Ottoman Empire fell behind economically. Its areas stood still seeing almost no development. It did so because there was no any investment. And there was no investment because the system disincentivised it
You have to know that the Ottoman Empire had a structure of a so called “oriental absolutism”. A ruler in an oriental absolutist empire is far more powerful that any ruler in Europe was. Technically speaking he owns everything in his empire including its inhabitants. This allows for incredible centralisation and incredible cash flow for the ruler. However once this cash is transferred to the ruler there is none left for investment. Initially the resources were used for warfare (the usual way in which rulers aggrandise themselves), with the Ottoman Empire being a sort of Prussia on steroids, so it with its many conquests looked strong on paper, but naturally even this in itself would have been higly problematic in the long term.
We have to keep in mind that at one point the area from the Persian Gulf almost to the Atlantic was ruled directly from Constantinople. No European power (with their still semi-feudal relations characterised by a strong nobility) of the time would have been able to rule such a wast and popolous area (and in such a centralised fashion) without disintegrating from within. In the Ottoman Empire however there was no class with a powerbase of its own and so no centrifugal forces that could constantly challange its integrity. (Certainly no such factors as a land owning aristocracy or wealthy autonomous cities, not even a vast militarised yeoman estate as in Russia.)
As the whole of the midd class between the ruler and the lowliest of the subjects were dependant on the power and the riches of the ruler from which they drew their own wealth the midd class was de facto a class of political entrepreneurs in its entirety. Its soldiers for example were enterpreneurs who were in return for service given certain privileges that can only be provided by a state. For example they would be given (for themselves, not for their descendants) a small settlement to collect certain taxes from for themselves (timariots) or they were given monopoly over performing a certain trade (jannisaries). Naturally over time this twisted the Ottoman culture from a culture of service to the ruler, to a culture of extreme rent seeking.
So over time there arose so many different rent seekers with so many different privileges all fighting to preserve and/or expand them and where before surplus resources rather than be invested went for warfare, now they went to useless rentseekers. Before you had little economic betterment, in its place you had self-aggrandising warfare, now you had in its place corrupt political enterprenuring.
This competition between and the pressure from the various rent seekers was intensified by a lack of new lands being added to the empire and by evacuation of possessions previously held as more and more often the economically increasingly backward Empire on the battlefields met defeat. Same or greater number of rent seekers were being left to squabble over smaller spoils. To appease them, the rulers extended the width and breath of their privileges creating even greater pressure on the tax payers and undercutting potential for long term economic improvement even further. (Making, in an enchanted circle, victory in war even more distant.)
The reforms of the last period of the Empire aimed at clipping the wings of the traditional rent seekers and institute a modern system where they would be displaced by a conventional buerocracy. This naturally caused upheavel as the beneficiaries of the old system objected to the new. However it can not be said that such modernisation was beyond the Empire. After all the Empire which finally folded was itself a much changed Empire from the one that was proclaimed in late 18th century to be “the sick man of Europe”.
Probably what doomed its fate was its clinging to the fruits of its previous conquests. It made it dependant on the rent seeking classes in the distant provinces to keep the subjugated Christians down. Ironically it would had never been able to cling to these posessions as long as it did, but for the patronage and support of the Powers of Western Europe that in order to frustrate Russia worked to freeze the “Eastern Question”. Once devoid of its imperial posessions it was restructured speedily by Kemalists whereas before most reform was either ineffectual or taking place at a glacial pace and was often reverted.
As a side note, the notion of “Ottoman tolerance” is as bogus as it gets. Christians did not enjoy some mystical autonomy. They were there to be economically exploited until they bled dry. While the Sultan was nominally the owner of everything there were practical and ideological reasons why he could not exploit Muslims to the extent he may have wished to do so. For the exploitation of the Christians on the other hand there existed a superb ideological justification - Islam. So in the first period the Christians peasants were the cattle class that the de facto funded its warfare, and in the second the cattle with which the rent seekers could be rewarded and over which various rent seekers squbbled among themselves and with the centre.