Turkey chose tanks over butter, now its inflation is skyrocketing

A few years ago, Turkey was the economic promise of Europe. A relatively young country, in the process of becoming part of the EU with a customs union since 1995, a member of NATO, involved in international affairs and with a population equivalent to that of Germany. A country that has 20 larger economies in the world, with recognizable marks that will affect consumers like Beko, that produces more checks than Reino Unido or Italy, with GDP greater than in Polonia and a GDP per capita greater than el from Mexico.

If there was a place with a potential equivalent of a Southeast Asian country in the old continent, it was Turkey. But not anymore, 38% inflation in 2021 is not a good letter of introduction to international investors.


In November 2021, Apple decided to stop selling in Turkey through its official store. Turkish Apple Stores, all in Istanbul, have stopped selling anything other than earphones or providing after-sales service as Turks try to stock iPhones as an alternative investment that won’t be affected by inflation. The Turkish lira keeps dancing against other currencies and multinationals find it difficult to operate in this market.

The Spanish bank BBVA made an offer for 50% of a Turkish bank (Garanti) of which it did not control 100%, which implies enormous uncertainty for the bank, because due to the irregular evolution of the Turkish lira, it is unclear whether it will cost €2.5 billion (initially budgeted), €1.4 billion on December 17, 2021 or €1.8 billion on December 21, 2021. Moreover, the Turkish bank operating in lira Turkey, a depreciation of the latter supposes a drop in profits for the Spanish bank, whose depreciation is not an immediate benefit for foreign investors.

The classic dilemma between butter and vats


In first year of economics Students are often faced with the dilemma of a country making butter (food) or tanks (defense). This is done to express the interchangeability of goods and the concept of the production possibility frontier.

This dilemma stems from a dilemma the United States had during World War I. With supplies of nitrates provided by Chile, the United States could compost them (which would lead to butter and food for the population) or use them to make gunpowder. In the end, the government launched a formidable campaign saying that there would be “weapons and butter”. Instead, Nazi leaders Goebbles and Göring said they preferred guns to butter and the concept was also referenced by President Lyndon B Johnson and Prime Minister Margaret Thatcher.

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Turkey in recent years seems to be of the same school as Putin, giving them more importance and being more effective in its military aspect than in its economic aspect. Since former Istanbul mayor and prime minister Recep Tayyip Erdoğan won the presidential election in 2014, he has pursued a hard-power foreign policy that has been labeled by critics as “neo-Ottomanist”. are increasingly intervening militarily in and around the Eastern Mediterranean.

Associate Professor at Qatar University Ali Bakir lists places where Turkey has a temporary and permanent presence, such as northern Syria or Qatar, countries in which Turkey has signed military agreements between 2017 and 2021, so diverse as Niger, Tunisia, Montenegro, Kazakhstan or Azerbaijan, and the times when the Turkish geopolitical situation was defined.

But as Turkey’s military power has grown, its economic power is weakening more and more. In the dilemma of butter and vats, Turkey has chosen. It’s not the only one, in a way it’s what’s happening with Russia and Putin’s doctrine in the Kremlin. It is true that Turkey’s borders with countries like Syria or Iraq force Turkey to have a well-armed army, but it seems that the ambitions for power have not matched the needs of the Turkish economy.

Why did the Turkish economy fall?

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In 2021, Turkey closed its year with inflation of 38%, the worst for nineteen years. To stop the fall of the currency, which in 2021 lost 44% of its value against the dollar, the central bank had to raise its rates from 14 to 19%. President Erdogan has blamed high interest rates as the father and mother of all evil and says Turkey’s economy will emerge from division in 2022.

It’s hard to believe his heterodox theories. Since Erdogan became president, the public deficit of the Turkish state has increased every year, in addition to trying to intervene in the interest rates of the Turkish Central Bank. It is true that spending on R&D and education has increased, but this is not having the desired effect.

According to the Financial Times, Turkey’s advantages of strong banks, a business-friendly entrepreneurial culture, and good demographics have been eroded by years of macroeconomic mismanagement. The depreciation of the Turkish lira against the euro shows this, in 2021 it fell by around 50%, but between 2017 and 2022 it fell by almost a fifth.

the Rise of authoritarianism in Turkey does not help the Turkish economy, the main investors believe that they have fewer guarantees and that the profitability and security of their investments will depend more on Ankara’s decisions than anything else. In 2020, Turkey was one of the countries that sold the most gold from its national reserves, just like Spain did in 2007, just before the financial storm.

Moreover, it separated from the countries which were its main investors, such as Germany, France and the Netherlands, which wanted to leave the country. As of August 2017, foreign investors held $92 billion worth of Turkish corporate stocks, bonds and debt. By July 2018, the amounts had fallen to $53 billion. It is not good news when international investors leave a country.

The problem with confidence in a country’s economy is that it’s like pottery sold in Istanbul’s Grand Bazaar, it breaks easily and isn’t easy to repair. Ankara will have to take a long and difficult road if it is to regain economic confidence in the years to come.

Ask the readers butter or vats?

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Picture | Nicholas Kaiser

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