BOSPORUS BLOG: Keep Chinese goods away from the Iraq bazaar!

By bne IntelliNews April 16, 2012

bne -

On April 5, the Turkish government revealed details of a highly anticipated manufacturing incentive package for the country, which includes policies to attract new investments to 15 of Turkey's less-developed eastern provinces. Is this just more talk or something more substantive?

"The new package is doubtless the most comprehensive and detailed of its type in the history of the republic, and it is clear that much work was put in to refine the stimulus for greater investment techniques," wrote Turkish columnist Cengiz Aktar on April 11. "What's more, it is clear that some lessons have been learned from previous exercises."

As with recent moves to manage energy prices, the incentive package is aimed at taming Turkey's massive current account deficit, which currently comes in at about 10% of the country's GDP. With the incentive package, the fourth since it came to power in 2002, the government aims to reduce imports on intermediary goods. Incentives will be offered to increase the production capacity and competition of sectors the government believed to be most responsible for the current account deficit: iron and steel production, the automotive sector, machines and manufacturing, chemical production and textiles, and food production and agriculture.

Raising the level of education and skills around the country is still needed to produce qualified workers for further research and development, but the government is taking steps to change the types of products that are made in Turkey, Aktar says.

These are the kinds of steps that numerous observers, including bne, have been advocating for some time. Turkey has been enjoying 8% growth in 2011, far superior to anywhere else in Europe. However, the nature of this growth, dependent as it is on short-term inflows of foreign money and a credit boom, is unsustainable. The country needs to adjust the fundamentals of its production methods by developing more advanced types of products, expanding exports, increasing education and stopping the mad imports of energy and basic materials.

As one Turkish expert recently commented to bne, the government purposely raised energy prices to lower the current account deficit, but this would also contribute to this year's expected slowdown as industrial production is likely to suffer. Some of Turkey's main exports are white goods that are shipped in vast quantities to countries such as Iraq. If prices for these goods go up, Turkish white goods will face increased competition from white goods made in China. The products are of the same basic quality and nature, yet China's white goods are cheaper. If Turkish industrial production falters and prices go up, Turkish businessmen may start hawking Chinese white goods on the Iraqi bazaar.

Hand on the tiller

Turkey's eastern regions are a fabled bread basket. Situated at the edges of what was once Mesopotamia, vast tracks of dark, fertile earth lie empty. The under-use is blamed on years of drought and conflict. The Turkish government continues a 30-year conflict with Kurdish militants in these lands, keeping investors away.

The incentive package is the latest attempt to economically invigorate these areas. "We as the government are committed to overcoming the obstacles presented by illegal groups that hinder the improvement of the eastern provinces with new investments. The region is going through a transformation and we need the support of private industries to help pick up the relatively poorer cities," Turkish Prime Minister Recep Tayyip Erdogan says of the incentive package's possibilities.

The last of the six regions that the package's implementation plan divides the country into, the southeast region, will be given the most attention. With a shortage of jobs, this is the perfect place for Turkey to increase its manufacturing capabilities and advance the skills of the local population. Organized Industrial Zones (OSBs) will attempt to attract foreign investors for the production of various products.

Strategic investments in these areas must be more than THY50m and create an added value of at least 40%, according to statements made by the Turkish government. These investments will be focused in the automotive, chemical, textile and machinery sectors.

However, it will ultimately take much more than another new incentive package to attract foreign investors to this region. The possibilities for agriculture there are huge, but the southeast has languished, a constant victim of more talk than action. "When one considers the projected 'general, regional, large scale and strategic investments' within the framework of the stimulus package, one notices that a long-term, regional and small and medium-sized enterprises (SME)-based approach is absent," the columnist Aktar notes.

Another hurdle to be faced is the basic implementation of the plan. As anyone who has ever visited a local government ministry in the southeast knows, the vast numbers of bureaucrats prefer drinking tea and chatting to going out and teaching the local population on new methods of farming or manufacturing. Their defence is that the local people do not see the benefits of learning new skills because the government is unwilling to subsidise their time spent learning them. If the new methods fail, the farmers will be out the money they could have made using the old techniques.

Perhaps it will take Prime Minister Erdogan himself going to southeast Turkey, investors following behind him, to make the package succeed.

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