Turkey’s economy… the last two decades

One year on, how has Turkey performed during the COVID-19 crisis? The Wheeler Institute for Business and Development invited Sebnem Kalemli-Ozcan – Neil Moskowitz Professor of Economics and Finance University of Maryland – back to share her views on the Turkish government’s response to the COVID-19 crisis over the past year, and her hopes for EU-Turkey cooperation in future. Kalemli-Ozcan joined the Wheeler Institute COVID-19 series in May 2020.

Monetary reforms and careful planning will be crucial for Turkey to escape long-term economic effects of the COVID-19 pandemic

The way Turkey entered the pandemic directly impacted its ability to respond to the public health crisis. The country was in a relatively weak phase when the pandemic hit. The economy was slowing down, and Turkey entered March 2020 with high inflation, fiscal deficit and current account deficit problems, and issues with credible policies; moreover, there were high amounts of external dollar debt, primarily from the banking sector which intermediated capital flows. COVID-19 hit all sectors of the economy, beginning with the hospitality, services and tourism sectors, which are all imperative to Turkey’s growth. Caused by the confluence of internal policy issues and forced shutdowns in these industries, the Turkish Lira dropped to be the worst performing emerging market currency in 2020.

Early conjecture that Turkey (alongside many other emerging markets) would have to go to the IMF for a bailout was avoided due to slashed interest rates and large stimulus packages in the US. This was excellent for Turkey: low interest rates in advanced countries is massively beneficial for a commodity importer in emerging markets by bringing capital flows back into the economy. Because market-based finance was available on international markets, Turkey benefited from the fact that the cost of finance is pinned by US monetary policy. The government was also able to offer a fiscal package equivalent to about 3% of GDP – lower than the 6% average of emerging markets, and far behind the 20-25% of GDP that European countries offered. Kalemli-Ozcan opines that they utilized the fiscal injection well, by prioritizing small to medium enterprises and the tourism sector. One year later, Kalemli-Ozcan believes that Turkey is not in the worst position it could have been at this point in time: both government and the banking sector managed to rollover their debt, and this easing of financial conditions in global financial markets provided short-term relief.

However, Turkey did not escape without some scarring. The closing of schools meant that human capital investment took a huge hit, and the lack of a summer tourism season in 2020 adversely affected many businesses. Many of the vulnerabilities we knew were present came to the fore in the COVID-19 crisis, none made more obvious than the defects in the health policy. The vaccine procurement and administration strategy was ill-advised – Turkey was offered an opportunity to acquire Pfizer-BioNTech vaccines at an early date, for a low price, but turned this down. This kept the country in lockdown for much longer than other economies who opted to procure early, and this gap was exacerbated by a poor rollout strategy in 2021.

However, Kalemli-Ozcan believes that Turkey is positioned to ride to the ‘growth in emerging markets’ tide for now and has a small window of opportunity to protect itself from the inevitable increase in US interest rates. By addressing monetary policy concerns early and pushing through necessary reform, it will be in the best position it can be for rate hikes in 2023/2024. She warns that if Turkey continues its current path – no independent central bank, no credible monetary policy and few policy reforms – then the worst economic impacts of the pandemic remain to be seen.  

Reforming the fractious partnership between Turkey and the EU could lead to increased economic growth and security in the region

Turkey has been a key partner to the EU for many years now. In the years up to 2000, there were tangible benefits from financial partnerships between the two: EU-Turkey exports grew by 60%, Turkey became the EU’s fourth  largest trading partner, more than two million workers in the EU were employed by ~300 Turkish entrepreneurs, and Turkey’s annual growth rate of ~6.8% looked to offer a boost to the EU’s slowing rates. However, fast-forwarding to 2008, we had an environment where many previously communist countries were integrated into the EU and problems began to arise with enlargement fit in the wake of the global financial crisis. The Euro was struggling after just 10 years of usage and attention was on solidifying and supporting the Union. Turkey was growing much more authoritarian politically. There was internal confusion and lack of clarity over allegiance within the government itself – Kalemli-Ozcan alikens this to the wheels eventually falling off the wagon. The deterioration of democracy in Turkey led to the EU closing the door on negotiations in 2018, preferring to deal with its own direct interests. However, Kalemli-Ozcan opines that not re-igniting talks and the eventual accession of Turkey to the EU would be a colossal mistake for both sides. Turkey is incredibly important to European security as the gateway to Asia, and the economic benefits from EU inclusion to Turkey are obvious. Kalemli-Ozcan hopes that newfound dynamism in Europe post-COVID will propel engagement between the two, stating that increased cooperation within the region is a win-win for everyone.     


Sebnem Kalemli-Ozcan is Neil Moskowitz Professor of Economics at the University of Maryland. She is a Research Associate at the National Bureau of Economic Research (NBER) and a Research Fellow at the Center for Economic Policy Research (CEPR). 

Victoria Henderson (MBA 2021) has three years’ experience in management consulting at Bain & Company, and a background in Law and Politics. She is an intern for the Wheeler Institute, contributing to the creation of content that amplifies the role of business in improving lives.

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