EMRE DELİVELİ >Lord of the incentives

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Thetitle, cheesy even by my standards, is not actually mine. It was on the frontpage of a pro-government daily after thenew investment incentive scheme (NIS) was announced by Prime MinisterErdoğan, followed by a more detailed presentation by Economy Minister Çağlayan, on April 5-6.

Iwas initially somewhat disappointed: I was hoping that somewhere among the longlist of incentives would be some kind of support for my belovedBeşiktaş to renovatetheir historic stadium. Our familybusiness in Marmaris could do with some free cash to help out with ourplanned investment next year as well.

Butİstanbul and Muğla are both part of the first "region" of provinces,which reflects their relatively high level of development. This first region,of six in total, isn't getting much support, but then I saw that tourisminvestments in designated tourism areas would be treated as part of the fifthregion. It is great to be getting money for an investment I would have alreadymade! That’s probably why the private sector has reacted so positively to theNIS. 

Settingaside the question of the incremental effect of the policy, I am skeptical thatthe government, or anyone for that matter, can cherry-pick “winners”, althoughsome of the designated strategic sectors such as large-scale pharmaceuticals, schools(a recent note by Ankara think-tank TEPAV argues that the budgetary cost of thenew education reform will be rather large) and maritime/railway transportationmake a lot of sense.

Thisis actually the fourth investment incentive scheme by the ruling Justice andDevelopment Party in their decade-long rule. And to render unto Erdoğan what isErdoğan’s, they actually keep getting better each time. The first two schemesin 2004 and 2006, for example, had the same support for 49 provinces, whichunsurprisingly resulted in the more developed of the bunch getting the lion’sshare of investment. 

Despitesuch important improvements, I have serious doubts that the new NIS couldmagically satisfy the multiple objectives of reducingthe current account deficit, raising the value added in production,increasing development in less-developed areas and reducing regionaldisparities. 

Forexample, while the NIS is supposed to decrease imports by encouraging domesticproduction of intermediate inputs, it is also designed to increase the overalllevel of investment. As Turkey is suffering from a chronicsavings shortfall, without an increase in the savings rate, we could aswell end up with a higher current account deficit. Harvard’s Dani Rodrik, who haswritten extensively on incentives, has apparently made a similar point. 

TheNIS is also aiming to increase Turkey’s global competitiveness by supporting clustersand R&D. Since Turkey was ranked 59 in World Economic Forum’s Global CompetitivenessReport, this sounds like a step in the right direction. But improving thebusiness climate, asI argued last week, would be a much better method for achieving that goal. 

Butthe government has been strangelyreluctant to implement structural reforms. Without those, the NIS lookslike a temporary patch. Or it is merelycompensation for the sour investment climate.


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