Do Government Incentives Work for Turkey’s Less Developed Regions?

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By Arzu Karaarslan  @ArzuKaraarslan  / Mardin

Dağ Medya Economy Writer

Do Government Incentives Work for Turkey’s Less Developed Regions?

The New Investment Incentive Program (NIIP), which was initiated on the 1st of January 2012, aims to increase domestic and foreign direct investment, create employment opportunities, reduce the current account deficit and reduce economic disparities among Turkish regions. The Program, whose structure is depicted in the below figure, consists of four schemes or components: a General Investment Incentive Scheme, a Regional Investment Incentive Scheme, a Large Scale Investment Incentive Scheme and a Strategic Investment Incentive Scheme.

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Source: Ministry of Economy, 2012

Now that we are two years into the program, it seems reasonable to assess the program’s success and failures. Rather than evaluate the Program’s progress on all of the aforementioned goals, this article will focus on the Program’s last, namely, reducing economic disparities across Turkish Regions. As a development expert at a regional development agency, I will focus on the TRC3 (Mardin, Batman, Siirt, Şırnak) region, one of Turkey’s poorest and most disadvantaged regions. In addition to critically evaluating the success and failures of this part of the Program to date, I will offer some new policy advice for the TRC3 Region and other poor regions that will hasten their catch up with the rest of Turkey.

Although all four schemes of the program contain incentives that are intended to reduce economic disparities across regions, the Regional Investment Incentive Scheme is by far the most important one for achieving this objective.  It aims to eliminate inter regional imbalances by setting tax rates and subsidies according to each region’s level of development with the poorest regions receiving the lowest tax rates and highest subsidy rates.

The following table provides official measures of the Program’s achievements for various periods for all of Turkey (TR), the 6th Region, and the Tigris (TRC3). The official measures are: the number of certificates issued, the total lira investment committed and the total employment committed. In order to obtain the preferential tax rate or interest support, an investor must obtain a certificate from the government. Hence, the number of certificates issued by the government is a proxy for the coverage of the program. As the Table shows, the total number of certificates, committed investments and committed employment increased by 10%, 31% and 24% respectively during the implementation of the program in Turkey. Importantly, the 6th Region’s share rose dramatically: total number of certificates rose by 30%; committed investments by 280%; and committed employment by 195%.  However, for the stated period, most of the growth was outside the Tigris Region.  The Tigris Region’s share in the 6th Region only increased by 4% (from 25% to 29%).


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Note: This data includes sum of active and implemented certificates for the stated periods. Source: Ministry of Economy, 2014

In order to understand the contribution level of the program in eliminating inter-regional imbalances, one needs to know more about the implementation of the program. The data provided by the Ministry shows the number of issued certificates and commitments only. These are commitment, which mean that not all the issued certificates or all the investment, employment commitments were implemented or met during the stated periods.  It is clear that some certificates never turn to the real investments. Unfortunately there are no official data on the number of cancelled certificates and implementation results. My own sense having worked in the region is that a high fraction of issued certificates are not implemented and the actual investment and employment are often less than the commitments. There are a number of factors that lead to certificates not being implemented and investment and employment falling short of commitments.  Some of these are; lack of investment location, lack of trained work force, low institutional capacity and limited access to finance.

So how can incentives be redesigned so as to bring about a greater catch-up by the poorest regions in Turkey? Even though rates of support varied with the level of development of the regions, there are large differences among provinces within regions. Provinces like Hakkari, Siirt and Şırnak in the 6th Region are different from the other provinces in this region because of greater security risks and harsher geography. Thus, a more effective incentive system would allow for different rates not just across regions, but across provinces within regions.  Another key factor for investors in deciding to start a project is the effective land allocation and infrastructure in the province. Although land allocation is one of the areas that the government supports, it is very hard to find land for investments due to bureaucratic procedures. The inventory for investable treasury land should be prepared and land allocation should be planned accordingly. Infrastructure, is especially poor in the less developed regions like TRC3 region. The government should prepare a plan for industrial infrastructure investments according to sectoral priorities and investment demands. The government should also make financial access easier for potential investors. This it could accomplish through  public grants and by centralizing support programs. Also sector, thematic and investor oriented alternative support mechanism programs could be implemented in regional level.

Incentive schemes are important to eliminating regional disparities, but they are just one part of a comprehensive program.  For the poorest regions in Turkey to achieve the economic success of other regions, the government must supplement incentives with infrastructure investment, more effective governance, and public loans. Only then will we see living standards in the TCR3 rise to levels near those so İstanbul, İzmir, Ankara.    

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