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Cablegate: Corruption: Turkey's 800-Pound Gorilla?

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ISTANBUL 000526

SIPDIS

SENSITIVE

TREASURY FOR INTERNATIONAL AFFAIRS - MMILLS AND CPLANTIER
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: N/A
TAGS: KCOR ECON EFIN TU
SUBJECT: CORRUPTION: TURKEY'S 800-POUND GORILLA?

REF: ANKARA 1728

Sensitive but unclassified. Not for internet distribution.
This message was coordinated with Embassy Ankara.

1. (SBU) Summary: Public attention has returned to the
subject of corruption in Turkey in recent weeks with
publication of a country survey by the "Economist" magazine
blaming the problem for Turkey's failure to attract more
foreign investment. The survey coincided with the
publication of Transparency International's Global Corruption
2005 report, which focused on the construction sector. That
organization's 2004 perceptions index confirmed Turkey's
negative reputation with a 3.2 score, reflecting observers'
belief that the country's environment verges on "rampant
corruption." Our contacts, however, are inclined to view
this single-minded focus on corruption itself as a mistake,
believing instead that the problem is broader, and that there
are a number of other factors that contribute to the
"opaqueness" of the Turkish economy. These views find
support in the World Bank's newly-released World Development
Report 2005, which asserts that Turkish companies pay 6
percent of their turnover for bribes, but nonetheless finds
that most investors view high taxes, tax administration, and
legal problems as bigger obstacles. End Summary.

2. (U) Public Indictment: In a series of Istanbul and Ankara
seminars aimed at disseminating the "Economist's" recent
survey on Turkey, author Tim Hindle repeatedly reiterated
that he views corruption as perhaps the most pressing issue
facing Turkey today. Citing the example of corrupt
politicians, he argued that Turkey is a "fish that has rotted
from the head," and that "sleaze and authorized theft" have
undermined Turkey's economic life. In particular, he
suggested, corruption is a key reason why foreigners have
steered clear of the Turkish economy. Given its present
situation, he elaborated, Turkey may be able to attract
investment from "equally or more corrupt nations" such as
Russia and the Ukraine, but not from Western Europe or North
America. The "Economist's" indictment was given wide press
play in Turkish media, and has sparked discussion about just
how pervasive and important the issue is.

3. (U) On the Edge: By chance, the "Economist" survey
coincided with release by Turkey's local Transparency
International chapter of the organization's report on Global
Corruption 2005. An accompanying index of "Corruption
Perceptions, completed in 2004, also emphasized the
perception problem Turkey faces. The index is a poll of
polls, drawing on 18 surveys conducted by 12 institutions
between 2002 and 2004. A score above 9 reflects a relatively
clean environment; a score less than 3 reflects rampant
corruption. As in the past, Turkey found itself relatively
lowly rated, with a score of 3.2. While the score left
Turkey in 77th place among 146 countries, only Romania among
EU candidate or member countries ranked lower. The
accompanying report listed deficiencies in Turkey's
legislative framework, including failure to fully reform
public procurement practices, the absence of an independent
corruption fighting agency in a new draft anti-corruption
statute, and the absence of aims or guiding principles for a
new public servants ethics commission. The local chapter
drew particular attention to the problem of corruption in the
construction sector, where contractors rig bids and evade
zoning requirements by bribing inspectors, often with
potentially deadly results.

4. (SBU) A problem, but: Our Istanbul contacts concede that
corruption is an ever present facet of Turkish life, but
argue that its scope and impact have been exaggerated, and
that it is more a result of other deficiencies than a
principle actor in its own right. Price Waterhouse Cooper's
(PWC) Senior Partner Adnan Nas, who has studied the issue for
a number of clients, characterizes corruption as just one
aspect of the larger problem of the "opacity" of the Turkish
economy. Corruption, he argued, is "easier for the media to
talk about and more sensational," and hence attracts more
attention, but leads observers to miss other underlying
factors, which can be more important. These include such
other deeply rooted problems as the absence of an assured
legal environment, with effective legislation and
enforcement, macro-economic instability, and the lack of
internationally accepted accounting standards. Nas notes
that PWC conducted its own study in 2001 of "opacity," and
concluded that these problems were the equivalent of a 36
percent increase in Turkey's already high corporate tax
rates, and estimated the amount of foreign investment they
kept away at 1.8 billion USD.
5. (SBU) Bureaucratic Obstacles: Nas argued that corruption
results from a nexus of shortcomings in the Turkish system,
including bureaucratic inertia, an ineffective legal system,
and a tendency of Turkish corporations to compensate for
their lack of competitiveness by rent-seeking behavior. Nas
pointed to the attitude of civil servants in Turkey, noting
that the vast majority find it preferable to do nothing
rather than to take proactive action. "Action leads to
investigation" by inspecting authorities," he suggested,
noting that while cases are frequently taken to court under
Article 240 of the Civil Service Code for misuse of
authority, cases are almost never brought under the article
covering negligence (230). The natural tendency for civil
servants is thus to do nothing, which can lead companies
seeking government action to utilize corrupt means. Nas
conceded that elements of Turkish tradition can lend
themselves to this, though they are often not perceived that
way by civil servants themselves. Giving of presents is seen
as normal in government offices, he argued, and often these
can involve substantial amounts. Little control is
exercised, as was evident earlier this year when the
controversy surrounding the gifts presented to the Prime
Minister and his wife in Russia showed that no effective
monitoring or tracking system existed within the government.

6. (SBU) Little Disincentive: TUSIAD Board Member Pekin Baran
noted that in and of itself Turkey's bureaucratic complexity
lends itself to corruption, even if most civil servants are
honest. While company registration procedures have been
streamlined, other procedures have not. If one must deal
with 23 desks in order to clear a particular action, Baran
argued, the odds are that 2 or 3 may make illegal requests.
Baran argued that the legal system provides little
disincentive to committing such illegal acts, since few if
any civil servants or politicians have been punished or tried
for such actions. Bank of New York Representative Neslihan
Tombul echoed that view, suggesting that currently in Turkey
there is "no fear or respect for the law." Currently "greed"
wins out over "fear" every time, she said, and corruption can
only be effectively addressed when that equation is reversed.


7. (SBU) Legal System/Rent-seeking: Additional incentives to
corruption include Turkey's dated and inadequate legal
system, which in itself is a key obstacle to foreign direct
investment. Indeed, Nas believes these legal problems are
the number one contributor to corruption in Turkey. An
additional contributor is a lack of private ethics among some
Turkish companies, which are "not ready to compete" and
instead are opportunistic and seek to profit from government
connections. Nas (himself a former Chief Inspector at the
Ministry of Finance) characterized that Ministry as highly
ethical, but suggested that staff at the other "spending
ministries" are less highly qualified and ethical, and
instead are susceptible to the
bureaucratic/political/business nexus through which
government favors are distributed. Nas suggested that the
top-tier of Turkish companies no longer relies on this
system, but argued that second tier companies are in big
trouble, and will either lose their position or undergo a
significant transformation. Almost in passing, Nas conceded
the existence of political corruption, which looms largest in
the public consciousness, but argued that political parties,
which are most often blamed for the problem, are not its
drivers. Instead, they are being used by a culture in which
people contantly seek favors from their deputies. Only the
EU, he said, will be able to break these habits.

8. (SBU) A Balanced View: TUSIAD's Baran concurred that
corruption is an endemic reality in Turkish life, but echoed
Nas's view that such other problems as taxation, the
judiciary, and bureaucracy are bigger obstacles to foreign
investment. He noted that TUSIAD is undertaking a major
study of the issue, however, focusing initially on the civil
service. Succeeding chapters will focus on parliament and
the judiciary. The key, he argued, is for such "legal
exceptions to responsibility" as parliamentary immunity to be
lifted. Only when that is done, he believes, will the
problem be effectively tackled. Tombul added that another
contributor to the problem is the inadequate pay scale for
some civil servants, particularily in the law enforcement
area. "If you paid these guys properly," she suggested,
there would be less incentive for such transgressions.

9. (SBU) World Bank View: These more nuanced appraisals find
support in the World Bank's newly released World Development
Report, though it is the study's assertion that 6 percent of
the turnover of Turkish companies is devoted to "bribes" and
"gifts" aimed at greasing the wheels of Turkish bureaucracy
that has garnered headlines. Investors identified Turkey's
extremely high taxes and complex tax administration, together
with legal uncertainty, as even more important problems.
Equally striking was the study's conclusion that in those
cases where legal proceedings are opened, they last for an
average of 2.9 years.

10. (SBU) Comment: Discussions of corruption are a popular
pastime in Turkey and this will undoubtedly remain true. But
Turkey's difficulties are more complex than blaming
corruption alone would indicate, and the fixation on that one
aspect of the problem conceals the more important systemic
reforms that need to be undertaken to attract the foreign
investment that will sustain Turkey's recent economic growth
over the long term. End Comment.


ARNETT

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