The impact of inward processing trade regime on current account: An empirical application for Turkey

The current account deficit is one of the most controversial issues in developing countries. Liberalization of capital movements in Turkish economy has caused high current account deficits and increased external debt stock, which has made the international investment position increasingly fragile. Increasing exports has become a priority of economic policy for developing countries which have frequently faced balance of payment crisis, as in the case of Turkey. Turkey's membership to World Trade Organization and Customs Union agreement with European Union as of 01.01.1996 required Turkey to abolish direct incentives for exports in the form of cash payments. Instead, indirect incentives such as inward processing have started to be given. This study investigates the impact of inward processing regime on current account in Turkey. To this end, using quarterly data over 2003-2017 the study performs an ARDL bounds test to see if the variables of interests form a cointegration relationship. The results show that there is a cointegrating relationship. More specifically, inward processing regime and trade balance are negatively related in the long run. This finding indicates that, as an export incentive policy, the inward processing regime in Turkey contributes to the improvement of foreign trade balance.