Mustafa Sönmez – Hürriyet Daily News, May/ 23 /2016

Major regional inequality is one of Turkey’s structural problems. Even though investment incentive measures were taken in 2012, this gap is not shrinking.
In terms of regional inequality, Turkey is second only to Chile in the Organization for Economic Co-operation and Development (OECD). Among OECD member countries, the best regional balance is seen in North European countries, led by Sweden and Holland.
The regional inequality issue in Turkey is also an important obstacle to Turkey’s EU membership. Turkey must lower its interregional differences to an acceptable level, which is one of the key conditions to joining the union.
There are significant historic, social and economic reasons for regional inequality in Turkey. Provinces in eastern and southeastern Anatolia have not been able to benefit adequately from the advantages of development. Not only them but also the easternBlack Sea region, certain parts of Central Anatolia, and even some parts of western Anatolia and the Mediterranean.
From the 1980s to the 2000s, when Turkey became more open to the global economy and market fluctuations and more distanced from central planning, regional inequality in the country was exacerbated in favor of strong regions and against underdeveloped regions.

In a 26-region categorization of Turkey, six sub-regions in eastern and southeastern Anatolia are in the bottom seven places. Istanbul’s share of the overall national population is 3 percentage points higher than the population of 21 provinces in the east, but its share of national income is over 20 percentage points higher at 28 percent. The lowest six sub-regions in southeast Anatolia have a share of 7.4 percent.

Incentive programs and results

The “New Investment Incentive Program” that went into effect in mid-2012 introduced different practices according to the type of the investment, its size, and the region. The program is made up of four different practices:

1-Regional Investment Incentive Practice

2-Large-scale Investment Incentive Practice

3-Strategic Investment Incentive Practice

4-General Incentive Practice

The program contains tools such as tax reductions, support for the employer’s insurance premiums, and support for interest rates. It separates Turkey into six different regions according to economic and social development levels, within the framework of a study conducted by the Ministry of Development in 2011.

Region 1 was granted the least advantageous incentives while Region 6 was granted the best incentives.

However, this program was not successful as it failed to be sufficiently selective in supporting a certain region or a certain sector. As a result of this inefficient program, the desired reduction in the regional gap was not reached. The results of the period from June 2012 to the end of 2015 prove this.

According to data from the Ministry of Economy, in that period investments worth a total of 309 billion Turkish Liras were supported with incentives. However, the regional distribution of investments does not seem to be good at lowering the imbalance as desired. In the same period, Region 1 – which included Istanbul – took the top slot in investments with a share of 35 percent. Regions 2 and 3, both of which lie in the west of the country, had a share of 31 percent of the investments. As a result, two thirds of the supported investments were made in already developed and relatively developed regions. The least developed Region 6, covering the eastern and southeastern Anatolia, took only a 5 percent share of the supported investments in the same period.

For a more effective policy

Even though the gap in the distribution of national income among regions is an issue going back many years, it grew further with the neoliberal policies after the 1980s put an end to public investments. Following the privatization and closure of many public enterprises, along with their investments, the gap between the regions grew wider.

What’s more, the new paradigm that has based economic growth on the inflow of foreign resources – because of inadequate domestic savings – preferred to attract hot money with low exchange rates and high interest rates. This made importing cheaper, and the destructive policy of encouraging imports has rapidly eroded industry in Anatolia, which should have been protected. When Anatolia could not save itself from the de-industrialization disease, the bleeding in the workforce and capital accelerated with domestic migration.

Although a regional perspective in supporting investments seemed to be developed in the AKP era, an effective incentive policy was not created. The public sector has persistently avoided making investments, especially in the industrial sector, exacerbating inequality between developed and underdeveloped regions.

Incentives have mainly been offered to the most profitable sectors in the short-term, including the construction sector, the energy sector (which develops many environmentally unfriendly projects), and other service sectors with no value in foreign trade. The limited number of manufacturing investments was made largely in Istanbul and its neighboring regions, rather than Turkey’s more underdeveloped regions.

In recent years, especially when industrial investments slowed down, a new growth approach required a fresh industrial perspective that would encourage new investments. A fresh public investment model, focused on the public good rather than profitability, will be crucial in resolving problems resulting from regional inequality.

Written by Mustafa Sönmez