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April 11, 2012, Wednesday

The new investment incentive package

Recently the government revealed a new investment stimulus package valid from Jan.1. Ever since investment stimulus Law 5084 was adopted in 2004, an increasingly regional incentive policy has begun to emerge. The new package is doubtless the most comprehensive and detailed of its type in the history of the republic, and it is clear that much work was put in to refine the stimulus for greater investment techniques. What’s more, it is clear that some lessons have been learned from previous exercises. Let us hope that this one augurs well for the future.

In order to analyze the package, I have to compare it to current practice as well as EU criteria in terms of regional development. Viewed from this angle, though, there is a certain dilemma in the approach and philosophy of the package.

The previous 2009 package aimed to reduce imbalances in regional development, increase competitiveness, support technology and research and development with large investments, support sector-based concentrations and put the spotlight on economies of scale for investments to be supported. “National production of goods,” which is music to the ears but far from being convincing, was already present in the investment stimulus of 2009. The stimulus was aimed at motorized transportation vehicles, mining, medical equipment, drugs, sensitive optical tools, airplanes, machines, railroads, pipelines and the chemical sector. The difference is that today the government is attempting to reduce imports of intermediary goods and ultimately the current account deficit. Unfortunately, there are no quick fixes for qualified workers, and R&D is necessary for tangible import substitution.

Let’s take a look at the second method of reducing regional imbalances. This is a very hard, time-consuming, far-reaching and long-term policy goal. Especially in a hyper-centralized country like Turkey, regional empowerment would take a long time. The 2009 incentive program for regional and sector investments looked at 26 regions that fell within the EU harmonization reforms. In the 2009 approach, the size of the industrial sector and technological know-how of 26 regions were separated into four categories. Accordingly, eastern regions falling in the third and fourth categories with technology in short supply saw sectors such as agriculture and agriculturally related industry, ready-to-wear clothing, leather, plastics, rubber, tourism, health and education supported and encouraged. In the new package, however, the 26-region framework has been abandoned and 81 administrative departments constitute the new basis.

First and foremost, this is a move for EU harmonization. Turkey, which has an extremely centralized administrative system compared to EU member states and to countries with which it competes, took its first steps towards decentralized governance thanks to EU-inspired regional division. Accordingly, 26 development agencies were set up. But with the re-establishment of the old departmental system as the basis of the incentive package, it appears that regionalization has fallen by the wayside.

By lumping together 78 smaller and larger departments into groups of three and four, the center-periphery relation took on a new dimension and created an opportunity for solidarity among the weaker departments. (The remaining three regions of Ankara, Istanbul and Izmir have remained on their own.) But with the introduction of the new package, one cannot help wondering how the departments that lag behind will be pulled up. For example, how will places like Bayburt or Hakkari be capable of attracting new investment on their own, even with incentives?

Just as with the 2009 package, those that lag behind will have difficulty attracting investment. Despite sizeable increases in investment in those regions through the 2009 package, 60 percent of all investment still went to developed regions of the country. What’s more, the ongoing political problems in some Kurdish regions will not make implementation any easier, no matter what sort of stimulus packages are presented and passed.

In the end, what remains of the new set of policies, which will have a difficult time achieving targets in terms of regional development and decreasing the amount of imported goods? When one considers the projected “general, regional, large scale and strategic investments” within the framework of the stimulus package, one notices that a long term, regional and small and medium-sized enterprises (SME)-based approach is absent. To the contrary, one perceives that there is a desire to see growth occur at whatever the cost, with or without detailed planning and through large foreign investment and know-how. In other words, through short cuts but without the necessary structural reforms in the labor market, tax system, savings policy, education, training, R&D, decentralization, environment and competitiveness…

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