Turkey is in a full-blown crisis and has an extremely high despair index of 93.8, even worse than that of sanction-embattled Russia’s 42.5 in May. But that is only if you believe the official statistics. Independent economists estimate that the real rate of inflation is closer to 150%, which would send Turkey’s despair index to 170.3. That is even worse than war-torn Ukraine’s 115.3, as the chart shows.

bne IntelliNews invented the despair index several years ago as an indicator of the pain the bottom third of society feels during a crisis. It is based on the “misery index”, which is simply the addition of inflation and unemployment: in a crashing economy both these indicators go shooting up, but disproportionately affect the poor, so the index is a convenient shorthand way of quantifying the amount of pain the man in the street is suffering from.

To the misery index bne IntelliNews added poverty to better capture the pain in developing markets; few developing markets have a functioning social safety net and so poverty adds another dimension to the suffering of the underprivileged in times of crisis.

An ideal despair index should score below a value of ten if residual indicators are taken into account: inflation (2%) + residual unemployment (4%) + poverty (0%). Unfortunately, while 2% inflation and 4% unemployment are regularly reported, no countries have ever managed to eradicate poverty, which runs at least 12% in the developed world and averages in the mid-teens or above in most developing countries.

Of course, where you set the bar for poverty makes a big difference and each country has a different level, making direct comparisons between countries problematic, but the despair index remains a useful indicator of how much a country is suffering from economic problems.

Russia and Ukraine are both suffering from high despair rates at the moment, thanks to the effects of the coronavirus (COVID-19) pandemic in 2020 and now exacerbated by the war that began in February. But as bne IntelliNews reported, Russia’s despair index has probably already fallen back to an almost normal, albeit high, rate of 30 thanks to the successful emergency actions taken by the Central Bank of Russia (CBR). Ukraine’s rate could decline from here too if the war stops soon and the impulse of the reconstruction work gives the economy a boost.

In Turkey the outlook is bad, and things are likely to only get worse.

 

	Russia, Ukraine, Turkey despair index
		4Q 2020	1Q 2021	2Q 2021	3Q 2021	4Q 2021	1Q 2022	2Q 2022
Russia	poverty	13.50	14.20	12.50	11.00	8.50	14.50	14.50
	inflation	4.44	5.55	6	6.86	8.31	11.5	20
	unemployment	6.7	5.6	4.97	4.4	4.3	4.2	8
	despair	24.64	25.35	23.47	22.26	21.11	30.20	42.50
Ukraine	poverty	1.1	2	2	2	2	2	90
	inflation	6.2	8.8	9.97	10.73	9.9	14.67	14.67
	unemployment	10	10	11	9	9	11	11
	despair	16.8	20.9	22.47	22.03	21.1	27.27	115.27
Turkey	poverty	9	9	9	9	9	9	9
	inflation	13.5	15.59	17.1	19.26	25.76	54.76	150
	unemployment	12.87	13	12.52	11.77	11.3	11	11.3
	despair	35.37	37.59	38.62	40.03	46.06	74.76	170.3
	source: bne IntelliNews, World Bank, national statistic agencies

 

 

Poverty, unemployment and inflation

Turkey achieved significant poverty reduction between 2004 and 2016 with growth in earnings and employment being the major drivers, according to the World Bank.

However, in a sign of how much work there is left to do, the poverty line, like in Ukraine, is measured as the number of people that have an income of less than $5 per day ($150 per month), whereas in more developed economies like Russia the line is set at some low average salary. Today a bit more than one in ten people live in poverty in Turkey.

Following the increase in GDP per capita of 158% during 2000-2015, the poverty incidence decreased from 44% to 18% between 2002 and 2014, according to a World Bank study. In the same period, the incidence of extreme poverty declined from 13% to 3% of the population. Poverty continued to fall to about 9% and remained there for the next few years before starting to climb again as the currency crisis gather pace. Poverty rose to 10.2% in 2019 and to 12.2% in 2020, according to the World Bank.

The coronavirus pandemic, which hit Turkey particularly hard in 2020, drove poverty up, but even as the economy started to recover towards the end of that year, the more vulnerable segments of society didn’t feel the benefits.

"While the recovery in late 2020 has helped labour markets recover somewhat, many have been left behind, especially women, youth and lower-skilled workers," the World Bank said in its Turkey Economic Monitor report.

"This, in conjunction with high inflation, is likely to have hurt the poor more. Poverty is estimated to have risen to 12.2% in 2020 from 10.2% in 2019. Bringing the poverty rate back to pre-pandemic levels presents a challenge," it said.

The World Bank said the impact of the pandemic would be a "struggle to shake off" globally but that Turkey's economy is expected to grow 5% this year due a recovery in exports.

In 2021 poverty jumped again as the combination of the global impact of the coronacrisis and Turkey’s own currency crisis took its toll, sending the poverty rate to 21.9%, according to the Turkish Statistical Institute’s annual survey.

Retail, accommodation and food, transport and construction sectors, where low-income households comprise a significant share of the workforce, were hit hardest. Loss of employment and income have been the main transmission mechanisms of the crisis for low-income households.

Unemployment has been consistently high in recent years, running between 12.6% and 14.1% for most of 2020 and 2021. But unemployment dropped dramatically to 10.4% in June 2021, but has remained at the still uncomfortably high level of between 11.1% and 11.3% since then. Youth unemployment is even higher, averaging at about 20% in the same period.

The government introduced wage support for formal employees and increased targeted social assistance to existing beneficiaries to minimise the negative consequences of the crisis in the short run. However, these measures will not reach the 5.6mn people presently not covered by the current social protection system, and also exclude the 4mn refugees currently residing in the country who rely on the informal sector.

And finally, Turkey has lost control of inflation, which has climbed steadily from 12.9% in the fourth quarter of 2020 to the current rate of 73.5% in May.

Despair index

Russia has been reporting a despair index on a par with many of the EU countries in recent years. Unemployment fell to post-Soviet record low of 3.6% in October 2018 as the economy started to recover from a four-year long recession. Inflation also fell to a post-Soviet record low 2.2% in January 2018. With a poverty rate averaging about 12.8% that gave Russia a despair index of 18.6 – on the best in Europe and on a par with Czechia, Europe least desperate country pre-crises. (Czechia is currently suffering from its highest level of inflation for almost three decades).

Given the soaring inflation and the looming threat of stagflation across the entire region everyone’s despair index has risen to around 30 now or worse.

Ukraine has done less well, as in the last three decades it has failed to implement any meaningful reforms and has been one of the poorest countries in Europe, despite its vast human, agricultural and industrial potential. In bne IntelliNews’ last pan-regional despair survey in May 2020 Ukraine had a despair index score of 42.3, the same level as sanctioned Russia suffered from in May this year, when its despair rating peaked.

But things were going well for Ukraine in the months before the war as it started to feel the benefits from a post-COVID bounce-back. Unemployment had fallen back to post-Soviet low of 7.3% in the third quarter of 2019, inflation had reached a post-Soviet nadir of 2.3% in September 2020 but poverty remained stubbornly high at 27%, when measured on a scale comparable to Russia. Combined that gave Ukraine a despair index of 36.6, still uncomfortably high, due to the high levels of poverty in the country.

In the current survey Ukraine’s poverty is measured by the World Bank rating, which sets the bar very low at $5 a day, not a minimum salary, a change that reflects the fact that Ukraine remains a truly poor nation by the World Bank’s standards, while Russia’s much higher poverty line is a reflection of the fact that Russia is the only emerging market that has been reclassified “high income” by the United Nations Development Programme (UNDP) in the last decade.

Under the World Bank’s definition of poverty Ukraine’s rate falls to only 2%, which is understated if comparing Ukraine and Russia directly. However, for the calculation of the final despair index result in the first quarter, we used the latest estimate by the World Bank that warned the poverty rate could jump to 90% as a result of war. As there is a war going on all of the indicators at the moment are largely guesses.

Getting a clear grip on the situation in Turkey is also difficult, as the government is deliberately obfuscating the data to bury the bad news. Turkey has a relatively modest poverty rate of 9%, but actually, as the line is also set at $5 a day, this is in fact a very high level and far worse than Ukraine. Unemployment rates in Ukraine and Turkey are on a par and stuck at a little more than 10%. So it is inflation that makes the difference.

The official inflation rate is currently 73.5%, which gives a despair index of 93.8, but the real rate of inflation is probably closer to 150%, giving a despair rating of 170.3.

The government’s inability to control inflation is causing the population real economic pain and the Turks, by this measure, are suffering more than Ukrainians are.

With elections looming the high despair score is a danger for Turkish President Recep Tayyip Erdogan, but he has such a complete hold on the political process and the media he has successfully managed to transfer blame elsewhere.