Plain Sense Economics

Flag of Turkey

In my summer Principles of Macroeconomics class we’ve been discussing the reasons why China has surged to be such a strong economic power.

In an article in The New York Times, Turkey is described as another surprising country showing remarkable growth.

Today, Turkey is a fast-rising economic power, with a core of internationally competitive companies turning the youthful nation into an entrepreneurial hub, tapping cash-rich export markets in Russia and the Middle East while attracting billions of investment dollars in return.

It’s interesting to speculate on the reasons for this economic growth. The article speaks about the policies of Prime Minister Erdogan – socially conservative but pragmatic. My guess (and it is just a guess) is that Turkey made it much easier for foreign investment dollars to flow into the country.

[Reminder to my students: investment capital is a classic scarce resource that countries cherish. They can gather it by selling exports or attracting foreign investments or by national savings. Whatever way it comes, capital allows a country to make investments in productivity, market formation, and more.]

There is a dark side to foreign investment, and that is a potential loss of control of a country’s key assets to foreign management and investors. Many countries fear this loss of economic sovereignty and put up significant barriers to foreign investment. There are many examples, particularly in mining and other natural resource extraction, where the foreign companies reap large profits, with only token royalty payments to the home country.

There can be other ingredients for economic success, including a government and legal system that protects property rights and encourages investment – whether domestic or foreign. Turkey will be interesting to watch.