The main difference between the new and the old system is that the former incentivizes “strategic investments.”

Last week I attended a conference at Uludağ University. During the session following the conference, some fellows explained how a one-paragraph amendment to the old incentive system affected the University. Here it goes: Around 150 engineers employed in an automobile company were working in the Technopolis in the University. The amendment to the incentive system cleared away the advantages of carrying out R&D activities in technopolises located in university campuses and encouraged carrying out such activities within factory premises. As a result, the engineers moved back to the factory. Which option is more beneficial concerning the economy is out of the scope of this commentary, though it is a good subject to discuss. What matters for the purposes of this commentary is that the incentive system is an effective policy tool for changing the status quo, both in the wrong or the right direction. 

Strategic investments changed drastically

The new incentive system was announced last Thursday. It is too soon to evaluate the amendments; we need to study it with scrutiny and discuss with the experts of the issue. All I have on the new system is a thirty-slide presentation by the Ministry of Economics and the transcript of the remarks by the Prime Minister. Today, I would like to make a preliminary assessment based on these.

The main difference between the new and the old system is that the former incentivizes “strategic investments” which, as far as I understood, are handled under two headings: first refers to investments that will reduce import-dependency and therefore ease the current account deficit via lowering imports. Such investments will benefit from major incentive schemes. Second, investments on high-tech production will be incentivized regardless of whether they substitute import goods or not.

Each region will benefit from a different incentive scheme. The timing of incentives constitutes an interesting detail. Investments which are to be initiated before the end of 2013 will be able to benefit from bigger incentive schemes. Therefore, the system seems to have an aim to bring investments forward. Some features of the old system such as the incentives to encourage high-scale investments and small number of broad incentive schemes are preserved in the new system.

Another distinctive feature of the new system is divides Turkey in six regions, more than the previous system. The provinces which will benefit from more advantageous incentives constitute the region 6 and those which will benefit the least constitute the region 1. Investments in certain sectors are to benefit from the privileges defined for region 5 regardless of the region they are actually located in. Among these sectors are education, pharmaceuticals, railway and maritime transportation, and some fields related to R&D activities. Investments in these sectors match to a degree with “strategic investments.” In fact, the majority of goods and services produced in these sectors constitute strategic investments.

In a recent panel, one participant from the audience raised an important point when asking a question to the discussants. This point, I believe, must be handled when making a detailed assessment on the incentive system: We all know that domestic savings of Turkey are insufficient. Economists are unable to recommend a policy to raise private sector savings. Then, wouldn’t it be more useful to prioritize reforms that will boost productivity instead of large infrastructure plans based on external borrowing? For example, why not allocate more funds to R&D and education? Of course, this does not imply that infrastructure investments shall be ceased all out. This only discusses whether prioritizing investments in these areas would be more useful or not. I think this suggestion is worth considering.

This commentary was published in Radikal daily on 07.04.2012