Turkey's latest major infrastructure project was completed last week as the third bridge to straddle Europe and Asia was put into service. As anyone who has been to Istanbul can attest, the bridge was long overdue and welcome news to residents and businesses alike. With several major infrastructure projects slated to come online in the coming months, Turkey will begin to reap the rewards of years of investment. The Yavuz Sultan Selim Bridge, as the third Bosporous bridge is known, will be followed by an underground tunnel connecting both sides of the city as well as the addition of the third major airport to be completed later next year.
Infrastructure projects are generally noted as the greatest investments governments can make in terms of their multiplier effects on the economy. Taxes collected are spent on public goods with the intent of spurring a net increase in aggregate demand and thereby raising the national income. Many U.S. politicians have argued for similar major infrastructure projects to help pull the country out of the 2008 recession, which it has yet to overcome by many metrics.
Turkey has taken a different approach in pushing for added investment in major infrastructure projects, namely the "build-operate-transfer" model. Emerging markets and other countries that do not possess "hard-currencies" or who are not rich in natural resources such as oil, find themselves searching for alternate ways of financing public works projects. Turkey is no exception to this rule, especially with relatively high financing costs associated with borrowing. To this end, Turkey has teamed-up with private sector companies in commissioning and implementing many desperately need public works projects such as the latest bridge.
In a working paper released last night, Elif Semra Ceylan and Semih Tumen of Middle East Technical University and the Central Bank of Turkey respectively, detailed the fiscal multiplier of Turkish government spending on national income. The paper, "Growth Effects of Local Government Spending: Evidence from Outer Space," finds that Turkey's fiscal multiplier is 2.7, meaning 1 lira in government spending adds nearly 3 liras to the national income. An impressive return by any standard, the paper echoes what many Turks have experienced anecdotally. As infrastructure improves in Istanbul and around the country, the ability of businesses to more efficiently conduct operations allows consumers to enjoy lower prices, which results in more disposable income and spending. The cycle continues throughout the economy, benefiting the country as a whole.
Many studies done in European countries have found multiplier effects to be far less than the figures presented in the paper and this can be attributed to the difference in the projects governments invest in. Many of Turkey's major infrastructure projects are not the refurbishing of already completed projects but of implementation of green-field projects already in demand. Throughout the history of the Republic of Turkey, governments have either been voted out soon after taking up their posts or have been unable or unwilling to complete public works projects. Turkey is only now beginning to realize the longer term positives effects of a stable government. Not only are more bids being accepted for government projects, which allows for more competition and a better deal for tax payers, but also, these projects are cheaper to finance as country risk continues to decrease.
Credit default swaps for Turkey, which insure against political and economic instability, continue be cheaper to buy and are currently priced near those of many European Union countries, which are implicitly backed by the European Central Bank. Coupled with decreased interest rates and a robust currency, in the face of much adversity, Turkish businesses will soon benefit from these mega-projects. The next major project, the "Channel Istanbul" project will offer an alternate route for ships to traverse the Sea of Marmara-Black Sea divide, currently a monopoly of the Bosporus. This will allow for faster travel by larger tankers and may bring added revenue to Turkish companies servicing the passing ships. The institution of a "canal-zone," such as the "Panama Canal Zone" may also lead to a bustling free-trade zone. While some environmentalists have argued against the implementation of any new infrastructure projects, the necessity for such projects can simultaneously be answered while respecting the environment.
Should Turkey continue on this path of implementing business friendly infrastructure projects that boost employment and benefit society as a whole, it could continue to be the center for investment many return-hungry managers are desperately searching for.