Turkey’s long-forgotten reform agenda

In this column, I have been often very critical of the government’s economic policy.

But a report last week reminded me that I have to render unto the government the things which are the government’s: With knockoff fiscal measures, rumors of an IMF deal, financial center daydreaming and the like, they have managed to sway attention from the much-needed micro-reform agenda.

Were it not for the American Business Forum in Turkey’s annual survey on Business and Investment Climate in Turkey, I would probably be discussing now the recent Capital Markets Board claim that there is no relationship between rumors of an IMF deal and Turkish asset prices.

The survey has asked 110 US company executives their perceptions on the Turkish business and investment environment in a wide variety of areas such as macroeconomics, red tape, infrastructure, taxation, legal system and labor force & education. Since it has been conducted since 2007, there is also some scope for time series comparison.

To start off with the good, the executives seem to be content on the macroeconomics environment. I would go a step further by declaring boldly that the 2001 crisis, which led the way to the macroeconomics reforms in the five years that followed, is one of the best things that happened to the Turkish economy.

A snapshot of the economy on the eve of the crisis would paint a very ugly picture. Public finances were in much worse shape than today’s Greece. The country was dealing with chronic inflation as long as anyone could remember and was faced with a deep recession.

Commendable execution of a well-planned program towards economic stability, with an expansionary fiscal contraction and banking reforms at its pillars, coupled with very favorable global conditions, did wonders for the economy in the AKP’s first term in office.

I have yet to devote a column to it, but that macroeconomic performance was the driving force behind the party’s stellar performance at the 2007 elections- just as it is mainly responsible for AKP’s recent waning support at the polls.

In fact, the survey reveals that the government is still reaping the benefits of those five years despite the fiscal slippages in the last couple of years, which have led some executives raise concern over the lack of a fiscal anchor. But it is not the macro, but micro reforms, or rather their lack of, that is really worrying.

The survey clearly highlights that not much has been done in the last three years in terms of microeconomic reform. There has not been any improvement in areas that were defined as in need for improvement in the 2007 inaugural survey such as university-business relations, policy transparency, customs, legal system and corruption.

One could argue that the survey could be reflecting the concerns of large foreign corporations, whose interests might not necessarily be aligned with domestic firms, especially small and medium-sized enterprises.

But other studies that have used a much more representative sample, such the World Bank’s 2006 Investment Climate Assessment survey and 2005-2007 Labor Sector studies, point at exactly the same areas.

These studies are also better-suited to international comparisons and identification of binding constraints to investment. They confirm that executives of US firms are right on track: Not only Turkey lags behind its peers in their problem areas, their concerns also come out of these other studies as major barriers to investment.

Interestingly, I could hardly find any other mention of the survey in the other Turkish dailies, which were preoccupied with the “sledgehammer crisis”. Maybe, the government is not only Caesarian in terms of authoritarianism, after all...

Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes. Read his economics blog at http://emredeliveli.blogspot.com.