to remain in existence.

The growth figures show that there was an increase in fixed capital investment spending in the private sector in 2006. The private sector spent YTL 96.3 billion, in other words close to 67 billion dollars, on fixed capital investments. This increase in investments is of course a welcome development! But the other side of the coin is that foreign debt in the sector also climbed to 121 billion dollars by the end of 2006 - an increase of 36 billion over the 85 billion at the end of 2005. And we know that growth in private sector borrowing has negative consequences for the current account deficit.

For the 38.8 billion dollar growth in GNP in 2006 there was a corresponding current account deficit of 31.5 billion dollars. And this means that Turkey last year chalked up a deficit of 81 dollars for every 100 dollars of GNP growth. Yet the current account deficit must be kept to tolerable levels in an economy whose enterprises are unable to generate adequate funds!

Esteemed members of the Assembly,

Distinguished guests:

Yes, the Turkish economy is growing. But to close the gap with the developed countries and solve its economic and social problems, Turkey needs to grow without interruption and at higher rates. In other words, Turkey needs to make a leap, to achieve a virtual economic miracle. As I pointed out at the start of my talk, the biggest contribution to the country's growth comes from the industrial sector. Therefore, the path to such an economic leap lies through industry. Industry in Turkey is essentially concentrated in the Marmara region. Istanbul, where the foundations of our industry were laid, has been the crux of Turkish manufacturing since the 1950s. But it is becoming more and more difficult for Istanbul and the Marmara region to shoulder that burden, in terms both of population and of infrastructure.

An approach based on reducing Istanbul's share in industry and turning it into a global center for services, finance, tourism, commerce, management and logistics has been bruited about frequently in recent years. But it is not realistic to think that Istanbul, which is home to 38% of the nation's industrial enterprises, is going to relinquish that role easily and assume a service-oriented structure. Indeed, the manufacturing industry took first place with 53% of incentive-based investments made in Istanbul between 2002 and 2006.

This means that Istanbul has not given up on industry. There is definitely going to industry in Istanbul! And there should be! But serious thought needs to be given to how that industry is going to be.

At the same time, great industrial leaps have been made in recent years in a number of provinces in Anatolia. We always return with great hope from all our trips after witnessing the production potential in Anatolia. Surely this enthusiasm should be able to take us further ahead! Therefore, we need to rethink our industry both in Istanbul and the Marmara region and in the country as a whole within the context of a new division of labor. We should take up the question as part of a plan or program involving ports as well as highway and rail connections. This is of great importance as a way of controlling migration and of eliminating income differences among the regions.

As we think about a new industrial strategy, we need to focus on this question:

What should we target for our industry?

Turkey has chalked up a successful record in the outward orientation process it has been following since the 1980s. What we need to ask now is where do we go from here?

In our opinion, China and India can manufacture everything more cheaply than we can. And tomorrow others are going to manufacture the same things even more cheaply. There will always be somebody that can produce something more cheaply! Both for the Marmara region and for Anatolia, we should target a structure of production that is based on skill, knowledge, technology and quality, and that creates high value added!

How are we going to go over to such a structure of production?

As a very important step on the path to this goal we are assessing the development in cooperation between the universities and industry. As I said earlier in our assembly, in the studies we have done on the subject here at the Istanbul Chamber of Industry we have seen that our universities have a very different agenda from that of our industry. So, first of all, it is necessary to bridge that gap and to bring the areas of interest of the universities and of industry into sync. And, once again, we should not think of this merely in terms of Istanbul or the Marmara region. From the standpoint of the transition to a skill and knowledge-based industry it is of crucial importance that this relationship be able to develop between our industrialists and universities in Anatolia as well. The industrialist must be able to ask things of the university and the university must be able to go to the industrialist. And we, as industrialists and as a chamber, should be the locomotive force in developing that cooperation.

At the same time, again as industrialists, we must realize that the rules of the game have changed both at home and abroad. We should recognize in particular that only by pooling their resources can our SME's make the kind of investments that are required by today's global competition, and if we are targeting the global markets then we should bear in mind the following, namely, if you're going to sail the open seas you need big and sturdy ships.

Taking this as our point of departure we must put aside the mentality 'let it be small but let it be mine' and join forces to build big ships. We must go for company mergers, for cooperation before competition. The success of such initiatives requires that we work together, trust each other, be transparent and share our knowledge. We must develop these aspects of ourselves. Unfortunately we aren't very good at that.

As a final point, I would like to remind you of how important vocational training is in the transition to a skill-based industry. Our industry's pressing need for skilled workers comes up a lot these days. And this could be interpreted as a sign that we have already begun to make the transition from an unskilled to a skill-based industry.

Esteemed guests:

Here at the Istanbul Chamber of Industry we are engaged in a quest to answer the question of how to take our industry into the future as best we can. For five years, for example, we have been organizing annual industry congresses and trying to contribute to the development of an industrial strategy, to producing solutions. But everyone knows and acknowledges that on its own our private sector's efforts in this direction will not be sufficient. A great responsibility falls upon our government and the managers of our economy for developing a roadmap for our industry. Areas like education and industry, in which we cannot expect to get results overnight, require long-term approaches.

What we expect is that our government and the managers of our economy will be proactive and will act on more long-term policies. Taking a long-range approach should not however be construed to mean that we enjoy the luxury of being able to waste time. As we have reiterated time and time again, "we now live in a world not where the big fish eats the little fish but where the fast fish swallows up the slower fish." Speed has become a crucial factor under the conditions of global competition.

In the last five years, for example, we were very slow in effecting structural reforms. And the effects of the reforms that were passed were not reflected in production.

Our energy costs are higher than those of our competitors. Among the OECD countries Turkey in 2006 was also the one with the heaviest burden of taxes and premiums on employers. In five years there has unfortunately still been no amelioration of these basic problems.

We were not expecting much headway to be made on structural reforms in a year like 2007 which is marked by two elections, and we therefore brought to the agenda only our request for micro reform. We see however that even our demands for micro reforms have elicited no response amidst the growing election debates. Now that the question of who will be our next president, which has occupied Turkey for days, has finally been clarified, we are hoping that attention can be focused, at least in part, on the problems in production and exports. The election agenda should not be a reason for neglecting the problems of production and of our industry, for such an oversight will entail costs!

Finally, I would like to say that we hope Abdullah Gül's candidacy for president will be good for our country and will contribute to its tranquility and political and social stability. In closing I salute all of you once again on behalf of the board of directors.

C. Tanıl KÜÇÜK
Istanbul Chamber of Industry
Chairman of the Board of Directors

The Chairman's Speech at the Assembly