Turkey’s Natural Earthquake and Economic Shock

In the past two days, a piece of news has swiped my screen. On February 6, local time, two 7.8-magnitude earthquakes hit Turkey. So far, thousands of people have been killed and over 10,000 injured in Turkey and Syria. And now, those grim numbers don’t seem to stop their rise in the slightest. This is Turkey’s worst disaster in over 80 years. Apart from the time of silence and the fever discussion on humanitarian aid, we have to think about a more severe question, how will this disaster deal with Turkey’s fragile economic system?

In recent years, Turkey has been plagued by high inflation, foreign debt, and fiscal deficits. Perennial inflation and devaluation of the lira have made the market of the Turkish economy highly dependent on economic assistances from external capital. The foreign debt generated by the massive development of infrastructure further triggered the collapse of the Turkish currency.

Just imagine, the price of goods keeps surging because of inflation, and the domestic currency devaluation. How does this situation increase the desire for private consumption? In particular, Turkey’s economic growth is mainly driven by people’s consumption and government purchases. Its service industry and commodity trade account for a relatively high proportion of GDP. This has to mention the unusual policy of the Turkish government in the face of inflation. Regarding inflation, the mainstream economic view often holds that banks should increase interest rates to absorb the amount of money circulating in the market in order to reduce inflationary pressures. However, in Turkey, bank lowered interest rates, which further stimulated investment and consumption desires in the domestic market, and ultimately helped Turkey achieve economic growth. President Erdogan has always played down the impact of inflation and insisted on low interest rates to increase exports of Turkish products. Although domestic consumption and investment increased because of this policy, it also further increased the inflation rate.

It is conceivable that such a fragile Turkish economy will multiply the impact of emergencies. In fact, changes in the international situation have exacerbated Turkey’s economic difficulties. Because of the multiple impacts of COVID-19, the conflict between Russia and Ukraine, global inflationary pressures and the strength of the US dollar, international raw material prices have risen. The Turkish currency, lira, continues to devalue, making Turkey need to spend more money to import essential energy, medical care, food and industrial products. The money in people’s hands is becoming more and more like pieces of worthless waste paper. The devaluation of the lira and unstoppable inflation have consumed a lot of government financial resources. Higher prices and devouring savings keeps fueling the inherent fiscal deficit. In this national environment, the sudden strong earthquake will stagnate consumption, and the fiscal expenditures required for rescuing put the pressure on the government suddenly increased. The reduction in commodity exports and tourism revenue further exacerbated Turkey’s economic imbalance and fiscal deficit.

The domestic economic imbalance multiplies the impact of any disaster, and the huge losses caused by successive strong earthquakes have further increased Turkey’s inflation. This creates a vicious circle that is hard to break out of. It is foreseeable that the earthquake caused a shortage of materials in the disaster area in a short time, which further exacerbated the rise in prices. The damage to infrastructure and inconvenient transportation caused by the earthquake will also seriously affect the recovery of the tourism industry. The Turkish government will bear double the financial pressure to rebuild and restore the disaster area. The earthquake has brought new shocks and challenges to Turkey’s fragile economy. Pessimistically speaking, post-disaster reconstruction will also be a huge challenge for the Turkish government with limited funds.

Economic loss directly reflected by the earthquake physically, such as damage to houses, loss of production, and rescue costs, etc. A disaster can also have a psychological and emotional impact on people, causing them to change their behavior, especially in economic decisions. Because of the cost of natural disasters, people living in disaster-prone areas need to take precautions to survive after the disaster. This makes sense: people who have suffered a disaster will build up their savings to protect against the next disaster. But what if people lose trust in the market entirely? In other words, will people have an idea: life is not very good, instead of saving for the losses caused by uncertain natural disasters, it is better to fully enjoy the present moment? Perhaps the Turkish people will have two extreme situations after the disaster, completely losing their desire to consume, or spending wildly. Uncontrollable consumption behavior may once again impact the Turkish economic market. In this sense, the psychological changes brought about by the earthquake may continue to have economic effects long after they complete reconstruction.

However, it is worth mentioning that based on humanitarianism, assistances from international countries may gradually form a benign interaction between Turkey and its foreign debtor countries. Turkey can use this to ease some of the current economic difficulties facing the government external debt. At least for now, we should expect things to go in a good direction together.

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