RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/44
14 September 1998
(98-3439)
Trade Policy Review Body
TRADE POLICY REVIEW
TURKEY
Report by the Secretariat
This report, prepared for the  Trade Policy Review of Turkey, has been drawn up
by the WTO Secretariat on its own responsibility.  The Secretariat has, as
required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of Turkey on its trade
policies and practices.
Document WT/TPR/G/44 contains the policy statement submitted by the
Government of Turkey
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Turkey.Turkey WT/TPR/S/44
Page iii
CONTENTS
SUMMARY OBSERVATIONS x
INTRODUCTION x
(1) ECONOMIC ENVIRONMENT x
(2) DEVELOPMENTS IN TURKEY 'S TRADE POLICY REGIME x
(3) SPECIFIC TRADE AND TRADE -RELATED MEASURES xii
(i) Tariff and non-tariff border measures xii
(ii) Internal measures xii
(4) S ECTORAL POLICIES xiii
(5) OUTLOOK xiv
I. ECONOMIC ENVIRONMENT 1
(1) INTRODUCTION 1
(2) RECENT ECONOMIC DEVELOPMENTS 2
(i) Overview 2
(ii) Growth and economic structure 4
(iii) Public finances 5
(iv) Exchange rate and monetary policies 7
(v) Inflation and interest rate developments 7
(vi) Balance-of-payments 8
(3) COMPOSITION AND DIRECTION OF TRADE 11
(i) Composition of merchandise trade 11
(ii) Direction of merchandise trade 13
(iii) Trade in services 15
(4) OUTLOOK 15
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 16
(1) OVERVIEW 16
(2) THE INSTITUTIONAL FRAMEWORK 16
(i) General framework 16
(ii) Economic and trade policy formulation 18
(3) TRADE RELATIONS 20
(i) Trade policy objectives 20
(ii) Turkey and the WTO 21
(iii) Plurilateral agreements 25
(iv) Bilateral agreements 30WT/TPR/S/44 Trade Policies Review
Page iv
(4) FOREIGN DIRECT INVESTMENT POLICY 31
(i) The legislative framework 31
(ii) International investment agreements 34
III. TRADE POLICIES AND PRACTICES BY MEASURE 35
(1) OVERVIEW 35
(2) MEASURES DIRECTLY AFFECTING IMPORTS 37
(i) Customs procedures 37
(ii) Tariffs and additional duties 39
(iii) Variable import levies 50
(iv) Other levies and charges 50
(v) Minimum import prices 51(vi) Import prohibitions 51
(vii) Import licensing and authorization 53
(viii) Import quotas 54
(ix) Imports by state economic enterprises 56
(x) Import cartels 56(xi) Countertrade 56
(xii) Local-content schemes 57
(xiii) Anti-dumping and countervailing measures 57
(xiv) Safeguard actions 62
(xv) Measures implemented in exporting countries 62
(xvi) Balance-of-payments measures 62
(xvii) Import privileges extended to free zones 62
(3) 
MEASURES DIRECTLY AFFECTING EXPORTS 63
(i) Registration and documentation 63
(ii) Preshipment inspection and quality control 64
(iii) Export taxes, charges and levies 64
(iv) Minimum export prices 64(v) Export prohibitions 64
(vi) Export licensing 65
(vii) Export quotas 66
(viii) Exports by state-economic enterprises 66
(ix) Export cartels 66(x) Voluntary restraints, surveillance and similar measures 66
(xi) Measures maintained by importing countries 66
(xii) Subsidies and other financial support to exporters 66
(4) 
OTHER MEASURES AFFECTING PRODUCTION AND TRADE 74
(i) Competition policy and related issues 74
(ii) Investment incentives – state aid 79
(iii) Standards and other technical regulations 83
(iv) Government procurement 88
(v) Price and distribution controls 91
(vi) Trade-Related Investment Measures (TRIMs) 91Turkey WT/TPR/S/44
Page v
(vii) Trade-related  Intellectual Property Rights (TRIPs) 91
IV. TRADE POLICIES BY SECTOR 97
(1) OVERVIEW 97
(2) AGRICULTURE 98
(i) Main features 98
(ii) Policy instruments and indicators of assistance 99(iii) Planned reforms 109
(3) 
ENERGY 110
(i) Main features 110
(ii) Policy objectives and instruments 113
(4) MANUFACTURING 116
(i) Main features 116
(ii) Policy instruments 118
(iii) Developments in selected industries 121
(5) SERVICES 130
(i) Commitments under the General Agreement
on Trade in Services (GATS) 130
(ii) Financial services 131
(iii) Transportation 138
(iv) Telecommunications 142
(v) International tourism 143
REFERENCES 147
APPENDIX TABLES 151WT/TPR/S/44 Trade Policies Review
Page vi
CHARTS
I. ECONOMIC ENVIRONMENT 1
I.1 Sectoral distribution of GDP and labour force 5
I.2 Public sector position, 1990-97 6
I.3 Product composition of merchandise trade, 1993 and 1997 12I.4 Merchandise imports by function, 1990-97 13
I.5 Direction of merchandise trade, 1993 and 1997 14
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 16
II.1 Structure of the Undersecretariat of Foreign Trade, 1998 19
II.2 Turkey's trade with free-trade agreement partners, 1980-97 29
III. TRADE POLICIES AND PRACTICES BY MEASURE 35
III.1 Tariff structure by rates, 1993 and 1998 (second half) 42
III.2 Tariff structure by sector, 1993 and 1998 (second half) 43
III.3 Tariff escalation by 2-digit ISIC industry, 1998 (second half) 44
III.4 Anti-dumping cases, 1989-97 60III.5 Net-operating cash flows of the Export Credit Bank of Turkey,
1993-96 71
III.6 Concentration in industry, 1985 and 1994 76
III.7 Breakdown of investment incentive certificates, 1997 81
III.8 Overview of Turkey's Intellectual Property System 93
IV. TRADE POLICIES BY SECTOR 97
IV.1 Trade in agricultural products, 1990 and 1997 100
IV.2 Tariffs on agricultural products, 1998 (second half) 103
IV.3 Average tariff levels and bindings in agriculture, forestry
and fishing, 1998 105
IV.4 Tariffs on manufactured products, 1998 (second half) 119
IV.5 Average tariff levels and bindings in manufacturing, 1998 120IV.6 Exports of textiles, clothing and leather by destination, 1997 122
IV.7 Tariff escalation in textiles, clothing and leather, 1998 (second half) 123
IV.8 Tourism and merchandise trade balances, 1990-97 145Turkey WT/TPR/S/44
Page vii
TABLES
I. ECONOMIC ENVIRONMENT
I.1 Basic social indicators, 1970-97 1
I.2 Selected economic indicators, 1985-97 3
I.3 Foreign investment, 1990-97 11
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Turkey's main legislation related to trade, 1998 17
II.2 Status of selected notification requirement to the WTO, June 1998 23
II.3 Cases involving Turkey under WTO dispute settlement provision,
July 1998 25
II.4 Turkey's bilateral trade agreements, 1998 31
II.5 Sectors subject to foreign direct investment restrictions, 1998 33
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Rules of origin 39
III.2 Tariff structure of Turkey, 1993 and 1998 41III.3 Tariff by stage of processing, 1993 and 1998 44
III.4 Key features of the concessional entry schemes in Turkey 46
III.5 Applied MFN rats and bound rates, 1998 and 2005 47
III.6 Tariff quotas on agricultural and processed agricultural products 48
III.7 Preferential trading agreements, June 1998 49
III.8 Taxes levied on imports and domestic goods 50
III.9 Import prohibitions, June 1998 52III.10 Imports requiring a licence, February 1998 53
III.11 Quota and surveillance on certain textile and clothing imports,
June 1998 55
III.12 Imports and exports restricted to government agencies or
pre-approved organizations, June 1998 56
III.13 Anti-dumping measures in force, December 1997 61
III.14 Export prohibitions, June 1998 65
III.15 Fiscal cost of export incentive programmes, 1992-94 67
III.16 Export subsidy programmes eliminated since the previous
Trade Policy Review 67
III.17 Key features of the export credit and guarantee programmes,
June 1998 69
III.18 Key features of the export insurance programmes, April 1998 72
III.19 Substantial provisions of Turkey's competition law 75
III.20 Composition of state economic enterprises by sector, as a share
of their total production, 1985-96 77
III.21 Turkey's state economic enterprises, June 1998 78
III.22 Fiscal cost of general investment aid programme, 1990-94 80
III.23 Official Turkish standards and their equivalence with
international standards 85
III.24 Key features of Turkey's procedures on government procurement 90
III.25 Turkey's status in International agreements, conventions and treaties 92WT/TPR/S/44 Trade Policies Review
Page viii
IV. TRADE POLICIES BY SECTOR
IV.1 Production and producer subsidy equivalents by farm sector,
1996 and 1997 99
IV.2 Transfers associated with agricultural policies, 1986-97 101
IV.3 Agricultural sector tariffs 102
IV.4 Export subsidies in the agriculture sector, 1997-98 (per June 1998) 106IV.5 Main domestic supports in the agriculture sector 107
IV.6 Payments to agriculture sector in Turkey, 1993-98 108
IV.7 Turkey's energy balances, 1973-2010 111
IV.8 Selective State interventions in the energy sector 112
IV.9 Credit schemes through the Mining Fund, June 1998 114IV.10 Overview of the manufacturing industry, by ISIC category 117
IV.11 Allocation of textile and clothing quotas to WTO Member
countries, 1998 124
IV.12 Main policies in Turkish motor vehicle manufacturing sector,
1993 and 1998 128
IV.13 Selected average MFN tariffs in the motor vehicle manufacturing
industry, 1993 and 1998 129
IV.14 Motor vehicles subject to import licensing, 1993 and 1998 129
IV.15 Overview of the telecommunications sector, 1985-97 142Turkey WT/TPR/S/44
Page ix
APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Public sector position, 1990-97 153
AI.2 Balance-of-payments, 1990-97 154AI.3 Balance-of-payments adjusted for "shuttle trade", 1996-97 155
AI.4 Exports by groups of products, 1980-97 156
AI.5 Imports by groups of products, 1980-97 158
AI.6 Exports by destinations, 1980-97 160
AI.7 Imports by origins, 1980-97 161
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
AII.1 Legislation enacted by Turkey as a result of the CUD, July 1998 162
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Effective and bindings, by HS chapter 164
AIII.2 Imports restricted to government agencies and
pre-approved organizations, 1992-96 167
AIII.3 Anti-dum ping and countervailing actions against Turkish
exporters, February 1998 168
IV. TRADE POLICIES BY SECTOR
AIV.1 Turkey's MFN tariff by ISIC category, 1993 and 1998 169
AIV.2 Selected agricultural support prices, 1992-97 173
AIV.3 Turkey's utilization rates of export quotas under the WTO
Agreement on Textiles and Clothing, 1994-97 174
AIV.4 Summary of Turkey's specific commitments in services 176
AIV.5 Summary of Article II (MFN) exemptions listed by Turkey 179WT/TPR/S/44 Trade Policies Review
Page x
SUMMARY OBSERVATIONS
INTRODUCTION
1. Since the previous Trade Policy
Review in 1994, Turkey has implemented a
wide range of reforms within the framework ofthe customs union between Turkey and the EU,
taking it significantly beyond its Uruguay
Round commitments as well as generating
improved and more secure trading
opportunities for third countries.  In additionto halving its manufacturing tariffs to the
levels of the EU common external tariff (CET),
Turkey has also harmonized much of its
legislation with that of the EU in areas such as
competition policy, customs provisions,intellectual property rights and standards.
While the Customs Union Decision (CUD) has
clearly resulted in an overall liberalization,
some new trade measures were introduced as
a result of the customs union (quantitative
restrictions on textiles and clothing, and tariff
quotas).  Another area of concern is the policyimbalance between manufacturing and
agriculture:  over the past four years, the
manufacturing sector has experienced
substantial liberalization while transfers to the
already heavily supported agricultural sectorhave increased.  In addition, macroeconomic
imbalances (high fiscal deficits and inflation)
and slow progress in the implementation of
key structural reforms (including in the social
security system, the privatization programmeand in banking) may threaten the
sustainability of Turkey's strong, but variable,
growth performance.
(1) E
CONOMIC ENVIRONMENT
2. In 1994, the Turkish economy
experienced a severe recession, following
growth of 8% in 1993.  A severe budget deficit
and real currency appreciation triggered a
financial and foreign exchange crisis at the
beginning of 1994, leading to a contraction of
6% in GNP for the year.  However, the
economy quickly recovered, aided by thecustoms union between Turkey and the EU andderegulation in general:  annual average
growth between 1995 and 1997 was 7.7%.
Over the same period, the current account
deficit widened somewhat but was generally
kept at a manageable level.  Gross
international reserves accumulated to a recordhigh of nearly five months of merchandise
imports and the real exchange rate remained
relatively stable.
3. Historically, expenditures on state
economic enterprises were a major source ofTurkey's fiscal imbalances.  These have
largely been brought under control;  however,
social security spending and interest payments
have now become major causes of the deficit.
In the past, monetization of deficitscontributed to high inflation, but the new
Banking Act has greatly limited the Central
Bank's ability to do so.  The Government has,
instead, resorted to domestic borrowing on the
open market.  As a result, the public sector
borrowing requirement almost doubled
between 1995 and 1997, reaching 8% of GNP.This has driven up real interest rates,
threatening to crowd out private investment.
4. Despite the recovery, the overall
economic situation remains fragile,
particularly in respect of price inflation.Macroeconomic imbalances and slow
progress in the implementation of key
structural reforms (including in the social
security system, the privatization programme,
and banking) may threaten the sustainabilityof the strong growth performance.
(2) D
EVELOPMENTS IN TURKEY 'S 
TRADE POLICY REGIME
5. Far-reaching structural and
legislative reforms have been undertaken byTurkey in connection with its customs union
with the European Union.  Exposure to foreign
competition has increased as trade barriers
have been lowered on an MFN basis, and
many trade-related reforms have been
implemented while others are in the pipeline.
Examples include the adoption of newTurkey WT/TPR/S/44
Page xi
legislation protecting intellectual property
rights and the establishment of a competition
authority.  Over the past four years, Turkey
has also enacted a comprehensive law on
privatization and simplified its already
relatively liberal foreign direct investmentregime.  However, the restructuring of the
costly social security system, the
implementation of the privatization
programme and reform of the banking sector
are areas where much remains to be done.
6. Within the framework of the Customs
Union Decision (CUD), which entered into
force in January 1996, Turkey has eliminated
tariffs on manufactured imports originating in
the EU, adopted the EU common externaltariff (CET) for manufactures and the
industrial component of processed
agricultural products, and is progressively
aligning itself to the EU's preferential trade
regime, as required.  The CUD goes well
beyond the basic requirements of a customs
union;  in the context of the Decision, Turkeyhas enacted a wide range of trade and trade-
related legislation, seeking to apply many
elements of the "acqui s communautaire" in the
areas of customs provisions, duty concessions,
officially supported export credits, competitionpolicy, state aid, intellectual property rights,
standards, and sanitary and phytosanitary
measures.  Turkey has until 2001 to implement
the CUD fully.
7. Generally, the adoption of the CUD
has improved market access conditions for
third countries to most sectors of the Turkish
market, and the implementation of many of the
trade-related reforms will improve the
business environment for foreign investors andtraders.  The Decision, however, has also
obliged Turkey to introduce some new external
trade measures to achieve harmonization with
those of the EU.  For example, the adoption of
the EU textile and clothing regime was
designed to close the bridge to the EU market
that would otherwise be opened under theCUD;  this measure is currently subject to a
challenge by India under WTO dispute
procedures.  Turkey itself is a major exporterand very limited importer of textiles and
clothing.  Turkey has also introduced tariff
quotas on some agricultural and processed
agricultural products in the framework of
some of its recently signed free-trade
agreements;  these include agreements withthe Baltic States (Estonia, Latvia and
Lithuania), several Eastern European
countries (Bulgaria, Czech Republic,
Hungary, Romania, Slovak Republic and
Slovenia) and Israel.
8. As bilateral barriers have been lifted,
trade between Turkey and the EU has grown.
Imports from the EU increased from US$17
billion in 1995 to US$25 billion in 1997,
amounting to about half of Turkey's imports.However, exports to the EU increased only
marginally, as most manufactured exports
have been traded duty-free since the early
1970s and agriculture is yet to be liberalized.
While there may be concern about trade
diversion, third countries should generally
benefit from the alignment of Turkey's tariffswith the EU CET.  Since 1 January 1996,
Turkey has been applying the same rules of
origin as the EU with respect to imports from
third countries, in terms of both preferential
and non-preferential rules.
9. In most areas, Turkey's commitments
towards the EU involve obligations exceeding
those of the WTO Agreements.  However, some
legislative changes introduced since the
previous Review have also been induced byWTO commitments including on trade-related
aspects of intellectual property rights (TRIPS)
and safeguards.  As a result of the Uruguay
Round, the share of bound tariff lines
increased from 31 to 46%, with allagricultural lines bound.  While nominal
bindings in industry are generally well above
applied rates, the CUD obliges Turkey not to
impose higher tariffs than the EU common
external tariff (except in areas where the CUD
does not apply, mainly in agriculture) with the
consequence that Turkey's tariff is, in practicalterms, bound at EU rates.  Turkey also made
extensive commitments under the General
Agreement on Trade in Services (GATS); itsWT/TPR/S/44 Trade Policies Review
Page xii
schedule covers 72 activities out of a total of
161 in nine sectors.  Since then, Turkey has
become a party to the 1995 Interim Agreement
on Financial Services, the 1997 Agreement on
Telecommunications Services, the 1997
Information Technology Agreement (ITA), andthe 1997 Agreement on Financial Services.
Turkey ceased to apply Article XVIII:B
("balance-of-payments" article) of GATT in
1997.
(3) S
PECIFIC TRADE AND TRADE -
RELATED  MEASURES
(i) Tariff and non-tariff border 
measures
10. Since the previous Trade Policy
Review in 1994, Turkey has further opened itseconomy to foreign competition.  The Mass
Housing Fund (MHF) levy has been virtually
eliminated, thus simplifying taxes payable on
imports and improving transparency.  In 1998
the levy covered 3% of the tariff lines,
compared with 87% in 1993.  In addition, in
January 1996, Turkey adopted the EUcommon external tariff (CET) on most
industrial imports (except for 290 "sensitive"
items at the twelve-digit level on which tariffs
will remain above the CET until 1 January
2001) and on the industrial component ofprocessed agricultural goods.  As a result of
these actions, the average level of border
taxation (including the MHF) was cut by more
than half from 27% in 1993 to 13% in 1998.
On the other hand, substantial tariff dispersioncontinues to exist and there is a large number
of tariff rates (242 distinct rates, excluding
ad valorem equivalents) with the greatest
variations seen in agriculture.
11. Turkey ranks sixth among WTO
Members for the number of final anti-dumping
measures imposed between 1989 and 1996;
however, the number of new cases initiated
has declined in recent years and no new final
measures have been introduced since 1995.
Turkey is not obliged under the CUD to adopt
the EU's anti-dumping measures, and the twoparties retain their mutual rights in this area.Import certificates were abolished in 1996, but
a number of goods remain subject to prior
import licensing, partly related to the
enforcement of standards.  Examples include
certain telecommunications equipment,
machinery, motor vehicles, transmissionapparatus, chemicals and civil aircraft related
products.
12. Turkey has eliminated many of its
export incentive programmes, including the
energy incentive (providing discounted priceson electricity, natural gas and liquified
petroleum consumed in the production of
exported products); free wheat (supply of
wheat without payment to certain companies
subject to export performance); and thetransportation subsidy (for exports of some
agricultural products).  Instead, Turkey now
relies on a wide range of indirect measures,
including duty concessions and preferential
credit allocation to exporters.  Within the
framework of the CUD, the OECD Consensus
principles on officially supported exportcredits with a repayment term of two or more
years have been adopted.  Nevertheless, the
Turk Eximbank incurs substantial negative net
operating cash flows associated with its export
and credit guarantee programmes.  SinceTurkey's previous review, the number of items
prohibited for exports, by broad categories,
has increased from seven to 14, while the
items affected by export taxes has fallen from
seven to two (hazelnuts and semi-processedleather).
(ii) Internal measures
13. Turkey's state-aid system of tax
exemptions and concessional credit is
complex, non-transparent and generous,amounting to 7.5% of GDP in agriculture
alone.  The wide range of factors determining
the value of incentives poses difficulties in
evaluating the impact of the schemes.  Studies
have emphasized the distortionary resource
allocation effect of these measures.
14. State economic enterprises increased
their share of GDP (at constant prices) fromTurkey WT/TPR/S/44
Page xiii
8% in 1991 to 11% in 1994 (latest available
data), but evidence suggests that this role may
have diminished since then.  Moreover, the
financial position of the enterprises has
improved, largely because of the adoption of
more realistic, market-based pricing policies.Nevertheless, the demarcation between the
private and the public sector is not always
clearly defined.  In this regard, the
comprehensive privatization law of 1994
provides a framework for progress, but theprivatization process has so far been slow and
marred by legal disputes.
15. The private sector environment has
improved with the enactment of a modern and
comprehensive legal framework in the area ofintellectual property and the establishment of
a competition board.  However, enforcement
capacity is lagging behind the legislative
progress.
(4) S
ECTORAL POLICIES
16. Since Turkey's previous Review, the
already heavily supported agricultural sectorhas received increased assistance, while the
manufacturing sector has opened up to foreign
competition through lower border protection.
17. The agriculture sector accounts for
14% of GDP and employs about half of thelabour force.  The sector, which is largely
excluded from the customs union, continues to
be subject to extensive and costly government
intervention.  Support to the sector has
increased in recent years.  According toOECD estimates, total transfers (expressed in
U.S. dollars) almost doubled in the period
1994 to 1997, reaching the equivalent of 7.5%
of GDP.  Support price interventions and the
fertilizer subsidy continue to be serious drainson the budget.
18. Tariff protection in the agriculture
sector constitutes a significant barrier to
imports, and has increased since the previous
review;  using the Uruguay Round definition,
the average MFN tariff increased from 35% in
1993 to 43% in 1998.  The food, beverage andtobacco subsectors are also characterized by
strong tariff escalation, thereby maintaining
higher levels of effective protection than is
evident from the nominal rates.  A ban on
imports of live animals and meat has been in
force since May 1996 to prevent the expansionof epidemic diseases (including bovine
spongiform encephalopathy (BSE)).
19. While agriculture (other than the
industrial element of processed items) is
excluded from the customs union agreement,Turkey undertook important agricultural
commitments in the Uruguay Round.  All
agricultural tariff lines were bound at levels
equal to or above the sum of applied MFN
rates and MHF levies.  Unlike many WTOMembers, however, Turkey did not undertake
any "tariffication" for agricultural products.
Turkey also undertook to reduce its budgetary
outlays for export subsidies for 46 products by
24% and the volume of subsidized exports by
14%, in equal instalments over a ten-year
period starting in 1995.  However, it made nocommitment to cutting financial support for
agricultural producers, as the level of support
computed by the Government was below the de
minimis level of 10%.
20. As a result of the customs union and
the phasing out of the MHF, Turkey's average
MFN tariff on imports of manufactures (ISIC
3) more than halved from 27% in 1993 to 12%
in 1998.  Excluding food, beverages and
tobacco manufacturing (ISIC 31), the averageMFN rate for manufactures dropped from
25% to 5.5% over the same period.  Trade
between the EU and Turkey, with a few
exceptions, is duty free.  In the automobile
sector, foreign investors have accepted as a"gentlemen's agreement", without any legal
obligation, to incorporate a certain share of
local content.
21. State economic enterprises dominate
the energy sector (some 90% of the market is
state-owned) and many prices are influenced
by Government policies.  In order to improvethe functioning of the sector and to meet the
projected energy demand, the sector is aWT/TPR/S/44 Trade Policies Review
Page xiv
primary target for privatization.  However,
progress has so far been slow, with court
rulings overturning many decisions.
22. Since the previous review, several
services areas are beginning to open up.
However, investors in certain sectors,particularly finance and banking, require
special government approval before setting up
business.  Privatization of dominant state
economic enterprises in areas such as air
transport and basic telecommunications wasinitiated with the enactment of the 1994 law on
privatization, but, as with other sectors,
progress has been slow.  Five ports have so
far been transferred to the private sector,
while the main ports are owned and operatedby state economic enterprises.
23. The banking sector suffers from a
number of weaknesses.  Preferential lending to
favoured sectors, which accounts for about
half of the loans to the state banks, not only
introduces distortions but also has a high
direct financial cost.  Supervision andaccounting standards need to be strengthened,
while cross-ownership between banks and
industrial companies may also imply that
market principles for extending credits are not
fully applied.
(5) O
UTLOOK
24. While Turkey's overall economic
performance is strong, the budget deficit
continues to be a drag on the economy,
causing high inflation and elevated realinterest rates to the detriment of private
investment. Moreover, the slow progress in theimplementation of key structural reforms, such
as reform of the social security system, may
hinder improvement of the fiscal position.  The
efficiency of the economy would also benefit
from moving ahead with the privatization of
state economic enterprises and reform of thefinancial sector.
The reforms induced by the customs union
between EU and Turkey are expected to have
significant economic benefits, especially in
terms of restructuring and modernization ofthe manufacturing sector;  by and large, other
countries should also benefit from the market-
opening in manufactures and greater security
in the trade regime and business environment.
However, the agreement with the EU does notcover agricultural products, and the current
trend of increasing support in this sector is
contrary to the liberalization seen elsewhere
in the economy.  This sectoral imbalance
could be a tax not just on consumer welfare
but also implicitly on manufacturing and
services that compete with agriculture forproduction factors.