D OECD ECONOMIC SURVEYS C E TURKEY O 1997 SPECIAL FEATURE • PROGRESS IN STRUCTURAL REFORM OECD ECONOMIC SURVEYS 1996-1997 TURKEY ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (cid:211) OECD, 1997. (cid:211) Software: 1987-1996, Acrobat is a trademark of ADOBE. All rights reserved. OECD grants you the right to use one copy of this Program for your personal use only. Unauthorised reproduction, lending, hiring, transmission or distribution of any data or software is prohibited. You must treat the Program and associated materials and any elements thereof like any other copyrighted material. All requests should be made to: Head of Publications Service, OECD Publications Service, 2, rue Andr´ e-Pascal, 75775 Paris Cedex 16, France. ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996) and the Republic of Korea (12th December 1996). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). Publie´ e´galement en franc¸ais. (cid:211) OECD 1997 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through Centre Franc¸ais d’Exploitation du Droit de Copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Inc. (CCC). All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue Andre´-Pascal, 75775 Paris Cedex 16, France. Table of contents Assessment and recommendations 1 I. Recent economic developments and prospects 13 Introduction 13 Demand and output 13 Labour market trends 17 Costs and prices 19 External developments 20 Short-term economic prospects 25 II. Macroeconomic policies 29 Introduction 29 Fiscal policy 29 Monetary and exchange rate policy 37 The costs of inflation 41 A medium-term macroeconomic policy framework 44 III. Building a consensus for structural reform 48 Income distribution in Turkey is highly skewed 49 Human resource development 52 Recent progress in structural reform 53 Other areas of reform 61 Concluding comments 62 Notes 64 Bibliography 71 iii Annexes I. The inflation process 72 II. Financial stress index 75 III. The financeable public sector deficit 81 IV. Medium-term fiscal strategic planning 84 V. A currency board approach to monetary policy 88 VI. Calendar of main economic events 92 Statistical annex and structural indicators 95 Tables Text 1. Supply and use of resources 16 2. Labour market indicators 18 3. Balance of payments 21 4. External debt of Turkey 25 5. Projections for 1997 and 1998 28 6. Public sector finances 33 7. 1996 and 1997 budgets 35 8. Monetary conditions 38 9. Summary of recent progress in Turkish structural reform 53 Annexes A1. Regression equation for wholesale prices 73 A2. Regression equation for Financial Market Stress index 78 A3. OECD Secretariat central case 85 A4. 1997 budget programme followed by further progress 86 A5. No fiscal consolidation and less favourable market developments 87 Statistical annex and structural indicators A. Gross domestic product, current prices 96 B. Gross domestic product, constant prices 97 C. Gross domestic product by kind of activity 98 D. Industrial production 99 iv E. Prices 100 F. Imports by commodities 101 G. Exports by commodities 102 H. Geographic distribution of foreign trade 103 I. Balance of payments 104 J. External trade indicators 105 K. External debt of Turkey 106 L. Money and banking 107 M. Public sector borrowing 108 N. Consolidated budget 109 O. Central government budget revenue 110 Figures Text 1. Key aspects of economic activity 14 2. Industrial trends 15 3. Debt maturity and activity 17 4. Inflation developments 19 5. Exchange rate developments 22 6. Current account, direct investment and external debt 23 7. Financial Market Stress index 26 8. Consolidated budget and primary budget balances 30 9. Financing the consolidated budget deficit 32 10. Debt redemptions and redemption ratios 34 11. Real money growth 39 12. Currency substitution 40 13. Financial deepening 42 14. Bank credit 42 15. Inflation and money growth 44 16. Lorenz curves for Turkey 49 17. The Gini measure of income inequality 50 18. Factor income shares 51 19. Producer subsidy equivalents 54 20. Composition of farm assistance 55 v Annexes A1. Actual and predicted monthly inflation outcomes 73 A2. Simulated annual inflation paths 74 A3. Financial stress index component series 76 A4. Medium-term fiscal inflation trade-offs 82 vi BASIC STATISTICS OF TURKEY THE LAND Area (thousand sq.km) 779 Major cities, 1990 (thousand inhabitants): Agricultural area (thousand sq.km) 275 Istanbul 7 309 Forests (thousand sq.km) 202 Ankara 3 237 Izmir 2 695 THE PEOPLE Population, 1996 (million) 63.9 Civilian labour force, 1996 (million) 21.6 Per sq.km, 1996 82 Civilian employment 20.2 Annual rate of change of population, 1996 2.2 Agriculture, forestry, fishing 9.3 Industry 3.1 Construction 1.3 Services 6.5 PRODUCTION GDP, 1995 (TL billion) 7 765 501 Origin of GDP, 1996 (per cent): Per head (US$) 2 715 Agriculture, forestry, fishing 15.0 Gross fixed investment, 1995 (TL billion) 1 786 276 Industry 28.4 Per cent of GDP 23.0 Construction 7.8 Per head (US$) 627 Services 48.8 THE GOVERNMENT Public consumption, 1995 (per cent of GDP) 10.8 Public debt, end-1995 (per cent of GDP) 48.3 Central government current revenue, Domestic 18.0 1995 (per cent of GDP) 18.0 Foreign 30.2 FOREIGN TRADE Commodity exports, 1995, f.o.b. Commodity imports, 1995, c.i.f. (per cent of GDP) 13.1 (per cent of GDP) 21.6 Main exports (per cent of total exports): Main imports (per cent of total imports): Agriculture 10.7 Investment goods 29.4 Mining 1.9 Consumption goods 12.4 Industry 87.4 Intermediate goods 50.0 Crude oil 8.2 THE CURRENCY Monetary unit: Turkish lira Currency unit per US$, average of daily figures: 1994 29 778 1995 45 738 1996 81 281 Note: An international comparison of certain basic statistics is given in an annex table. This Survey is based on the Secretariat’s study prepared for the annual review of Turkey by the Economic and Development Review Committee on 1 April 1997. • After revisions in the light of discussions during the review, final approval of the Survey for publication was given by the Committee on 13 May 1997. • The previous Survey of Turkey was issued in September 1996.