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Just how bad is COVID-19 for Turkey's economy?
Last week, the only thing Turks were talking about was Idlib. The coronavirus, dubbed COVID-19, was an exotic news story from distant lands. Since the outbreak has been classified as a pandemic and taken over the global news cycle, our object of existential anxiety has shifted overnight. Turkey has proven itself ready so far, with only two documented cases of the virus and no deaths. Still, the virus has entered the country, and its spread is inevitable.
It is important that in times like these, everyone focuses on what they can do to help. We at the Economic Policy Research Foundation of Turkey (TEPAV) have been thinking about the economic impact of the pandemic. I will take this opportunity to sketch out how our thinking has changed at different stages of the spread of COVID-19.
During the initial stages of the disease, when it was contained to China and some Asian countries, it looked like the impact on the Turkish economy would be indirect, and maybe even positive. With the Chinese economy slowing down, the price of oil started to drop. Given that Turkey is an energy-starved economy, every $10 decline in oil lightens the nation’s petroleum bill by $4 billion. A $20 decline? That’s a bonus of 1 percent of gross domestic product. If things had stayed there, COVID-19 might have been yet another lifeline for what is a fundamentally unsustainable economic model.
But as the disease spread in Europe, some adverse effects gradually became apparent, especially regarding the supply chain impact. Turkey, being part of German value chains, could be hit indirectly, we were thinking then. Trade integration (the share of bilateral trade in total combined trade) between China and Turkey is low, at 1.1 percent, but it is 6.4 percent with Germany, 11.1 percent with South Korea and 16.6 percent with the United States. If these economies were hit, the supply chains Turkey depends on would suffer, and this would hurt Turkish manufacturing.
What we didn’t understand at the time was just how fast COVID-19 spreads. Because the disease is very contagious and its kill rate is below 1 percent, it spreads with exponential speed. That is how it has shifted from being an exotic news item to a global event. We now had to face the fact that the virus would come to Turkey as well, which changes the economic picture entirely. As an economist, it’s very hard for us to make comparisons with other periods in Turkey’ history, as it must be for other countries. We simply can’t predict how people will act. People in large cities are currently doing their utmost to be less social in their daily lives. Who, in which sectors, can self-isolate? How long can people do this before they run out of supplies, have to go back to work, or simply get tired of it? What happens when not only the manufacturing industry but also the services sector starts to contract rapidly? We can only guess.
Economic management in times like these can do much to mitigate misery. Unemployment and inflation are already serious problems in Turkey. It is the most vulnerable blue-collar workers, whose incomes are going to be at risk, who will probably suffer the first economic losses of this pandemic. Turkey stands out as one of the countries which have taken precautions very early on, and we will see how things progress on the economic front. It is safe to say, however, that the government will face some very painful choices.
On the global level, it is becoming increasingly clear that an unprecedented economic contraction can only be countered with global fiscal stimulus. Those at the center of the global financial system need to take this responsibility. Unfortunately, with Donald Trump as president of the United States, that is unlikely to happen.
We will probably see uncoordinated bumps of fiscal stimuluses here and there. The problem is that there is limited fiscal room left in countries like Turkey. And as the blue-collar workers of the global economy, we are likely to take the brunt of the financial hit from this pandemic.