Friday, April 30, 2010

On Competition (II)- Doing Business in Turkey: A Tale of Two Crises

As you might (or might not) know, I sometimes get commissions for writing, anything from op-eds to academic stuff. I recently wrote a short piece for the Risk Advisory Group for their monthly newsletter on doing business in Turkey. Below is the text, so that my loyal readers can enjoy it and other can accuse me of scaring foreign investors away. It is kind of a continuation of the Hurriyet Daily News piece I wrote back at the end of February.

Economic historians will probably conclude a few decades from now that two crises in the first years of the new millennium had a profound impact on the structure of the Turkish economy.

The 2001 domestic crisis paved the way to the macro reforms of the next five years. Commendable execution of a well-planned IMF program, with an expansionary fiscal contraction and banking reform at its pillars, did wonders for the economy in the ruling Justice and Development Party’s first term in office, leading it to nearly 50 percent of the votes at the 2007 general elections.

It is therefore not very surprising that despite some recent slippage, especially on the fiscal front, the macroeconomics environment came out at the top on American Business Forum in Turkey’s latest annual survey on Business and Investment Climate in Turkey, which was released at the end of February.

The 2008 global crisis, on the other hand, stalled the government’s infant attempts at micro reforms, as Economics Minister Ali Babacan candidly admitted at the IMF-World Bank Annual Meetings in Istanbul back in October. As some countries capitalized on the crisis for pushing forward their reform agenda, Turkey’s World Bank Doing Business ranking fell to 73 from 63 a year earlier.

But the overall rank could be misleading. For example, as a result of the government’s early reform drive, it takes 6 days to start a business, down from 38 in 2004. Other areas of relative strength are registering property, enforcing contracts and protecting investors. On the other hand, closing a business, dealing with construction permits and employing workers are areas where Turkey literally ranks at rock-bottom.

Whereas the Doing Business survey, which depends on objective criteria such as the number, time and cost of procedures, is useful for benchmarking, actual practice can be quite different from what is written on paper. Therefore, it is useful to supplement such surveys with the private sector’s subjective opinions, and by asking 110 U.S. company executives their perceptions on the Turkish business and investment environment, the American Business Forum survey does exactly that.

According to these American executives based in Turkey, the main areas in need of improvement are university-business partnerships, policy transparency, customs, legal system and corruption. Incidentally, these are the same problem areas that came out in the 2007 inaugural survey, confirming that there has not been much reform in the past couple of years. Moreover, the results are strikingly similar to the wider-sample 2006 World Bank Investment Climate Assessment survey, attesting to their robustness.

It is also important to be aware of regional disparities. For example, U.S. executives are satisfied with their employees who have degrees from top Turkish universities and American graduate schools. But as a recent World Bank study on higher education highlights, this rosy picture darkens quickly once you begin talking to small and medium-sized enterprises in the hinterland, who often complain of not being able to find skilled workers even at significant wage premiums.

Perhaps most worryingly, the government has stopped to listen, as a top-level executive of a multinational firm based in Istanbul recently confided: “I am unaware of any sector that has established a sustained, constructive and forward-looking dialogue with the government on coherent policies and strategies”, she noted.

This is really bad news for a government whose receptiveness to the private sector was one of its defining strengths early on.

No comments: