In this episode, we'll explore how Turkey went from an economic darling to a country plagued by sky-high inflation.
We'll learn about the key factors behind the woes of the Turkish economy, and see why a kebab can cost more in Istanbul than it does in Stockholm.
[00:00:05] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:20] I'm Alastair Budge, and today we are going to be talking about Turkey.
[00:00:25] Not the kind that British people like to eat at Christmas, but the country of Turkey, or the Republic of Türkiye to give it its proper name.
[00:00:34] Specifically, today we will be talking about what went wrong with Turkey’s economy.
[00:00:41] It went from economic darling to a nation plagued by sky-high inflation, resulting in a drastic drop in disposable income and living standards.
[00:00:50] So, let’s not waste a minute, and talk about why.
[00:00:56] We are going to start this episode, uncharacteristically, in a kebab shop.
[00:01:02] Not because we are talking about Turkey, and therefore we need to start by talking about kebabs, but because it is a useful starting point for addressing the question of the Turkish economy.
[00:01:15] In July this year, I spent 10 days in Turkey.
[00:01:20] My sister got married to a man from Istanbul, and we had a wonderful time celebrating, visiting the sights of Istanbul, and we even got the chance to visit the islands outside the city.
[00:01:34] It was great, and anyone who is fortunate enough to have been to Istanbul will know that it is one of the great cities of the world.
[00:01:43] But it was also an eye-opening experience into the reality that many people in Turkey have been living over the past few years, are still living today, and if you are from Turkey, well, this is your reality.
[00:02:00] So, where do kebabs fit in?
[00:02:02] Well, after a wonderful trip, we arrived at the airport, ready to get a flight home.
[00:02:09] It had been a long trip to the airport, involving ferries, taxis and buses, and by the time we arrived everyone - myself, my wife and our two kids - we were all quite hungry.
[00:02:23] I suggested, for the adults in our party at least, to cap things off, that we might have a doner kebab.
[00:02:30] Sure enough, we were led by our noses to a restaurant, where a man with a very sharp knife was standing in front of a rotating spit, from which he was carving doner kebabs.
[00:02:43] Bingo.
[00:02:45] But, fortunately before placing an order, I looked up at the menu, or the price list, to be precise.
[00:02:54] A doner kebab cost €40, which is almost $50 US dollars.
[00:03:01] And this was no special kebab. It seemed like a perfectly decent but utterly normal doner kebab, one that might cost less than a quarter of that in most major Western European capitals.
[00:03:15] Now, of course, this was at an airport, and prices are often inflated significantly at airports.
[00:03:23] But even in Istanbul itself, and we were mainly out in a suburb far out from the touristy centre, the price for a kebab was probably somewhere between €10 and €15, so still the same if not higher than you would pay in London or Stockholm.
[00:03:45] The difference, however, is that the median salary in a country like Sweden is more than six times that in Turkey.
[00:03:55] Economic theory would suggest that the price of something, especially something that is considered a staple good, should broadly reflect the salaries of the residents of that area, because that’s basic economics.
[00:04:10] If prices are too low, businesses will raise their prices without customers complaining or it affecting sales.
[00:04:18] If prices are too high, then customers won’t buy as much or as often.
[00:04:24] The price of anything is typically the cost of the raw ingredients, the cost of everything else that goes into delivering it, plus a little bit on top as profit.
[00:04:35] So, how is it that a kebab in Istanbul can cost the same, or even more, than one in Stockholm, when the average salary in Istanbul is only a fraction of that in Sweden?
[00:04:49] Something doesn’t quite add up.
[00:04:52] Hidden inside this expensive kebab, is at least part of the story of Turkey’s economic woes.
[00:05:00] Now, to understand how we got here, we need to go back—not just to this kebab shop, and not just a decade or two, but centuries.
[00:05:09] Turkey, or as it was known for hundreds of years, the Ottoman Empire, was once one of the most powerful and influential empires in the world.
[00:05:19] It spanned three continents—Europe, Asia, and Africa—and its capital, Constantinople, was the beating heart of global trade and politics.
[00:05:30] The Ottoman Empire was famously a bridge between East and West, connecting the riches of Asia with the markets of Europe.
[00:05:40] This geographic advantage is something modern Turkey still benefits from, sitting literally at the crossroads of continents. Istanbul, or Constantinople as it was formerly known, is the only major city in the world that spans two continents, Europe and Asia.
[00:05:59] If you go to Istanbul, you’ll hear people talking about whether something is on the European side or the Asian side, referring to whether something is to the east of the Bosphorus Strait, and is therefore in Asia, or to the west of the Bosphorus Strait, and is therefore in Europe.
[00:06:19] It was and still is an incredibly advantageous location, connecting East and West.
[00:06:27] But by the late 19th century, the Ottoman Empire was in decline, earning it the nickname “the sick man of Europe.”
[00:06:36] And after its defeat in World War I, the empire collapsed entirely. Out of its ashes rose the Republic of Turkey in 1923, led by Mustafa Kemal Atatürk, the father of modern Turkey.
[00:06:52] Now, Atatürk deserves his own episode, but in brief, he transformed Turkey into a modern, secular nation-state.
[00:07:02] He introduced sweeping reforms—changing the alphabet, granting women more rights, and pushing for industrialisation. His vision was for Turkey to become a modern European nation, firmly grounded in the West.
[00:07:19] Fast-forward to the early 2000s, and after struggling for much of the 1980s and 1990s, Turkey was in a new golden era.
[00:07:31] After a financial crisis in 2001, the country had introduced a series of reforms to stabilise its economy.
[00:07:40] Inflation, which had been a huge problem throughout the 1990s in particular, was brought under control. Foreign investors poured money into the country, and the economy grew at an impressive rate.
[00:07:55] For over a decade, Turkey was one of the fastest-growing economies in the world.
[00:08:01] It seemed unstoppable.
[00:08:03] The government invested in huge infrastructure projects—bridges, airports, and roads—and the middle class expanded.
[00:08:12] People were optimistic about the future, and Turkey’s ambition to become one of the world’s top 10 economies by 2023 didn’t seem so beyond the realms of possibility.
[00:08:25] But, this growth had a somewhat unstable foundation.
[00:08:31] Turkey has historically had a pretty low savings rate, meaning that Turkish people do not tend to save a high proportion of their salary.
[00:08:41] Now, this isn’t just a feature of how wealthy a country is; there are rich countries with very low savings rates and poor countries with high savings rates.
[00:08:52] And Turkey, well, it has historically been a place with a low savings rate.
[00:08:58] Why this is important is that it means that banks do not have large reserves of cash, so it is harder for them to give out loans.
[00:09:08] But to invest in stuff like infrastructure, real estate, and so on, you need lots of capital, you need lots of money, you need cold, hard, cash.
[00:09:19] So, where did Turkey turn to to get loans for these ambitious projects it was embarking on?
[00:09:26] Well, both the Turkish government and private companies took out loans from abroad, which were denominated in foreign currencies like the US dollar or the euro.
[00:09:39] In other words, a company that wanted to build a new tower block might need, let’s say, 350 million Turkish Lira, which was equivalent to around 100 million US dollars in 2017.
[00:09:53] The company would borrow the money in US dollars, convert it to Lira to pay local costs in Lira, but they would have to pay it back in US dollars.
[00:10:04] Now, this is no problem at all when the exchange rate between dollars and Lira is stable, but if the exchange rate fluctuates, if it moves, then it can spell trouble.
[00:10:19] And this was unfortunately what happened in 2018.
[00:10:25] The Turkish lira had been losing value gradually for many years, but in the summer of 2018, things took a turn for the worse.
[00:10:35] There were tensions with the United States over a detained American pastor, a mini diplomatic crisis ensued, and Turkey was sanctioned by the United States.
[00:10:47] This spooked investors, and caused the Turkish Lira to fall 30% against the dollar, suddenly making those dollar-denominated loans 43% more expensive.
[00:11:01] That Turkish company that took out the loan for 100 million dollars in 2017, well in just the course of a few months, it cost them an extra 43% in Lira to repay their dollar-denominated loan.
[00:11:17] And it got worse.
[00:11:20] In June of 2018, 1 US dollar was worth 4.5 Turkish Lira.
[00:11:26] By August in the same year it had shot up to 6 Lira.
[00:11:31] It kept going up and up, and in 2022 the rate at which it devalued started to accelerate.
[00:11:39] As of last summer, 1 US dollar was worth 33 Turkish Lira, meaning that in just 6 years, the Turkish currency lost almost 90% of its value against the dollar.
[00:11:54] This was part of a vicious cycle.
[00:11:57] Businesses defaulted on loans, meaning that investors started to pull out, investment dried up, jobs were lost, faith in the Turkish Lira as a currency continued to reduce, and the vicious cycle continued.
[00:12:12] Paying off foreign debt became much more expensive, meaning that the prices for everything increased, costs went up, inflation rose, people were even less likely to save, given that they knew that their money would be worth less in the future, so banks had even fewer reserves to make loans for people to invest in businesses or buy houses or do all of the sorts of things that banks normally did.
[00:12:38] It is not easy for a country to break this cycle, but there are some pretty well agreed-upon tools that a government or central bank can use to break a cycle of inflation.
[00:12:51] Specifically, they can raise interest rates.
[00:12:56] Now, to explain this very simply, the central bank interest rate is the rate at which the central bank lends money to other banks, and is the main driver of the rate at which banks lend money to customers or pay customers in interest on their savings.
[00:13:14] When this rate goes up, it makes borrowing money more expensive—for banks, businesses, and regular people.
[00:13:22] It also makes saving more appealing.
[00:13:26] To give you a working example, if the interest rate is, let’s say, 1% but inflation is 10%, every year a bank might give you 1% of your savings in interest but the value of your money is eroded by 10% through inflation.
[00:13:46] It means there is little incentive to save money, as you may as well spend it. Every year it is worth less and less.
[00:13:55] But if you get paid a 10% interest rate by your bank and inflation is 1%, then the opposite is true.
[00:14:05] There is a much greater incentive to save your money instead of spending it, and if people save not spend, then businesses are more likely to reduce prices, and this helps reduce inflation.
[00:14:19] What’s more, increasing the interest rate means that a country’s currency becomes more attractive to foreign investors, which helps inject money into the economy.
[00:14:31] If a foreign financial institution thinks it can get a 20% or 30% or even a 50% return on its investment by buying a foreign currency, then suddenly that becomes a pretty attractive thing.
[00:14:46] Using interest rates as a way to control inflation and either heat or cool an economy is something that almost all economists agree upon, it’s something that has been tried and tested multiple times, with great success, and is a major tool in the central banker’s armoury.
[00:15:06] But there was one man who didn’t subscribe to this economic philosophy.
[00:15:13] Recep Tayyip Erdoğan, the Turkish president.
[00:15:16] Now, as a quick recap to Erdoğan, he has been the dominant figure in Turkish politics for over two decades now.
[00:15:25] He first rose to power in 2003 as prime minister and later became president in 2014.
[00:15:34] Under his leadership, Turkey’s economy initially thrived, and he was credited with bringing stability and growth to the country after the 2001 financial crisis.
[00:15:47] Part of this was by keeping interest rates at record lows, at least by Turkish standards.
[00:15:54] So, he believed that low interest rates were a key part of Turkey’s economic plan; he didn’t want to raise them in the face of high inflation, and–contrary to the view of most mainstream economists–he actually stated that high interest rates cause inflation, not that they reduce it.
[00:16:17] So, while inflation in Turkey hit double digits, and then 85% in late 2022, with some suggesting that the true figure was even higher, Erdoğan stuck to his guns and refused to increase the interest rate.
[00:16:34] Or rather, it shouldn’t have been his decision, it should have been the decision of the Turkish Central Bank, but whenever the bank looked like it wanted to increase interest rates, Erdoğan fired the governor, making it clear who was really in charge.
[00:16:52] And of course, without a truly independent central bank, this shook investor confidence even more.
[00:17:00] And while this probably all sounds theoretical, central bank governors, interest rates, inflation and investor confidence, it was felt acutely by tens of millions of people living in Turkey, who saw the price of everyday goods double, triple, quadruple, while their salaries barely moved.
[00:17:22] Suddenly those in the Turkish middle class, people with what had previously been good, well-paid jobs, found themselves struggling to make ends meet.
[00:17:34] Incidentally, this show is particularly popular in Turkey, I think it’s about the 6th or 7th most popular country.
[00:17:42] And a couple of years ago I started to receive pretty regular messages from listeners and members in Turkey, talking about the difficulties they faced in their day-to-day lives.
[00:17:54] This was all happening against the backdrop of increasing global inflation, after COVID-19, the Russian invasion of Ukraine, and the cost of everything worldwide going up.
[00:18:08] But Turkey was in a particularly difficult situation.
[00:18:12] There were already high levels of inflation and Turkish people were then hit with even higher prices, especially for anything imported, because it was denominated in dollars or Euros.
[00:18:25] And even for non-imported goods, prices increased significantly. The uncertainty of a volatile currency meant that businesses would charge more for the same goods to compensate for a devaluation in the Lira or some unforeseen tax or government charge.
[00:18:44] Businesses and investors like things to be calm, they like to know what the price for something is and be sure that it isn’t going to be vastly different in 1 month’s time, and any kind of uncertainty or volatility only makes things more expensive.
[00:19:02] Fortunately, there has been some stabilisation.
[00:19:07] After years of holding fast and refusing to increase interest rates, Erdoğan did do a slight u-turn, and increased them in 2023, after being re-elected in the Turkish Presidential election.
[00:19:21] The interest rate went from 8% to 15%, a sizable jump but not nearly high enough to solve Turkey’s problems for good.
[00:19:32] Since then it has been pushed up to 50%, a huge number but one the investors believe is necessary to stabilise the situation and start to restore faith in the Turkish economy.
[00:19:47] So, the question is, can Turkey turn things around?
[00:19:52] There are some signs of hope. Interest rates are now very high, inflation has come down significantly, meaning that prices are not increasing as fast as they were before.
[00:20:05] But there is still the problem that prices for everyday goods are at historic highs, and salaries have not kept up with inflation.
[00:20:16] And so, we come back to that €40 kebab at the airport.
[00:20:20] Why was it so expensive?
[00:20:22] Well, it’s not just about inflation or airport markups.
[00:20:27] It’s also about the very airport where the kebab was sold.
[00:20:31] This sparkling, modern terminal—one of the largest in the world—was built with billions of dollars in foreign loans. Loans that now, thanks to the collapse of the Turkish lira, are far more expensive to pay back, but paid back they must be.
[00:20:49] The cost of the loan, and the complete crash of the Turkish currency, is trickling down into things like the price a kebab shop at the airport needs to charge to cover its costs.
[00:21:01] Now, there is so much going for Turkey, its strategic location between Europe and Asia, its large, skilled population, and its relatively low cost of labour.
[00:21:13] Economists agree that Turkey still has many structural problems, from its high trade deficit to its reliance on foreign investment.
[00:21:22] But there are plenty of economists who are suggesting that the stars are finally starting to align for Turkey to bounce back, with inflation almost under control, foreign investment coming back in and a solid base upon which to rebuild, the next 10 years offer real opportunities for Turkey and the Turkish people.
[00:21:44] I certainly hope that is the case.
[00:21:47] But for now, the only suggestion I have is that if you are flying out of Istanbul International Airport, and you don’t want to feel like you have been the victim of daylight robbery, then I would recommend that you bring a packed lunch.
[00:22:05] OK then, that is it for today's episode on what went wrong with the Turkish economy.
[00:22:10] To state the obvious, it is a hugely complex subject that even professional economists are still arguing about, so there is a lot more to it than we have had time to talk about today.
[00:22:21] But at least, to those who didn’t know much about the Turkish economy beforehand, I hope that it has piqued your interest and you can do some more research into it, and to the amazing Turkish listeners among you, I hope that you feel that we’ve done the subject justice, and we have shone some light into what’s going on in your wonderful country.
[00:22:40] As always, I would love to know what you thought of this episode, especially from anyone from Turkey.
[00:22:46] What else should we have mentioned? How has day-to-day life changed for you in Turkey? And what hope do you have for the future?
[00:22:54] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:23:03] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:23:07] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
[00:00:05] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:20] I'm Alastair Budge, and today we are going to be talking about Turkey.
[00:00:25] Not the kind that British people like to eat at Christmas, but the country of Turkey, or the Republic of Türkiye to give it its proper name.
[00:00:34] Specifically, today we will be talking about what went wrong with Turkey’s economy.
[00:00:41] It went from economic darling to a nation plagued by sky-high inflation, resulting in a drastic drop in disposable income and living standards.
[00:00:50] So, let’s not waste a minute, and talk about why.
[00:00:56] We are going to start this episode, uncharacteristically, in a kebab shop.
[00:01:02] Not because we are talking about Turkey, and therefore we need to start by talking about kebabs, but because it is a useful starting point for addressing the question of the Turkish economy.
[00:01:15] In July this year, I spent 10 days in Turkey.
[00:01:20] My sister got married to a man from Istanbul, and we had a wonderful time celebrating, visiting the sights of Istanbul, and we even got the chance to visit the islands outside the city.
[00:01:34] It was great, and anyone who is fortunate enough to have been to Istanbul will know that it is one of the great cities of the world.
[00:01:43] But it was also an eye-opening experience into the reality that many people in Turkey have been living over the past few years, are still living today, and if you are from Turkey, well, this is your reality.
[00:02:00] So, where do kebabs fit in?
[00:02:02] Well, after a wonderful trip, we arrived at the airport, ready to get a flight home.
[00:02:09] It had been a long trip to the airport, involving ferries, taxis and buses, and by the time we arrived everyone - myself, my wife and our two kids - we were all quite hungry.
[00:02:23] I suggested, for the adults in our party at least, to cap things off, that we might have a doner kebab.
[00:02:30] Sure enough, we were led by our noses to a restaurant, where a man with a very sharp knife was standing in front of a rotating spit, from which he was carving doner kebabs.
[00:02:43] Bingo.
[00:02:45] But, fortunately before placing an order, I looked up at the menu, or the price list, to be precise.
[00:02:54] A doner kebab cost €40, which is almost $50 US dollars.
[00:03:01] And this was no special kebab. It seemed like a perfectly decent but utterly normal doner kebab, one that might cost less than a quarter of that in most major Western European capitals.
[00:03:15] Now, of course, this was at an airport, and prices are often inflated significantly at airports.
[00:03:23] But even in Istanbul itself, and we were mainly out in a suburb far out from the touristy centre, the price for a kebab was probably somewhere between €10 and €15, so still the same if not higher than you would pay in London or Stockholm.
[00:03:45] The difference, however, is that the median salary in a country like Sweden is more than six times that in Turkey.
[00:03:55] Economic theory would suggest that the price of something, especially something that is considered a staple good, should broadly reflect the salaries of the residents of that area, because that’s basic economics.
[00:04:10] If prices are too low, businesses will raise their prices without customers complaining or it affecting sales.
[00:04:18] If prices are too high, then customers won’t buy as much or as often.
[00:04:24] The price of anything is typically the cost of the raw ingredients, the cost of everything else that goes into delivering it, plus a little bit on top as profit.
[00:04:35] So, how is it that a kebab in Istanbul can cost the same, or even more, than one in Stockholm, when the average salary in Istanbul is only a fraction of that in Sweden?
[00:04:49] Something doesn’t quite add up.
[00:04:52] Hidden inside this expensive kebab, is at least part of the story of Turkey’s economic woes.
[00:05:00] Now, to understand how we got here, we need to go back—not just to this kebab shop, and not just a decade or two, but centuries.
[00:05:09] Turkey, or as it was known for hundreds of years, the Ottoman Empire, was once one of the most powerful and influential empires in the world.
[00:05:19] It spanned three continents—Europe, Asia, and Africa—and its capital, Constantinople, was the beating heart of global trade and politics.
[00:05:30] The Ottoman Empire was famously a bridge between East and West, connecting the riches of Asia with the markets of Europe.
[00:05:40] This geographic advantage is something modern Turkey still benefits from, sitting literally at the crossroads of continents. Istanbul, or Constantinople as it was formerly known, is the only major city in the world that spans two continents, Europe and Asia.
[00:05:59] If you go to Istanbul, you’ll hear people talking about whether something is on the European side or the Asian side, referring to whether something is to the east of the Bosphorus Strait, and is therefore in Asia, or to the west of the Bosphorus Strait, and is therefore in Europe.
[00:06:19] It was and still is an incredibly advantageous location, connecting East and West.
[00:06:27] But by the late 19th century, the Ottoman Empire was in decline, earning it the nickname “the sick man of Europe.”
[00:06:36] And after its defeat in World War I, the empire collapsed entirely. Out of its ashes rose the Republic of Turkey in 1923, led by Mustafa Kemal Atatürk, the father of modern Turkey.
[00:06:52] Now, Atatürk deserves his own episode, but in brief, he transformed Turkey into a modern, secular nation-state.
[00:07:02] He introduced sweeping reforms—changing the alphabet, granting women more rights, and pushing for industrialisation. His vision was for Turkey to become a modern European nation, firmly grounded in the West.
[00:07:19] Fast-forward to the early 2000s, and after struggling for much of the 1980s and 1990s, Turkey was in a new golden era.
[00:07:31] After a financial crisis in 2001, the country had introduced a series of reforms to stabilise its economy.
[00:07:40] Inflation, which had been a huge problem throughout the 1990s in particular, was brought under control. Foreign investors poured money into the country, and the economy grew at an impressive rate.
[00:07:55] For over a decade, Turkey was one of the fastest-growing economies in the world.
[00:08:01] It seemed unstoppable.
[00:08:03] The government invested in huge infrastructure projects—bridges, airports, and roads—and the middle class expanded.
[00:08:12] People were optimistic about the future, and Turkey’s ambition to become one of the world’s top 10 economies by 2023 didn’t seem so beyond the realms of possibility.
[00:08:25] But, this growth had a somewhat unstable foundation.
[00:08:31] Turkey has historically had a pretty low savings rate, meaning that Turkish people do not tend to save a high proportion of their salary.
[00:08:41] Now, this isn’t just a feature of how wealthy a country is; there are rich countries with very low savings rates and poor countries with high savings rates.
[00:08:52] And Turkey, well, it has historically been a place with a low savings rate.
[00:08:58] Why this is important is that it means that banks do not have large reserves of cash, so it is harder for them to give out loans.
[00:09:08] But to invest in stuff like infrastructure, real estate, and so on, you need lots of capital, you need lots of money, you need cold, hard, cash.
[00:09:19] So, where did Turkey turn to to get loans for these ambitious projects it was embarking on?
[00:09:26] Well, both the Turkish government and private companies took out loans from abroad, which were denominated in foreign currencies like the US dollar or the euro.
[00:09:39] In other words, a company that wanted to build a new tower block might need, let’s say, 350 million Turkish Lira, which was equivalent to around 100 million US dollars in 2017.
[00:09:53] The company would borrow the money in US dollars, convert it to Lira to pay local costs in Lira, but they would have to pay it back in US dollars.
[00:10:04] Now, this is no problem at all when the exchange rate between dollars and Lira is stable, but if the exchange rate fluctuates, if it moves, then it can spell trouble.
[00:10:19] And this was unfortunately what happened in 2018.
[00:10:25] The Turkish lira had been losing value gradually for many years, but in the summer of 2018, things took a turn for the worse.
[00:10:35] There were tensions with the United States over a detained American pastor, a mini diplomatic crisis ensued, and Turkey was sanctioned by the United States.
[00:10:47] This spooked investors, and caused the Turkish Lira to fall 30% against the dollar, suddenly making those dollar-denominated loans 43% more expensive.
[00:11:01] That Turkish company that took out the loan for 100 million dollars in 2017, well in just the course of a few months, it cost them an extra 43% in Lira to repay their dollar-denominated loan.
[00:11:17] And it got worse.
[00:11:20] In June of 2018, 1 US dollar was worth 4.5 Turkish Lira.
[00:11:26] By August in the same year it had shot up to 6 Lira.
[00:11:31] It kept going up and up, and in 2022 the rate at which it devalued started to accelerate.
[00:11:39] As of last summer, 1 US dollar was worth 33 Turkish Lira, meaning that in just 6 years, the Turkish currency lost almost 90% of its value against the dollar.
[00:11:54] This was part of a vicious cycle.
[00:11:57] Businesses defaulted on loans, meaning that investors started to pull out, investment dried up, jobs were lost, faith in the Turkish Lira as a currency continued to reduce, and the vicious cycle continued.
[00:12:12] Paying off foreign debt became much more expensive, meaning that the prices for everything increased, costs went up, inflation rose, people were even less likely to save, given that they knew that their money would be worth less in the future, so banks had even fewer reserves to make loans for people to invest in businesses or buy houses or do all of the sorts of things that banks normally did.
[00:12:38] It is not easy for a country to break this cycle, but there are some pretty well agreed-upon tools that a government or central bank can use to break a cycle of inflation.
[00:12:51] Specifically, they can raise interest rates.
[00:12:56] Now, to explain this very simply, the central bank interest rate is the rate at which the central bank lends money to other banks, and is the main driver of the rate at which banks lend money to customers or pay customers in interest on their savings.
[00:13:14] When this rate goes up, it makes borrowing money more expensive—for banks, businesses, and regular people.
[00:13:22] It also makes saving more appealing.
[00:13:26] To give you a working example, if the interest rate is, let’s say, 1% but inflation is 10%, every year a bank might give you 1% of your savings in interest but the value of your money is eroded by 10% through inflation.
[00:13:46] It means there is little incentive to save money, as you may as well spend it. Every year it is worth less and less.
[00:13:55] But if you get paid a 10% interest rate by your bank and inflation is 1%, then the opposite is true.
[00:14:05] There is a much greater incentive to save your money instead of spending it, and if people save not spend, then businesses are more likely to reduce prices, and this helps reduce inflation.
[00:14:19] What’s more, increasing the interest rate means that a country’s currency becomes more attractive to foreign investors, which helps inject money into the economy.
[00:14:31] If a foreign financial institution thinks it can get a 20% or 30% or even a 50% return on its investment by buying a foreign currency, then suddenly that becomes a pretty attractive thing.
[00:14:46] Using interest rates as a way to control inflation and either heat or cool an economy is something that almost all economists agree upon, it’s something that has been tried and tested multiple times, with great success, and is a major tool in the central banker’s armoury.
[00:15:06] But there was one man who didn’t subscribe to this economic philosophy.
[00:15:13] Recep Tayyip Erdoğan, the Turkish president.
[00:15:16] Now, as a quick recap to Erdoğan, he has been the dominant figure in Turkish politics for over two decades now.
[00:15:25] He first rose to power in 2003 as prime minister and later became president in 2014.
[00:15:34] Under his leadership, Turkey’s economy initially thrived, and he was credited with bringing stability and growth to the country after the 2001 financial crisis.
[00:15:47] Part of this was by keeping interest rates at record lows, at least by Turkish standards.
[00:15:54] So, he believed that low interest rates were a key part of Turkey’s economic plan; he didn’t want to raise them in the face of high inflation, and–contrary to the view of most mainstream economists–he actually stated that high interest rates cause inflation, not that they reduce it.
[00:16:17] So, while inflation in Turkey hit double digits, and then 85% in late 2022, with some suggesting that the true figure was even higher, Erdoğan stuck to his guns and refused to increase the interest rate.
[00:16:34] Or rather, it shouldn’t have been his decision, it should have been the decision of the Turkish Central Bank, but whenever the bank looked like it wanted to increase interest rates, Erdoğan fired the governor, making it clear who was really in charge.
[00:16:52] And of course, without a truly independent central bank, this shook investor confidence even more.
[00:17:00] And while this probably all sounds theoretical, central bank governors, interest rates, inflation and investor confidence, it was felt acutely by tens of millions of people living in Turkey, who saw the price of everyday goods double, triple, quadruple, while their salaries barely moved.
[00:17:22] Suddenly those in the Turkish middle class, people with what had previously been good, well-paid jobs, found themselves struggling to make ends meet.
[00:17:34] Incidentally, this show is particularly popular in Turkey, I think it’s about the 6th or 7th most popular country.
[00:17:42] And a couple of years ago I started to receive pretty regular messages from listeners and members in Turkey, talking about the difficulties they faced in their day-to-day lives.
[00:17:54] This was all happening against the backdrop of increasing global inflation, after COVID-19, the Russian invasion of Ukraine, and the cost of everything worldwide going up.
[00:18:08] But Turkey was in a particularly difficult situation.
[00:18:12] There were already high levels of inflation and Turkish people were then hit with even higher prices, especially for anything imported, because it was denominated in dollars or Euros.
[00:18:25] And even for non-imported goods, prices increased significantly. The uncertainty of a volatile currency meant that businesses would charge more for the same goods to compensate for a devaluation in the Lira or some unforeseen tax or government charge.
[00:18:44] Businesses and investors like things to be calm, they like to know what the price for something is and be sure that it isn’t going to be vastly different in 1 month’s time, and any kind of uncertainty or volatility only makes things more expensive.
[00:19:02] Fortunately, there has been some stabilisation.
[00:19:07] After years of holding fast and refusing to increase interest rates, Erdoğan did do a slight u-turn, and increased them in 2023, after being re-elected in the Turkish Presidential election.
[00:19:21] The interest rate went from 8% to 15%, a sizable jump but not nearly high enough to solve Turkey’s problems for good.
[00:19:32] Since then it has been pushed up to 50%, a huge number but one the investors believe is necessary to stabilise the situation and start to restore faith in the Turkish economy.
[00:19:47] So, the question is, can Turkey turn things around?
[00:19:52] There are some signs of hope. Interest rates are now very high, inflation has come down significantly, meaning that prices are not increasing as fast as they were before.
[00:20:05] But there is still the problem that prices for everyday goods are at historic highs, and salaries have not kept up with inflation.
[00:20:16] And so, we come back to that €40 kebab at the airport.
[00:20:20] Why was it so expensive?
[00:20:22] Well, it’s not just about inflation or airport markups.
[00:20:27] It’s also about the very airport where the kebab was sold.
[00:20:31] This sparkling, modern terminal—one of the largest in the world—was built with billions of dollars in foreign loans. Loans that now, thanks to the collapse of the Turkish lira, are far more expensive to pay back, but paid back they must be.
[00:20:49] The cost of the loan, and the complete crash of the Turkish currency, is trickling down into things like the price a kebab shop at the airport needs to charge to cover its costs.
[00:21:01] Now, there is so much going for Turkey, its strategic location between Europe and Asia, its large, skilled population, and its relatively low cost of labour.
[00:21:13] Economists agree that Turkey still has many structural problems, from its high trade deficit to its reliance on foreign investment.
[00:21:22] But there are plenty of economists who are suggesting that the stars are finally starting to align for Turkey to bounce back, with inflation almost under control, foreign investment coming back in and a solid base upon which to rebuild, the next 10 years offer real opportunities for Turkey and the Turkish people.
[00:21:44] I certainly hope that is the case.
[00:21:47] But for now, the only suggestion I have is that if you are flying out of Istanbul International Airport, and you don’t want to feel like you have been the victim of daylight robbery, then I would recommend that you bring a packed lunch.
[00:22:05] OK then, that is it for today's episode on what went wrong with the Turkish economy.
[00:22:10] To state the obvious, it is a hugely complex subject that even professional economists are still arguing about, so there is a lot more to it than we have had time to talk about today.
[00:22:21] But at least, to those who didn’t know much about the Turkish economy beforehand, I hope that it has piqued your interest and you can do some more research into it, and to the amazing Turkish listeners among you, I hope that you feel that we’ve done the subject justice, and we have shone some light into what’s going on in your wonderful country.
[00:22:40] As always, I would love to know what you thought of this episode, especially from anyone from Turkey.
[00:22:46] What else should we have mentioned? How has day-to-day life changed for you in Turkey? And what hope do you have for the future?
[00:22:54] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:23:03] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:23:07] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
[00:00:05] Hello, hello hello, and welcome to English Learning for Curious Minds, by Leonardo English.
[00:00:11] The show where you can listen to fascinating stories, and learn weird and wonderful things about the world at the same time as improving your English.
[00:00:20] I'm Alastair Budge, and today we are going to be talking about Turkey.
[00:00:25] Not the kind that British people like to eat at Christmas, but the country of Turkey, or the Republic of Türkiye to give it its proper name.
[00:00:34] Specifically, today we will be talking about what went wrong with Turkey’s economy.
[00:00:41] It went from economic darling to a nation plagued by sky-high inflation, resulting in a drastic drop in disposable income and living standards.
[00:00:50] So, let’s not waste a minute, and talk about why.
[00:00:56] We are going to start this episode, uncharacteristically, in a kebab shop.
[00:01:02] Not because we are talking about Turkey, and therefore we need to start by talking about kebabs, but because it is a useful starting point for addressing the question of the Turkish economy.
[00:01:15] In July this year, I spent 10 days in Turkey.
[00:01:20] My sister got married to a man from Istanbul, and we had a wonderful time celebrating, visiting the sights of Istanbul, and we even got the chance to visit the islands outside the city.
[00:01:34] It was great, and anyone who is fortunate enough to have been to Istanbul will know that it is one of the great cities of the world.
[00:01:43] But it was also an eye-opening experience into the reality that many people in Turkey have been living over the past few years, are still living today, and if you are from Turkey, well, this is your reality.
[00:02:00] So, where do kebabs fit in?
[00:02:02] Well, after a wonderful trip, we arrived at the airport, ready to get a flight home.
[00:02:09] It had been a long trip to the airport, involving ferries, taxis and buses, and by the time we arrived everyone - myself, my wife and our two kids - we were all quite hungry.
[00:02:23] I suggested, for the adults in our party at least, to cap things off, that we might have a doner kebab.
[00:02:30] Sure enough, we were led by our noses to a restaurant, where a man with a very sharp knife was standing in front of a rotating spit, from which he was carving doner kebabs.
[00:02:43] Bingo.
[00:02:45] But, fortunately before placing an order, I looked up at the menu, or the price list, to be precise.
[00:02:54] A doner kebab cost €40, which is almost $50 US dollars.
[00:03:01] And this was no special kebab. It seemed like a perfectly decent but utterly normal doner kebab, one that might cost less than a quarter of that in most major Western European capitals.
[00:03:15] Now, of course, this was at an airport, and prices are often inflated significantly at airports.
[00:03:23] But even in Istanbul itself, and we were mainly out in a suburb far out from the touristy centre, the price for a kebab was probably somewhere between €10 and €15, so still the same if not higher than you would pay in London or Stockholm.
[00:03:45] The difference, however, is that the median salary in a country like Sweden is more than six times that in Turkey.
[00:03:55] Economic theory would suggest that the price of something, especially something that is considered a staple good, should broadly reflect the salaries of the residents of that area, because that’s basic economics.
[00:04:10] If prices are too low, businesses will raise their prices without customers complaining or it affecting sales.
[00:04:18] If prices are too high, then customers won’t buy as much or as often.
[00:04:24] The price of anything is typically the cost of the raw ingredients, the cost of everything else that goes into delivering it, plus a little bit on top as profit.
[00:04:35] So, how is it that a kebab in Istanbul can cost the same, or even more, than one in Stockholm, when the average salary in Istanbul is only a fraction of that in Sweden?
[00:04:49] Something doesn’t quite add up.
[00:04:52] Hidden inside this expensive kebab, is at least part of the story of Turkey’s economic woes.
[00:05:00] Now, to understand how we got here, we need to go back—not just to this kebab shop, and not just a decade or two, but centuries.
[00:05:09] Turkey, or as it was known for hundreds of years, the Ottoman Empire, was once one of the most powerful and influential empires in the world.
[00:05:19] It spanned three continents—Europe, Asia, and Africa—and its capital, Constantinople, was the beating heart of global trade and politics.
[00:05:30] The Ottoman Empire was famously a bridge between East and West, connecting the riches of Asia with the markets of Europe.
[00:05:40] This geographic advantage is something modern Turkey still benefits from, sitting literally at the crossroads of continents. Istanbul, or Constantinople as it was formerly known, is the only major city in the world that spans two continents, Europe and Asia.
[00:05:59] If you go to Istanbul, you’ll hear people talking about whether something is on the European side or the Asian side, referring to whether something is to the east of the Bosphorus Strait, and is therefore in Asia, or to the west of the Bosphorus Strait, and is therefore in Europe.
[00:06:19] It was and still is an incredibly advantageous location, connecting East and West.
[00:06:27] But by the late 19th century, the Ottoman Empire was in decline, earning it the nickname “the sick man of Europe.”
[00:06:36] And after its defeat in World War I, the empire collapsed entirely. Out of its ashes rose the Republic of Turkey in 1923, led by Mustafa Kemal Atatürk, the father of modern Turkey.
[00:06:52] Now, Atatürk deserves his own episode, but in brief, he transformed Turkey into a modern, secular nation-state.
[00:07:02] He introduced sweeping reforms—changing the alphabet, granting women more rights, and pushing for industrialisation. His vision was for Turkey to become a modern European nation, firmly grounded in the West.
[00:07:19] Fast-forward to the early 2000s, and after struggling for much of the 1980s and 1990s, Turkey was in a new golden era.
[00:07:31] After a financial crisis in 2001, the country had introduced a series of reforms to stabilise its economy.
[00:07:40] Inflation, which had been a huge problem throughout the 1990s in particular, was brought under control. Foreign investors poured money into the country, and the economy grew at an impressive rate.
[00:07:55] For over a decade, Turkey was one of the fastest-growing economies in the world.
[00:08:01] It seemed unstoppable.
[00:08:03] The government invested in huge infrastructure projects—bridges, airports, and roads—and the middle class expanded.
[00:08:12] People were optimistic about the future, and Turkey’s ambition to become one of the world’s top 10 economies by 2023 didn’t seem so beyond the realms of possibility.
[00:08:25] But, this growth had a somewhat unstable foundation.
[00:08:31] Turkey has historically had a pretty low savings rate, meaning that Turkish people do not tend to save a high proportion of their salary.
[00:08:41] Now, this isn’t just a feature of how wealthy a country is; there are rich countries with very low savings rates and poor countries with high savings rates.
[00:08:52] And Turkey, well, it has historically been a place with a low savings rate.
[00:08:58] Why this is important is that it means that banks do not have large reserves of cash, so it is harder for them to give out loans.
[00:09:08] But to invest in stuff like infrastructure, real estate, and so on, you need lots of capital, you need lots of money, you need cold, hard, cash.
[00:09:19] So, where did Turkey turn to to get loans for these ambitious projects it was embarking on?
[00:09:26] Well, both the Turkish government and private companies took out loans from abroad, which were denominated in foreign currencies like the US dollar or the euro.
[00:09:39] In other words, a company that wanted to build a new tower block might need, let’s say, 350 million Turkish Lira, which was equivalent to around 100 million US dollars in 2017.
[00:09:53] The company would borrow the money in US dollars, convert it to Lira to pay local costs in Lira, but they would have to pay it back in US dollars.
[00:10:04] Now, this is no problem at all when the exchange rate between dollars and Lira is stable, but if the exchange rate fluctuates, if it moves, then it can spell trouble.
[00:10:19] And this was unfortunately what happened in 2018.
[00:10:25] The Turkish lira had been losing value gradually for many years, but in the summer of 2018, things took a turn for the worse.
[00:10:35] There were tensions with the United States over a detained American pastor, a mini diplomatic crisis ensued, and Turkey was sanctioned by the United States.
[00:10:47] This spooked investors, and caused the Turkish Lira to fall 30% against the dollar, suddenly making those dollar-denominated loans 43% more expensive.
[00:11:01] That Turkish company that took out the loan for 100 million dollars in 2017, well in just the course of a few months, it cost them an extra 43% in Lira to repay their dollar-denominated loan.
[00:11:17] And it got worse.
[00:11:20] In June of 2018, 1 US dollar was worth 4.5 Turkish Lira.
[00:11:26] By August in the same year it had shot up to 6 Lira.
[00:11:31] It kept going up and up, and in 2022 the rate at which it devalued started to accelerate.
[00:11:39] As of last summer, 1 US dollar was worth 33 Turkish Lira, meaning that in just 6 years, the Turkish currency lost almost 90% of its value against the dollar.
[00:11:54] This was part of a vicious cycle.
[00:11:57] Businesses defaulted on loans, meaning that investors started to pull out, investment dried up, jobs were lost, faith in the Turkish Lira as a currency continued to reduce, and the vicious cycle continued.
[00:12:12] Paying off foreign debt became much more expensive, meaning that the prices for everything increased, costs went up, inflation rose, people were even less likely to save, given that they knew that their money would be worth less in the future, so banks had even fewer reserves to make loans for people to invest in businesses or buy houses or do all of the sorts of things that banks normally did.
[00:12:38] It is not easy for a country to break this cycle, but there are some pretty well agreed-upon tools that a government or central bank can use to break a cycle of inflation.
[00:12:51] Specifically, they can raise interest rates.
[00:12:56] Now, to explain this very simply, the central bank interest rate is the rate at which the central bank lends money to other banks, and is the main driver of the rate at which banks lend money to customers or pay customers in interest on their savings.
[00:13:14] When this rate goes up, it makes borrowing money more expensive—for banks, businesses, and regular people.
[00:13:22] It also makes saving more appealing.
[00:13:26] To give you a working example, if the interest rate is, let’s say, 1% but inflation is 10%, every year a bank might give you 1% of your savings in interest but the value of your money is eroded by 10% through inflation.
[00:13:46] It means there is little incentive to save money, as you may as well spend it. Every year it is worth less and less.
[00:13:55] But if you get paid a 10% interest rate by your bank and inflation is 1%, then the opposite is true.
[00:14:05] There is a much greater incentive to save your money instead of spending it, and if people save not spend, then businesses are more likely to reduce prices, and this helps reduce inflation.
[00:14:19] What’s more, increasing the interest rate means that a country’s currency becomes more attractive to foreign investors, which helps inject money into the economy.
[00:14:31] If a foreign financial institution thinks it can get a 20% or 30% or even a 50% return on its investment by buying a foreign currency, then suddenly that becomes a pretty attractive thing.
[00:14:46] Using interest rates as a way to control inflation and either heat or cool an economy is something that almost all economists agree upon, it’s something that has been tried and tested multiple times, with great success, and is a major tool in the central banker’s armoury.
[00:15:06] But there was one man who didn’t subscribe to this economic philosophy.
[00:15:13] Recep Tayyip Erdoğan, the Turkish president.
[00:15:16] Now, as a quick recap to Erdoğan, he has been the dominant figure in Turkish politics for over two decades now.
[00:15:25] He first rose to power in 2003 as prime minister and later became president in 2014.
[00:15:34] Under his leadership, Turkey’s economy initially thrived, and he was credited with bringing stability and growth to the country after the 2001 financial crisis.
[00:15:47] Part of this was by keeping interest rates at record lows, at least by Turkish standards.
[00:15:54] So, he believed that low interest rates were a key part of Turkey’s economic plan; he didn’t want to raise them in the face of high inflation, and–contrary to the view of most mainstream economists–he actually stated that high interest rates cause inflation, not that they reduce it.
[00:16:17] So, while inflation in Turkey hit double digits, and then 85% in late 2022, with some suggesting that the true figure was even higher, Erdoğan stuck to his guns and refused to increase the interest rate.
[00:16:34] Or rather, it shouldn’t have been his decision, it should have been the decision of the Turkish Central Bank, but whenever the bank looked like it wanted to increase interest rates, Erdoğan fired the governor, making it clear who was really in charge.
[00:16:52] And of course, without a truly independent central bank, this shook investor confidence even more.
[00:17:00] And while this probably all sounds theoretical, central bank governors, interest rates, inflation and investor confidence, it was felt acutely by tens of millions of people living in Turkey, who saw the price of everyday goods double, triple, quadruple, while their salaries barely moved.
[00:17:22] Suddenly those in the Turkish middle class, people with what had previously been good, well-paid jobs, found themselves struggling to make ends meet.
[00:17:34] Incidentally, this show is particularly popular in Turkey, I think it’s about the 6th or 7th most popular country.
[00:17:42] And a couple of years ago I started to receive pretty regular messages from listeners and members in Turkey, talking about the difficulties they faced in their day-to-day lives.
[00:17:54] This was all happening against the backdrop of increasing global inflation, after COVID-19, the Russian invasion of Ukraine, and the cost of everything worldwide going up.
[00:18:08] But Turkey was in a particularly difficult situation.
[00:18:12] There were already high levels of inflation and Turkish people were then hit with even higher prices, especially for anything imported, because it was denominated in dollars or Euros.
[00:18:25] And even for non-imported goods, prices increased significantly. The uncertainty of a volatile currency meant that businesses would charge more for the same goods to compensate for a devaluation in the Lira or some unforeseen tax or government charge.
[00:18:44] Businesses and investors like things to be calm, they like to know what the price for something is and be sure that it isn’t going to be vastly different in 1 month’s time, and any kind of uncertainty or volatility only makes things more expensive.
[00:19:02] Fortunately, there has been some stabilisation.
[00:19:07] After years of holding fast and refusing to increase interest rates, Erdoğan did do a slight u-turn, and increased them in 2023, after being re-elected in the Turkish Presidential election.
[00:19:21] The interest rate went from 8% to 15%, a sizable jump but not nearly high enough to solve Turkey’s problems for good.
[00:19:32] Since then it has been pushed up to 50%, a huge number but one the investors believe is necessary to stabilise the situation and start to restore faith in the Turkish economy.
[00:19:47] So, the question is, can Turkey turn things around?
[00:19:52] There are some signs of hope. Interest rates are now very high, inflation has come down significantly, meaning that prices are not increasing as fast as they were before.
[00:20:05] But there is still the problem that prices for everyday goods are at historic highs, and salaries have not kept up with inflation.
[00:20:16] And so, we come back to that €40 kebab at the airport.
[00:20:20] Why was it so expensive?
[00:20:22] Well, it’s not just about inflation or airport markups.
[00:20:27] It’s also about the very airport where the kebab was sold.
[00:20:31] This sparkling, modern terminal—one of the largest in the world—was built with billions of dollars in foreign loans. Loans that now, thanks to the collapse of the Turkish lira, are far more expensive to pay back, but paid back they must be.
[00:20:49] The cost of the loan, and the complete crash of the Turkish currency, is trickling down into things like the price a kebab shop at the airport needs to charge to cover its costs.
[00:21:01] Now, there is so much going for Turkey, its strategic location between Europe and Asia, its large, skilled population, and its relatively low cost of labour.
[00:21:13] Economists agree that Turkey still has many structural problems, from its high trade deficit to its reliance on foreign investment.
[00:21:22] But there are plenty of economists who are suggesting that the stars are finally starting to align for Turkey to bounce back, with inflation almost under control, foreign investment coming back in and a solid base upon which to rebuild, the next 10 years offer real opportunities for Turkey and the Turkish people.
[00:21:44] I certainly hope that is the case.
[00:21:47] But for now, the only suggestion I have is that if you are flying out of Istanbul International Airport, and you don’t want to feel like you have been the victim of daylight robbery, then I would recommend that you bring a packed lunch.
[00:22:05] OK then, that is it for today's episode on what went wrong with the Turkish economy.
[00:22:10] To state the obvious, it is a hugely complex subject that even professional economists are still arguing about, so there is a lot more to it than we have had time to talk about today.
[00:22:21] But at least, to those who didn’t know much about the Turkish economy beforehand, I hope that it has piqued your interest and you can do some more research into it, and to the amazing Turkish listeners among you, I hope that you feel that we’ve done the subject justice, and we have shone some light into what’s going on in your wonderful country.
[00:22:40] As always, I would love to know what you thought of this episode, especially from anyone from Turkey.
[00:22:46] What else should we have mentioned? How has day-to-day life changed for you in Turkey? And what hope do you have for the future?
[00:22:54] You can head right into our community forum, which is at community.leonardoenglish.com and get chatting away to other curious minds.
[00:23:03] You've been listening to English Learning for Curious Minds, by Leonardo English.
[00:23:07] I'm Alastair Budge, you stay safe, and I'll catch you in the next episode.
