Module 1 - Turkey: Hybrid Adjustment/Investment Lending

In the late 1990s, one of the most critical issues in Turkey’s agricultural sector was the inefficient and costly system of agricultural support policies. Subsidies for fertilizer, credit, and price supports (mainly for sugar, hazelnut, and tobacco) were distortionary and failed to enhance productivity growth. These agricultural policies favored larger-scale farmers, were a heavy burden on consumers and taxpayers, and contributed to Turkey’s macroeconomic problems. Reforming this system was a primary goal of a dialogue initiated with Bank policy notes and workshops in 1998, leading to the inclusion of agricultural policy reform elements in the Bank’s Economic Reform Loan, effective 2000, and in an IMF macroeconomic stabilization package. The reforms are also important to assist the government in meeting preconditions for EU accession. Recent work in Turkey highlights the latest use of hybrid lending, moving the reform agenda forward quickly, but requiring “hands-on” coordination to ensure success.

Project Objectives and Description

The Agricultural Reform Implementation Project (ARIP) evolved from the Economic Reform Loan to ensure sustainability of the reforms, including the institutional change and the formation of sustainable institutions.

Two-thirds of the loan is for an investment program with objectives to:

• Substitute subsidies with an incentive-neutral support system of Direct Income Support (DIS) payments, made on a per hectare basis to partially mitigate adverse impacts on income when distortionary subsidies are removed.
• Facilitate farmers’ transition out of tobacco and hazelnut production through per hectare grants for switching to alternative crops (such as maize, soybeans, sunflowers, beans, vegetables, and medicinal plants) and to more efficient production patterns.
• Promote more efficient cooperative marketing channels by assisting the execution of the Law on Agricultural Sales Cooperatives, through restructuring and cooperative development programs and financing labor retrenchments.
• Build public support for politically sensitive reforms.
  

One-third of the loan is adjustment lending that seeks to enable the government to make up some of the anticipated shortfall in funds needed for the critical first rounds of the DIS payments in 2001-03.

Benefits and Impacts

A recent supervision report noted that the government is on track with key elements of the ARIP-supported program. With payments to over 2.18 million farmers, more than 50 percent of all DIS-eligible farmers were paid under the 2001 DIS Program, exceeding by four-fold the target 12.5 percent of all farmers to be paid. In 2002, direct and indirect agricultural subsidies (not including DIS) totaled US$1.1 billion, compared to US$7.2 billion in 1999. No new subsidies have been introduced.