World Bank Country Director for Turkey Martin Raiser has said the June 7 general election results signal that people are willing to live with the ambiguity that comes with negotiation. After having spent three-and-half years in Ankara observing the rapid transformation in the country, Raiser said Turkey is an example of successful reforms in various fields but stressed that the reform process needs to be continued in order to protect the achievements and get the country in a better position in the competitive global environment.
Daily Sabah sat down with Raiser, who spent much of his professional career focusing on the transition from communism to market economies, just days before leaving Turkey for his next post in Brazil and talked about the recent election results, the World Bank's ongoing activities, Turkey's position on the global competitiveness index and needs for structural reforms.
Daily Sabah: How do you perceive the election results? As you know, there are talks about the possibility of a coalition government. Do you think a possible coalition government will be able to continue the economic reforms?
Martin Raiser: My simple answer is, why not. I know Turkey has issues about the historical memories of its coalition governments, which were often unsuccessful economically, however if you look at the examples of other countries you will see that sometimes most reforms are done by coalition governments. In a sense, the burden is shared; some unpopular reforms may be done with sharing responsibility between two parties – possibly making it easier. In a single-party government, due to the fear of not being elected in the next election, they might hold the reform back. In a coalition government, it may be done. There is not a principle that states coalition governments cannot actualize reforms, however in practice, I am not sure how this will work. I have previously said that the election results signaled people are willing to live with the ambiguity that comes with negotiation. The message is that they want politicians to be pragmatic and compromise. I think this is also what the markets are expecting. It is not going to be easy, however I think there is every reason for us to hope that it happens and to be supportive.
D.S.: Could you give us some information about what the World Bank does in Turkey? What are the World Bank's ongoing projects concerning Turkey?
Raiser: We are in the last year of our strategy now, and the strategy is that we will lend around $1 billion to Turkey per year. We have fulfilled that target as we have lent around $4 billion in the last four years. The main sectors that we have provided financial support for in Turkey are the area of energy, small- and medium-sized enterprises (SME), access to finance and the area of supporting key reforms. We have also continued to engage with the health sector and we are just about to take a new project aboard on that. We have continued to support the development of the cadastral system in Turkey. There again, we are extending our engagement. We have continued to be engaged in disaster risk management through the İSMEK project in Istanbul. Those remain important themes of our cooperation. Of course we have done extensive analytical work of two types – one is traditional analytical work that we have done over the years to work with particular ministries on a particular reform plan. For instance, we have worked with the Labor Ministry on the national employment strategy and we are working with the Development Ministry on private-public partnerships. Those are examples of the kinds of support that we have traditionally provided.
But over the last four years, one new thing that we have done is we worked with Turkey to analyze its own development experience and put it into a global context. Other countries that want to learn from Turkey can easily access the knowledge that Turkey has about what worked and what did not from the perspective of the World Bank, meaning from the perspective of how we compared it with other countries. We have published a big book in October last year that is all about trying to take stock of how Turkey went from being an essentially agriculture-oriented and closed economy with a gross domestic product (GDP) of $2,500 to $3,000 in 1980 to being an industrialized service economy with s 5 percent of the population living in cities and on the threshold of high income at the end of first decade of the 2000s. How did that happen? There are other countries, for example in South Asia, in parts of Latin America, in the Middle East and North Africa and even parts of sub-Saharan Africa that looked very similar to what Turkey was in 1980. It's very interesting for them to figure out how that worked.
D.S.: How did you describe this transformation in the last decade that Turkey underwent in the book?
Raiser: We put it under the two headings of integration and infusion. The integration lessons are basically very simple. Turkey has done well when it is turned out toward the world. When Turkey is opened up for foreign investment, foreign trade, foreign ideas and integration with the EU, but also more broadly with the global economy it has done well. Turkey is a part of a group of successful globalizers. That's the first big picture and that is important for countries that are now just studying how to integrate and globalize. I think of sub-Saharan Africa, for instance, where this is now at the beginning. The heading of inclusion has also some very well-learned lessons. Basically, they are the messages following heavy and difficult fiscal stabilization.
Turkey was able to reallocate the resources that it used to spend on debt services to increasingly access social services, and it did so at the very same time and benefited from the process of structural change where people move from the countryside to cities. On the one hand, it has more money to spend on social services, and on the other, people move to the cities, so it is easier to reach them. As a result you have a dramatic expansion of access to health services, education services, to municipal services, and people notice that. You can ask any taxi driver what has improved over the last 20 years and he will tell you that roads are much better and there is access to much better health services. Turkish citizens know about this achievement. This is not trivia. A lot of developing countries struggle with access to services. People live in rural areas, it is difficult to get or because the physical results can be straining, and Turkey provides a good example. Of course, the process is not finished because you might have access but people want to have better quality. It is not just about moving to the cities, it is also about making the cities a nice place to live. It is not just about giving people access to health services, but making sure that they get the best quality at affordable prices. It's not just building schools, it is also about making sure that you get top-notch teachers and you teach a curriculum that makes you competitive in the world economy.
D.S.: In Turkey the World Bank prioritizes credit grants in fields such as energy, urban development, health services, education and environmental management. Why have these fields been prioritized?
Raiser: The most important thing to remember is that we are a bank and we lend money. If you lend money, there are always two players, the lender and the borrower. The borrower in our cases is the Turkish government and priorities are determined by the Turkish government. It decides which areas it wants to borrow for, which areas it would like to have technical assistance and which areas it does not want to cooperate with the bank. I think it is important to realize that. The Turkish government asks us to work in the energy sector; of course we could have said no, this is not a good idea. But this is a very good idea. Think of how strategic the energy sector is for Turkey and what Turkey has done in the last decade by bringing in private investments to the energy sector and increasing capacity by 60 million megawatts over that period of time. Introducing a lot of renewable energy resources with solar, hydro, wind, upgrading the grid to be able to capture these renewable sources of energy and creating smart grids were involved with that. With privatizing the distribution network, introducing market-based pricing, strengthening an independent regulator, Turkey is now ana position for potentially developing into an energy hub in a regionally broad context. This is an extremely important priority for the country's development, but also for the region more generally.
We have been very happy to closely associate with a lot of good things. SMEs for instance, is this important? Absolutely. SMEs provide 90 percent of the jobs in Turkey and yet SMEs account for only around 25 percent of total bank credit. We still think that there is a lot of room to improve the ability of SMEs to access credit, to improve the ability of SMEs to import new and more efficient technologies, to improve the access of SMEs to export national markets and, as a result, make sure that Turkey's modernization, the competitiveness of the manufacturing industry is not just a story of the biggest companies, but also a story of Turkish SMEs.
Disaster risk management is the third example. Turkey sits on the fault line of Anatolia. We remember painfully what happened in the Marmara earthquake. We are happy to say thanks to working closely with the Istanbul mayoralty over a decade in the İSMEK project, Istanbul is much better prepared today for the eventuality of an earthquake. It's a two-way street. The government tells us what they would like from us and we look at to see if it makes sense and we support.
D.S.: While Turkey is among the G20 due to its economic magnitude, the country is ranked lower according to the Human Development Index. How does the World Bank contribute to Turkey's development in this field?
Raiser: I think the U.N. development index has basically a number of important components. It has health, education and GDP per capita, and it recently introduced gender equity and when you look at Turkey's comparative performance in particularly the health sector, we have been engaged ever since late 1999 and have been very strongly engaged with the launch of the health transformation program. Turkey has done remarkably well. Thus, life expectancy has increased and infant and maternal mortality has been reduced. Turkey has met the millennium development goals in all of these respects. We now use Turkey as an example of successful reform, particularly in primary healthcare reform and the provision of universal healthcare.
When you look at education, the picture is little more mixed. On one hand we were earlier speaking about a dramatic increase in access so secondary school enrollment is now 75 percent to 76 percent and the gap between boys and girls has been reduced 1 percent to 1.5 percent, which is very encouraging. However, when you look at the quality of the education, though we see some strong improvements in the Programme for International Student Assessment (PISA) rankings, we also see there are some concerns such as Turkey still being second to last in the Organisation for Economic Co-operation and Development (OECD), so when you are talking about the G20 it's important that you compare your education performance to the top performers in the G20. Turkey is still quite a bit away from that, so emphasis on quality of education is something we would like to do more and, of course, increasing the quality of higher education. Turkey has built over 100 universities in the last decade, but it's not building buildings that will give you the skills for the labor market. It's whether you have the professors, the curriculum and the international methods of the quality of research. I think Turkey still has some room for improvement there in quality assurance of higher education.
When you look at gender, we know that Turkey is challenged in this area. The female labor force participation rates have been increasing in Turkey, and we very encouraged seeing that Turkish women today think that there are opportunities for them in the labor market. They are entering the labor market much more than they used to. But you still need to create jobs for them. Another dimension of gender equality is now we have a Parliament where 19 percent of the deputies are now women, up by 14 percent from the last Parliament, the highest number of female deputies ever. As it is very encouraging, it is still far away from the parity that you see from many of the Scandinavian countries.
Again, if your objective is top performance in the G20 or in the world, then you need to look at the components in the U.N. development index. I'm happy to say that whether it comes to gender equality, whether it comes to higher education reform, whether it comes to further strengthening the performance of the health sector, we are engaged in all of these fields, we are having active dialogue. But of course these challenges are nationwide challenges, they are at a much bigger scale and what we can bring is perhaps an international experience. Turkey has been making progress when you look at the dynamics the U.N. development index. Turkey has been improving its ranking over the time, but it is still not in the top tier.
D.S.: In your opinion, what should Turkey accomplish to increase its competitiveness and competitive advantage?
Raiser: Turkey's performance in the competitive global index has seen improvement in the period between 2010 and 2012. Largely due to Turkey generating a very positive buzz during that period because of the rapid recovery after the global economic crisis. There was a lot of optimism, a lot of people wanting to come and invest, a lot of people saw market opportunities. In the last couple of years that improvement has slowed down, and I think what we learned from that are two things. The first is don't mistake the recovery from the crisis as your long-term trend, because that recovery was exceptionally strong thanks to the extraordinary monetary stimulus that was provided by the world economy. But it was also unsustainable as it was based on a dramatic widening of the current account deficit. I know it is popular to hear that the global crisis that hit the world in 2008 was a problem of America and Europe, and Turkey never had anything to do with it. After the crisis Turkey grew so fast that it showed what a dynamic country it is. But this is only true to some extent because that recovery was fueled by extraordinary monetary policies, and now what we are seeing is what really matters for long-term sustained growth rates is how fast you are improving your productivity. That is much more challenging, and there we find that you look at the world economic forum and they are pointing at Turkey for not being good at innovation, the fact that Turkey is not good in the skills of its labor force, that Turkey's institutions are not performing very strongly, thus there is still a question about the quality of regulation and the independence of regulatory institutions and the quality of the business environment.
When the world is awash with liquidity and investors are looking for a yield they are going to look at Turkey. But in an environment in which competition for capitalists is tight, in which people are looking at your fundamental structural strength, these are the things that start to matter again. Right now we are in the latter environment, not in the post-crisis period.
D.S.: Can you be more specific, perhaps concerning the business climate, in regards to what Turkey needs to do?
Raiser: How difficult to start a business is one. Turkey, in doing global business is ranked in the 50s. How difficult to access credit is another. Turkey has a good banking system, but it's not easy to get a loan. You need to get a lot of collateral, there is virtually no project finance, and there is no secure transaction framework. So this is increasing the cost of credit for businesses. These are relatively easy reforms that Turkey can make rapid progress in our view. When you look at access to land construction permits, of course when you look around construction has been doing well in Turkey up until recently, but it is not an impediment in the construction industry. As an investor, knowing that you can access industrial land and that the price is transparent and that you know how zoning decisions are made in the contexts of allocating industrial land and how easy is it to get a permit for building a new enterprise for a new facility is good. In this Turkey is ranked very poorly in the global index. You can go through a number of these and that is why we do these annual reviews – to show the areas that Turkey can further improve. Again, on doing business, Turkey is now ranked 55, which is better than Brazil, China, Russia and some Eastern European countries. But it's still behind places like Mexico, Malaysia, and Poland, and of course behind in some of the leading G20 countries, so it's all relative. It's not that Turkey is doing badly, but if you want to improve to get to the top 20, you need to look at these indicators and look at where you are particularly weak and where you can further improve.
D.S.: There are speculations that Turkey's economy cannot achieve its potential due to the lack of structural reforms. What are these structural reforms? Does Turkey really lack in structural reforms?
Raiser: We have talked about some of them already. I think the most important one in the short run is to reassure investors. It is important to send a clear message that Turkey is not changing the rules. The rules that have served Turkey well, independent regulatory agencies, rules that are oriented to European standards, a transparent climate, rule of law, they are not being questioned. I think it's very important that is felt very strongly by the investment community because they were not entirely sure, let's face it. With these elections, there were some questions. You see it in the investment figures. They do not perform very well. Then you look at some of the impediments for investors. I think you need to start by looking at the labor market. It could be more flexible. Some of the things here are also in the national employment strategy. Actually, the government has developed the road map for this. If we move forward with an implementation of the plan, that would be very beneficial. Further improvements can be made through the framework for attracting investment in infrastructure.
Even though Turkey attracts a lot of investment, sometimes it takes a long time before a deal can be closed. That has to do to some extent with the fact that the framework is a little bit fragmented. You have separate regulations and separate ones in transport and other sectors. That makes it difficult for investor to understand which rules are applied. I think some progress can be made. We have talked about rule of law. I think investors are still concerned that if an issue goes to court in Turkey, it may take a long time to resolve. Increasing the efficiency and predictability of the legal system would be an important additional factor. Some of these are immediate constraints. Then I think you need to think about what the assets that Turkey has are and how can you make the best choice with those.
A big asset of Turkey is the young, dynamic and entrepreneurial population. But it doesn't yet have the skills that it needs to really make full use of this asset. I would put a lot of emphasis in investing the skills in secondary or higher educational. Make sure that you catch up with the skill levels in high-income countries and make that the main priority. The second big asset of Turkey is its location. It's a fantastic location between Asia and Europe. Make use of that location in the transport sector. Turkey is already doing very well, but it can be better. Reform the railway system. We had some recent talks with Turkish State Railways (TCDD) about their plans. They have a good road map. Implement that because railway will be an important part of logistic competitiveness. And the same is true for the energy sector. If you want to use this location, think about investing more in the energy sector. Think about the gas sector moving forward by dismantling of BOTAŞ into a transmission, storage and distribution company. That would be in line with the third package in the EU. It would facilitate this greatly.
D.S.: How can Turkey avoid the middle-income trap? Everybody says Turkey needs a new economic story. What could it be?
Raiser: In terms of getting out of the middle-income trap, we have some messages in the book that I mentioned before. It can be summarized in three P's – productivity, participation and persistence. Production, in the manner of labor production, has been flat since 2010 and 2011. What can be done to improve productivity? To answer this question, first you must think about what can be done to stimulate more investment and more innovation. There is a lot of thinking about how the resources that Turkey spends in public, publicly supporting research and development can be made more relevant, more salient in terms of real business applications. As you know, Turkey has been increasing its R&D investments in the public sector considerably through Scientific and Technological Research Council of Turkey (TÜBİTAK), Small and Medium Enterprises Development Organization (KOSGEB) and other institutions, but the private R&D part has not grown at the same pace. What you have to do is to use public money to catalyze private sector innovation. You have to look at examples such as Germany, South Korea, Switzerland, California – it is not just the public sector, it is the private sector. For this you have to create an environment in which there is rigorous monitoring and strong competition for these funds. It is not just about distributing them and hoping something will happen. It is about making sure that these funds are really accounted for; unless you deliver, you should not be sure you will get more funds. This provides the incentive for the private sector.
On participation, you have a young population and you have a significant population of women wanting to enter the labor market. If you increase labor force participation in aggregate from currently around 55 percent to the OECD average, which is close to 65 percent to 70 percent, this will provide a huge boost to your economy. Even now, Turkey has over a million jobs created yearly. If you solve the productivity problem, this means that the aforementioned jobs will be good jobs, more productive. You have a great demographic dividend. If you create employment for the young and for women, I think you will have a significant economic opportunity. A big part of that, by the way, is to continue to use the mechanisms that work well. This is the persistence part. When was the period that Turkey increased its productivity most dramatically? It was the early part of the 2000s. What happened during that period? During that period, Turkey orientated itself strongly toward the EU, introduced many important institutional reforms, moved clearly toward rule-based governance and accelerated the processes of economic integration.
In the context of thinking about a new growth story, just reminding yourself about the factors that drove Turkey's growth story in the past is a third element. Innovation needs to be more important than it used to be – this is true for participation as well. Do not try to reinvent the wheel – Turkey has many things to learn from itself.
D.S.: What is the connection between maintaining the path toward the EU and increasing labor productivity? Is there a direct connection between these two things?
Raiser: Absolutely, via integration you import technology, knowledge and foreign direct investment. This does not mean that you should not integrate with the rest of the world – you absolutely should. You should look at Asia as Asia is developing very dynamically. Think about which countries have gotten to high income – there are three groups of countries. First are countries like Saudi Arabia and Kuwait, they have found oil. This will not work for Turkey. The second group of countries is Asian countries such as South Korea, Singapore, and Hong Kong – they have savings rates in excess of 30 percent of their GDPs, while Turkey's is at 15 percent. Turkey will not be able to achieve this rate in the short term. The third group of countries is less historically economically powerful members of the EU – Spain, Portugal, Ireland, Greece, Poland, Slovakia, Hungary, etc. These countries were able to use the high-level of skills they have and geographical locations combined with European capital. This brought technology and investment creating what we call the "European convergence machine." Of course, it is much easier to use that when Europe itself is booming. In the last five years Europe has gone through major difficulties and adjustments, which may not be entirely over, but you can see the first signs of recovery. The principle that you can import technology, benefit from that convergence machine as a result of your location stays very much true. Thus, I do think there is a connection here.