NEW DIRECTIONS FOR US-TURKEY ECONOMIC RELATIONS

UNCLAS SECTION 01 OF 03 ANKARA 006744

SIPDIS

SENSITIVE

E AND EB FOR U/S SHINER AND A/S WAYNE
SIPDIS

E.O. 12958: N/A
TAGS: ECON TU
SUBJECT: NEW DIRECTIONS FOR US-TURKEY ECONOMIC RELATIONS

REF: ANKARA 6386


1. (SBU) Summary. Following the last meeting in December
2003, it is Turkey's turn to host the Under Secretary-level
U.S.-Turkey Economic Partnership Commission (EPC) in Ankara.
Turkey's strong economic recovery since the 2001 financial
crisis, notwithstanding large risks of backsliding, creates
new opportunities to take our economic dialogue in directions
that will help lock-in Turkish growth, support economic
change in the region, and open opportunities for U.S.
business. An effective agenda for a high-level bilateral
economic dialogue should engage a range of U.S. and Turkish
economic and foreign policy agencies on energy, economic
policy, terrorism finance, regional initiatives, and business
development, as well as more "traditional" trade and
investment issues. End Summary.

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Turkey's Growth Creates New Opportunities
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2. (SBU) After four years of strong economic performance
and the start of EU accession negotiations, Turkey's economy
has crossed a watershed. Private sector-led growth based on
sound monetary and fiscal policy has brought down inflation,
real interest rates, and government debt; spurred capital
inflows; led to massive trade growth, private investment and
consumption; and created new jobs. Lured by the prospect of
EU membership, European, American, Middle Eastern, and Asian
investors are once again looking at opportunities in Turkey
and driving Turkish asset prices to new highs. For
instance, GE Capital's recent acquisition of a $1.6 billion
stake in Garanti Bank is a big bet on Turkey's economic
future, as is interest by leading U.S. corporations in
Turkey's telecom, energy, automotive, and financial sectors.
The resolution of headline commercial disputes involving
U.S. companies (e.g., Cargill, Motorola) adds to the
positive new atmosphere.


3. (SBU) Turkey's economic success story comes as its
strategic importance continues to grow. Economic growth and
widening prosperity offers an unprecedented opportunity to
(a) lock Turkey into the global economy (showing that market-
driven economic success is possible in a Muslim country),
(b) turn Turkey into an agent of regional economic growth
and change, and (c) open new opportunities for U.S. business
that would undergird a durable bilateral relationship. Yet,
Turkey's continued success is not assured. Economic reform
is incomplete; Turkey's most pressing economic issue is no
longer how to return to positive growth, but how to avoid
backsliding and sustain strong growth for the many years
needed to catch up with its EU partners to be.

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But the Risks Remain Large
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4. (SBU) Implementing sound macro policies under an IMF
program is easy compared to the microeconomic, 'structural'
reforms now needed to sustain growth. The EU process will be
a major driver of the tax, banking, social security,
agricultural, regulatory, legal and judicial reforms that
will keep investment and growth on track. Nevertheless,
reforms will shake traditional power relationships and
undermine entrenched interests in the traditional corporate
realm as well as in the bureaucracies and military. Economic
change will create new tensions as millions of hitherto
protected agricultural and textile workers are displaced and
new entrants into the fast growing workforce clamor for jobs
and opportunity. Already harsh regional economic disparities
are likely to be aggravated. Turkish Islamists and
nationalists remain hostile to foreign investment and
privatization. Thus, even as political and human rights
reforms create their own tensions, the uncertainties of
economic change alone will create myriad opportunities to
plunge Turkey back into its economic and political
nightmares.

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A New Mix of U.S.-Turkish Economic Engagement
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5. (SBU) This new mix of great opportunity and large risks
calls for a new mix in our economic engagement with Turkey.
Since the financial crisis, our bilateral focus has been on
keeping IMF-sponsored economic reforms on track, resolving
outstanding trade and investment disputes, and leveling the
playing field for new investors. For its part, Turkey has
sought concessional access to the U.S. market, notably for

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its textile exports, even as it keeps its agricultural
markets closed and threatens to deprive U.S. pharmaceutical
firms of their intellectual property.


6. (SBU) A new mix would not neglect the important issues
of macro policy and commercial equity. Indeed, it is
critical that having resolved some long-standing disputes,
Turkey move on to modernize judicial and regulatory
infrastructure to ensure that foreign firms are treated
equally in the future. A new mix, however, would add (a)
greater attention to the micro-policies needed to sustain
growth (sharing, for example, U.S. experience with
deregulation and employment and income policies),(b) global
issues on which Turkey will be a more important player, and
(c) new opportunities for expanding regional economic
integration, and for U.S. trade and investment.

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A New Agenda
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7. (SBU) Encompassing market access, IPR, and investment
issues, the trade dialogue led by USTR and the Turkish
Foreign Trade Undersecretariat under the Trade and
Investment Framework Agreement (TIFA) will be an important
part of a renewed economic dialogue. Post looks forward to
an early TIFA Council meeting (perhaps in January 2006). At
the same time, trade and investment dialogue is not
sufficient. The Economic Partnership Commission (EPC)
(which last met in December 2003 under the leadership of
former Under Secretary of State Larson and former MFA Under
Secretary Ziyal) affords a potential umbrella for an

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enhanced dialogue with the participation of various U.S.
agencies that looks at the following issues:

-- Energy: The impending completion of the BTC project
should not mark the end of cooperation on "East-West"
and "North-South" gas and oil transport systems that
enhance global energy security and reinforce regional
economies. This will require improvement of Turkey's
domestic energy investment environment, which also
offers local opportunities for U.S. business and clean
coal technology, energy efficiency, hydrogen, nuclear,
and LNG technologies. DOE and its Turkish counterpart
have expressed interest in stronger cooperation. A
productive first step could be a visit to the U.S. by
Energy Minister Guler (ref).

-- Economic Growth: The Turkish system does not have a
capacity for generating sound economic policy
recommendations, and Turkish politicians reflexively
turn to subsidies and transfers to address social
objectives. Enhanced economic policy discussion should
include not only macro policies, but sharing of U.S.
experience on market-led policies that that promote job
creation, poverty reduction, and reduction of regional
economic disparities. Engagement of Council of Economic
Advisors staff in addition to Treasury, and perhaps non-
USG economists, could support such a discussion.

-- Terrorism Finance/Financial Crime: As economic
exchanges with the rest of the world grow, so do
opportunities for abuse. Turkey does not yet have a
robust counter terrorism finance system, lacking for
example an independent capacity to designate terrorist
groups and a fully effective Financial Intelligence
Unit. U.S. Treasury and DOJ have offered greater
engagement with the Turks at the working level. Policy-
level engagement by State and Treasury, however, is
needed to get things done.

-- Regional Economies: Turkey's economic linkages with
Middle East and Central Asian countries are growing, but
remain far less than their potential. Encouraging
greater infrastructure, energy, trade, and investment
linkages with the region would allow for a greater
spillover of robust Turkish growth, particularly to the
Middle East. In addition to energy projects, it could
be useful to explore the potential for including Turkey
in emerging regional economic mechanisms, like the
Middle East Free Trade Area.

-- Business Development: Despite, or perhaps because of,
the multiplicity of bilateral business organizations,
U.S.-Turkey private sector linkages remain
underdeveloped. U.S. business appears unaware, or wary,
of the changed environment in Turkey and Turkish
businesses are intimidated by the size of the U.S.
market. A new project between the U.S. Chamber of

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Commerce and the leading Turkish business federation,
TOBB, to develop SME connections has received $400,000
in U.S. funding. This is, however, a small start.
Intensified engagement by the U.S. Commerce Department
and private sector, perhaps including U.S. subsidiaries
in Europe, could help create stronger connections,
including institutional connections, between the two
business communities. This would also create more
effective business-led constituencies for investment
oriented judicial and regulatory reforms.

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A Broader-Based Mechanism
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8. (SBU) One reason past EPC's have been unsatisfactory
was the bureaucratic mismatch between the U.S. Under
Secretary of State for Economic Affairs and the MFA Under

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Secretary, whose normal portfolio is almost entirely

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political and whose agency has limited economic capacity and
sway over economic ministries. There is no easy solution to
this problem, but an effective mechanism might be the
creatio of issue-oriented working groups led by Turkish
line agencies with their counterpart U.S. agencies that
report to an umbrella group led by the two Under
Secretaries.

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Comment
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9. (SBU) With a new E in place, we expect the Turkish MFA
to come forward with a proposal for an EPC meeting, picking
up where the last session left off. We believe that high-
level economic dialogue has the potential to make a positive
contribution to the bilateral relationship. However, for a
dialogue to be effective it will be important to be prepared
to come back to the Turks with a new, forward-looking
agenda, like the one described above, that effectively
engages a range of Turkish economic agencies.

McEldowney