The opening of the World Economic Forum (WEF) in Istanbul on the November 23-24 was particularly timely, with a critical juncture in Turkey's EU accession bid over Cyprus looming in December and elections on the horizon in 2007. While participants engaged in a series of plenary and interactive sessions - discussing a full range of political, strategic and social issues - investors were particularly keen to follow the plenary session on Turkey's long-term comparative advantages, which also served as a check-up on the economy.
Aside from underlining the progress that has been made over recent years in stabilising the economy under the ruling Justice and Development Party (AKP), the panellists highlighted a number of primary areas of concern. Hugh Bredenkamp, the senior resident representative of the International Monetary Fund (IMF) in Turkey, summarised these succinctly in five main points during his speech. First is the relatively low rate of personal savings - placed at 6% of Gross National Product (GNP) - which comes out lower than the average of the Organisation for Economic Cooperation and Development (OECD) countries but roughly equal to other emerging markets.
Failure to increase savings, or compensate for the gap through foreign capital, will lead to slower growth of the economy. But dependence on foreign finance and overly zealous and untimely credit expansion poses its own set of risks, meaning that the economy would be less able to absorb external shocks. In this context, Bredenkamp underlined the importance of phasing in credit rules - whether on mortgages or private pension funds - as tools to encourage personal savings.
Turkey's underdeveloped consumer credit market was placed as another key point in Bredenkamp's list of five. These markets, according to the IMF are 20% below that of comparable countries and as little as one fifth of that enjoyed by developed markets. Should Turkey realise rapid economic expansion minus strong regulation, the country would be prone to asset bubbles, which underlines once again the importance of phasing in consumer credit measures.
A third point flagged by Bredenkamp was Turkey's high public debt burden, which remains double that of EU states. He highlighted the risk of short-term debt exceeding foreign exchange reserves. All of the above linked in with the size of the current account deficit, which economists expect to exceed $31bn by the end of 2006 - the major thorn in the side of Turkey's otherwise robust economy.
The last two points made by Bredenkamp concern labour and taxes. Greater labour flexibility is needed, with as much as 1.8% of the workforce entering the labour market every year. The rapid rate at which rural labourers and farmers abandon agricultural jobs in search of alternative and more financially rewarding professions has placed extra pressure on the labour market. Also, with only 25-30% of females working, Turkey is far from harnessing the potential of its work force.
On the taxation front, more needs to be done to enforce even compliance. Businesses, according to Bredenkamp, have had to face statutory excess and special-use taxes with undue reliance by the government on select indirect taxes. The most distorting taxes should be eliminated. This is in spite of the fact that the overall tax to GDP ratio is not excessively high.
None of this is to discredit Turkey's immense economic potential, with Bredenkamp underlining the fact that vulnerabilities also count as opportunities. Fellow speaker Michael Martin, Ireland's minister of enterprise, trade and employment, also highlighted the importance of targeted education, job creation and full utilisation of the labour force, drawing on Ireland's own experience. "The key to our success was our focus on education, not only enrolment figures...with a special emphasis on developing courses in business and science." Apart from underlining the importance of the EU accession process in ensuring fiscal discipline, Martin also addressed the taxation issue. "You should marry your skills and education policy with a good tax regime. Thus our low corporate tax rate of 12% yields three times the revenue per capita than the higher tax in France, so it's not all about the rate."
In the same session, Ali Babacan, Turkey's minister of the economy and chief negotiator for the EU, underlined the strengths of the Turkish economy and progress that had been made since the party came to power in November 2002. From a longer list, inflation has been dramatically cut to single digits (even if presently hovering at the double-digit threshold), with per capita income doubling to $5000 over the last four years. Levels of foreign direct investment have jumped from $1bn a year between 1993 and 2002 to $9.7bn in 2005, with $12.8bn registered in the first nine months of 2006.
Turkey's political stability, Babacan said, was a kind of guarantee for the future, which he linked to the EU accession process and associated reforms. Still, investors will be closely following the presidential and parliamentary elections in 2007 along with the more immediate deadline on Cyprus, hoping that Turkey's reform process is not in any way disrupted.
Babacan later made a number of key points during the questions and answers session. He conceded that, in spite of tax adjustments, little progress had been made in shrinking the size of the unregistered economy since 2002. Many analysts say the informal economy constitutes 50% of all economic activity at a national scale. In this context Babacan highlighted the recent establishment of an independent tax collection authority, only linked to the treasury through the treasury minister. While the body should implement a fairer tax regime, the minister said more work needed to be done.
On the issue of low savings, Babacan commented that Turkey has a unique social advantage in so far as individuals can frequently rely on a close family network in the case that they land in the red. He also pointed to the air of confidence in society, that citizens expect the economy to continue improving, which as consumers is essential for business confidence.
As for the participation of women in the labour force, the minister conceded that the situation was disappointing, but that the comparatively high percentage of Turkish women employed in such vocations as medicine and law come as positives. Turkey's business environment is opening up, with an increasing number of extremely successful businesswomen emerging on the scene.
In keeping with the overall tone of the WEF mini summit, the plenary session not only underlined Turkey's importance as an international player and its incredible pulling power as an investment and business destination.
Local and foreign investors had reason to nod in unison as the WEF's founder and executive chairman, Klaus Schwab, included Turkey on the list of economic tigers reshaping the global economy - Brazil, Russia, India and China.
