A different kind of recession

COVID-19 is now stopping economic activity all over the planet. It is not the infectious disease itself that causes this effect, but the social distancing measures we have taken to buy us time. This is “the worst economic fallout since the Great Depression,” said Kristalina Georgieva, the Bulgarian economist who is now the head of the International Monetary Fund (IMF). We are used to have sudden stops in economic activity before in our part of the world, but this one is totally different.

Take for example, the G20 summits we have every year. It started in 1999, not as a summit, but as an annual meeting of the treasury ministers and central bank governors of “economically relevant countries.” This was soon after the 1997 sudden stop in economic activity in Southeast Asia. That crisis started in the financial markets of Malaysia and South Korea, then spread around the globe. Politicians around the world were beginning to understand that their economies were deeply interconnected, and they needed to build ways of touching base regularly in order to avoid shocks of a similar kind.

Then the 2008 global financial crisis started in the U.S., then spread around the globe, putting the breaks on economic activity in a way nobody expected. The countries at the core of the world economy decided that they needed to upgrade the G20 into a meeting of leaders. This made sense. In the first quarter of 2009, the Turkish economy contracted by 14.4 percent. The contraction in the services sector for the same quarter was around 23 percent, and in manufacturing, it was 24.2 percent. These were big numbers, yet the economic impact was short lived at the time. Decades of research and experience in economics had taught us how to deal with situations when the real economy suddenly stops.

The sudden stop that we are now facing is different. In 1997 and 2008, the root of the problem was in the financial markets. COVID-19 has stopped the economy by making it dangerous for people to cooperate in the same physical space. It’s not the financial wizardry that is the problem, it’s the physical things we do in order to produce wealth. We don’t have decades of economic research on what to do in this kind of a situation.

What makes me nervous is how much time it has taken world leaders to understand the gravity of the situation. We were physically and mentally unprepared for this type of pandemic. Just have a look at the G20’s lists of global risk assessments, and there is nothing on a pandemics, despite consistent warnings by specialists.

When the pandemic paralyzed our health systems, we became overwhelmed by the spread of the disease. I remember a Metropoll survey of March 2020 in Turkey, conducted when the death toll and case number were rapidly rising in our country. The share of respondents saying that the economy is the number one problem in the country dropped from 66.3 percent in February to 29.8 percent in March 2020. Meanwhile, 51.7 percent were saying that COVID-19 was the country’s number one problem. I’m guessing that we are going to see those numbers shift in the coming weeks and months. People currently weigh the risk of infection against the danger of their household’s economic collapse, and the latter’s weight is going to increase day by day. The longer the lockdown lasts, the worse it will get, and if we end it prematurely, we risk a second spike of infections, and an even worse situation.

Compared to the first quarter of 2009, I expect a far deeper and longer economic contraction in Turkey. The early OECD analysis only confirms my fears. Negative 23 percent for Turkey in 2020.

Looking for a silver lining in all this? In this totally new situation of a real economy based sudden stop, where no one knows how to respond, I find it reassuring to see a managing director in the IMF with a long career in the World Bank and the EU. Georgieva was born in Sofia, Bulgaria. She has worked in our part of the world and knows its problems.

I tend to think that this pandemic is going to hit the developing world the hardest. That is why COVID-19 requires a global response, both in terms of health and economic response. It happened in 2009, it must happen again today.