But China offers even more

Turkey's ruling party is under increasing pressure from struggling exporters to devalue the lira in order to make Turkish products more competitive on world markets.

The debate has exposed fault lines in Turkish society, between those pushing for further EU- and International Monetary Fund (IMF)-inspired reforms and others concerned about losing jobs to China in key manufacturing sectors.

Exporters and manufacturers argue that the lira is overpriced against the euro and the US dollar, making it impossible for them to compete with Chinese and other Asian producers.

Manufacturing currently accounts for approximately 23% of the country's jobs. The textile and clothing sectors, which account for one third of all industrial employment, have been hit particularly badly.

In the first quarter of this year, while exports on average grew by 6.8%, clothing exports were down by 6.5% year on year.

But a debate that would ordinarily be confined to industrialists and economists is acquiring political significance ahead of next year's general elections.

The ruling Justice and Development Party (AKP) is struggling to reconcile the demands of voters with pleasing the international community.

In the last five years under the AKP, robust economic growth has not delivered the substantial reduction in unemployment levels for which many had hoped.

Unemployment remains entrenched at around 10% despite World Bank predictions that the economy will continue to grow by 6% in 2006 and 2007.

Some now see devaluation as a way of stimulating job growth in low-tech sectors and securing existing jobs that are being lost to China.

The central bank has repeatedly intervened in currency markets to prop up the lira, but some are now pressing them to go further by cutting interest rates or stopping the lira from floating freely on exchange markets.

Respected economists such as Robert Mundell are lending credence to such arguments.

He recently told a conference in Istanbul that devaluation was inevitable, but he stressed it should not be done before inflation targets have been reached.

Others are calling for interest rates to be cut now.

"Interest rates are high compared with European levels, higher interest is prompting fresh capital coming into the country. There is too much in the foreign reserves in Turkey," said Mustafa Mente, director-general of the Turkish Clothing Manufacturers' Association.

"The Turkish lira currently stands at 1.64 euro and $1.32. We would like to see exchange rates of around 1.80 euro and $1.50," Mente added.

But such calls come at a difficult time for the government as it struggles to regain support after a turbulent couple of weeks for the Turkish economy.

Riots in Istanbul and the Kurdish south-east, uncertain prospects for deepening ties with the EU and rising oil prices have dented confidence.

But what appears to have most concerned the markets are questions over the independence of the central bank and the government's commitment to reforms.

Prime Minister Recep Tayyip Erdogan had pressed hard for Islamic banker Adnan Bykdeniz to be appointed as governor of the Turkish central bank, despite concerns about his lack of experience in interest rates.

Critics feared Erdogan's decision not to reappoint the well-respected incumbent, Sreyya Serdengecti, might indicate the government was preparing the ground for a rate cut or for removing the lira from world markets as a free-floating currency.

Eventually bank board member Durmu Y�lmaz was appointed to the role and Turkey's internationally respected treasury minister and chief negotiator with the EU, Ali Babacan, has been on a charm offensive to convince international lenders that monetary discipline will be maintained.

But questions are still being asked in Turkey and in the EU about the commitment to reform at the highest levels of the Turkish government.

"[The government is] obviously not very happy with the independence of the central bank and this is one of the reasons that it did not reappoint Serdengecti," said Soli ...zel, a professor at Bilgi University and a prominent columnist.

"It was either an example of mismanagement or incompetence, or ignorance of how these things are done. Or all of the above," he added.

Ümit Boyner, chief financial officer for Boyner Holdings and one of Turkey's most prominent businesswomen, agreed: "Our government has a communications issue, the whole process was managed badly. The way it was communicated gives lots of ground for speculation."

But Boyner, who manages the country's biggest non-food retailer, is in little doubt about what is now needed from the government: patience.

"Unemployment is not a problem that will be solved in a year or two...[but] the level of structural reform and structural change will increase employment figures over time," she said. "This is an experience that most countries have gone through. I expect that this will continue for some time...the value of the lira has to be determined by the market."

But as people like Boyner and Ozel press for further reforms, employment looks set to remain a political problem for the government.

According to Mente of the Turkish Clothing Manufacturers' Association, the competitiveness of the clothing sector is likely to be improved by increasing quality and productivity, measures that are not likely to increase employment levels in the short term.

Major analysis feature looking at the economic situation in Turkey. Author says that Turkey's ruling party was under increasing pressure from struggling exporters to devalue the lira in order to make Turkish products more competitive on world markets. He argues that the national debate had exposed fault lines in Turkish society, between those pushing for further EU- and International Monetary Fund (IMF)-inspired reforms and others concerned about losing jobs to China in key manufacturing sectors.