EconoMonitor

The Kapali Carsi

Turkey: Industrial Policy, New Investment Incentives Scheme and the Current Account

The title, cheesy even by my standards, is not actually mine. It was on the front page of a pro-government daily after the new investment incentive scheme (NIS) was announced by Prime Minister Erdoğan, followed by a more detailed presentation by Economy Minister Çağlayan, on April 5-6.

Here’s the introduction to my Hurriyet Daily News column from a few weeks ago, where I discussed the NIS. The title was Lord of the Incentives, an homage to the J.R.R. Tolkien book (and the Peter Jackson movie)  You can read the rest at the Daily News website, but if you wanted me to summarize my views on the measures in one sentence, it would be something like, “the best incentive scheme so far in the history of Turkey, but still many holes.” Incidentally, my ex-colleague Ozan Acar of Ankara think-tank TEPAV reaches more or less the same conclusion (BTW, if you happen to speak, or at least read, Turkish, there are several well-written articles at TEPAV’s web site on the NIS). Oxford Business Group adopts a similar approach as well, but I wasn’t surprised, as Ozan and your friendly neighborhood economist were the analyst’s main sources.

So why am I so skeptical? I made some points in the column, on which I would like to elaborate a bit more:

First, this initiative alone is unlikely to address Turkey’s well-recognized structural weaknesses (such as rigid labor markets and highly regulated product markets), which undermine competitiveness/productivity. As I argued it the column, looked in this way, the NIS is nothing more than compensation for these problems. And I like business climate improvements more, as they are, unlike industrial policy, sector-neutral.

Second, given the highly complex nature of the subsidy scheme, whether the bureaucracy has adequate implementation and monitoring capacity remains an open question. Just think how effective the Soviet economy was and the world is changing rapidly than even 10 years ago, let alone 40! In that case, to have any chance at real success, this would have to be a dynamic exercise.

Third, even if one believes that the package will be effective in narrowing the current account deficit, it would take time. Given the authorities’ reluctance to contain domestic demand, this means that Turkey will need to live with a wide current account deficit in the near-term, which continues to leave the country at the mercy of global financial markets.

This last point was actually the springboard for my latest Hurriyet Daily News column, where I argued that taming the current account deficit (or at least part of it) is really much simpler than may people would think:

The panel discussion “The Relationship Between Industrial Policy and the Current Account Deficit”, organized last Wednesday by the Turkish Industry & Business Association and Competitiveness Forum, illustrated just how much we are confused about both topics.

This is the introduction to that column. You can read the rest at the Daily News website.

My main point is that we are looking for long-term and structural fixes to the current account, which, by their nature, will take time- even if they work, and that’s a big if in the first place. But there were much easier fixes, such as keeping demand and inflation under control, which would have shaved off at least a couple of points from the current account deficit.

BTW, YapiKredi economists elaborate on the point I made at the end of the column- that the NIS is more geared towards reducing imports than increasing exports. They also have a detailed discussion of their impressions of the same conference that inspired me to write the column, so their piece is good complementary reading.

As a more general point, I don’t like the fact that too much is being expected of the NIS. Central Bank of Turkey Governor Erdem Basci joined the bandwagon by claiming that the NIS  “would help the Bank to reach its inflation objective by raising ‘potential’ output”. While that may indeed be the case, I really hate it when a Central Bank Governor makes such ambitious statements without providing any proof whatsoever. In any case, it would take some time for the NIS to start raising potential output and reduce inflation from the demand side…

Coming back to the conference, there were some other good observations on the NIS. For example, Esra Durceylan of Sabanci University noted that it would be smarter to concentrate on creating incentives to reduce fixed costs (rather than marginal costs) if we would like some intermediate inputs produced in Turkey- the NIS has both. Cengiz Cihan of the Central Bank talked about a survey he and his colleagues had conducted with exporters- about which I had written two years ago. While he used the survey’s results to support the NIS, I would emphasize their findings that many exporters don’t go for the local intermediate inputs not because they are unavailable, but because they are not as good as their domestic counterparts.

The conference also showed me that there are more questions than answers about the NIS at the moment. That’s because the government did a horrible job at disclosing it: They revealed it with a short presentation rather than a full-pledged report, and before finalizing their work. So several sector representatives at the conference were questioning whether or not their sector would be covered. The same goes for your friendly neighborhood economist: We are not sure the renovation we are planning for our family business  would be covered. We will do it anyway; we already agreed with the tour operators we would, but I am sure many are holding off investment plans until things clear up.

Even at a more basic level, the process is not transparent at all: As I summarized in the column, all the provinces have been classified into six categories based on their level of development. The Econony Ministry is saying they have made the decision based on dozens of criteria, but the data they are supposed to have used are not available- there isn’t even a report to that effect. So I don’t really blame my friend from Eskisehir, who claims they were classified in the most developed category, meaning they would get the least incentives, just because they didn’t vote for the ruling Justice and Development Party (AKP) at the last elections.

OK, I have been rather gloomy, but there are some like Fitch who like the incentives package. And Turkish and foreign investors alike are very positive as well, which didn’t surprise me much- after all who doesn’t like cash handouts?:) Just so you know…BTW, speaking of Fitch, Econ. Minister Zafer Caglayan, who has been critical of Fitch of late, was dismissive: “Even a watch that is not working shows the right time twice a day”, he noted:)…

This has been one of my longer posts, so if you have made this far, and if you are American on a three-day weekend nonetheless, I would like do an early observance of Memorial Day. Wars are stupid and all that, but that doesn’t change the fact that these men and women we are honoring have sacrificed their most valuable possessions, their lives. That’s why Memorial Day was my favorite holiday by far during my 12 years in the U.S. That and because it marked the beginning of the summer:) We have many holidays in Turkey, but the first time I visited the cemeteries and memorials in Gallipoli, I wished we had a memorial day as well… Anyway, I am planning to observe it, a few thousand miles from the U.S., by watching this movie I’ve been planning to see for a long time: Saints and Soldiers. I’ll let you my impressions at the end of the next post…

2 Responses to “Turkey: Industrial Policy, New Investment Incentives Scheme and the Current Account”

ThomasMay 27th, 2012 at 9:57 pm

"I would emphasize …… local intermediate inputs ………are not as good as their domestic counterparts." What are "local intermediate inputs" and how do they differ from domestic counterparts? I am not familiar with the term local intermediate inputs.

edeliveliMay 27th, 2012 at 10:00 pm

I apologize, it should have been “imported counterparts”… Sent by BlackBerry Internet Service from Turkcell

Most Read | Featured | Popular

Blogger Spotlight

Dan Steinbock

Dr Dan Steinbock is a recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among the major advanced economies (G7) and large emerging economies (BRICS and beyond).

Economics Blog Aggregator

Our favorite economics blogs aggregated.