Turkey's business and investment climate (11.02.2008)

A stable macroeconomic environment based on the right mix of fiscal and monetary policies that ensure low inflation is necessary but not sufficient for sustaining high growth. A favorable business and investment climate at the firm level is also required to promote innovative entrepreneurship and raise productivity. Two recent complementary World Bank studies help us evaluate Turkey's business and investment climate and underscore the urgency of further microeconomic reforms to improve that climate.

The first of these studies, the "Doing Business 2008" report, in its fifth edition, is cosponsored by the World Bank and International Finance Corporation. Its purpose is to investigate and compare the government regulations that either facilitate or hinder business activities around the globe. It ranks 178 countries on their "ease of doing business," based on 10 quantitative indicators (see the table below) with data current as of June 2007. The second study, "Turkey: Investment Climate Assessment (ICA)," prepared by the World Bank and the Economic Research Foundation of Turkey (TEPAV) with the Turkish government's collaboration, focuses on Turkey's investment climate in much greater detail. In this column, I will review the major findings of the first study. In my next column, I will turn attention to those of the second.

According to Doing Business 2008 during April-June 2007, 98 out of 178 economies introduced 200 reforms to make it easier to do business. The most popular reform area was "Starting a Business," followed by "Paying Taxes" (cutting taxes and making their payment easier). The least popular reform area was "Employing Workers" (regulations that enhance labor market flexibility in hiring and firing workers). Not surprisingly, in the overall ease of doing business, the highest ranked group was the OECD High Income countries. Surprisingly, however, the group of countries in Eastern Europe and the former Soviet Union, which registered the largest number of reforms among all regions, ranked slightly higher than those in the East Asia and Pacific region. Nine of the top 10 ranked countries (Singapore, New Zealand, United States, Hong Kong, Denmark, United Kingdom, Canada, Ireland, Australia and Iceland) in 2007 were also among the top 10 in 2006. Among the 178 countries covered, Egypt was the top reformer, improving its ranking from 152nd to 126th, with Croatia as the runner-up. Ghana was third.

According to the table below, Turkey rose in the global rankings in the overall ease of doing business from 65th in 2006 to 57th in 2007. Turkey is listed twice among the reforming countries, several of which are mentioned many times for multiple reforms. Turkey's two reforms were in "Paying Taxes" and "Trading Across Borders." The improvement in the overall ranking was mostly due to Turkey's dramatic improvement in "Paying Taxes," by (1) enacting a new corporate tax code, (2) cutting the corporate tax rate to 20 percent from 30 percent, (3) decreasing the tax on interest to 15 percent from 18 percent, (4) simplifying other taxes such as those on property and check transactions, and (5) reducing, through improved e-filing, the time by 31 hours for businesses to comply with tax regulations. Turkey was the runner-up in tax reforms, after Bulgaria, which slashed its corporate tax rate to 10 percent from 15 percent. The second area in which Turkey's improvement was impressive was in "Trading Across Borders," thanks to reductions, through more efficient electronic customs procedures, in the time to export and to import to six days and 10 days, respectively. What is also striking, however, is Turkey's very low rankings in both years in terms of "Dealing with Licenses," "Employing Workers" and "Closing a Business." These are the areas in which further microeconomic reforms by the ruling Justice and Development Party (AK Party) government are urgently needed.

Asım Erdilek
Today's Zaman