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Where Does Turkey Stand in the Competition for FDI


The 'cancer' of informality. Turkey's informal sector is large. ... Revenue increases are not the answer unless they come from those now in the informal sector. ... – PowerPoint PPT presentation

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Title: Where Does Turkey Stand in the Competition for FDI

Where Does Turkey Stand in the Competition for
Rodrigo A. Chaves February 21, 2007
The Investment Climate and Investment
  • The investment climate supports or hinders
    opportunities and incentives for firms to invest
    productively, create jobs, and expand output
    affecting economic growth and welfare.
  • Turkey is in a race with other countries to
    attract investment, including FDI, to bring new
    technologies, skills and organizational methods
    that will promote growth, jobs and living

Turkey has received limited FDI
FDI-Income correlation (2005)
Gross FDI as percentage of GDP
FDI as of GDP
Log per capita GDP, PPP.
Attracting FDI could become increasingly
difficult for Turkey
  • Going forward, global FDI inflows as a share of
    world GDP in 2005-10 expected to average about
  • Business environments across the world have
    continued to improve and be more competitive.
  • FDI to emerging markets is likely to be highly
    concentrated in commodity rich countries.
  • Privatization and MAs in the financial sector
    will drop - Greenfield investment is needed.

FDI is Vital for Turkey
There has been progress
  • Privatization, competition, administrative, and
    regulatory policies.
  • Areas for further improvement include (a) the
    commercial code, (b) reducing registration fees
    and licenses, (c) corporate governance, (d)
    accounting standards, and (e) facilitating access
    to land for foreigners.
  • Major challenges remain to investment and growth.

The cancer of informality
  • Turkeys informal sector is large.
  • Less than half of the active labor force pays
    social security contributions. The tax burden is
    unfairly distributed, discouraging investors
  • Unfair competition of the informal sector
    restricts new investors.
  • Overall productivity and therefore growth are

Tax rates remain a key constraint
  • Percentage of firms identifying the issue as a
    major obstacle to operation

Not enough jobs are created
Only 23 percent of the increase in working age
The fiscal adjustment
  • Revenue increases are not the answer unless they
    come from those now in the informal sector.
  • Largest part of public expenditures are
    non-discretionary and produce low development
  • This produces a situation where the state has
    limited ability to invest in growth and job
    producing activities.

A comprehensive and strategic vision is required
  • To sustain high growth in the economy by
    attracting more investment and financing while at
    the same time generating more and better jobs.

From vision to action Coordinated package of
Areas of Reform
Expected Outcomes
Productive Public Investment
Create fiscal space
Investment climate

Attraction of FDI
Labor Markets Financial Markets
Steady Economic Growth with Employment Generation
Technology, quality, innovation and labor skills
  • Possible elements in the comprehensive program

Fiscal space policies
  • Fiscal space to meet expenditure pressures should
    be created by a combination of structural public
    expenditure reforms, expenditure reallocations,
    and continuing tax reform efforts.
  • Sector-specific reforms
  • Shift resources to programs for growth and social
  • Horizontal reforms that improve the efficiency
    of expenditure programs across sectors.
  • Initiatives to further rationalize the tax system
    to broaden the tax bases.

Investment Climate
  • Improve corporate governance.
  • Strengthen protection of creditor rights.
  • Strenghten competition policy
  • Monitor state aid, phase out distortions and
    create a state aid monitoring agency

Investment climate
  • Adopting the revised Commercial Code in line with
    EU requirements
  • Reduce registration fees and licenses by
    replacing them with better reporting and stronger
  • Transfer social security collection to the MIFIN
    to complement reforms in social security
  • Further simplify tax system and conclude
    functional restructuring of tax administration

Labor Market Reform
  • Reduce the labor tax wedge as much as fiscally
    responsible to create new jobs
  • Measures to improve the incentives to hire
  • Lower severance requirements
  • Lower unemployment insurance requirements
  • Allow temporary work for economic reasons and
    functioning of temporary work agencies.
  • Protecting workers (rather than jobs)
  • Ease eligibility criteria for unemployment
  • Extend collective bargaining
  • Improve ISKURs capacity for active labor market
    policy and license private employment agencies.
  • Improve dispute resolution mechanisms

Increase Efficiency and Competitiveness in
Financial Sector
  • Continue with privatization of the state banks
  • Enact a framework law for the insurance industry
    in line with EU requirements
  • Enact law in support of the primary residential
    mortgage market and establish regulation for
    secondary market
  • Develop legal and regulatory framework for credit
    bureau for consumers and corporate business
  • Create legal framework and effective filing
    system for security interests on movable

Increase Technology Absorption and Innovation
  • Develop a national innovation strategy
  • Align Innovation policy and regulatory framework
    with EU requirements
  • Evaluate results and fiscal impact of
    Technoparks RD fiscal incentive schemes,
    matching grants and loans
  • Recognize tests and standards from countries with
    which the EU has mutual recognition agreements

Improve Education System
  • Raise graduation rates from secondary school and
    improving educational opportunities at the
    tertiary level
  • Modify curricula with a view that all secondary
    school graduates are taught academic as well as
    applied competencies
  • Eliminate rigid separation of vocational and
    general secondary students
  • Restructure OSS to challenge students to
    demonstrate learning across all academic
    disciplines and at high standards
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