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Stitching the economy

Ankara weaves a recovery plan

by Peter Grimsditch

Last month Turkish Prime Minister Recep Tayyip Erdogan announced economic stimulus measures designed to put the nation back to work and the economy on the path to recovery. Tax cuts, exemption from social security payments, relocation expenses and subsidies for intern on-the-job training were part of what Erdogan described as turning a “crisis into an opportunity.” On paper, the plan looks sound.

For investment purposes the country has been carved into four zones, from the least developed east to the most developed north-west. As an incentive for new investors to  set up shop in eastern Turkey, start-up businesses will see corporate tax rates cut from 20 percent to 2 percent, social security contributions exempted for seven years, and a subsidy of 5 percentage points on the interest rate for Turkish lira loans for business start-ups, to a maximum of TL500,000 ($325,000). Smaller versions of the same formula will apply to the other three regions.

Sweetening the pie

The textile industry, a chunk of which has been exported to Egypt, is among several areas singled out for special treatment. Any company owner willing to transfer their operations, lock, stock and barrel from either of the two richer zones to either of the two poorer zones will have the corporate tax rate slashed from 20 percent to 5 percent, all relocation expenses paid and be exempted from social security payments for five years.

There are, inevitably, some conditions. The move has to be made before the end of next year and the company has to employ at least 50 people. The name of Erdogan’s game here is to spread the productive economy more evenly around the country. With the state subsidies and lower salaries paid in eastern Turkey, overhead operating costs would be cheaper for those who take the plunge. What they also face in parts of the region is a transport infrastructure in need of a vast overhaul and a local labor pool drawn from the least educated slice of the Turkish population. In any case, no one has explained how creating jobs in one area by making people redundant in another can be counted as a net gain.

Indeed, the unemployment rate has reached a worrisome 15 percent. For that reason, the prime minister included in his announcement an employment package that will pay 200,000 people $9.70 a day to join on-the-job training program, while providing jobs for another 120,000 others in school and health center maintenance, tree planting, erosion control and caring for parks.

“The government is determined to turn around the economy whatever the costs,” Erdogan said.

Perhaps mindful of continuing talks with the International Monetary Fund on a new standby agreement and differences between the two sides on tax and spending policies, he added that none of the measures would involve the “slightest concession to fiscal discipline.”

The IMF appears unconvinced. Later in June, director of the IMF’s European Department, Marek Belka, said Turkey may need to cut its spending levels to achieve financial sustainability. Speaking in Washington, Belka was quoted by the Reuters news agency, saying, “No matter if there is an IMF program or no program, the Turks themselves have to make the necessary adjustments, fiscal cuts if necessary or longer-term reforms both on the expenditure and tax side, so that we can both agree that the fiscal situation is under control in the longer term.” The last agreement expired in May 2008.

Hope makes for happy markets

Belka’s remarks came the day after IMF First Deputy Managing Director John Lipsky held talks with Turkish authorities in Ankara. The agenda was ostensibly preparations for the annual meetings of the World Bank and IMF governors to be held in Turkey in October. Although there were no substantive talks on a new loan agreement, both the Istanbul Stock Exchange and the currency improved simply on the possibility of a deal.

The current talk in Ankara — that an agreement could be signed by August — is reminiscent of the political gossip put out every month since last October. This alternates with suggestions that the Turkish economy is sound enough to survive without an IMF loan anyway. Certainly, the Turkish government appears in no mood to don an IMF straitjacket and abandon its current policies.

Peter Grimsditch is Executive’s correspondent in Istanbul

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