Making the business climate more friendly to investment

Inward FDI and equity investment have slowed in recent years and are low in international comparison.

At the same time, the contribution of total factor productivity to GDP growth has decreased over the past decade reflecting barriers to effective resource allocation. Going forward, faster income convergence will require addressing underlying structural weaknesses associated with competition and regulations. This would improve the business climate and enable resources to flow to the most promising activities and firms.

Labour market regulations hamper the creation of more and higher quality jobs. Despite progress over the past decade, a considerable share of the workforce, in particular women and youth, still do not actively participate in labour markets. Even though informality has decreased significantly over the past decade, it remains high, particularly among youth, refugees and women. Rigid labour regulations and an expensive severance pay system provide protection to those with a formal job against the fallout of an economic crisis. However, they impede formal job creation for those currently without one. High labour tax wedges and high minimum wages relative to median wages discourage formal job creation. Minimum wages are set at the national level while ample disparities in living standards across regions prevail. Better protecting people, by giving the unemployment insurance system a larger role and by improving the scope and quality of active labour market policies, is a prerequisite for introducing much needed labour market flexibility.

Figure 4. The employment rate is low 15-64 year-olds, 2021

There is a need to promote more open competition in product markets. Strict regulations shield incumbents from competition and limit the entry of new firms. Particularly, complex and burdensome administrative procedures to obtain permits, licences or concessions, hamper the creation of formal businesses. Türkiye should consider creating a one-stop shop issuing all licenses and authorisations. There is also room to ease barriers to international trade and investment, particularly restrictions on foreign ownership, which are stricter than in other countries.