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The Ottoman Empire existed for six centuries and it has left behind a rich legacy with contributions to various fields such as medicine, architecture, the military, and much more. Today, the country with the most prominent association with the Ottomans is of course Turkey. Uniquely located in both Asia and Europe, the country of Turkey was the centre place of Ottoman rule with the historic city of Istanbul being its capital. The modern state of Turkey as we know it today is less than a hundred years old, having been founded in 1923. Since then, the country has undergone various transformations but economically the same problems have a habit of repeating themselves. At the time of publication, Turkey is currently facing a severe economic crisis. We will take a closer look at how the history of this nation has unfolded and why it is in the position it finds itself in today. 

Birth of the Republic

Mustafa Kemal Atatürk

The Ottomans at their very peak ruled from the Persian Gulf in the east to Algeria in the west and from Vienna in the north all the way to Yemen in the south. It is without a doubt one of history’s great empires and its contribution to civilization equally grand. Around the 17th and 18th centuries, however, the European powers began to make great advancements militarily. As in the case of all empires, a certain element of complacency creeded in. The Ottomans found themselves with an inferior military capacity and as such over time began to diminish in size, losing battles and wars to the British, French, and Russian forces. 

By the start of the 20th century, the centres of power had decidedly shifted west. In a last-gasp effort to wrestle back some control, the Ottomans sided with Central Powers during World War 1 but ended up losing most of their territories to the Allied Powers of France, Britain, Russia, Italy, and so on. This had all but marked the end of the empire but it was also the platform from which the Republic of Turkey would be built. 

Led by Mustafa Kemal, the fractured remnants of the Ottoman Empire banded together to fight back against the Allied forces. In what is known as the Turkish War of Independence, which consisted of battles between various rebel groups and the British and French armies, the forces led by Mustafa Kemal emerged victoriously and went on to form the nation of Turkey. Mustafa Kemal received a secular education at a time when Islam still had an enormous influence on life within the empire. This education had a lifelong impact on Kemal and would go on influence Turkish life even today. He was of the view that in order to modernise, religion must not be allowed to play any kind of role in public life. He maintained the view that religion should only be a matter of the heart of each individual but must not interfere with how a country functions. 

The six main ideals of the new republic would revolve around the following – republicanism, statism, nationalism, secularism, populism, and revolution. These were enshrined in the country’s constitution in 1937. The emphasis on secularism in national life led to many immediate changes. For example, the Arabic alphabet was substituted by its Latin counterpart as Kemal felt that this would make learning the language easier. The ‘fez’, which is traditional Islamic headgear, was banned in all public places that were not mosques as they were considered to be symbols of backwardness and the traditional Muslim Hijri calendar was replaced by the Gregorian one. The caliphate was also soon abolished and the Sufi dervish orders (a form of praise of Allah) were done away with. All these changes quickly reduced the impact of religion on everyday Turkish life. 

Naturally, there was resistance. Most Turkish people at the time were still intensely religious and these changes were radical from their point of view. The idea of secularism was primarily accepted in the minds of the educated urban elite who also happened to be members of government. Nonetheless, Kemal’s policies would eventually bear fruit. The literacy rate improved across the country and Turkey granted its people universal suffrage. The modernisation of culture was well underway. 

Early Turkish Economy

The economy of Turkey over the decades has followed a familiar pattern. As mentioned before, one of the Kemalist ideals that were a part of the constitution was the concept of ‘statism’. This essentially meant that the government would play the central role in the planning of national life, which naturally included the economy. Like many newly formed countries of the 20th century, the Turkish government embarked on 5-year plans which oversaw the gradual development of the economy. The main reason behind state control was borne out of a worry of foreign influence. Having struggled for independence from the European powers, Kemal was wary of free-market policies which could open up a pathway for stronger and more developed economies to have an undue influence on the economy of Turkey. As a result, the economy remained largely in control of the state until the 1950s. 

Mustafa Kemal had passed away in 1938, just before the outbreak of the Second World War. His place in Turkish history, however, was guaranteed. Known as Kemal Ataturk (father of the Turks), the man who guided his country to independence and thereby restored a sense of national pride remains one of the most consequential figures in Turkish history. He was succeeded by his closest advisor who governed the country through the war. Kemal did not want to invest in a large and powerful military initially, but the war meant that the country had to suddenly start shoring up its defences and as such heavy investment into the armed forces began. This had a huge impact on the Turkish economy as the majority of the resources were now being diverted away from the other sectors. Agriculture formed the major chunk of the economy and its output fell drastically which in turn caused inflation to soar through the roof. When the war ended, however, the economy benefitted from the post-war boom that was seen all over the world. 

This boom was short-lived. While output increased for a couple of years, it soon began to fall which forced the government to import goods in order to meet domestic demand. Soon, Turkey’s balance of trade tilted heavily against its favour which meant that inflation would rise again. The new Democrat government which was elected in 1950 soon found itself being unable to manage the economy and amidst soaring prices came under increasing pressure from the public. The Democrats also began moving away from the Kemalist ideal of secularism which caused those at the top levels of government to become uncomfortable. In 1960, with the economy in bad shape and the Democratic Party’s support waning, the military staged a successful coup in order to restore the original ideas of the republic back to the centre stage.

The constitution was rewritten and the army began ceding control back to the people as elections once again began in 1961. The next two decades would see no clear dominant political force, with small parties playing a crucial role in forming coalition governments. These coalitions soon proved to be ineffective as the economy once again entered a period of high inflation and unemployment. The rising oil prices of the 70’s were the final nail in the coffin for the government at the time as the military once again completed a successful coup. The constitution was rewritten again, but this time it provided for a much stronger president who would serve 7- year terms and had the ability to appoint senior judges and to dismiss parliament if he/she deemed it necessary. The influence of smaller parties was also constitutionally reduced as no party that had won less than 10% of all the votes cast would be granted seats in parliament. 

Major Reforms in the 1980s

Until now, Turkey’s approach to its balance of trade problems had revolved around import substitution. This means the government sought to produce the goods domestically that it was purchasing from other countries. The new government of the 80s decided instead to specialise in manufacturing other goods which it could then export to fund its imports. The government reduced its own role in the economy and favoured a free-market approach while maintaining control over the monetary policy. Exports soon quadrupled and the trade deficit began to stabilize. Despite these positives, the inflation rate remained substantially high along with the rate of unemployment. 

Turkey’s Annual Inflation Rate (1960-2020)

One of the major sources of income for the Turkish government was through the oil pipeline constructed by the Iraqis which passed through the Turkish mainland. Iraq allowed Turkey to use a portion of this oil for its own domestic needs and also paid the country a sum of between $200 to $ 500 million annually for being able to use Turkish land. Iraq relied on these pipelines to export its oil, but after the Gulf War of the early 90s, trade sanctions imposed on Iraq totally restricted its exports. This had a huge impact on the Turkish economy the embargoes on Iraq meant that all trade was restricted. The estimated losses were in the region of $3 billion annually. This began a troubling decade for Turkey economically as it once again ran into issues with its balance of payments. 

Since the country had begun to do better in the preceding decade, financial institutions on Wall Street looked upon Turkey more favourably and gave it a good credit rating which then allowed it to borrow cheaply from international markets. The government in Turkey, however, kept the domestic rates high. This provided an opportunity for arbitrage for the commercial banks who borrowed heavily from international markets and then lend at a profit domestically. Too much money entered the economy causing it to overheat and devalue the Lira. The fiscal deficit rose sharply & the local currency had lost so much of its value that 50% of all deposits held in turkey were in foreign currencies, up from 1% from just the year before. The government then announced the inevitable and went into a period of austerity over the next few years which saw the Turkish economy slow down drastically. 

Turkey’s Annual GDP Growth

The liberalisation policies implemented during the 80s did prove to have many long-term positive impacts on the nation’s economy. Focusing on manufacturing for the purposes of exporting meant that from the early 2000s onwards Turkey’s growth started to increase impressively. The average income of the citizens went up and the inflation rate stabilised at around 7%-8%. The new century saw the elevation of Turkey to a ‘middle-income’ country and poverty decrease from 44% in 2002 to 18% in 2014. Extreme poverty also fell from 13% to 3% during the same period.

Present Day Economic Crisis

This period of relative prosperity would slowly begin to slip away. Just as was the case during the 1990s, Turkey began to borrow heavily from foreign institutions in order to finance its public investments. Once again, it had a decent credit rating providing it access to cheaper loans. The problem this time around, however, is that the country’s president, Recep Tayyip Erdogan decided to invest heavily in the construction sector. The country has built many skyscrapers, residential complexes, business centres, and so on. The problem with this is that construction on its own doesn’t produce anything that Turkey can then export to other countries to maintain its balance of payments. Cheap money entering the economy caused inflation to soar again and the Turkish Lira has been plummeting in value. The poorest in the country are most affected, but even those in the upper-income brackets are feeling the heat. The value of people’s savings has been forcibly reduced and although there are jobs on offer, working for a Turkish salary is currently less than appealing.  

The crisis appears to be getting worse day by day as the Lira continues to fall and set new records for historic lows. Inflation has more than tripled in just 5 years and Erdogan is under immense pressure to resolve the situation quickly. Erdogan’s problem is that he does not believe in the secular principles laid out by the country’s founder. He has been staunchly against the concept of interest rates and his reasoning has to do with his religious teachings. In Islam, charging interest rates is forbidden and Erdogan has taken this teaching to the national stage. If he had raised interest rates earlier, in 2018 or 2019, the situation would have been controlled and the Lira would have stabilised. Instead, he continued to lower interest rates and intends to keep doing so in spite of the fact that this will only lead the country to disaster. The problem now is that he will need to raise the rates by an incredible 15% to 20% in order to control inflation. Such an increase would cause the economy to enter into a painful state of austerity and the situation as it stands is already painful enough. Unfortunately, there appears to be no other alternative. 

Labour Force Participation Rate – OECD Members
Tertiary Education Attainment Rates – OECD Members

The attitude of attaining money and spending it quickly is something that can be found at both the individual and national levels. The country’s personal savings rate is also quite low and as we have seen across various points in the country’s history, it spends at an unsustainable rate. The question then becomes is there anything they can do to avoid making the same mistakes over and over again? It is difficult to answer this question because the issue seems to be cultural. The government can work to incentivise higher education attainment and the growth of small private businesses. It must also reduce the power that the president has over the country’s central bank. During the 90s and even today, the central bank has been overruled by the president and in both cases it only caused the crisis to get worse. Structural changes are needed in order to rectify the current pattern of economic fallacy. 

The country itself has a lot to offer the world. It possesses great historical and cultural value and given that it currently has a young population, the potential to grow into a fully developed European style country is certainly there. For now, it has to wrestle with certain internal dilemmas that need to be resolved in order for it to move forward. 

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