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.

The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.

The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe. (Source: New York Times, June 13, 2010)

This is a good opportunity to review the core economic concepts of scarce resources and production possibilities. Classical economics starts with the idea that resources which can make us happy, or make our nations thrive are scarce – there are not enough resources to satisfy all of our needs. Going from here, classical economics studies how people and nations make decisions on the allocation/use of those scarce resources.

Afghanistan is a desperately poor nation – with a GDP of $800 per capita; compared to $46,400 for the U.S. (Source: CIA World Factbook). Much of this is due to decades of war and conflict within its borders. It must allocate a small number of scarce resources to a variety of outputs. Just two of these many outputs might be food production (necessary for health and a standard of living) and textiles (necessary as an export good).

Before and After the Discovery of Mineral Deposits

We use a production possibility curve to illustrate the decisions on how to allocate scarce resources between two outputs. Consider this sample graph.

We choose two outputs – food and textiles – and place one on each axis. The points where the curve touches an axis represent the theoretical output if all scarce resources were devoted to that single output. More realistically, the curve represents various combinations of outputs, based on allocating those scarce resources between the two outputs. If the country operates on its production possibility curve, it is using all of its resources efficiently. If it operates below the curve, some scarce resources are not being used.

Now, all of a sudden, Afghanistan discovers that it has these vast reserves of precious minerals. The possibilities in their economy will improve. The production possibility curve will shift out and to the right. The challenge for this country hobbled by poor transportation networks, corruption in government, and active hostilities within its borders is to reach this new production possibility.

It never fails. No sooner does some calamity trigger an urgent need for basic resources than self-righteous voices are raised to denounce the amazingly efficient system that stimulates suppliers to speed those resources to the people who need them. That system is the free market’s price mechanism — the fluctuation of prices because of changes in supply and demand.

Thank you to Anya Quinn on Flickr for the use of this image.

We all reflexively abhor an opportunist, who raises prices on a critical item just when it is needed the most. Yet, pricing is what allows society and its members to make thoughtful judgements on the best use of scarce resources. Read through the article, and ponder a bit.

P.S. – My friend, Melanie, writes PrattleNog, and her blog just got a day’s worth of fame on the WordPress home page. She teaches and works with adult students at Marylhurst University and sometimes teaches a course on Social Media. I noticed that she has been scrupulous about crediting the source of her images, and properly chastened I vowed to emulate her. This particular image is made available for sharing under the Creative Commons licensing site/movement. I’m including the official attribution below, but if you are interested in the whole digital copyright brawl, follow the CC link for more information.

Farmers like Mr Errotabere have begun to use water more efficiently, dripping it through perforated hoses rather than flooding fields. There is a growing market in water trades between farmers. Most important, the state has set up a water bank. Farmers north of the Sacramento delta, many of whom grow rice, can offer to keep fallow their least productive lands and sell water to cities and needy farmers farther south.

As the excerpt notes, increasingly scarce water in California’s Central Valley is beginning to be reallocated using some market mechanisms. It isn’t a true market yet – the prices for selling and buying irrigation water is set by a state board. There is a glimmer of hope, though, that consumers of water will start paying something close to water’s value, rather than the historically subsidized fee.As the article points out, Federal and state efforts in the 1930s brought water to a fertile but arid part of California. Water has remained cheap to farmers, and so there was no incentive to use it sparingly. When we drive from Ashland down to the SF Bay Area we pass huge rice fields submerged in water, with what must be huge evaporation loss.

This story in progress points out how, when you want to ration a scarce resource, the best solution is to let the price of that resource reach a level on its own that clears the market, but leaves no surplus or shortage. Not only do we reach an economically efficient solution, but the consumers have an incentive to use the resource wisely.