Annex 2
Rural Public Expenditure Review
1.Introduction
Objectives and Scope
1.1The purpose of this rural sector Public Expenditure Review (PER) is to assist both the Government of Turkey and the World Bank to enhance the impact of rural development in Turkey. This annex provides a cross-agency picture of the magnitude and structure of public expenditures to the rural sector in Turkey, with reference where appropriate to comparator countries. It is intended that this analysis will inform future decisions over priority public expenditures for rural development and the shifts in expenditure allocations that are necessary to make the most effective use of available resources.
1.2The rural PER examines public expenditure and performance in the rural sector over the period 1999-2003. Analysis of actual spending is restricted to capital investment and recurrent expenditures recorded by the State Planning Organization (SPO) and Ministry of Finance (MOF). The PER does not include analysis of agricultural subsidies and the impact of recent subsidy reforms - these are presented in a separate study.[1] The health, education and housing sectors are also outside of the scope of this review.
1.3The review covers both central and local government expenditures to the rural sector. For the purposes of this study, ‘rural’ is defined as covering:
- agriculture - including farmer support services such as extension and research, animal health, plant protection;
- forestry, erosion control, and other agri-environment programs; and,
- irrigation and other rural infrastructure - rural roads, water supply and sanitation, electricity.
1.4The report is structured as follows. The remainder of this Section summarizes recent rural performance, including information on rural poverty and the role of agriculture, as well as details of the principal government agencies involved in rural areas. Section 2 briefly outlines recent government reforms in agriculture and strategic planning issues. Section 3 reviews public expenditure management, including a summary of recent reforms introduced by government. Section 4 reviews public expenditure trends in rural areas and provides an analysis of the composition of this expenditure by economic classification (capital and recurrent spending), by function, and by geographic region. Section 5 sets out the principal findings and recommendations of the study.
Rural Poverty
1.5Rural development, including both growth in agriculture and off-farm employment, is important for achieving poverty reduction in Turkey. It is estimated that 35 percent of Turkey’s population live in rural areas[2]. This is high relative to the rest of Europe and Central Asia, where on average 25 percent of the population is rural. The distribution of the rural population varies considerably between provinces, ranging from 74 percent (Bartin) to 9 percent (Istanbul). What is important to note is that by all measures of poverty, the rural sector accounts for 50-60 percent of poor households in Turkey[3].
1.6The 2002 Household Budget Survey (SIS) shows that the relative poverty incidence in rural areas is almost twice that of urban areas - 20 percent of the rural population is defined as poor, compared to 11 percent of the urban population. Other poverty incidences such as food and non-food poverty rate (22.0 percent for urban and 34.5 percent for rural), people living below US$ 2.15 per capita per day (2.4 percent in urban and 4.1 percent for rural) as well as people living below US$ 4.3 per capita per day is 24.6 percent in urban and 38.8 percent in rural areas) all show similar differences. Rural communities also lag behind their urban counterparts in measures of human development[4]. The 2002 survey shows the most significant determinants of household poverty in Turkey are education, employment status, and whether or not the household is located in a rural or urban area. Overall, 37 percent of households whose principal economic activity derives from the agricultural and natural resources sector (defined as agriculture, hunting, forestry and fisheries) are poor, and face the greatest risk of poverty of any group.
Rural Sector Performance
1.7A recent study estimates that the rural sector contributes 30-35 percent of GDP[5]. This compares with a share of agriculture in GDP for comparator countries as follows: Brazil – 11 percent; Poland – 29 percent; Mexico - 24 percent; China – 24 percent; and India – 28 percent. In Turkey, the rural share of GDP in 54 provinces out of 81 is greater than 50 percent. In fact when one excludes Marmara region, the remaining regions together have a rural share of GDP of almost 47 percent and the agricultural share of GDP ranges from 15-30 percent. (The same phenomenon is operative in other countries in which their main industrial and service sector region is excluded, e.g, Sao Paulo state in Brazil.) The study found that rural GDP is growing more slowly than the rest of the economy and the relative share of rural value-added from agriculture has been declining in recent years.
Table 1 - Comparator Country GDPs
Country / Rural Population Share / Rural GDP Share / Agricultural GDP Share / National GDP Per Capita (Atlas) US$India / 72% / 28% / 23% / 460
China / 63% / 24% / 15% / 890
Brazil* / 49% / 11% / 6% / 3,070
Mexico* / 38% / 24% / 4% / 5,530
Turkey / 35-40% / 30-35% / 13% / 2,530
Poland / 36% / 29% / 5% / 4,230
*Rural GDP shares for Brazil and Mexico are expanded ag. figures including food and processed products.
Source: WB SIMA Tables, Own Calculations.
1.8Given the low agricultural share of GDP (12 percent), the relatively high share of rural GDP indicates that the rural off-farm economy is fairly developed. In addition, the variation of the relative size of the rural off-farm economy is not high as it ranges from a low of 53 percent in the Black Sea region to a high of 66 percent in the Central Anatolia region. In sum, the rural sector is large and off-farm GDP is the main source of rural income. However, compared to Poland which has a similar land tenure pattern, a comparable population active in agriculture (28 percent in 2001) and relatively the same share of agricultural value added per hectare (roughly USD 600/ha), the off-farm sector in Turkey is much smaller.
1.9This is because the industrial and service sectors need to expand further in rural areas, as they have in Poland over the 1990s. Over the last 25 years, industry’s share of GDP in Turkey has risen from 17 percent to 25 percent (having reached as high as 37 percent in 1996) and that of the service sector has risen from 50 to 63 percent. Agriculture has performed poorly over the same period, and agriculture’s share of total GDP has fallen quickly from 34 percent in 1970 to 12 percent in 2003. The declining share of agriculture within GDP is typical as a country develops, since land availability generally limits growth of agricultural GDP, while industrial and services sectors are not as constrained by fixed factors of production.
1.10What is problematic in Turkey is that the growth of jobs in the urban and off-farm sectors has not been sufficient to accommodate a larger shift of labor out of agriculture. In 2002-2003, agriculture continued to employ over 35 percent of the country’s total workforce. At the same time, land and labor productivity in agriculture have been stagnant[6], suggesting that Turkey has failed to benefit widely enough from global advances in agricultural technical efficiency. Thus, as long as labor demand outside the agricultural sector is relatively weak, and a large proportion of the total workforce is employed in an agricultural sector with lagging productivity, rural development policy will need to focus as much on increasing agricultural productivity as generating off-farm employment if rural income growth is to accelerate and contribute to poverty reduction more broadly in Turkey.
1.11Table 2 shows recent performance of the agriculture sector relative to the rest of the economy. The impact of the recent economic crisis has been especially noticeable in the agriculture sector. In 2001, while total GDP fell by 7.4 percent in real terms, agricultural income fell by more than 22 percent. But agriculture made considerable recovery in 2002, and 2003 growing by 7.1 percent and 7.6 percent respectively.
Table 2 - Agriculture Performance 1999 – 20031999 / 2000 / 2001 / 2002 / 2003
GDP (TL trillion, 1999 prices) / 75,101 / 79,203 / 73,326 / 78,915 / 83,468
GDP growth in 1999 prices / -4.9% / 5.5% / -7.4% / 7.6% / 5.8%
Agric GDP (TL trillion, 1999 prices) / 11,301 / 11,268 / 8,700 / 9,319 / 10,026
Real Agric. Income growth in 1999 prices* / -17.7% / -0.3% / -22.8% / 7.1% / 7.6%
Share of GDP
Agriculture / 15.0% / 14.2% / 11.9% / 11.8% / 12.0%
Industry / 22.6% / 23.5% / 25.1% / 25.2% / 24.8%
Services / other / 62.4% / 62.3% / 63.0% / 63.0% / 63.2%
Employment by sector (%)
Agriculture / 40.2 / 36.0 / 37.6 / 34.9 / 35.4
Industry / 17.2 / 17.7 / 17.5 / 18.5 / 17.8
Services / other / 42.7 / 46.3 / 44.9 / 46.6 / 46.8
* Change in agricultural GDP by using GDP Deflator.
Sources: State Planning Organization, State Institute of Statistics.
1.12Besides investment in irrigation and other infrastructure, the state has traditionally supported rural areas through a wide range of agricultural subsidies (especially credit and fertilizer) and direct government involvement in agricultural production, agro-processing, and marketing. Fiscal subsidies to the agriculture sector reached over 3 percent of GDP in 1999 - this was at a time when agriculture contributed just 14 percent of GDP.
1.13Such pervasive government intervention in agriculture has had negative consequences for the rural economy. It subsidized inefficient production technologies, discouraged production in sub-sectors where Turkey has comparative advantage, and hindered private sector involvement in rural markets. Moreover, the benefits of this policy tended to be captured by the larger farmers and more affluent regions of the country.
1.14Since 2000, government has been reforming its rural and agricultural support policies. This has involved the reduction or elimination of subsidies and, in partial compensation for these subsidy reductions, the introduction of a Direct Income Support (DIS) Program. At the same time government is gradually withdrawing from marketing and processing activities and cooperatives are being restructured. This has resulted in a dramatic reduction of net fiscal transfers to agriculture, which fell to 0.7 percent of GDP by 2003.
1.15Turkey’s National Development Plan for 2004-2006 emphasizes accelerated rural development for achieving national objectives of economic growth and poverty reduction. Achieving these objectives is likely to require further investments in rural infrastructure and in sustainable rural institutions that deliver critical services (technology transfer, rural credit, marketing, processing). In this respect, the challenge for government is to define priority areas where it can lead and other areas where it can promote private sector initiative.
1.16Growing inequality between regions is explained both by differences in the sectoral structure of production and in agricultural productivity. The lagging regions have more resources employed in agriculture and also in less productive sub-sectors of agriculture. Income levels in the richer provinces (Marmara, major port cities around the Aegean and Mediterranean coast) are converging, while poor provinces are falling further behind. Unlike in Western Europe, state transfers have played little role in equalizing incomes at the individual or household level. On the contrary, previous government support to agriculture in the form of input and price subsidies disproportionately benefited large farmers, and contributed to income inequality and the widening of absolute income differentials in rural areas. However, the government recognizes the problem of regional inequalities, and is attempting to address this through targeted spending (see Section 4.77- 4.79).
Sector Institutions
1.17Public spending to the rural sector is channeled through both central and local government agencies. This section provides an overview of the principal agencies responsible for rural sector spending, and a brief outline of current proposals for decentralized government.
Central Government
1.18Central government in Turkey is administered through a series of ministries and affiliated agencies. Ministries have field offices at provincial and district levels,[7] which are also under the authority of the provincial governors (vali) and district sub-governors (kaymakam). The provincial administration operates on the principle of de-concentration (i.e. a delegation of power from the central administration to the provincial level). Provincial governors and sub-governors are appointed by central government and have authority over the field offices of the central administration.
1.19The State Planning Organization (SPO) is part of the Office of the Prime Minister. It is responsible for advising and coordinating the activities of ministries and public institutions on economic, social and cultural policies, and preparing long-term development plans and annual programs.
1.20The Ministry of Agriculture and Rural Affairs (MARA) is the lead agency responsible for policy and public services for agriculture and rural development. It has four service directorates:
- TUGEM (Agricultural Production Development General Directorate): agricultural support policies, livestock development and implementation of various donor-funded projects.
- KKGM (Protection and Control General Directorate): regulatory functions, including animal health, crop protection and quarantine services.
- TEDGEM (Organization and Support General Directorate): education and extension services, and permits for cooperatives.
- TAGEM (Agricultural Research General Directorate): publicly funded agricultural research undertaken through a number of research institutes.
1.21The General Directorate of Rural Services (GDRS) was established in 1984 by merging three directorates: YSE (Rural Roads, Drinking Water and Electricity), Topraksu (Soil and Irrigation Works), Toprak Iskan (Land and Settlement). It is responsible for the provision of rural infrastructure services and (since 2001) reports to MARA. GDRS is mainly involved in the construction of rural roads, and developing ground and surface water resources for small irrigation and drainage schemes. It also provides safe drinking water to villages, and land consolidation and resettlement services.
1.22The General Directorate of Highways (GDH)[8] is responsible for the planning, design, construction, and maintenance of highways. It is an annex budget organization affiliated to Ministry of Public Works and Settlement.
1.23The General Directorate of Hydraulic Works (DSI) reports to the Ministry of Energy and Natural Resources. It is responsible for planning, constructing and managing large-scale water resources for irrigation, drinking water and hydraulic energy.
1.24The Ministry of Environment and Forestry (MOEF) was established in May 2003 by merging the Ministry of Forestry and Ministry of Environment. Its responsibilities include: environment management, environmental assessment and planning, forestation and erosion control, village forest relations, and the management of national parks. Reporting to MOEF, the General Directorate of Forests (GDF) is the principal agency responsible for the management of national forest resources. It is an annexed budget organization and majority of its activities are funded through a revolving fund (through the sale of timber and other forest resources).
1.25The Turkish Electricity Distribution Company (TEDAS) is the state electricity agency. Following the economic reforms of the mid-1980s there are now many privately owned firms also involved in the electricity sector. The distribution system currently served by TEDAS has been divided into 25 regions and long-term operating rights have been awarded to private investors in 14 of these regions.
Local Government
1.26There are three forms of local administration in Turkey: Special Provincial Administrations (SPA), municipalities, and villages. These are democratic governmental organizations established outside of the central administration, based on the principle of decentralization and with responsibility for the provision of local public services. They are locally elected and have their own budgets. Local administrations are coordinated by the Ministry of Interior through its General Directorate of Local Authorities.
1.27By the size of their budget, Municipalities are by far the most important level of local administration. A municipality must be set up in all province and district centers, regardless of their population. In addition, all settlements of over 2,000 inhabitants can request to set up a municipality subject to approval from central government. The municipal population elects the municipal council and the mayor. Core services provided by Municipalities include urban transportation, water supply and wastewater management, and solid waste collection and disposal[9].
1.28There are a total of 3,225 municipalities in Turkey. Most of them, however, are very small and more akin to villages and rural areas than urban centers. Overall, the average size of municipalities is 17,000 residents. Half of the urban population lives in eight ‘greater municipalities’, each of which includes several municipalities and has a total population over 600,000 residents. Municipalities of less than 20,000 inhabitants - which, together with villages, can be approximated as ‘rural’ - account for 20 percent of total municipal spending.
1.29Villages do not fall under the jurisdiction of municipalities, but are governed by an elected village headman (muhtar) and an elected council of village elders. Currently there are 35,140 villages. The village headman, as chief village executive, not only represents his village and takes responsibility for local services, but also acts as the representative of central government. While the law establishes a number of responsibilities for village administrations, in practice many of these are carried out, even if sporadically, by the provincial offices of central government agencies.
1.30The creation of Special Provincial Administrations (SPA) can be traced back to the late Ottoman period. Each province has an SPA. The decision-making body is the provincial council, composed of elected members on behalf of districts. SPAs are subject to the de facto control of the provincial governors (not elected but nominated), who are heads of the provincial council and whose ratification is required for all decisions and the budget. The functions assigned by law to the SPA are very broad (including health and social assistance, public works, education, and agriculture). In practice, SPAs perform these tasks only to a limited extent, partly because they do not have the necessary resources and partly because the central administration and its field offices often carry out these functions. Most SPA spending goes to rural areas - specifically to villages and small municipalities that have limited budgets.
Decentralization
1.31Government is currently reviewing a draft law to shift responsibility for the provision of certain services to local administrations[10]. If this law is accepted, a number of important rural services will shift to the responsibility of local administrations. These include services provided by the Ministry of Agriculture and Rural Affairs, Ministry of Environment and Forests, and some public works and health services. As part of these reforms, GDRS is to be abolished. Regional offices and field staff of these ministries (including GDRS) will be merged with local administration. Sayistay (Court of Accounts) will be responsible for external auditing of both central and local administrations, and will have power to establish regional and/or functional departments.