Turkey's Economic Straddle

Turkey's program of straddling its Islamic past and its economic future is being pushed, watched and challenged. It is being pushed by the government and watched by the EU, which Turkey wishes to join, and by its own army. At the same time, Turkey's employers are being challenged by low-wage competition from the country's near neighbors and European buyers concerned about labor conditions.

Americans concerned with keeping our friendship with this Islamic country need to understand Turkey's economic challenges. Although almost entirely Islamic, Turkey's citizens support Ataturk's secular state, in part because they have seen the economic benefits it has brought. Turkish Prime Minister Recep Tayyip Erdogan -- former Mayor of Greater Istanbul -- leads the Islamist Justice and Development (AKP) Party. His candidate for president, Foreign Minister Abdullah Gul, was recently elected despite the concerns of the army about an Islamic agenda.

Erdogan meanwhile continues his aggressive Thatcher-like program of privatization of public assets along with growing trade with the west. This has fueled five years of GDP growth averaging 7 percent a year. At the center of this growth is the crucial textiles and apparel industry, which accounts for nearly 40 percent of Turkey's exports. The industry is being squeezed by competition from the rest of Asia at the same time as western buyers are asking questions about labor conditions in Turkish factories.

Neighboring countries have labor costs that can be as little as one-fifth of Turkish wages. The Turkish government itself has contributed to employer costs by taxing employment heavily and land lightly. A joint initiative (called JO-IN) of international NGOs looking at worplace conditions in Turkey calculated in 2005 that apparel workers cost employers directly 594 YTL (New Turkish Lira) per month, but after payroll taxes the workers received just 350 YTL. Employers say they pay another $100 a month for lunch and travel allowances, and that costs are rising rapidly -- the Turkish minimum wage rose more than 50 percent from 2001 to 2005. Turkey's trade unions respond that the minimum wage is still far below what they believe to be an appropriate living wage. However, for most garment workers the taxes are not paid at all, because so many workers are unregistered participants in Turkey's large gray economy.

In the thick of these issues is Yesim (YEH-shim), Turkey's largest apparel employer. According to JO-IN members, Yesim is a model garment-sector employer, certified to the SA8000 labor standard. Certification has helped with western buyers, but Yesim feels cost pressures from nearby cheaper competitors.

One May morning in Istanbul's Richmond Hotel, I spoke with Yasemin Basar, Director of Social Compliance for Yesim. The company has been growing outside of Turkey, but its employment has shrunk one-third from a few years ago, to 4,000 employees. Yasemin is proud that Yesim's Turkish workplaces enjoy high standards of morale, quality, on-time delivery, retention and productivity. Still, she told me: "It has not been easy for us to bring up labor standards at our factory to satisfy western buyers and at the same time remain competitive."

Yesim and other large employers can move production to Egypt, Moldova, Pakistan, Romania and Bulgaria, where wages are 20 percent or less of Turkish base wages and where payroll taxes are much less or zero. Yesim seeks to implement the high standards of its human-resource management systems everywhere, but it is hard.

When apparel jobs leave Turkey, the displaced employees may not find new work, reducing an employment rate already low by world standards, especially for female workers. The government gives more priority to high-margin industrial sectors. But if apparel jobs leave, what are the options for the laid-off workers?

Manufacturers are responding by increasing their efficiency as well as fending off possible black-listing by socially conscious western buyers. I visited an impressive Topkapi factory, certified as meeting global norms, with thousands of looms being operated by a small number of skilled workers.

Erdogan's government meanwhile is encouraging job creation in poorer areas by waiving 80 percent of the employer's social security contribution in rural Anatolia. Hey Group, the second-largest textile employer in Turkey, has two factories in the region. Benan Vey, who works on compliance issues with Hey Group, told me that the government concessions are "very helpful."

How can Turkey reduce payroll taxes while continuing to build the country's infrastructure and still provide public services and a safety net? When the government started considering reducing the Value Added Tax on tourism and food, to 8 percent from 18 percent, the IMF expressed concern that these cuts imperiled the country loan commitments.

If more workers were registered, the rates might not have to be so high. But a more basic question is whether Turkey could better face its challenges with lower taxes on payrolls and higher taxes on land.