A General Equilibrium Analysis of the Impact of the COVID-19 Outbreak on Turkey’s Economy and a Policy Alternative to Protect Labor Incomes

Abstract

The COVID-19 pandemic is being experienced as a multidimensional systemic crisis based on the simultaneous manifestations of the supply, demand, and financial shocks. These effects have already been realized in the exacerbation of deep inequalities in income distribution, in functional, regional, and gender terms; in access to public services that are commercialized; and therefore, in an environment where poverty is experienced with social exclusion due to severe inequalities of income.

The crisis has hit the Turkish economy under a conjuncture where the adverse effects of the 2018 financial turbulence have not yet been alleviated, and the macroeconomic balances have not been resolved in a sustained fashion. Turkey has displayed already high rates of unemployment (at the rate of 13.6%) and inflation (11%) by the end of 2019. Projections by the IMF also reveal that as a result of the economic measures of isolation and employment disruption, Turkey’s GDP will likely contract by 5% in 2020.

Given this background, our aim in this study is to analyze the upon-impact effects of the COVID-19 outbreak on Turkish economy and to investigate policy alternatives that can be implemented against these impacts. We utilize a macroeconomic applied general equilibrium model designed for this purpose; and examine the effects of the crisis conjuncture caused by the COVID-19 outbreak on sectoral production, employment, wages, and capital revenues, national income, and foreign trade balances. Then, we provide an analysis of defensive policies that can be developed against the crisis.