Thanks for inviting me to the Forum and since Simon has talked about some of the relationships between Turkey and the BRICs, I thought I would focus on something else. Let me start by saying that it is a pleasure to be here. The IMF and Turkey have had a very long and certainly recently very successful relationship and Turkey’s economic performance as Simon pointed out has been exemplary in the last few years. But my focus today will be not so much on Turkey but in a sense on the outside world. I think if you look outside the window in any hotel in Istanbul you see the consequences of globalization. You see immense number of container ships coming into Turkey loading and unloading. Globalization is on the move and it’s made consumers everywhere better off by reducing prices, increasing real incomes and keeping inflation in check. Also global interest rates are low partly because there is now global pool of capital and that is able to finance large current account deficits like those of the US and also that of Turkey. The question here is how countries take maximum advantage of this globalization process and in the process we can talk about how country like Turkey interacts with the BRICs. Turkey certainly has taken a lot of advantage but I want to talk about different country, I want to talk about India which I know a lot better then Turkey and ask the question, what can we learn more generally from India’s emergence? Lessons that could apply possibly to other countries and also I want to ask what challenges there could be, finally should Turkey see other countries like the BRICs as countries to fear or countries to join with? Obviously I think my answer will be a little bit of all three.
Let me start with India and I don’t know how familiar you are with India but I am sure you are familiar with India’s handicaps. India is a poor country, its infrastructure has to be seen to be believed the kinds of airports, roads etc. which are changing considerably but are still some of them at third world level but India has bureaucracy which has learned very well from many years of experience and can stifle any initiative in a jiffy. So it has poor infrastructure, a lot of regulations some inherited from laws in the books date from 1840 & 1850’s. It has a bureaucracy which enforces every letter in word of these laws and also has very chaotic but effective democracy which some such as Liqvanyu have argued holds back growth. Yet despite these seeming disadvantages India has been growing 7 to 8% in the last three or four years. It has grown 6% in the last two decades virtually uninterrupted. Question is what did India do? Specially when you look at some of India’s successes that is India’s service industry, the software and business process industries and what lessons can we learn from that both positive and negative?

Let me start first with India’s development history very quickly because it will ring and there will be some resonance with some of you who know about Turkey’s history. India followed apart with many emerging markets today have followed which is it focused on imports substitution with the public sector commandeering the commanding heights of the economy. The main aim was to take the important industries for the public sector but at the same time allow private enterprise but restrain monopoly. In order to restrain monopoly credit was very carefully directed, there was licensing, there were preference for small skill industries, there were anti-monopoly laws and there were very very strong labor laws which prohibited firing workers and once you exceeded the size a 100 workers today you came under this whole gamut of labor laws.

So these were kinds of policies that were put in place there was also emphasis on private education. India didn’t do well on primary education but it had a very few very good universities with extremely vigorous entrance exams, quality of entrance and quality of education high. What does these policies do? Remember, they were there in order to spread income to make sure that everybody participated in growth and that the private sector was in some sense focused on creating jobs as opposed to necessarily creating wealth. It turned out to have almost exactly the opposite affect. The idea was to force companies into small skill sector by offering privileges to the small skill sector. What that did was it essentially prevented companies that were successful in small skill sector from growing and as a result industries that typically would grow in other countries based starting small and growing larger would prevent it from growing in India. Similarly India wanted to promote labor-intensive industries but because of the very strong labor regulation it made sure that people who wanted to enter labor-intensive industries thought twice about doing that because they wouldn’t be able to get rid of excess labor if they actually wanted to. So as a result what India had was a capital poor economy had a lot of focus large scale capital intensive industries because the cost of hiring labor was so high and India had very little of presence on labor intensive industries. So you had fairly secure economy for an emerging market, India still having unskilled labor industries, as being the big biz it was skill labor industries, instead of having labor-intensive industries your capital-intensive industries.

When India liberalized, it was not surprising that these were the industries that took off. What you see today is that services in India have exploded. Why have services exploded? Because services took advantage of India’s relative strength in higher education, for example software services also the labor laws did not apply to skilled labor. If you hire somebody as a manager, you could fire him or her the next day but if you hired them as worker you can never fire them. As a result companies focus more on the service sector, it was also a sector which didn’t require infrastructure at least traditional infrastructure. You didn’t require an efficient road transport system, what you required was telecommunications. That was another service, which has opened up and quickly became very effective. So the negatives that India had did not apply the flexible labor laws for the skilled, inflexible labor laws for the unskilled workers did not hurt so much and the infrastructure did not matter.

What do you learn from this? As you know the Indian service sector has made a big comparative move in the world and is well known outside, the software, the business process, outsourcing and so on. I think what you learn from this is that it is very hard for government to pick where the industries will have comparative advantage and to push them into those industries. One of the advantages that the software industry in India has that the government didn’t pay any attention to it. Because it didn’t pay any attention to it, it didn’t put any roadblocks in the way and the industry actually flourished for long time with limited government direction. Now this is not to say that they did not benefit from the unintended consequences government action. Government set up very good technological training institutions, these helped. The government set up strong public sectors in the electronics and electric industry and people leaving these industries, these public sector firms then set up private sector firms. So government helped but it helped in ways that it never imagined. It helped by creating this infrastructure of human capital, which then could take advantage once the economy, opened up.

So the point I want to make is that it is very hard for emerging market to plan where they will have comparative advantage. Comparative advantage emerges, the main thing is to create an enabling environment and this is where India did very well in creating an enabling environment. The inflation was always kept relatively low in India. The private sector was always allowed an opportunity with limitations to enter industry and this has expanded considerably in the last few years. So India, to the extend, it can be successful. Hasn’t done a great job in creating infrastructure that is something that the current government has finally taken to task and doing it but it really did a great job in creating the macro economic environment in which private enterprise could flourish and also did some things which had opposite consequences what it intended but today because the private sector can move it has been very good.

It is all to the good. Are there any problems? Yes, there are problems because India created jobs in skill intensive industries but not been able to create jobs in labor-intensive industries it has a growing problem. India, like Turkey has a very young population, this population is entering the labor force with the kinds of jobs that are available top them in the quantities that they need will only emerge if India can move into labor intensive industries in a big way. That needs far more effort in infrastructure and it needs far more effort on basically removing the labor laws, removing the imperilments to create some of these industries.

Second problem, India has which Simon pointed too is growing inequality. There are some states, which are doing very very well, and there are some states that are falling behind. The only way to get to states that are falling behind up to the level of really good states is to improve the quality of the infrastructure, include the quality of education there. This requires government action, which hasn’t as they argued been very forthcoming in the past.

And finally, India like Turkey faces many of the problems of emerging markets have. So let me conclude, the bottom line is India’s development path has been a path where the private sector has adopted sometimes to decent government policies and sometimes to misguided government policies but similar lining in India’s policies have always been they allowed some room for entrepreneurial spirit and that’s been very good. Now, India’s path of growth should not be seen just as a comparative threat in some of the industries that are the emerging markets are completely, but also some opportunities in enlargement class and this middle class can be seen not just as producers but also as consumers. And for emerging markets I think the kinds of concerns are common.

To conclude there are many lessons that India can learn from Turkey and Turkey can learn from India and finally I don’t think there is any problem for Turkey joining the BRICs.

Question - Ayşegül: Boğaziçi Üniversitesi, Ekonomi son sınıf öğrencisiyim. Benim sorum Linda Hanım’a olacak. Girişimciliğe baktığımızda, büyük ülkelerin ortak bir payda olduğunu görüyoruz. Çin hükümetinin girişimciliğini desteklemesini ve bu konudaki görüşlerini bildirmesini istiyorum.

I also want to add a comment on your last comment, which is one, shouldn’t minimize the amount of art and culture coming from these countries. One doesn’t may be relate to them immediately because they are in a different language in fact many different languages and in a sense they are under the surface at this point but I would see over time greater integration of world cultures where you do perceive the tremendous performance going on in many of these countries. You’ve seen a lot of Chinese cinema coming out into the Western world. But there is debt to Indian cinema. There is debt to Indian literature which is in many languages and similarly of Chinese so I think while the point these countries are getting richer I think it is also giving them more time to in fact produce the culture which there is long tradition of but you think much more of it now. Indian painting, Chinese painting, sculpture, all this will come and I think the world will be richer as a result.