Turkey and Other Middle Income Countries Face Unique Challenges in the COVID-19 Crisis
This article is from our archives, originally written on November 10th, 2020
The Turkish lira at over 8 to the U.S. dollar. (Photo: Sam Harshbarger)
Two days after the announcement of the then President-elect Joe Biden’s apparent victory in the U.S. election, Turkish Finance Minister Berat Albayrak posted a letter of resignation to his Instagram account, citing health problems. Albayrak, the son-in-law of Turkey’s authoritarian president, Recep Tayyip Erdoğan, had received his appointment in July 2018 amidst acrimony over allegations of nepotism. With Turkey’s economy enduring a period of near continuous worsening during his ministerial tenure, he became among the most hated individuals in the Erdoğan government. His resignation and hasty deletion of all his social media accounts prompted Turks to take to Twitter, where #TeşekkürlerBeratAlbayrak (#ThanksBeratAlbayrak) trended with an outpour of sarcastic comments lambasting Albayrak for his perceived mismanagement of the economy and corruption.
For a while, it was unclear whether Albayrak had really left and, consequently, who was at the helm of Turkish economic policymaking. In April, powerful Interior Minister Süleyman Soylu offered his resignation in the wake of confusion over his Ministry’s policies to contain the coronavirus, only for it to be rejected by President Erdoğan. Some commentators jokingly referred to Albayrak as “Schrödinger’s Finance Minister.”
Finally, by afternoon the following day, President Erdoğan accepted his son-in-law’s resignation, appointing AK Party stalwart Lütfi Elvan to the position. The Turkish lira soared on expectations that Albayrak’s departure might bring about a new period of more orthodox and effective economic policy. Just days before, Erdoğan had also appointed Murat Uysal as president of Turkey’s central bank, following signs of a lack of investor confidence when the central bank refused to raise rates that month.
The episode, however, exhibits the unique vulnerabilities that Turkey and other countries like it have in dealing with the COVID-19 crisis. The World Bank classifies Turkey as an upper middle income country with a high human development index. Turkey, while suffering greatly since the pandemic emerged globally in March of last year, has, for good reason, not received international support in the manner of poorer nations. However, Turkey and countries like it are trapped with the paradox that they are too wealthy for assistance but too feeble to smooth out the pandemic with fiscal stimulus and monetary easing.
The U.S. and the international community would be advised to think creatively about how to assist countries that fall into this bracket. Expanding the Federal Reserve’s currency-swap lines would be among the most effective. As panicked investors sought refuge throughout last year from the financial blows of the pandemic, they sought E.U.-denominated bonds and U.S. treasuries, devaluing their native currencies in a rush to safety. The success of the Fed’s currency-swap lines in preventing such effects in countries it provides dollars to, such as South Korea, is stark when compared to the onslaught of economic woes befalling those with scarce access to dollars.
The geopolitics of such an endeavor would be inevitably fraught. In the cases of Nigeria, Thailand, and Turkey in particular, corruption and authoritarianism have led governments to commit grave crimes against humanity and damaged their relationships with the United States. However, the stakes are simply too high. It took the 2008 crisis for the Fed to realize and subtly access its power as world market-maker of last resort. Perhaps this time, it might take decisive action to prevent the present downturn heralding a global depression.