IPA 2010 CONFERENCE December 6 2010 Turkey Progress

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IPA 2010 CONFERENCE December 6, 2010 Turkey Progress & Priorities Ulrich Zachau Country Director,

IPA 2010 CONFERENCE December 6, 2010 Turkey Progress & Priorities Ulrich Zachau Country Director, Turkey, World Bank

Turkey: Progress & Priorities 1 2 3 4 5 6 Messages Macroeconomic Developments Competitiveness

Turkey: Progress & Priorities 1 2 3 4 5 6 Messages Macroeconomic Developments Competitiveness Institutions Summary of Progress & Priorities Closing: Turkey, EU, & WB

Intro Macro Comp Inst Tu: Sum TU-EUWB Main Messages Economic management ◦ Turkey has

Intro Macro Comp Inst Tu: Sum TU-EUWB Main Messages Economic management ◦ Turkey has a strong track record, bolstering stability and growth ◦ Focus now on fiscal quality for confidence and competitiveness Europe 2020/Competitiveness Agenda ◦ Skills, education, and labor reform needed to create good jobs ◦ Clean, efficient, secure energy: much achieved; much to do; key for sustainability, along with stronger environmental management Institutions ◦ Strong public expenditure, financial, debt management ◦ Key challenge is limited capacity in key sectors and line agencies e. g. , agriculture, education, justice, environment ◦ Opportunities for institution building in areas of government priority Major WB engagement in e. g. , energy, environment, health, food safety, labor Common Goals… 3

Intro percent Macro Comp Inst Tu: Sum TU-EUWB Fundamental Strengths => Rapid Recovery (after

Intro percent Macro Comp Inst Tu: Sum TU-EUWB Fundamental Strengths => Rapid Recovery (after a steep recession) 10 percent 15 Quarterly growth (% y/y, left axis) 8 6 10 4 5 2 0 0 -2 -5 -4 -6 Inventory growth contribution (% y/y, left axis) -8 -10 2010 Q 1 2009 Q 1 2008 Q 1 2007 Q 1 2006 Q 1 2005 Q 1 2004 Q 1 2003 Q 1 2002 Q 1 2001 Q 1 2000 Q 1 -15 1999 Q 1 -10 Source: Turkish Statistical Institute 4

Intro Macro Comp Inst Tu: Sum TU-EUWB External Imbalances Have Returned… percent USD (log)

Intro Macro Comp Inst Tu: Sum TU-EUWB External Imbalances Have Returned… percent USD (log) 7 5 Current Account Deficit (% of GDP, left axis) 6 5 4 4 3 2 Oil Price per Barrel (log USD, right axis) 1 3 0 -1 -2 -3 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2 Source: State Planning Organization, World Bank 5

Intro Macro Comp Inst Tu: Sum TU-EUWB … Access to FX Has Been Robust,

Intro Macro Comp Inst Tu: Sum TU-EUWB … Access to FX Has Been Robust, with Some Reliance on Short-term Inflows percent 60 40 20 Share of Short-Term Flows in Total Capital Inflows (previous 12 months) 43% short-term inflows 0 -20 short-term outflows -40 -60 -80 -100 -120 Jan- Apr Jul- Oct Jan- Apr Jul 07 -07 08 -08 09 -09 10 -10 10 Source: Central Bank of Turkey, World Bank 6

Intro Macro Comp Inst Tu: Sum TU-EUWB “Medium Term Program +” Merits Support; “Fiscal

Intro Macro Comp Inst Tu: Sum TU-EUWB “Medium Term Program +” Merits Support; “Fiscal quality” Remains Key Challenge percent Primary Expenditures (% of GDP) 2005 -13 25 12. 5 Total (left axis) 20 10. 0 Current transfers (right axis) 15 7. 5 Personnel (right axis) 10 5. 0 Investment (right axis) 5 0 2005 2006 2007 2008 2009 2010 Est. 2. 5 2011 2012 2013 - MTP Targets Source: State Planning Organization 7

Intro Macro Comp Inst Tu: Sum TU-EUWB Investment climate Building Global Competitiveness Employment Trade

Intro Macro Comp Inst Tu: Sum TU-EUWB Investment climate Building Global Competitiveness Employment Trade Agriculture Infrastructure Exchange rates Education Science & Technology Innovation and R&D 8

Intro 40 20 Micro 34 35 25 Comp Inst Tu: Sum Top 5 Obstacles

Intro 40 20 Micro 34 35 25 Comp Inst Tu: Sum Top 5 Obstacles to Growth of Firms percent 30 Macro 26 Small Medium Large Proportion of Firms Citing Severest Constraint as… 24 19 20 19 14 15 19 12 18 18 13 15 15 13 11 5 5 Access to finance Tax rates Political instability 25 15 10 0 TU-EUWB Informal competition 8 Inadequately educated workforce Source: Investment Climate Assessment (ICA), 2010 9

Intro Macro Comp Inst Tu: Sum TU-EUWB Proportion of firms (density) Informality Lowers Firm

Intro Macro Comp Inst Tu: Sum TU-EUWB Proportion of firms (density) Informality Lowers Firm Productivity ~20% productivity gains from formalizing Productivity Simulation (services) Firm Output (log scale) Source: World Bank Country Economic Memorandum, 2009 10

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkish Labor Regulations Are among the Most

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkish Labor Regulations Are among the Most Rigid weeks 120 Redundancy Costs in Selected Countries (weeks of salary, 2009) 100 80 60 40 20 Indonesia Portugal Turkey Philippines Germany Spain Mexico Hungary France Czech Republic Russian Federation Poland Bulgaria Romania Denmark 0 Source: Doing Business 2010 Note: Redundancy costs are defined as the sum of severance payments after 20 years’ service and the cost of prior notification. 11

Intro Macro Comp Inst Tu: Sum TU-EUWB Unemployment: Down after the Crisis, High Overall,

Intro Macro Comp Inst Tu: Sum TU-EUWB Unemployment: Down after the Crisis, High Overall, Highest among Youth percent Feb ’ 09 Unemployment 2005 -2010 (%) 30 29% Youth Sep ’ 10 25 21% 20 15 Overall 10 5 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 Nov-08 Sep-08 Jul-08 May-08 Mar-08 Jan-08 Nov-07 Sep-07 Jul-07 May-07 Mar-07 Jan-07 Nov-06 Sep-06 Jul-06 May-06 Mar-06 Jan-06 Nov-05 Sep-05 Jul-05 May-05 Mar-05 Jan-05 0 Source: Turkish Statistical institute 12

Intro Macro Comp Inst Tu: Sum TU-EUWB Female Labor Force Participation: a Large Untapped

Intro Macro Comp Inst Tu: Sum TU-EUWB Female Labor Force Participation: a Large Untapped Potential percent 70 65. 8 60 53. 3 50 56. 9 59. 1 61. 5 40 30 36. 0 28. 4 28. 0 20 10 2009 2008 2007 2006 2005 2004 OECD 2003 2002 2001 EU 15 2000 1999 Turkey 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 0 Source: World Bank, State Planning Organization 13

Intro Macro Comp Inst Tu: Sum TU-EUWB Education: the Long-Term Priority for Global Competitiveness

Intro Macro Comp Inst Tu: Sum TU-EUWB Education: the Long-Term Priority for Global Competitiveness score percent OECD average Math proficiency of 15 -year olds (percent of children) Math scores by region Source: PISA, 2006 14

Intro Macro Comp Inst Tu: Sum TU-EUWB Energy: a Near-Term Challenge … Electricity Demand

Intro Macro Comp Inst Tu: Sum TU-EUWB Energy: a Near-Term Challenge … Electricity Demand (proj. ) High Case Electricity Demand (proj. ) Low Case Bottleneck? Electricity Supply (proj. ) Source: Türkiye Elektrik İletim A. Ş. (TEİAŞ), (2009 data) 15

Intro Macro Comp Inst Tu: Sum TU-EUWB … and a Sustainable Growth Priority: 77%

Intro Macro Comp Inst Tu: Sum TU-EUWB … and a Sustainable Growth Priority: 77% of GHG Emissions are from Energy 28 23 18 1. Russia 2. Albania AN INDEX OF EXPOSURE TO CLIMATE CHANGE (Europe and Central Asia) 3. Turkey 4. Armenia 5. FYR Macedonia 13 8 3 -2 Source: World Bank, 2009 16

Intro Macro Comp Inst Tu: Sum TU-EUWB Institutional Capacity Building: a Complex Landscape Private

Intro Macro Comp Inst Tu: Sum TU-EUWB Institutional Capacity Building: a Complex Landscape Private Sector Governance Climate Line agency institutional capacity Cross-cutting public financial management Local government capacity Overall Governance and Accountability State-owned enterprise capacity 17

Intro Macro Comp Inst Tu: Sum Turkey Has Done Well on “Upstream” PFM Reforms

Intro Macro Comp Inst Tu: Sum Turkey Has Done Well on “Upstream” PFM Reforms TU-EUWB Comparison with selected upper MICs Source: World Bank/Treasury (PFMP) 18

Intro Macro Comp Inst TU-EUWB Tu: Sum Food Safety: Huge Potential & Needs Financial

Intro Macro Comp Inst TU-EUWB Tu: Sum Food Safety: Huge Potential & Needs Financial & Institutional 12 8 30000 6 20000 4 Pre-Accession 500 3000? Turkey 400 Romania 500 2000 Hungary 5000 Poland 0 11000 Post-Accession Number of Food Enterprises 2 0. 9 1. 75 0 2 1. 5 0. 18 Pre-Accession 0. 4 0. 1 Turkey 40000 10? 10 Romania 50000 Hungary 52000 Poland 60000 Post-Accession Estimated Support (€ billion) Source: World Bank, 2010 (GAP Analysis) 19

Intro Macro Comp Inst Tu: Sum TU-EUWB Well Designed and Well Implemented Active Labor

Intro Macro Comp Inst Tu: Sum TU-EUWB Well Designed and Well Implemented Active Labor Market Programs Can Help Source: World Bank 20

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey: Progress & Priorities Summary Turkey has

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey: Progress & Priorities Summary Turkey has made great strides in the last decade ◦ Economic management now good practice among MICs Europe 2020 => the most immediate challenge ◦ Labor markets, education/skills, and energy are macrocritical in the medium term ◦ The World Bank is a close partner with government in key areas: e. g. , energy, environment, health, labor, municipal infrastructure Institutional reforms => underpin competitiveness ◦ The World Bank is a close partner of government on public administration & financial management reforms ◦ Capacity shortfall in line agencies. Long-term engagement crucial 21

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey-EU-World Bank Partnership Sectors? Instruments? Timing. .

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey-EU-World Bank Partnership Sectors? Instruments? Timing. . . ? 22

Intro Macro Comp Inst Tu: Sum Turkey, EU, World Bank: Alignment of Strategies TU-EUWB

Intro Macro Comp Inst Tu: Sum Turkey, EU, World Bank: Alignment of Strategies TU-EUWB Turkey’s 9 th National Development Plan Europe 2020 Turkey-World Bank Group Partnership Strategy Axes Strategic Pillars 1. Increasing competitiveness 1. Smart growth (education, R&D, innovation) 2. Sustainable growth (energy/environment) 1. Improved competitiveness and employment opportunities 2. Increasing employment 3. Strengthening human devt. 3. Inclusive growth 2. Equitable human and social (employment, skills & training, & social solidarity development growth benefits for all) 4. Ensuring regional development 5. Increasing quality and effectiveness in public Services 3. Efficient provision of high quality public services 23

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey-World Bank Group Partnership: Pillars and Financing

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey-World Bank Group Partnership: Pillars and Financing Pillar I: Improved Competitiveness & Employment Pillar 2: CPS Total IBRD 4 -year financing: Up to $8. 1 bn Equitable Human & Social Development Current IBRD Portfolio: $5. 04 bn Pillar III: Current IFC Portfolio: $2. 3 bn FY 08 -11 Efficient Provision of High Quality Public Services 24

Intro Macro Comp Inst Tu: Sum TU-EUWB IBRD Program in Turkey Analysis, Advice, Technical

Intro Macro Comp Inst Tu: Sum TU-EUWB IBRD Program in Turkey Analysis, Advice, Technical Assistance - Examples 25

Intro Macro Comp Inst Tu: Sum TU-EUWB IBRD Program in Turkey Supports Alignment with

Intro Macro Comp Inst Tu: Sum TU-EUWB IBRD Program in Turkey Supports Alignment with the EU WB Program Sectors/Themes Selected Activities Financing EU Acquis Related Areas Analysis, Advice, Tech. Assistance Economic Management • Policy-based budget support for growth & employment • Savings • Labor markets, informality • Public fin. management • Labor market regulations • Financial Control Directive • Judicial Reform Private Sector Development • Credit lines for SMEs and exporters • SMEs • Food safety–private sector • Investment climate and business regulation • Food safety Energy, Climate Change, Environment • Policy-based budget support for energy, climate change, environment • Credit lines for private investment in renewable energy & energy efficiency • Project financing for gas, electricity • Clean Technology Fund grant • Energy efficiency • Renewable energy • Environmental sustainability • Food safety–public sector • • • Infrastructure & Urban • Project financing for railways, water, wastewater, natural disaster mgmt • Municipal financing • Disaster mgmt expertise • Urban waste water directive • EU Directives on Railways Human Development • Investment lending: Secondary education; Health system reform • • • Cooperation framework on education, training, youth Quality of education Female Labor Participation Health financing Youth engagement Energy supply security Energy efficiency Renewable energy Competitiveness EU Directives (e. g. water, strategic env. assessment) 26

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey, EU, World Bank: Ongoing Collaboration—Future Directions?

Intro Macro Comp Inst Tu: Sum TU-EUWB Turkey, EU, World Bank: Ongoing Collaboration—Future Directions? Ongoing Collaboration: Thematic working groups (TWG) Policy dialogue: e. g. Procurement PFMC & TCA legislation; Education Studies to support EU accession: e. g. Food Safety; Environmental Standards; Labor Market EU TA complementing IBRD investment: e. g. Avian Influenza Parallel investment financing: e. g. Istanbul Seismic Risk Mitigation: EIB, CEB; Electricity Distribution: EIB Future Directions? More analysis & advice to support policy making and EU Acquis alignment? TA to strengthen capacity for absorption of IPA funds and EU accession? Explore increased financial Turkey-EUWB partnership: results-based lending, SWAps, budget support? Explore scaling up WB support in Turkey’s priority areas for EU alignment - with pooling of funds, fee-based services, trust funds? 27

Thank You!

Thank You!

Annex Further Analysis

Annex Further Analysis

External Financing: Resilient… percent Monthly External Debt Rollover Ratio of the Corporate Private Sector

External Financing: Resilient… percent Monthly External Debt Rollover Ratio of the Corporate Private Sector (%) 300 250 200 150 238 6 -month average 155 100 50 75 69 72 81 33 990 44 65478 0 4715936093 130942 5 0982 716932 09875432 0 Source: Central Bank of Turkey 30

… and during the Crisis the Private Sector Drew on Own FX Holdings 3

… and during the Crisis the Private Sector Drew on Own FX Holdings 3 Net External Repayments of Private Sector USD billion 2 1 - (1) Net Errors and Omissions on BOP (2) (3) Oct 08 -Sep 09: Correlation = 91% (4) Oct 09 -Sep 2010: Correlation = 28% Sep-10 Aug-10 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Jul-08 Jun-08 (5) Source: Central Bank of Turkey, World Bank 31

4 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 8 Nov-08 Sep-08

4 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 Jan-09 8 Nov-08 Sep-08 6 Jul-08 May-08 Mar-08 Jan-08 Nov-07 Sep-07 Jul-07 May-07 Mar-07 Jan-07 Nov-06 Sep-06 Jul-06 14 May-06 Mar-06 Jan-06 Nov-05 Sep-05 Jul-05 May-05 Mar-05 Jan-05 Unemployment Is Improving but Remains a Persistent Challenge… 16 10 Seasonally Adjusted 8 Unemployment (%) 12 6 10 4 Seasonal Factor (RHS) 2 3% 0 -2 Source: Turkish Statistical Institute 32

…with Large Regional Variations percent 25 22% 20 19% Adana 17% 15 Diyarbakır Istanbul

…with Large Regional Variations percent 25 22% 20 19% Adana 17% 15 Diyarbakır Istanbul 10 8% Çanakkale 5 0 2004 2005 2006 6% Trabzon 2007 2008 2009 Source: Turkish Statistical Institute 33

IBRD Financing in Turkey Total Lending by Sector: 2001 -2011 Total Lending by Instrument:

IBRD Financing in Turkey Total Lending by Sector: 2001 -2011 Total Lending by Instrument: 2001 -2011 (USD m) 7, 000 6, 000 5, 000 4, 000 5, 000 3, 000 4, 000 2, 000 1, 000 3, 000 0 CAS FY 01 -FY 03 CAS FY 04 -FY 07 CPS FY 08 -FY 11 Credit Line: Financial Intermediary Loans Policy Support: Adaptable Program Loans, Development Policy Loans & Emergency Recovery Loans Investment Lending: Specific Investment Loans, Program Sector Loans & Adaptable Program Loans 2, 000 Agriculture & Rural Development 1, 000 Energy & Environment Public Sector Governance & Economic Management Financial & Private Sector Development 0 Social Security & Health Urban & Transport CAS FY 01 -FY 03 CAS FY 04 -FY 07 CPS FY 08 -FY 11 34