A Rip in the Sea - Bülent Eczacıbaşı

BE

Professor Gükaynak said that the private sector demanded things that were in its own interest, that it was seeking rent. It doesn’t have to be about rent, though. It could be things that increase business competitiveness or effectiveness in the international arena. I’m not convinced that the private sector doesn’t have sophisticated policy demands. Perhaps you mean the private sector doesn’t demand the kinds of policies necessary for the long-term health of the economy and for social prosperity if such policies don’t directly serve their interests in the short term.

There may be two reasons for this. Perhaps the private sector isn’t aware, or doesn’t care, about such things, busy as it is pursuing its own interests and trying to keep afloat. Or perhaps it thinks demanding reforms isn’t going to be of any use. Another significant reason, I think, is the private sector’s dependence on government in Turkey; hence, our studies and demands with respect to policy choices don’t attract as much attention as we’d like and certainly nowhere near as much as in countries we consider to be our role models. Perhaps the institutional mechanisms needed to evaluate our demands have yet to mature in Turkey. Instead, dialogue takes place through informal mechanisms based on goodwill and a desire to preserve a positive environment. Lacking any institutional structure, these mechanisms are impermanent and unlikely to provide consistently good results.

Let’s discuss the state of our industry now.

Based on my own observations and experience, without reference to data, it seems that large-scale industrial investments are no longer high on the agenda. We used to have enormous manufacturing projects that everyone knew about, even newspaper readers not involved with business. Everyone talked about the projects and watched as they took shape. People knew when they would come on line and looked forward to the date. That atmosphere seems to have vanished. Instead, we all know how much construction has come to the fore in Turkey. Another observation is this: Some intermediate product manufacturers have closed down, and imports are now supplying many product categories. We understand the reasons for this to a degree. Opening up to international markets and the customs union were certain to cause collateral damage; that’s the nature of this process. Since no one can be competitive in all things, it’s to be expected that our dependence on imports will rise in some product groups, and our reach into foreign markets will rise in others, leading to structural changes. At the same time, it’s also true that some companies and institutions are moving their investments abroad. They gain considerable market share abroad and move their production accordingly. Unless I’m mistaken, however, neither the share of industry in our economy nor Turkey’s ranking among manufacturing countries has changed much. Turkey continues to be an impressive manufacturer, and manufacturing continues to be a powerful economic driver. How would you assess our position in this context? Does Turkey need to develop an economic structure led by an advanced service sector? Or do you think we’ll never be able to do that unless the manufacturing industry can defend its position? What is the outlook, and where are we headed?

MÜ

May I ask you a question, Mr. Eczacıbaşı? When you look at Turkey’s history, which periods do you identify as the good ones, the ones we can learn from? There are periods of rapid growth and others of slower growth. Why don’t we briefly review the past first, and then ask ourselves, “What lessons can be drawn from our own history?”

BE

Quite a few lessons, I think. First of all, what we’re experiencing now is the highly predictable outcome of a very long period as a closed economy. Was that long period due to our own mistakes or dictated by global conditions? Like Turkey, many other countries were trying to develop as closed economies. Perhaps Turkey wasn’t that late in opening up, but the fact is that those years delayed our progress in some areas. The effects of that delay are quite clear in international markets where we’re trying to build our presence. Regardless of how well we do everything, we still face certain obstacles; these are the disadvantages of being latecomers. Our brands must compete against well established brands that consumers recognize. Our companies must compete against experienced players who entered those markets well before us and made their mark, and so on. You can’t break into those markets in a day by simply making a great product. A good product is only one aspect, undoubtedly an important one, but there’s so much more. The result is that we’re truly behind in these areas: We only have a handful of Turkish brands and Turkish companies with a say in the global market. We’re far from where we ought to be relative to our position among the world’s top 20 economies. This is one lesson I think we should learn.

No doubt, the period of liberalization that started in the 1980s raised us to a new level of competitiveness; but as you know much better than I do, our macroeconomic conditions were far from ideal at the time. We never really enjoyed a period of stability. We never tackled reforms in an integral or comprehensive way, which laid the groundwork for the turbulent 1990s. Sadly, we never fully reaped the fruits of those energetic 1980s. Back then, had we pursued healthier, more rational and more comprehensive policies, we’d be in a very different place today.

There are conclusions and lessons we need to draw from more recent times, too. Turkey has enjoyed a relatively good period since 2002. The conclusion I draw from this is that we’re able to do some things right when we face great problems. If only we could do what we all know needs to be done before reaching that point. By not making those reforms earlier, for political reasons or lack of resolve, we created the crisis of the early 2000s and forced ourselves to make the unavoidable reforms. Then, we enjoyed the fruits of subsequent improvements for quite some time. Our strengthened economic structure helped us to ride out the storm caused by global developments during that period.

Which brings me to another lesson. Despite the favorable conditions post-2007, we were again late in doing what we needed to do. If we’d been able to leverage that period, we might have been in a completely different position today.

RG

True, there are times in this country’s history that suggest, “Yes, that was good.” We’ve proven ourselves several times, first and foremost during the early years of the Republic when our country was founded out of nothing. For a very long time we had to look back to this period to give ourselves hope. You’re better placed than we are to comment, but today, looking back, the period after 2002 is similar in that we can describe it as “five years when things were done properly.”

Clearly, Turkey not only accomplished all that but is also capable of doing so again. Which begs the question: Why does it choose not to? Even you phrase the problem as “things we were unable to do.” But, actually, it’s not that we were unable to do these things, it’s that we did not do them, and I think this distinction matters. We had control over decisions, so we can’t make excuses that we tried something but it didn’t work because the conditions weren’t right, etc.

It’s the same with our evaluation of issues related to our present level of development. I don’t accept the idea that we’re unable to teach children proper IT skills; it’s our unwillingness to teach them. No one is preventing us from teaching these skills; it’s our choice. Nor can we say that everyone is trying to teach them but not all succeed. If you do it a certain way you succeed, but we choose not to. It’s important to discuss why we make these choices. They’re not economic choices, they’re political, and they’re important. But first, it’s crucial to present them as real choices. And it’s possible to do all these things; it’s not like they can’t be done in Turkey.

Turkey’s business world believes innovation is essential. You want innovation, innovation in the real sense of the word. I agree, and it can be done in Turkey. It may not be essential for everyone, or their first priority, but it can be done provided the will is there. There is nothing that Turkey can’t achieve. And I’m not basing this statement on what “our glorious forefathers” achieved; I’m basing it on experience. An earthquake hits Turkey, razes everything to the ground, and three days later we’re constructing new buildings. A crisis hits, the entire banking system crashes, and two years later we’re roaring into new growth. So, we can achieve things when we put our minds to it.

We’re a nation capable of doing so much, yet we choose to do so little. If we’re going to focus here on education, there are certain fundamental skills that clearly need to be taught. But we always measure education in terms of years. We used to say that the average Turkish worker had four and a half years of schooling and was a primary school drop-out; that’s no longer true. Mandatory education has rapidly increased time spent at school. But skills don’t grow at the same rate as time spent in school. We overlooked the importance of quality back then, but we now see how much it matters, especially in light of PISA assessments.[1] They tend to be regarded as “what the kids have learned” tests. And because we’re so stuck on secondary education entrance exams, university entrance exams, what have you, there’s this impression that our kids don’t know their times tables or how to solve integrals. But the purpose of PISA is to measure how you use what you learn at school in real life.

Our education system isn’t founded on “understanding.” Understanding is predicated on “questioning,” and questioning doesn’t come from knowing your multiplication tables. And once people start questioning, they never stop. If you live in a less than tolerant political environment, it all comes to the same thing.

1. http://www.oecd.org/pisa/

BE

Now let’s take a look at the recipe we’ve all memorized for lasting economic growth. You need higher value-added production and higher value-added exports, and in order to achieve both, you need innovation. To increase our competitiveness, we need to design innovative products and production processes. Innovation lies at the root of it all. We have to speed it up. I’m going to ask you whether you believe that’s sufficient or not; my experience in business is that it helps. We’ve improved our market position and profitability wherever we’ve accelerated innovation in the true sense. I can see how it could help the economy significantly when it’s done on a wide scale.

Of course, this question pops into mind: Is this really the recipe we need for lasting growth? It’s become something of a template, but is it the right one? Should we be expanding this template across the whole country, using all political options and instruments at hand, or should we focus on other areas, too?

MÜ

Probably both. Innovation is probably essential for companies; after reaching a certain level of maturity, there really is no other way of competing in certain fields. But there are simpler problems in Turkey, too. Take SMEs, the enormous sector that constitutes something like 99.5 percent of our entire economy. They’re beleaguered by much simpler problems: issues of scale, knowhow, and the large portion of them operating in the informal and unproductive economy.

There, the problem isn’t innovation, as you know much better than me. It’s much simpler: We need to identify the policies that will transform this sector into a truly productive one. What I mean isn’t just throwing money at it like we do today, with credit guarantee funds and more. Instead, we need to understand their side of the matter. How do our SMEs differ from German SMEs, or Mittelstand, for example? We could at least aim for their position. Without a doubt, we could create many productive companies. But it isn’t happening. There isn’t the know-how or the scale and so on. What’s required here is not innovation, it’s much more basic. It’s inevitable for a company of your scale and productivity to focus on innovation, but it seems to me that we need very different analyses and solutions at the other end of the spectrum.

BE

You’ve mentioned German companies. There are many medium-sized German companies that are major global players in their own fields, and their names aren’t out there for everyone to see. Because they generally manufacture intermediate products, they’re only known in their own sphere, yet they have powerful brands that command significant market share. As consumers we never notice them, but they’re known by companies that need their parts. These medium-sized companies aren’t famous but they may have a global share in their niches of 60, 70 or even 80 percent. They’re often referred to as the “hidden champions.” I wonder if we differ on this point. Because the strength of these German companies is innovation, nothing else. That’s why we have to get used to accepting innovation as the sine qua non of business and industry, as an integral part of it all. The idea that we can have industry that doesn’t innovate at one stage but then starts innovating later on is fundamentally unsound. On the contrary, we have to embrace the idea that industry without innovation is impossible.

How are we going to define innovation? Maybe we could describe it as a “novelty that can be transformed into a commercial product.” Innovation is undoubtedly nourished by research and development and scientific research, but it doesn’t depend on them. We might also define innovation as “the transformation of existing knowledge and technological skill into practical processes and products with commercial value.” But we probably have to admit that without innovation, without a product that is the result of innovation, industry couldn’t exist anyway; you can’t establish an industry by imitating someone else’s products or manufacturing a copy of something else. It may take some time, though, for players who have operated for so long in a closed economic environment to accept this fact.

MÜ

So, what are the characteristics of the environment that encourages innovation? We probably have slightly different views here. It’s also important to create an environment that will generate innovation. A company has to reach a certain scale, a certain level of training and governance, so that it can innovate.

I’m not saying innovation isn’t necessary; what I’m trying to say is that there are certain sine qua nons we must tackle before we can innovate. Perhaps we don’t exactly differ, then, but complement each other. I think the first thing we have to do is to correctly analyze our needs. Can I change fundamental parameters of my own business segment so that they think about innovation? Our typical SMEs are not that interested in innovation at the moment; all they want is more money. World Bank studies reveal the same thing. When asked what they need most, their answer is “access to finance.” Obviously, this may sound a little pessimistic and unjust, but giving them more money and more credit isn’t the answer. No pain, no gain. Does the environment force our SMEs to increase productivity? That is the issue. I don’t think it does. We always want to eat and lose weight at the same time. Ultimately, you create an environment where companies need to pull their socks up, and innovation will follow. A typical Turkish SME can’t innovate in the sense that you’re talking about.

RG

We don’t actually expect companies to see it this way anyway. They see what the real problem is at certain exceptional times – and this is one of those times – but otherwise they attribute low capacity utilization to low demand.

But, in the case of the German companies you mention, they have no choice. If you’re the leader of your sector, your growth has to come from innovation. But if you don’t even exist in the sector – like our companies – then innovation may not be at the top of your agenda. However, it isn’t a forked road as in, “Either you innovate, or, since we can never invent anything anyway, we’ll just be a country of cheap labor.” That’s not how it works. I mean, I don’t believe the second option is either right or good. But what is true is what you just mentioned: innovation to create value added production. The “value added production” aspect is correct. What we call exports is actually value added production, and it can only grow through innovation. If that innovation is truly about inventing something, bringing about something completely new that no one ever thought of before, that’s great – if you can do it. But it’s difficult, and it’s not the top priority for many of our companies. If Turkey had a network of railways across the land that could serve exports, for example, we’d see our value added increase by leaps and bounds. Now I might not see innovation there, but value added will rise, and even though it’s not cheap, it’s still reasonably simple and important.

In Turkey, transportation is a genuinely major obstacle for exports. There are some good studies in this area by our colleagues. When a new road is built, for example, what happens to exports from its furthermost point? Something happens indeed. The same is true for company organizations. Basic quality control is a major innovation for most Turkish businesses. The product return rate for our SMEs is so high that even high volumes fail to bring in profits. Even the simple act of quality control will increase added value enormously, and the first priority should be doing that. Imitation is not a shameful start. That’s how we start to play a musical instrument; you like someone so you try to play like that person, and later you move on to your own interpretation. It’s important, however, to aim towards a good example. Some accomplish the best, but countless others are well below that level of high productivity. We’re well inside, much further down. Our first task is not to push the boundaries. We can make enormous gains in productivity even when we simply aim for our boundaries.

MÜ

Yes, exactly, we’re inside the production possibility “frontier,” if you will. We probably differed a little because I’m defining innovation as pushing that frontier further out.