2009 Index of Economic Freedom

Quick Facts

Population:

• 73.0 million

GDP (PPP):

• $614.3 billion
• 6.9% growth
• 7.2% 5-year compound annual growth
• $8417 per capita

Unemployment:

• 9.9%

Inflation (CPI):

• 8.8%

FDI Inflow:

• $20.1 billion

Turkey's economic freedom score is 61.6, making its economy the 75th freest in the 2009 Index. Its score is 1.6 points higher than last year, reflecting better scores in five of the 10 economic freedoms. Turkey is ranked 31st out of 43 countries in the Europe region, and its overall score is slightly higher than the world average.

Turkey has achieved economic growth of about 7 percent over the past five years. The economy has been restructured since the 2001 financial crisis. Inflation is down to single digits for the first time in more than 30 years, foreign direct investment has risen to record levels, management of public finance has improved, and the ratio of public debt to GDP is down almost 50 percent. Turkey is near the world average on most economic freedoms.

Regulation and taxation, despite some improvements, remain burdensome and deter more dynamic entrepreneurial activity. The state still sets some prices and maintains state-owned enterprises. The labor market remains rigid. Property rights are usually enforced, but the judiciary is overburdened and slow. Corruption is perceived as significant.

Background Back to the top

Founded as a secular state in the 1920s and situated at the crossroads of Europe and the Middle East, Turkey has struggled with questions of secular identity, religion, and culture. A two-decade conflict with a large Kurdish minority has taken an estimated 35,000 lives. With a constitution adopted in 1982 following a military coup, Turkey is now a successful multi-party democracy. Prime Minister Recep Tayyip Erdogan has held office since 2003. Turkey has been seeking membership in the European Union since 1987. The EU agreed to accession talks in October 2005, but significant roadblocks, especially strong opposition from France and Austria, make it likely that accession will take at least another decade. The public sector still dominates some industries. Principal exports include foodstuffs, textiles, clothing, iron, and steel.

Business Freedom 69.9 Back to the top

Turkey's regulatory environment has improved somewhat in recent years. Starting a business takes an average of six days, compared to the world average of 38 days. Obtaining a business license requires more than the global average of 18 procedures but less than the world average of 225 days, and costs are relatively low. Bankruptcy proceedings can be burdensome and lengthy.

Trade Freedom 86.6 Back to the top

Turkey's weighted average tariff rate was 1.7 percent in 2006. Some prohibitive tariffs for agriculture, import taxes, some services market access barriers, restrictive import certification requirements for food and agriculture products, some import licensing requirements, non-transparent and arbitrary standards and regulations, export-promotion programs, weak enforcement of intellectual property rights, and corruption add to the cost of trade. Ten points were deducted from Turkey's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 73.2 Back to the top

Turkey has a high income tax rate and a low corporate tax rate. The top income tax rate is 35 percent, and the top corporate tax rate is 20 percent. Other taxes include a value-added tax (VAT), a property tax, and an inheritance tax. In the most recent year, overall tax revenue as a percentage of GDP was 32.5 percent.

Government Size 83.4 Back to the top

In the most recent year, Turkey's central government spending equaled 23.5 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. An agreement limiting social spending expired in May 2008, leaving open the possibility of increases in government spending on agricultural subsidies and infrastructure.

Monetary Freedom71.1 Back to the top

Inflation is high, averaging 8.9 percent between 2005 and 2007. 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. Ten points were deducted from Turkey's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign and domestic capital receive equal treatment under the law, but foreign investment is restricted in a number of sectors. Foreign investment is not screened. All investors face excessive bureaucracy, a slow judicial system, weaknesses in corporate governance, and frequent changes in the legal and regulatory environment. Residents and non-residents may hold foreign exchange accounts. There are few restrictions on payments and transfers. Restrictions on purchases of real estate by foreigners are based on reciprocity.

Financial Freedom50.0 Back to the top

Turkey’s financial sector has undergone a period of restructuring and transformation in recent years. Since the 2000–2001 financial crisis, the government has increased transparency, strengthened regulatory and accounting standards, and improved oversight. 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 banks that have been part of the government’s ongoing privatization effort. 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.

Property Rights50.0 Back to the top

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 Corruption41.0 Back to the top

Corruption is perceived as significant. Turkey ranks 64th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. An independent public procurement board has the power to void contracts. Parliament continues to probe allegations of corruption involving senior officials in previous governments, particularly in connection with energy projects. The judicial system is viewed as susceptible to external influence and somewhat biased against outsiders.

Labor Freedom40.3 Back to the top

Turkey's inflexible labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is high, and the difficulty of firing a worker creates a disincentive for additional hiring. Turkey's rigid labor market results in high unemployment and has contributed to the formation of a large informal sector.