Turkey's economy is 60.8 percent free, according to our 2008 assessment, which makes it the world's 74th freest economy. Its overall score is 2.5 percentage points higher than last year, reflecting improved scores in more than half of the 10 economic freedoms. Turkey is ranked 32nd out of 41 countries in the European region, and its overall score is lower than the regional average.
Turkey is near the world average in most areas but has very strong trade freedom, with a low average tariff rate and some non-tariff barriers. The environment for young companies is business-friendly, although licensing and bankruptcy procedures are difficult. The top income and corporate tax rates are moderately high, and overall tax revenue is relatively moderate as a percentage of GDP. Property rights are well protected.
Turkey is very weak in labor freedom; laying off workers is difficult, and work rules are highly inefficient. Freedom from corruption, financial freedom, and monetary freedom score slightly below average. Inflation is fairly high, and the government distorts the prices of a variety of agricultural goods through direct subsidies. Total government expenditures equal more than a third of GDP. Corruption is not as serious as it is in some nearby Middle Eastern countries.
Background:
Ever since Mustafa Kemal Ataturk founded modern secular Turkey in 1923, the country has sought a more Western-oriented approach to policy, especially in its vigorous attempts to join the EU. In recent years, the government has sought with partial success to reverse decades of corruption, economic mismanagement, and authoritarian intervention with more market-based reforms. The public sector still dominates some industries. The EU agreed to start formal accession talks with Turkey in October 2005, but significant roadblocks make it appear that accession will take at least a decade. Principal exports include foodstuffs, textiles, clothing, iron, and steel.
Business Freedom - 67.9%
The overall freedom to start, operate, and close a business is relatively well protected by Turkey's regulatory environment. Starting a business takes an average of six days, compared to the world average of 43 days. Obtaining a business license requires more than the global average of 19 procedures but less than the world average of 234 days, and costs are relatively low. Bankruptcy proceedings can be burdensome and lengthy.
Trade Freedom - 86.8%
Turkey's weighted average tariff rate was 1.6 percent in 2005. Service market access barriers, prohibitive tariffs for agriculture and food products, import taxes, restrictive import licensing requirements for food and agriculture products, non-transparent and arbitrary standards and regulations, export promotion programs, weak enforcement of intellectual property rights, and corruption add to the cost of trade. An additional 10 percentage points is deducted from Turkey's trade freedom score to account for non-tariff barriers.
Fiscal Freedom - 77.7%
Turkey has implemented lower tax rates. The top income tax rate is 35 percent, down from 40 percent, and the top corporate tax rate is 20 percent, down from 30 percent. Other taxes include a value-added tax (VAT), a property tax, and a tax on interest. In the most recent year, overall tax revenue as a percentage of GDP was 24.5 percent.
Freedom from Government - 68.3%
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 32.5 percent of GDP. The ratio of public debt to GDP has been declining since 2001. Deregulation and privatization have somewhat reduced the role of the public sector.
Monetary Freedom - 70.8%
Inflation is high, averaging 9.2 percent between 2004 and 2006. Unstable prices explain most of the monetary freedom score. The government sets prices for many agricultural products and pharmaceuticals and influences prices through regulation, subsidies, and state-owned utilities and enterprises. Municipalities fix ceilings on the retail price of bread. An additional 10 percentage points is deducted from Turkey's monetary freedom score to account for policies that distort domestic prices.
Investment Freedom - 50%
Foreign capital is legally equal to domestic capital. There are formal and informal barriers in broadcasting, aviation, maritime transportation, and value-added telecommunications services, and port facilities must be at least 51 percent Turkish-owned. The purchase of real estate by non-residents is restricted; foreign companies may acquire real estate through a Turkish legal entity or local partnership. Foreign investment is not screened. Procedures have been improved, but bureaucracy, a weak judicial system, and frequent changes in the legal environment remain deterrents. There were major privatizations in telecommunications, oil refining, and steel in 2005. Residents and non-residents may hold foreign exchange accounts. There are few restrictions on payments and transfers.
Financial Freedom - 50%
Following Turkey's 2000–2001 financial crisis, the government increased transparency, strengthened regulatory and accounting standards, and improved oversight. As of November 2006, there were three state-owned banks, controlling 30 percent of assets; 17 private domestic banks; and 13 majority foreign-owned banks, controlling 6 percent of assets. The five largest banks account for 60 percent of assets. Two of the 13 development and investment banks are majority foreign-controlled, and three are state-run. There were 24 non-life and 20 life/pension insurance companies in late 2006; foreign companies are not broadly represented. Capital markets are relatively small and dominated by government securities. The stock exchange is state-owned but autonomous.
Property Rights - 50%
Property rights are generally enforced, but the courts are overburdened and slow, and judges are not well trained for commercial cases. The judiciary is subject to government influence. The intellectual property rights regime has improved, but insufficient protection of confidential pharmaceutical test data and high levels of piracy and counterfeiting of copyrighted and trademarked materials remain concerns.
Freedom from Corruption - 38%
Corruption is perceived as significant. Turkey ranks 60th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. An independent public procurement board has the power to void contracts. The judicial system is viewed as susceptible to external influence and somewhat biased against outsiders.
Labor Freedom - 48%
Inflexible employment regulations hinder overall productivity growth. The non-salary cost of employing a worker is high, and the rigidity of hiring and firing a worker creates a risk aversion for companies that would otherwise employ more people and grow. A recently enacted labor law allows employers increased flexibility.
Quick Facts
- Population:72.1 million
- GDP (PPP): $605.9 billion, 7.4% growth in 2005, 7.5% 5-yr. comp. ann.
- Growth, $8,407 per capita
- Unemployment: 10.3%
- Inflation (CPI): 8.2%
- FDI (net inflow): $8.6 billion
- Official Development Assistance: $431.4 million (3.1% from the U.S.)
- External Debt: $171.1 billion
- Exports: $121.8 billion, primarily machinery, chemicals, semi-finished goods, fuels, transport equipment
- Imports: $102.8 billion, primarily apparel, foodstuffs, textiles, metal manufactures, transport equipment
