First the General Directorate of Foreign Investments within the Treasury Undersecretariat released its International Direct Investment Report 2006 (www.treasury.gov.tr/guncelduyuru/20070613_-UDYatirim_Rapor.pdf) and its June International Direct Investment Information Bulletin (www.treasury.gov.tr/stat/yabser/ybs_bulten_Haziran2007_eng.pdf) in Ankara. Second the Investment Advisory Council for Turkey (IAC) -- consisting of top-level executives from major multinational corporations, international organizations and business associations -- held its fourth annual meeting and issued a statement of outcomes (www.treasury.gov.tr/guncelduyuru/YBS_20070611_ydksonucbildirisi.pdf) in İstanbul. The IAC has been holding regular summits with top government officials, such as Prime Minister Recep Tayyip Erdoğan himself, since March 2004 in an effort to provide direct input for improving Turkey’s investment climate through the Coordination Council for the Improvement of the Investment Environment (YOİKK). In this column I will focus on the significance of these two developments.According to Table 1, Turkish net IFDI increased by 54 percent during 2002-2003, 64 percent during 2003-2004, 240 percent during 2004-2005 and 105 percent during 2005-2006. These extraordinary rates of increase exceeded significantly those in the corresponding global IFDI flows. By attracting $20.2 billion in IFDI in 2006 -- its highest total ever -- Turkey ranked among the top five developing countries. Moreover in the first quarter of this year, Turkish net IFDI increased by 486 percent relative to the first quarter of last year, suggesting a strong continuation of the IFDI surge this year. Howeve, this may not turn out to be the case according to Table 2, which shows a sharp monthly deceleration of IFDI during this year’s first quarter. The major reason for this deceleration, according to the statistics in the June Direct Investment Information Bulletin, is the sharp drop in the IFDI banking sector after Jan. 2007. The Turkish banking sector, which was responsible for 40 percent of IFDI during 2006, has faced intense opposition by those questioning the rising dominance of foreign financial institutions. Though the banking sector accounted for 95 percent of IFDI in January 2007, that share averaged 20 percent between February and April and a mere 3 percent in April 2007.
According to the IAC statement of outcomes, the Justice and Development (AK Party) government has made great progress in improving the country’s IFDI environment, as evidenced by the recent surge in IFDI discussed above. However the IAC still finds room for improvement in the business climate. It draws the government’s attention to various specific issues, including the need for:
1) greater fiscal discipline and consolidation to reduce public debt and target expenditures in priority areas such as education and infrastructure, especially in communications, energy and transportation;
2) lower and stabilize inflation based on effective inflation targeting and a free floating exchange rate regime;
3) improve labor market flexibility and lower non-wage costs;
4) place greater emphasis on the incentives for applied research and development, which will lead to innovation and a more forceful protection of intellectual property rights;
5) reduce administrative requirements and lighten bureaucratic burdens on business; and
6) implement more effective corporate governance, greater financial transparency and stronger tax compliance enforcement. Still the IAC goes beyond these and several other suggestions in emphasizing the vital importance of wider and deeper economic and political reforms moving toward an open and democratic society based on rule of law, all as part of Turkey’s quest for EU membership and increased globalization. These are the necessary changes for an improved business climate, according to the IAC.
The AK Party government is to be commended for their consistent and genuine attention to IAC criticisms and recommendations since 2004. This indicates that the IAC was not intended to be merely a public relations gimmick. Unfortunately Turkey has recently been confronted with rising political instability, throwing into doubt -- at least in the short term -- the ability if not the willingness of the AK Party government to continue the kind of reforms advocated by the IAC and other friends of Turkey. The sharp monthly deceleration in IFDI during the first quarter could be the result of global investors’ accurate forecast of the political instability that has begun to engulf Turkey in recent months, coupled with rising domestic opposition to IFDI in the financial services sector. I hope that this does not mark the end of Turkey’s remarkable but short IFDI surge -- the dismal scenario I discussed in an earlier column, “The economic costs of rising political instability.”
