Turkey’s economy is in crisis. The country is facing one of the worst economic downturns in its modern history. Inflation has skyrocketed, the Turkish lira has lost significant value, and the cost of living is suffocating ordinary citizens. The economic policies of recent years—characterized by state-controlled interest rates, excessive public spending and heavy-handed intervention in markets—have only deepened the structural problems. Instead of allowing free-market forces to correct inefficiencies, the government has doubled down on control, leading to instability and financial distress.

It is clear that the current approach is unsustainable. The failures of the current system mirror those of other nations that have relied on socialized economic models, only to face inevitable collapse. Turkey must drastically shift its approach, embracing free-market principles, deregulation and fiscal discipline. Economic thinkers like Milton Friedman, Friedrich Hayek and Daron Acemoğlu, along with President Javier Milei’s bold reforms in Argentina, provide a roadmap for Turkey to escape this economic disaster. It is time to abandon the illusion of state-controlled prosperity and embrace full capitalism as the only viable path forward.

Lira under pressure

Inflation is one of the most pressing issues, reaching levels not seen in decades. Official figures from the Turkish Statistical Institute (TÜİK) indicate that annual consumer price inflation slowed to 38.01% in March 2025, down from a peak of around 75% in May of the previous year. While this decline appears positive, the figure remains alarmingly high. Basic necessities such as food, fuel and housing have become increasingly unaffordable. The government’s refusal to implement conventional monetary policies—such as raising interest rates to combat inflation—has exacerbated the crisis. Instead, the government has pursued an unorthodox economic model favoring low interest rates, contrary to fundamental economic principles.

The depreciation of the Turkish lira has further intensified the economic turmoil. By March 28, 2025, the lira had reached a record low, with one US dollar worth approximately 38.02 lira. This rapid devaluation has significantly increased the cost of imported goods. Additionally, it has led to capital flight, as both domestic and foreign investors lose confidence in the country’s economic management. A weak currency, instead of boosting exports as the government claimed, has only contributed to a loss of real wages and a declining standard of living for the Turkish people.​

Public debt and budget deficits have also spiraled out of control. The government has relied on excessive borrowing to fund large-scale infrastructure projects and social welfare programs. While these expenditures may have temporarily stimulated growth, they have left Turkey with an unsustainable fiscal burden. As of September 2024, government debt accounted for 25.6% of the country’s nominal GDP, a slight decrease from 26.1% in the previous quarter. However, the consolidated fiscal balance recorded a deficit equal to 5.2% of nominal GDP in December 2024, up from 5.0% in the previous quarter. In February 2025 alone, the deficit clocked in at 310.1 billion Turkish lira (approximately $8.13 billion). With mounting debt repayments and declining investor confidence, the country is struggling to secure external funding without resorting to further currency depreciation and inflationary policies. The social model that has provided subsidies and state-controlled benefits has become a heavy strain on public finances. It has pushed the nation toward a fiscal cliff.​

The labor market has suffered as well, with unemployment and underemployment reaching critical levels. In February 2025, the seasonally adjusted unemployment rate declined slightly to 8.2% from 8.4% in January. However, there is a drop in labor force participation to 53.2%. This indicates that fewer individuals are actively seeking employment. Many businesses, particularly in the private sector, are under strain. In 2024, approximately 15,000 companies shut down, marking a 28% increase from the previous year. Instead of fostering an entrepreneurial environment, the current economic framework suppresses innovation and discourages private investment. This will leave Turkey lagging behind in global competitiveness.​

A significant factor contributing to Turkey’s economic woes is its underperforming education system. Despite some improvements, such as a steady rise in PISA mathematics scores over the past two decades, Turkey’s average score of 453 in 2022 remains below the Organization for Economic Co-operation and Development (OECD) average of 472. In reading, the country’s average declined from 466 in 2018 to 456 in 2022, while the OECD average stands at 476. In science, Turkey scored 476 in 2022, compared to the OECD average of 485. These figures indicate that Turkish students are not performing at the same level as their peers in other OECD countries. 

The education system faces the challenges of frequent policy changes, which hinder the development of a skilled workforce capable of driving economic growth. Consequently, the economy remains reliant on low-value goods and services. It limits national income and stifles growth. Investing in education is crucial for building human capital as it fosters innovation and enhances economic competitiveness. Without substantial reforms in the education sector, Turkey will continue to struggle in transitioning to a knowledge-based economy capable of producing high-value goods and services.

International markets and credit rating agencies have not been blind to Turkey’s economic mismanagement. Major credit agencies such as Moody’s, Fitch and S&P have downgraded Turkey’s sovereign debt rating to near junk status, warning of heightened risks of default. Fitch Ratings, for instance, affirmed Turkey’s rating at ‘BB-‘ with a stable outlook in January 2025, noting that general government debt declined to 25.2% of GDP at the end of 2024 and is projected to average 26.3% of GDP in 2025-2026. Foreign direct investment (FDI), once a strong pillar of the Turkish economy, has plummeted due to uncertainty and policy inconsistency. Countries that once saw Turkey as an attractive market are now hesitant to invest. This isolation from global financial markets further limits Turkey’s ability to recover.

Turkey’s social spending paradox

Turkey’s economic framework reveals a striking paradox. Despite its constitutional identity as a social state committed to reducing inequality and supporting vulnerable populations through progressive taxation and redistribution, its fiscal policies and spending patterns often fail to reflect this principle. The government collects revenue through a mix of income taxes, value-added taxes (VAT) and indirect levies. This is a taxation model aligned with social welfare objectives. However, public spending does not consistently prioritize robust social programs. In 2022, social protection expenditures accounted for just 12.4% of Turkey’s GDP—modest compared to OECD peers like France, which allocated nearly 31.6% in 2022. Instead, the government directs significant resources toward infrastructure, debt servicing and private-sector incentives. It creates a structural disconnect between revenue collection and its allocation.

Turkey’s income inequality, as measured by the Gini coefficient, starkly reflects the paradox. In 2021, it stood at 0.444, signaling rising disparity, with only a slight improvement to 0.413 by 2024. A true social state should leverage taxation and transfers to significantly reduce inequality, yet Turkey’s high Gini index suggests redistribution mechanisms are ineffective. 

Turkey’s social spending, specifically its composition and scale, reveals this misalignment. A large share of social protection expenditures goes to public pensions, with limited funding for family support, unemployment benefits, or direct assistance for low-income groups. Since 2010, public social expenditure has stabilized at around 12% of GDP. Economic downturns and inflation further erode the real value of these benefits. Turkey’s fiscal priorities genuinely don’t support its constitutional commitment to social justice. Instead it leans toward austerity or market-driven policies.

Turkey’s institutional imbalance

The Turkish government has significantly expanded its role in the economy over the past decade. The expansion strained fiscal health and revealed bureaucratic inefficiencies. As of December 2024, the employment rate stood at 49.5%, with 66.9% for men and 32.4% for women. The total number of employed persons was approximately 32.7 million. Despite these employment figures, the public sector remains one of the largest employers.

Turkey’s budgetary performance reveals the fiscal implications of this expansion. In 2024, the central government budget deficit widened significantly, reaching approximately 5% of the country’s GDP. This was seven times higher than the deficit recorded in 2022. The government’s escalating deficits reveal its unsustainable fiscal policies, which necessitate increased borrowing and debt servicing costs.

Daron Acemoğlu and James A. Robinson in the Narrow Corridor posits that for a nation to achieve sustained prosperity, there must be a balance where the state is strong enough to enforce laws and provide public goods but constrained enough to prevent autocracy and ensure accountability. In Turkey’s case, the state’s expanding role in the economy, coupled with weakened checks and balances, suggests a drift away from this equilibrium. The erosion of institutional independence has curtailed civil liberties and economic freedoms. It has pushed the country towards a more extractive institutional framework.

According to the World Bank’s Worldwide Governance Indicators (WGI), Turkey’s government effectiveness score dropped from -0.34 in 2010 to -0.57 in 2022, indicating deteriorating institutional quality. Similarly, its rule of law ranking fell from the 55th percentile in 2010 to the 38th percentile in 2022, reflecting weakened checks and balances.

Acemoğlu and Robinson in Why Nations Fail argues that nations decline when political and economic institutions become extractive, serving the interests of a select few rather than the broader populace. In Turkey, the intertwining of political power and economic privilege has led to cronyism, where government contracts and resources are disproportionately allocated to politically connected entities. This not only stifles competition and innovation but also perpetuates inefficiencies and corruption within the public sector.

Turkey exhibits many characteristics of an extractive system:

• The government often grants large infrastructure projects, construction contracts and public-private partnerships to businesses with close ties to it. This exemplifies crony capitalism and state-favored enterprises. In 2024, Turkey ranked 107th out of 180 countries on Transparency International’s Corruption Perceptions Index.
• Despite Turkey’s high tax burden—VAT is 20%, corporate tax is 25-30% and personal income tax reaches up to 40%—public services remain underfunded, inefficient and unevenly distributed. This tax-extraction mechanism disproportionately affects middle- and lower-income groups.
• Persistent inflation and currency depreciation serve as hidden taxation mechanisms. While inflation benefits the state by reducing real debt burdens and increasing nominal tax revenues, it weakens household purchasing power and diminishes economic stability.

The inefficiencies of Turkey’s expansive government are also reflected in its budgetary allocations. A significant portion of public expenditure is directed towards debt servicing, public sector wages and subsidies for state-owned enterprises, leaving limited fiscal space for critical investments in education, healthcare and infrastructure. 

Immigration’s pressure on Turkey’s economy

Turkey has become one of the largest recipients of immigrants and refugees in the past decade. It hosts millions of displaced individuals, particularly from Syria, Iraq and other crisis-stricken regions. Immigration has significantly impacted the Turkish economy, particularly in terms of inflationary pressures and labor market distortions. The government’s policies of providing financial aid, subsidized services and employment opportunities for migrants have added to inflationary pressures, while the influx of low-wage labor has weakened the bargaining power of skilled laborers.

Mass immigration has significantly affected Turkey’s housing market, with rental prices skyrocketing in major urban centers like Istanbul and Ankara, as demand from both locals and migrant populations has surged beyond supply. While Turkish citizens bear the full brunt of high prices and heavy taxation, many migrants benefit from informal employment, avoiding income taxes and social security contributions. This discrepancy fuels inflation by increasing aggregate demand without a proportional increase in government revenue. It then forces the state to cover public spending through borrowing or higher taxation on locals. 

Beyond inflation, mass migration has reshaped Turkey’s labor market by suppressing wages and reducing opportunities for skilled Turkish workers. The influx of low-cost labor, particularly in sectors such as construction, agriculture and services, has created downward pressure on wages. Employers, seeking to cut costs, often prefer hiring migrants who accept lower wages and work in unregulated conditions. This phenomenon has led to a two-tier labor market, where Turkish workers, particularly in blue-collar jobs, face declining wages and job competition, while professionals in higher-paying sectors struggle as the overall quality of the workforce declines. The long-term consequence is a weakening of the high-value working class, as many educated and skilled Turkish professionals either experience wage stagnation or choose to emigrate in search of better economic opportunities abroad.

Mass immigration’s demographic shift creates broader socio-economic implications. The presence of a large, underprivileged migrant population has increased demand for public services, stretching the capacities of Turkey’s healthcare and education systems. Schools in major migrant-hosting cities are experiencing overcrowding. Healthcare services have also been overwhelmed. These challenges disproportionately affect middle- and lower-income Turkish citizens, who rely on public services the most. Additionally, social tensions have escalated as public sentiment toward immigration has turned increasingly negative.

To mitigate the negative economic impact of mass immigration, Turkey must adopt a more strategic and balanced approach. Firstly, the government should implement stricter regulations to prevent illegal employment and ensure that migrants contribute to the tax system like Turkish citizens. Secondly, investment in education and workforce development should prioritize Turkish citizens and ensure that local professionals do not face declining job prospects due to immigration-induced labor market distortions. Thirdly, immigration policies must be restructured to limit the intake of unskilled labor while attracting high-skilled workers who can contribute to economic growth. Without these reforms, the current trajectory will continue to erode the financial stability of the state and the economic well-being of Turkish citizens.

Free Market Reforms in Turkey

Turkey needs radical reforms to reverse its decline. The core principles guiding this transformation must include a drastic reduction in government size, the liberation of markets, the dismantling of crony capitalism and the restoration of monetary discipline.

Friedrich von Hayek argues in The Road to Serfdom that excessive government intervention leads to economic inefficiency, corruption and stagnation. This is precisely the issue Turkey faces today. The state employs over 5 million people, consumes nearly 40% of GDP and maintains a sprawling bureaucracy that stifles private enterprise. To restore economic vitality, the Turkish government must drastically reduce its size and spending:

• Many of Turkey’s industries—including energy, transportation and banking—remain partially or fully controlled by the state. These enterprises are inefficient, politically managed and hinder market competition. Turkey should follow Milei’s model and rapidly privatize these entities.
• The government must eliminate wasteful subsidies, cut non-essential bureaucratic positions and halt politically driven infrastructure projects that serve as channels for corruption.

Milton Friedman emphasized that economic freedom is the key to prosperity. Turkey’s increasing government control over industries, high tax burden and regulatory overreach have suffocated private enterprise and discouraged foreign investment. To unleash economic growth, the following liberalization measures must be taken:

• Turkey must reduce and simplify tax rates, shifting to a flat tax system to incentivize investment, formal employment and business expansion.
• The government must deregulate the labor market and make hiring and firing easier, removing unnecessary labor protections that discourage companies from employing workers. This will increase job creation and reduce the informal economy.
• Artificially fixing prices—such as rent controls, fuel subsidies and controlled currency exchange rates—creates inefficiencies and shortages. Instead, markets should determine prices freely to reflect real supply and demand.

Turkey has drifted toward an extractive model, where government contracts, state resources and legal protections disproportionately benefit politically connected businesses. This must be reversed through institutional reforms:

• Authorities must conduct a complete audit of public contracts, government expenditures and State Owned Enterprises (SOEs), and they must introduce mechanisms to ensure transparent tenders and government procurement, in order to promote transparency and fight corruption. 
• Authorities must remove political influence from the courts and regulatory bodies to ensure a level playing field for businesses.
• To dismantle monopolies and cartels created through political favoritism, Turkey must enhance competition laws and prevent a few conglomerates from dominating entire sectors of the economy.

One of Turkey’s biggest economic problems is inflation. Milton Friedman famously stated that “inflation is always and everywhere a monetary phenomenon.” A monetary reset is essential for Turkey:

• Turkey’s Central Bank must be fully independent from political interference and committed to a strict inflation-targeting policy rather than financing government deficits.
• Market forces should set the interest rate rather than government intervention. Suppressing interest rates artificially has led to financial instability and capital flight.

Turkey’s economic crisis is not inevitable—it is a direct result of flawed policies, government overreach and extractive institutions. By adopting Hayek’s principles of limited government, Friedman’s focus on free markets, Acemoğlu’s emphasis on inclusive institutions and Milei’s radical libertarian reforms, Turkey can transition from its current path of decline to a high-growth, low-tax, competitive economy.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.