12 Expected Consequences for Turkey of EU Entry in 2015 Tugrul Temel1 12.1 Introduction This chapter draws on the previous chapters of the book in order to derive the likely consequences for Turkey’s agricultural and agrifood sectors if it becomes an EU member in 2015. The assumptions about how the underlying context will have changed by 2015 are summarised in Section 12.2. If Turkey becomes a full member of the EU in 2015, this means that Turkey has to comply fully with the EU acquis communautaire by that date. Therefore, part of the discussion in this chapter focuses on the implications for Turkey of adopting the acquis. We do not explore the expected consequences for Turkey in the years following EU entry in 2015, since this would require making assump- tions about the precise entry terms agreed in the negotiations, as well as predictions about many exogenous factors that are hard to foresee so far ahead. Two groups of issues are explored in this chapter. The first set of issues relates to Turkey’s ability to assume the obligations of the acquis regarding competition rules, property rights, and free movement of agricultural products by 2015. The second set of issues relates to the implications of membership for agricultural markets in Turkey and their capacity to cope with competitive pressure and market forces implied by the EU single market. The emphasis will be on how the policy changes necessary for membership affect the functioning of agricultural and food markets, given the assumptions in Section 12.2. This chapter is organised in eight sections. Following the introduction, Section 12.2 presents the key assumptions underlying the discussion. Section 12.3 critically examines the implications of EU membership for Turkish policies that relate to agriculture, food and rural development, international trade, and agri-environmental interactions. Section 12.4 explores the implications from agrifood chain developments. Implications for the institutional framework of Turkish agriculture are discussed in Section 12.5, with an emphasis on the quality and functioning of economy-wide and agrifood-specific institutions. Section 12.6 1 With contributions from Siemen van Berkum, Alison Burrell, Irene Molina Vilchez and Arie Oskam. 251 252 Turkey in the European Union comments on the budget consequences, already reported in Chapter 11. Section 12.7 discusses the findings of recent selected studies that assess the consequences for Turkey of accession. Section 12.8 concludes the chapter. 12.2 Summary of assumptions Macro-economic assumptions The assumptions presented in Section 11.2 are applied in this chapter. They include: Annual economic growth rates of 5.2 per cent per year for Turkey and 2 per cent for the EU-27 are assumed, with some differences between country sub- groups (see Table 11.2 for details). Inflation of 2 per cent for the Euro zone is assumed. This implies that by 2015, the price level will be 24.3 per cent higher than that in 2004 or 26.8 per cent higher than that in 2003. The following average annual rates of population growth are assumed for the period 2004-2015: Turkey (1.29 per cent), EU-15 (0.10 per cent), NMS (-0.20 per cent) and AC-2 (-0.37 per cent). We assume that the gap between the market exchange rate and the PPP rate measured in 2003 will have closed by 20 per cent by 2015. Given that GDP in PPS in 2003 is double the GDP in euro, this implies a 20 per cent appreciation of the lira against the euro. For the NMS and for EU-15 members outside the euro zone, we assume no change in exchange rates; for the AC-2 countries, a 10 per cent appreciation of the exchange rate against the euro is assumed. It is assumed that the Commission’s proposal for the Financial Perspective 2007-2013 is accepted and continues to 2015. The Financial Perspective assumes that the own resources ceiling is maintained at 1.24 per cent of the Gross National Income (GNI) and appropriations for payments remain at 1.14 per cent of the EU GNI. Assumptions with respect to agricultural policies Although Turkey is assumed to adopt the acquis fully, its precise content will depend on the evolution of EU policies between now and 2015. Therefore, assumptions about future EU policies need to be made. We assume that EU agricultural policy will become increasingly market oriented, moving towards lower support prices and decoupled income transfers (see Section 11.2). This will result in lower market prices. The budget costs of Turkey’s direct income support will shift to the EU, on condition that Turkish farmers observe the EU’s cross compliance rules associated with decoupled direct income support. Full incorporation into policies of the WTO Doha Round agreement (elimination of export subsidies and further tariff cuts) is assumed. Specifically, we assume that import tariff bindings will be 50 per cent lower in 2015 compared to the levels in 2000. A new round of policy revisions will be needed, probably before 2010, to incorporate the Doha Round agreement and to achieve fully decoupled direct income payments. During this period, it is likely that Expected consequences for Turkey of EU entry in 2015 253 further changes will be made to the CAP to accommodate the entry of AC-2 countries and Turkey. Regarding the CAP second pillar, we assume policy rules in line with the proposals of the European Commission for the financial perspective 2007-2013 (see Section 11.6). Furthermore, we assume that Turkey will use all the funds available to it under the second pillar. For structural and cohesion programmes, we assume that the Commission’s proposal for structural fund reform for 2007-2013 is adopted, and that these rules remain unchanged for 2015. With respect to environmental policy in relation to agriculture, we expect a strong influence of EU regulations on Turkey’s national policies (Nitrate Directive, Directive for Plant Protection Products, Water Directive, etc.). At the same time, we assume that EU environmental pressures on member states will not increase in the period 2005-2015. 12.3 Consequences for Turkish policies Implications for agricultural, food, rural and structural policies Agricultural policy The basic principles of Turkey’s agricultural policy have been laid down by the ARIP programme (2001-2005). Adapting current policies to the EU’s agricultural policy acquis over the period 2005-2015 is expected to pose no fundamental problems. The impact of accession in 2015 would depend greatly on the lira- euro exchange rate at the moment of accession and on how far the Turkish food chain has already adopted a market-oriented approach without state economic enterprises and enforced cooperatives. Turkish agricultural policy already incorporates a direct income support system with a flat rate payment per hectare and a cap at 50 hectares per farm, whereas it will take years to fully phase in such a system for EU-27. Given this existing direct income support scheme and the relatively high prices for agricultural products, there is at first sight no strong reason to phase in CAP direct income support gradually, as has been done for the NMS and is agreed for the AC-2. There would be a strong tendency to start CAP direct payments in 2015 at least at the level of direct income support current at the moment of accession. Complications might arise if by 2015 Turkish crop prices have not been aligned with EU prices and income compensation for a price fall is demanded. This would interfere with the flat rate system and would also lead to an upward pressure on direct income support. By 2015, a large share of the CAP budget will be spent on decoupled direct income support (the Single Farm Payment). By 2006, existing EU members will have converted their area and headage payments to a flat rate per hectare, and will have adopted the cross compliance requirements related to these payments. In Turkey, there are currently no cross compliance rules, which Turkish farmers would have to accept under the CAP. 254 Turkey in the European Union More difficulties will be experienced in the animal sector. This sector is both declining and inefficient. Producing beef, sheep and milk generates direct income support as long as ‘registered’ land is involved. At least for beef, a price fall is to be expected. Here, direct income compensation based on the number of cattle might be demanded. But this would not fit into the flat rate per hectare and would open up demands for substantial compensation. A basic dilemma, already extensively discussed during the negotiations of the NMS is whether, instead of direct income payments to farmers, these funds should be allocated to restructuring the agricultural sector so that land, labour and capital are used more productively, either inside or outside agriculture. From an economic perspective, supporting the agricultural sector by means of direct income support is not very productive. It keeps labour in agriculture, and it hinders restructuring and farm consolidation because the payment is capitalised into the value of land. For the NMS, however, there was a political decision to introduce the CAP direct income payments, because otherwise there would be a difference in the way farm policy works across EU member states. The fact that farmers in the NMS experienced lower prices before accession and that there was no reason to compensate them for price decreases, was used only as a justification for phasing in the direct income support gradually. This justification does not apply for Turkey. Nevertheless, phasing in has been proposed by the European Commission (European Commission, 2004b). This time, budget restrictions are used as the main argument for limiting direct income support for Turkey. The best argument, of course, is that if the same budgetary amounts could be used for restructuring, it would be more efficient for the Turkish economy in the medium term. There will be strong political pressure in Turkey to raise the direct income support payment level before 2015 as close as possible to the EU-27 level. After entering the EU, only 3 cents of every euro spent on direct income support will be perceived as being paid by Turkey. Moreover, these transfers might be considered helpful for influencing the Turkish agricultural population to vote in favour of entering the EU.2 Other products where difficulties may arise when adopting the CAP are sugar and tobacco. Sugar is highly protected in both Turkey and the EU. The EU’s reform proposal for sugar involves bringing internal prices more into line with international prices and shifting from a quota system with high prices to lower prices and direct income support (European Commission, 2004c). Specifically, this means a 33 per cent institutional price reduction and a direct income payment that compensates for 60 per cent of the price decrease. Sugar quota will be reduced by 2.8 million tons or 16 per cent, and isoglucose quota will be increased by 0.1 million tons. This implies that policy has to adjust in the same direction in Turkey. Policy changes will run parallel with the privatisation of 2 As was observed in Poland. Polish farmers, however, did not receive the full CAP direct income payment from the beginning. Moreover, they came from a lower price level than the EU-15. Expected consequences for Turkey of EU entry in 2015 255 TÜRK(cid:1)EKER, a state company that dominates the total sugar sector. Tobacco prices in Turkey are also far above EU prices and are likely to adjust downwards, although it is difficult to say how much of the price differential is due to quality differences. For most other products, either (a) they are not highly concentrated in one particular area or their production value per hectare is relatively low, or (b) prices are not much higher or even lower than in the EU, or (c) in the EU there is no direct income compensation for the particular product. Under such circumstances, either no direct income payments are required or a slight general increase in the flat rate direct payment can be expected. Rural policy The expected decline in certain sectors of Turkish agriculture in a more competitive environment, together with existing rural-urban income differences, means that rural and structural policy measures will be important for generating rural employ- ment and income. New jobs are likely to come from small businesses that provide services to agriculture, industry and other parts of the service sector. Job- creation policies, although present in the National Development Plan (NDP) (Republic of Turkey, 2003: iv), have not been used so far in Turkey.3 Moreover, the NDP lacks useful approaches and instruments for these problems, in particular for rural areas. It will therefore be crucial for the EU and Turkey to develop a joint strategy that allows spending for rural development to be adapted to the needs of the Turkish situation. Although the menu approach of Regulation 1257/99 allows choices from among a set of instruments, Turkish rural development policy may require special instruments aimed at education, job creation and income in rural areas (see Chapter 5). We make no assumptions about how specifically funds are used, but expect that Turkey will use the funds available for EU rural policy. Structural policy Structural policy in Turkey has focused mainly on infrastructure and – for rural areas – on large irrigation projects. Infrastructure often needs a long lead time for development. This type of project does not directly address the need to find employment for large numbers of young people with low skills who will soon enter the job market. For a country like Turkey with large differences in regional development and large cities, there is a strong tendency to invest in urban centres because of scale effects (Krugman, 1991). However, development funding needs to be focused on rural areas in order to redress regional inequality within Turkey. 3 Employment and income generating policies (although not absent in EU rural policy - see e.g. LEADER+) are not central to EU rural policy. This is due to the history of these policies where a large part of the budget goes to environmental improvements in relation to agriculture, investments in farming and community development. 256 Turkey in the European Union The potential availability of structural policy funds for Turkey is substantial but this would put a large burden on the EU budget. This budget pressure is the main reason for the European Commission to suggest reduced funding for structural policy in Turkey (European Commission, 2004b). Food policy Turkey adopted a food act in 1995 - succeeded by the Food Law 560 of 2004 - and the Codex Alimentarius in 1997. However, these adjustments require changes in the relevant institutions and considerable investments because many quality improvements demand new technology and facilities. The required changes could be facilitated by more foreign direct investment in the food and retail sector. Most importantly, they require effective and rigorous implementation of food control systems. During the pre-accession period, food quality issues will receive a lot of attention (for example, through twinning projects). Given the rather long lead time to 2015, implementing the acquis by 2015 does not appear to be impossible. However, even if the level of food safety and food quality improves, in particular in cities and in relation to the activities of supermarkets, this does not imply that sufficient guarantees can be given to allow free market exchange within the EU. Animal welfare Upon accession, Turkey will have to comply with EU rules for the transport and slaughtering of animals, and with regulations concerning, for example, animal housing and stocking densities for intensive livestock production. Implications for trade policy, and animal and plant health Trade Several changes to Turkey’s current trade situation can be expected if it becomes a full member by 2015. First, Turkey will adopt the common external tariff of the EU for every agricultural product. Currently, Turkey has some higher tariff bindings than those of the EU. If the Doha Round Agreement imposes smaller tariff cuts on developing countries than on developed countries, average tariff bindings for the EU will be reduced by more than those of Turkey, and so by 2015 Turkey may have higher bindings than EU common external tariff (CET) bindings for more individual products than at present. Thus, the tariff gap between Turkey and the EU could actually increase in the period prior to trade harmonisation. This means that, if agricultural trade harmonisation between the EU and Turkey occurs in 2015, the fall in the maximum allowed tariff protection for these more highly protected products in Turkey will be relatively greater than it appears today. However, actual prices will fall only to the extent that Turkey’s applied tariffs are higher than the EU’s applied CET tariffs and fully determine the price gap between domestic and world market prices. Currently, this is not always the case. Expected consequences for Turkey of EU entry in 2015 257 If current policy trends continue up to 2015, the largest price falls following trade harmonisation will be experienced in the livestock sector. Meat, eggs and butter prices are currently considerably higher in Turkey than in the EU, due to high tariff barriers and Turkey’s 8-year long import ban on red meat. These factors severely limit consumption of animal products. Although the current EU consumption levels of animal products are considered by some nutritionists to be unhealthy, even a doubling of meat consumption after their prices fall would raise Turkish per capita consumption to only about 50 per cent of the average EU-15 level. Assuming steady income growth between now and 2015, and bearing in mind that these products have a relatively high income elasticity of demand (particularly at such a low level of consumption), a strong expansion in animal product demand is likely to occur if trade protection, and hence internal price levels, are equalised. To the extent that this demand expansion is met largely by imports from the rest of the EU, internal prices should become stronger elsewhere in the Union and the price fall in Turkey will be slightly less than one might predict on the basis of extrapolating from current differentials. Currently, Turkey sources a part of its cereals and oilseeds imports from North America. These imports are purchased at world market prices and represent a source of tariff revenue for Turkey. After joining the Union, there is likely to be trade diversion involving imported cereals, as they are replaced by cereals imported from elsewhere in the Union. Trade diversion of other agricultural imports is likely to be small. Membership of the EU would imply that Turkey surrenders its right to a national trade policy. This means that, whilst remaining an individual WTO member, Turkey no longer negotiates independently in WTO multilateral negotiations, and its import and export regimes and protocols become those of the EU. During the pre-accession phase, one would expect Turkey’s position on international trade issues to become closely aligned with that of the EU. By 2015, Turkey must be in a position to operate the degree of controls for goods on its external borders that is required to implement all EU measures for goods that cross its frontiers. Apart from a small border in the Northwest with Europe, Turkey’s borders consist of seacoast, and land borders in the south and east with Asian countries. Developing the infrastructure, administrative capacity and commitment for effective border control will be a challenging element in Turkey’s adoption of the acquis. The future of Turkey’s participation in ECOTA4 will depend on whether its trade agreement with other members of the ECO can be incorporated into some kind of preferential agreement with the EU. To the extent that the EU already has bilateral trade agreements with some of the countries concerned5, we can expect a rationalisation of agreements on this front. Indeed, with Turkey inside 4 The Economic Cooperation Organisation Trade Agreement (ECOTA) signed between Afghanistan, Iran, Tajikistan and Turkey in July 2003 (see section 8.2). 5 A Trade and Cooperation Agreement between Iran and the EU has been under negotiation since 2002. The EU signed a Partnership and Cooperation Agreement with Tajikistan in October 2004. 258 Turkey in the European Union the Union, other members of ECO become “frontier states”, and it becomes even more in the EU’s interests to have stable long-term trade ties with them. Animal and plant health A significant part of the agricultural acquis communautaire concerns animal and plant health, animal welfare, hygiene standards and food safety. Within this body of regulations, the sanitary and phytosanitary (SPS) regulations relate specifically to the health of plants and animals, and set standards necessary for maintaining plants and animals in a healthy state, both in order to protect the plant and animal populations themselves, and also to avoid any consequences for human health that may derive from consumption of diseased or infested plant or animal material. In discussing Turkey’s adoption of the SPS acquis, it is necessary to distinguish three phases: (a) assessing the appropriate legislation and setting up the administrative infrastructure and frameworks required by the legislation; (b) implementation of the regulations with the rigour and expertise necessary for them to function effectively; (c) convergence of the actual levels of plant and animal health with those of the EU. Chapter 10 has reported that Turkey is already making a good start with the first stage: the programme of legislation and training envisaged up to 2006 is a significant step in the right direction, and is financed through a combination of national and EU funding (NPAA, 2003). However, given the fragmentation of agriculture, the large number of farmers and their generally low educational level, it seems clear that a much greater number of trained personnel will be needed to breathe life into this legislation than has been allowed for so far. At the second stage, there are several issues. It has to be borne in mind that the creation of an infrastructure to manage the acquis is a longer and more difficult process than simply adopting the necessary legislation. Again, the fragmentation of the sector and the fact that a substantial share of output is disposed of in informal markets or by auto-consumption means that effective communication of the SPS acquis to producers, as well as monitoring and control of all the regulations, will be a difficult and daunting task. Moreover, governance issues are important. The training of inspectors and extension officers, and the efficient organisation of these services so that regulation can be implemented and farmers can participate will require a huge effort. The third stage, namely the convergence of the actual levels of plant and animal health with those of the EU, cannot happen overnight. Eradication of diseases and pest populations may take a very long time because biological processes with long cycles are involved. Moreover, the good functioning of an effective, participatory biosecurity system can also take some time to achieve. Assuming accession in 2015 and adoption of the SPS acquis into the legislation, it is unlikely that the conditions for a single market in animal products, without border controls for SPS inspection, will be possible for the EU and Turkey for Expected consequences for Turkey of EU entry in 2015 259 some years after that. A cautious line must be adopted here, as an expanded EU without internal checks on animal movements will have the international animal-health status of whichever country has the weakest status, even in the absence of reported trade flows of animals or animal products from that country to other parts of the EU. Turkey will have to adopt strong, proactive eradication programmes, and strengthen existing programmes for disease eradication and control where a programme already exists, in parallel with increased border controls for illegal animal movements, which will have to involve more than simply enforcing strict border inspection on main road routes with neighbouring countries. Implications for policies concerning environmental impacts of agriculture Administrative capacity By accession, Turkey will have to adopt EU legislation aiming to avoid adverse impacts of agricultural activities on the environment. Overall, Turkey’s current alignment with the environmental acquis is limited. The adoption of a new Regulation on Environmental Inspection represents a positive step towards increasing Turkish administrative capacity to implement the acquis (European Commission, 2004a). Critical issues to be addressed in this respect relate to capacity development in the implementation, monitoring and enforcement of the environmental acquis. Here, Turkey may face difficulties because of society’s low valuation of environmental amenities and resources. Lack of environmental awareness could also hinder the further development of the organic food sector. NGOs and public-private partnerships can be expected to play a prominent role in the conservation and protection of the environment and in easing the adverse environmental effects of agricultural activities. Such partnerships are already underway in some EU member countries. Monitoring and enforcement will be one of the most difficult issues to address, but accession will serve as a catalyst in this respect. Furthermore, the use of agri-environmental indicators at European standards6 will help to benchmark the integration of environmental concerns into Turkey’s agricultural activities. Natural resources and biodiversity To withstand stronger competition in the domestic market, Turkish agriculture will have to become more efficient. Government measures such as strengthening water pricing institutions and improving farm extension services will not only promote efficiency but will also have positive environmental benefits. Thus, membership of the EU in 2015 could help Turkey to bring under control various adverse effects of agricultural activities on the environment, such as soil 6 The IRENA project: Indicator Report on the integration of Environmental concerns into the Agricultural policy. 260 Turkey in the European Union degradation and salination. For example, the Water Framework Directive could be fully implemented by 2015, the same year foreseen for current member states (Sözen et al., 2003). Similarly, future policy instruments originating from the European thematic strategy on soil protection will be highly relevant for Turkey. Accession will require the application of the environmental acquis regarding the protection of vulnerable natural habitats and species, and the provision of funds for biodiversity conservation. New legislation covering all biodiversity conservation activities needs to be prepared and international commitments be incorporated in this legislation. Turkey will be able to draw on the support provided by the EU for the protection and enhancement of the environment, including funding from the second pillar of the CAP for land management and rural development actions related to Natura 2000 nature protection sites. Financial assistance from other EU instruments and from other international organisations will be crucial for continuing to fund environmental protection projects. Here, too, NGOs will play a key role in the protection and conservation of these important natural assets and in raising public awareness. Accession could also stimulate the growth of domestically funded activities to protect the environment, but this depends on the weight given to environmental protection in the agendas of stakeholders with conflicting priorities. Regulations and behaviour Adapting Turkey’s national environmental legislation to European standards should pave the way for better protection and use of the environment. However, in areas where there is a strong behavioural element, it is likely that advances will be slow. The level of environmental awareness in the Turkish society is low relative to the EU-15 countries and environmental values are not well integrated into individual decision making processes. The recently adopted legislation to facilitate registration and financing of associations is a strong signal that the Turkish government wants more local participation in the formation of policies, including environmental policies. Currently, municipalities are in charge of implementing environmental law. The process of local participation, together with NGO support, is likely to gain momentum during the pre-accession period and after membership. On the other hand, if policy implementation is decentralised, government may lack reliable information on environmental problems that is mostly available only at local level. With the introduction of the CAP single farm payment, environmental cross compliance will become mandatory, and will be linked to the use of farm extension advice. This may help to control those farming practices regarding chemical and water use that are detrimental to environmental protection The extension services will have key role in providing farmers with training on environmentally friendly agricultural practices, which could be of great benefit in Turkey providing the necessary expertise is available. The CAP second pillar will also be important for helping Turkish farmers to improve allocative efficiency in