moving forward: an investment climate assessment for turkey emre deliveli ankara, 13 august 2005

Moving Forward:An Investment Climate Assessment for Turkey

Emre DeliveliAnkara, 13 August 2005

e c o n o m i c p o l i c y r e s e a r c h i n s t i t u t ee k o n o m i p o l i t i k a l a r ı a r a ş t ı r m a e n s t i t ü s ü

Investment Climate Assessment for Turkey Slide 2

Agenda Recent Economic Developments Changing Binding Constraints for

Private Sector Investment Climate Assessment

Objectives, Methodology and Examples Starting a Policy Dialogue

Government-Stakeholders World Bank Country Assistance

Strategy


Changing Binding Constraints… The binding constraints of the 90s:

Macroeconomic (inflation, debt, RER, unemployment)

Political (unstable coalition governments, domestic tensions, terror)

Institutional (red tape, corruption)

2000-2001 crisis


Macroeconomic Environment Declining Inflation, but… Declining Real Interest Rates, but… Productivity Growth, but…

Political Environment Stable one-party government, but… Improved policy certainty, but…

Institutional Environment Time to start up a business significantly shorter,

but… Equal treatment for domestic and foreign

investment, but…

Turkey’s Recovery since 2001 (1)


Turkey’s Recovery since 2001 (2) Stabilisation and

Healthy Growth Structural

Transformation at the corporate sector

Rising Productivity and Competitiveness

0,00

20,00

40,00

60,00

80,00

100,00

120,00

140,00

Oca

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Nis

-99

Tem

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Eki

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Nis

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-03

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-03

Tem

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Industrial Production

Interest rate

Inflation

60,0

70,0

80,0

90,0

100,0

110,0

120,0

130,0

140,0

150,0

160,0

1996

1997

1998

1999

2000

2001

2002

2003

2004

EmploymentProductionLabour productivity

economic program

Productivity Increases

Non-inflationary growth

Customs Union80

120

Source: Central Bank of Turkey


GNP (billion $)

Growth (%)

Inflation (CPI%)

Public debt (% of GNP)

Budget Deficit (% of GNP)

Exports (billion $)

Foreign Reserves (billion $)

2001

150

-9,4

70

95%

17

31

19

2004

300

9,9

10

65%

10

60

35

Turkey’s Recovery since 2002 (3) Transformation Relative Stability Superior

Economic Growth


Not everything is rosy… (1) Productivity increase not sustainable? Current Account

Imports of intermediate and capital goods are increasing… more than exports

Rising Trade Intergration has not led to an adequate Financial Structure

…yet patterns & trends seem promising FDI inflows Unemployment


Investment Climate Problems: Tax System and Administration Labor Regulations Informal Economy and Anti-competitive practices Access to and Cost of Finance Access to Land Local Administrative Barriers (i.e. Licenses and

permits) Corporate Governance and Restructuring Low Technological Base Lack of Innovative Capabilities Lack of Skills

Not everything is rosy… (2)


An Example: Institutional Environment Matters…

FDI Inflows to Turkey (million US$)

0

500

1000

1500

2000

2500

3000

3500

4000

4500Authorized

Realized

Source: Foreign Investment Directorate, Treasury

Investment Climate Assessment for TurkeySlide 10

Which one is binding now? For whom?

Sectors Sizes Regions Domestic vs. Foreign

Why matters? Low Investment Lack of competitiveness of local

industries How can we find out?


Role of Investment Climate Assessment What are ICAs?

Survey

Policy Dialogue World Bank’s Country Assistance

Strategy

Background Papers Report


Survey Sample 1300 manufacturing

+ 200 hotels 8 subsectors 5 regions, 19 cities 15% foreign and

exporting firms 80% representation

Value addedEmployment # of firms

473

140 123 11070 58 56 43 38 36 32 30 22 21 21 17 9

050

100150200250300350400450500

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65 73 77123 138

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What does an ICA provide? (1) Identifying the appropriate binding

constraints to doing business Variations across sectors / regions / firm sizes

Assessing the relationship between firm performance and investment climate components

Benchmarking against China New and potential EU members Other comparable countries (Argentina, Russia)

Policy recommendations and best-practices


What does an ICA provide? (2)

611 Firms - % perceiving severe and very severe

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

TelekomAccess to LandTransportation

ElectrcityCustoms

Civil Unrest/ crimeLicenses and Permits

SkillsLegal System

Regulatory UncertaintyAccess to FinanceLabor Regulations

Cost of FinanceCorruption

Non-competitive environmentTax admin

Macro UncertaintyTax rates



20

30

40

50

60

70

80

90

Large

Medium

Small



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10

20

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40

50

60

Civil U

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Large

Medium

Small


Binding Constraints and Action Plans Binding Constraint in Pakistan: Low labor

productivity, higher wages Committee on Reforms in Regulatory Legal and Policy

Environment introduced labor market reforms Binding Constraint in Moldova: Over-

regulation, excess inspections, large agency fees and compliance costs New Inter-Ministerial Commission for

Deregulation Action Plan prioritizes curtailing inspections and agency fees, simplifying licensing and reporting requirements

Binding Constraint in Bangladesh: erratic and poor quality of electricity supply WB financed Power Sector Development

Technical Assistance Project ($15.5 million)


Potential Ideas for Turkey’s ICA Implications for Industrial Policy Setting the priorities (not limited to):

Would regional Incentives / Subsidies work? What would be the performance gains be if the

energy costs were the same as in China? What are the root causes of lack of access to

finance? Is access to finance a problem for SMEs only or is it a problem for large companies as well?

Are exporters more productive than non-exporters? if yes why?

Does innovative capabilities depend directly on R&D activities? Or are they embedded in other characteristics of firms (exporting, licensing, education of managers etc)?


Limitations of the Survey Data provides only a snapshot of the

economy: Dynamic Analysis in background papers

• Informality• FDI• Innovation• Red Tape

Conducting biannual ICA surveys (Indonesia) Dynamic Analysis will be captured with

accompanying projects:• Computable General Equilibrium Model


Dynamic Analysis matters… Dynamic Transformation of the Turkish

Economy Sectoral transition

• Which sectors will become the engines of growth?• From traditional towards modern doing business (i.e.)retail

From informal to formal• Effect of informality on competition, public finance, and

productivity?

Sectoral and Corporate Restructuring • End of the dynastic family businesses?• Increasing importance of economies of scale and scope

Creative destruction & Transformation• Competition easier entry & exit


Challenges Intensifying Global Competition

Annual Change in Manufacturing Value Added (%)

-2

0

2

4

6

8

10

12

14

16

Turkey Czech Hungary Poland Malaysia China Korea Thailand India Indonesia

1992-19971997-2002

Young EU Asia

Sustainability of transformation? Adopting EU standards (costly in the short term).

Solution: Infrastructure and public sector reforms (decreasing costs) Corporate Governance (institutionalization)

Source: UNIDO


Long term Goals Innovative Policy Responses

e.g. textile sector in TR: EREZ in Palestine; mom&pop shops in retail

Technically correct Administratively implementablePolitically feasible

Policy Dialogue A dialogue instrument between business

community and government• Public-private partnership is crucial for policy success

Capacity building for policy formulation at TOBB Continuation of the YOIKK initiative Cooperation with and between different

government agencies


Questions and Answers

Further questions and comments? Please send them to

[email protected]

If you would like to join the ICA Turkey mailing list, please send an e-mail to [email protected]

moving forward: an investment climate assessment for turkey emre deliveli ankara, 13 august 2005

Documents

treasury slide

investment climate problems

central bank of turkey

foreign investment directorate

productivity growth

turkey emre deliveli

competitiveness productivity

changing binding constraints