Turkey at the Crossroads

September 22, 2003

9:30 a.m.	Registration
9:45	Welcome:	Jeane J. Kirkpatrick, AEI
10:00-11:45	Economic issues: The Turkish role in rebuilding Iraqi economy, free trade agreements, and the Turkish economy
	Panelists:	Deniz Gokce, Bogazici University
		Charles Johnston, Baker Donelson BDBC
		Reza Moghadam, International Monetary Fund
		Guven Sak, Union of Chambers and Commodity Exchanges of Turkey
	Moderator:	Desmond Lachman, AEI
Noon	Luncheon Keynote Address:	Richard Perle, AEI
1:15 p.m.	Turkish foreign policy and Turkey's role in the New World Order: U.S.-Turkish strategic cooperation and Turkey's relations with Europe, NATO, Israel, and the United States
	Panelists:	Ilan Berman, American Foreign Policy Council
		Gen. (ret.) James Jamerson, Lockheed-Martin and Turkish Aircraft Industries
		Ilhan Kesici, member of parliament and former secretary of the State Planning Organization
		Seyfullah Nejat Tashan
2:45	Break
3:00	Closing Remarks:	Turkey in the Twenty-first Century
		Bernard Lewis, Princeton University
3:30	Adjournment

UNEDITED TRANSCRIPT PREPARED FROM A TAPE RECORDING

View the transcript of the luncheon keynote by Richard Perle here.

View the transcript of the closing remarks by Bernard Lewis here.

Proceedings:

MR. : [In progress] -- and, three, this growth in the Turkish economy has been achieved at the same time that inflation, which has long been one of Turkey's major afflictions, looks set to come down to 20 percent by the end of this year and would provide the opportunity for Turkey to get inflation down towards European levels, which would be important for Turkey's aspiration to at some stage join the European Union.

What's also occurring is that the growth has taken place at a time that Turkey's debt, public debt to GDP, which formerly was very close to 100 percent of GDP, looks as if it's set to come down to something like 70 percent of GDP by the end of 2003, which, once again, is a very positive development.

Having said that, what one has to recognize--and this was be the second point that I'd like to make--is that Turkey is currently being helped by a very favorable international financial situation. In the first place, you've got the multilateral organizations providing a lot of support to Turkey, that they've lent to Turkey very heavily in the past, and they have recently, in effect, rescheduled some of Turkey's payments. So Turkey does have a window in terms of the amortization of payments the next couple of years, that they aren't as heavy as they were before. What we also have is we have the United States talking about loan guarantees which would help Turkey in a financial situation to deal with its public debt.

At the same time that that's been occurring, we have international financial markets awash with liquidity, so emerging markets in general have really benefited from a very favorable international financial situation where interest rates in Europe and the United States have been brought down to levels that we haven't seen in the last 45 years. And as a result, we've got money flowing into the emerging markets, and Turkey has been a beneficiary of that.

As a result, you know, what one sees is that the Turkish currency has appreciated fairly strongly this year, something like 15 percent, and interest rates on Turkish treasury bills, which were as recently as March at about 70 percent annual rate, are now down to something like 40 percent, which is a whole lot more manageable.

The final point I'd make before turning over to the panelists would be that experience tells us that international financial conditions cannot stay as favorable as they are right now for emerging markets for a prolonged period of time. In particular, as soon as the United States economy begins recovering, what one would expect to see is one would expect to see interest rates backing up, and that won't be a favorable outcome for emerging markets. It will pose a challenge to the Turkish economy in particular. So the third point that I would like to make is that this would seem to be the time that Turkey should be taking advantage of the favorable financial conditions to deal with the many vulnerabilities in the Turkish economy.

I'm sure the panelists will deal with more of those vulnerabilities, but I'd just mention that a public debt ratio of 70 percent, while it's a very big improvement from what we had earlier, nonetheless is something that gives cause for concern. The IMF has come out with a recent study in the context of its Annual Meeting being held in Dubai, suggesting that emerging markets that get public debt ratios to the tune of 60 or 70 percent in the past have frequently run into crisis situations. So I don't think that a public debt ratio of 70 percent of GDP is an occasion for complacency.

A second vulnerability would be Turkey's public finances that is related to the public debt situation but is something that needs to be dealt with, and the social security situation is a third vulnerability that would need to be addressed.

I've probably said too much here. The panelists will know a lot more than I do about the subject, and what I'm proposing is that we would start with Reza Moghadam, who's sitting second at the table, who's the head of the IMF negotiating team to Turkey, is an assistant director in the IMF's European Department. He'll start with some remarks, 10 to 15 minutes; then we'll move over to Deniz Gokce, a professor at Bogazici University in Turkey, and after that, Guven Sak, a professor at Ankara University, will have some remarks; and finally, we'll have remarks by Charles Johnston, a partner at the Washington, D.C., office of Baker Donelson firm, and who's been involved with Turkey the last 15 years in counseling the American-Turkish Council. We'll then throw it open to discussion.

Reza, perhaps if you'd like to start.

x MR. MOGHADAM: Thank you, Desmond.

Desmond has touched on most of the key issues, so I'm tempted to pass over and come back perhaps to some of the issues in the discussion. And I agree with most of the points that Desmond made, particularly the issue that there is a need for a strong Turkish economy if Turkey is to play a role not just in Iraq but regionally and globally.

Often when economists from the Fund are asked to talk about economic issues, we tend to focus on the recent crisis and, because of the firefighting nature of the work we do, on the very short term. But I would like to take a little bit longer perspective today because I think that will be helpful to highlight some of the challenges in Turkey and some of the underlying problems.

If one looks at two variables, say, from 1950s until now, inflation and growth, I think a very telling story comes out. Most countries, particularly emerging market countries, as well as industrial countries, faced an increasing inflation during the '70s, which was brought back down during the '80s. However, in Turkey, you see basically a trend increase in inflation from the '70s to last year. So you have inflation in the 20s in the '70s. It goes up to the 40s in the '80s. By the '90s, it's in the 70s--60s, 70s. So a very high inflation country compared to most of the emerging markets and developing countries. Inflation is higher almost the entire period.

The second fact is growth. If you look between 1950s and the end of 1980s, you see reasonable per capita growth, 2.5 percentage points, which is respectable, in line with a number of developing countries, not as high as, for example, East Asia. During the 1990s, however, you see that per capita growth is almost zero, and when you look at the data for the entire period more closely, you see periods of high growth, 6, 7 percent, interrupted by many crises. And the latest of those--we had three crises recently, in 1994, '97, and 2000-2001. So this suggests a very high potential rate of growth, but perhaps policy inefficiencies, policy problems.

So what are the sort of explanations for these two indicators. Why do they behave the way they have?

Of course, high inflation indicates problems with the conduct of monetary and fiscal policy, in this case particularly fiscal policy, because if you look at debt in Turkey, it has had very much a rising trend since the '70s, and so by the time even of the 1999 crisis, debt was already at, I think, about 60 percent, very, very high. Debt with short maturity in a high-inflation context, so indicating basically continuous loose fiscal policy and probably also institutional weaknesses. And these weaknesses one can see in a number of areas. For example, in the banking system, because of the high-inflation environment, many depositors had shifted to dollar, so you have a very dollarized economy, while the banks were basically buying government debt. So on the one side of the balance sheet, you have domestic assets, but you have large foreign-denominated liabilities, causing a major imbalance within the banking system.

Also, weak business environment. FDI in Turkey has been very low. It's still extremely low, indicating discomfort with the environment to invest in.

Also, the fiscal situation, apart from not holding to policy tight, has underlying problems. For example, the decisionmaking on the budget is very much distributed among a large number of agencies. So even designing, controlling, and executing the budget is a very difficult task. So when you do have fiscal problems, it's very difficult to rein back government spending.

And weak institutions, until very recently there was not, for example, an independent central bank or an independent banking supervisory agency.

So by the time of the latest involvement of the IMF in 1999, we had an economy whose inflation was running in the 70s; interest rates of about 100 percent, so real interest rates of about 30, very high. In 1999, growth was negative. We were going through one of those phases of--it was minus 6 percent, sharp downturn. Very high debt, 60 percent. Current account deficit, widening current account deficit. And an interest bill for the government which was about 20 percent of GDP, extremely high.

These are some of the problems, but there are sort of bright spots, too. Let me highlight one which basically emerged during the '80s. The Turkish manufacturing has been a vibrant sector, and if you look at any indicators of market share in any of the European countries or the U.S., the Turkish market share throughout the '80s is increasing through the '90s. And I think as an aside, it is interesting to note that Turkey started quite aggressive trade liberalization in the '80s, and perhaps one could conjecture that the two are related. And at the moment, for example, the manufacturing industry in Turkey is very liberalized. For example, there are free trade agreements with the EU and the European Free Trade Area, and for other countries, the tariff level is very low, about 4.5 percent. So as an aside, there has been a vibrant manufacturing sector.

Now, given this picture, what has the IMF-supported program tried to do? Let me highlight some of the issues and some of the problems and some of the solutions, and then we can come back to it perhaps during the discussion.

The number one problem at the outset was debt sustainability, with a very high debt, with a very high interest rate, high inflation, and a country which had access to the markets and wanted to maintain them. Debt sustainability was the major concern, both for the markets and the policymakers.

When you have a debt problem, there is only one variable you can truly control. Debt will be basically determined, a part of debt, by your interest rate, real interest rate, by growth, and by the primary surplus that you can run. And among these, only one can be a policy instrument, and that is the primary surplus that the government can run. So obviously that suggests having to run a very strong primary--a very large primary surplus in order to turn around the debt dynamics.

Now, of course, when you--in '99, in fact, the primary was in a deficit. The country was in a recession. The question is: When you are faced with this recession, is it wise to strengthen fiscal policy and run a stronger fiscal policy? And I think probably the record shows that it was the right thing to do because in a country which is faced with very high short-term debt and questions about debt sustainability, controlling the fiscal situation probably has a more positive confidence effect than its potential negative effect on the pace of economic activity. And, of course, by controlling the fiscal situation, you also help reduce interest rates eventually.

Now, fiscal policy was also important in terms of controlling inflation because even if you had a central bank independence, even if you had moved to inflation targeting then, you had a situation where there was a classic fiscal dominance. So monetary policy was subservient to fiscal policy. So controlling the fiscal situation was also instrumental in enabling a reasonable monetary policy to be run by the central bank in order to control inflation. So that was the sort of second pillar.

The third pillar I would call structural institutional reform. Now, that was built on the idea that to have a credible anti-inflation policy in a country which was plagued by inflation, you do need a central bank whose focus, whose mandate is entirely on inflation, within a context, of course, of fiscal dominance. So independent central bank was another element.

Also, during the crisis, the vulnerabilities in the banking system really came out. I mentioned the vulnerabilities in the balance sheets. Of course, when you have devaluation, when you have high inflation, and a crisis does occur, the banking system is devastated. And the contingent liabilities which were in the banking system, of course, had to be brought onto the budget, leading to even higher debt. Basically debt went from the 60s to the 90s. But after this, if you like, the cleanup of the banking system has taken place, one needs to put it on a very strong footing, initiating sort of management and structures in the state banks which are professional and aimed at the core business and putting the rules of the game for the private sector, which put--which creates a level playing field as well as the efficient banking system. So that was another key part of the strategy which also involved having an independent banking agency supervising the banks and dealing with the problem banks.

And the final part of the strategy was the slew of structural reforms. As I mentioned, there were enormous weaknesses within the budget structure, so changing the way the budget planning, execution, and control was done required institutional changes and legalistic changes--legislation to put the budget on a sound footing. And I mentioned the business environment. So the structural reforms also included, for example, putting a proper FDI law on the books, revamping the bankruptcy legislation, increasing the transparency of the public sector.

To give credit for both the last government and the current government, there has been enormous progress, I think, since 1999, and those are transparent in some of the indicators that Desmond mentioned. This year it is likely that growth would be at least 5 percent. Inflation for the first time, I think, since the '70s has gone--is heading towards the 20s. It's heading towards 20 percent, possibly even lower.

The government has managed to maintain a fairly strong primary surplus, despite some problems during the last elections. The fiscal situation has been held rather successfully.

The reserve situation, just in the last two months, if you look at the activities of the central bank, you will see enormous inflows, which are not only inflows from outside but also reverse dollarization, people changing from dollar to the domestic currency, indicating that they have greater confidence in the way the economy operates and greater confidence in the banking system and in the policymakers.

However, as--let me mention one other factor. Access to the markets has been maintained during the entire period. Of course, with periods of drought, but Turkey has managed to maintain access even during the difficult periods in the emerging markets. Of course, now we are going through a rather benign period, as Desmond mentioned, and the liquidity in the emerging markets is very good. But that liquidity for Turkey will not have been there was it not for the strength of policies and confidence in the policies that are being implemented. Turkey issued, for example, last week a bond on the international markets for over a billion with collective action clauses, which even six months ago for Turkey would have been unimaginable.

So there has been enormous progress, but as Desmond mentioned and I would like to stress, the situation is still vulnerable and subject to policy slippage. I think the danger now is with such a turnaround, a barely marked turnaround in the last few years, policy complacency or a benign environment, benign external environment, which may not last, may lead to relaxation of policies, and that I see as a great danger because, unfortunately, the luxury is not there for Turkey to do that, not yet. Debt has come down from 90 percent to 70 percent, but a large part of that over the last year has been because the exchange rate has been stable. And almost the entire decrease from the end of last year to what is projected to be now has been due to the strength of the exchange rate. There has been a real appreciation. That could easily reverse, either because of sentiments in the engagements, because of regional developments, developments in Iraq, one of Turkey's neighbors, or domestic policy slippage.

The maturity of debt has improved. Two years ago, the government was not able to issue domestic debt of longer than six-month maturity. Now they can easily issue more than a year. But, still, it's very short maturity, and so vulnerabilities are there.

The financial institutions have been cleaned up, but we have not yet gone through a sufficiently long expansion mode to see if the modus operandi of the banks has truly changed. The supervisory agency is doing well but still needs to be tested. It still needs to establish a track record. The central bank has done exceptionally well. It has controlled inflation to enormous success. But the operational independence of the bank is new, and, again, the track record needs to be built.

So I'll leave with a thought that although there has been enormous improvement in the last two, three years, we are still in a fragile situation.

Thank you, Desmond.

MR. LACHMAN: Thank you, Reza, for providing us with a comprehensive and a pretty candid assessment from the IMF's point of view of what the achievements have been and what the outlook has been for Turkey.

Perhaps if we could have Professor Gokce make some remarks. I notice you have a slide presentation. I give the floor to you.

x MR. GOKCE: Ladies and gentlemen, it's a pleasure for me to be here in Washington and to be able to address you. Obviously when you speak after an economist of the caliber of Mr. Moghadam, the only thing you do is to provide the charts to everything he said. But I will go beyond that. There are a couple of points which I need to make.

I have about 20 charts, so we are going to spend 30 seconds per chart. If you need any copies of the charts, I can provide them. There is a copy of them available, and even if you want something more than that, we can forward them to you through e-mail. After the meeting we can do that.

This is what Mr. Moghadam has been talking about. This is a quarterly growth chart of Turkey. As you can see, we call it the Turkish roller coaster. Turkey collapses within a year or two into a breakdown, but surprisingly gets out of it within four quarters. I'm not sure which mechanism pulls it out of these holes so quickly, but it does. So that's starting from '88 all the way to 2003. The second quarter is there. Very volatile in the '90s.

The fiscal dominance which Mr. Moghadam mentioned, basically a tremendous budget deficit. Just take a look at 1999. That's when the program was put together with the IMF. Total budget deficit or public sector borrowing requirement is 24 percent of GDP. That was a world record in those days, and it still is the record, I think. Only Bulgaria for a very short time, for a quarter, went to 52 percent in the spring of '97. Other than that, we have a tremendous problem.

And '99 is the time period when Turkey went over 60 percent net debt of the public sector limit, which is a Maastricht condition for Europe. And then in 2000, we really did not have much of an option because in an economy which was growing at minus 8 percent, two earthquakes, one election following the Russian moratorium, you couldn't really apply a strong monetary stabilization policy, so we had to take the risky road with the exchange rate anchor, and then we had problems with that. We probably are the proud owner of the title of having an exchange rate-based problem in the economy with the highest reserves of the country in its history and under an IMF program. That distinguishes us from the rest of the world.

The gray area was the target that was established in 2002. We want to come to positions of fiscal picture which is similar to Argentina at the peak of its problems. So when Mr. Moghadam says there are still problems to be solved, a tremendous effort has been put together, but there is some distance to go, and the question I should be answering at the end is: Is Turkey going to do it? And I'll talk about that.

He mentioned the high inflation after 1970s. That's when--1970s was the first petroleum crisis. We are going up the hill to the peak, and now we are coming down the hill, hopefully, and by the end of this year we'll be back to 1975 and might even be less than what was started in the beginning of this year.

The mood in Turkey is very optimistic. The central bank uses a lot of expectations data, and the numbers are very optimistic, too, but I just am providing you private mood index, CMBCE(?). These are almost two years old now, and you can see at the right-hand side all the indexes--consumer confidence, retail sales, individual consumption, consumption trend, all sorts of indexes are on the up. All of this in spite of the fact that while the economy is picking up due to a large industrial exportation boom, the domestic demand is weak, and I'll show you in a second why it is weak.

He talked about the dollarization. This is a very poor index of dollarization, obviously. It affects deposits over total deposits, but it shows something. The purple area, as you can see, with the red arrows. On the exchange rate base program, you would expect the public to switch from dollars into Turkish currency, which has not happened in that program. So the public did not support the program to the extent the government would desire. And now you can see the reverse dollarization is happening or coming down the hill, which means this creates an overvaluation of the Turkish lira because the public wants to switch from the dollars to TL. It is not a policy thing, but induced by the desires and expectations of the public at large, businesses, individuals, and so on. So, sure, overvaluation is overvaluation, but it's much better if the public causes it rather than a government policy of exchange rates.

Here is the big problem. Turkey had two large banking segments. One is the government banking segment; the other was the private sector. We had hidden a lot of agricultural subsidies into the government banks to the tune of about $21 billion, all the way going back to 1994, and those have been cleaned out in this 2001-2002 stabilization process by issuing non-market-sold paper from the treasury to the central bank and other government institutions. They are included in the government net debt picture, but they are sort of not as bad as one thinks because, after all, last year the central bank had a profit and they turned a profit because of this paper to the treasury. So the interest burden is not as bad. And the principal, some of them are five-year bonds [inaudible], and whatever inflation remains will take care of some of that principal. So although the numbers, the debt numbers are relatively large, you have to take into consideration what we call the non-cash component of it, which is debt of the treasury to government institutions.

On the banking side, obviously Turkey had serious problems. As Mr. Moghadam mentioned, the mathematics of the Turkish Government on finance were wrong. I mean, if the government is borrowing 80 percent of all funds in the economy and at rates 10 percent above the going market rates, if the government banks are offering 10, 15 percent higher interest than the private banks, obviously you are pushing the private banks into difficulty, liquidity and otherwise, to take more risk. But the cure has also been imperfect because you can start with the rehabilitation of the real sector and the rehabilitation of the banking system may be sequentially or simultaneously, but we ended up with starting with the banking system, which then left a lot of the real sector firms' loans as bad debt on the banks, for which they had to put up capital, and then the banks themselves got into difficulty, which they already had a lot of it, anyway. And so the cleaning of the real productive sector and the banking sector is still an issue which is going on, and I think Mr. Moghadam will have to wrestle with it a lot.

But the net result of this has been that the real credit has been down in Turkey--one, because of the number of banks and their deposit base is declining; two, because of the lack of availability of credit. This is a chart of real credit stock which starts from '98. You can see the boom during the stabilization program, and then the collapse, the red line, all the way to half. This is why obviously the domestic demand component of output in Turkey is not growing at a rate which is desirable, although the industry and export side is booming. So we have right now a growth rate, the second quarter was about 3.9 and 3.7 of GDP and GNP. It is going to probably be close to the targeted 5 percent and might even exceed that. But if the mood continues the way it is now, the real growth might come next year, obviously, if nothing political interferes.

This is a big problem in Turkey which needs to be ironed out. We realize the start is slow. It's starting to turn up because inflation is going down and credit is recovering. Some consumer credit, automotive, and some housing might be recovering soon. And so if it does, then (?) will turn up, and domestic demand will recover as a result of it.

Why is all of this happening? Past-due loans as a total of domestic loans, it's very large--the blue one, 60, 70 percent, blue chart is government banks. This is partially because of the problems of government banks, but also partially because of the banks that were taken over by the government. They are now classified as government banks.

Here is the net public debt plan that was made initially. The 2003, this was the initial plan, its scenarios. The 2003 plan where I have the 74.8 spending. That number is close to 69 right now, and if the exchange rate go the way they did in the past, as Mr. Moghadam suggested, then reducing the debt ratio is easier.

It's very funny now. If you--the treasury calculates the real compound average interest burden on the treasury, real compound average interest burden on total government debt, that's about 4 percent in real terms. It's not 25. Because on the Turkish lira side, the average cost is about plus 13, and on the dollar-based side, it's about minus 9, minus 10, 12, depending on the period. And it averages out to real 4 percent, which means holders of Turkish dollar debt are subsidizing holders of Turkish lira government debt. And if there is any problem in Turkey, it turns around, the reverse will happen, obviously. The Turkish lira debt holders will subsidize, and I don't anticipate something like that in the near future--near future being a year.

If you look at the current numbers, you can see that, including the second quarter of 2003, the GDP growth is averaging about 3.9 percent. This is sort of a 5-percent-plus chart, which is slightly better than the past average. Annual inflation rates, the two dots at the bottom are the target, 20 and 16 for wholesale and retail. I think we will overshoot these in the sense we will have inflation lower than this. I'm tempted to say that both of these targets will be erring about a percentage or two percentage points below, and that will take us all the way back to 1974.

Mr. Moghadam mentioned overvaluation. There is a lot of crying and yelling on the part of Turkish exporters, but actually that's not a fair presentation of what is happening in the Turkish external sector. If you look at it, the Turkish external sector has a very strong trend. Blue is exports. A very steady, strong monthly export figure, and this chart has been accelerating partially due to exchange rate changes, growth rate changes, and partially due to increases export activity.

The volatile component of Turkish trade business is imports, which you can see collapsed in the crisis, then was stale for the moment, and is increasing. But it doesn't look that scary because if you look at the foreign trade deficit, it is not as high as it used to be in the 2001 crisis. And there are two things which also have an impact on this other than exchange rate. Here is the central bank's real exchange rate chart. The real exchange rate looks as if it is overvalued by 30-plus percent, but you have to take into consideration that real wages have been down in Turkey dramatically, and the real interest rate is coming down. And both of these you have to compare with this overvaluation.

I made a simple calculation, and a couple of other people did it, too. Due to the overvaluation, Turkish exporters lost about $3 to $4 billion over the last year, and the Turkish Government in debt service gained about $22 billion. Sure, overvaluation or undervaluation, it will help somebody, but I don't see any exchange-related difficulty in the picture.

Here is the balance of payments number, $4 billion. Estimates can go up all the way to $7, $8 billion, which is about 3, 4 percent of GDP. But we also have estimates which say that by the end of the year we'll still be at $4 billion. Let's see who wins at the end.

Looking at the Turkish debt, the external debt of the government--here's a breakdown--about $22 billion, central bank; $47 billion, private sector. The Turkish Government does not have any short-term debt, period. This makes it very different from the Latin America countries. And if you look at to whom the debt is, about $31 billion to international institutions, 21.5 to IMF. I hope Mr. Moghadam will tell us IMF does not intend to attack Turkey. So if you are making computations about Turkish debt service, the worry is not in the external side, and IMF has been very helpful in terms of changing the repayment schedule. So I'm not terribly worried about that.

Here is, as suggested by Mr. Moghadam, where the problem lies. But I wanted to show this chart to you. The dark area, the reddish area, is what we call non-cash debt, which is one government organization owing another government organization. The blue chart is the market-based debt. And if you look at this debt, you see $126 billion of debt officially published as of last month. About $60 billion is to government institutions, about 65 is to the market, and the last line shows that about $36 billion worth of it is short-term, with four months due date. That's where we have to worry about it, but with the interest rates declining, that is not that big a problem in the foreseeable future also.

I think a big area where this government scored is that primary surplus, which Mr. Moghadam mentioned, obviously, a couple of variables that are available or that impact debt sustainability, real interest rates, real growth, the primary surplus, and seignorage, or creation of money, which you cannot do excessively. And the primary surplus is important. In Turkey, we have seven budgets. Out of these, the largest is the consolidated budget, and we have the municipalities, social security institutions, and so on and so on, state enterprises. But the very large and important budget is the central government budget. You can see the yellow line at the bottom. The primary surplus is supposed to be 20.2 billion--quadrillion Turkish lira. It is as of August 15.5, 77 percent of its target now. This used to be an issue which was very sensitive, and I think the finance minister and the Treasury people are working hard to get rid of the worries on this account. So things look good right now on the fiscal problem side.

Here are your interest rates on government borrowing. You can see the exchange rate-based program in the mid dramatically had reduced government borrowing rates. We wasted that opportunity due to domestic political struggles, and I'll make a comment about whether something like that is likely in the near future. Then we have the crisis with the peak. You should remember that in the 1994 crisis, the peak interest rate on a compound basis was 450 percent. This time around it was only 190. And inflation had skyrocketed in '94 to about 150 percent, here only to 90. So although the crisis was a larger one, it was much better under control in terms of interest and exchange rate results. Even the exchange rate there jumped from 14,000 to 39. In the peak of the crisis here, it only doubled, so it was contained much better.

This is the secondary market. You can see here the election--the first crisis, second one, then the telecom crisis, which is purely political, obviously, and then the election [inaudible], and the improvement in mood and the Iraq impact and the post-war optimism there. So we are at that level now, and this is how the central bank is doing in terms of its overnight rates. Overnight rates, it's about 29 percent, the latest overnight quotation of the central bank. I think they are doing fine. I think they are fine central bank, being patient enough, although the Turkish general public doesn't understand this. We want exchange rates to move now and the interest rates to come down now, which is not possible given the economic structure and the accumulated problems over the years.

One more time, here's a set of numbers I can [inaudible] the current 2003 external debt service of the government was $11.5 billion, of which 7 is principal, 4 is interest. That's a small number given the size of the Turkish--so the problem in Turkey is managing the domestic side of the debt.

And here is a chart about the central bank. The red line shows the open position or the surplus position of the central bank in terms of foreign exchange. It hurts me to tell you that on the left-hand side the central bank had an $8 billion surplus position vis-a-vis its external debt, which is when we had this crisis in November and in January. And there was [inaudible] foreign exchange out of the central bank from 8 billion plus to about 11. That's about $19 billion reversal in a $40 billion central bank balance sheet, but about international reserves of $40 billion, that was too much for the markets to shoulder, so we had the difficulties.

Then came the IMF help. You can see the straight line jump up. That's assistance by the IMF. And the central bank recovered now to a square position. We are about $40 billion worth of reserves, of which about 29 or so are in the central bank and about 11 at the banking system, and the short-term debt of Turkey is about $15, $16 billion, so things look good and the central bank is under control. The blue part shows the extent to which the central bank is doing open market operations to siphon some of the liquidity because when they buy foreign exchange, they provide Turkish lira liquidity and they're in control.

Okay. That's roughly what Mr. Moghadam suggested in charts. IMF economists talk. Liars use statistics. I provided the lies for you.

[Laughter.]

MR. GOKCE: But I would like to add a couple of things to all of this, because with this picture, the question in your mind should be: Okay, it looks fine right now, what about six months, a year, two years from now? And there I'm going to make a defensive speech. It's part of my nature. I used to play goalkeeper in a professional team, and when I played basketball, which I did eight years in the league in Turkey, I used to cover the best player of the other team. So be ready for a defensive statement here, okay?

If there was an election today in Turkey, if there was an election, it's my judgment that AKP, or the Justice and Development Party, would improve its percentage. This is not only my opinion, but there are a couple of private opinion polls, and pretty soon they are going to have local elections and you will see that this will happen. So the public supports the current government while the other people do not.

We need to emphasize the fact that the period since the election in 2002 has been a period of great political change in Turkey, much more significant than what I have experienced in the last 20, 30 years in Turkey.

Let me mention here, I spent the year 1970 to '82 in the U.S. teaching at Emory University in Atlanta, and I've been back to Turkey the last 20 years teaching at Bogazici University, but I closely followed every day of economics and politics. So I'm giving you a sincere statement about where things stand.

The establishment in Turkey does not really understand the extent of the change that is happening in Turkey. I'm afraid some of our friends in the West also do not fully understand what's going on in Turkey in terms of domestic change.

In Turkey, in the last 20 years, the public vote has been shifting toward the center and to the right, such that a big part of the vote is now center and to the right of the political spectrum. And the extremes have a small weight, but there is a hollow(?) area between the extremes and this middle or to the center vote. And it was very clear to any political observer that the mood in Turkish politics would be changing, although a part of the media, universities, bureaucracy stayed on the left or in other extremes, right extreme.

Now, before this government, when we talked about people with Islamic convictions, I used to call them--we had what is called an Erbakan syndrome. Mr. Erbakan, who was Prime Minister in 1996 to mid-'97, he was a typical Third World sympathizer. He did not get along real well with the West, not well with the markets; democracy, well, he had problems with it. And I think his implicit goal was to distance Turkey from the West, from the market economy, and somewhat from the democracy, the type which you and I know and like.

On the economic policy side, he was an unbelievable populist, a state rule fan, and he was in favor of some degree of authoritarian polity. So he had great difficulty with such concepts like tight fiscal policy -- [tape ends].

-- programs and so on.

Now, this was the picture in 1997 in Turkey. Now, AKP people, some of them come from a background of Mr. Erbakan's party, but they have evolved into something which is very different from this. It's unbelievable the extent of change in the makeup of this party. They have become sort of a strong agent of change in Turkey.

When you look at why this has happened, Turkey had a bureaucracy or governments which were based on people coming from the bureaucracy which had, as the French would call it, "etatiste," state-oriented infrastructure. But this government probably is the most pro-business, the most pragmatic government that ever came to Turkey. Sure, they are going to have problems when change of this kind is happening as rapidly with people who are relatively inexperienced in bureaucracy or in political life. But I am underlining the fact that they are the most pro-business and most pragmatic government we've had in the last 20 years that I've been able to observe Turkish politics very closely.

For AKP, the market economy and private ownership present no problem at all. This is in great contrast with former leaders such as Mr. Ecevit or Mr. Inonu or Mr. Bikel (ph) and others. I'm just getting your attention on the fact how quickly and intelligently Mr. Finance Minister Unakitan pushed the pragmatic tax reform package in a very short time, sort of providing bribes to people who were willing to pay a little bit extra tax by virtue of eliminating some of the past or current tax sins in exchange for current support of the tax program. So very pragmatic.

Initially, I have to admit that as a journalist, as a teacher, as a television commentator, and as an economist, I was afraid that with an absolute majority the government would undertake a lot of populism to ensure the next election. But time has shown, the seven, eight months that they have been very active, that they were willing to operate under a fiscal constraint much better than any government I have seen before in Turkey and quick to undertake legal measures toward that goal. Whether it is IMF pressure or whether it is the stick of the markets under a floating exchange rate system, they ended up performing what is necessary (?) , and this makes me feel much better.

Now, so, I'm going to be very clear about this. Here currently they have a civilian Islamic-oriented movement in Turkey pushing an Islamic country toward integration with the rest of the world and with democracy, and if I may use this long phrase, this is not happening in spite of Islam, but it is happening with Islam. That's interesting. That's an experiment new for Turkey, and I think it's also a new model for the world, a new experimentation. So you should make an attempt to understand what is going on and follow it.

Now, all of this obviously does not mean that the government has been sailing smoothly. It hasn't, for example, the relationships with USA. Well, everybody knows USA has been a very strong supporter of Turkey for 50 years. I think all Turks know this, and most of the people present in this room also know it very well. We don't forget it. I keep teaching it to my students every day in class that in 1999, when we were really down--(?) moratorium, bad elections, two earthquakes, big problems with everybody around us--it was USA that convinced Europe to be gentle toward Turkey in Helsinki, and they helped solve the (?) problem and helped improve relationships between Turkey and Greece and Turkey and Israel, and asked the IMF and World Bank to give extra support to Turkey by the end of 1999. I think everybody in Turkey knows and appreciates this U.S. effort.

Now, next to this we have to put these parliamentary resolutions relating to Iraq. U.S. has been disappointed with the first parliamentary resolution in March. But you have to understand, by March there was a very strong polarization in Turkey. There was no gray opinion in Turkey. There was either white or black, and this was a situation that the government did not have the full confidence yet, a couple of months after the election, and they were bogged with the Cyprus issue with Europe, stabilization program with IMF and World Bank, Iraq with USA. And although the business community fully supported the first resolution, the isolationist elements in Turkey as well as the pro-Europe forces in Turkey, which are relatively strong, were against this Iraq resolution supporting U.S. It was too much too soon to handle for the government, and sort of they tried to withdraw and wait and see what is going to happen--an indecision, if I may put it that way.

But today the reality is very different, both domestically and internationally. I think today it is very difficult for the Turkish Government to say no to the recent parliamentary resolution towards the participation of Turkish military forces in the security operations in Iraq because there is no war issue today, only a transition period. And I think the government is going to take a strong position in this.

But there are problems in Turkey. If I as a Turk who has lived four years in Germany and 12 years in USA try to look at this situation, there exist a lot of uncertainties in the minds of Turkish politicians in terms of what USA wants to do in Iraq exactly and with Europe exactly.

Now, these are issues which are being debated here, in Europe, and in Turkey. But Turkey does not have a clear picture of where U.S. wants to go. I'm not trying to make an excuse for the government, but this is really the situation. People are trying to assess what is to come and how should we position ourselves and so on.

I'm of the opinion that if USA should put in front of the whole world a clear road map in terms of Iraq and its relationships with Europe, then I think the Turkish Government is going to clearly see what is going to be its duty, and I think it will side with the U.S. position in these issues. They are right now in confusion about the exact nature of where everybody wants to go. Turkey is not forgetting the historical alliance with U.S.

Obviously, this is a short-term event. In the long run, these short-term political and military events fade away, and economics comes to the forefront. And the long-run salvation in the region and in Turkey and Iraq and Syria, Iran, whatever this region is, obviously will be based on economics, on strong trade, on strong business relationships, and I feel like Turkey has a bigger role to play here and Turkey is ready to play this role, but due to different reasons than the past.

Turkey is changing rapidly, and in the past I have visited a lot of meetings of this kind. The issue always was about the real estate value of Turkey, which meant the location where we are in, in the mid of all the problems. And so a pro-West country in a region where being pro-West is a liability, so real estate value, we were important against Russia, Soviet Union; we were important with the U.S. and the East, and so on and so on.

Now, I think today the game has changed. Today, the real estate value is not of importance in Turkey. So the importance of Turkey today with this change, which even Turks have difficulty in understanding in Turkey, is not derived from where Turkey is located, real estate value, but where Turkey wants to be. Turkey does not have anymore an exaggerated sense of its real estate value. So what I'm saying is U.S. needs to show us the road map. Border proximity is not so relevant. What Turkey can do in this region is important, and I think a large number of people understand the fact that Turkey can contribute a lot.

I just wanted to make this statement here in addition to economic statistics because, sure, economics is important, but in the long run, where Turkey will go and where the region will go and where the U.S. interest will go depend a lot on this changed perception of Turkey.

Thank you very much.

[Applause.]

MR. LACHMAN: Thank you very much, Professor Gokce, both for the charts, which we'll try to make available to anybody who would like them--it really provides more than a comprehensive picture of the Turkish economy--and your latter remarks, you know, certainly provide a lot of food for thought, and I'm sure we'll be picking up on this in the discussion.

I'd turn now to Professor Sak. I give you the floor.

MR. SAK: Thank you.

Regarding economics, they said everything that I would say about the Turkish economy.

MR. GOKCE: [inaudible].

MR. SAK: Yes, you showed the numbers. What I'm trying to do is to start with the economic program, what we are trying to do in Turkey nowadays, and then try to bind it to this Iraqi affair and try to discuss a little bit about what Turkey could do on the Iraqi reconstruction. And I'll move a little bit towards foreign affairs, which is an area that I don't have any idea about, so I can freely talk about it.

I came to Washington last Tuesday, and I feel a tension in the air. You know, we were all here discussing that the program is on track now in Turkey, the economic program. Even today, when you look at the market figures, there is no problem. Interest rates are coming down. The TL is appreciating. That's a good thing in this context with the huge debt stock. Inflation is coming down. There is no problem until the end of the year.

And, in addition to being on track, the program is working so the program itself is building its own credibility, to. And, in addition to that, although the debt stock is considered as a negative thing, as a negative issue, as a sign of vulnerability, I believe that it's also the defense mechanism of the program itself. Because when the exchange rate--when you float the exchange rate, when the central bank is not intervening in the market very much, when the float is clean, then it tames the politicians. The debt stock, the dynamics of the debt stock itself tames the politicians. So it's not very important what the politicians are thinking about. They may think to leave the program on one day, but the next day, with the market parameters reacting to that situation by the help of the huge debt stock, they learn that they have to stay on track. The debt mechanism worked in Turkey in the last two years. I mean, with that coalition government it worked. It worked during the transition period. At that time, when you look at our announcements at the central bank, you could see that we have mentioned that this is a mechanism, this is a defense mechanism of the program itself, so there is no problem until the elections. We are pretty sure that everything is going to be on track. We made that announcement before the--four or five months before the elections, as far as I remember now.

So everything looks to be fine, so why then is there this tension thing in the air? We have to deal with that. That looks to be an issue much more related with foreign affairs. It's an issue much more related with Iraq, I think. Let me say a few words about Turkey, the transition process that we are in now, and then try to tie it to the Iraqi case.

It's good to start with the name of the conference, "Turkey at the Crossroads." Ambassador Kirkpatrick has mentioned there are frequent crossroads around, turning points, and transition periods, too. We are in Turkey in a transition period in the last two decades. We trying to build the basic institutional structure of a market economy in the last two decades. We weren't successful up until now, but after these two consecutive crises in 2000 and 2001, we have learned that there is something seriously wrong in the organization of life in the country. And we have learned that we have got to change it. And this huge debt stock now, which also shows that there is a problem in the economy, is helping us to make this change.

Mr. Moghadam was mentioning that there are other crises in the old times. Yes, we had crises in late 1970s. That's when we decided to start establishing the basic institutional structure of the market economy in Turkey. We weren't successful up until the--throughout the whole 1980s and 1990s, we couldn't--we did not manage to change the state apparatus. The public sector reform we couldn't do up until that time. And then we had this crisis, and now we are changing. So we are at a crossroads. We are at an important crossroads, that's for sure, and I believe that this economic program also leading to a redefinition of the role of government and state in the economy, in the Turkish economy, and also in Turkish society. So the economic program itself is beyond economics regarding its impact, so it is a major crossroads for Turkey when I look at it that way.

Regarding Turkey-U.S. relations--so now I can talk freely from now on--are we at a crossroads? No and yes. No because, I mean, the shared principles, the market economy, democracy, those principles are not changed. But the object of analysis now, the area of interest changes. You know, it was the Soviet Union at one time. It was simpler at that time. The real estate value I think was working better at that time. Then it was the Balkans, the Caucasus, and now it's becoming the Middle East. I mean, the Middle East, as we know, is becoming Iraq. So the only change is in the area of interest.

But when you look at Iraq, for example, it is, again, an area of shared interests between the U.S. and Turkey, and the interests of the two parties, in fact, juxtaposes in the case of Iraq.

This is not the first time that there was instability in Iraq, and this is not the first time that we feel security threats. This unfinished war in 1991 created instability in the region at that time. Iraq was unstable at that time, and we have learned that instability in Iraq is not good for Turkey; it's bad for Turkey. We have learned about that. And we paid a price for that, not only for economy-wise but also for security-wise we paid a price for that.

Now, after the intervention, Iraq today is more unstable. So it is fair to say that Turkey could not just idly wait for the U.S. to fail in Iraq. I mean, it's not possible. We have learned what instability in Iraq could lead to in Turkey, so this problem has got to be--it is a problem of Turkey as much as the problem of U.S. I don't think--at this point I don't understand this tension thing, tension in the air. It may be because of this hurricane maybe. It is not a question--when I look at Iraq, it is not a question about what should be done. There is an agreement on that. When I was in Ankara, there is an agreement on that. I mean, Turkey could not wait idly, and we all know that a U.S. success in Iraq is a must for Turkey after this initial status quo in Iraq (?) . Something should be done to this instability thing. So I see that the interests of both parties coincide totally on Iraq.

Although there is no question about what should be done in Iraq, there may be differences on how we should do it. He mentioned a little bit about that. Maybe I may go a little bit more on that issue, how we have to establish stability in Iraq where we have to start building stability in Iraq. If there is some kind of a tension in the air in an environment where there are shared interests, where there is mutual understanding of the issues, if there is still that tension in the air, then there is the need for more open, candid dialogue between the two parties. That looks to be a necessity. Deniz has mentioned that there is the need for Turkey to see if there is light at the end of the tunnel. What is the picture that's going to emerge at the end of the tunnel?

But as far as I understand, if both sides trust each other, trust the intentions of each other, through an open dialogue they both trust the intentions of each other, I don't see any problem, and I don't understand this tension thing in the air. So that's why I'm saying that it might be because of the hurricane.

When I look at the reconstruction of Iraq, I have some more--and he talked a lot. When I look at this Iraqi reconstruction, there is the need to define what we understand from reconstruction in Iraq. And this part now is from a report by Chambers of Turkey. They have prepared the report on how Turkey could contribute this Iraqi reconstruction thing. I don't work for the Chambers of Commerce, but I have dialogue, let's say, with them.

Regarding the Iraqi reconstruction, we have to define what we understand from this, how we can approach this problem of Iraqi reconstruction. There is first the need to restore law and order in Iraq as quickly as possible. That's the first place. There is a security issue. Fair enough. That's okay. And, secondly, with the playground ready, with stability and no unrest on the ground, then the reconstruction effort itself could start, rebuilding effort. We have a basis to start that, and I believe that Turkey has a role to play in both instances, in both phases. But it depends on, you know, how you define each phase.

For the first phase, for example, I believe that although the issue is security, the first phase, the establishment of law and order in Iraq, is not solely a military affair. It is also very much related to improving the living conditions of Iraqi citizens. So there is the need for some economic measures at the first phase and to increase the well-being of the Iraqis also. Otherwise--many countries tried that and it failed. You deal with the mosquitoes but you leave the swamp there. So you also have to provide basic necessities into the region, into Iraq, to normalize life in Iraq as quickly as possible because those things are not there.

So the supply of refined products are important. There is the need for Iraqi money, the Iraqi oil production to take effect. In order to do that, there is the need for electricity in the region. There is a need for some energy to start pumping oil besides the security of the pipeline, of course. There is the need for consumption goods for everything in this. So there are some economic measures. It's not simply military measures. And law and order, establishing the law and order part.

And the second part, when I see reconstruction effort, it's much more like a World Bank program. There is the need for a private sector development program in Iraq, and it is not going to be like, for example, German reconstruction because the basic institutional structure is not there. It has to be established. And I believe that it is not like the East European reconstruction, too, that there is going to be a meeting now about, whether the East European experience could help Iraqi reconstruction. But there is the need for more basic institutional structure to be established. And I believe, Professor, that there are much better people to discuss those issues here, but let me also add a few words about the possible impact of an economic development program, private sector development program on changing Iraqi society.

When people from the West are discussing our societies, they call it Islamic societies. When they discuss it, these religious relations, tribal relations, becomes of primary importance. They are important because they are institutions in an institution-less environment. That's what I see.

If you establish through economic reform programs also, through private sector development programs also, new institutions, you will see that they are not that much pervasive in the society. That's what I believe. And I believe the Turkish example is not only related with this (?)-ism, the secularism, and unitary state, et cetera, those things. But it is also related with developing this institutional structure, a new institutional structure through economic reform programs, economic development programs also. So I believe that this part, the second part of this reconstruction effort, if it is seen as a private sector development program, it would be very much helpful.

So does Turkey have a role in this process? I believe that Turkey has a role in both phases, not only in providing security, some sort of security in the region. I believe that the tension is related much more, you know, on this overemphasis on this one issue only. But if Turkey is also important to improve the living conditions of Iraqi citizens very quickly, Turkey is important in making the Iraqi oil to come to the market as quickly as possible. Turkey is important to provide electricity, to provide consumption goods, et cetera. The Chambers of Commerce are also preparing another report to the Turkish authorities to make the border, the (?) border gate more effective, for example. And I understand that Turkey is very important because the Turkey Chambers of Commerce has--Commerce and Industry, they have this Council of Foreign Economic Relations or there are Business Councils with every country. I asked those people about what they are discussing, how many Business Council meetings lately they had. They have meetings with South Africans, with Denmark, with Netherlands, with so many countries. And the major issue is let's establish a partnership to do something in Iraq.

So I gather that Turkey looks to be very much important, but when I look at those discussions at the Council on Foreign Economic Relations, I gather this.

There is also a role for the second phase, too, for Turkey, but for Turkey to achieve that role, we have to complete this transformation process of the Turkish economy first. We have to deal with this program. We have to stabilize the Turkish economy. We have to solve our economic problems. So we have to make Turkey a viable ground for business investments, because I believe that when I look at Turkey-U.S. relations, up until 1980s, or 1985, there weren't any discussions in Turkey about these textile quotas. You know, not that textile quotas were established, were put after 1985, but Turkey has changed with the 1980 reforms. We started to increase our exports. So I believe that with this economic transformation program, it becomes a more viable environment for investments, for U.S. investments this time, and only with that transformation, not only economy-wise but also with the changes that this economic program brings in Turkish society, Turkey is going to have some kind of a more active role in the second reconstruction efforts in Iraq.

Let me stop here. Thank you.

[Applause.]

MR. LACHMAN: Thank you very much, Professor Sak. I really appreciate your broadening the discussion to the role that Turkey could be playing in Iraq.

Finally, let me turn to Charles Johnston for his remarks.

x MR. JOHNSTON: Thank you, Desmond. I will be mercifully brief, and then I hope we'll have a lively discussion because I'm sure there are a lot of people out in the audience who have some comments and/or questions.

I'm talking to you really from the perspective of the business climate in Turkey. You've heard very erudite presentations regarding, if you will, the macroeconomic issues, and certainly some of the political issues. I'm going to try to bring it down, pardon me, to Earth.

I represent many different companies, both United States and Turkish, in trying to actually make a buck--or a lira--in this current environment. And what I'd like to do is present to you what I perceive to be the business perspective of Turkey at the crossroads and perhaps a little bit tainted by an American's point of view versus a Turk's.

Now, for the last 40 years, of course, Turkey has had some very strategic importance to the United States, but as an economic, if you will, partner, it's been relatively minimal. Only until Turgut Ozal came in in 1983 did Turkey start to really try to move out of its statist economic situation, tried to privatize, tried to become more of a market economy. Ozal's programs obviously were quite effective, but for a time. My own personal opinion is that Turkey became almost in a quagmire with Ozal's programs after a while. It became so obsessed with Ozal and the success that it did see in the early '80s that it failed to stop--while it failed to continue to think about programs and privatization and market economies, it became too comfortable, too convenient to think proactively, rather thinking retroactively. And Ozal's programs, in my personal opinion, actually became exhausted in the '90s.

But Turkey and its political leaders as well as its business leaders failed to take the ball and move it forward. Those two groups seemed, in my opinion--and I've been doing business with Turkey now since 1985, have known many different political and business leaders in both countries, and it strikes me that the buzz word for how both government and business reacted to what was happening economically in Turkey as well as in the relationship with the United States was reactionary. It was solely reactionary, and it was very frustrating from where I sat to witness this because Turkey is--of course, its potential is huge, as we all know.

Now, when the Cold War finally was over, Turkey realized its strategic importance was no longer strong, as strong, and that perhaps it had to create a new image. And, of course, as business people looking at Turkey as a strategically important partner, there were certain lines of business the United States particularly was pursuing, particularly in defense equipment. But everything else was very, very meager, minor.

Turkey then says to itself, All right, where are we now that the former Soviet Union is no longer really a problem? Our value to the United States is significantly diminished. What do we do now? And the policymakers at that point in time started thinking, okay, our new image is going to be that we are an economic and political role model for the region and for Islamist countries. And I subscribe to that. I think that's a very healthy political image and an economic image to pursue.

But, unfortunately, there are many hurdles that Turkey, sadly, had implanted and has been very, very hard-pressed to remove. And let me give you a list, again, from a business perspective, of what Turkey's problems currently are, if you will, in the trenches of dealing with day-to-day living.

Political instability, as we all know, constantly rocks the Turkish economy, and certainly political instability sends shock waves into other parts of the Turkish economy as well as its government. Turkey has still an excessive bureaucracy. Now, there are efforts, obviously, being made to trim that, but if you look at it historically, it still sort of harkens back to Ottoman times in many of our Western perspectives.

It has, sadly, a very weak judiciary, a weak track record in the courts that Western businesses have very, very little faith in. There is a frequent and confusing legal and regulatory changing environment. If you're a business person and you've been trying to do business in Turkey for the last ten years, you would lose count as to how many different times the laws and the regulations and who makes the decisions and where do you go to try to invest, try to do business with Turkey, it's truly awesome.

Finally, but sadly, probably the most important problem is the reputation for corruption. The Turkish Government is and has been for at least the last ten years too well known for at least reputation of significant corruption, and it has grown and it has escalated. Since Ozal, it has become horrific.

Now, my feeling--and, again, this is my own personal opinion--is that not only has this corruption problem been in government; it has now heavily infected the private sector. The private sector of Turkey now from a Western perspective--again, in my opinion, but I think it's a somewhat educated one--is that Western companies now view Turkish companies as corrupt. The Yuzons(ph) have not helped the Turkish image, none whatsoever. There are many other Turkish companies and many different horror stories that I can tell you as counsel to the American-Turkish Council where Turkish companies have simply abrogated their obligations and basically said "Catch me if you can" to the Western companies that they were doing business with.

This is a reputation that does not change overnight. You can have macroeconomic policies and a positive balance of payments and all these other things that make Turkey look good economically, but business perspectives and business reputation is what drives these economies eventually. And Turkey has a very long road to hoe in order to improve this reputational problem.

Now, yes, it's adopted reforms--banking reforms, foreign direct investment law--the new foreign direct investment law is very impressive. It's now embarking on a more aggressive privatization program. At least that's what we're being told. But I have to point out to you that when one looks at these reforms, if you will, of late, they've all been driven by external forces. These are driven by the IMF. These are driven by European accession. These are not internally motivated, and I have to question and wonder just out loud, Why not? And what does that say about Turkey's ability to follow through and implement these programs? Because as we too well know here in Washington, you can adopt a law, but whether you make it happen is a totally different story. And one wonders whether simply adopting legislation is what's going to improve the situation for Turkey as a venue for Western business investment, for Western business activities.

Let me also point out that with respect to Iraq, there are just stupendous opportunities, obviously now basically driven by U.S.-funded contracts through the Agency for International Development or the U.S. Army Corps of Engineers, and that's something for Turkish companies to be chasing, if you will.

One of the problems, for example, that I have direct contact with is with the Turkish construction industry. There were 16,000 registered Turkish construction groups approximately two years ago. The United States has about three. The changes, the reforms that have been drive now and have been adopted, putting a real crunch on credit, are going to start and are taking their toll on this huge construction industry in Turkey. This is a crisis, and this crisis--unfortunately, all the Turkish construction groups think, Aha, I will flock to Iraq, I will follow the Americans, I will follow the American money, and somehow I'll get bailed out. But what's happening is there is a huge consolidation going on in the Turkish construction industry, and there are only going to be a few survivors left. How the government is going to contend with this I'm not sure. But that state money has dried up, and you can go into Turkey and you can talk to anybody in the construction business and they will tell you people are out of work. That is having a huge effect.

Is Turkey a natural ally for the United States insofar as Iraqi reconstruction is concerned? Absolutely. Look at all the neighbors of Iraq. Where are they going to draw--where is the Coalition Provisional Authority and the new Iraqi Government, where are they going to draw the expertise? Where are they going to draw the raw materials and the supplies, the manufactured and industrial supplies, for the reconstruction? From Syria? No. Saudi Arabia? No. North? Turkmenistan? Iran? No. Turkey is the natural source of expertise and raw materials and building materials. And, hopefully, our government, the United States, will recognize this, but also I think the Turkish Government has to take recognition of this, and the business community has to take recognition of the fact this is a long haul, reconstruction. So don't just put all your eggs in the U.S.-funded-contract basket. Move into Iraq on your own and consider this to be a ten-year period for opportunity.

Last, let me point out something that I think I'm very fearful of, and I was talking to my friend here from the IMF about it before we started. Yes, Turkey has seemingly its grasp on the situation with respect to debt payment. But let me point out something to you. Turkey's external export earnings are derived from three different main sectors: one is textiles; second, interestingly enough, is gemstones and jewelry; and third is steel.

Now, of these three, we are looking in the next several years at what I can only call is a completely dysfunctional market. Textiles, as we know, the quota system is going to expire at the end of 2004. What is Turkey doing to develop a game plan to address the fact that it is not the low-end producer, it does not have recognized styles, it is going to be frozen out of so many of its major consuming markets without two years? And that sector alone employs God knows how many people within the Turkish economy who are going to start looking for other places to work pretty soon. They're going to have to. So textiles is in a crisis situation, and I submit to you simply the question: What is Turkey doing about that? I don't think they're doing anything particularly visionary.

Steel, same thing. We're talking about a subsidies agreement in the OECD. We're talking about a major export earner right now. But Turkey is not necessarily the low-end producer. China is the gorilla on the block. And what Turkey is going to do with respect to the competition that it has to contend with in these two vital export sectors in the next two to three years is truly a challenge that Turkey should address today.

I appreciate being here today, and I look forward to questions and participating in the rest of the conference.

[Applause.]

MR. LACHMAN: Thank you very much, Mr. Johnston. We get yet another perspective which I think really enriches the discussion that we've had so far.

I'd like to throw this open to questions, but before that, I'd just take the prerogative of the Chair just to ask one question which seemed to be pretty important on the economic side in the discussion, and that was the issue of debt sustainability. I think that's the point that Mr. Johnston raises at the end, do raise certain concerns about long-run growth. My question would be to Mr. Moghadam and to Professor Gokce, respectively. If Mr. Moghadam could just indicate what are the conditions for debt sustainability to work out in the Turkish context, you know, particularly if we have Europe somewhat under stress with an appreciating euro and recessionary conditions, if that's permeated for a while, what would the conditions be for debt sustainability? And, Professor Gokce, I can't resist asking you for your view as to how does the debt sustainability situation play out. You know, you indicated that that is a key question with which you're concerned, and then I'd like to throw it open to the floor.

MR. MOGHADAM: Thanks, Desmond. This is also a question which we have been grappling almost constantly with because, as I said, that's at the heart of macroeconomic stabilization.

On the face of it, the macroeconomic indicators that would ensure debt sustainability are not beyond reach. They are certainly within reach, and I think an indication of that is simply what has happened over the last two years. The debt has declined by 20 percentage points, and simply over the last two years.

Of course, it becomes more difficult to engineer 30 reductions because we're coming out of a high-inflation environment and we're coming out of an environment where hopefully exchange rates stabilization has taken place.

So it is certainly a source of vulnerability, but--and when you look at not just the IMF projections or the government projections on debt sustainability, but if you look at private sector--almost every investment house does its own projections--you see basically a very wide cone. The projections vary a lot, and the scenarios vary a lot.

The key determining factors are growth. Most analysts have a long-run growth rate of somewhere between 4 to 5.5 percent. And it would take that kind of growth on average to give comfort that that is on a declining path.

The other key variable, which is an assumption, again, is the real interest rates. We in the Fund, given the history of Turkey, given the very high real interest rates that this economy has seen, we have tended to be very cautious in terms of projecting our debt dynamics forward. And I hope we are on the pessimistic side. So we assume that real interest rates are somewhere between 15 and 20, which is quite high, so hopefully the economy has the potential to see lower rates. But given the rigidities in the economy, given the history of past inflation, given the shocks that it is subject to, we tend to be cautious.

The final issue is fiscal policy. The current program with the IMF is based on a primary surplus of 6.5 percent, so that is what we use--in the short term, at least. Of course, as debt dynamics improve, this could be revisited, and I think there are two factors: one is stabilization, but also as other speakers have mentioned, Turkey has an aspiration to join the EU. Recent studies also, as you mentioned, recent studies within the IMF, suggest that 60 percent is a rather high debt level, 70 percent at the moment, but even going down to 60 percent, which is the Maastricht criteria, is a high level for an emerging market country to hold. So the aim has to be to bring it below that.

So looking at fiscal policy, one has to bear that in mind. So that is why the Fund debt dynamics are based on an ambitious primary surplus. The market debt dynamics are based on lower surpluses in the medium term, more around about 5.

So those are the key variables, and, of course, any shock to those jeopardized debt dynamics.

MR. GOKCE: As Mr. Moghadam knows very well -- [tape ends].

T2A -- basically, as I mentioned before, the way I look at it is the domestic component of it is very important, and the treasury makes assumptions. I have them here in front of me. They are assuming 5-percent growth over the next five years, which looks possible without political domestic or international problems; 20-percent real interest rates declining to 18 by 2007, which is very high; and a 6.5-percent primary surplus, as suggested by Mr. Moghadam. And under base scenario, then the debt declines to 60 percent, which is the Maastricht criteria. This does not include any privatization revenue feeding to relax the budget constraint.

If you look at the problem without the external debt, which is more relevant for the Turkish case, I think, then obviously the question is very simple: The change in your debt ratio is a function of your primary surplus, or deficit, minus the money printing as a ratio of GNP, plus a second component, which is real interest rate minus the growth rate times the level of the debt ratio. So you can achieve a reduction two ways: either by reducing interest rates and increasing growth. And although interest rates are very high in Turkey right now, they are declining in real terms, and hopefully they will decline further if we do not have any domestic or international problem. And growth is recovering, and I'm hoping that it will recover more next year. Or you can do the primary surplus.

Now, in Turkey, people do not understand this, the general public, and I think we need to do a little bit more explanation to the folks about this. I'm looking here, going to the euro system, for example, Italy had a 6.2-percent primary surplus in 1997; Belgium, at 6.2 and 6 in '98, '99; Greece had almost 6 percent in '99; Denmark had 5 percent in '99; Sweden, 4.8, which might be one reason why they didn't join because they needed to do more of this or give up the welfare system; Finland, 4 percent; and Ireland, about 4.6 percent.

So the medicine that is being applied in Turkey is very standard medicine. It is nothing extraordinary, although the feeling of the Turkish common folk is that we are being squeezed too much. It is not true. The same thing is applied everywhere.

I'm of the opinion, if we have a government which stays the full five years--you realize there have been always early elections in the last 20 years, since 1987, early elections every two, three years, and early election is a disaster in Turkey. For example, part of the collapse in 1999 is an early election coupled with a huge agricultural production which, with promised rates of subsidy, created almost twice the budget deficit in 1999 combined with the two.

So the real question then in Turkey is this: Sure, the debt sustainability can be manageable if the politics in Turkey doesn't mess up. So this is why I tried to bring back the economics. Mr. Moghadam knows how it can be done, and so does Professor Sak, and me or anybody else here, how the mechanics can be done. But is the will--and in the case of Turkey, the will of the people.

Now, having a single-party government and possibly for two terms is a suitable environment unless we have an international problem. So my answer does not like in the mechanics. It can be done. It can be managed. But the assumption I have to make is whether the politics will be stable. If it is, then his job is much easier, I think.

MR. LACHMAN: Thank you very much.

Let me throw it open. If you'd just identify yourself?

MR. : [inaudible - off microphone] University and Johns Hopkins University. [inaudible] thank you very much. The question that I have deals with energy [inaudible] that really hasn't come up yet. Turkey remains quite dependent on Russian natural gas exports, and in the last few months, there have been detailed discussions [inaudible] Turkish Government and Gazprom and the Russian Government on rates. I wonder if somebody could comment on how these negotiations fit into the larger picture of the Turkish economy and where it's going.

[Laughter.]

MR. JOHNSTON: Well, I'm the lawyer. I can talk about anything.

[Laughter.]

MR. JOHNSTON: Actually, I have represented some energy companies in Turkey, and while I'm not specifically attuned to the Gazprom discussions, it is quite clear that the government, the current government, felt that the--let's call it the rates that were negotiated under the prior government were a bit excessive, to say the least. Indeed, most of the energy projects and programs that had been adopted during the last 15 years were--well, I'll use the word, a "fiasco." They were not based on solid law. The policy was every which way. The state planning organization would weigh in and weigh out. The Ministry of Energy would weigh in and weigh out. Botash(ph) would have things to say. It was a true mess.

And the net result was that certain elements within the government would have the opportunity to sit down and negotiate details, Botash being one of them, for example, and in some of their LNG contracts, they were paying way over what the market price should have been for what they were contracting. Many people would suggest--and it has been demonstrated even within the Turkish Government itself under the White energy Investigation--that perhaps corruption had a lot to do with this.

I'll stop at that point, but the fact is that, yes, this government is trying to renegotiate the terms with Gazprom. I think they'll be successful. In fact, I think it was reported they were successful.

MR. LACHMAN: Professor Sak?

MR. SAK: Yes, let me add a few points. I am an external member of the Monetary Policy Council of the central bank, but we don't deal with these issues. But I can put the thing into perspective..

All the issues that Mr. Johnston has mentioned--political instability, excessive bureaucracy, weak judiciary--I took note of every one of them--reputation for corruption, investment disputes--all of them are real in Turkey. And when I'm talking about this transformation process with this economic program, that involves this also. And I have also to underline that it is a costly process. This institutional reform thing is not cost-less. You have a corporate sector that is organized in one way when the incentive structure was organized in one way, and now you are changing the whole incentive structure by changing the public--through public sector reform, and now they have to adjust to a new environment.

You know, these guys at the IMF and the World Bank, they're saying that this--Mr. Johnston was like that, too. This situation, that's bad, you know, corruption, weak institutions, et cetera. Look at B, good, strong institutions, less corruption, et cetera, et cetera. But the issue for us is how we are going to go from one point to the other. And that's costly.

For example, what we are doing in this energy thing, for example, yes, it may be due to corruption or due to other reasons. We have some fishy contracts. They are too costly. And that increases energy costs. And it's not only the energy costs that the corporate sector in Turkey now has to bear. They also have to bear increasing social security premiums they have got to pay. That's because we didn't ask them to pay that much social security premiums in the past, so now they have to pay a lump sum a month, and it's too much. And there are many other cost issues that are coming onto the table just because of the reform process itself. And the corporate sector has to bear with these costs.

What the government is trying to do is to find the mechanism to deal with this issue. Either they are going to decline those costs, or they have to increase the prices, energy prices, once more. And that's bad for inflation. For us that's also bad. I mean, up until, let's say, this year, at the beginning of this year, it was good to achieve those primary surplus targets through increase in public revenues. That's easier. That could be done. But now, when the inflation is about lower 30s--it's lower than 30, a bit higher 20s, when it's at this level, any increase in public sector prices is going to have huge price effects, inflationary effects.

So that's why they're negotiating. But I don't know how it's going to end.

MR. LACHMAN: Thank you, Professor Sak.

MR. : [inaudible] May I take up a point that was raised about corruption, which is obviously an extremely important one and is very much a current concern. When I was in Turkey a few months ago, people talked of little else.

But I think one has to try and understand corruption within its historical, cultural, and social context, and here I think there's a very important difference between Western corruption, that is to say, our kind of corruption, and the kind of corruption of which Turkey is, so to speak, an heir, the traditional corruption of the Middle East. I would put the difference this way: that in our type of corruption, you make money, and then you use that money to buy influence or access to power. In Middle Eastern corruption, you get power, and you use the power to make money.

[Laughter.]

MR. : Morally, I see no difference between the two. Economically and politically, I feel that our kind of corruption does less damage.

Now, in Turkey at the present time--and this as in so many other respects--there is an interesting interplay between the new Western traditions and the old Middle Eastern traditions. One finds both kinds of corruption acting in different ways. I think it's important to bear in mind that the Eastern, the traditional kind of corruption, in many circles is seen not as a fault but as a merit. If you obtain a position of power, it is your duty and responsibility to help your kinsmen, your family, your friends, your neighbors. And, indeed, you are in dereliction of duty if you don't do that.

My question, addressed particularly to Mr. Johnston, is: You talk about the harm to Turkey's reputation of this kind of corruption. Is it any worse than in other parts of the region?

MR. LACHMAN: Thank you.

MR. JOHNSTON: Actually, Professor, I'd say that it is probably not as bad as other parts of the region. But, sadly, from where Turkey was 15 years ago, from a Western business perspective mind of what it was like to do business in Turkey, it has increased exponentially, to the point where this is not corruption to help yourself or your--necessarily yourself, but your family or your friends. This has become corruption of magnitudes that make the Mexicans look like pikers, and that's the problem. No one, I think, would go to Turkey expecting not to have a little--some baksheesh involved in virtually anything you're doing. And, yes, there's recognition there's traditional corruption. But it has become so profound and so--the magnitudes are so mind-boggling that it has totally scared off Western business investment, unless you're from France and you're used to it.

[Laughter.]

MR. JOHNSTON: Pardon me?

MR. : [inaudible].

MR. JOHNSTON: That's correct, still. Although the OECD's trying to correct that, but the French are blocking that, too.

MR. LACHMAN: Thank you.

MS. FISH: I'm Pat Fish with a company called International Destinations, and this is a comment furthering what you said, Mr. Johnston. We have worked with Turkey, with Istanbul, for the last nine years on sending conventions and conferences. When you had your statistics, I was interested to see that you put construction and services. Well, conventions are services, and I wanted to point out that that is one of the quickest and easiest ways to bring money in.

If you have one meeting of 1,000 people and they meet for about four days, they -- [tape ends].

T2B -- $79 per person per day, that would mean--that would bring in $2,716,000 with one little meeting, and that turns over seven-and-one-half times in the city, and look what that would do for your tax base.

MR. LACHMAN: Thank you.

MR. BEIFERT: I'm Brendel Beifert (ph) from the Kennedy School of Government. I wonder if some of the economists could comment on the potential impact of the European Union decision as to whether or not they're going to start negotiations with Turkey. [Tape ends.]

T3A MR. : -- and, again, where U.S. wants to go, Europe, Turkey, U.S. triangle, what is the long-term involvement for U.S. is going to have a lot to say on this Europe discussion. You realize it was U.S. that in 1999 pushed Europe to consider the Turkish membership more seriously, and I feel like if Turkish-U.S. relationships improve the short-term problems with the parliamentary decisions and we get beyond this, European way of looking at Turkey has to change a lot.

I know for a fact, by talking to a lot of political and business people, that if Europe and U.S. go into a better agreement and alliance relative to what the situation is today, one day before this Turkey will be taking a different policy approach and Europe will be forced to go along with it. But we can talk the details of it.

MR. : Professor, you pointed out that the Turkish participation in the European Customs Union has been beneficial. But I would submit that perhaps it is not. One-half of the trade--one-half--can you hear me? Harold Scott, a hearing problem. One-half of the deficit--I can't get--this is like a Chevy Chase routine.

One-half of the deficit of Turkish trade in 2002 was attributable to the European Union, and, in fact, if you look at the trade statistics, the trade deficit between Turkey and the European Union has increased over time since its membership. Sadly, a significant component in this is Germany. Germany represents two-fifths of that one-half and is increasing its share of, if you will, the deficit with Turkey.

So I'm not so sure European Customs Union membership has really benefited Turkey that much, and perhaps this afternoon we can talk further about whether accession to the European Union really is that good an idea.

MR. GOKCE: Let me quickly respond to this, in one minute, a very short answer.

[Laughter.]

MR. GOKCE: You see, I think penicillin was found in 1951, antibiotics, and my uncle waited four years for an importation permit into Turkey and died before antibiotics arrived in Turkey. I don't think you've had this kind of experience yourself.

When I was a kid in the '60s going to college, I could not travel outside of Turkey unless I did military service, and if I did military service, then I could leave the country once in three years and only have $200 with me. Can you imagine me arriving at Charles de Gaulle or London, whatever, Heathrow, with $200 in my pocket? No credit cards, no checks, nothing, with cash, and all the stuff hidden, extra dollars in my socks.

You see, when you look at--I'm not saying this lifestyle is available to everybody in Turkey. There is huge disparity of incomes in Turkey. But if you take a look at availability of certain things in Turkey, before or after the Ozal period and before or after the Customs Union, I think about 60 percent of the people will tell you that they are much better off right now. So we shouldn't be taking a short-term trade deficit approach to this. We should be taking a long-term thing.

I think my daughter will live a much higher standard than I did, and I lived a much higher standard than my parents lived. You have to imagine I was a professional football player, but I did not have a ball. I didn't own a ball, because it was imported. You have to look at it with this long-term perspective in it. So that short-term, who does the deficit derive from, I think we are living through a period of very high, expanded expectations in Turkey with the huge urbanization. The population of Istanbul in my lifetime jumped from 300,000 to 12 million people, and everybody wants everything. And that's part of that deficit. And since there are people in Germany, it's much easier to import from there.

So we need to take a somewhat short-term (?) short-term business perspective.

MR. LACHMAN: Thank you.

Reza?

MR. MOGHADAM: I, too, have to disagree with my friend Charles here. But before coming back to the strict trade issue, let me just recount the experience of Eastern Europe. Both Desmond and I worked on Eastern Europe during the transition to a market economy, and I worked on Hungary during the last IMF program in preparation for EU accession. And the prospect of EU membership proved an enormous impetus for implementing policies which have now put Hungary on a much higher growth path than it was ten years ago.

So, from Turkey's point of view--I'll come back to the EU's point of view. From Turkey's point of view, I think it is a very important incentive. In terms of purely putting in place the macroeconomic policies that would get you at the door of the EU, there's been mentioned some of the indicators. We have been talking a lot here about debt sustainability, and, of course, understandably, that's one of the key criteria of the EU membership, not necessarily getting there. Some of the countries like Belgium still do not meet that criteria, but being on a path that would eventually put you there, hopefully Turkey being an emerging market, being more vulnerable, could come below that target when the time comes. So in terms of macroeconomic policymaking, I think it's a huge impetus, and it is a very important one at that.

There is another side to it, and that is the institution building. I think we have seen over the last three or four years there has been a move to put in place independent institutions. We have talked about governance issues a lot, but, for example, if you look at the way the Imar (ph) Bank problem is currently being dealt with by an independent supervisory agency, it's a very different kind of environment than it would have been four, five years ago. So from the institutional building and contributing to better governance, it's also an impetus.

Finally, let me come back to this. Measuring success in terms of trade balances is the wrong way to look at it. Definitely I agree with Deniz that you cannot measure whether EU free trade agreement has been a success for Turkey and the EU by just looking at the trade balances. Standards of living in Turkey have improved as a result. And, ultimately--I mentioned earlier in my talk the success of the manufacturing sector where half of the exports go to the EU. Now, that I don't think would have been achieved, the security of the jobs, the standard of living of people who are employed in that sector, without the free trade agreement with the EU and the trade liberalization which has taken place in that sector and the low trade barriers which are in that sector in Turkey, because ultimately efficiency of that industry determines how well that industry does in the long run.

So we have to look at it at a broader perspective just than the balance.

MR. LACHMAN: I think we're probably needing to wrap this up, so let me just take two or three questions and I'll then ask the panelists to address them. Sir?

MR. O'DAY: Thank you. I'm Paul O'Day with the chemical fiber industry, and I have a question for Mr. Johnston. If you were High Commissioner of Textiles in Turkey right now--you mentioned the government isn't doing anything. If you look around the world as to what governments are doing in advance of what will happen when China comes in with both feet, you see India putting up $4 billion in subsidies; you see Korea putting up $1.6 billion just in my little sector. What would you have the government do that would in any way be a positive step that wouldn't be stepping back into things that Turkey would rather not go into, more subsidy, for example?

MR. LACHMAN: Thank you.

MR. JOHNSTON: I would--

MR. LACHMAN: Perhaps if I could just collect a couple of questions.

MR. JOHNSTON: It's going to get confusing.

[Laughter.]

MR. LACHMAN: I hope Alzheimer's hasn't set in with me to that degree.

MR. : I'm [inaudible] from Mass Mutual. Just a quick question. As an investor in Turkish markets since eight and a half years ago when the lira was at 34,000, one becomes antsy when everything seems to be going well and you keep looking for anomalies. And one anomaly that we've noticed is that, despite a very good positive and benign international investment environment, almost all of the improvement in Turkish external spreads and currency and local spreads has been because of local investors as opposed to international investors. Does that worry you? And how would you explain it? Maybe a question to Deniz and Mr. Moghadam.

MR. LACHMAN: Thank you.

MR. DAVIDSON: Jonathan Davidson with the European Commission delegation. Not a question, but a clarification, if I may. Joining EMU, European Monetary Union, or the single currency, is a separate issue from joining the EU, as I'm sure several panel members know. But the earlier question about meeting the ERM criteria, meeting the other criteria of the single currency do not apply to meeting the criteria for EU membership. The critical decision at the end of next year will be on the political criteria. Then there will be a long negotiation on all the 30 chapters of joining the EU, which Turkey knows well about and will be a painful process.

EMU, joining the euro, is further down the road. None of the countries coming in next year will join EMU at the outset, and Turkey doubtless will take quite a bit longer to join the single currency.

Thanks.

MR. LACHMAN: Thank you.

Okay. Let me turn to Mr. Johnston to address what he would do as High Commissioner of Turkey.

MR. JOHNSTON: First, your question was really oriented towards what the government should do, and I would first off heartily encourage the private sector to be doing something about it rather than the government. Insofar as the government is concerned, I think they have to begin to anticipate what the chaos will be in 2004. And when you look at what the United States--I think the United States is going to be the leader in creating, in effect, the market disruption chaos by allowing its textile and apparel industry to take various forms of trade actions. Obviously, they already have a market disruption mechanism for China. That will start to force consumers to determine where else they might be able to source their goods other than China because China may be still an unpredictable source.

There are a lot of legal mechanisms by which the U.S. industry, the textile and apparel industry here can assert controls over access to this market, not just through a quota system, whether it's antidumping actions or subsidies.

Now, as a government in Turkey, I would say first we should start right now analyzing our exposure to countervailing duty actions; we should start analyzing our exposure to trade actions that perhaps seek to, through safeguards mechanisms, set up a whole new quota system, much like we did, sadly, on steel. Because if that occurs, Turkey is going to have to determine what share of this market it can have vis-a-vis the other suppliers. So there are a lot of things that can be thought about now and planned for that the Government of Turkey can be doing.

Secondly, I would say there ought to be an adjustment assistance mechanism that Turkey should be talking to the IMF and the World Bank about, because there are going to be major displacements of workers in those industries. And unless there's some way to help cover that transition from being a textile worker to being a ceramic worker or an auto worker or something else, there's going to be a large dysfunction and a very, very significant, we'll call it, social unrest factor in Turkey that they should be planning for now.

MR. LACHMAN: Perhaps if I can turn to the economic side just in terms of the question on whether the