STEVE INSKEEP, HOST:
So what do you do if you're a strongman national leader and your economy falls apart? President Recep Tayyip Erdogan recently reshaped Turkey to give himself even more power, and now he faces runaway inflation. The value of his country's currency has collapsed. And in a bit of awkward timing, he is in a trade war with the United States. Just today, Turkey announced it is doubling tariffs on American goods, adding half a billion dollars' worth of fees. Now, in theory, Erdogan has the power to respond to a crisis almost any way he needs to. In practice, he's tried some unorthodox economic measures. NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: The root of the economic crisis Turkey faces is a lot like the turmoil that gripped Greece and Spain a few years ago. The government borrowed heavily during boom times to pay for new roads and buildings, and many ordinary people borrowed to buy consumer goods. Much of the money came from foreign banks. Aykan Erdemir is a former opposition politician from Turkey who's now with the Foundation for Defense of Democracies.
AYKAN ERDEMIR: Turkey, just like other emerging market countries, was flooded with foreign currency. That meant easier access to import goods, and that also meant easier access to credit.
ZARROLI: And with money flowing into the country from outside, Turkey enjoyed a decade of strong growth. But all that borrowing and spending came at a cost. Inflation grew at an annual rate of nearly 16 percent last month, which is really high for a European country. At this point, most economists would say that Turkey needs to try to get a grip on inflation by raising interest rates. But Henri Barkey of the Council on Foreign Relations says Turkey's president, Erdogan, has done exactly the opposite.
HENRI BARKEY: Erdogan has, can you say, weird (ph) economic understanding, which is he believes that if you increase interest rates, inflation goes up. In other words, the opposite of what traditional economists believe in.
ZARROLI: It's not really clear how Erdogan, who is said to have studied economics in college, formed these views, but he's doggedly refused to raise interest rates. Here he is speaking through an interpreter to Bloomberg last year.
(SOUNDBITE OF ARCHIVED RECORDING)
PRESIDENT RECEP TAYYIP ERDOGAN: (Through interpreter) However much you cut interest rates, inflation will start to fall with that. For my 40 years as prime minister and then president, I've followed this, and I've seen this.
ZARROLI: More recently, Erdogan has taken aim at the very concept of interest rates, calling them a tool of exploitation, the mother and father of all evil. Erdogan's views are especially important because of the amount of control he has over Turkey's economy. He's basically taken over the country's central bank, and Barkey says he's appointed his daughter's husband as finance minister.
BARKEY: Basically, the most sensitive issues in the economy are given to a family member (ph) who's really not qualified.
ZARROLI: Meanwhile, Erdogan has waged a war of words with the Trump administration over the continued detention of an American minister. All of this has done little to inspire confidence among outside investors, and Turkey's currency has been falling in value. That's been a disaster for Turkish companies. Erdemir says many of them borrowed from foreign banks during the boom, and they have to pay their debts in dollars or euros.
ERDEMIR: So Turkey's over-leveraged companies are finding it extremely difficult to pay their foreign currency loans, which will push many of them over the edge.
ZARROLI: And if enough of those companies fail, big banks in Spain and Italy could find themselves saddled with bad debt. So the fallout from the crisis in Turkey could end up spreading through other parts of Europe and beyond.
Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.