TURKEY'S SOUTHEASTERN ENGINE KEEPS CHUGGING; NEIGHBORING

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SIPDIS

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SIPDIS

E.O. 12958: N/A
TAGS: PGOV ECON PTEL TU CH
SUBJECT: TURKEY'S SOUTHEASTERN ENGINE KEEPS CHUGGING; NEIGHBORING
PROVINCES STILL WAITING THEIR TURN (CORRECTED COPY)

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CORRECTED COPY SBU ADDED TO PARAGRAPHS




1. (SBU) The Southeastern Turkish city of Gaziantep is the
region's
model child for economic development, with a diverse,
internationally competitive industrial base. Locals attribute
the success to an entrepreneurial tradition, a light touch by
government as well as above-average levels of smuggling and
off-book activity. By contrast, the neighboring provinces of
Urfa and Adiyaman are heavily dependent on the suffering
agriculture sector, though they have hopes of developing more
tourism. The GOT's massive SE Anatolian Project (GAP) also
plays a bigger role in these provinces. There is no
one-size-fits-all answer to Turkey's development needs, but it
appears that in these three provinces government policy was far
more effective when focused on creating stability for investors
than on disruptive mega-projects. End summary.

Small - and Big - Businesses Thrive in Antep
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2. (SBU) On a November 8-10 visit to Gaziantep, Urfa and
Adiyaman
provinces, Adana PO met with a variety of government,
private-sector and NGO contacts. Gaziantep's diverse,
trade-focused economy is continuing to generate growth and
export numbers that are the envy of southeastern Turkey. In the
first three quarters of this year, Gaziantep's exports increased
by 38 percent, led by its food processing and machine-woven
carpet industries. Four Organized Industrial Zones and its Free
Trade Zone are engines of the success, housing about 30 percent
of the city's output. Exports from the Free Trade Zone have
been increasing at about 25 percent annually and now exceed
$250m.


3. (SBU) We also visited Gaziantep's biggest company, Sanko,
which
generates about $500m in annual income. It is a family-owned
conglomerate that has one of the largest cotton-weaving plants
in the world as well as joint-ventures in heavy equipment,
cement, food-processing and financial services. Sanko is one of
only a few foreign companies authorized by Levi's to produce its
"501" denim fabric.

What Makes Gaziantep Tick?
--------------


4. (SBU) Asked why the local economy is so robust, particularly
in
contrast with neighboring provinces, our contacts offered a
range of explanations. Sanko CEO Abdulkadir Konukoglu
attributed Gaziantep's success to the city's entrepreneurial,
small-business culture in which Turks, Arabs, Jews and Armenians
all lived harmoniously (at least until the last century). He
added that the government's role in the region has been
traditionally light. Otherwise, he noted, "the best and
brightest would have aspired to be bureaucrats or to run
state-owned companies. Instead they had to fend for
themselves."


5. (SBU) An Adana businessman noted that Gaziantep's
businessmen have
a strong sense of civic loyalty, always reinvesting their
earnings locally rather than moving west to Istanbul (which the
Sabanci family did after early successes in Adana). Sanko is
the exemplar; despite doing business throughout the world, it
has kept its headquarters and most of its investments in
Gaziantep and the surrounding provinces.


6. (SBU) A Gaziantep businessman and newspaper publisher, Aykut
Tuzcu, said many local fortunes were ill-gotten, with
black-market activity accounting for as much as 60 percent of
Gaziantep's trade turnover. Tea, sugar and cigarettes are
smuggled in to avoid Turkey's protectionist tariffs. Crude oil
is also smuggled from Iraq and processed at small makeshift
refineries. During our meeting with Gaziantep's mayor, an aide
appeared with a document for his signature. He refused to sign
and told us it was a bid from a local company that was clearly
corrupt as it was seeking to supply fuel to the municipality for
five percent below the wholesale price. Tuzcu said that a few
days earlier one of the illegal refineries in the city blew up,
killing three people. Tuzcu added that, though neighboring
businesses and the authorities certainly know who ran the plant,
its ownership is now a mystery that no one is willing to talk

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about.


7. (SBU) While the structural, cultural and criminal
explanations
probably all play roles in Gaziantep's success, a business
contact in Urfa offered a more straightforward analysis: "The
people there are hard-working and they elect responsible,
pro-business public officials."

China: The New Threat?
--------------


8. (SBU) Despite their affluence, successful businessmen in
Gaziantep
were alarmist in discussing China's growing role. Sanko's
Konukoglu said China's government is systematically
under-cutting all potential competitors in order to secure
market share and put them out of business. Chinese companies
use prison labor and benefit from state subsidies, he claimed.
In a complaint echoed by many in the cotton trade, Konukoglu
said Chinese firms routinely import cotton and then sell
finished textiles for below the price they pay for the raw
inputs. He noted that manufacturing sectors such as textiles
take 20 years to build up and that China's goal is to destroy
established industries in Turkey, the U.S. and elsewhere,
leaving them dependent on China. Konukoglu urged the U.S. to
restrict Chinese imports and prop up its own textile industry
lest it become too dependent on Beijing. China, he and others
noted, is also now entering the Turkish furniture market with
extremely low priced products using European designs.

Urfa and Adiyaman: Agricuture and Top-Down Development
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9. (SBU) Sanliurfa (Urfa),an agricultural province east of the
Euphrates, has not experienced much spillover from Gaziantep's
success. The head of the local Chamber of Commerce, an
appliance dealer, complained that his profits had been higher
during the inflationary 1990's, because he was able to get away
with bigger mark-ups; now consumers have a greater expectation
of price stability. A local builder, however, said that lower
interest rates have benefited his industry, which appeared quite
healthy with extensive residential construction in Urfa's
suburbs. Local leaders also touted Urfa's tourism potential,
which is focused on the ancient city of Harran and the Rizvaniye
Mosque. They are particularly interested in a new international
project (in which Harvard is participating),"Abraham's Path,"
which plans to restore ancient sites from Urfa (Abraham's
birthplace) to Syria and then to Lebanon and Israel while
promoting inter-faith dialogue.


10. (SBU) Urfa also hosts the regional headquarters of GAP (the
Southeast Anatolian Project). The GAP's centrally planned,
mega-project approach to development contrasts with the
hands-off role that Konukoglu said accounted for Gaziantep's
success. In their briefing with us, GAP representatives
emphasized that, in addition to the headline hydropower
projects, GAP also focuses on other sectors including highways,
health and education. They noted, however, that the project's
plans to use the new reservoirs to irrigate 1.8 million hectares
of farmland are well behind schedule.


11. (SBU) Zafer Ersoy, The President of the Chamber of Commerce
in
Adiyaman (near the GAP's biggest project, the Ataturk dam) said
that, while the hydropower was helpful for local development,
the social costs of the project were exorbitant. The dam
displaced about 50,000 people, most of whom were farmers
clustered near the Euphrates. After leaving their homes, most
moved to Adiyaman city. They received compensation in five
installment (making it harder to buy property) and did not
receive assistance in making the transition to urban life or
alternative employment. The promises to provide irrigated land
to them have not been fulfilled. Ersoy said that, based on his
community's experience, he opposes additional hydropower
projects that involve large-scale resettlement, such as the
Ilusu dam proposal.


12. (SBU) Perhaps recognizing GAP's failings in addressing
micro-level development needs, the current AK Party government
is devoting considerable resources to building and improving
roads connecting even the smallest villages with the outside
world and providing villages with potable water. The Adiyaman
governor said that this program has benefited 500 Adiyaman
villages in recent years and that all villages are expected to

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have water service next year.

Comment
--------------


13. (SBU) Gaziantep, with its entrepreneurial energy and
diversified
economy, is well-positioned to benefit from the market
liberalization policies being pursued by the current government.
Its proximity to Syria and contacts with Iraq also serve as a
strong engine for business - legal and otherwise. Moving east,
however, regions such as Urfa and Adiyaman are suffering from
the worsening terms of agricultural trade brought on by market
reforms as well as the continuing social disruptions associated
with the movement of people caused by GAP-sponsored dam
construction; the evacuation of thousands of villages in
connection with the fight against the PKK in the 1990s has added
to the strains on Turkey's SE cities. While there is certainly
a need for large-scale infrastructure projects in SE Turkey
(particularly to ease transport bottlenecks and ensure adequate
energy),a more efficient focus for government may be to follow
the Gaziantep model of creating stable conditions for small and
medium sized manufacturers to develop.
GREEN