PESTLE analysis

PESTLE ANALYSIS Summary

The Turkish government is made up of democratically-elected representatives of the people, divided into several ruling bodies. In 1997, the military forced the resignation of the Erbakan government to end the increasing social and political power of Islamic institutions. Instability continued to increase, with the implementation of policies which secularized education, and political leaders implicated in corruption charges. Soon Turkey witnessed a series of cabinet changes and the year 2001 ended with acute economic crisis. On the international front, in 2002 and 2004, the Turkish parliament passed certain human rights laws with the aim of strengthening the countrys association with the EU. Turkey experienced a series of economic disruptions after the 1950s, which resulted in a balance-of-payments crisis by the 1970s. With ineffective structural reforms, Turkey had witnessed current account deficits, which it financed by external borrowing that led to an increase in the country's external debt. The Turkish government failed to take sufficient measures to tackle the increase in world oil prices during the 1970s, and borrowed short-term loans from foreign lenders; with rising inflation and unemployment, the government found it increasingly difficult to repay the interest on these loans. After 2000, however, Turkeys economy gradually benefited from prudent fiscal and monetary policies coupled with a significant reduction of expenditure on public infrastructure development. On the social front, Turkey has been faring well on various social parameters, mainly because of the manifold programs that the government initiated for fiscal sustainability in the areas of healthcare and pensions. Some of the most important social welfare schemes that the government provides are unemployment insurance, medical insurance, insurance for workrelated injuries, maternity insurance and housing security. Turkey aims to make radical changes in the public service sector by introducing advanced technologies; the country also intends to increase productivity in the long run by allocating more resources to R&D activities in both the public and private sectors. The government has been trying to make the country an attractive destination for foreign money by encouraging more infrastructure investment, which contributes significantly to the economic growth of the country through the diffusion of technology, positive externalities and capital inflows. Turkey has an independent judicial system responsible for the maintenance of law and order. As for ecological concerns, Turkey is involved in global environmental conservation programs and has linked its development aid to environmental objectives and policies focusing on air pollution, biodiversity, chemical substances, environmental health and issues such as climate change. However, Turkey suffers from industrial air pollution from power plants and the cement, fertilizer and sugar industries, which continues to be an area of concern.

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Political analysis
Overview
Turkey has been a strong promoter of liberal trade and investment policies and the recent governments have shown a sustained commitment to focus on improving economic policies. Turkey became a candidate for EU membership at the Helsinki Summit in 1999. Nevertheless, increasing corruption and a perceived lack of political commitment continue to discourage prospective international investors.

Table 3: Analysis of Turkeys political landscape

Current strengths Government policies on liberalization

Current challenges Terrorist attacks Rampant political and bureaucratic corruption

Future prospects Membership of the EU

Future risks Troubled relations with neighbors

Source: Datamonitor

DATAMONITOR

Current strengths Government policies on liberalization

Turkey is a strong proponent of liberal trade and investment policies. It has an open trading system, especially with the countries in the EU, with which it forged a customs union agreement in 1996. The agreement led to a positive shift in Turkeys trade policy, allowing many Turkish firms to successfully extend their presence in the global economy. Exports have increased at an average of rate of 10% every year in real terms over the past decade. The automobile sector in Turkey has benefited from the trade agreement; automotive exports as a percentage of GDP have grown significantly. In effect, these policies have stabilized inflation rates and have led to higher levels of investment and trade.

Current challenges Terrorist attacks

Turkey has witnessed a sporadic series of violent terrorist acts in the past, and it is believed that there are terrorist groups in the country. It has historically been under threat from widely disparate terrorist groups, including left-wing and Kurdish radicals, indigenous Islamic extremists, and Turkish militants with suspected links to Al-Qaeda. Furthermore, in 2006, the state police in Ankara informed the press about the involvement of a group of military officers in a plot to weaken the Adalet ve Kalknma Partisi (AKP) government.

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Most of the terrorist organizations in Turkey have targeted foreign tourists or assets in the country. Since 2004, the Kurdistan Workers Party (PKK) has been working to damage the Turkish tourism industry by targeting foreign tourists. Over the years, radical Turkish Islamists have plotted several attacks in Turkey, the majority of which have been prevented. The intention behind these schemes has been to hamper the foreign interests in the country, including institutions, businesses and personnel associated with the US and the UK. These repeated terrorist attempts will inevitably increase the security risk in the country and hamper its growth prospects.

Rampant political and bureaucratic corruption

Turkey faces widespread corruption in its political and bureaucratic machinery. The 2008 Global Corruption Report, published by anti-corruption organization Transparency International (TI), ranked Turkey 64 in its corruption perception index. According to both TI and the World Bank, corruption at the institutional level has traditionally been a cause of hesitancy among prospective investors. According to the 2007 activity report of the Turkish Police Department's Anti-Smuggling and Organized Crime Administration (KOM), several bureaucrats have been found to be involved in corrupt activities during various operations carried out by the police. The officials who were embroiled in these scandals were sacked from their jobs. Turkeys outlook for the future looks dismal as a result of increasing corruption cases and a perceived lack of political commitment.
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Future prospects Membership of the EU

In the 1999 Helsinki Summit, Turkey became a candidate for EU membership. This was a follow-up from the customs union signed with the EU in 1995. This initiative has lead to the implementation of several political and economic reforms in the country. For instance: after 2001, Turkey entered a period of high growth and significant structural transformation, with an average annual growth of 7.5%. Turkey has been able to sustain this position due to the government's continued commitment to improve its economic policies. The prospect of EU accession has helped Turkey increase its exports and draw large capital inflows.

Future risks Troubled relations with neighbors

Turkeys relations with its neighbors, especially Greece, have been showing signs of improvement. Nevertheless, the progress in its business relations does not change the fact that territorial disputes with its neighbors, in particular with Greece over Cyprus, continue to cause political tension. Furthermore, a rift between Turkey and its ally the US, over Ankara's intention to send troops into northern Iraq to fight Kurdish rebels, could further weaken its relations with the international community and damage its investment climate.

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Economic analysis
Overview
The economic structure of Turkey is well supported by the fiscal and monetary policies of the government. Moreover, the healthy flow of FDI into the country is boosting its economic development. The Turkish government also plans to implement free trade agreements (FTAs) with the intention of encouraging foreign and domestic investors and thereby improving competitiveness. Despite recent initiatives, such as the easing of overtime restrictions, the Turkish labor market remains relatively rigid compared to international standards.

Table 4: Analysis of Turkeys economy

Current strengths High inflow of foreign investment Prudent fiscal and monetary policies

Current challenges Current account deficit

Future prospects Implementation of free trade agreements

Future risks Rigid labor market

Source: Datamonitor

DATAMONITOR

Current strengths High inflow of foreign investment

Foreign investment plays a strong role in Turkeys rapid expansion and has been a driving force of its economic growth engine. The country received FDI worth $20 billion in 2006 compared to $2.7 billion in 2004, and it is anticipated that this will surpass $20 billion in 2008. The privatization program, scheduled to be implemented in 2008, includes the sale of major bridges, highways, electricity grids and a stake in the partly privatized commercial bank, Halkbank. The money inflow through foreign investment in Turkey will be useful for expanding the infrastructure of the country. The significant increase in the inflow of foreign investment to Turkey proves the countrys considerable economic size and quality of labor force.

Prudent fiscal and monetary policies

Turkeys economy has significantly benefited from prudent fiscal and monetary policies. The government has sought to tighten fiscal policies through the significant reduction of expenditure on public infrastructure development. Furthermore, the government significantly increased the prime lending rates for commercial banks to extract excess liquidity out of the market. Inflation in Turkey has witnessed a significant drop, as private investments have been increasing since 2003. The inflation rate of Turkey declined from 25.3% in 2003 to 8.5% in 2007, remaining in single digits during 2006 despite the depreciation of the Turkish lira. The Turkish central bank has been successful in lowering inflation since 2001, keeping it down by tightening fiscal policies and implementing structural reforms that resulted in high productivity growth.

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Current challenges Current account deficit

Turkey's declining current account balance has been hindering its economic stability. The current account deficit was $37.5 billion in 2007, compared to $8 billion in 2003. Imports have witnessed a sharp rise as a result of increased global commodity prices and a strong Turkish lira. The current account deficit makes the country even more susceptible during times of global financial uncertainty.

Future prospects Implementation of free trade agreements

The Turkish government plans to implement FTAs to encourage foreign and domestic investors and boost competitiveness. As part of this, the country entered into several trade agreements with various countries, including Jordan, Lebanon, the Faeroe Islands, Albania, South Africa and Mexico. During April 2008, Turkey entered into an agreement with Albania to boost economic and commercial relations between the two countries and promote joint investments between Turkish and Albanian businessmen. Moreover, Turkey wants to forge a FTA with India by increasing the annual bilateral trade between the two countries to $10 billion by 2012. Turkey also aims to broaden its business relations with India so as to narrow its trade deficits. These FTAs will greatly improve the prospects of economic expansion in Turkey.

Future risks Rigid labor market

Despite initiatives such as the easing of overtime restrictions, the Turkish labor market remains relatively rigid by international standards. According to the World Bank's Doing Business report 2007, Turkey is ranked 146 among 178 countries in regard to the difficulties faced by businesses in hiring and firing workers. The current labor market scenario is also stiff because the business sector in the country is finding it difficult to respond to competitive pressures and create an adequate number of jobs. To tackle this situation, governments need to take initiatives that would make Turkish laws and regulations more flexible. An overhaul of labor markets is essential to regain lost competitiveness and reduce the unemployment rate. In addition, high taxes on wages also contribute to Turkey's rigid labor market. The tax wedge, which is the share of employee earnings taken by the government, is equivalent to the difference between labor costs to the employer and the net take-home pay of the employee, including any cash benefits received from government welfare programs. For a family of four, Turkey's tax wedge was significantly higher than other OECD countries at 42.7%, and 15 percentage points higher than the OECD average wedge of 27.7% as of 2005. The rate of the tax wedge on wages has not kept pace with productivity, making the economy uncompetitive.
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Social analysis
Overview
Turkey has been grappling with the problems of high unemployment levels and the lack of a proper educational system. Turkeys infant mortality rate is six to seven times higher than that of the members of the EU. The government has initiated programs for fiscal sustainability, and reforms are expected to be undertaken in the areas of healthcare and the pension system. Some of the most important social welfare schemes that the government has been providing are unemployment insurance, medical insurance, insurance for work-related injuries, maternity insurance and housing security. The system is financed primarily by contributions made by employers and through the payroll deductions of employees. With the recent reforms in the education system, it can be expected that the tertiary education scenario will improve and the growing mismatch between academic and industrial needs will be rectified.

Table 5: Analysis of Turkeys social system

Current strengths Growing percentage of young population

Current challenges Low human development index Increasing infant mortality High level of unemployment

Future prospects Overhaul of social policies

Future risks Ineffective social security system Inadequate education system and infrastructure

Source: Datamonitor

DATAMONITOR

Current strengths Growing percentage of young population

More than half the population of Turkey is aged below 30. With the rest of Europe facing the problem of an increase in the average age of its population, Turkey has an opportunity to increase the employment rate within the country by capitalizing on its young labor force. In addition, European small and medium enterprises (SMEs), as well as countries such as Austria, Italy and Spain, have been showing an interest in investing in Turkey.

Current challenges Low human development index

Turkey has historically shown weak performances on various social parameters, mainly because of its policies on such matters. The human development index (HDI) of Turkey is 0.775 and the country is ranked 84 among the 177 countries rated. Life expectancy at birth is 71.4 years, while the combined primary, secondary and tertiary gross enrolment ratio is at
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68.7%. Turkey also fares low in terms of gender equality. Turkeys gender-related development index (GDI) value is 0.763. GDI measures achievements by using the HDI indicators, but captures also inequalities in achievements between women and men. The index indicates Turkeys inability to create a positive social climate for women.

Increasing infant mortality

Turkey has a dismal infant mortality rate. The countrys infant mortality rate is six to seven times higher than that of the members of the EU. For instance, the total number of deaths per 1000 live births during 2006 was approximately 37 in Turkey, making it the country with the worst infant mortality rate in Europe. Among males the rate was 40 deaths per 1,000 live births, while among females it was 33 per 1,000 live births. The insufficiency of several of Turkey's preventive and protective health services is the major cause for the high infant mortality rate in the country.

High level of unemployment

Turkeys highly regulated labor market has led to high employment costs and increasing levels of unemployment. According to the report released by the Turkish Statistics Institute, the number of unemployed people in 2007 increased by approximately 38,000 to reach 2.3 million. In early 2008, Turkeys population consisted of around 49.7 million people aged over 15 years: an increase of 737,000 people compared to the previous year. This rise has made it difficult for Turkey to create sufficient jobs for its population. In the first quarter of 2008, the unemployment rate in Turkey was 11.6%, compared to 11.4% during the same period in 2007. The unemployment rates in cities and rural areas were 13.4% and 8.5%, respectively, in the same period. In the first quarter of 2008, more than 73% of the population who were unemployed comprised males, approximately 56% did not have a high school education, and 30% had been jobless for a year.

Future prospects Overhaul of social policies

The Turkish government has undertaken several initiatives to implement policies aimed at improving the social benefits it provides to its people. The country initiated an IPARD in December 2007 to improve social conditions in settlements and regional centers. The program, which will run until 2020, aims to improve the social conditions of people living in rural areas by building hospitals, cultural centers, apartment buildings, roads, power-transmission lines and schools. The program's objective also includes the modernization of the agricultural sector. Furthermore, the government intends to allocate funds to improve agricultural holdings and the overall performance and competitiveness of the food processing industry along with the role of manufacturer groups in agricultural markets. This initiative would hence contribute to the development of the rural economy, and would promote the formation of microenterprises which would create employment opportunities in the rural areas.

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Future risks Ineffective social security system

The social security system in Turkey needs some serious enhancements, despite Turkey being the only country in the world that has made three reforms in social security in two years. The retirement age is currently 44 for women and 48 for men. The government has also made it clear that it has no plans to increase the retirement age to 65. As a result of both this and the country's inadequate pension system, the Turkish people are finding it difficult to lead a proper social life after their early retirement. Moreover, the current security system of Turkey is unsustainable due to low rates of registration among workers, the underreporting of incomes and drifts in spending, which are causing growing imbalances in the system.

Inadequate education system and infrastructure

To a great extent, Turkeys education system has been held responsible for the mismatch between labor demand and supply. In the future, economic growth will be led by the knowledge economy, and Turkeys educational system may not be capable of meeting the attendant needs. Furthermore, the primary and secondary schools in Turkey have inadequate infrastructure and resources. For instance, more than 80% of the primary and secondary schools suffer from a shortage of teachers, and 87.3% have limited infrastructure and physical space. Along with this, approximately 42% of the schools do not have a library, while 71.5% have inadequate library facilities. The outmoded education system and lack of infrastructure facilities in schools are seen as some of the primary reasons for the prevailing unemployment scenario.

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Technological analysis
Overview
Turkey has been slower in adopting technological advances than the EU countries, although policy measures have been undertaken to expedite this. Total expenditure on R&D in 2006 as a percentage of GDP was 0.6%, compared to 2.3% in the OECD countries. Nevertheless, over the past decade, Turkeys telecommunications industry has been booming due to the liberalization of the market. The number of mobile telephone subscribers increased at a CAGR of 22%, from approximately 23 million in 2002 to 62 million in 2007. However, the levels of patenting remain extremely low, despite a rapid increase in recent years. The R&D climate is expected to improve, as the government has been taking several initiatives towards developing the technological landscape of the country by encouraging foreign entities, prominent universities and research organizations to foster a culture of innovation.

Table 6: Analysis of Turkeys technology landscape

Current strengths Significant development in the ICT sector

Current challenges Low expenditure on R&D

Future prospects Government encouragement to improve R&D Prospects of joining the EU reversing brain drain

Future risks Lack of innovation and low number of patents

Source: Datamonitor

DATAMONITOR

Current strengths Significant development in the ICT sector

Turkey witnessed double-digit growth in the ICT market during 200107. Turkeys ICT market reached approximately $24 billion in 2007, compared to $21 billion in 2006. The ICT sector contributed approximately 4% of GNP in 2006, and the growth rate of this market was about 11% at the end of that year. The number of internet users in Turkey increased from approximately 10 million in 2004 to 19 million users in 2007, at a CAGR of 23%. The number of mobile telephone subscribers also increased at a CAGR of 22%, from approximately 23 million in 2002 to 62 million in 2007. The increase in the ICT sector has been due to the privatization of the Turkish telecommunications sector by the government, which has provided more scope for employment and attracted new foreign investment projects to Turkey.

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Current challenges Low expenditure on R&D

Total expenditure on R&D in 2006, as a percentage of GDP, was around 0.6%: well below the overall 2.3% in the OECD countries. In comparison, Frances expenditure for the same year was 2.13% of GDP, the US's 2.68%, Japan's 3.18% and Canada's 1.8%. This huge asymmetry points towards the gross inadequacy of investments by both the private and public sectors in R&D. In the long run, low R&D spending would erode the competitiveness of industries in Turkey.

Future prospects Government encouragement to improve R&D

The Turkish government is inclined towards developing the technological landscape of the country, and has given considerable encouragement to foreign entities, prominent universities and research organizations to foster a culture of innovation. The government initiated a project on science and technology called Vision 2023 for the period 200323 under the co-ordination of the Scientific and Technical Research Council (TUBITAK) and the Supreme Council of Science and Technology (BTYK). The project mainly covers the implementation of the national Technology Foresight study and seeks to gather and study information on the technological levels of industrial sectors. Other initiatives undertaken by the government in this regard include establishing science and technology centers and encouraging the e-commerce network in the country. The aim of these projects is to originate and formulate new national science and technology policies with the intention of promoting and encouraging innovation.

Prospects of joining the EU reversing brain drain

There has been an increase in the number of skilled scientists who are returning to Turkey to gain from the opportunities offered to them by the prospect of joining the EU. A total of 40 scientists left foreign universities and returned to Turkey during 200507. The European Commission has also allocated E4.7 billion to support researchers and institutions during 200713. The increase in the number of skilled scientists will provide a boost to the development of technology in the country.

Future risks Lack of innovation and low number of patents

The low level of innovation in Turkey is reflected by the low number of patents registered in the country. Although the number of patents registered is on the rise, it is still far behind the levels seen in EU nations. It compares very poorly to some EU and developed countries, as illustrated in the table below. A continuation of the trend is likely to hamper the scientific prospects of the country.

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Table 7: Patents received from the US Patent and Trademark Office by country
Year Turkey France Germany Japan US

2000 2001 2002 2003 2004 2005 2006

6 14 18 32 19 10 23

4,173 4,456 4,421 4,126 3,686 3,106 3,856

10,824 11,894 11,957 12,140 11,367 9,575 10,889

32,922 34,890 36,339 37,248 37,032 31,834 39,411

97,011 98,655 97,125 98,590 94,129 82,586 102,267 DATAMONITOR

Source: Datamonitor

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Legal analysis
Overview
Turkey has an independent judicial system responsible for the maintenance of law and order. The Constitutional Court, the highest constitutional body in Turkey with respect to legislation, determines the constitutionality of legislation prior to the enactment of new laws. The judicial system is divided into the judicial and administrative orders of courts, and a clear hierarchy of courts at different levels of states and center exists. The government has been trying to make Turkey an attractive destination for investment by encouraging more infrastructure investment, which contributes significantly to the economic growth of the countrys economy through diffusion of technology, positive externalities and capital inflows. Along with this, the government has reduced the basic rate of corporation tax, with the intention of drawing FDI in Turkey. However, there exist a lot of loopholes available for those looking to evade the tax system, which is leading to huge revenue losses for the government.

Table 8: Analysis of Turkeys legal landscape

Current strengths Comprehensive legal structure Robust framework for business entities Future prospects Reduction in tax rates Favorable laws for foreign investment

Current challenges Judicial inefficiencies

Future risks Existing loopholes in the taxation system

Source: Datamonitor

DATAMONITOR

Current strengths Comprehensive legal structure

The judicial system is composed of general law courts, heavy penal courts, military courts, the Constitutional Court and three high courts. The High Court of Appeals handles criminal cases, the Council of State handles administrative cases, and the Audit Court inspects the accounts of state institutions. Other courts include the civil, administrative, and criminal courts. The comprehensive legal structure of the country has the capability to address various bottlenecks and structural issues in the system and gives foundational strength to the investment climate of the country.

Robust framework for business entities

An entrepreneur in Turkey does not face any lengthy business registration processes for commencing a business. The overall freedom to start, operate, and close a business is protected by Turkeys regulatory environment. Starting a business in Turkey takes an average of six days, compared to the world average of 43 days. Gaining a business license requires

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more than the world average of 19 procedures but less than the world average of 234 days, with costs relatively low. The robust framework for business entities hence creates a successful commercial environment and drives business growth in Turkey.

Current challenges Judicial inefficiencies

Delays in the Turkish judicial system are a serious issue, and have become the subject of debate in recent times. Furthermore, the political bias of judges has affected legal outcomes. The High Council of Judges and Prosecutors controls the careers of prosecutors and judges, and thus can sway their decisions. Long pretrial detention and excessively protracted trials are major concerns. Turkish commercial courts are overloaded with cases, and on average it takes over a year to resolve each one. In criminal trials, the judicial process have been slow owing to the backlog of cases and court decisions which are often arbitrary and have been subject to political interference in high-profile cases, which leads to biased verdicts.

Future prospects Reduction in tax rates

Turkey has one of the lowest corporate tax rates in the world, with further reductions expected in the coming years. During 2007, the government reduced the basic rate of corporation tax from 30% to 20%. It also introduced and implemented online filing in an attempt to reduce the time required for preparing trade documentation, with the intention of drawing FDI into Turkey, and lowered personal income tax from 40% to 37%. This reduction in the tax rates is expected to stimulate the economic growth of the country.

Favorable laws for foreign investment

Turkey has been a hub for foreign investment over the years. According to the treasury, total foreign investment (including real property purchases) increased from $2.8 billion in 2004 to approximately $20.1 billion in 2006. The treasury's official figures for June 2007 reveal that about $10 billion in foreign capital entered the country during the first four months of 2007. This increase in foreign investment was mainly due to the introduction of law number 4875, or the Foreign Direct Investment Law, in June 2003 and the Directive for the Implementation of the Foreign Direct Investment Law in August 2003. The implementation of these laws removed almost all of the restrictions and requirements which were imposed on foreign investors and provided them with the same legal status as Turkish-owned companies under the Turkish Commercial Code. The government has been trying to make Turkey an attractive destination for business ventures by encouraging infrastructure investments. Foreign investment contributes to the economic growth of the countrys economy through the diffusion of technology, positive externalities and capital inflows.

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Future risks Existing loopholes in the taxation system

Enforcing regulations has been a challenge for the country and will continue to be the case in the future. The problem primarily lies with the loopholes available for those looking to evade the system. Furthermore, personal income, company sales and real-estate prices are frequently under-declared. According to a recent study, 30% of value-added tax (VAT) revenue in Turkey is never collected. Levels of employment are often concealed in order to avoid the payment of income tax and social security premiums on employees' salaries. If stringent action is not initiated very soon, the loopholes could lead to a huge revenue loss for the government.

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Environmental analysis
Overview
Turkey has been a leader with respect to environmental legislation and ranks ninth in terms of biodiversity compared to other European countries, with over 33% of its flora being endemic. The country is strongly involved in global environmental issues and has linked its development aid to environmental objectives and policies focusing on air pollution, biodiversity, chemical substances, environmental health, and global issues such as climate change. Despite the presence of a strong framework, environmental pollution in Turkey is high due to an increase in the amount of chemicals and detergents being dumped. There has also been a rise in air pollution, particularly in urban areas.

Table 9: Analysis of Turkeys environmental landscape

Current strengths Rich biodiversity

Current challenges High pollution levels

Future prospects Kyoto Protocol

Future risks Increasing levels of hazardous waste Rising emission levels

Source: Datamonitor

DATAMONITOR

Current strengths Rich biodiversity

Turkey is acclaimed for its rich natural resource base and ranks ninth in terms of biodiversity compared to other European countries, with over 33% of its flora being endemic. Turkish flora boasts of many wild species and important domestic species like wheat, chickpeas, lentils, apples, pears, apricots, chestnuts and pistachios. The Turkish landscape is also dotted with ornamental flowers like the tulip. The distinctive biodiversity of the country has immense potential for sustainable development or ecotourism.

Current challenges High pollution levels

There is an urgent requirement for water treatment plants, wastewater treatment equipment and solid waste management facilities in Turkey. The main reasons for the current high levels of environmental pollution in Turkey are: the increase in chemical and detergent effluents; and the rise in air pollution, particularly in urban areas. Furthermore, the discharge of pollutants by neighboring countries has contaminated the Black Sea.

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