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Cablegate: Cautious Optimism On Economic Reform

VZCZCXRO5621
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHIT #0053/01 0310532
ZNR UUUUU ZZH
P 310532Z JAN 08
FM AMCONSUL ISTANBUL
TO RUEHC/SECSTATE WASHDC PRIORITY 7830
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHDA/AMCONSUL ADANA PRIORITY 2333
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 02 ISTANBUL 000053

SIPDIS

SIPDIS

TREASURY FOR J.ROSE
USDOC FOR 4200/ITA/MAC/EUR/PDYCK/CRUSNAK

E.O. 12958: N/A
TAGS: ECON EINV EFIN TU
SUBJECT: CAUTIOUS OPTIMISM ON ECONOMIC REFORM

ISTANBUL 00000053 001.2 OF 002


1. Summary. Consul General met leaders of three key
Istanbul-based business groups to discuss the prospects for
renewed economic reform in 2008. MUSIAD Secretary General
Omer Bolat describes his organization's membership as
medium/large-sized, religiously conservative family-owned
firms. Istanbul Chamber of Commerce (ITO) President Murat
Yalcintas is fond of noting that his organization's 350,000
members represent 50% of Turkey's economy. YASED represents
foreign investors and is chaired by BP country manger Tahir
Uysal. All three agreed that the government lost focus on
economic reforms during 2007, a double election year, but
were cautiously optimistic that senior political leaders were
returning attention to the economic reform agenda. End
Summary.

2. Independent Businessmen's Association (MUSIAD) Secretary
General Omer Bolat described the last 6 years as a stable and
rising economic and political trend for Turkey and opined
that although the external environment was becoming more
difficult at least the political uncertainty that had plagued
earlier governments was unlikely to repeat itself during the
next three years. Tahir Uysal, chairman of the board of the
association representing foreign investors (YASED) agreed,
noting the investment climate and economic environment had
both improved greatly since the 2001 financial crisis.

3. Istanbul Chamber of Commerce President Murat Yalcintas
underscored the importance of an external justification for
political and economic reforms. Over the past five years the
government achieved unprecedented reform, he argued. However
political reform was anchored by the EU accession process,
especially the Copenhagen Criteria, while economic reform was
motivated by the need to recover from the 2001 financial
crisis and to comply with IMF guidelines. The EU and the IMF
drove political and economic reforms in a way that drew broad
popular support. Now, the public has been disappointed by
the EU's stance on Cyprus and by new personalities in Europe
(Sarkozy and Merkel), he argued. Popular support for the EU
process is declining, taking away the external justification
for further reform. Yalcintas underscored the close links
between political and economic reforms - Turkey needs to
retain the EU anchor on the political side to drive reform in
both areas.

4. All three business leaders agreed that political
stability was crucial to economic reform and indicated the
business community generally supports the Justice and
Development (AKP) party-led government because it is
reform-oriented while the center-left opposition opposes
reforms on principle. Yalcintas, who is closely linked to
the AKP, argued that government officials are sincerely
committed to both political and economic reforms. A more
skeptical Uysal argued the government has "taken its eye off
the ball" as far as economic reform is concerned, noting 2007
was a disastrous year for spending as the government loosened
fiscal reins in advance of elections. Yalcintas conceded
the two elections in 2007 (parliamentary and presidential)
produced an "election economy" not focused on reform, but
believes things will get back on track now that elections are
over.

5. The government is responsive to business community
concerns and has worked to create formal and informal avenues
for constructive dialogue. Yalcintas noted recent tax
reforms were vetted by private sector and expects that
forthcoming policies will also be the subject of dialog with
the private sector. Uysal emphasized the importance of the
Investment Advisory Council, through which YASED (and other
economy-focused civil society groups) pushed for the creation
of an Investment Support and Promotion Agency (ISPA).
Turkey's ISPA is now up and running with a dynamic chief,
Alparslan Korkmaz, and about 30 staff in various locations
around the world. In an example of less formal channels
through which the private sector affects government policy,
MUSIAD's grass roots membership is very influential in the AK
Party and former MUSIAD Secretary General Zafer Caglayan is
now Minster for Trade and Industry. The association has
"open access to ministers" and expects the government to
respond on issues of importance to them, Bolat explained.

6. Yalcintas described an early January meeting he attended
in Ankara. The group of 15-20 people was chaired by the
Prime Minister and attended by economic ministers as well as
economy-focused civil society organizations (TOBB, ITO, labor
unions.) Government officials previewed planned reform
policies. Business was generally in favor of the reforms
while labor groups were less positive. Yalcintas believes

ISTANBUL 00000053 002.2 OF 002


the government will implement these reforms, but cautioned
the government must get buy-in from civil society and the
unions in the run-up to municipal elections. Bolat also
referred to this meeting, but was more optimistic that the
government would be able to resolve labor concerns and move
forward quickly with social security reform.

7. Reform fatigue is a concern for all three business
leaders. Uysal noted Investment Advisory Council meetings
were on hold from May - December 2007 due to the elections.
Political leadership is necessary to activate bureaucrats he
argued; there is just no impetus without pressure from the
political side. Bolat applauded the Prime Minister's recent
press conference outlining the targets of an economic plan.
He believes this signals a move away from politics and a
return to the economic reform agenda. Uysal agreed, noting
YASED is now getting signals that the government is
re-focusing on the economy. However, he noted there is no
overarching policy, a lack of coordination among ministers
and Nazim Ekren (Deputy Prime Minister and Minister in charge
of the economy) doesn't really drive the agenda. All three
business leaders expect announcements in February on labor
market reforms and other key aspects of the policy agenda.

8. Municipal elections are slightly more than a year away
(March 2009) and could be an excuse to defer some painful
reforms, Uysal cautioned. Yalcintas agreed noting local
elections show the real pulse of the population because local
officials are in touch with the people the way national
officials (who are not required to live in the constituency
they represent) are not. The government is therefore
unlikely to take painful measures now, he argued noting
administered price increases were made as soon after the
national elections as possible in part to distance them from
local elections. Some commentators have suggested the
government may be tempted to move municipal elections up to
fall 2008 to pre-empt paying at the polls for negative fall
out from the worsening global economy. This move would
likely be supported by the business community who suspect
looming elections could preclude much needed reforms.

9. Comment. The AK Party did an extraordinary job with
economic reform during its first term in office, but
benefited from a very positive international environment and
a populace that would accept virtually any reform that held
out the hope of digging out from the disastrous 2001
financial crisis. Our business interlocutors in recent
discussions described a government that in essence put the
economic reform agenda in neutral in the months immediately
following the 2007 elections. The media frenzy surrounding
fall 2007 PKK attacks distracted the general public, but not
business leaders, from this lack of activity on economic
reform. Now the global credit crunch seems to have prompted
a renewed focus on economic reform. However, more demanding
voters will test the GOT's commitment to reform, particularly
labor market reforms that are likely to bring short-term pain
with promises of long-term gain. End Comment.
WIENER

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