Pre-War Economy

On the eve of the First World War, the Ottoman Empire had a large territory of 1.7 million square kilometres in area, comprising present day Turkey, Syria, Palestine, Iraq and parts of the Arabian Peninsula. Its population was more than 23 million, of which three fourths were living in Anatolia. Although the Empire had gone through a period of substantial economic transformation and growth in the 19th century, especially over the last two decades, it was considerably poorer than the European countries, in terms of real gross domestic product (GDP), both cumulative and per head. The Ottoman GDP in 1913 (at current prices) was £220 million and the GDP per head was roughly £10 [Sources: Eldem (1970) and Pamuk (2005)]. These figures correspond to $25.3 billion and $1,100, when calculated at purchasing power parity and 1990 prices. They can be compared to $226.4 billion and $4,921 respectively for the United Kingdom, $257 billion and $676 for British Colonies, $138.7 billion and $3,485 for France, $257.7 billion and $1,488 for Russia, $244.3 billion and $3,648 for Germany, $100.5 billion and $1,986 for Austria-Hungary.  [Sources: Maddison (2001), Broadbery and Harrison (2005)]. It has to be noted, however, that in terms of GDP, the Ottoman Empire was richer than its southern neighbours Egypt and Iran.

"Let the owner milk it"
Cartoon by D'Ostoya | Kalem, July 22, 1909

Why did the Ottoman Empire remain behind Europe?

Ottoman territorial expansion had ceased in late 16th century and so had the flow of money to the Ottoman treasury. As a result of the discoveries in the New World, the Mediterranean had lost its central position in global trade; to make things worse, the flow of gold and silver from the Americas were shaking the money-price balance in the global economy. Consequent wars and civil unrests were a great burden on Ottoman finances and, as Kepenek and Yentürk mention, “In contrast with the great powers of the time, Ottomans were fighting continuously not for capital accumulation but for mere survival.” The Empire could not catch up with the Industrial Revolution that started in Britain with new forms of production and technologies. European countries, who were enjoying special privileges in the Empire, were invading the Ottoman markets with their export products, literally finishing off the domestic producers.

In this era, the Ottoman government was unable to control the public finance, foreign trade and the money supply. Deficits had to be financed through heavy foreign borrowing, which soon turned into a deadly spiral because the economic and social structure of the Empire was not allowing the creation and practice of macroeconomic policies that would cover the whole economy. Structures of capital ownership and capital use were not suitable for an economic growth policy and there was a serious incompatibility between the state and the sources of capital accumulation.

Domestic sources of capital were not enough to keep the wheels of the economy running. The tax system was inefficient and unfair, placing a large burden on taxpayers in rural areas, whereas foreigners and ethnic minorities were enjoying generous exemptions.

The monetary system was also troublesome. There were coins and banknotes issued by the Imperial Ottoman Bank in circulation, but foreign currencies were widely in use as well. In 1881, a golden Ottoman Lira was defined as the equivalent of 7,216 grams of gold and one Lira was equal to 100 Piasters. A silver Mecidiye coin was worth 20 Piasters. In time, when silver lost its value and copper Mecidiye coins entered the circulation, a bimetallic system emerged. Discrepancies in monetary units led to melting and re-minting of coins, which opened way to large scale speculations on the currency.

There were two sources of foreign capital. The first one was the foreign debt, which commenced with the Crimean War and reached an unsustainable size in time. The other source was the foreign investments that focused mainly on sectors with high profit prospects in short term. According to Yerasimos, the cumulative amount of foreign capital in the Ottoman economy was 234.1 million Liras, of which 149.5 million Liras was foreign debt and the rest foreign investment. The most attractive sector was railroad construction where 53.3 million Liras was invested. It was followed by banking and insurance with 8.2 million Liras, industry with 6.5 million Liras, public utilities with 5.7 million Liras, port construction with 4.7 million Liras and mining with 3.6 million Liras. In terms of rate of returns, the most profitable sector was banking and insurance with a rate of return of 10.9 percent, followed by foreign debts with 8.7 percent, industry with 8.6 percent and mining with 6.4 percent. In this period, 44 percent of the foreign capital was French, 34 percent was German, 17 percent British and the rest Belgian and American.

Agriculture and industry

Turkish peasants in Anatolia | Büyük Cihan Harbi Fotoğrafları Albümü

The Ottoman economy was predominantly agrarian, with agriculture corresponding to 48 percent of the GDP as of 1913. The 19th century had witnessed changes in the structure of land ownership in the Empire. Previously all agricultural lands had belonged to the state and plots were rented to civil servants whose duty was to collect taxes and conscript soldiers. Central government had the total control over economic activities such as production and distribution. However, later this system proved to be inefficient. With the Land Law of 1858 (Kanunname-i Arazi) the principle of private ownership was embraced.

The basic production unit was the family enterprise with a pair of oxen and a small plot of land to cultivate. Additionally there were also larger scaled enterprises and peasants who did not have their own oxen and land. These latter were providing services as sharecropping tenants to larger landowners. According to the data of Turkish State Institute of Statistics, as of 1913, 87 percent of peasant families were those with some land to cultivate and to them belonged 35 percent of all arable land. 8 percent of peasant families had no land at all, whereas landlords, who made 5 percent of all families owned 65 percent of the land.

Agricultural activities were mainly done in coastal areas and less so in the interior due to scarcity of labour, means of transportation and lack of arable land. As Pamuk states, farmers who were mostly cultivating cereals and other subsistence crops began to shift to cash crops such as tobacco and cotton as well as industrial raw materials during the 19th century as a result of the commercialization of agriculture. Before the war, 80 percent of the agricultural land was used for cereals, 7 percent for cash crop, 7 percent for vegetables and 4 percent for fruit.

Şevket Pamuk also points to the fact that manufacturing activity was largely based on artisan forms. As of 1913, the share of the industrial sector in the economy was only 12 percent, mainly due to the fact that the Empire had remained far behind the Industrial Revolution in Europe and modern factories began to emerge only towards the end of the 19th century. The Ottoman Industrial Census of 1913 (which covers only West Anatolia) states that there were 600 manufacturing establishments that employed more than 10 workers and only 60 establishments that employed more than 100 workers.  Total employment in manufacturing was 35 thousand, merely 0.2 percent of the total population. This employment was mainly generated by textile, food processing, construction materials, paper and printing sectors. 55 percent of the establishments were located in Istanbul and 22 percent in Izmir.

In addition to the small size of the domestic market and the low level of technology, another reason for the backwardness of industry was the fierce competition of imported products. In 1830s, the Ottoman government had signed several international agreements setting ad valorem tariffs on imports as low as 5 percent, with the first agreement signed being the one signed with Britain in 1838. When foreign goods could easily penetrate into the Ottoman markets like this, sale of domestically produced goods from one province to another were subject to an interior customs tax of 8 percent. This tax was abolished in 1908 and the import tariffs were pulled up to 15 percent before the war. A law issued in 1913 with the aim of supporting the industrial development brought incentives such as tax exemptions and free land allocation and managed to bring about some development in private industrial entrepreneurship.

A women's labour battalion | Harp Mecmuası

Kepenek and Yentürk wrote the following about the situation of industry in pre-war Ottoman Empire: “The Ottoman industry, which was largely based on artisan forms and guild structures failed to manage the transformations required for an industrial revolution and with the opening of the economy it suffered severely... Possession of the existing industry belonged to non-Muslim minorities and foreigners. These groups were considering themselves outside the community structure and political decision making mechanism, hence feeling a lack of confidence that prevented attempts to raise production. The relative profitability of the services sector was hindering the flow of resources to the industry. The Ottomans launched industrial establishments with public investment in order to meet the needs of the military, took measures to develop the industry and in later years provided incentives, however none of them managed to secure industrialization. It is possible to say that the only thing inherited by the Republic from the Ottoman era is nothing but just a desire for industrialization.”

Mining, railroads and foreign trade

Mining was an important sector that had developed substantially in the late Ottoman era thanks to foreign investment, mainly from France. Coal was extracted for domestic use whereas others whereas the rest was mainly intended for exports. In 1911, the Ottoman Empire produced 904 tons of coal, 17.5 tons of chromium, 13.5 tons of borax, 11.5 tons of lead and around 1,000 tons of copper. In the same year, 75 percent of the mining output belonged to foreigners. According to the Mining Law of 1906, foreigners could lease mines for 99 years and the government was charging a rent for the land as well as a fee which varied according to what was being extracted. It was 1-5 percent for coal, copper and lead; 10-20 percent for chromium, borax and oil. Legislation was favouring the foreign capital, as output grew; it was the foreign companies that benefited.

As mentioned above, railroad construction was the most attractive sector for foreign investment entering the Ottoman Empire. Foreign enterprises were granted long term operational rights (in some cases between 70-100 years) and profit guarantees. Before the war, 57 percent of railroad investments belonged to Germany. Kepenek and Yentürk identify two economic effects of railroad construction. First, it boosts the production volumes of required raw materials, especially iron and steel, and second, it connects the interior regions to markets. The first one was not possible in the Ottoman Empire because there was no domestic iron-steel industry. Therefore the railroads’ real contribution to the development of the economy was in the form connecting the agricultural production with market places and linking West Anatolian agricultural output with export markets.

Ereğli coal mine before Enver Pasha's inspection | Harp Mecmuası

Issawi argues that Ottoman foreign trade policies were traditionally based on the principles of curbing exports and increasing imports, which was confusing for Europeans. This policy was aimed increasing the output of products in the domestic market and in this way ensuring price stability. As a result the Ottoman economy always had a trade deficit. In 1840, the deficit was 1.9 million Liras and the export/import ratio was 75.3 percent. The deficit widened to 16.7 million Lira and the export/import ratio fell to 54.1 percent in 1912. Agricultural products, especially tobacco, cotton, hazelnuts, silk and figs, as well as coal were exported, whereas the main import items were clothing, woven materials, fuel, sugar and flour. During the same period, export prices rose slower than import prices, which was another setback for the economy.

Guns or butter? Or neither?

A gun factory

Before the war, Ottoman manufacturing of war materials such as military vehicles, guns and ammunition was very limited and therefore there was a great dependence on imports. Production of iron and steel was insignificant and so were the production of chemicals and refining of petroleum. The only manufacturing establishments of guns and ammunition the Empire had were one cannon and small arms foundry, one shell and cartridge factory and one gunpowder factory, all located just outside Istanbul. The Empire had enough coal before the war, it was even a net exporter, however there were to be serious problems during the course of the war when Russians bombarded Ereğli coal mines.

Although there had been a substantial inflow of foreign investment to railroad construction in this period, the railroad network was not wide enough to meet the needs of the war. The total length was only 6,000 kilometres and in Eastern Anatolia there were no railroads at all, since the government had agreed not to build them without consulting the Russians on this matter first. There were also no railroads connecting Anatolia with Syria and Palestine and it was only in January 1917 when tunnels in Taurus Mountains and Southern Anatolia were completed. Before that, troops and materials had to be unloaded at the last station, unloaded, transported by road, re-loaded to trains at the point where railway begins again. At the same time, land roads were poorly maintained and transportation depended mostly on draught animals.

There is no doubt that the Ottoman Empire was economically less prepared than most of the other combatant nations to face the consequences of a general war of long durations fought simultaneously in several fronts. Despite all its shortcomings and disadvantages, the Ottoman economy managed to feed the war machine until the end of the war and a total financial collapse has not been the case.