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The New Investment Incentive Package and the Other Turkey 09/04/2012 - Viewed 4585 times

The new investment incentive package was announced at the beginning of April. According to the initial reflections in the media, everyone is quite content with it. I would be too, if I was an investor here. It seems that the incentive experts of the Ministry of Economy have designed a smart incentive bill that will please investors as much as possible. I don’t think it would have been possible to satisfy this wide an array of demands and views from as many sectors more successfully. We have to congratulate the Ministry. So far so good. But can the new incentive package fulfill its aim of eliminating regional development disparities?

The new zoning method is chief among the distinguishing features of the new scheme. It divides Turkey’s 81 provinces into six regions, each of which will benefit to different degrees. The map below shows the distribution of provinces by region.

Map: New Incentive Regions of Turkey

We have yet to learn by what criteria this colorful map was drawn.[1] Having looked at the economic indicators of these six regions, some points drew my attention.

Here is the first one: if the objective is to promote manufacturing industry, I think there are not six, but only two regional classifications in Turkey: Region 1 is made up of Ankara, Antalya, Bursa, Eskişehir, Istanbul, Izmir, Kocaeli and Muğla. Region 2 is everywhere else.  This, unfortunately, is what I see when I look at the figures below that show the share of incentive regions in certain economic magnitudes. The share of Region 1 is 80 percent in total exports, 70 percent in bank loans, 50 percent in insured employment and 40 percent in population. The other five regions consisting of 73 provinces have tiny shares, each in the mentioned magnitudes.

Figure: Regions under the New Incentive Scheme and their shares in exports, commercial loans, insured employment and population.

It’s sad, right? In terms of the distribution of economic opportunities, there are only two regions in Turkey:

• One region with a physical connection to the rest of the world, and one that is isolated.
• One region with respected universities and secondary schools, and one that sends illiterate kids out to work.
• One region with sufficient physical infrastructure including energy, water and treatment systems, and one where the buildings crumble into dust at any earthquake.
• One region with enough of a quality of life and urban infrastructure to attract foreign executives and researchers, and one that attracts foreign human rights activists and news reporters.
• One region that requires only a couple of wardens to ensure security, and one that requires many, many more.

So, does the proposed incentive package involve any measures to upgrade the other regions to Region 1? No, it does not. Like previous schemes, it just rewards investors who dared to make an investment despite all challenges. Or, as Hasan Ersel puts it,[2] it “compensates” investors for potential losses, as it is not profitable to invest in regions other than Region 1.

The new incentives might please investors through its compensations and might secure their presence in 2013, right before the 2014 elections. But what about the investments on the way towards 2023? We will probably start handling this with a new scheme by 2021.

If things stay this way by 2023, those who are planning to invest in Region 9 will still be unable to export to Europe. They will probably have to ask for additional support mechanisms to compete with Iranian companies in the Iraqi market.

We will be discussing new incentive packages for years unless we broaden our focus and aim to upgrade all regions into Region 1.[3]

[1] We cannot comment on the categorization since the Ministry of Development did not issue the basis documents.

[2] If you are interested, please read this study: Ersel, Hasan and Filiztekin, Alpay, "Incentives or compensation? government support for private investments in Turkey", Industrial policy in the Middle East and North Africa: rethinking the role of the state, Galal, Ahmed (ed.), Cairo, Egypt: The American University in Cairo Press 2008, 35-50

[3] Recently I asked to an Italian economist if his country had organized industrial zones. He responded, “No, we don’t. The entire Italy is an organized industrial zone.” I said, “Oh, okay” and stopped speaking.

*Esen Çağlar, TEPAV Economic Policy Analyst, http://www.tepav.org.tr/en/ekibimiz/s/1025/Esen+Caglar