TEPAV Assesses the New Incentive Package: “The best package so far, but there is more to do” TEPAV's note stressed that the package alone cannot help Turkey reach the 2023 targets and that the need for reform in many fields was continuing.

ANKARA - TEPAV, stressing that the new incentive package was the most comprehensive and technically-correct incentive regulation so far, said that the package alone could not fulfill the 2023 targets and that the need for a structural reform agenda continued.

TEPAV released a new policy note titled “An Assessment on the New Investment Incentive Package” by TEPAV Economic Policy Analysts Ozan Acar and Esen Çağlar.

It is not possible to estimate the impact on the current account deficit

Assessing whether the new package can fulfill the stated objectives, the note said, “The fact that the new incentive system has multiple objectives raises the question of whether it is possible to reach them with a single policy instrument. It is not possible to say whether or not financial incentives can contribute to the sustainable competitiveness of Turkey without overcoming market failures.”

The note continued:

“One chief matter of debate about the new incentive package is whether it can help reduce the current account deficit. When evaluated from an economic perspective, it is not easy to see the effects of the package on the current deficit. At the base of Turkey’s high current account deficit lie weak domestic savings that fail to meet domestic investments. It would be more reasonable to expect the new package not to decrease but to increase domestic investments, which is more likely to stimulate current account deficit unless savings rates change.

The potential effect of the new incentive package in reducing regional development disparities is another matter of debate. From the perspective of regional development, it would be optimistic to expect a single package to completely overcome the imbalances in the distribution of the economic opportunities.”

Possible challenges for implementation …

The note addressed some issues which can possibly challenge the implementation of the package. Among the questions raised were, “How will the balance between the rights earned through unfair competition between and within the provinces be ensured? Will the center have all the authority regarding the implementation? If so, will the capacity for project-based assessment be enhanced? Will protective measures be implemented to ensure the competitiveness of strategic investments to be incentives with the aim to lower the current account deficit?"

Yes, but not enough

The note said that when compared to the previous incentive packages, it was possible to say that the new regulation will make a large contribution to the increase of the amount of manufacturing industry investments in different regions, underdeveloped ones to begin with. It added:

“From this perspective, the new incentive package is extremely successful. The package seems to satisfy the wide array of demands and views from as many sectors successfully with a regulation that will contribute to industrialization. In terms of responding to the demands, the new incentive package can be considered as the most comprehensive and technically-correct incentive regulation so far.”

However, the note emphasized that it would be unfair to the incentive package and those who prepared and are to implement it to expect it to sustain industrialization, reduce regional development disparities, enhance global competitiveness, and lower the current account deficit, which are ambitions objectives that require a wide array of policy interventions. Stressing that the success of an incentive system that is not supported by an assertive structural reform agenda would be limited, the note concluded:

“Therefore, without reforming the components of the competitiveness index among which are labor force and skills, institutional and physical infrastructure and governance, it would be unrealistic to expect the new incentive package to make Turkey one of the top ten economies in the world. The new incentive system can encourage a high number of new investments by 2013, as stressed in the introduction meetings. Yet, the need for a structural reform agenda for 2023 continues. And our time is running out.”