Public policy and private investment in Turkey

Policy, Planning, and Research WORKING PAPERS Public Economics Country Economics Department The World Bank October 1988 WPS 120 Public Policy and Private Investment in Turkey Ajay Chhibber and Sweder van Wijnbergen Turkey's public policy for expenditure and growth encouraged private investment despite the high real interest rates necessary to induce private domestic savings in a period of declining foreign savings. The Policy. Planning, wnd Rescarch Complex disttibutes PPR Working Papers to disaninate the findings of work in progrenss and to encourage the exchange of ideas among Bank staff and all others interested in development issues. The6e papers carry the names of the authors, reflect only their views, and should be used and cited accordingly. Te findings. ntupretations, and conclusions are the authors' own. They should not be attributed to the World Bank, its Board of Directors, its marnagement, or any of its menmber countries.  Polac,Pnning, and Research Pubic Economics Developing countries trying to emerge from countries, Turkey has managed to increase the recessionary spirals must recognize the impor- rate of investment in recent years despite exter- tance of public-private interactions in designing nal constraints and high real interest rates. growth-oriented adjustment programs. They must appreciate the complex impact of fiscal Turkey's strategy nevertheless has limits. policy on the economy - the way government The surges in public investment in 1986 and credit, investment, and (indirectly) exchange rate 1987 have since hurt macro stability. And policies affect export performance and hence private investment has tilted toward such growth and capacity utilization, thus encourag- nontradables as housing - partly as a result of ing private investment. special credit schemes directed at mass housing and partly because housing investment is an Turkey is an interesting country for studying attractive hedge against inflation. Unless how public policy can stimulate private invest- corrected, this shift could hurt future export ment. The reason is that unlike other high-debt prospects. This paper is a product of the Public Economics Division, Country Economics De- partment. Copies are available free from the World Bank, 1818 H Street NW, Wash- ington DC 20433. Please contact Ann Bhalla, room NIO-077, extension 60359. The PPR Working Paper Series disseminates the findings of work under way in the Bank's Policy, Planning, and Research Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations. and conclusions in these papers do not necessarily represent official policy of the Bank. Copyright