<html><body><A class=eResources href="http://www.aei.org/events/eventID.611/event_detail.asp">Turkey at the Crossroads</A> September 22, 2003   <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="25%"> 9:30 a.m.</TD> <TD vAlign=top align=left width="75%" colSpan=2> Registration</TD></TR> <TR> <TD vAlign=top align=left width="25%">9:45</TD> <TD vAlign=top align=left width="25%">Welcome:</TD> <TD vAlign=top align=left width="50%">  Jeane J. Kirkpatrick, AEI</TD></TR> <TR> <TD vAlign=top align=left width="25%"> 10:00-11:45</TD> <TD vAlign=top align=left width="75%" colSpan=2> Economic issues: The Turkish role in rebuilding Iraqi economy, free trade agreements, and the Turkish economy</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%">Panelists:</TD> <TD vAlign=top align=left width="50%"> Deniz Gokce, Bogazici University</TD></TR> <TR> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="50%">Charles Johnston, Baker Donelson BDBC</TD></TR> <TR> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="50%">Reza Moghadam, International Monetary Fund</TD></TR> <TR> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="50%">Guven Sak, Union of Chambers and Commodity Exchanges of Turkey</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%"> Moderator:</TD> <TD vAlign=top align=left width="50%">Desmond Lachman, AEI</TD></TR> <TR> <TD vAlign=top align=left width="25%"> Noon</TD> <TD vAlign=top align=left width="38%">Luncheon Keynote Address:</TD> <TD vAlign=top align=left width="37%">Richard Perle, AEI</TD></TR> <TR> <TD vAlign=top align=left width="25%"> 1:15 p.m.</TD> <TD vAlign=top align=left width="75%" colSpan=2> Turkish foreign policy and Turkey's role in the New World Order: U.S.-Turkish strategic cooperation and Turkey's relations with Europe, NATO, Israel, and the United States</TD></TR> <TR> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="25%">Panelists:</TD> <TD vAlign=top align=left width="50%">Ilan Berman, American Foreign Policy Council</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="50%"> Gen. (ret.) James Jamerson, Lockheed-Martin and Turkish Aircraft Industries</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="50%"> Ilhan Kesici, member of parliament and former secretary of the State Planning Organization</TD></TR> <TR> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="25%"></TD> <TD vAlign=top align=left width="50%">Seyfullah Nejat Tashan</TD></TR> <TR> <TD vAlign=top align=left width="25%">2:45</TD> <TD vAlign=top align=left width="25%">Break</TD> <TD vAlign=top align=left width="50%">  </TD></TR> <TR> <TD vAlign=top align=left width="25%">3:00</TD> <TD vAlign=top align=left width="38%">Closing Remarks:</TD> <TD vAlign=top align=left width="37%">Turkey in the Twenty-first Century</TD></TR> <TR> <TD vAlign=top align=left width="25%"> </TD> <TD vAlign=top align=left width="38%"> </TD> <TD vAlign=top align=left width="37%"> Bernard Lewis, Princeton University</TD></TR> <TR> <TD vAlign=top align=left width="25%"> 3:30</TD> <TD vAlign=top align=left width="75%" colSpan=2> Adjournment</TD></TR></TBODY></TABLE> UNEDITED TRANSCRIPT PREPARED FROM A TAPE RECORDING <A class=eResources href="http://www.aei.org/events/contentID.20031003144313426/default.asp">View the transcript of the luncheon keynote by Richard Perle here</A>. <A class=eResources href="http://www.aei.org/events/contentID.20031003144712974/default.asp">View the transcript of the closing remarks by Bernard Lewis here</A>. Proceedings: MR. : [In progress] -- and, three, this growth in the Turkish economy has been achieved at the same time that inflation, which has long been one of Turkey's major afflictions, looks set to come down to 20 percent by the end of this year and would provide the opportunity for Turkey to get inflation down towards European levels, which would be important for Turkey's aspiration to at some stage join the European Union. What's also occurring is that the growth has taken place at a time that Turkey's debt, public debt to GDP, which formerly was very close to 100 percent of GDP, looks as if it's set to come down to something like 70 percent of GDP by the end of 2003, which, once again, is a very positive development. Having said that, what one has to recognize--and this was be the second point that I'd like to make--is that Turkey is currently being helped by a very favorable international financial situation. In the first place, you've got the multilateral organizations providing a lot of support to Turkey, that they've lent to Turkey very heavily in the past, and they have recently, in effect, rescheduled some of Turkey's payments. So Turkey does have a window in terms of the amortization of payments the next couple of years, that they aren't as heavy as they were before. What we also have is we have the United States talking about loan guarantees which would help Turkey in a financial situation to deal with its public debt. At the same time that that's been occurring, we have international financial markets awash with liquidity, so emerging markets in general have really benefited from a very favorable international financial situation where interest rates in Europe and the United States have been brought down to levels that we haven't seen in the last 45 years. And as a result, we've got money flowing into the emerging markets, and Turkey has been a beneficiary of that. As a result, you know, what one sees is that the Turkish currency has appreciated fairly strongly this year, something like 15 percent, and interest rates on Turkish treasury bills, which were as recently as March at about 70 percent annual rate, are now down to something like 40 percent, which is a whole lot more manageable. The final point I'd make before turning over to the panelists would be that experience tells us that international financial conditions cannot stay as favorable as they are right now for emerging markets for a prolonged period of time. In particular, as soon as the United States economy begins recovering, what one would expect to see is one would expect to see interest rates backing up, and that won't be a favorable outcome for emerging markets. It will pose a challenge to the Turkish economy in particular. So the third point that I would like to make is that this would seem to be the time that Turkey should be taking advantage of the favorable financial conditions to deal with the many vulnerabilities in the Turkish economy. I'm sure the panelists will deal with more of those vulnerabilities, but I'd just mention that a public debt ratio of 70 percent, while it's a very big improvement from what we had earlier, nonetheless is something that gives cause for concern. The IMF has come out with a recent study in the context of its Annual Meeting being held in Dubai, suggesting that emerging markets that get public debt ratios to the tune of 60 or 70 percent in the past have frequently run into crisis situations. So I don't think that a public debt ratio of 70 percent of GDP is an occasion for complacency. A second vulnerability would be Turkey's public finances that is related to the public debt situation but is something that needs to be dealt with, and the social security situation is a third vulnerability that would need to be addressed. I've probably said too much here. The panelists will know a lot more than I do about the subject, and what I'm proposing is that we would start with Reza Moghadam, who's sitting second at the table, who's the head of the IMF negotiating team to Turkey, is an assistant director in the IMF's European Department. He'll start with some remarks, 10 to 15 minutes; then we'll move over to Deniz Gokce, a professor at Bogazici University in Turkey, and after that, Guven Sak, a professor at Ankara University, will have some remarks; and finally, we'll have remarks by Charles Johnston, a partner at the Washington, D.C., office of Baker Donelson firm, and who's been involved with Turkey the last 15 years in counseling the American-Turkish Council. We'll then throw it open to discussion. Reza, perhaps if you'd like to start. x MR. MOGHADAM: Thank you, Desmond. Desmond has touched on most of the key issues, so I'm tempted to pass over and come back perhaps to some of the issues in the discussion. And I agree with most of the points that Desmond made, particularly the issue that there is a need for a strong Turkish economy if Turkey is to play a role not just in Iraq but regionally and globally. Often when economists from the Fund are asked to talk about economic issues, we tend to focus on the recent crisis and, because of the firefighting nature of the work we do, on the very short term. But I would like to take a little bit longer perspective today because I think that will be helpful to highlight some of the challenges in Turkey and some of the underlying problems. If one looks at two variables, say, from 1950s until now, inflation and growth, I think a very telling story comes out. Most countries, particularly emerging market countries, as well as industrial countries, faced an increasing inflation during the '70s, which was brought back down during the '80s. However, in Turkey, you see basically a trend increase in inflation from the '70s to last year. So you have inflation in the 20s in the '70s. It goes up to the 40s in the '80s. By the '90s, it's in the 70s--60s, 70s. So a very high inflation country compared to most of the emerging markets and developing countries. Inflation is higher almost the entire period. The second fact is growth. If you look between 1950s and the end of 1980s, you see reasonable per capita growth, 2.5 percentage points, which is respectable, in line with a number of developing countries, not as high as, for example, East Asia. During the 1990s, however, you see that per capita growth is almost zero, and when you look at the data for the entire period more closely, you see periods of high growth, 6, 7 percent, interrupted by many crises. And the latest of those--we had three crises recently, in 1994, '97, and 2000-2001. So this suggests a very high potential rate of growth, but perhaps policy inefficiencies, policy problems. So what are the sort of explanations for these two indicators. Why do they behave the way they have? Of course, high inflation indicates problems with the conduct of monetary and fiscal policy, in this case particularly fiscal policy, because if you look at debt in Turkey, it has had very much a rising trend since the '70s, and so by the time even of the 1999 crisis, debt was already at, I think, about 60 percent, very, very high. Debt with short maturity in a high-inflation context, so indicating basically continuous loose fiscal policy and probably also institutional weaknesses. And these weaknesses one can see in a number of areas. For example, in the banking system, because of the high-inflation environment, many depositors had shifted to dollar, so you have a very dollarized economy, while the banks were basically buying government debt. So on the one side of the balance sheet, you have domestic assets, but you have large foreign-denominated liabilities, causing a major imbalance within the banking system. Also, weak business environment. FDI in Turkey has been very low. It's still extremely low, indicating discomfort with the environment to invest in. Also, the fiscal situation, apart from not holding to policy tight, has underlying problems. For example, the decisionmaking on the budget is very much distributed among a large number of agencies. So even designing, controlling, and executing the budget is a very difficult task. So when you do have fiscal problems, it's very difficult to rein back government spending. And weak institutions, until very recently there was not, for example, an independent central bank or an independent banking supervisory agency. So by the time of the latest involvement of the IMF in 1999, we had an economy whose inflation was running in the 70s; interest rates of about 100 percent, so real interest rates of about 30, very high. In 1999, growth was negative. We were going through one of those phases of--it was minus 6 percent, sharp downturn. Very high debt, 60 percent. Current account deficit, widening current account deficit. And an interest bill for the government which was about 20 percent of GDP, extremely high. These are some of the problems, but there are sort of bright spots, too. Let me highlight one which basically emerged during the '80s. The Turkish manufacturing has been a vibrant sector, and if you look at any indicators of market share in any of the European countries or the U.S., the Turkish market share throughout the '80s is increasing through the '90s. And I think as an aside, it is interesting to note that Turkey started quite aggressive trade liberalization in the '80s, and perhaps one could conjecture that the two are related. And at the moment, for example, the manufacturing industry in Turkey is very liberalized. For example, there are free trade agreements with the EU and the European Free Trade Area, and for other countries, the tariff level is very low, about 4.5 percent. So as an aside, there has been a vibrant manufacturing sector. Now, given this picture, what has the IMF-supported program tried to do? Let me highlight some of the issues and some of the problems and some of the solutions, and then we can come back to it perhaps during the discussion. The number one problem at the outset was debt sustainability, with a very high debt, with a very high interest rate, high inflation, and a country which had access to the markets and wanted to maintain them. Debt sustainability was the major concern, both for the markets and the policymakers. When you have a debt problem, there is only one variable you can truly control. Debt will be basically determined, a part of debt, by your interest rate, real interest rate, by growth, and by the primary surplus that you can run. And among these, only one can be a policy instrument, and that is the primary surplus that the government can run. So obviously that suggests having to run a very strong primary--a very large primary surplus in order to turn around the debt dynamics. Now, of course, when you--in '99, in fact, the primary was in a deficit. The country was in a recession. The question is: When you are faced with this recession, is it wise to strengthen fiscal policy and run a stronger fiscal policy? And I think probably the record shows that it was the right thing to do because in a country which is faced with very high short-term debt and questions about debt sustainability, controlling the fiscal situation probably has a more positive confidence effect than its potential negative effect on the pace of economic activity. And, of course, by controlling the fiscal situation, you also help reduce interest rates eventually. Now, fiscal policy was also important in terms of controlling inflation because even if you had a central bank independence, even if you had moved to inflation targeting then, you had a situation where there was a classic fiscal dominance. So monetary policy was subservient to fiscal policy. So controlling the fiscal situation was also instrumental in enabling a reasonable monetary policy to be run by the central bank in order to control inflation. So that was the sort of second pillar. The third pillar I would call structural institutional reform. Now, that was built on the idea that to have a credible anti-inflation policy in a country which was plagued by inflation, you do need a central bank whose focus, whose mandate is entirely on inflation, within a context, of course, of fiscal dominance. So independent central bank was another element. Also, during the crisis, the vulnerabilities in the banking system really came out. I mentioned the vulnerabilities in the balance sheets. Of course, when you have devaluation, when you have high inflation, and a crisis does occur, the banking system is devastated. And the contingent liabilities which were in the banking system, of course, had to be brought onto the budget, leading to even higher debt. Basically debt went from the 60s to the 90s. But after this, if you like, the cleanup of the banking system has taken place, one needs to put it on a very strong footing, initiating sort of management and structures in the state banks which are professional and aimed at the core business and putting the rules of the game for the private sector, which put--which creates a level playing field as well as the efficient banking system. So that was another key part of the strategy which also involved having an independent banking agency supervising the banks and dealing with the problem banks. And the final part of the strategy was the slew of structural reforms. As I mentioned, there were enormous weaknesses within the budget structure, so changing the way the budget planning, execution, and control was done required institutional changes and legalistic changes--legislation to put the budget on a sound footing. And I mentioned the business environment. So the structural reforms also included, for example, putting a proper FDI law on the books, revamping the bankruptcy legislation, increasing the transparency of the public sector. To give credit for both the last government and the current government, there has been enormous progress, I think, since 1999, and those are transparent in some of the indicators that Desmond mentioned. This year it is likely that growth would be at least 5 percent. Inflation for the first time, I think, since the '70s has gone--is heading towards the 20s. It's heading towards 20 percent, possibly even lower. The government has managed to maintain a fairly strong primary surplus, despite some problems during the last elections. The fiscal situation has been held rather successfully. The reserve situation, just in the last two months, if you look at the activities of the central bank, you will see enormous inflows, which are not only inflows from outside but also reverse dollarization, people changing from dollar to the domestic currency, indicating that they have greater confidence in the way the economy operates and greater confidence in the banking system and in the policymakers. However, as--let me mention one other factor. Access to the markets has been maintained during the entire period. Of course, with periods of drought, but Turkey has managed to maintain access even during the difficult periods in the emerging markets. Of course, now we are going through a rather benign period, as Desmond mentioned, and the liquidity in the emerging markets is very good. But that liquidity for Turkey will not have been there was it not for the strength of policies and confidence in the policies that are being implemented. Turkey issued, for example, last week a bond on the international markets for over a billion with collective action clauses, which even six months ago for Turkey would have been unimaginable. So there has been enormous progress, but as Desmond mentioned and I would like to stress, the situation is still vulnerable and subject to policy slippage. I think the danger now is with such a turnaround, a barely marked turnaround in the last few years, policy complacency or a benign environment, benign external environment, which may not last, may lead to relaxation of policies, and that I see as a great danger because, unfortunately, the luxury is not there for Turkey to do that, not yet. Debt has come down from 90 percent to 70 percent, but a large part of that over the last year has been because the exchange rate has been stable. And almost the entire decrease from the end of last year to what is projected to be now has been due to the strength of the exchange rate. There has been a real appreciation. That could easily reverse, either because of sentiments in the engagements, because of regional developments, developments in Iraq, one of Turkey's neighbors, or domestic policy slippage. The maturity of debt has improved. Two years ago, the government was not able to issue domestic debt of longer than six-month maturity. Now they can easily issue more than a year. But, still, it's very short maturity, and so vulnerabilities are there. The financial institutions have been cleaned up, but we have not yet gone through a sufficiently long expansion mode to see if the modus operandi of the banks has truly changed. The supervisory agency is doing well but still needs to be tested. It still needs to establish a track record. The central bank has done exceptionally well. It has controlled inflation to enormous success. But the operational independence of the bank is new, and, again, the track record needs to be built. So I'll leave with a thought that although there has been enormous improvement in the last two, three years, we are still in a fragile situation. Thank you, Desmond. MR. LACHMAN: Thank you, Reza, for providing us with a comprehensive and a pretty candid assessment from the IMF's point of view of what the achievements have been and what the outlook has been for Turkey. Perhaps if we could have Professor Gokce make some remarks. I notice you have a slide presentation. I give the floor to you. x MR. GOKCE: Ladies and gentlemen, it's a pleasure for me to be here in Washington and to be able to address you. Obviously when you speak after an economist of the caliber of Mr. Moghadam, the only thing you do is to provide the charts to everything he said. But I will go beyond that. There are a couple of points which I need to make. I have about 20 charts, so we are going to spend 30 seconds per chart. If you need any copies of the charts, I can provide them. There is a copy of them available, and even if you want something more than that, we can forward them to you through e-mail. After the meeting we can do that. This is what Mr. Moghadam has been talking about. This is a quarterly growth chart of Turkey. As you can see, we call it the Turkish roller coaster. Turkey collapses within a year or two into a breakdown, but surprisingly gets out of it within four quarters. I'm not sure which mechanism pulls it out of these holes so quickly, but it does. So that's starting from '88 all the way to 2003. The second quarter is there. Very volatile in the '90s. The fiscal dominance which Mr. Moghadam mentioned, basically a tremendous budget deficit. Just take a look at 1999. That's when the program was put together with the IMF. Total budget deficit or public sector borrowing requirement is 24 percent of GDP. That was a world record in those days, and it still is the record, I think. Only Bulgaria for a very short time, for a quarter, went to 52 percent in the spring of '97. Other than that, we have a tremendous problem. And '99 is the time period when Turkey went over 60 percent net debt of the public sector limit, which is a Maastricht condition for Europe. And then in 2000, we really did not have much of an option because in an economy which was growing at minus 8 percent, two earthquakes, one election following the Russian moratorium, you couldn't really apply a strong monetary stabilization policy, so we had to take the risky road with the exchange rate anchor, and then we had problems with that. We probably are the proud owner of the title of having an exchange rate-based problem in the economy with the highest reserves of the country in its history and under an IMF program. That distinguishes us from the rest of the world. The gray area was the target that was established in 2002. We want to come to positions of fiscal picture which is similar to Argentina at the peak of its problems. So when Mr. Moghadam says there are still problems to be solved, a tremendous effort has been put together, but there is some distance to go, and the question I should be answering at the end is: Is Turkey going to do it? And I'll talk about that. He mentioned the high inflation after 1970s. That's when--1970s was the first petroleum crisis. We are going up the hill to the peak, and now we are coming down the hill, hopefully, and by the end of this year we'll be back to 1975 and might even be less than what was started in the beginning of this year. The mood in Turkey is very optimistic. The central bank uses a lot of expectations data, and the numbers are very optimistic, too, but I just am providing you private mood index, CMBCE(?). These are almost two years old now, and you can see at the right-hand side all the indexes--consumer confidence, retail sales, individual consumption, consumption trend, all sorts of indexes are on the up. All of this in spite of the fact that while the economy is picking up due to a large industrial exportation boom, the domestic demand is weak, and I'll show you in a second why it is weak. He talked about the dollarization. This is a very poor index of dollarization, obviously. It affects deposits over total deposits, but it shows something. The purple area, as you can see, with the red arrows. On the exchange rate base program, you would expect the public to switch from dollars into Turkish currency, which has not happened in that program. So the public did not support the program to the extent the government would desire. And now you can see the reverse dollarization is happening or coming down the hill, which means this creates an overvaluation of the Turkish lira because the public wants to switch from the dollars to TL. It is not a policy thing, but induced by the desires and expectations of the public at large, businesses, individuals, and so on. So, sure, overvaluation is overvaluation, but it's much better if the public causes it rather than a government policy of exchange rates. Here is the big problem. Turkey had two large banking segments. One is the government banking segment; the other was the private sector. We had hidden a lot of agricultural subsidies into the government banks to the tune of about $21 billion, all the way going back to 1994, and those have been cleaned out in this 2001-2002 stabilization process by issuing non-market-sold paper from the treasury to the central bank and other government institutions. They are included in the government net debt picture, but they are sort of not as bad as one thinks because, after all, last year the central bank had a profit and they turned a profit because of this paper to the treasury. So the interest burden is not as bad. And the principal, some of them are five-year bonds [inaudible], and whatever inflation remains will take care of some of that principal. So although the numbers, the debt numbers are relatively large, you have to take into consideration what we call the non-cash component of it, which is debt of the treasury to government institutions. On the banking side, obviously Turkey had serious problems. As Mr. Moghadam mentioned, the mathematics of the Turkish Government on finance were wrong. I mean, if the government is borrowing 80 percent of all funds in the economy and at rates 10 percent above the going market rates, if the government banks are offering 10, 15 percent higher interest than the private banks, obviously you are pushing the private banks into difficulty, liquidity and otherwise, to take more risk. But the cure has also been imperfect because you can start with the rehabilitation of the real sector and the rehabilitation of the banking system may be sequentially or simultaneously, but we ended up with starting with the banking system, which then left a lot of the real sector firms' loans as bad debt on the banks, for which they had to put up capital, and then the banks themselves got into difficulty, which they already had a lot of it, anyway. And so the cleaning of the real productive sector and the banking sector is still an issue which is going on, and I think Mr. Moghadam will have to wrestle with it a lot. But the net result of this has been that the real credit has been down in Turkey--one, because of the number of banks and their deposit base is declining; two, because of the lack of availability of credit. This is a chart of real credit stock which starts from '98. You can see the boom during the stabilization program, and then the collapse, the red line, all the way to half. This is why obviously the domestic demand component of output in Turkey is not growing at a rate which is desirable, although the industry and export side is booming. So we have right now a growth rate, the second quarter was about 3.9 and 3.7 of GDP and GNP. It is going to probably be close to the targeted 5 percent and might even exceed that. But if the mood continues the way it is now, the real growth might come next year, obviously, if nothing political interferes. This is a big problem in Turkey which needs to be ironed out. We realize the start is slow. It's starting to turn up because inflation is going down and credit is recovering. Some consumer credit, automotive, and some housing might be recovering soon. And so if it does, then (?) will turn up, and domestic demand will recover as a result of it. Why is all of this happening? Past-due loans as a total of domestic loans, it's very large--the blue one, 60, 70 percent, blue chart is government banks. This is partially because of the problems of government banks, but also partially because of the banks that were taken over by the government. They are now classified as government banks. Here is the net public debt plan that was made initially. The 2003, this was the initial plan, its scenarios. The 2003 plan where I have the 74.8 spending. That number is close to 69 right now, and if the exchange rate go the way they did in the past, as Mr. Moghadam suggested, then reducing the debt ratio is easier. It's very funny now. If you--the treasury calculates the real compound average interest burden on the treasury, real compound average interest burden on total government debt, that's about 4 percent in real terms. It's not 25. Because on the Turkish lira side, the average cost is about plus 13, and on the dollar-based side, it's about minus 9, minus 10, 12, depending on the period. And it averages out to real 4 percent, which means holders of Turkish dollar debt are subsidizing holders of Turkish lira government debt. And if there is any problem in Turkey, it turns around, the reverse will happen, obviously. The Turkish lira debt holders will subsidize, and I don't anticipate something like that in the near future--near future being a year. If you look at the current numbers, you can see that, including the second quarter of 2003, the GDP growth is averaging about 3.9 percent. This is sort of a 5-percent-plus chart, which is slightly better than the past average. Annual inflation rates, the two dots at the bottom are the target, 20 and 16 for wholesale and retail. I think we will overshoot these in the sense we will have inflation lower than this. I'm tempted to say that both of these targets will be erring about a percentage or two percentage points below, and that will take us all the way back to 1974. Mr. Moghadam mentioned overvaluation. There is a lot of crying and yelling on the part of Turkish exporters, but actually that's not a fair presentation of what is happening in the Turkish external sector. If you look at it, the Turkish external sector has a very strong trend. Blue is exports. A very steady, strong monthly export figure, and this chart has been accelerating partially due to exchange rate changes, growth rate changes, and partially due to increases export activity. The volatile component of Turkish trade business is imports, which you can see collapsed in the crisis, then was stale for the moment, and is increasing. But it doesn't look that scary because if you look at the foreign trade deficit, it is not as high as it used to be in the 2001 crisis. And there are two things which also have an impact on this other than exchange rate. Here is the central bank's real exchange rate chart. The real exchange rate looks as if it is overvalued by 30-plus percent, but you have to take into consideration that real wages have been down in Turkey dramatically, and the real interest rate is coming down. And both of these you have to compare with this overvaluation. I made a simple calculation, and a couple of other people did it, too. Due to the overvaluation, Turkish exporters lost about $3 to $4 billion over the last year, and the Turkish Government in debt service gained about $22 billion. Sure, overvaluation or undervaluation, it will help somebody, but I don't see any exchange-related difficulty in the picture. Here is the balance of payments number, $4 billion. Estimates can go up all the way to $7, $8 billion, which is about 3, 4 percent of GDP. But we also have estimates which say that by the end of the year we'll still be at $4 billion. Let's see who wins at the end. Looking at the Turkish debt, the external debt of the government--here's a breakdown--about $22 billion, central bank; $47 billion, private sector. The Turkish Government does not have any short-term debt, period. This makes it very different from the Latin America countries. And if you look at to whom the debt is, about $31 billion to international institutions, 21.5 to IMF. I hope Mr. Moghadam will tell us IMF does not intend to attack Turkey. So if you are making computations about Turkish debt service, the worry is not in the external side, and IMF has been very helpful in terms of changing the repayment schedule. So I'm not terribly worried about that. Here is, as suggested by Mr. Moghadam, where the problem lies. But I wanted to show this chart to you. The dark area, the reddish area, is what we call non-cash debt, which is one government organization owing another government organization. The blue chart is the market-based debt. And if you look at this debt, you see $126 billion of debt officially published as of last month. About $60 billion is to government institutions, about 65 is to the market, and the last line shows that about $36 billion worth of it is short-term, with four months due date. That's where we have to worry about it, but with the interest rates declining, that is not that big a problem in the foreseeable future also. I think a big area where this government scored is that primary surplus, which Mr. Moghadam mentioned, obviously, a couple of variables that are available or that impact debt sustainability, real interest rates, real growth, the primary surplus, and seignorage, or creation of money, which you cannot do excessively. And the primary surplus is important. In Turkey, we have seven budgets. Out of these, the largest is the consolidated budget, and we have the municipalities, social security institutions, and so on and so on, state enterprises. But the very large and important budget is the central government budget. You can see the yellow line at the bottom. The primary surplus is supposed to be 20.2 billion--quadrillion Turkish lira. It is as of August 15.5, 77 percent of its target now. This used to be an issue which was very sensitive, and I think the finance minister and the Treasury people are working hard to get rid of the worries on this account. So things look good right now on the fiscal problem side. Here are your interest rates on government borrowing. You can see the exchange rate-based program in the mid dramatically had reduced government borrowing rates. We wasted that opportunity due to domestic political struggles, and I'll make a comment about whether something like that is likely in the near future. Then we have the crisis with the peak. You should remember that in the 1994 crisis, the peak interest rate on a compound basis was 450 percent. This time around it was only 190. And inflation had skyrocketed in '94 to about 150 percent, here only to 90. So although the crisis was a larger one, it was much better under control in terms of interest and exchange rate results. Even the exchange rate there jumped from 14,000 to 39. In the peak of the crisis here, it only doubled, so it was contained much better. This is the secondary market. You can see here the election--the first crisis, second one, then the telecom crisis, which is purely political, obviously, and then the election [inaudible], and the improvement in mood and the Iraq impact and the post-war optimism there. So we are at that level now, and this is how the central bank is doing in terms of its overnight rates. Overnight rates, it's about 29 percent, the latest overnight quotation of the central bank. I think they are doing fine. I think they are fine central bank, being patient enough, although the Turkish general public doesn't understand this. We want exchange rates to move now and the interest rates to come down now, which is not possible given the economic structure and the accumulated problems over the years. One more time, here's a set of numbers I can [inaudible] the current 2003 external debt service of the government was $11.5 billion, of which 7 is principal, 4 is interest. That's a small number given the size of the Turkish--so the problem in Turkey is managing the domestic side of the debt. And here is a chart about the central bank. The red line shows the open position or the surplus position of the central bank in terms of foreign exchange. It hurts me to tell you that on the left-hand side the central bank had an $8 billion surplus position vis-a-vis its external debt, which is when we had this crisis in November and in January. And there was [inaudible] foreign exchange out of the central bank from 8 billion plus to about 11. That's about $19 billion reversal in a $40 billion central bank balance sheet, but about international reserves of $40 billion, that was too much for the markets to shoulder, so we had the difficulties. Then came the IMF help. You can see the straight line jump up. That's assistance by the IMF. And the central bank recovered now to a square position. We are about $40 billion worth of reserves, of which about 29 or so are in the central bank and about 11 at the banking system, and the short-term debt of Turkey is about $15, $16 billion, so things look good and the central bank is under control. The blue part shows the extent to which the central bank is doing open market operations to siphon some of the liquidity because when they buy foreign exchange, they provide Turkish lira liquidity and they're in control. Okay. That's roughly what Mr. Moghadam suggested in charts. IMF economists talk. Liars use statistics. I provided the lies for you. [Laughter.] MR. GOKCE: But I would like to add a couple of things to all of this, because with this picture, the question in your mind should be: Okay, it looks fine right now, what about six months, a year, two years from now? And there I'm going to make a defensive speech. It's part of my nature. I used to play goalkeeper in a professional team, and when I played basketball, which I did eight years in the league in Turkey, I used to cover the best player of the other team. So be ready for a defensive statement here, okay? If there was an election today in Turkey, if there was an election, it's my judgment that AKP, or the Justice and Development Party, would improve its percentage. This is not only my opinion, but there are a couple of private opinion polls, and pretty soon they are going to have local elections and you will see that this will happen. So the public supports the current government while the other people do not. We need to emphasize the fact that the period since the election in 2002 has been a period of great political change in Turkey, much more significant than what I have experienced in the last 20, 30 years in Turkey. Let me mention here, I spent the year 1970 to '82 in the U.S. teaching at Emory University in Atlanta, and I've been back to Turkey the last 20 years teaching at Bogazici University, but I closely followed every day of economics and politics. So I'm giving you a sincere statement about where things stand. The establishment in Turkey does not really understand the extent of the change that is happening in Turkey. I'm afraid some of our friends in the West also do not fully understand what's going on in Turkey in terms of domestic change. In Turkey, in the last 20 years, the public vote has been shifting toward the center and to the right, such that a big part of the vote is now center and to the right of the political spectrum. And the extremes have a small weight, but there is a hollow(?) area between the extremes and this middle or to the center vote. And it was very clear to any political observer that the mood in Turkish politics would be changing, although a part of the media, universities, bureaucracy stayed on the left or in other extremes, right extreme. Now, before this government, when we talked about people with Islamic convictions, I used to call them--we had what is called an Erbakan syndrome. Mr. Erbakan, who was Prime Minister in 1996 to mid-'97, he was a typical Third World sympathizer. He did not get along real well with the West, not well with the markets; democracy, well, he had problems with it. And I think his implicit goal was to distance Turkey from the West, from the market economy, and somewhat from the democracy, the type which you and I know and like. On the economic policy side, he was an unbelievable populist, a state rule fan, and he was in favor of some degree of authoritarian polity. So he had great difficulty with such concepts like tight fiscal policy -- [tape ends]. -- programs and so on. Now, this was the picture in 1997 in Turkey. Now, AKP people, some of them come from a background of Mr. Erbakan's party, but they have evolved into something which is very different from this. It's unbelievable the extent of change in the makeup of this party. They have become sort of a strong agent of change in Turkey. When you look at why this has happened, Turkey had a bureaucracy or governments which were based on people coming from the bureaucracy which had, as the French would call it, "etatiste," state-oriented infrastructure. But this government probably is the most pro-business, the most pragmatic government that ever came to Turkey. Sure, they are going to have problems when change of this kind is happening as rapidly with people who are relatively inexperienced in bureaucracy or in political life. But I am underlining the fact that they are the most pro-business and most pragmatic government we've had in the last 20 years that I've been able to observe Turkish politics very closely. For AKP, the market economy and private ownership present no problem at all. This is in great contrast with former leaders such as Mr. Ecevit or Mr. Inonu or Mr. Bikel (ph) and others. I'm just getting your attention on the fact how quickly and intelligently Mr. Finance Minister Unakitan pushed the pragmatic tax reform package in a very short time, sort of providing bribes to people who were willing to pay a little bit extra tax by virtue of eliminating some of the past or current tax sins in exchange for current support of the tax program. So very pragmatic. Initially, I have to admit that as a journalist, as a teacher, as a television commentator, and as an economist, I was afraid that with an absolute majority the government would undertake a lot of populism to ensure the next election. But time has shown, the seven, eight months that they have been very active, that they were willing to operate under a fiscal constraint much better than any government I have seen before in Turkey and quick to undertake legal measures toward that goal. Whether it is IMF pressure or whether it is the stick of the markets under a floating exchange rate system, they ended up performing what is necessary (?) , and this makes me feel much better. Now, so, I'm going to be very clear about this. Here currently they have a civilian Islamic-oriented movement in Turkey pushing an Islamic country toward integration with the rest of the world and with democracy, and if I may use this long phrase, this is not happening in spite of Islam, but it is happening with Islam. That's interesting. That's an experiment new for Turkey, and I think it's also a new model for the world, a new experimentation. So you should make an attempt to understand what is going on and follow it. Now, all of this obviously does not mean that the government has been sailing smoothly. It hasn't, for example, the relationships with USA. Well, everybody knows USA has been a very strong supporter of Turkey for 50 years. I think all Turks know this, and most of the people present in this room also know it very well. We don't forget it. I keep teaching it to my students every day in class that in 1999, when we were really down--(?) moratorium, bad elections, two earthquakes, big problems with everybody around us--it was USA that convinced Europe to be gentle toward Turkey in Helsinki, and they helped solve the (?) problem and helped improve relationships between Turkey and Greece and Turkey and Israel, and asked the IMF and World Bank to give extra support to Turkey by the end of 1999. I think everybody in Turkey knows and appreciates this U.S. effort. Now, next to this we have to put these parliamentary resolutions relating to Iraq. U.S. has been disappointed with the first parliamentary resolution in March. But you have to understand, by March there was a very strong polarization in Turkey. There was no gray opinion in Turkey. There was either white or black, and this was a situation that the government did not have the full confidence yet, a couple of months after the election, and they were bogged with the Cyprus issue with Europe, stabilization program with IMF and World Bank, Iraq with USA. And although the business community fully supported the first resolution, the isolationist elements in Turkey as well as the pro-Europe forces in Turkey, which are relatively strong, were against this Iraq resolution supporting U.S. It was too much too soon to handle for the government, and sort of they tried to withdraw and wait and see what is going to happen--an indecision, if I may put it that way. But today the reality is very different, both domestically and internationally. I think today it is very difficult for the Turkish Government to say no to the recent parliamentary resolution towards the participation of Turkish military forces in the security operations in Iraq because there is no war issue today, only a transition period. And I think the government is going to take a strong position in this. But there are problems in Turkey. If I as a Turk who has lived four years in Germany and 12 years in USA try to look at this situation, there exist a lot of uncertainties in the minds of Turkish politicians in terms of what USA wants to do in Iraq exactly and with Europe exactly. Now, these are issues which are being debated here, in Europe, and in Turkey. But Turkey does not have a clear picture of where U.S. wants to go. I'm not trying to make an excuse for the government, but this is really the situation. People are trying to assess what is to come and how should we position ourselves and so on. I'm of the opinion that if USA should put in front of the whole world a clear road map in terms of Iraq and its relationships with Europe, then I think the Turkish Government is going to clearly see what is going to be its duty, and I think it will side with the U.S. position in these issues. They are right now in confusion about the exact nature of where everybody wants to go. Turkey is not forgetting the historical alliance with U.S. Obviously, this is a short-term event. In the long run, these short-term political and military events fade away, and economics comes to the forefront. And the long-run salvation in the region and in Turkey and Iraq and Syria, Iran, whatever this region is, obviously will be based on economics, on strong trade, on strong business relationships, and I feel like Turkey has a bigger role to play here and Turkey is ready to play this role, but due to different reasons than the past. Turkey is changing rapidly, and in the past I have visited a lot of meetings of this kind. The issue always was about the real estate value of Turkey, which meant the location where we are in, in the mid of all the problems. And so a pro-West country in a region where being pro-West is a liability, so real estate value, we were important against Russia, Soviet Union; we were important with the U.S. and the East, and so on and so on. Now, I think today the game has changed. Today, the real estate value is not of importance in Turkey. So the importance of Turkey today with this change, which even Turks have difficulty in understanding in Turkey, is not derived from where Turkey is located, real estate value, but where Turkey wants to be. Turkey does not have anymore an exaggerated sense of its real estate value. So what I'm saying is U.S. needs to show us the road map. Border proximity is not so relevant. What Turkey can do in this region is important, and I think a large number of people understand the fact that Turkey can contribute a lot. I just wanted to make this statement here in addition to economic statistics because, sure, economics is important, but in the long run, where Turkey will go and where the region will go and where the U.S. interest will go depend a lot on this changed perception of Turkey. Thank you very much. [Applause.] MR. LACHMAN: Thank you very much, Professor Gokce, both for the charts, which we'll try to make available to anybody who would like them--it really provides more than a comprehensive picture of the Turkish economy--and your latter remarks, you know, certainly provide a lot of food for thought, and I'm sure we'll be picking up on this in the discussion. I'd turn now to Professor Sak. I give you the floor. MR. SAK: Thank you. Regarding economics, they said everything that I would say about the Turkish economy. MR. GOKCE: [inaudible]. MR. SAK: Yes, you showed the numbers. What I'm trying to do is to start with the economic program, what we are trying to do in Turkey nowadays, and then try to bind it to this Iraqi affair and try to discuss a little bit about what Turkey could do on the Iraqi reconstruction. And I'll move a little bit towards foreign affairs, which is an area that I don't have any idea about, so I can freely talk about it. I came to Washington last Tuesday, and I feel a tension in the air. You know, we were all here discussing that the program is on track now in Turkey, the economic program. Even today, when you look at the market figures, there is no problem. Interest rates are coming down. The TL is appreciating. That's a good thing in this context with the huge debt stock. Inflation is coming down. There is no problem until the end of the year. And, in addition to being on track, the program is working so the program itself is building its own credibility, to. And, in addition to that, although the debt stock is considered as a negative thing, as a negative issue, as a sign of vulnerability, I believe that it's also the defense mechanism of the program itself. Because when the exchange rate--when you float the exchange rate, when the central bank is not intervening in the market very much, when the float is clean, then it tames the politicians. The debt stock, the dynamics of the debt stock itself tames the politicians. So it's not very important what the politicians are thinking about. They may think to leave the program on one day, but the next day, with the market parameters reacting to that situation by the help of the huge debt stock, they learn that they have to stay on track. The debt mechanism worked in Turkey in the last two years. I mean, with that coalition government it worked. It worked during the transition period. At that time, when you look at our announcements at the central bank, you could see that we have mentioned that this is a mechanism, this is a defense mechanism of the program itself, so there is no problem until the elections. We are pretty sure that everything is going to be on track. We made that announcement before the--four or five months before the elections, as far as I remember now. So everything looks to be fine, so why then is there this tension thing in the air? We have to deal with that. That looks to be an issue much more related with foreign affairs. It's an issue much more related with Iraq, I think. Let me say a few words about Turkey, the transition process that we are in now, and then try to tie it to the Iraqi case. It's good to start with the name of the conference, "Turkey at the Crossroads." Ambassador Kirkpatrick has mentioned there are frequent crossroads around, turning points, and transition periods, too. We are in Turkey in a transition period in the last two decades. We trying to build the basic institutional structure of a market economy in the last two decades. We weren't successful up until now, but after these two consecutive crises in 2000 and 2001, we have learned that there is something seriously wrong in the organization of life in the country. And we have learned that we have got to change it. And this huge debt stock now, which also shows that there is a problem in the economy, is helping us to make this change. Mr. Moghadam was mentioning that there are other crises in the old times. Yes, we had crises in late 1970s. That's when we decided to start establishing the basic institutional structure of the market economy in Turkey. We weren't successful up until the--throughout the whole 1980s and 1990s, we couldn't--we did not manage to change the state apparatus. The public sector reform we couldn't do up until that time. And then we had this crisis, and now we are changing. So we are at a crossroads. We are at an important crossroads, that's for sure, and I believe that this economic program also leading to a redefinition of the role of government and state in the economy, in the Turkish economy, and also in Turkish society. So the economic program itself is beyond economics regarding its impact, so it is a major crossroads for Turkey when I look at it that way. Regarding Turkey-U.S. relations--so now I can talk freely from now on--are we at a crossroads? No and yes. No because, I mean, the shared principles, the market economy, democracy, those principles are not changed. But the object of analysis now, the area of interest changes. You know, it was the Soviet Union at one time. It was simpler at that time. The real estate value I think was working better at that time. Then it was the Balkans, the Caucasus, and now it's becoming the Middle East. I mean, the Middle East, as we know, is becoming Iraq. So the only change is in the area of interest. But when you look at Iraq, for example, it is, again, an area of shared interests between the U.S. and Turkey, and the interests of the two parties, in fact, juxtaposes in the case of Iraq. This is not the first time that there was instability in Iraq, and this is not the first time that we feel security threats. This unfinished war in 1991 created instability in the region at that time. Iraq was unstable at that time, and we have learned that instability in Iraq is not good for Turkey; it's bad for Turkey. We have learned about that. And we paid a price for that, not only for economy-wise but also for security-wise we paid a price for that. Now, after the intervention, Iraq today is more unstable. So it is fair to say that Turkey could not just idly wait for the U.S. to fail in Iraq. I mean, it's not possible. We have learned what instability in Iraq could lead to in Turkey, so this problem has got to be--it is a problem of Turkey as much as the problem of U.S. I don't think--at this point I don't understand this tension thing, tension in the air. It may be because of this hurricane maybe. It is not a question--when I look at Iraq, it is not a question about what should be done. There is an agreement on that. When I was in Ankara, there is an agreement on that. I mean, Turkey could not wait idly, and we all know that a U.S. success in Iraq is a must for Turkey after this initial status quo in Iraq (?) . Something should be done to this instability thing. So I see that the interests of both parties coincide totally on Iraq. Although there is no question about what should be done in Iraq, there may be differences on how we should do it. He mentioned a little bit about that. Maybe I may go a little bit more on that issue, how we have to establish stability in Iraq where we have to start building stability in Iraq. If there is some kind of a tension in the air in an environment where there are shared interests, where there is mutual understanding of the issues, if there is still that tension in the air, then there is the need for more open, candid dialogue between the two parties. That looks to be a necessity. Deniz has mentioned that there is the need for Turkey to see if there is light at the end of the tunnel. What is the picture that's going to emerge at the end of the tunnel? But as far as I understand, if both sides trust each other, trust the intentions of each other, through an open dialogue they both trust the intentions of each other, I don't see any problem, and I don't understand this tension thing in the air. So that's why I'm saying that it might be because of the hurricane. When I look at the reconstruction of Iraq, I have some more--and he talked a lot. When I look at this Iraqi reconstruction, there is the need to define what we understand from reconstruction in Iraq. And this part now is from a report by Chambers of Turkey. They have prepared the report on how Turkey could contribute this Iraqi reconstruction thing. I don't work for the Chambers of Commerce, but I have dialogue, let's say, with them. Regarding the Iraqi reconstruction, we have to define what we understand from this, how we can approach this problem of Iraqi reconstruction. There is first the need to restore law and order in Iraq as quickly as possible. That's the first place. There is a security issue. Fair enough. That's okay. And, secondly, with the playground ready, with stability and no unrest on the ground, then the reconstruction effort itself could start, rebuilding effort. We have a basis to start that, and I believe that Turkey has a role to play in both instances, in both phases. But it depends on, you know, how you define each phase. For the first phase, for example, I believe that although the issue is security, the first phase, the establishment of law and order in Iraq, is not solely a military affair. It is also very much related to improving the living conditions of Iraqi citizens. So there is the need for some economic measures at the first phase and to increase the well-being of the Iraqis also. Otherwise--many countries tried that and it failed. You deal with the mosquitoes but you leave the swamp there. So you also have to provide basic necessities into the region, into Iraq, to normalize life in Iraq as quickly as possible because those things are not there. So the supply of refined products are important. There is the need for Iraqi money, the Iraqi oil production to take effect. In order to do that, there is the need for electricity in the region. There is a need for some energy to start pumping oil besides the security of the pipeline, of course. There is the need for consumption goods for everything in this. So there are some economic measures. It's not simply military measures. And law and order, establishing the law and order part. And the second part, when I see reconstruction effort, it's much more like a World Bank program. There is the need for a private sector development program in Iraq, and it is not going to be like, for example, German reconstruction because the basic institutional structure is not there. It has to be established. And I believe that it is not like the East European reconstruction, too, that there is going to be a meeting now about, whether the East European experience could help Iraqi reconstruction. But there is the need for more basic institutional structure to be established. And I believe, Professor, that there are much better people to discuss those issues here, but let me also add a few words about the possible impact of an economic development program, private sector development program on changing Iraqi society. When people from the West are discussing our societies, they call it Islamic societies. When they discuss it, these religious relations, tribal relations, becomes of primary importance. They are important because they are institutions in an institution-less environment. That's what I see. If you establish through economic reform programs also, through private sector development programs also, new institutions, you will see that they are not that much pervasive in the society. That's what I believe. And I believe the Turkish example is not only related with this (?)-ism, the secularism, and unitary state, et cetera, those things. But it is also related with developing this institutional structure, a new institutional structure through economic reform programs, economic development programs also. So I believe that this part, the second part of this reconstruction effort, if it is seen as a private sector development program, it would be very much helpful. So does Turkey have a role in this process? I believe that Turkey has a role in both phases, not only in providing security, some sort of security in the region. I believe that the tension is related much more, you know, on this overemphasis on this one issue only. But if Turkey is also important to improve the living conditions of Iraqi citizens very quickly, Turkey is important in making the Iraqi oil to come to the market as quickly as possible. Turkey is important to provide electricity, to provide consumption goods, et cetera. The Chambers of Commerce are also preparing another report to the Turkish authorities to make the border, the (?) border gate more effective, for example. And I understand that Turkey is very important because the Turkey Chambers of Commerce has--Commerce and Industry, they have this Council of Foreign Economic Relations or there are Business Councils with every country. I asked those people about what they are discussing, how many Business Council meetings lately they had. They have meetings with South Africans, with Denmark, with Netherlands, with so many countries. And the major issue is let's establish a partnership to do something in Iraq. So I gather that Turkey looks to be very much important, but when I look at those discussions at the Council on Foreign Economic Relations, I gather this. There is also a role for the second phase, too, for Turkey, but for Turkey to achieve that role, we have to complete this transformation process of the Turkish economy first. We have to deal with this program. We have to stabilize the Turkish economy. We have to solve our economic problems. So we have to make Turkey a viable ground for business investments, because I believe that when I look at Turkey-U.S. relations, up until 1980s, or 1985, there weren't any discussions in Turkey about these textile quotas. You know, not that textile quotas were established, were put after 1985, but Turkey has changed with the 1980 reforms. We started to increase our exports. So I believe that with this economic transformation program, it becomes a more viable environment for investments, for U.S. investments this time, and only with that transformation, not only economy-wise but also with the changes that this economic program brings in Turkish society, Turkey is going to have some kind of a more active role in the second reconstruction efforts in Iraq. Let me stop here. Thank you. [Applause.] MR. LACHMAN: Thank you very much, Professor Sak. I really appreciate your broadening the discussion to the role that Turkey could be playing in Iraq. Finally, let me turn to Charles Johnston for his remarks. x MR. JOHNSTON: Thank you, Desmond. I will be mercifully brief, and then I hope we'll have a lively discussion because I'm sure there are a lot of people out in the audience who have some comments and/or questions. I'm talking to you really from the perspective of the business climate in Turkey. You've heard very erudite presentations regarding, if you will, the macroeconomic issues, and certainly some of the political issues. I'm going to try to bring it down, pardon me, to Earth. I represent many different companies, both United States and Turkish, in trying to actually make a buck--or a lira--in this current environment. And what I'd like to do is present to you what I perceive to be the business perspective of Turkey at the crossroads and perhaps a little bit tainted by an American's point of view versus a Turk's. Now, for the last 40 years, of course, Turkey has had some very strategic importance to the United States, but as an economic, if you will, partner, it's been relatively minimal. Only until Turgut Ozal came in in 1983 did Turkey start to really try to move out of its statist economic situation, tried to privatize, tried to become more of a market economy. Ozal's programs obviously were quite effective, but for a time. My own personal opinion is that Turkey became almost in a quagmire with Ozal's programs after a while. It became so obsessed with Ozal and the success that it did see in the early '80s that it failed to stop--while it failed to continue to think about programs and privatization and market economies, it became too comfortable, too convenient to think proactively, rather thinking retroactively. And Ozal's programs, in my personal opinion, actually became exhausted in the '90s. But Turkey and its political leaders as well as its business leaders failed to take the ball and move it forward. Those two groups seemed, in my opinion--and I've been doing business with Turkey now since 1985, have known many different political and business leaders in both countries, and it strikes me that the buzz word for how both government and business reacted to what was happening economically in Turkey as well as in the relationship with the United States was reactionary. It was solely reactionary, and it was very frustrating from where I sat to witness this because Turkey is--of course, its potential is huge, as we all know. Now, when the Cold War finally was over, Turkey realized its strategic importance was no longer strong, as strong, and that perhaps it had to create a new image. And, of course, as business people looking at Turkey as a strategically important partner, there were certain lines of business the United States particularly was pursuing, particularly in defense equipment. But everything else was very, very meager, minor. Turkey then says to itself, All right, where are we now that the former Soviet Union is no longer really a problem? Our value to the United States is significantly diminished. What do we do now? And the policymakers at that point in time started thinking, okay, our new image is going to be that we are an economic and political role model for the region and for Islamist countries. And I subscribe to that. I think that's a very healthy political image and an economic image to pursue. But, unfortunately, there are many hurdles that Turkey, sadly, had implanted and has been very, very hard-pressed to remove. And let me give you a list, again, from a business perspective, of what Turkey's problems currently are, if you will, in the trenches of dealing with day-to-day living. Political instability, as we all know, constantly rocks the Turkish economy, and certainly political instability sends shock waves into other parts of the Turkish economy as well as its government. Turkey has still an excessive bureaucracy. Now, there are efforts, obviously, being made to trim that, but if you look at it historically, it still sort of harkens back to Ottoman times in many of our Western perspectives. It has, sadly, a very weak judiciary, a weak track record in the courts that Western businesses have very, very little faith in. There is a frequent and confusing legal and regulatory changing environment. If you're a business person and you've been trying to do business in Turkey for the last ten years, you would lose count as to how many different times the laws and the regulations and who makes the decisions and where do you go to try to invest, try to do business with Turkey, it's truly awesome. Finally, but sadly, probably the most important problem is the reputation for corruption. The Turkish Government is and has been for at least the last ten years too well known for at least reputation of significant corruption, and it has grown and it has escalated. Since Ozal, it has become horrific. Now, my feeling--and, again, this is my own personal opinion--is that not only has this corruption problem been in government; it has now heavily infected the private sector. The private sector of Turkey now from a Western perspective--again, in my opinion, but I think it's a somewhat educated one--is that Western companies now view Turkish companies as corrupt. The Yuzons(ph) have not helped the Turkish image, none whatsoever. There are many other Turkish companies and many different horror stories that I can tell you as counsel to the American-Turkish Council where Turkish companies have simply abrogated their obligations and basically said "Catch me if you can" to the Western companies that they were doing business with. This is a reputation that does not change overnight. You can have macroeconomic policies and a positive balance of payments and all these other things that make Turkey look good economically, but business perspectives and business reputation is what drives these economies eventually. And Turkey has a very long road to hoe in order to improve this reputational problem. Now, yes, it's adopted reforms--banking reforms, foreign direct investment law--the new foreign direct investment law is very impressive. It's now embarking on a more aggressive privatization program. At least that's what we're being told. But I have to point out to you that when one looks at these reforms, if you will, of late, they've all been driven by external forces. These are driven by the IMF. These are driven by European accession. These are not internally motivated, and I have to question and wonder just out loud, Why not? And what does that say about Turkey's ability to follow through and implement these programs? Because as we too well know here in Washington, you can adopt a law, but whether you make it happen is a totally different story. And one wonders whether simply adopting legislation is what's going to improve the situation for Turkey as a venue for Western business investment, for Western business activities. Let me also point out that with respect to Iraq, there are just stupendous opportunities, obviously now basically driven by U.S.-funded contracts through the Agency for International Development or the U.S. Army Corps of Engineers, and that's something for Turkish companies to be chasing, if you will. One of the problems, for example, that I have direct contact with is with the Turkish construction industry. There were 16,000 registered Turkish construction groups approximately two years ago. The United States has about three. The changes, the reforms that have been drive now and have been adopted, putting a real crunch on credit, are going to start and are taking their toll on this huge construction industry in Turkey. This is a crisis, and this crisis--unfortunately, all the Turkish construction groups think, Aha, I will flock to Iraq, I will follow the Americans, I will follow the American money, and somehow I'll get bailed out. But what's happening is there is a huge consolidation going on in the Turkish construction industry, and there are only going to be a few survivors left. How the government is going to contend with this I'm not sure. But that state money has dried up, and you can go into Turkey and you can talk to anybody in the construction business and they will tell you people are out of work. That is having a huge effect. Is Turkey a natural ally for the United States insofar as Iraqi reconstruction is concerned? Absolutely. Look at all the neighbors of Iraq. Where are they going to draw--where is the Coalition Provisional Authority and the new Iraqi Government, where are they going to draw the expertise? Where are they going to draw the raw materials and the supplies, the manufactured and industrial supplies, for the reconstruction? From Syria? No. Saudi Arabia? No. North? Turkmenistan? Iran? No. Turkey is the natural source of expertise and raw materials and building materials. And, hopefully, our government, the United States, will recognize this, but also I think the Turkish Government has to take recognition of this, and the business community has to take recognition of the fact this is a long haul, reconstruction. So don't just put all your eggs in the U.S.-funded-contract basket. Move into Iraq on your own and consider this to be a ten-year period for opportunity. Last, let me point out something that I think I'm very fearful of, and I was talking to my friend here from the IMF about it before we started. Yes, Turkey has seemingly its grasp on the situation with respect to debt payment. But let me point out something to you. Turkey's external export earnings are derived from three different main sectors: one is textiles; second, interestingly enough, is gemstones and jewelry; and third is steel. Now, of these three, we are looking in the next several years at what I can only call is a completely dysfunctional market. Textiles, as we know, the quota system is going to expire at the end of 2004. What is Turkey doing to develop a game plan to address the fact that it is not the low-end producer, it does not have recognized styles, it is going to be frozen out of so many of its major consuming markets without two years? And that sector alone employs God knows how many people within the Turkish economy who are going to start looking for other places to work pretty soon. They're going to have to. So textiles is in a crisis situation, and I submit to you simply the question: What is Turkey doing about that? I don't think they're doing anything particularly visionary. Steel, same thing. We're talking about a subsidies agreement in the OECD. We're talking about a major export earner right now. But Turkey is not necessarily the low-end producer. China is the gorilla on the block. And what Turkey is going to do with respect to the competition that it has to contend with in these two vital export sectors in the next two to three years is truly a challenge that Turkey should address today. I appreciate being here today, and I look forward to questions and participating in the rest of the conference. [Applause.] MR. LACHMAN: Thank you very much, Mr. Johnston. We get yet another perspective which I think really enriches the discussion that we've had so far. I'd like to throw this open to questions, but before that, I'd just take the prerogative of the Chair just to ask one question which seemed to be pretty important on the economic side in the discussion, and that was the issue of debt sustainability. I think that's the point that Mr. Johnston raises at the end, do raise certain concerns about long-run growth. My question would be to Mr. Moghadam and to Professor Gokce, respectively. If Mr. Moghadam could just indicate what are the conditions for debt sustainability to work out in the Turkish context, you know, particularly if we have Europe somewhat under stress with an appreciating euro and recessionary conditions, if that's permeated for a while, what would the conditions be for debt sustainability? And, Professor Gokce, I can't resist asking you for your view as to how does the debt sustainability situation play out. You know, you indicated that that is a key question with which you're concerned, and then I'd like to throw it open to the floor. MR. MOGHADAM: Thanks, Desmond. This is also a question which we have been grappling almost constantly with because, as I said, that's at the heart of macroeconomic stabilization. On the face of it, the macroeconomic indicators that would ensure debt sustainability are not beyond reach. They are certainly within reach, and I think an indication of that is simply what has happened over the last two years. The debt has declined by 20 percentage points, and simply over the last two years. Of course, it becomes more difficult to engineer 30 reductions because we're coming out of a high-inflation environment and we're coming out of an environment where hopefully exchange rates stabilization has taken place. So it is certainly a source of vulnerability, but--and when you look at not just the IMF projections or the government projections on debt sustainability, but if you look at private sector--almost every investment house does its own projections--you see basically a very wide cone. The projections vary a lot, and the scenarios vary a lot. The key determining factors are growth. Most analysts have a long-run growth rate of somewhere between 4 to 5.5 percent. And it would take that kind of growth on average to give comfort that that is on a declining path. The other key variable, which is an assumption, again, is the real interest rates. We in the Fund, given the history of Turkey, given the very high real interest rates that this economy has seen, we have tended to be very cautious in terms of projecting our debt dynamics forward. And I hope we are on the pessimistic side. So we assume that real interest rates are somewhere between 15 and 20, which is quite high, so hopefully the economy has the potential to see lower rates. But given the rigidities in the economy, given the history of past inflation, given the shocks that it is subject to, we tend to be cautious. The final issue is fiscal policy. The current program with the IMF is based on a primary surplus of 6.5 percent, so that is what we use--in the short term, at least. Of course, as debt dynamics improve, this could be revisited, and I think there are two factors: one is stabilization, but also as other speakers have mentioned, Turkey has an aspiration to join the EU. Recent studies also, as you mentioned, recent studies within the IMF, suggest that 60 percent is a rather high debt level, 70 percent at the moment, but even going down to 60 percent, which is the Maastricht criteria, is a high level for an emerging market country to hold. So the aim has to be to bring it below that. So looking at fiscal policy, one has to bear that in mind. So that is why the Fund debt dynamics are based on an ambitious primary surplus. The market debt dynamics are based on lower surpluses in the medium term, more around about 5. So those are the key variables, and, of course, any shock to those jeopardized debt dynamics. MR. GOKCE: As Mr. Moghadam knows very well -- [tape ends]. T2A -- basically, as I mentioned before, the way I look at it is the domestic component of it is very important, and the treasury makes assumptions. I have them here in front of me. They are assuming 5-percent growth over the next five years, which looks possible without political domestic or international problems; 20-percent real interest rates declining to 18 by 2007, which is very high; and a 6.5-percent primary surplus, as suggested by Mr. Moghadam. And under base scenario, then the debt declines to 60 percent, which is the Maastricht criteria. This does not include any privatization revenue feeding to relax the budget constraint. If you look at the problem without the external debt, which is more relevant for the Turkish case, I think, then obviously the question is very simple: The change in your debt ratio is a function of your primary surplus, or deficit, minus the money printing as a ratio of GNP, plus a second component, which is real interest rate minus the growth rate times the level of the debt ratio. So you can achieve a reduction two ways: either by reducing interest rates and increasing growth. And although interest rates are very high in Turkey right now, they are declining in real terms, and hopefully they will decline further if we do not have any domestic or international problem. And growth is recovering, and I'm hoping that it will recover more next year. Or you can do the primary surplus. Now, in Turkey, people do not understand this, the general public, and I think we need to do a little bit more explanation to the folks about this. I'm looking here, going to the euro system, for example, Italy had a 6.2-percent primary surplus in 1997; Belgium, at 6.2 and 6 in '98, '99; Greece had almost 6 percent in '99; Denmark had 5 percent in '99; Sweden, 4.8, which might be one reason why they didn't join because they needed to do more of this or give up the welfare system; Finland, 4 percent; and Ireland, about 4.6 percent. So the medicine that is being applied in Turkey is very standard medicine. It is nothing extraordinary, although the feeling of the Turkish common folk is that we are being squeezed too much. It is not true. The same thing is applied everywhere. I'm of the opinion, if we have a government which stays the full five years--you realize there have been always early elections in the last 20 years, since 1987, early elections every two, three years, and early election is a disaster in Turkey. For example, part of the collapse in 1999 is an early election coupled with a huge agricultural production which, with promised rates of subsidy, created almost twice the budget deficit in 1999 combined with the two. So the real question then in Turkey is this: Sure, the debt sustainability can be manageable if the politics in Turkey doesn't mess up. So this is why I tried to bring back the economics. Mr. Moghadam knows how it can be done, and so does Professor Sak, and me or anybody else here, how the mechanics can be done. But is the will--and in the case of Turkey, the will of the people. Now, having a single-party government and possibly for two terms is a suitable environment unless we have an international problem. So my answer does not like in the mechanics. It can be done. It can be managed. But the assumption I have to make is whether the politics will be stable. If it is, then his job is much easier, I think. MR. LACHMAN: Thank you very much. Let me throw it open. If you'd just identify yourself? MR. : [inaudible - off microphone] University and Johns Hopkins University. [inaudible] thank you very much. The question that I have deals with energy [inaudible] that really hasn't come up yet. Turkey remains quite dependent on Russian natural gas exports, and in the last few months, there have been detailed discussions [inaudible] Turkish Government and Gazprom and the Russian Government on rates. I wonder if somebody could comment on how these negotiations fit into the larger picture of the Turkish economy and where it's going. [Laughter.] MR. JOHNSTON: Well, I'm the lawyer. I can talk about anything. [Laughter.] MR. JOHNSTON: Actually, I have represented some energy companies in Turkey, and while I'm not specifically attuned to the Gazprom discussions, it is quite clear that the government, the current government, felt that the--let's call it the rates that were negotiated under the prior government were a bit excessive, to say the least. Indeed, most of the energy projects and programs that had been adopted during the last 15 years were--well, I'll use the word, a "fiasco." They were not based on solid law. The policy was every which way. The state planning organization would weigh in and weigh out. The Ministry of Energy would weigh in and weigh out. Botash(ph) would have things to say. It was a true mess. And the net result was that certain elements within the government would have the opportunity to sit down and negotiate details, Botash being one of them, for example, and in some of their LNG contracts, they were paying way over what the market price should have been for what they were contracting. Many people would suggest--and it has been demonstrated even within the Turkish Government itself under the White energy Investigation--that perhaps corruption had a lot to do with this. I'll stop at that point, but the fact is that, yes, this government is trying to renegotiate the terms with Gazprom. I think they'll be successful. In fact, I think it was reported they were successful. MR. LACHMAN: Professor Sak? MR. SAK: Yes, let me add a few points. I am an external member of the Monetary Policy Council of the central bank, but we don't deal with these issues. But I can put the thing into perspective.. All the issues that Mr. Johnston has mentioned--political instability, excessive bureaucracy, weak judiciary--I took note of every one of them--reputation for corruption, investment disputes--all of them are real in Turkey. And when I'm talking about this transformation process with this economic program, that involves this also. And I have also to underline that it is a costly process. This institutional reform thing is not cost-less. You have a corporate sector that is organized in one way when the incentive structure was organized in one way, and now you are changing the whole incentive structure by changing the public--through public sector reform, and now they have to adjust to a new environment. You know, these guys at the IMF and the World Bank, they're saying that this--Mr. Johnston was like that, too. This situation, that's bad, you know, corruption, weak institutions, et cetera. Look at B, good, strong institutions, less corruption, et cetera, et cetera. But the issue for us is how we are going to go from one point to the other. And that's costly. For example, what we are doing in this energy thing, for example, yes, it may be due to corruption or due to other reasons. We have some fishy contracts. They are too costly. And that increases energy costs. And it's not only the energy costs that the corporate sector in Turkey now has to bear. They also have to bear increasing social security premiums they have got to pay. That's because we didn't ask them to pay that much social security premiums in the past, so now they have to pay a lump sum a month, and it's too much. And there are many other cost issues that are coming onto the table just because of the reform process itself. And the corporate sector has to bear with these costs. What the government is trying to do is to find the mechanism to deal with this issue. Either they are going to decline those costs, or they have to increase the prices, energy prices, once more. And that's bad for inflation. For us that's also bad. I mean, up until, let's say, this year, at the beginning of this year, it was good to achieve those primary surplus targets through increase in public revenues. That's easier. That could be done. But now, when the inflation is about lower 30s--it's lower than 30, a bit higher 20s, when it's at this level, any increase in public sector prices is going to have huge price effects, inflationary effects. So that's why they're negotiating. But I don't know how it's going to end. MR. LACHMAN: Thank you, Professor Sak. MR. : [inaudible] May I take up a point that was raised about corruption, which is obviously an extremely important one and is very much a current concern. When I was in Turkey a few months ago, people talked of little else. But I think one has to try and understand corruption within its historical, cultural, and social context, and here I think there's a very important difference between Western corruption, that is to say, our kind of corruption, and the kind of corruption of which Turkey is, so to speak, an heir, the traditional corruption of the Middle East. I would put the difference this way: that in our type of corruption, you make money, and then you use that money to buy influence or access to power. In Middle Eastern corruption, you get power, and you use the power to make money. [Laughter.] MR. : Morally, I see no difference between the two. Economically and politically, I feel that our kind of corruption does less damage. Now, in Turkey at the present time--and this as in so many other respects--there is an interesting interplay between the new Western traditions and the old Middle Eastern traditions. One finds both kinds of corruption acting in different ways. I think it's important to bear in mind that the Eastern, the traditional kind of corruption, in many circles is seen not as a fault but as a merit. If you obtain a position of power, it is your duty and responsibility to help your kinsmen, your family, your friends, your neighbors. And, indeed, you are in dereliction of duty if you don't do that. My question, addressed particularly to Mr. Johnston, is: You talk about the harm to Turkey's reputation of this kind of corruption. Is it any worse than in other parts of the region? MR. LACHMAN: Thank you. MR. JOHNSTON: Actually, Professor, I'd say that it is probably not as bad as other parts of the region. But, sadly, from where Turkey was 15 years ago, from a Western business perspective mind of what it was like to do business in Turkey, it has increased exponentially, to the point where this is not corruption to help yourself or your--necessarily yourself, but your family or your friends. This has become corruption of magnitudes that make the Mexicans look like pikers, and that's the problem. No one, I think, would go to Turkey expecting not to have a little--some baksheesh involved in virtually anything you're doing. And, yes, there's recognition there's traditional corruption. But it has become so profound and so--the magnitudes are so mind-boggling that it has totally scared off Western business investment, unless you're from France and you're used to it. [Laughter.] MR. JOHNSTON: Pardon me? MR. : [inaudible]. MR. JOHNSTON: That's correct, still. Although the OECD's trying to correct that, but the French are blocking that, too. MR. LACHMAN: Thank you. MS. FISH: I'm Pat Fish with a company called International Destinations, and this is a comment furthering what you said, Mr. Johnston. We have worked with Turkey, with Istanbul, for the last nine years on sending conventions and conferences. When you had your statistics, I was interested to see that you put construction and services. Well, conventions are services, and I wanted to point out that that is one of the quickest and easiest ways to bring money in. If you have one meeting of 1,000 people and they meet for about four days, they -- [tape ends]. T2B -- $79 per person per day, that would mean--that would bring in $2,716,000 with one little meeting, and that turns over seven-and-one-half times in the city, and look what that would do for your tax base. MR. LACHMAN: Thank you. MR. BEIFERT: I'm Brendel Beifert (ph) from the Kennedy School of Government. I wonder if some of the economists could comment on the potential impact of the European Union decision as to whether or not they're going to start negotiations with Turkey. [Tape ends.] T3A MR. : -- and, again, where U.S. wants to go, Europe, Turkey, U.S. triangle, what is the long-term involvement for U.S. is going to have a lot to say on this Europe discussion. You realize it was U.S. that in 1999 pushed Europe to consider the Turkish membership more seriously, and I feel like if Turkish-U.S. relationships improve the short-term problems with the parliamentary decisions and we get beyond this, European way of looking at Turkey has to change a lot. I know for a fact, by talking to a lot of political and business people, that if Europe and U.S. go into a better agreement and alliance relative to what the situation is today, one day before this Turkey will be taking a different policy approach and Europe will be forced to go along with it. But we can talk the details of it. MR. : Professor, you pointed out that the Turkish participation in the European Customs Union has been beneficial. But I would submit that perhaps it is not. One-half of the trade--one-half--can you hear me? Harold Scott, a hearing problem. One-half of the deficit--I can't get--this is like a Chevy Chase routine. One-half of the deficit of Turkish trade in 2002 was attributable to the European Union, and, in fact, if you look at the trade statistics, the trade deficit between Turkey and the European Union has increased over time since its membership. Sadly, a significant component in this is Germany. Germany represents two-fifths of that one-half and is increasing its share of, if you will, the deficit with Turkey. So I'm not so sure European Customs Union membership has really benefited Turkey that much, and perhaps this afternoon we can talk further about whether accession to the European Union really is that good an idea. MR. GOKCE: Let me quickly respond to this, in one minute, a very short answer. [Laughter.] MR. GOKCE: You see, I think penicillin was found in 1951, antibiotics, and my uncle waited four years for an importation permit into Turkey and died before antibiotics arrived in Turkey. I don't think you've had this kind of experience yourself. When I was a kid in the '60s going to college, I could not travel outside of Turkey unless I did military service, and if I did military service, then I could leave the country once in three years and only have $200 with me. Can you imagine me arriving at Charles de Gaulle or London, whatever, Heathrow, with $200 in my pocket? No credit cards, no checks, nothing, with cash, and all the stuff hidden, extra dollars in my socks. You see, when you look at--I'm not saying this lifestyle is available to everybody in Turkey. There is huge disparity of incomes in Turkey. But if you take a look at availability of certain things in Turkey, before or after the Ozal period and before or after the Customs Union, I think about 60 percent of the people will tell you that they are much better off right now. So we shouldn't be taking a short-term trade deficit approach to this. We should be taking a long-term thing. I think my daughter will live a much higher standard than I did, and I lived a much higher standard than my parents lived. You have to imagine I was a professional football player, but I did not have a ball. I didn't own a ball, because it was imported. You have to look at it with this long-term perspective in it. So that short-term, who does the deficit derive from, I think we are living through a period of very high, expanded expectations in Turkey with the huge urbanization. The population of Istanbul in my lifetime jumped from 300,000 to 12 million people, and everybody wants everything. And that's part of that deficit. And since there are people in Germany, it's much easier to import from there. So we need to take a somewhat short-term (?) short-term business perspective. MR. LACHMAN: Thank you. Reza? MR. MOGHADAM: I, too, have to disagree with my friend Charles here. But before coming back to the strict trade issue, let me just recount the experience of Eastern Europe. Both Desmond and I worked on Eastern Europe during the transition to a market economy, and I worked on Hungary during the last IMF program in preparation for EU accession. And the prospect of EU membership proved an enormous impetus for implementing policies which have now put Hungary on a much higher growth path than it was ten years ago. So, from Turkey's point of view--I'll come back to the EU's point of view. From Turkey's point of view, I think it is a very important incentive. In terms of purely putting in place the macroeconomic policies that would get you at the door of the EU, there's been mentioned some of the indicators. We have been talking a lot here about debt sustainability, and, of course, understandably, that's one of the key criteria of the EU membership, not necessarily getting there. Some of the countries like Belgium still do not meet that criteria, but being on a path that would eventually put you there, hopefully Turkey being an emerging market, being more vulnerable, could come below that target when the time comes. So in terms of macroeconomic policymaking, I think it's a huge impetus, and it is a very important one at that. There is another side to it, and that is the institution building. I think we have seen over the last three or four years there has been a move to put in place independent institutions. We have talked about governance issues a lot, but, for example, if you look at the way the Imar (ph) Bank problem is currently being dealt with by an independent supervisory agency, it's a very different kind of environment than it would have been four, five years ago. So from the institutional building and contributing to better governance, it's also an impetus. Finally, let me come back to this. Measuring success in terms of trade balances is the wrong way to look at it. Definitely I agree with Deniz that you cannot measure whether EU free trade agreement has been a success for Turkey and the EU by just looking at the trade balances. Standards of living in Turkey have improved as a result. And, ultimately--I mentioned earlier in my talk the success of the manufacturing sector where half of the exports go to the EU. Now, that I don't think would have been achieved, the security of the jobs, the standard of living of people who are employed in that sector, without the free trade agreement with the EU and the trade liberalization which has taken place in that sector and the low trade barriers which are in that sector in Turkey, because ultimately efficiency of that industry determines how well that industry does in the long run. So we have to look at it at a broader perspective just than the balance. MR. LACHMAN: I think we're probably needing to wrap this up, so let me just take two or three questions and I'll then ask the panelists to address them. Sir? MR. O'DAY: Thank you. I'm Paul O'Day with the chemical fiber industry, and I have a question for Mr. Johnston. If you were High Commissioner of Textiles in Turkey right now--you mentioned the government isn't doing anything. If you look around the world as to what governments are doing in advance of what will happen when China comes in with both feet, you see India putting up $4 billion in subsidies; you see Korea putting up $1.6 billion just in my little sector. What would you have the government do that would in any way be a positive step that wouldn't be stepping back into things that Turkey would rather not go into, more subsidy, for example? MR. LACHMAN: Thank you. MR. JOHNSTON: I would-- MR. LACHMAN: Perhaps if I could just collect a couple of questions. MR. JOHNSTON: It's going to get confusing. [Laughter.] MR. LACHMAN: I hope Alzheimer's hasn't set in with me to that degree. MR. : I'm [inaudible] from Mass Mutual. Just a quick question. As an investor in Turkish markets since eight and a half years ago when the lira was at 34,000, one becomes antsy when everything seems to be going well and you keep looking for anomalies. And one anomaly that we've noticed is that, despite a very good positive and benign international investment environment, almost all of the improvement in Turkish external spreads and currency and local spreads has been because of local investors as opposed to international investors. Does that worry you? And how would you explain it? Maybe a question to Deniz and Mr. Moghadam. MR. LACHMAN: Thank you. MR. DAVIDSON: Jonathan Davidson with the European Commission delegation. Not a question, but a clarification, if I may. Joining EMU, European Monetary Union, or the single currency, is a separate issue from joining the EU, as I'm sure several panel members know. But the earlier question about meeting the ERM criteria, meeting the other criteria of the single currency do not apply to meeting the criteria for EU membership. The critical decision at the end of next year will be on the political criteria. Then there will be a long negotiation on all the 30 chapters of joining the EU, which Turkey knows well about and will be a painful process. EMU, joining the euro, is further down the road. None of the countries coming in next year will join EMU at the outset, and Turkey doubtless will take quite a bit longer to join the single currency. Thanks. MR. LACHMAN: Thank you. Okay. Let me turn to Mr. Johnston to address what he would do as High Commissioner of Turkey. MR. JOHNSTON: First, your question was really oriented towards what the government should do, and I would first off heartily encourage the private sector to be doing something about it rather than the government. Insofar as the government is concerned, I think they have to begin to anticipate what the chaos will be in 2004. And when you look at what the United States--I think the United States is going to be the leader in creating, in effect, the market disruption chaos by allowing its textile and apparel industry to take various forms of trade actions. Obviously, they already have a market disruption mechanism for China. That will start to force consumers to determine where else they might be able to source their goods other than China because China may be still an unpredictable source. There are a lot of legal mechanisms by which the U.S. industry, the textile and apparel industry here can assert controls over access to this market, not just through a quota system, whether it's antidumping actions or subsidies. Now, as a government in Turkey, I would say first we should start right now analyzing our exposure to countervailing duty actions; we should start analyzing our exposure to trade actions that perhaps seek to, through safeguards mechanisms, set up a whole new quota system, much like we did, sadly, on steel. Because if that occurs, Turkey is going to have to determine what share of this market it can have vis-a-vis the other suppliers. So there are a lot of things that can be thought about now and planned for that the Government of Turkey can be doing. Secondly, I would say there ought to be an adjustment assistance mechanism that Turkey should be talking to the IMF and the World Bank about, because there are going to be major displacements of workers in those industries. And unless there's some way to help cover that transition from being a textile worker to being a ceramic worker or an auto worker or something else, there's going to be a large dysfunction and a very, very significant, we'll call it, social unrest factor in Turkey that they should be planning for now. MR. LACHMAN: Perhaps if I can turn to the economic side just in terms of the question on whether the lack of participation so far of the external investors is a question of concern. MR. MOGHADAM: I think it's certainly a question of concern, and I think it comes back to what I ended my talk with. The track record is still too short. I think policy credibility will take some time to establish. And, therefore, it's because of that that there is no room for complacency, there is no room to let off from policy implementation as it has been carrying on for the last couple of years. I think one statistic always bothers me in this respect, not just sort of in terms of market flows. It is true market flows are coming back there slow, and certainly a lot of the current exchange rate movement is driven by domestic flows changing from foreign currency to domestic. But the foreign flows are starting, but they are slow. But the statistic which worries me a lot is foreign direct investment in Turkey for a number of reasons that other panelists have also mentioned. There is hardly any of it. And you can start the process by accelerating privatization, for example, by putting in place the rules of the game in such a way that people have comfort in investing in Turkey. But it is a problem. And I do not expect that to pick up until a longer track record of good policy implementation has been put in place. MR. LACHMAN: Thank you very much. I'm sure this discussion could have gone on for a lot longer. I at least have found the participants' really excellent review of what the Turkish situation is and what prospects are, and I'd just ask you to join me in thanking them for their participation. [Applause.] MR. LACHMAN: I understand there will be a lunch which Richard Perle speaking, which will begin pretty soon. [Luncheon recess.] LUNCHEON KEYNOTE MR. : What I am wanting to do is to move on to the next stage of our session today. We're very fortunate to have--is that any better? We're very fortunate to have as our lunchtime speaker Richard Perle, who is probably well-known to all of you. Richard Perle is a scholar at the American Enterprise Institute. Before that, Richard Perle served during the 1980s as Assistant Secretary of Defense for International Security Policy in the United States. He was also Chairman of the NATO High-Level Defense Group, and currently he is on the Defense Policy Board. Mr. Perle's expertise extends very widely, but he does have a keen interest in Middle East affairs, and Mr. Perle is going to address us in what I'm sure is going to be a very interesting discussion. But before I call Mr. Perle to the podium, I was just wanting to acknowledge Mr. Kerakimech (ph) of the (?) group. We're fortunate to have him with us, and we are grateful that you have come along. Mr. Kerakimech is pretty much an example of a Turkish success story, and I think it very much follows up the discussion that we had this morning of the need for entrepreneurship in Turkey, having converted a family business into a truly large international conglomerate that is so important to the Turkish economy. It's an example that could very well be emulated and give us some encouragement for Turkey's future. Just with those few words, I'd ask Richard Perle to address us. [Applause.] MR. PERLE: Thank you. Thank you very much indeed. Could I simply add to what you've just heard? We are honored to have the support and friendship of an industrial group that has shown the way in Turkey, modern business practices across a large variety of activities, operating in many countries in the world, and with enormous effectiveness and skill. So we thank you very much indeed for your support and congratulate you on the great success you've achieved. I want to say a little bit about some very immediate issues, a little bit about the United States and Turkey, of course, in the aftermath of the liberation of Iraq, a little bit about the situation in Iraq, and then something about the war on terrorism, which is now the central preoccupation of the Government of the United States, is likely to remain the central concern of any American government, whether a continuation of this administration or a successor from the other party, because I believe that the impact of September 11 on American policy, while understood in this country, for the most part is poorly understood outside the United States, and it leads often to a failure to appreciate the driving concerns of the American administration and the American people. But first a word about Turkey and the United States. I think we missed an important opportunity to collaborate in the liberation of Iraq, and I regret that. And I believe there are a number of Turks who regret it as well. I watched that situation develop, as I know many others in this room did, with a sense that if we were communicating better and more effectively, we could almost certainly have sorted out the issues that, in the end, became an obstacle to collaboration. I think it was in part the newness of the Turkish Government and its lack of experience in handling crises. You get better at crises when you have more of them. And this was probably the first political crisis of that new government. And that distinguishes the failure of Turkey to work with us from the failure of some others to work with us who knew exactly what they were doing, who had no claim to crisis that would excuse their failure to work with us or even their opposition. And so while it will take a long time to rebuild the relations with some countries, I don't think that is the case with Turkey, and I think we have already--we are already looking at those events through a rearview mirror. And that's a good thing. It's a pity that Turkey wasn't alongside us going into Iraq, not least of all because there are such important Turkish interests next door. I think it might have been different if it had been understood in Turkey that this was a war that would be over in three weeks with hardly any casualties, hardly any Iraqi casualties. But the specter of war was widely misunderstood in Turkey and, for that matter, around the world. People expected large numbers of casualties, if not on the American side, on the Iraqi side. And what we saw in that conflict was in many ways the first modern war, the first war in which weapons of extraordinary precision were used in a manner that reflected the ability to distinguish targets. We've had smart weapons for some time now, but finally the doctrine for the use of smart weapons has caught up with the technology, and this war was planned and executed in a way that was intended--as it should have been since it was a war of liberation--to minimize the damage that would be done to Iraqis, to Iraq's ability to rebuild itself after that war, which is why the bridges were still standing when the war was over. It is why the power stations were not attacked. It is why the basic infrastructure was carefully protected. There is a great deal to do in Iraq, and I will come to that in a moment, but very little damage from the military action that liberated 25 million people after three decades of tyranny. So we've seen what can be done, and there were undoubtedly those who feared a very different kind of war, and so it's perhaps understandable that the polls were so heavily weighted against military action. Had people understood what was coming, we might have seen a different result. We face now a very large challenge in Iraq in the aftermath of this war. But I want to tell you that things in Iraq are a good deal better than you would believe if you were dependent on the press reporting that is coming from Iraq, and even more if you were dependent on commentators who were not in Iraq discussing the situation as they imagine it to be. Every incident in which an American is killed or a bomb is detonated is reported. What is not reported is the positive side of the picture in Iraq, the fact, for example, that every Iraqi student, from kindergarten through university, is now in a classroom--unless he prefers to be elsewhere--and schools are open. It is rather more than you can say for France these days where a teachers' strike has threatened yet another academic year. In towns and villages across the country, city councils have been established, and for the first time the people of Iraq at the local level are making decisions that affect their destiny on the basis of the will of those citizens and not at the dictate of Saddam Hussein. We've pretty much now restored electrical power to pre-war levels and have done that despite the acts of sabotage, desperate acts of sabotage that are intended to assure that we will not succeed, acts of sabotage undertaken by the bitter-end remnant of Saddam Hussein's regime. These are the people who are known to their neighbors for their participation in his reign of terror, the people who got up in the morning and went to their jobs in the prisons, who administered torture. And when this is unquestionably over, they will either face a trial or in some cases, if found first by the families of the victims, they are in mortal jeopardy. And they know it. So they have nothing to lose. And they have some support from some of the money that was siphoned off from the Iraqi people over three decades. And so that's not surprising. There are criminals in the streets of Iraq as well. Saddam opened the prisons. I think any urban area would be afflicted in the way Baghdad has been afflicted if the prisons were emptied. And, finally, there are outsiders who understand that a success, an undeniable success in Iraq--that is, the establishment of a decent regime and some hope for the future on the part of Iraqis--is a threat to their regimes, which allow no public participation in the decisions of government. Iraq is surrounded, with the exception of Turkey, by dictatorships, and those dictators have no interest whatsoever in demonstrating that the fruits of democracy can be brought to neighboring Iraq. And so they will do what they can to destroy the prospects of the Iraqi people for success. We haven't done everything perfectly. We've been much too slow to empower Iraqis to give them responsibility for their own future and their own destiny. And that's regrettable. I think if we communicated more effectively with the Iraqis, if we understood them better, if we listened more carefully to what they have to say, we would be far more confident about their ability to manage their own affairs. They will need our help, of course, but they are far more capable than many bureaucrats believe. And so the sooner we turn over the critical functions of government to the people of Iraq, the better. This should not be confused with certain proposals advanced by the French and others, and I want to draw an important distinction. When the French talk about returning sovereignty to the Iraqis, what they have in mind is a massive international intervention in the affairs of Iraq that will keep the international community there forever. Forever. The UN doesn't go home. It puts down bureaucratic roots and it does not relinquish them easily. It would be a great mistake to internationalize the future of Iraq. The sooner Iraq is turned over to Iraqis, the better. And so I think we are quite right, the administration is quite right to treat warily the suggestions from the French and others that an infusion of an international bureaucracy is the right way to nurture the development of Iraq. The war on terror was overdue on September 11. Prior to September 11, there were a number of acts of terror, to which the American response was feeble, at best. And we all know the list: Khobar Towers, a planned assassination of a former American President, the Cole, the embassies in East Africa, and the like. And the response in every case was either symbolic or in some cases we regarded acts of terror as violations of the law and not acts of war. The result was certainly to embolden the terrorists. And, indeed, we know from what the terrorists have said to one another that they considered after each successful act of terror that they were advancing toward their ultimate purpose. That ultimate purpose--and we should be under no illusion about this--is the destruction of the United States, which they see as the principal obstacle to their vision of a world governed by Islamic law. This is a war against radical Islam. And we need to be clear about that. If we're not clear about it, we will dissipate what energy we need for this war in looking elsewhere. The heart of the problem is radical Islam and a view of the world with which there can be no possible compromise. We've begun to mobilize to fight that war. It's probably fair to ask whether our institutions are up to the task. And, unfortunately, we weren't prepared for this war, and so the institutions are not optimized for fighting it. I think we've done remarkably well under the circumstances. As an open society, it's easy to come to this country. It's easy to move around in this country once one gets here. It's easy to get lost in the United States. We have never exerted and will not now exert the kind of control over our citizens that could enhance our security, but at a price that is too high to pay. So we have to find other ways to protect ourselves. One way, and the way that is inevitably going to cause differences between the United States and other countries, even friends of the United States, is to put such pressure on the terrorists that they are fugitives every moment of every day; that is to say, to deprive them of the sanctuary that they enjoyed when they operated freely, for example, in Afghanistan; when they could visit Baghdad for medical care and other support; when they could open offices in Damascus and elsewhere. The list of countries is not large, but the countries that have given sanctuary and support to terrorists are now in this President's conception on the side of the terrorists, and they will have to face the consequences. This does not make many of our friends comfortable. We've become accustomed to a view of what is right and proper in international affairs in which only an invasion across a national border is regarded as unacceptable behavior. Support for terrorism, what goes on within the confines of one's national borders, are considered off limits, an inappropriate subject for international intervention. That has to change. The threats for which the international institutions that we have now were designed are the threats of the 20th century. And we're now living in the 21st century, and the threats are very different. Without ever crossing a border until it is too late to do anything about it, terrorists can operate within a country, planning, organizing, and perhaps ultimately acting on plots to kill Americans, potentially large numbers of Americans, utilizing potentially weapons of mass destruction. And nowhere in that chain of events do our current concepts of international regulation and discipline come to bear. So some of our friends and some of our allies are having trouble recognizing that we now feel it necessary to act, sometimes independently because we don't have an international structure, but it gives us an opportunity to protect ourselves through the instruments of international law and international practice. Maybe we're in a transition period. Maybe we'll modernize the United Nations. Maybe we'll update our concepts of what constitutes a threat to which it is appropriate to respond. But until that happens, I suppose we will be accused from time to time of acting unilaterally. But what's the alternative? Another September 11? A September 11 carried out next time, as it may well be, by a weapon of mass destruction in which the fatalities are not in the thousands but in the tens or even hundreds of thousands? No government, no American government--and forget about what you're hearing from a long list of Democratic candidates. This is election politics. No government can afford to ignore the magnitude of the threat we face. If you sit in the White House, you are getting reports daily based on interrogations at Guantanamo based on documents unearthed in Afghanistan, documents found in Iraq, intercepted conversations. And it all adds up to one thing: There are some thousands of people who, if given an opportunity to use a weapon of mass destruction for the purpose of killing Americans, there are thousands of people who will do it, and they will do it without remorse. And so no American President, from either party, from any administration, can fail to take the most effective measures that we can devise to deal with it. And if that means complications in our diplomacy because other countries don't feel the same sense of danger that we do, so be it. It, in fact, would be unreasonable to expect--to expect anyone in any other country to be as concerned and preoccupied as Americans must be. And it is probably unreasonable, therefore, to expect a degree of support that we're unlikely to achieve. So we will have to do what we must do in order to protect ourselves. We do have friends and we do have allied. And, by and large, we get a lot of help. A lot of it isn't talked about. A lot of it is in the areas of intelligence, policing. But even some of our critics are, in fact, helpful. And in some places in the world, the Arab world in particular, some of our critics are consistently helpful. They just don't want the world to know they're being helpful. Turkey is one of the friends of the United States that we've always been able to count on, a long history of working closely together. We had a small glitch in the relationship. We're past that now, and I expect we can go back to working closely together. That has already begun, and I see no lasting obstacle to that collaboration. And it's helpful when Americans and Turks can come together on occasions like this to discuss these matters. Prospects in Turkey are looking very bright. Do you remember the predictions about how awful it would be for the Turkish economy if we went to war with Iraq? Anybody notice a change in the Turkish economy since this war? Is it worse? Better? It looks to me to be a lot better and the prospects to be a lot better. It was an absurd and unnatural situation for Iraq to be isolated and sanctioned as it was and for anyone to think that was in the interest of any of Turkey's neighbors. I never understood how anyone could have thought that there was anything but a brighter future with Saddam Hussein out of the way. Well, now he's out of the way. And if we meet again next year at about this time, I expect there will be a really thriving trade in the region, and we will see rapid economic development, not only in Iraq but in Turkey, working closely with Iraq. So the problems that affect Americans and Turks are, I think, largely behind us. The problems in Iraq are ahead of us, but we're doing better than people think. And a year from now, I'll be very surprised if there is not some grand square in Baghdad that is named after President Bush. There is no doubt that, with the exception of a very small number of people close to a vicious regime, the people of Iraq have been liberated and they understand that they've been liberated. And it is getting easier every day for Iraqis to express that sense of liberation. Thanks. [Applause.] MR. PERLE: I've been asked to take questions, which, of course, I'm happy to do. MS. : I have a question. I was reading [inaudible] a few days ago in the New York Times, and he said that the emphasis on our Ahmed Chelabi was too much. In fact, they tried to work with other Iraqis and build a post-war Iraq. But a great emphasis [inaudible] in Ahmed Chelabi, who is in exile. Did you read that article? What are your thoughts on that article? MR. PERLE: The question was about Ahmed Chelabi and reference was to an article which I haven't read. But let me just say that the Iraqi people must choose their next government, their leaders. If they choose Ahmed Chelabi, I think they will have a very bright future. I've known Ahmed Chelabi for more than a dozen years. He is a man, in my experience, of absolute integrity and courage, and he would be a great Iraqi leader. I read stories all the time about how he has the backing of the Pentagon. Some of us who are connected one way or another to the Pentagon who know him have a high regard for him. But he doesn't have the backing of the Pentagon. Whatever he is able to accomplish in Iraq will be on the strength of his own abilities, his character, his intelligence, and his commitment to the freedom of the people of Iraq. I can't imagine a leader who more fully embodies the values that caused the Americans to believe we should liberate Iraq. He believes in democracy. He believes in individual freedom. He's a Shia who does not want a theocracy in Iraq. And it pains me to see some officials of this government make disparaging remarks about him. For the most part, the disparagement comes from people who don't know him, who have never met him, and it's based on jealousies and in some cases embarrassment. Chelabi was right over many years when they were wrong. So it's been troubling to see the disparagement of this great man. But I have complete confidence that his qualities will lead him into a position of leadership in Iraq. MR. : Thank you, Richard. As always, when it comes to Iraq, I agree with virtually everything you had to say. But I want to ask you about something you didn't talk about in your presentation, and that has to do with Iraq's presumptive possession of weapons of mass destruction. That was not, as you know, the sole justification for the war against Iraq, but it was certainly the primary justification. And yet several months after the liberation of Iraq, none of these weapons have been found. On the one hand, it's almost impossible to believe that Saddam didn't have them. On the other hand, since we've now presumably had access to dozens if not hundreds of Iraqi scientists and technicians who were presumably in a position to know about these programs, the fact that no information has become public indicating that they were, in fact, in possession of chemical and biological weapons and working to produce more suggests that we haven't received credible intelligence confirming that assumption. So I guess I have two questions. The first is: What do you make of the curious absence of intelligence about the fate of these weapons? And, secondly, if it turns out that, in fact, Iraq didn't have these weapons and hasn't had them for some time, with the benefit of hindsight, if one had known that before we went to war against Iraq, if we had been confident that Saddam had relinquished these weapons several years ago, would you still have favored the war? And if so, why? MR. PERLE: Well, thanks, Steve. To begin with the last part of the question, I would have favored the war. I think we were right to liberate that country, with or without weapons of mass destruction. I don't know anyone who did not believe that Saddam possessed weapons of mass destruction, including the United Nations, including Hans Blix, including all the previous inspectors. We know that he had them at one time because he used them. He used them against Kurdish villages. He used them in the war against Iran. We know he had a nuclear program. We know that there was research into biological weapons. All of that was thoroughly documented. The United Nations inspectors actually prepared a P&L statement that indicated his holdings, things that were known to have been produced, in some cases acknowledged to have been produced. And when we tried to determine what had happened to those holdings and ask Saddam to document the destruction that the Iraqis claimed, they didn't do so. They chose not to say, as they might well have, yes, we had so much anthrax, but on this date at this place a crew headed by Rashid destroyed it under orders, and here's the documentation. I mean, as Hans Blix himself said, nerve gas is not marmalade. You don't toss it around. You don't treat it without careful controls. So there should have been documentation of the disposition of weapons of mass destruction that we knew to have been created, and there was none. Now I see Blix propounding the theory that Saddam wanted us to believe he had weapons of mass destruction, even though he didn't. Well, that's--nobody can say at this point that that isn't possible, but it's an extraordinary thing if he allowed this war to take shape when he could easily have provided evidence that would have been exculpatory with respect to weapons of mass destruction. But I think it's very important to look back to where we were before this war. We had a policy of isolating Iraq that we called "containment." It was based on sanctions that followed the cease-fire in 1991 after the war. Those sanctions were collapsing. There was massive violation. Across the Syrian border, a pipeline was transporting a billion dollars a year worth of oil, an out-and-out violation of the sanctions. There were days when there were 20 kilometers of heavy trucks lined up at the Jordanian border waiting to cross into Iraq, and there were even long lines at the Turkish border. So the sanctions--and Iran was marketing Iraqi oil and cooperating in other ways. So as a practical matter, the sanctions had become exceedingly porous. But as a juridical matter, they were more and more difficult to sustain because the impression had been created that the people of Iraq were suffering as a result of the sanctions, even though the Oil for Food Program could have provided relief that Saddam never allowed to be provided. The Russians, the French were opposed to continuing the sanctions. It was simply a matter of time before those sanctions would have collapsed. And what would have been the result of that? A victory by Saddam Hussein over the West, and the political ramifications of that for the region, for the war on terror, were simply unacceptable. We could not allow Saddam to escape the last vestiges of containment. So I think we would have had to act under any circumstances. But I find it very hard to believe that had we abandoned the sanctions and allowed Saddam to go back to business as usual that we would not have found weapons of mass destruction in Iraq's future. And I believe that when David Kay finishes his work that we will know a lot more about those programs, and we will be able to document the fact that he had weapons of mass destruction and may even now have some. MS. : Mr. Perle, I would like to ask you about the prospect of decision of the Turkish parliament on sending troops to Iraq. As you know, there are concerns in Iraq coming from several parties, not only the Kurds but also some Arabs. There are concerns and objections to the presence of Turkish troops on their soil. I would like to ask you what you think of these concerns, and do you think the desperate need for additional troops would justify those concerns and objections be overridden? MR. PERLE: Well, I can give you a personal opinion that differs, I suspect, with that of the administration on this. I don't believe that we need additional troops in Iraq. In fact, I think it would be a mistake to send additional troops to Iraq. What we need to do is turn the security function over to Iraqis as soon as possible, and if we send--if we internationalize this and bring in large numbers of outside troops, it will probably delay the date at which we ask the Iraqis to take responsibility for their own security. They will need help. They can't do it entirely by themselves, so Americans would have to work alongside them. But I don't believe the problem is too few soldiers in uniform. Now, the administration would welcome some outside help, partly as a symbol of international collaboration in this enterprise, and I think that would be the good thing. And it might offer some modest relief to American forces, and that would be a good thing. But I don't believe that it is essential or vital that additional military forces be sent to Iraq. MR. : Supposing Turkish parliament rejects the motion again, how would that influence Turkish-American relations? MR. PERLE: I'm sorry. I didn't hear the--could you ask it again? MR. : The motion to send troops to Iraq, let's suppose it's rejected by the parliament in Turkey. How would that influence Turkish-American relations? MR. PERLE: Well, I suspect, as I'm sure you do, that headlines that Turkey says no to the U.S. will not be helpful to U.S.-Turkish relations, despite the private view you've just heard that we don't need additional forces. I'm not saying it would be a good thing if Turkey sent additional forces. What I'm at pains to say is I don't think it is essential to success in the mission in Iraq that additional forces be sent. This is not a life-or-death matter, in my view. But I think it will probably be damaging. MR. : Mr. Perle, my name is Arsinol (?) from Ankara University. I would like to ask about something that you did not comment on, which is Iran. I think my supposition is that Syria will ultimately be scared or coerced into towing the line, and now Turkey seems to be back in the bag, if I may say so. But Iran troubles us over there, and I'm sure it does the Americans as well. What is to be done, if anything, with Iran? What's going on there? What I read in the paper is very confusing. MR. PERLE: Well, Iran is obviously a very large problem for us. The Iranians are determined to build nuclear weapons. They support terrorism on a big scale. They are probably the single most important supporter of terrorism. And they believe in a state in which a few mullahs dictate every aspect of people's lives. So by every measure, the place is objectionable and dangerous. It must by now be clear to everyone that if the people of Iran were free to choose a government, it would not include the people who, in fact, are governing them. It might include some people who have been elected to parliament, but it certainly would not include the mullahs, who are, in fact, the effective government in Iran. And my own view is that, out of sympathy as well as self-interest, we should be supporting those Iranians who want to free their country from the heavy hand of the mullahs. And others should be doing the same. We've been very timid in this respect--much too timid, in my view, and I don't understand why we have been so timid. We don't even do simple things like broadcast effectively into Iran. A few hours a week. A few hours a week. We should be broadcasting 24 hours a day, just the news so that the people of Iran can judge their own situation. They go to great lengths to do that. They run risks to listen to things they're not permitted to listen to, and we ought to be helping them. I think in the end that situation will resolve itself. I think in the end the people of Iran will change their government. They'll change their leadership. It's just a question of when and whether it is a relatively peaceful transition. And we should do what we can to accelerate what is going to happen anyway. MR. : My name is Murat Varga (ph). Nice to see you here again. Sir, I have one question. When you mentioned about Iraq sooner--Iraq to be returned to Iraqis, that's all the international community wants at once. And we are kind of against a massive international intervention. But in this case, when you leave things to the hands of the Iraqis and if they come up with a constitution like that of Iran's, the first line starting that Iraq is a religious state, as in the case of Iran, and the constitution law and order will be done under Shia regime. Is there--I think there may be some kind of risk in that type of process, so this constitution thing is a very, very serious step to take, I think. MR. PERLE: The constitution is absolutely essential, vital. It will determine the future of Iraq, and it must be a constitution that offers freedom to all the people of Iraq. And it is not freedom if people who do not wish to be governed by a majority that oppresses a minority are unable to be protected. So it must be a constitution that offers individual liberty and the protection of minorities. And I think it will be. We need to encourage that process, accelerate that process, to be sure. So I think there is no inconsistency between the idea of moving as rapidly as possible to place authority in the hands of the Iraqis and making sure that a constitution evolves that protects the basic rights of all Iraqis. MR. : Mr. Perle, anti-Americanism is growing all over the world. So what's your comment on that? What are the reasons? How can United States think about to deal with this problem? MR. PERLE: Well, you're quite right there is a surge of anti-Americanism, and I think there are many reasons. Some of them are simple jealousy. The anti-Americanism is often a product of the relationship between our government and governments that are themselves unpopular. In the Middle East, for example, the places where the anti-Americanism is greatest are the places where we are closest to dictatorial governments. We're unpopular in Saudi Arabia. Do you think that has something to do with the fact that we're close to the Saudi Government and lots of Saudis resent that and object to it? In Iran, we're pretty popular. Maybe that's because we have nothing good to say about the way Iran is now governed. So that's part of it. Part of it is the natural resistance to the superpower. It's sort of understandable. One thing is clear: that if we have to choose between anti-Americanism and relinquishing the measures necessary to protect ourselves, we're going to live with anti-Americanism. MR. : Mr. Perle, you mentioned the doctrine of smart weapons, also liberation and the need to liberate people from the grip of dictatorship as a source of security against terrorism and so on. Does that suggest that--and to act unilaterally, you said that we have a right to act unilaterally. Does that mean that this liberation war should move on the road to Syria and Iran and Libya and maybe Zimbabwe and so on? MR. PERLE: No, I don't think that a military response is always necessary or always useful or always appropriate or always the preferred strategy. Let me be clear about the relationship between democracy and our own security. Democratic countries, by and large, do not allow terrorists to operate freely on their territory. It is also true that some dictatorships restrain terrorists, but a lot less reliably. They often cut deals with terrorists. I wouldn't be shocked to discover that there was a quite understanding between the Saudi royal family and -- [tape ends]. -- the United States in which they agreed to behave themselves in Saudi Arabia, and the Saudis agreed to ignore their activities. That's not the sort of behavior that we would expect from most democracies. So, by and large, if the world were made up entirely of democracies, I think we would be a great deal more secure. Now, how do we encourage democracy? There are a lot of ways to encourage it. The least preferred method is by toppling a dictatorship that stands in the way of democracy. Iraq was a unique situation, and I don't know anyone who's proposing that we launch wars to achieve democratic reform. If Iraq is the success that I'm confident it will be--and we've got to give it a little while. It's absurd, the idea that you can judge an upheaval of the magnitude of Iraq in a hundred days. If Iraq turns out to be the success I'm confident it will be, I think others in the region will look at Iraq and say, Why can't we rid ourselves of a regime that's rather similar in some ways to the Iraqi regime? So the precedential effect of liberating Iraq may assist in bringing about democratic reform elsewhere. Thank you for being so attentive. [Applause.] MR. : I'm sorry to have had to interrupt that, but we have another session on Turkish foreign policy that is a little bit overdue. I think we really have to thank Richard Perle, both for his insights, which are, as usual, extremely on the mark, but also for being so generous in time and taking so many questions. Thank you. [End of Luncheon Keynote.] AFTERNOON SESSION MR. LACHMAN: Everybody who wants to take a seat, please do so if you would. Thank you. [Blank spot on audiotape.] MR. LACHMAN: [In progress] -- that's probably certainly been true, and it's primarily true because of one thing, and that is, in modern times because of the incredible marriage that is taking place in Turkey between western civilization and Islamic civilization. The highly westernized Ottoman Empire gave way to the Young Turk movement, which gave way to Ataturk, which you might say led to Turgut Ozal, who Bernard Lewis has once referred to, and I think quite accurately, as the greatest Turk since Ataturk, which has led now today to a much more democratic society in Turkey than we've ever seen before. And the question then also comes up then, as Turkey evolves and becomes a more democratic state, which I think by definition also means that it will become a more Islamic country. Its identity, its Islamic identity is reemerging to a certain extent. Will that change the very nature of the relationship with the United States and with the European Union? Will the relationship with the United States become more stressed and more difficult than it was in the past? Certainly the events before the Iraq war and after suggest that might be the case, and I suspect that will be a subject of conversation here today. On our panel we are going to have Ilan Berman, who is part of the American Foreign Policy Council. General Bier [ph] will not be here today. He was initially listed. I am told that due to inclement weather he cannot make it. Retired General James Jamerson of Lockheed-Martin and the Turkish Aircraft Industries is here. Ilhan Kesici, a member of parliament and a former secretary of the State Planning Organization is with us today. And also Mr. Seyfullah Nejat Tashan, who's the director of the Foreign Policy Institute of Bilkent University in Ankara is here with us today. With that, I will turn it over, I think, to Mr. Berman at that end, and then we'll just come forward. MR. BERMAN: Thank you. I was hoping not to have to go first, but I'll do my best. On the agenda today was for me to talk about the Turkish-Israeli relationship and the implications of that relationship on Turkey's future strategic orientation and its role in U.S. foreign policy. I think this is probably actually a very good starting point because the Turkish-Israeli partnership that's evolved over the last decade is really one of the most pivotal alliances that both Turkey and Israel have in the Middle East and I would say globally. Since its beginnings in 1991-92, the relationship has evolved into extensive military to military coordination and joint trainings by, if I'm not mistaken, all three branches of the Israeli and Turkish military, as well as major defense industrial contacts and relatively large-scale intelligence sharing. All of this evolved on the basis of several commonalities. The first was concern over regional threats like Iran, Iraq and Syria, also worries over proliferation of ballistic missiles and weapons of mass destruction and also attempts to grapple with terrorism, both their respective varieties, Palestinian nationalism for Israel and Kurdish separatism for Turkey, but also of a more internationalized Islamist nature. This has really come into sharp focus in the last 24 months after September 11th. They also have a stake in the common evolution of Central Asia and the political direction that the Central Asian republics take. There is also an effort at expanded deterrence, at an effort to expand strategic reach that neither country can really accomplish on their own. by joining forces they have the capability to really project power on a regional level rather than within their immediate neighborhood. This is the basis of the relationship. Much of this is now changing, not everything, but to a large degree this equation is in flux as a result of a number of different factors. The first would have to be changing political indicators within Turkey itself. The AKP, the new AKP Government in Turkey has set about truncating the power of the military, very plainly. There have been a raft of agreements signed late this summer in late July and early August which substantially reduce the political presence of the military in Turkish politics. This has been done very much under the guise of EU oriented reform, but the long-term strategic implications of marginalization of the military has yet to be felt, I think. There's also a new internationalist focus on the part of the AKP. Rhetorically, the new Turkish Government is still very much focused on Europe and on the United States. But increasingly there are indicators that there is emphasis in their strategic policy on alliances with Middle Eastern states. Just a couple of example. With Iran there's a lot of indication of a growing energy partnership. According to some estimates, Turkey could become dependent on Iran for as much of 20 percent of its natural gas needs by the end of the decade, which is a relatively significant alteration in the traditional balance of power between the two countries. There's also a new military warmth between Turkey and Syria. There was a military framework accord signed last summer which created what some Turkish analysts call the new era for relations. I think this is relatively significant in terms of a change in Turkey's regional position as seen from Ankara. But I think nevertheless the prognosis for the Israeli-Turkish partnership is on balance positive, and it's positive for the simple reason that it remains the relationship that's the most seriously grounded in the long-term strategic objectives of both countries. The new regional partnerships that I just described, on Turkey's part are not likely to be durable. Syria remains a state sponsor of terrorism, and it has not severed ties with the PKK. So there's always the lingering doubt in Turkish political circles about Syria's durability as a peace partner. There's also outstanding water and territorial claims between Syria and Turkey. At the same time with Iran, even though Turkey's becoming increasingly dependent on Iranian energy, there is growing concern in Ankara that Iran poses both a missile and a nuclear threat to Turkey, and this is particularly so since over the last couple of months we've seen the Iranian regime roll out a missile capable of targeting large swaths of Turkish territory. There's clearly a perceived threat here and it's growing. Finally, I think one fact that also needs to be taken into account is that Turkey cannot rely on Europe to meet its strategic needs. This was demonstrated very eloquently during the first Gulf War when Turkish strategic policy oriented around having to confront threats on its own and not allowing NATO to--under the assumption that NATO would not come to its aid. This was also demonstrated very recently in the run up to the Iraq war when NATO was divided amongst itself about whether to deploy missile defenses to protect Turkey against potential Iraqi missiles. The good news here is that the strategic interests that both countries have are likely to supersede the political inclinations of any particular government. About six or seven years ago, more actually, seven or eight ago, the Turkish-Israeli relationship weathered the rule of Erbakan in Turkey, the Erbakan Government, even though Erbakan was very explicit about his efforts to truncate the Israeli-Turkish relationship and his efforts to establish what he called an Islamic anti-NATO. The Israeli-Turkish relationship actually progressed and evolved in spite of this. So the key here is that the Turkish-Israeli relationship is durable and it's likely to be durable in this instance as well. It's also likely to be durable for the reason that it's the only regional alliance that's capable of supplementing Turkish military requirements, and also of assisting Turkey to achieve its strategic potential. We have had a lot of conversations with the Turkish Government in the run up to the Iraq war about the potential role Turkey can play in a post-Saddam Middle East. That window of opportunity is still there, but it needs to be seized, and the Israeli-Turkey relationship can help Turkey to project power into the greater Middle East, into the Persian Gulf region into Central Asia, and also to promote the model of moderate political Islam much like the Ozal vision of a decade or more ago. There's also a potential for cooperation on terrorism and nonproliferation that I think we see increasingly becoming a focal point of the Israeli-Turkish relationship. Israel and Turkey have entered into a significant dialogue on missile defense, on creating a regional missile defense shield to cover the Eastern Mediterranean, and have also stepped up their counterterrorism dialogue in the last two years. I think this is significant because it very much dovetails with what we see as the evolution of U.S. strategy. The United States, in promoting international cooperation and in pursuing the war on terrorism, has gravitated towards the concepts of missile defense and counterterrorism as the strategic glue by which to bind its alliances. I think it's very significant to note that the Turkish-Israeli relationship has at its core those elements already. My final point I think would be that this is a mixed assessment, but in general I think it's positive, and it's borne out by the events of the last couple of months. There have been a spate of high-level military to military visits between Jerusalem and Ankara, and there's also a pending deal on the sale of Turkish water to Israel, which is very strategically significant for Ankara. And I think this points to the fact that despite the bumps in U.S.-Turkish relationships and in the regional realignment that's taken place after the fall of the Saddam Hussein regime, the Turkish-Israeli relationship is a relationship that's going to be around for a relatively long period of time, and it is also one that could quite possibly see notable expansion as the United States begins to look towards a post-Saddam vision of the Middle East. Thank you. [Applause.] MR. LACHMAN: Mr. Jamerson, would you like to go next? GENERAL JAMERSON: A little bit of history then up to modern times. Just so you understand my relationship in this, I'm going to stay within the bounds of generals and what generals know even though is a good time for retired generals right now. It may only last for days or weeks, but it's a good time to be there. [Laughter.] GENERAL JAMERSON: I would say two overarching comments. The interests that bind us in Turkey far overshadow those that don't, it's been my experience, and I'll give you a little bit of a timeline on that experience. The other comment I would make is the more things change, the more they stay the same, and I'll come back to that. I became involved in Turkey in 1990-1991, about the time of the first Gulf War. Some experience prior to that, but deep sort of day-to-day working experience largely with the Turkish military, it was 1991. Continued on that through the '90s in a succession of jobs that I had in Europe, spent a lot of time working different issues in Turkey. That's sort of the background that I bring to this. I would say when we went down for the Gulf War, the first Gulf War--and this is the part that says the more things change the more they stay the same--Turkey was a reluctant partner in our involvement the first time around. It was a thin, thin margin that had us in the fight. I was held out as the guy that was sort of the commander of the force that went to the task force, not allowed to come into the country, right until the time that there was a decision made which is an issue for a different conversation, but even how that decision was made might be interesting. If General Bier were here, he and I could have probably carried on a conversation about how we actually got permission to enter the war. Be that as it may, we did. But it was not with a great deal of enthusiasm at all in Turkey. I went back down after just a few weeks for what was called "provide comfort." This was the project, the humanitarian project to bring assistance to the people who had fled Iraq, eventually to take them back into Iraq. Again, if I said Turkey was a reluctant partner the first time, I'd sort of call them a reluctant demanding partner the second time around, because now we got involved in crossing the border with ground forces, doing things besides just flying airplanes and doing the things that airplanes do, and tremendous sensitivity--which I think the United States is, and sometimes surprising, the levels of our government fails to understand the sensitivity on Kurdish terrorism, the PKK instability on the borders, these sorts of things that come with what was viewed as I think sort of a naive approach by the Americans to what we were doing. It was not just Americans, by the way. It was the Europeans as well. So a reluctant demanding partner, difficult to operate down there. We did a humanitarian operation. It was at the request of the Turkish Government, the United States Government, and I think we worked very well together, but it was difficult, difficult times because of this sensitivity about working outside the borders, and we're down in Iraq, and what are we doing in Iraq, and how does that affect other things that were important to Turkey? That sort of morphed itself into a thing called Northern Watch over time, which was the long-term continuing U.S. air operation, which I will tell you, it sometimes was so painful it could bring tears to your eyes, trying to do what we wanted to do versus what the government of Turkey wanted to do. I have always used that in my career and after as a classic example of how two countries can have almost diametrically opposed objectives and still find a way to get the job done. But it means hard work, it is hard to do. It takes a lot of listening and takes a lot of talking. You should not make assumptions. Assumptions are such dangerous things when you get involved in--we simply again did not understand the sensitivity of Turkey as a nation with their neighbors. I think we just read too much into what we think we know about the region. But it worked. The key is that it worked. We were able to get this job done. Now, today, the more things change, the more they're the same. I don't have the same access to information into what goes on that I had then. I read it the same way in the press, the same reluctance to get involved in the activities of neighbors. If you will, it's sort of the same, the United States' view, "Well, you must want to do this because we want to do it," and if we want to do it, surely everybody else wants to do it, because it's the right thing to do. We just don't have enough depth of knowledge of what drives that nation versus what drives ours. I would call it a sort of reluctant unknown partner now today. Now we have this new government, which we were sitting at lunch today talking. I defy anybody to tell me very much about the new government. I'm sure there's some gentlemen here from Turkey can do that, and there as well, men and women who could talk about it much better than I could talk about it. But I'm not sure anybody really understands where things are and where things are going very well, except that in my view they haven't changed all that much. There is still a substantive reluctance to get into the issues of your neighbors and all of the turmoil that comes with that sort of thing. There is still a great sensitivity, I think--I read it anyway--on Kurdish terrorism and all the steps that could be taken and how that affects the security of Turkey, whether it was the PKK before and whether it's KADEK or whoever they are today, there still is tremendous sensitivity into how that's being handled, and I really don't think we understand that, we on the United States side, understand it all that well, which leads oftentimes to misjudgments. Contact with the neighbors, again, these are personal preferences of mine, but they're the things that I saw. When you have borders with countries that we don't necessarily like. I shared a note with a friend of mine the other day that said the United States did what was called military-to-military context. We did it all through the Cold War. It was a key part of how we won, if you will, the Cold War. And yet when other countries talk about doing military-to-military context, there's a sense of we don't want you to do that. We don't want you talking to your neighbors. Again, this is what I read. I can't say this is U.S. Government policy. I'm just saying this is what I read in here. We don't want you to do that, even though we did that to some success years ago. Some contact is better than no contact with regimes that you don't like. You'll never change a regime if you don't have some contact with them. Turkey in general though, I would tell you from a military fellow's perspective, both in my NATO job when I had that and the time I spent in Turkey, it has been a great friend. We've all said this before but I saw it on the ground. Turkey has come to Bosnia, come to Kosovo, come to Afghanistan. They've gone places they probably didn't really want to go, weren't that anxious to do that, but they did. So if we work it carefully and communicate carefully with each other we can achieve a lot together. So I guess I would say my bottom line or view of the experience I had there, which was painful at times but overall successful for both nations I think, is that we just need to give Turkey time to work out where they are right now, which few of us understand, and I think they have to take time to get through all this themselves. That's as much as I would want to say. Then we can keep the conversation going as we move. Thanks. [Applause.] MR. LACHMAN: Thank you. Mr. Kesici? MR. KESICI: Mr. Chairman, let me make a small correction about my title. Unfortunately, although Mr. Chairman says I am still a member of the parliament and former under secretary of the State Planning Organization in Turkey, I am also a former member of the parliament and former under secretary of the State Planning Organization. I wish I am going to be a member again of the Turkish Parliament. It's often claimed that there is no place for friendship in the field of international relations, countries only have mutual interests. It's unrealistic but not wise. It is wisdom which gives politics its ultimate meaning in its effort to create a better world for our countries and our regions. The history of relations between the countries and good or bad memories of each other have their impact on current and future affairs. In this respect I think that history of the United States-Turkish relations is qualified to be called a friendship. I consider this friendship benevolent since it gives us a great opportunity as a starting point to improve peace and stability in our region. It's become necessary to have a new perspective for the U.S.-Turkish relations after 50 years of Cold War period. Over the past 50 years the U.S. needed Turkey primarily to contain the U.S.S.R. and then Iraq. Now these countries are no longer a threat. In this panel I deliberately do not discuss the U.S.-Turkish relations in terms of any specific case or topic. This is not the forum to discuss specific issues. Additionally, coming from a background of state planning, I choose to look at the issues with a metro overview. Although the cooperation on Iraqi issue is urgent and hot, the future of U.S.-Turkish relations is much more comprehensive and beyond the limits of the Iraqi issue. The region we will deal with would be at least the greater Middle East, the region from Central North Africa to the Caspian Basin and to Central Asia. This must be the scope. I really do believe that Turkey's a perfect partner, as being the best functioning democracy in the Middle East and in the Muslim world. Besides we are good friends. Our people have good remembrance of each other. Turkey is capable of playing a key role in the process of democratization and sustaining the conditions of peace and stability in Iraq and in this region. Having a history of friendship with the world's only super power, the United States, has a great chance and opportunity for the establishment of friendly relations between the greater Middle East countries and the West. Under these circumstances the solution of these problems is only a matter of time. Some problems may require us to put better efforts to consider each other's points of view and some may need us to employ long-term perspectives. But at the end we shall overcome all difficulties in cooperation rather than confrontation. Since last year the U.S.-Turkish relations has been chilly at best. High hopes for a pivotal Turkish in a new Middle East dissolved into mutual recriminations when Ankara failed to support the Bush administration in the war against Saddam Hussein. The rejection of the resolution of March the 3rd, the day the Turkish Parliament against allowing the U.S. ground troops to cross Turkey on their way into Iraq, was of course, a real catastrophe. Many said this was the death of democracy, particularly in the circles of the ruling party and within the government itself. When it comes to the European Union, ladies and gentlemen, the Justice and Development Party, which is the ruling party, government says, We have more enough majority in the Parliament, and the European Union reforms will pass without any incident. Indeed the government has aggressively pushed various European Union reform packages over the past months. The Justice and Development Party made sure that its deputies would vote in favor of these packages and did not allow any room for opposition within its ranks. Understandable. This being the case, when it comes to a resolution towards relations with the United States or sending peacekeepers into Iraq, they say there is democracy in Turkey and we have to consult our parliament. I guess I need say no more. Yes, of course, it was a costly mistake. Without Turkish approval the United States couldn't send heavy armored units in the Iraq from the north, I said before, and without this northern front it could not crush pro-Saddam forces in the Suni triangle. That's where the trouble began for the U.S. occupation in Iraq and that's where major trouble still prevails. The most important feature of an alliance must be based on the absolute reliability the partners repose in each other, and economic benefits--as the demanding partner, economic benefits cannot and should not be the reason or the main purpose for an alliance. It should only be one of the results of that partnership. Distinguished guests, so far humanity suffered a lot from all sorts of enmities among nations, races, ethnicities, and religions. But unfortunately a much worse situation did arise after September the 11th, the international terrorism. After 9-11, then unbelievable terrorism two years and the whole world has seen the consequences of an international terrorism. It became urgent to find ways to overcome this new enmity and confrontation of course. Very understandably the United States took the lead. It was a great task and challenge. No one or no country can do it alone. But unfortunately, the international community in general, some very important leading states in the European Union in particular, and even the most affected partners, including Turkey, have not given enough support to the United States in its efforts. But a threat to all must be answered by all. Therefore, an international understanding of cooperation is a must to confront this. Today we rather witness the [inaudible] between democracy and dictatorships, conflicts between freedom and terror, order and disorder. As British Prime Minister Tony Blair, Mr. Tony Blair puts it in a speech to the Congress in July the 17th in the Congress: Our new world rests on order, and the danger is disorder, and just the terrorists seek to divide the humanity in hate. So we have to unify around an idea, and that idea is liberty. Dear guests, the last thing we want to see in our region, in the Middle East, is to surrender to everlasting enmities, civil strife, the rise of all sorts of fundamentalism and political instability. The Iraqi issue, with an overview, to me is nothing but this. After the removal of a brutal and hostile dictator in Iraq, the United States sees its [inaudible] to promote more than democratic values more than ever as a precondition of war/peace instability. The U.S. has a history of good relations with many Muslim countries with different regimes before. The democratic tolerance of different cultures should be considered as an added(?) in international relations. Yet now it's become very clear to all of us that world order and peace can only be sustained by the interaction of democratic regimes. And religious fundamentalism and ethnic claims are also threats to democracy in any country. Establishment of a democratic regime in Iraq must be free from the threat of any kind of fundamentalism. As far as Turkish perspective, after the National Assembly voted against allowing the U.S. ground troops to cross Turkey on their way into Iraq, as I said before, some argued that the Iraqi Kurds proved to be better allies for the United States than Turks, and will soon replace Turkey as political partners. First of all, I do not think that good relations between the United States and the Iraqi Kurds should necessarily be in opposition to the interest of Turkey. Turkey is the best potential ally for the Iraqi Kurds if they are able and capable to realize and see the whole picture and the future. Without Turkey, Iraqi Kurds have either Syria or Iran to re-access the outside world. You can imagine the irrationality of both. Secondly, to be frank, I never believed that such a great power like the United States will engage such a short-term power game rather than the possibility of long-term stability and cooperation in the region. And finally, I think the partnership between the United States and Turkey cannot easily be ruined since it is based on alliance in principles, their uncompromising commitment to democracy, capitalism, freedom, human rights and historical friendship memory. All of those who will benefit from peace and stability in this region should unite all their efforts to reach this goal, including Turks, Arabs, Iraqi Kurds, Turkemans and the other minorities who have lived here together for centuries. Mr. Chairman, speaking of the greater Middle East, I must emphasize that Turkey and Israel are the only two democratic countries in the region with open societies. And a Turkish-Israeli partnership is a valuable asset for the United States and strategic thinking in shaping the new greater Middle East. The peace between Israelis and the Palestinians is an urgent problem. Turkey is lucky not to have neither historical nor pleasant popular hostility towards Israel. Therefore, Turkey and Israel must have a strong alliance to support the U.S. efforts in democratizing the region. Dear guests, another important issue is the Turkish-European Union relations. European Union relations have ultimate importance for Turkey. Turkey chooses its historical direction as becoming not only one of western democracy--repeat again--as becoming not only one of western democracy but also a part of the western world in all world institutions. This policy has always been one of the basic pillars of the republic. Nevertheless, the rapid global developments require assurance and confirmation of the old political and economic ties and formulation of new ways of collaboration and cooperation. But so far, unfortunately, the European Union has not been treating Turkey on an equal footing with the Central and Eastern European countries on the issue of membership in the European Union. Turkey is not only the best functioning democracy in the Islamic world but also the inheritor of the sophisticated and tolerant Ottoman interpretation of Islam and the Ottoman experience of multi-culturalism. Turkey now intends to improve its democracy to adjust the demands for some additional religious and ethnic diversity. This brings Turkey the ability to support the United States in dealing with other Muslim nations. Another major difference in understanding between us and other Muslim nations is that some view Islam as the glue effect to put their nation together. According to them, as Professor Bernard Lewis artfully puts: Muslims, however, tend to see not a nation subdivided into religious groups, but a religion subdivided into nations. In the other [inaudible] we consider the rise of Islamism or religious fundamentalism as a political current in Turkey, a threat to the indispensable values of secularism and democracy, and determine to protect them from any inclusion. In fact, political [inaudible] is rather smooth to transform to the politics of the present government party, the Justice and Development Party, which defines itself as conservative rather than Islamist. I am not one of those who think that they are hypocrites. And I am critical of the present government for some other reasons, for their incapability, inexperience and lack of skill to understand the happenings in the world, and govern such an important culture during such important times. And a very strong Islamist part of the majority of the governing party members of course is a real problem, not because of their hypocrisy or hidden agenda, as some claim, but coming from a political background as marginal and radical, the governing party keeps the habit of perceiving politics in a rather simplified way. This habit hinders the government and members of the parliament to comprehend and handle Turkey's conditions and problems properly. Besides their problem of legitimacy, [inaudible] damages the smooth functioning of democracy in the sense that the coordination and cooperation of various branches of constitutional institutions and the executive is inevitably affected by the political background of the governing party. I am finishing, Mr. Chairman. Thank you. This is not a question of sincerity on behalf of the ruling party, but their credibility and their capability to govern the country. There's a huge difference between the fundamentalist mindset and government. Ankara must now step up to the plate and play a more active role in shaping the new Middle East. This would multiply America's capacity to transform the region. However, now I see that Turkey is chafing from the separation. It also worries me about the future of the United States and Turkish relations. The Turkish public and the Turkish State have never been anti-American, anti-western and anti-Israel ever before. However, currently, an unbelievable anti-Americanism prevails in Turkey. If left to brew, anti-Americanism could lay deep roots in Turkey, and this is particularly significant at a time when the situation in Iraq and in the region is not yet stable. Persuading the general public in international affairs in this new era is as important as military operations themselves. At this point, again, let me express my high appreciation and respect for the British Prime Minister, Mr. Tony Blair, for taking a firm standing. He kept his position in spite of all opposition to him, knowing the consequences, that his position may cost him losing election, and he has made tireless efforts to explain his position, both to the British public and to the rest of the world, over and over again. This is what I call public diplomacy and leadership, particularly in hard times. I would like to wrap up with the words of a great leader from the last century, Winston Churchill. He says, "Out of intense complexities intense simplicities emerge." And this is a time of intense complexity for the world as well as for the United States-Turkish relations, and ultimately we're looking for peace and prosperity for our region, and I am in the hope that a stronger partnership will emerge as the intense simplicity. Thank you so much, Mr. Chairman. [Applause.] MR. LACHMAN: Thank you. Mr. Tashan? MR. TASHAN: That causes me to be rather brief in my remarks. This is not a prepared remark because I was not expected to appear on this panel. I was here in the United States, together with members of the Board of Directors of the Foreign Policy Institute for a visit. But I was very pleasantly surprised that I was going to talk in this room which has the name of Wohlstetter. Albert Wohlstetter has been a good friend of mine and also an excellent friend of Turkey. For many years we have worked together, and I recall our first meeting took place in 1979 when Turkey was undergoing a crisis, and Albert brought together 13 Americans, 13 Europeans, and 13 Turks together in Istanbul, and we had--we discussed so many things that eventually that became the basis of Ozal policies in Turkey. That was very interesting. I think Richard Perle was there also at that meeting. So later on when we had the many problems with the U.S., even before the embargo after the 1974 Turkish intervention in Cyprus--there was the U.S. embargo. I remember going with Albert Wohlstetter to the U.S. Congress and asking the Senators why Turkey was so much important to U.S. and Turkish alliance was so important for Gulf security. So those were the years we had strong cooperation, and I have this sentimental memory of Albert Wohlstetter, and I'm happy to see that his name is going to live in this building. I'm not going to discuss very much about the pros or cons of the Turkish domestic policies and the government policies and how they are progressing. Mr. Kesici is a politician, has been a leading bureaucrat, and he has presented his views on this issue. I will not get involved in the nature of Turkish domestic politics. But I would like to mention the position of Turkey. As you may imagine, it is the title of the conference, "Turkey at Crossroads." But I would say Turkey is as in between. We are in between Europe and the Middle East. We are in between Russia and the Middle East. We are in between Black Sea and the Mediterranean. We are in between development and poverty. So the Turkish foreign policy is more of less based on this difficult position of adjacency to different areas but being at the center. So with the medium size of power, Turkish foreign policy has to be very, very careful in approaching the neighborhood, its neighborhood. Now, here in our neighborhood, unfortunately, we have gone through these huge problematic areas, the axis of evil on one side, Kurdish terrorism in the South, and a friend, Israel, is good. But the ancient historical enmity, I would say, between the Arab notion of the Turks, the Ottoman Empire, and the-- [Tape change.] MR. TASHAN: [Continues] -- and their problems, and particularly in a democratic country, the pressures weigh very much inside Turkey and that they affect Turkish foreign policy as well. That's why we have the Cyprus problem. That's why we have the Turkeman problem in Iraq. That's why we had at one period problems with Greece and problems in Bulgaria. All these Ottoman heritage has made life very difficult for Turkey. Secondly, I should say Turkey has been a little bit under the pressure of its concept of Turkishness. Anyone who is linked to the Turkish Constitution as a member of the Republic of Turkey is a Turk on one hand. On the other hand, there is a concept of Turkish ethnicity. So these two mergers, we were not so successful in doing this like America, saying that everyone is American, irrespective of its--but we have done it to a great extent since the foundation of the Republic, but we have not completed the job. But there are reasons, because there are Kurds in other areas, there are Georgians in other areas. But the Kurdish voice has been rather strong, and that they have succeeded in getting support from western democracies, and that even the terrorism that they committed against Turkey has been connived. Unlike what Richard Perle said, that democracies do not support terrorism, terrorism in Turkey has been supported by West European countries mostly. They even refuse to recognize these organizations as terrorists, and they have safe havens in west European countries. As to our relations with the region, our relations with the region can only be developed in a process of understanding and gradual development of exchanges. We cannot afford to act like the United States or ostracize Iran completely or cut off relations with Syria. We cannot do it. We are neighbors and we are going to stay as neighbors. That is why this neighborhood concept and also the consciousness of the historical image in these countries have led Turkey to be very, very careful about the possible Turkish military intervention in Iraq. That's why the President of the Republic talks about legality, and opposition says again legality but we should not be carried by American imperialism or whatever they call it. And there is also much influence of the European attitudes, so Turkey is going to Europe and they say, "Oh, France does this, Germany does this. Why should we go forward to be so active, to actively support the United States in something that Europe doesn't consider proper?" So I believe this Turkish foreign policy would greatly benefit--also both Europe and the United States would greatly benefit--if there is a modest vivendi or modest operandi between Europe and the United States. I think this current rift creates a rift inside Turkish politics as well. So what can we do on this issue, I don't know, but at this moment our politicians should support, and I think they are supporting harmony between Europe and America is most desirable from the point of view of Turkey. I'll stop here and we can answer questions. MR. LACHMAN: Thank you. [Applause.] MR. LACHMAN: I'm going to take my position as moderator and abuse it a little bit and ask the first question, and then I will throw it out to the audience. Going back to the issues of Turkish identity, of what it is today, I mean it appears that we have--however contradictory it may seem--three forces coming together in Turkey now. That is, it's becoming democratic, it is becoming more publicly Islamic, and it's also becoming more European. Now, the United States has advocated for the longest time, I think, with pretty strong constancy, that Turkey ought to be in the European Union. Now, it is possible, that as Professor Fordagerme [ph] of Johns Hopkins has recently written, that being more European is not necessarily a felicitous thing for the United States, and that Turkey's response to the Iraq war actually in many ways doesn't significantly differ from the responses that we saw in France, Italy and throughout most of Europe. So is it possible that Turkey can in fact become more democratic, more Islamic and more European, and that can be very good for the health of the Turkish Republic, but bad for us? Anybody? MR. : I can answer that. That will not be--your question presupposes that European and American interests are divergent. I believe they are not divergent. I think that that is a question of communication between Europe and the United States. Once this communication problem is overcome, the European and American interests overlap very much both in Iran, Syria and everywhere. Europe is a champion of human rights and democracy. They are running a program, a huge program for the Mediterranean countries and now they are enlarging this program to cover western newly independent states. Democratization of these countries and globalization of the economies is also a European objective. The problem is the U.S. and Europe cannot come together to do the job together. I think that is very important. I support fully--there is no difference in the end between Europe and America, and the only thing is lack of communication and that they should--if they do succeed, Turkey's place in the European Union will be a further advantage because at that moment Turkey, feeling behind itself, Europe and America can be more active for western codes in the Middle East. MR. LACHMAN: Thank you. I might add though I think that Mr. Chirac and Mr. Vilpan [ph] might quibble with you a bit. I'll throw it out to the audience. QUESTION: [Off microphone.] Good afternoon. [Inaudible] about the increasing pressure by the United States to supply [inaudible] with Iraq, that vote will have to be taken again by the Turkish Parliament regardless of what the military-to-military agree upon. And it has the potential, if it's rejected, to sour progress in the U.S.-Turkish relations [inaudible]. What is your thought on whether or not Turkey will eventually agree to send peacekeepers into Iraq? With the understanding by both countries that they would not be [inaudible]? MR. : Well, my point is that it has been explained on different occasions that there are certain worries of Turkey in sending troops to Iraq. That is the fear of the existing conditions in Iraq, which has been overplayed in the media. There is a question of legality. And above all, there is a question of PKK, which has about 5,000 armed troops that are dedicated to fighting against Turkey and which they have ended the cease fire that they were following since their leader's capture and imprisonment in Turkey. So we are worried that these people, these terrorists are running rampant in Northern Iraq and that U.S. is doing nothing on this subject. It causes a lot of worry. Why the hell should we go to Iraq? Why the hell should we? So I think that certain steps to be taken by the United States will be determining a very important factor for the favorable decision of the Turkish Parliament. QUESTION: Mr. Chairman, I want to make a brief statement, a very brief statement. I see many-- MR. LACHMAN: As long as it's followed by a question. QUESTION: Okay, it will be followed by a question to, to I think Mr. Kesici, who is a politician. A lot of the commentary this morning and this afternoon will probably lead our American colleagues to believe that things in Turkey are going very well. In fact, there's a segment of society in Turkey, including myself, who are very unhappy. The problem is the current government, which is by far a majority in the parliament, exercising a tyranny of a majority in a sense, because the popular vote is not really reflected accurately in the parliament. They only got something like, what, 34 percent of the vote? And represent a good 70 percent of the parliamentary seats. And from the point of view of culturalism(?), secularism and the principles by which we were brought up in the last 50 years, things are not going well in the country. Thank you. So, Mr. Kesici may want to comment on this as a politician. [Laughter.] MR. KESICI: Okay. This--to me, this Justice and Development Party got 35 percent of the accepted voters. According--[unintelligible] election participation it is to be considered as 28, 26, 28, 29 percent, and in fact 24 percent of the total of the voters. The problem is, as you pointed out very clearly, they represent in the parliament, 71 percent. Even they, under normal conditions 35 percent of the general vote cannot and should not be a government, but in this particular, in this very particular case, they can even change the constitution by themselves without any help. This is a problem, of course. This is because of the election--this is because of some other things. And in the morning session, I am a little bit surprised about the economic performance of Turkey and this government or this Justice and Development Party got their 35 percent of the vote under this condition. In 1999--there was a three-part coalition before this government. In 1999 the GNP was fallen 6-1/2 percent. In 2001, again fallen 10-1/2 percent. It makes up in three years 18 percent declines in the gross national product, gross domestic product. It is very important and it can ruin everything. And it is done like this. Under normal conditions this sort of government cannot get 35 percent and cannot get--or cannot represent about 70 percent of the parliamentary seats of course. MR. LACHMAN: What about the other things, [inaudible]? MR. KESICI: What about the other things? I explained. Because I don't--of course they're coming from a radical and marginal pro-Islamic background, but they are telling that they are changed. I believe in that, as I pointed out before, but I criticize because of their incapability to understand what's happening in the world and in Turkey. Also their Islamic backgrounds put some pressures on them to reach the right decisions, the right time, the right decisions, the rejection of the first resolution, and now there is the peacekeeping forces they're sending to Iraq, and later issues, I think mainly because of their past radical Islamic tradition. Thank you. QUESTION: I'd like to take an issue with the term "Islamic Turkey." Since Ataturk had his reforms Turks are free to practice their religion any way they wanted to, including the minorities. I am a Turk. I grew up in Turkey and I practiced Islam. But I don't like the label "Islamic Turkey." Americans are very naive in this approach. They think by labeling us "Islamic Turkey" that they're endearing themselves to other Islam countries. It's a very naive and a misleading statement. And Turkey is not getting any more Islamic than it is now because we have total freedom to practice our religion. So statements like that, Turkey is getting more Islamic, is totally misleading and wrong, and we don't call Christian America, we don't call Christian--we don't even call Jewish Israel. Israel we know is majority Jewish. So please stop that term. QUESTION: Given the proliferation of weapons of mass destruction in the region, that is chemical, biological or nuclear weapons, is there any movement in Turkey to acquire such weapons? MR. : I could answer that question. Well, in the past when we were members of NATO there was no desire for developing nuclear and chemical weapons or biological weapons. And this is still the policy of Turkey as far as I know. There are no specific groups who demand nuclear or mass destruction weapons for Turkey, and Turkey's a member of all the relevant international instruments for MPT and missile agreement and so on. This is not even discussed in Turkey as an option. MR. BERMAN: I'm sorry. I just wanted to add one thing. I think what's important to point out here is not so much the prospectives within Turkey on acquiring ballistic missiles and weapons of mass destruction, but rather the response to ballistic missiles and weapons of mass destruction as an orienting point in Turkish strategic policy. What you see now is you see an increased dialogue between Turkey and Israel, between Turkey and India, between Turkey and NATO and between Turkey and United States on precisely how to combat the proliferation of these weapons. I think that's a much more significant orienting point insofar as it provides a commonality for Turkey to expand its partnerships abroad. Thank you. MR. : May I just add to this? Also the Turkish strategic concept is that if any of the neighbors of Turkey dare to use such a mass destruction weapon, its impact can only be small because Turkey's a large country, and that Turkey has sufficient conventional weapons and conventional capability to destroy that country. MR. LACHMAN: We have time for just maybe two quick questions. One question? QUESTION: I'm [inaudible] from the Washington Institute. I have a quick idea to bounce off the panel. There has been much talk in town since the Iraq war to what extent Turkey's strategic importance in the eyes of the United States still continues, and whether this is going to [inaudible], and a lot of people have been saying that Turkey is not as important as it used to be. The idea I'd like to bounce off is that perhaps Turkey's strategic importance has gone unused and as a result of that doesn't have the same value that it did prior to the Iraq war. And before I'd like to hear what you think on this, let me elaborate a little bit on this. To me it seems that an analogy you can use to refer to this is strategic components of the country is foreign cash. The same foreign cash is not valuable when it's not convertible. I think, given the developments of the last year, the fact that Turkey did not cash in its strategic importance, has made it--and has not used its strategic importance, has perhaps diminished its value in the eyes of the United States. I'd like to hear what you think of that and perhaps what can be done for Turkey and from the United States' perspective, so that the country can cash in its strategic value once again. Thanks. MR. : I totally agree with the [inaudible]. If there is--in fact, this is not a strategic partnership, normally strategic--a definition of a strategic partnership, I may say "with each other and for each other under any condition." The only strategic partner of the United States, I think, is Israel, the Israeli-United States partnership, [inaudible] a strategic partnership. But we have a very good partnership so far. I wish we will have that strategic partnership. Of course, last year is also a turning point of history in our region, in the world. We must act accordingly to the United States or with the United States in shaping our region. The rejection of the resolution of March the 1st, and the reluctancy, as General James Jamerson a while ago point out very clearly, very understandably and very beautifully, a reluctant partner, a reluctant demanding partner, reluctant unknown demanding partner, et cetera. If Turkey will go on like this--to me will not go and cannot go on like this--the strategic importance is nothing of course, or it may be hazardous from time to time under some conditions. In order to act accordingly in the new reshaping of the Middle East and the greater Middle East, and reshaping the understandings of the whole world. As far as the terrorism, weapons of mass destruction, proliferation of the nuclear weapons, et cetera, is concerned, we should act with the United States very actively. GENERAL JAMERSON: Just a quick comment. I mean I would say, my personal view is Turkey is probably more strategically important today than ever. Early days of the Cold War perhaps, declining days of the Cold War not so much, both from its geographic positioning, and with all respect to the lady who I totally agree in the front, to its religious positioning. I mean it is a country that can help us through the difficulties of dealing with the rogue side of Islam if we work on the problem. So I think it's more important than it was before. MR. : Richard Parrish wrote a book in 1960s I think. It called Turkish-American alliance as the "troubled alliance." We have had crises, many crises in Turkish-American relations. We begin with the Jupiter crisis of '62. It was a major crisis. We had Johnson letter, '64, major crisis. In 1972 when first detente agreements were signed in Moscow, and somebody said, "Now Russia and America are together and there will be no more need for Turkey as a strategic partner or an ally." But in 1978, when there was the Iranian revolution, and Turkey was again an important partner. So these ups and downs that always been Turkish-American relations, but the basic--two factors are important. Turkey is, with Israel, only democracy in the region. Turkey has a way of life, the democratic values of the United States and Western Europe. Turkey has and respects human rights, even though this is not very much appreciated in Europe and partly in the United States. And Turkey has a military power. But that doesn't mean that Turkey automatically will follow the United States on all issues. It will be negotiated. Then interests of two sides will be brought together and the partnership will operate on this condition. MR. LACHMAN: On that happy note, I'll call it closed. I want to thank the panel for its time and effort for being here, and we'll take about a 10-minute break, and then Bernard Lewis will talk to us. [Applause.] [Recess.] CLOSING REMARKS MR. LACHMAN: We're going to have to start this thing very promptly. Professor Lewis does not have that much time today. Since Professor Lewis requires absolutely no introduction, I'm not going to give him one. I will just say that he has to leave sharply at 3:30, so any attempt to keep him longer than that will be dealt with sharply. PROFESSOR BERNARD LEWIS: Thank you. I'll just give them time to sit down. Good afternoon, ladies and gentlemen. I shall be brief as the time is short and I want to leave some time for discussion. When I received the program of this event, and saw that I was down to speak on Turkey and the 21st Century, I must say I felt more than a little alarm. The 21st Century is only in its third year and hasn't even finished that, which means, in effect, that the task that was assigned to me was one of prophecy, and I'm, as you know, a historian by profession, which means to say that I deal with the past. Not only that but I'm a retired historian, so even my past is passe. Nevertheless, on reflection, I feel that there may be some lessons that we can learn, particularly because my past is passe. As an old-fashioned historian, a very old-fashioned historian, I like to deal first with the sequence of events, you know, ask the traditional historical questions. What happened? When did it happen? Where did it happen? And for the intellectually ambitious, Why did it happen? And that may serve a useful purpose if we start making comparisons between then and now, between events which occurred in the past and events which are occurring in our own time. It has often been said that history repeats itself. That of course is not true. Historians repeat one another; but that's another matter. During the last few months, my mind has gone back frequently to the events of 1939. Not long before the outbreak of war, the Republic of Turkey had signed a full military alliance with Britain and France. When war broke out, the Turkish government decided to invoke a clause which said that nothing in the treaty should require Turkey, should raise the possibility of Turkey coming into hostile relations with the Soviet Union. The Soviet Union was of course neutral at that time and remained so, until it was invaded by the third Reich. But this continued to be the basis for Turkish nonintervention. Turkish neutrality was, as you know, sustained right through the war years, going through a number of very interesting variations, and I might say, aberrations. I was reminded again of a conversation I had with the late Turgot Ozol, which I remember very vividly. It was in November '90, that's to say after the invasion of Kuwait but before the Gulf War. I was in Turkey on university business and spent the evening with Turgot Ozol who was, at that time, the president, but I had known him for a long time before he rose to high political office, so our conversation was, shall we say, more relaxed than would be normal between a head of state and a foreign visitor. And at one point, he said, speaking of the possibility, not yet determined at that time, the possibility that the United States might take military action. He said there will be a war. People are wondering will there, won't there. There will be a war, he said, and when it comes, he said, it will be short, cheap and easy. That rather surprised me. I mean, in Washington they were preparing for war as if they were about to encounter the Third Reich in its prime, and this short, cheap and easy was rather startling. I asked him what was the basis for his assessment, and he smiled that special smile that he had, and he said we like to know what's happening among our neighbors. In other words, we have good intelligence. And then I asked him another question. I said: if and when it comes, will you be with us? And he said of course, no hesitations, no equivocation. Of course. I was a little surprised at this very clear, immediate answer, and again I said, May I ask why? Oh, he sad, for the same reason we declared war on the Axis in February 1945. He said when the fighting is over and the peace talks begin, he said we want to be at the victors' table and we want to be there on the guest list, not on the menu. I've often thought of the events of the war years, and that conversation with Turgot Ozol in watching the development of current events, the present time, and much that gives rise to disquiet and concern, but not nearly as much disquiet and concern as one finds expressed in various places. I have no time to go into a full and thorough examination, so let me just pick up and deal with a few points which seem to me significant and relevant. We talk a great deal about our friends and allies, here or there, and sometimes use the word "friend" or "friendship" in dealings with, between nations, as if it were between individuals. It is not the same thing at all; quite different. Friendship between nations is of two kinds. It may be based on a perceived community of interests, and therefore it will last as long as A, the community of interest lasts, B, the perception of that community of interest lasts. A slight change in the situation, a change of ruler, particularly in an autocratic society, a change of ruler, or even the ruler changing his mind, would swiftly end the alliance and the friendship. We saw that happen a number of times in the Middle East, in the post-war years, when Egypt passed from being an ally to being an enemy, and then to being an ally again, without any necessary changes in the Egyptian structure. The other kind of alliance is one which is based not just on a necessarily temporary community of interests but on a genuine affinity of outlook, of institutions, of way of life, of political definitions and aspirations. That kind of alliance is more permanent, and is indeed much more difficult to end. It seems to me that with Turkey, over the years, it is that kind of alliance that has been developing, an alliance that can survive upheavals--even, I use, I deliberately use "upheaval" rather than "glitch"--I think glitch is inadequate to describe what happened in March--can survive that and still resume its even course. Turkey, we say is a democracy. Yes, indeed, it is. It was, for a long time, the only democracy in the Islamic world. Now there are some others, they're mostly rather far away from the region, and that, in itself, is an important basis. The Russians, in the days of the Soviet Union realized very well that a firm relationship resets on such an affinity. That is why they tried so hard to create communistic dictatorships in all the countries to which they extended their power. It's more difficult to create democracies than to create communist dictatorships. It's also, as it turned out, more difficult to destroy them. That is a point I think from which we may derive some encouragement, and when I say "we," I'm talking of both sides. Let me turn now to my assigned subject, the future. Obviously, I make no pretense of being able to predict what will happen, but what I think one can reasonably attempt to do is to formulate alternatives, look at things which are likely to happen, consider how these things will affect the course of events, and try, as I say, to formulate the different ways that things can happen, the different choices that the parties may be called upon to make. And let's look at this in the context of the whole region, and Turkey's not alone in the world, and Turkey's in an unfortunate neighborhood, I would say, and has problems, has had or has problems of one kind of another with virtually all its neighbors. It also has affinities with a number of those neighbors. Looking at the historical record, I turn briefly back to the past, for many, many centuries the rival powers, the alternative futures for the Middle East were Turkey and Iran. These are the only two states in the region which have a long record of independence, going back for many centuries. They were both Muslim but they represented different interpretations of Islam, different forms of Islam which were in rivalry. Their conflict went on for centuries and came to an end. Oddly enough, the same thing is happening again today, where we see Turkey and Iran representing different diagnoses of what is wrong and different prescriptions for putting it right. Putting it briefly, I would say the Turkish prescription is and has for a long time been a lack of modernization. We have fallen behind the modern world. Therefore, the remedy is to modernize, to catch up with the modern world. [End of tape side 5B.] PROFESSOR LEWIS: [in progress] The Iranian message is the exact opposite from--what has gone wrong they say is not insufficient modernization but too much modernization, excessive modernization, and the remedy is to return to the pure, austere, authentic Islam of our ancestors. In Turkey, we know that a significant number of Turks are willing to buy that alternative, willing to support it, to accept that diagnosis. We do not know how many Iranians would prefer the Turkish line, because in the Islamic republic, it is not permitted to express that preference, nor is there any legal way of giving expression to it. But the indications are becoming stronger and stronger, that there are probably more secularists in Iran today than in Turkey. They have tried the Islamic republic and they don't like it, and in countries under dictatorship, the most reliable indication of how people are thinking, what people are feeling is the political joke. It's the only comment which is authentic and uncensored, and nowadays, thanks to the Internet and other means of communication, one can get them piping hot. Let me just detain you with one from Iran. Two Iranians are chatting and one says, "This is awful, that's terrible, this is worse, that's dreadful" and so on, and they go on like this, about how awful the situation is in their country, and then one of them says, "There's only one thing that can save Iran. What we need here is an Osama bin Laden," and the other one looks at him in horror and says, "What? Are you crazy?" He said, "No. Then the Americans would come and rescue us." It's a piece of current Iranian humor which will tell you something. Turkey and Iran, still at the present day, as in the days of the Ottomans and the Setavids [ph], represent alternatives churches, and in this case there has been no open conflict between them, I hope there wont be, but the rivalry is very clear, and there's a fair amount of, shall we say, not so open conflict, and particularly attempts at subversion by the Iranians in Turkey. That is one possibility, one possible future, or, rather, one possible line of conflict into the future which gives you two alternatives. What is happening in the Arab countries? Here, the situation is more gloomy. Practically without exception, these countries are under corrupt tyrants and this special combination of corruption and tyranny has led to a devastatingly bad economic situation, and to a growing rage, well-justified rage, which the rulers of those countries find it necessary, advisable, to direct outwards. Obviously, there has to be a safety valve, there has to be someone you can blame. When you become aware things are going badly wrong, two questions you can ask. You can ask, What did we do wrong? which basically is what the Turks and the Iranians asked, and then of course the next question that follows is, How do we put it right? That hasn't been asked in most of the Arab countries. The question they ask instead is, Who did this to us? and this leads into a twilight world of conspiracy theories and neurotic fantasies. The regimes in those countries are going from bad to worse, and here it must be admitted, painfully, that a significant proportion of these regimes we are proud to call our friends and allies, which means of course that a good deal of the blame for what is going wrong in those countries is directed this way, not without some substance. What about the larger surrounding? Well, to the West lies the European Union, now about to be enlarged by incorporating the greater part of Eastern Europe. There are still people in Turkey who cherish the belief that they will one day be admitted into the European Union. Personally, I find this--well, since we're among friends, I'll be, I'll speak plainly--absurd. I see no prospect whatever, or other--I'll correct that. I see only one possibility of Turkey being admitted to full membership of the European Union. That one possibility is if, present demographic trends continuing, the European Union becomes a Muslim state. Short of that, I don't see a hope in hell of Turkey being admitted, and I think that from the Turkish point of view, by far the best policy for them to follow, the best tactic for them to use is to negotiate the best possible deal that they can with the European Union in such matters as customs, preferences, and the like, short of full membership. There are many forms of associate membership which can be very useful and I think would be acceptable. That raises the larger question of relations with Europe, and here, if you will permit a retired historian another excursion into the past. The movement for Westernization in the Middle East saw the West almost exclusively in European terms. Part of it came through a European imperial presence, mainly British or French. Part of it came through enthusiastic reformers like the various sultans and ministers in Turkey, like Muhammad Ali, pasha in Egypt, and others. We, in the West, tend to assume, comfortably, that this is a process of improvement. In many ways it is; in many ways it isn't. In many ways, the impact of Europe, or, rather, of European-inspired change, has been harmful rather than good. Someone spoke this morning of the inflated bureaucracy and blamed it on the Ottomans. Here I must spring to the defense of the Ottomans. The inflated bureaucracy does not date from Ottoman times. It dates from the reforms, when the state took over more and more and more of public life, and when, therefore, the state apparatus got larger and larger and larger. This is the beginnings of the modern state as it exists all over the Middle East, or almost all over the Middle East, and a British naval officer who was attached to the Turkish forces put it very well. He said the old nobility, that's to say, before the reforms--the old nobility lived on their estates. For the new nobility, the state is their estate. I think that was a very accurate formulation which remains true to the present day in much of the Middle East. This is seen, not inaccurately, as part of the Europeanization of the region. There's more to it than that. People talk of Saddam Hussein's dictatorship and the Baath Party as if these were immemorial antiquity. This is how they are, we can't change them. This is the line that's known as pro Arab in the State Department. In fact that type of dictatorship and that kind of party have no roots whatever in the Arab or Islamic past. They are part of the Europeanization. The Baath dates from the period of Nazi influence, through French-occupied Syria, and is modeled on the Nazi and Fascist parties. When the Soviets took over, it needed very minor adjustments to bring it to the communist model, and so on and so forth. So it seems to me that that, again, is part of the process of Europeanization. Now let me come back, as my time is running out--in fact it has already run out--to these alternatives. In the west Europe, further west the United States, in the north Russia. For the moment Russia is not a major player, but I cannot believe that a country of the size, the numbers, the resources of Russia, will indefinitely remain on the sidelines of history. Sooner or later Russia will be back as an active, major, great power. What kind of Russia it will be, I have no idea, but it's something I think that we have to think about and prepare for in planning a future for this region. There are also two other powers which are increasingly becoming involved, China and India, and there again I think there are interesting questions for the future. Well, let me stop there and invite your questions. [Applause.] PROFESSOR LEWIS: I'm sorry. You know, university teachers are programmed by internal computers to speak for 50 minutes, and it's difficult to be shorter than that. QUESTION: A very short question. PROFESSOR LEWIS: Good. That's all we have time for. QUESTION: How do you think the Turkish troops will be received in Iraq, if Turkey decides to send them? PROFESSOR LEWIS: How do I think Turkish troops would be received in Iraq, if Turkey decides to send them? I think the first reaction would be one of utter astonishment, which I would share. How they would be received, I think that depends very much on what part of Iraq and in what circumstances. They could be welcomed in some places, received with suspicion and hostility in others, but it depends mainly on the circumstances in which it happens, if it happens. Please. QUESTION: To follow up on that, once this utter astonishment--what do you think will happen when the Turkish parliament brings this to the floor? What do you think--what do you predict the decision that day would be? PROFESSOR LEWIS: Well, I only make long-term predictions. [Laughter.] QUESTION: Well, it might take them a long time to decide on this one, so-- PROFESSOR LEWIS: I would be very surprised if it comes back at all. QUESTION: Why is that? PROFESSOR LEWIS: Because it would create a very awkward and difficult situation. They would have problems if it passes and problems if it fails, and I think the easiest, probably the wisest course would be to avoid that particular problem. QUESTION: Professor, let me ask you, in your capacity as a historian, to look to the past rather than to the future. In your book, "What Went Wrong?" you described in compelling detail the decline of Islamic civilization, and you also described the various efforts that were made by the Islamic countries to counteract this historic trend. But could you share your thoughts with us on the reasons why Islam declined as a civilization, from the leading civilization in the world to its present state. PROFESSOR LEWIS: Well, there's no single, simple answer to that. I mean, the decline of a civilization is a very complex process. The historian can examine the evidence and will have great difficulty in distinguishing causes, symptoms and effect. They all interact. Now the discussion on what went wrong began more than 300 years ago. We can date it very precisely. After the second Turkish defeat in Vienna and the treaty of Karlovitz, of 1699, the first treaty that the Ottomans were forced to sign as a defeated power, they started talking about it. The debate began in the Ottoman governing elite. It spread to the rest of the Turks. It spread from Turkey to other countries. The debate is still going on, in passionate terms, all over the Muslim world. The facts can no longer be concealed or denied. All kinds of different explanations are offered and I don't think I can give you sort of one short, simple answer. It is a complex change and, well, perhaps one simple, short answer. The whole of human history has a record of the rise and decline of civilizations. Why should this one be different? QUESTION: You stated that Turkey will not enter European Union, I mean, that's a very unlikely possibility, and in the same speech you also made statement that Russia will be a power that's going to grow and there is China and India. PROFESSOR LEWIS: Yes. QUESTION: In your mind, do you think that Turkey should look to those countries more than to Europe? Should there be a policy change in expanding horizons towards east rather than west? PROFESSOR LEWIS: I think Turkey has to bring these countries into its calculations for future policies, but as to the main direction, I would look at it differently. Let me put it this way. More than a thousand years ago, the Turks were still in Central Asia. They were poised between two great civilizations, China and Islam. They made the Western choice. They moved west, they became part, and then the leading part of Islamic civilization. In the 19th Century, they find themselves again between two civilizations, Islam and Europe. Again they made a Western choice and moved in spirit and in institutions in the direction of Europe. Now I think they face a third choice between east and west, with the Atlantic as the dividing line. I think that's a good note on which to end. MR. LACHMAN: Since Professor Lewis has to leave, I think we're going to call it right here. I want to thank everybody for coming, and good day. [End of closing remarks.]</body></html>