At no. 67 in the world, are we competitive?

According to the Wall Street Journal/Heritage Foundation’s newly released 2010 Index of Economic Freedom, Turkey’s position has moved up to #67, behind Thailand, and ahead of Montenegro. Hong Kong is #1. The US is #8. Can we take encouragement from this?

A few days ago, the New York Times published the Standard & Poor’s credit ratings for individual countries. Like corporations, countries can be ranked according to their projected ability to pay back debts in full and on time. The most recent data rates Turkey at BB-, the same rating given in January 2008. This puts Turkey behind all 50 American states, Canada, Jordan, Pakistan and Nigeria, ahead of Ukraine, and on a par with Serbia and Mongolia. America has not changed its 2008 S&P position despite its travails. Turkey’s position has not changed despite its successes.

What to make of this? Turkey’s prowess in the competition for foreign direct investment is the result of two factors: its friendliness as a foreign capital destination, and its fiscal discipline.

The innovative medicines sector in Turkey captures Turkish fiscal problems in a nutshell. In recent years, Turkey opened its borders to Phase I, II, III and IV medical trials, making itself an attractive destination due to lower costs and a population mostly unexposed to innovative medicines. Yet late last year, Turkey’s National Health Service reduced manufacturer reimbursements for drug costs by 30%, a move that is scaring off investors. It’s this tendency to govern in lurches, rather than by policy, that scares off new investment. Investors want predictability. During a global economic downturn, when Turkey must compete for every investment dollar, corporations need government strategy, not tactics. Government officials must be able to hold out for the long-term, even against determined political pressure.

The WSJ/Heritage Index defines “economic freedom” as “the fundamental right of every human to control his or her own labor and property.” In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.”

We know that using this definition, “economic freedom” is an imperfect measure of a nation’s well-being. Freedom of capital never guaranteed anyone a job. The “lottery of birth” does not guarantee equal access to capital, it guarantees the opposite. But viewed strictly in economic terms, the WSJ/Heritage Index is a solid barometer of national attractiveness to FDI.

According to this year’s Index, “[Turkey’s] score is 2.2 points higher than last year, reflecting improved scores especially in investment freedom, freedom from corruption, and fiscal freedom.”

This is good news. Turkey has become more welcoming to foreign investment in terms of investor protections. Some key problems remain, including inflexible labor regulations and corruption.

The Standard & Poor’s rating system makes no claims to philosophical underpinnings. It limits itself to a nation’s projected reliability as a debtor. We can thus discern the key findings this year: (a) Turkey is viewed, unfortunately, at the bottom in terms of credit worthiness and (b) Turkey has made no progress since 2008. Turkey is viewed as a credit risk. The lack of fiscal discipline is relevant: Turkey’s 2009 budget deficit is 52.2 billion Turkish Liras, a threefold increase over 2008.

In this, Turkey mirrors the United States, and its current policy of deficit spending to spur the economy. But deficit spending, aside from encouraging inflation, discourages lenders, because it tends to weaken the lira: even when debtors are fully repaid, they lose money anyway.

The U.S., far ahead of Turkey on the Economic Freedom scale, has seen no change to its triple-A S&P rating. But the dollar remains the world’s reserve currency, making the U.S. unique. Still the solution for Turkey parallels what U.S. policy should be.

We at the chamber believe international comparisons are useful, if not always gospel. In 2010, we can only encourage policymakers to try to adhere to fiscal discipline, and to resume the enthusiasm for reform that drove economic activity for most of the past decade. A lower budget deficit makes for a stronger currency and reassures investors. Economic reform gives them confidence. It is never more difficult, but never more important, to hew to the long term in policy during uncertain times. As famous American President Ronald Reagan once said, “Stay the course.”

* Rahşan Cebe is chairwoman of the American Business Forum in Turkey, an affiliate of the U.S. Chamber of Commerce.