Opportunity lost and found? Incentives, investments, and reforms

Last week I have voiced some doubts concerning ‘opportunities lost’. My claim was twofold. First, what has become a ‘folk theorem’, namely that the developed economies stifle newcomers, although not entirely devoid of content, is a theme that darkens more than it enlightens. Pick someone up randomly in the street and ask her if ‘imperialism’ indeed blocks development either in the Muslim world or in the EM countries at large; the answer would probably be ‘yes’. Second, emerging economies rarely find a chance to climb the ladder of development, and forge ahead, reducing the gap between them and the developed world. When there is a window of opportunity, they had better not miss it. Let’s develop this theme and apply it to the Turkish economy as it currently stands.

Consider FDIs. The relevant graphic displays both the USD amounts of FDIs and their ratio to GDP over the last 27 years. 1990 is a good candidate for the choice of the base year because the Turkish capital (financial) account had been opened up to overseas investors in 1989. While the regulatory and legal changes to really motivate FDIs awaited 2004, at least Turkish bond and equity markets were opened much earlier. The new investment climate had paid off by 2006, 2007 and 2008, as can be seen, but these years remained the peak years for over a decade. Over the last 5 years, the annual average of FDIs relative to GDP has been 1.09 percent, and the average amount was $9.45 billion. If we consider the last decade, the picture doesn’t change much: the respective figures are $10.27 billion and the FDI-to-GDP ratio stands at 1.15 percent. Admittedly, for a country that has had the habit of running rather large current account deficits and financing them through cross-border flows, these are very low figures. As time went by, the share of portfolio investments grew, and that of FDIs remained modest. Could it be that the only markets that proved to be attractive were the bond, equity and to a very small extent, real estate markets? I don’t think so. This is unthinkable because banks could increase their non-core liabilities rather fast during that episode, and they extended loans to the Turkish private sector sometimes at breakneck speed.

If we look at the sectoral composition of FDIs, we see that in 2017 the total stood at $7.44 billion, of which services attracted $4.75 billion, i.e. 64 percent. Financial and insurance activities accounted for $1.45 billion, or 30.5 percent of total services. The other large chunk lies with transportation: $1.35 billion, but this is only valid for 2017, an exception. Manufacturing explains 47.5 percent of the industry total. Health and education are negligible. There may be investment opportunities in city hospitals, in other words. During the last four years, in three, FDIs were even less than their post-Lehman period average, and their composition was not particularly eye-catching either. On the other hand, when we examine the investment series, even with the new GDP data that posts a lot of past investment and a lot of savings that we hadn’t perceived at that time – calculated as residual given the current account deficit because domestic savings plus foreign savings should add up to investments - we can observe that after 2010, fixed capital formation wasn’t tantamount to what a vibrantly growing EM would aspire to see. We don’t particularly like the new series, but even if we accept they reflect past reality in full, we can’t fail to grasp that fixed capital investments more often than not leave a lot to be desired. Furthermore, private consumption is not always sufficient by itself, and even public consumption has to step in to shore up the momentum. In short, this is the picture of an economy that warrants all sorts of incentives and subsidies plus direct intervention of the public to keep it going. The good thing is machinery and equipment investment has picked up recently, but the graphic overstates this fact a bit, given that construction isn’t what it was before. The direction of the movement is correct though, and industrial production of 2016 and 2017 has confirmed that fact.

What can then be the ‘opportunity found’? I take it for granted that AKP will win all of the 2019 elections. Because there is no opposition party that proposes a politico-economic and ideological line that can possibly convince large chunks of the masses nor is there any likelihood of the formation of a ‘historical bloc’ that could shake the political landscape, the incumbent party will win. Hence, there will be plenty of time to restructure the economy. If not now or, even with further vigor, not in the aftermath of the elections, then when? Now, the last profound economic change came in the heat of the 2001 crisis, and some of its repercussions took shape in its aftermath. We know that whenever there is a new drive, a strong will and attempt at a sweeping sea-change in the economic outlook, the private sector has responded well. The new incentives package could be such a landmark. We are talking about an amount reaching to TRY 100 billion, or around $25 billion. The package

didn’t come out of the blue; it has been “in the air,” putting it colloquially, for over two years. Currently there are 22 such projects. The drive involves almost all there is in the agenda of PPPs, and global business giants seem to be already in. It will provide VAT exemptions, exemption from the customs duty, provision of funding at low interest rates and suchlike. More importantly, there is a PPP element that projects the state to step in and invest directly up to 49 percent of the total amount in a way set to step out after 10 years. Support for R&D allowing very high wages – up to 20-fold of the gross minimum wage, help in the provision of energy, and public purchase guarantees complete the picture. It is reminiscent of the idea of organized industrial zones; only this time around there are also renewable energy resource areas. I gather that the drive will be followed up by a state-guided reorganization of some SMEs, providing further industrial zones that could be used not only as hubs logistically, but as consolidating and cost-cutting devices such as use of a single conveyor for many a similar medium-scale firm. As such, they may at first serve the purpose of curtailing import costs in some industries. The package is already spread over many an important sector including – but possibly not confined to defence, energy, chemicals, medical devices, aviation and information and communication technologies. Tenders have already been provided, and auctions held, won by consortiums involving Siemens, Hanwha, etc. Add to this GE and others. What is going on?

Now, restructuring the SME sector is a difficult task because there are lots of them. Dealing with banks or with large conglomerates is another matter. The first requires market-wide price and other incentives, the second warrants bargaining at arm’s length. $25 billion as a green field investment is quite a sum. With the help of tax breaks and subsidies it can be done, and if it is done the investment generated will be on a par with, say, the normal course of the manufacturing industry’s net investments over a 4-5 year horizon. The multiplier effect will be close to two. Investments of such magnitude are liable to swing back and forth, so there will also be secondary effects. Add to this possible PPPs in the health sector, which promises an investment of up to $20 billion. Remember that investments targeting electricity production added up to around $50 billion in the 2000s. Energy and property development/construction were the driving wheels of the economy for over a decade. A similar impetus can be relinquished via the new route. This is very important on account of the fact that portfolio investments account for an unduly large portion of capital inflows, and the FDI portion has been stagnating since the early startjump of 2006-2007.

Giovanni Arrighi had already clearly signalled in the opening sentences to his short – but analytically very well argued - study on the geometry of imperialism that the term imperialism was surrounded by a “profound ambiguity.” To wit, the seminar that was called for a scholarly discussion on imperialism in 1969 at Oxford had proved to be at cross-purposes, references to imperialism lacking coherence, and only generated further misunderstanding and spread disenchantment among scholars at that time. As Arrighi reports, in the late 1960s and early 1970s, there were at least ten themes related to the over-burdened term imperialism. Imperialism in international affairs can be seen as the first and mostly vulgar reference and it was surely not confined to leftist circles. What were the others? Imperialism and underdevelopment, imperialism and capital accumulation, imperialism as the monopoly stage of capitalism (also the last and highest stage in the Leninist lexicon), imperialism as finance capital, imperialism as the cartel solution to an oligopoly game (in the meaning of Kautsky, thus leading to ultra or super-imperialism), imperialism and uneven development, imperialism as tendency to war (first between imperialist powers, then among underdeveloped states as provoked by imperialist powers) were the others. We should also add a qualifier here, to the effect that imperialism manifests itself as militarism before tending towards universal warmongering. Contrary to Hobson, Arrighi claims in passing that imperialism could be characterized as an unstable and temporary phenomenon, which we may as well add to our list of attributes. So, which is it today, or else is there a tractable definition of what ‘imperialism’ could be now beyond ‘folk theorems’? I doubt it. In a world where China emerges as defender of free trade, and where the foreign capital share in Chinese manufacturing hovers around 35 percent, there is no other way. As such, such global linkages and long-term foreign investments can also be seen as Defensor Pacis, i.e. ‘the defender of peace’ worldwide, even though Marsilio da Padova didn’t intend the title of his 1324 book to be used in this vein.