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Dianne Wampler  01/29/2007 12:20:14 PM  From  DB/Inbox:  Dianne Wampler

Cable 
Text:                                                                      
                                                                           
      
UNCLAS    SENSITIVE     ANKARA 00160

SIPDIS
CX:
    ACTION: ECON
    INFO:   CONS PA RAO FAS MGT PMA FCS POL DCM AMB

DISSEMINATION: ECON /1
CHARGE: PROG

APPROVED: ECON:TGOLDBERGER
DRAFTED: ECON:TGOLDBERGER
CLEARED: ECON:ASNOW, RKIMBRELL

VZCZCAYI517
RR RUEHC RUEHIT RUEHDA
DE RUEHAK #0160/01 0261138
ZNR UUUUU ZZH
R 261138Z JAN 07
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC 0721
INFO RUEHIT/AMCONSUL ISTANBUL 1996
RUEHDA/AMCONSUL ADANA 1581

UNCLAS SECTION 01 OF 02 ANKARA 000160 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV BEXP PGOV TU
SUBJECT: ECONOMIC FREEDOM IN TURKEY: MORE, BUT NOT ENOUGH 
 
REF: ANKARA 38, B) 2006 ANKARA 6734 
 
SENSITIVE BUT UNCLASSIFIED. 
 
¶1.  (SBU)  Summary.  According to the Heritage Foundation's 2007 
Index of Economic Freedom (IEF), Turkey has made impressive strides 
in reducing the dead weight of government interference in the 
economy and economic decision-making over the past five years.  This 
helps explain Turkey's similarly impressive investment performance, 
including large increases in FDI inflows, over the same period, 
along with the concomitant absence of new greenfield FDI (ref b). 
Although Turkey is one of fastest risers of the 157 countries 
included in the IEF, it still remains in the middle of the global 
pack in 83rd place.  Deeper reforms are needed in order to sustain a 
competitive investment environment, particularly in a judicial 
system perceived as inefficient, corrupt, and biased.  Such reforms 
require strong political will, underlining the importance of Turkey 
coming out of this election year with a government able to implement 
tough reforms.  End Summary. 
 
--------------------------------- 
ABSOLUTE AND RELATIVE IMPROVEMENT 
--------------------------------- 
 
¶2.  (SBU)  Turkey's IEF ranking has dramatically improved in 
absolute and relative terms over the past 5 years. According to the 
Heritage Foundation's annual report, Turkey's 2007 score on 10 
indicators of "economic freedom" averaged 59.3 out of a possible 100 
points, placing it 83rd out of 157 countries scored. This compares 
to a score of 50.9 and 120th place in 2003. Turkey bottomed out in 
2005 at 50.6, when it was in 124th place.  The performance of only 
three countries -- Georgia, Romania, and Kazakhstan -- exceeded this 
41 place improvement in Turkey's rank in just two years. 
 
¶3.  (SBU)  Turkey's score improved in seven of the index's ten 
components. The most dramatic contributions to the higher overall 
score are in increased regulatory and financial freedom and in 
monetary policy.  Freedom from excessive government, trade openness, 
fiscal policy, and corruption scores also improved, but less 
dramatically.  Scores for investment and property rights remained 
flat, while labor policies declined slightly.  Although the IEF 
tries to minimize data discontinuities, some of the improvement also 
seems to result from better methodology. For example, the use of the 
World Bank's "Doing Business" database to measure regulatory freedom 
starting in 2006 seems to explain the sharp improvement in that 
indicator. 
 
-------------------------------------- 
STUCK IN THE MIDDLE OF THE GLOBAL PACK 
-------------------------------------- 
 
¶4.  (SBU)  Nonetheless, from the bottom 20% of countries ranked, 
Turkey has moved to the middle of the global pack.  This is a vast 
improvement, but Turkey still has a long, long way to go to reach 
the levels of fast growing countries in Asia. Several countries with 
which Turkey competes for foreign investment, including Hungary, 
South Africa, Mexico, Brazil, and the Czech and Slovak Republics, 
rank higher, although some others, notably Poland, Greece, India, 
China and Russia, are lower (Table II). 
 
---------------------- 
Judicial Reform is Key 
---------------------- 
 
¶5.  (SBU)  To raise Turkey's overall rating, improvements are needed 
in all areas. Some of these will come more easily than others.  For 
example, the monetary policy indicator is a simple average of 
inflation rates over the previous five years.  But making progress 
on the other indicators will require structural reforms that are 
politically difficult.   Turkey has the furthest to go to improve 
its corruption rating, which is imported from Transparency 
International's "Corruption Perceptions Index."  Among other things, 
this will require improving the administration of justice and 
training a new generation of judges, in an environment in which 
changing the judiciary is a political hot button for Kemalist 
secularists.  Other examples of how judicial and legal deficiencies 
affect Turkey's overall ranking are low scores for protection of 
property rights (including intellectual property) and freedom to 
invest, especially in real estate.  Improving the labor law will 
require freeing up rigid labor laws, including severe legal 
limitations on companies' ability to lay off workers that are 
similarly sensitive politically. 
 
------- 
Comment 
------- 
 
¶6.  (SBU)  The improvement in economic freedom in Turkey over the 
past five years is impressive given where Turkey has come from.  But 
there is still a lot to do.  Although it may have some 
methodological shortcomings that make it slow to reflect on the 
ground improvements, the IEF is a useful reminder to the Turkish 
government of the need to focus reform efforts on the judicial 
system.  Without this Turkey will not be able to sustain the high 
levels of foreign and domestic investment needed to per capita 
income from the current $5,000 to European standards.  This is 
another reminder (ref a) of the issues at stake in this election 
year and the importance of coming out of it with a government that 
has the broad-based support needed to implement deep reforms. 
 
Table I 
Index of Economic Freedom: Turkey 
 
                2007   2006   2005   2004   2003   2002 
                ----   ----   ----   ----   ----   ---- 
Regulation      67.4   65.9     30     30     30     30 
Trade           76.0   76.0   71.0   69.2   68.6   74.6 
Fiscal          79.4   78.7   76.9   73.8   76.4   76.8 
Government      69.9   72.7   62.3   64.6   53.9   66.8 
Monetary        70.2   64.7   53.8   46.1   42.9   41.0 
Investment        50     50     50     50     50     50 
Financial         50     50     30     50     50     50 
Property Rights   50     50     50     50     50     50 
Corruption      35.0   32.0   31.0   32.0   36.0   38.0 
Labor           45.4   44.6   47.6    -      -      - 
                ----   ----   ----   ----   ----   ---- 
Score           59.3   58.5   50.6   51.7   50.9   53.0 
Rank              83     92    124    116    120    106 
 
Table II 
Country Comparisons 
 
                 2007         2007 
Country          Rank        Score 
-------          ----        ----- 
Cyprus             20         73.1 
Czech Republic     31         69.7 
Israel             37         68.4 
Slovak Republic    40         68.4 
Hungary            44         66.2 
Mexico             49         65.8 
South Africa       52         64.1 
Jordan             53         64.0 
Bulgaria           62         62.2 
Romania            67         61.3 
Brazil             70         60.9 
Turkey             83         59.3 
Poland             87         58.8 
Greece             94         57.6 
India             104         55.6 
China, PR         119         54.0 
Russia            120         54.0 
Ukraine           125         53.3 
Vietnam           138         50.0 
Wilson