A change in the nature of uncertainty

The COVID-19 induced uncertainty has brought a sudden stop to real economic activity. We needed to slow down the spread of the virus to gain time and get to know the virus better. But now we are finally thinking about living with the virus, as new cases are subsiding. We cannot yet magically lift uncertainty, but we have a better sense of things. We are gradually moving away from the world of complete uncertainty into a world where we can assign probabilities to different eventualities, kind of moving from crisis management to change management. That’s what reopening is to many.

I see Carmen Reinhart’s appointment as the new vice president and the chief economist to the World Bank Group last week as another sign of this shift. The former IMF chief economist was interviewed on Bloomberg with her co-author Kenneth Rogoff just last week. I took note of her focus on the impact of COVID-19 on the developing world. After praising the G20 initiative on a debt moratorium for low income countries, she rightly noted that “the problem in large emerging markets goes beyond the poorest countries” in terms of their repayment capacity. “Nigeria, Ecuador, Colombia, Mexico—they’ve all been downgraded. So the hit to emerging markets is just very broad. Nigeria is in terrible shape. South Africa is in terrible shape. Turkey is in terrible shape,” she said. I find this position quite in line with Jerome Powel of Fed’s latest remark on “it’s the virus, not the usual suspects—something worth keeping in mind as we respond.” It’s good to see a common understanding taking shape in D.C. at last.

I was in D.C. in mid-February, and COVID-19 was the problem of a faraway country back then. In my meetings, we did talk about its impact on the Turkish economy, but almost exclusively as a potential advantage. Low oil prices were good for Turkey. It was good for Turkey’s balance of payments and would even cover up some of its recent policy mistakes, help the country to muddle through in 2020. The focus was not on the virus, but on the “usual suspects,” mind you.

And look where we are now. The virus circulated through the global centers of Europe and the United States, and reached Turkey in mid-March. By that time, the best practice was to implement strong social distancing measures at massive economic expense, and that is what Turkey did in the last 10 weeks. This also severely impaired the country’s hard currency earning capacity.

Comparing April 2020 to April 2019, we see that airline passengers coming into Turkey declined by 99 percent. Car sales declined by 72 percent. Tourism and industrial exports, which are crucial sources of foreign currency, have vanished into thin air. From April to April, the official data indicates a 40.5 percent decline in exports, yet still there is a current account deficit. As economists in Turkey, we had long been talking about the need to diversify, to create other sources of foreign exchange, but to be honest, that would not have mattered much in this scenario. Just look at that the natural resource exporting EMs. We can safely say that “this time is different,” just like the title of Reinhart-Rogoff book.

Let me come to the change in the nature of uncertainty that I’m seeing. We were all overwhelmed by the virus at the beginning. It was unexpected outside of a small circle of epidemiologists, and our governments hadn’t taken proper precautions. We faced an “unknown unknown,” to borrow from Donald Rumsfeld’s minimalist theory of knowledge. Faced with this high uncertainty situation, everybody started to close their borders and focus on what’s happening inside their countries. No country had the bandwidth to really look at how the international system was doing. We lived through a kind of interregnum of international governance.

Then the international organizations started to fill the void through the G20. Both the World Bank and the IMF acquired relative autonomy. This is because the virus manifested itself in the economic sphere as a liquidity shortage, which made these organizations all the more important. That’s how the whole discussion about the debt moratorium started, as far as I see. Once that discussion began to produce solutions, the problem shifted from being “unknown unknowns” to “known unknowns.” We moved from a complete blackout to assigning probabilities to possible outcomes. This is risk assessment; it is terra firma for us economists.

There are still many risks, and unexpected things could still happen, but they probably won’t be as big and as unexpected as the virus itself. There is much to be done in the way of change management in our cities, factories and workplaces. People are once again envisioning their future selves and trying to direct their actions towards those visions. The trick is to imagine together, and act together. That is what our international institutions are for.