World Bank Turkey Director Johannes Zutt spoke to Daily Sabah regarding the country's economy and the bank's various projects for the first time since he assumed the post of country director from Martin Raiser in November, 2015. Before his appointment to Turkey, Dutch national Zutt held the post of country director for Bangladesh and Nepal, starting in May 2013.
Director Zutt condemned the March 13 bomb attack by the PKK that killed 35 civilians in Turkish capital Ankara, where World Bank Turkey office is also located. "I would condemn terrorism, and express the Bank's condolences following last week's car bombing in Kızılay, and the hope that such incidents do not recur. The death of innocent people, who simply happened to be in the wrong place at the wrong time, is always extremely sad," he said in a message as the attack took place after this interview was carried out.
The World Bank is active in projects in health, finance, energy and urban areas in Turkey. It has been accompanying the Turkish Ministry of Health for the last 15 years in reforming the health sector, which has proven largely successful. In finance, it has been helping the banking sector to broaden their focus in providing loans through technical assistance and funding. "As an example, we are working with banks to help them to lend money to companies that want to improve their energy efficiency or want to finance renewable energy projects in the country," Zutt said.
In most other finance projects, he observed that the World Bank helps the banking sector to understand businesses, assess their risks and develop longer maturities, which is essential for SME's especially in developing countries.
The World Bank has put a lot of emphasis on the electricity sector for quite a while. Zutt said that Turkey now has one of the most modernized electricity sectors in Europe, with an important amount of private sector participation. In a recent project, the World Bank helped the Ministry of Energy to complete the energy transmission loop around the Sea of Marmara by laying cables under the Dardanelles Strait, which would help to create more stability in the electricity network in the region where most of Turkey's industries are located. The bank also helps increase Turkey's natural gas storage facilities via a project near the Salt Lake located in central Konya province, helping the country to increase its energy security. The World Bank also takes part in financing the Trans Anatolian Natural Gas Pipeline (TANAP) project that will connect Azerbaijan's gas field with Europe.
There is an ongoing land cadaster project with the Ministry of Environment and Urbanization and the bank also assists municipalities to develop local transport, water supply and waste water treatment facilities.
Zutt highlighted the Istanbul Seismic Risk Mitigation Project (ISMEP), of which the World Bank is a contributory as a series of projects since 1999, that helped upgrade the city's emergency preparedness through building command control centers on both sides of the Bosporus, along with upgrading the building code and helping to rehabilitate high valued public buildings, including schools, hospitals and in a few important buildings notable for Turkey's cultural heritage. The bank is also involved in technical assistance to various government agencies.
Asked whether the bank has projects in the agriculture sector, which remains of key importance due to increasing food prices in the country that triggers inflation, Zutt said they have ongoing projects on river basin management and improving irrigation efficiency in cooperation with the Ministry of Agriculture, the Ministry of Environment and Urbanism and State Hydraulic Works (DSİ), which would partially influence the agriculture sector. He stated that the current trend of Turkey's water exploitation is not sustainable, and the issue remains a medium to long term challenge for the water-restrained country. The bank currently has an ongoing project with the DSİ to improve the country's irrigation system.
Noting that this is a fairly modest engagement for the bank in the agriculture sector compared to other countries, he explained the main reason for this is that they believe moving into higher technology and income is currently the key challenge for Turkey.
Low oil prices, Eurozone firming to benefit Turkey in 2016
The World Bank was "pleasantly surprised," said Zutt, by Turkey's 4.2 percent GDP growth in 2015, which was significantly higher than their expectations, and the 2.4 percent growth in 2014, despite the prolonged electoral cycle, geopolitical tension from neighboring Syria and increasing terrorism in the southeast of Turkey. "There was also the unfortunate incident with the government of Russia surrounding the shooting down of the Russian plane over Turkish territory, which did not have big a effect in 2015 because it happened at the end of the year, but may have an impact going forward due to Russian sanctions," Zutt added.
Regarding the challenges awaiting the Turkish economy in 2016, Zutt underlined the importance of keeping inflation under control in the face a depreciating Turkish lira and the minimum wage increase that went into effect in February 2016, all of which Zutt said are expected to increase consumer demand. He emphasized Turkey's growing dependency on higher volatility short-term external financing to sustain the current account deficit (CAD) instead of foreign direct investments as a key challenge because this makes the Turkish economy more vulnerable to market shocks and policy changes taking place abroad. "I think we saw a hint of that with the so-called taper tantrum last year, when the U.S. Federal Reserve (Fed) first started indicating that they would tighten the U.S. monetary policy. A number of countries, Turkey among them, experienced some short term financing withdrawals that created some instability in the economy, and it is going to be a challenge going forward as well," he stated.
Zutt predicted that low oil prices will continue to help Turkey in 2016, along with continuation of the recovery in European economies. I think firming in the Eurozone, which I hope will continue, will also help Turkey because Turkey's largest trading partner continues to be the Eurozone. He also noted the environment of relative political stability party resulting from the fact that there is no election until 2019, and added that he hopes the government would carry the reforms needed to enable Turkey achieve a higher level of growth and higher income status in this period. Zutt noted that the government has largely done a very good job with macroeconomic management, though it continues to be an area that needs attention.
Inflation remains key mandate for CBRT
Answering whether the timing is good for Turkey to put more emphasis on lowering the interest rates — as repeatedly emphasized by President Recep Tayyip Erdoğan and the government to allow more funding for businesses to fuel the growth — because the Fed started increasing interest rates and a portion of short term foreign financial investments have already left Turkish markets, Zutt said the most important challenge of the Central Bank [of the Republic of Turkey (CBRT)] remains maintaining price stability as the inflation in Turkey remains high. "Why? Because it is hard for businesses to make investments in a high inflation environment, and also because inflation erodes the purchasing power of the poor. So, for those very fundamental reasons, that continues to be a critical mandate of the CBRT," he said. He noted that the market itself should set the rates for borrowers, and the cost of borrowing money should be decreased through better overall macroeconomic management and containing inflation rate.
Moving into higher tech, higher income remains key challenge for Turkey
Zutt summarized the journey of Turkey's economic growth as one of remarkable progress, starting with liberalization of the economy and trade in the 1980's, continued with admission into the Customs Union in 1995 and the initiation of the EU accession process in 2005. He noted that especially since the Justice and Development Party (AK Party) came to power in 2002, forward moving developments like strong macroeconomic management, switching to liberal exchange and rapid urbanization alongside well-thought investments in transportation, logistics, and energy sector have taken place and have been supported by the restructuring of the banking sector in 2001 and 2002 and good business regulations imposed in the last decade.
He noted that these developments enabled the business sector to grow quickly, create more jobs, and lift more people out of poverty, while that transforming its labor from agriculture into industry and services and increasing its exports in manufactured goods. "That is a very good strategy for a developing country and Turkey did a very good job over the last 10 to 15 years bringing medium technology manufactured goods to Europe and elsewhere," he said.
However, Zutt said that Turkey should switch its manufacturing sector into higher technology to overcome middle income trap. "The medium tech area is not good enough anymore to enable Turkey to grow to higher income. That means the key challenge now, and it will take a number of years to meet this challenge, is to move into goods manufactured with higher technology. It means a stronger emphasis on innovation, a stronger emphasis on moving up the value chain in particular industries," Zutt said.
He cited key achievements for Turkey to overcome this challenge as higher quality tertiary education added to the expansion in recent years, a skilled labor force and more high-tech FDI and partners. He also noted current economic institutions should be expanded or reformed to bring the country to the higher income level status.
"For instance, in the financial sector, the banking sector quite strong and well-developed, but Turkey for a country of its size, still does not really have very good capital markets" Zutt said, pointing out to their role providing financing for businesses.
Answering whether he finds the reforms put forward in the government's one-year reform implementation plan as promising to move out of the middle income trap, Zutt said that the trick for Turkey in this challenge is the implementation of these reforms along with the initiative to do so.
"I think the government is aware that the reform initiative that existed between 2002 and 2007, which really accelerated growth in that period, was critical to making that growth happen" he said, adding that the effects of the 2008 financial crisis slowed down the growth, while the momentum of the initial reforms has also come to an end.
Zutt said that the Turkish authorities understand the fact that they need to reevaluate the current situation of the economy periodically, determine their challenges and move forward with a new reform agenda. However, he underlined that Turkey, as a developing economy, needs to improve the way that different parts of the government and private sector cooperate with each other in implementing those reforms. If fully implemented, on the time frame that the government has set out, he said these plans would make a significant difference.
World Bank undertakes large survey to determine conditions of Syrians in Turkey
Praising Turkey's role and practices – registration, providing ID documentation, access to healthcare and education services, social assistance and work permits – in coping with the ongoing Syrian refugee crisis, Zutt said Turkey's actions will contribute to a realizing a better result than those experienced with other refugee crises in the world.
"It makes it much more possible for Syrians to integrate into the Turkish economy during their period of temporary refuge. That means that they will be much better off and it would be much more likely that they will contribute to Turkey's economy going forward, rather than simply be a drag on it, which is what often happens when you have concentrations of refugees in large camps in other countries in the world," Zutt said.
Answering whether the World Bank can play a role for supporting Turkey to cope with the ongoing Syrian refugee crisis in terms of more funding and assistance, Zutt said that Turkish government did has not made a direct request to borrow any funds from the World Bank regarding Syrian refugees. Commenting on the recent EU-Turkey agreement amounting to six billion euros for assisting refugees, Zutt said that this amount is very important. "It makes very good sense for the government of Turkey to determine how that money will flow and be used before it goes beyond to talk to other donors about additional financing" he said.
Zutt explained that the bank currently undertakes a large survey of Syrians who are now under temporary protection in Turkey to determine the challenges they are facing in daily life. He said that this survey will both help ministries and municipalities to understand the challenges they are facing at the local level.
"There is actually very little known about what we are going through. There have been very few large, comprehensive, statistically robust surveys done anywhere. We firmly believe if you don't know what is happening, it is very hard to design a response that will actually help to make things better," he added.
Zutt said that this survey will also include hosting communities, which are under the pressure of facing a sudden increase in demands for services, houses and jobs. He told that the survey will include answers to issues like "what sorts of challenges they are facing, what sort of situation they are in, where they came from, who they are, where they are going, how they are living, how they are gaining their livelihoods."
He added that they want to survey the whole Syrian population, not only the ones living in camps, which make up roughly ten percent of the whole Syrian population in the country. In order to achieve this aim and provide valuable information for Turkish ministries, they aim for a sample size of at least 8,000 people or perhaps 12,000.
"We will finally have some hard data about how Syrians under temporary protection in general are faring in Turkey" Zutt said, emphasizing that most stories on Syrians living in Turkey are anecdotal, and that they are trying to get accurate information that can enable the government to tailor its responses to the population in a much better way.
Zutt said that in countries like Jordan or Lebanon, the World Bank have helped to manage money coming from donors, but have not met such request from the Turkish authorities.
Labor reform needed to improve conditions of the poor, unemployed
Asked to comment on his earlier statement published by the official Anadolu Agency that more flexible labor legislation is needed while the government is pressing for reforms and encountering increasing resistance from trade unions, Zutt said the key difficulty in the Turkish labor market is releasing workers and hiring new ones under the current severance regime.
"Job security is something that everybody worries about, but what we have in Turkey is a severance regime that in a way is so generous, that employers cannot actually pay it" he said, noting that businesses tend to take evasive action when facing paying high premiums to release workers, resulting in worse contracts for employees in the labor market, newly hired employees or informal employment with no social security. He emphasized the need for a severance regime that would enable a less problematic release of workers no longer meeting business needs.
"Having said all that, I do recognize, and the World Bank also recognizes, that if you are advocating for businesses to let go of employees who no longer serve an appropriate function within a business, you also need a regime that enables those employees to re-skill themselves to move into another part of the economy" Zutt continued, noting the need for structures and institutions to support workers in case they are released.
"But that is an example of a labor rigidity that we think is actually suppressing total employment, and certainly total formal employment, in this country; and that means that the worst-off people in the Turkish economy have fewer chances to get better positions."
Regarding the possible reaction from trade unions and the public, which has become increasingly focused on labor related issues due to labor accidents in recent years, Zutt said the interests of unemployed people is very important in this discussion. "Clearly the people who are in current employment are working under a certain contract, and the terms of that contract should be respected. But it may be possible with prospective entrance into the labor force for them to come in with a different kind of contract that results in a different sort of severance package than the ones that exist currently," he said.
Completing his education with a J.D. from Harvard University and a D.Phil. (in philosophy) from the University of Oxford, Dutch national Zutt worked in program planning, monitoring and evaluation for UNICEF and the UNDP in eastern and southern Africa, before joining World Bank in 1999. During his career, he has worked as the country director for Eritrea, Kenya, Rwanda and Somalia (2009-2013), country program coordinator for countries including Angola, China, Malawi, Mongolia, Mozambique, and Zambia, and was the team leader for numerous country strategies and projects. In 2006, Mr. Zutt was appointed adviser to one of the bank's two managing directors, and in January 2008 was asked to serve as the acting head of the Department of Institutional Integrity (INT), which is mandated to investigate allegations of fraud and corruption related to group-financed projects.