Second Competitiveness & Employment Development Policy Loan

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This Second Competitiveness and Employment Loan (CEDPL 2) supports the advances in the implementation of the government's competitiveness and employment agenda since mid-2007. Turkey's future competitiveness and employment agenda is expected to include additional major reforms, such as: the passage of a new Commercial Code, the completion of the second phase of the labor market reforms, and the approval of a new capital markets law. A possible follow-up CEDPL 3, the second in a series of two programmatic operations, is envisaged to support such future reforms. The government's competitiveness and employment program is a central pillar of Turkey's Ninth Development Plan, and the proposed loan is a cornerstone of the 2008 Country Partnership Strategy (CPS) which fully integrates the Bank's activities for FY08-11 into the 9th Development Plan. The program carries several risks. From the macroeconomic side, given the global down-turn Turkey's continued reliance on external finance creates significant risk. In particular, a sudden capital outflow and disorderly depreciation would have an adverse impact on growth and employment. Key to mitigating this risk is government preparedness for potential downside scenarios for the international financial system and their impacts on Turkey. On the program side, all CEDPL 2 supported reforms have been implemented, and the risk of reversal is low. Among three key future reforms expected to be supported by the planned CEDPL 3 (second phase labor market reforms, the enactment of the new Commercial Code, and the enactment of the new Capital Market Law), the second-phase labor-market reform presents high risks because of the intrinsic political economy challenges of introducing regulation to make labor markets more flexible.