Weakening the tenge – and paying the piper
The new customs union with Russia (and, depending on the day of the week, with Belarus) will make Kazakhstan an economic appendage of its northern neighbor, since its economy is less than a tenth as large. Trade barriers between the two countries will fall, and Kazakhstan will adopt the same tariffs against the rest of the world as Russia already has. This particular tail won't be wagging the wolfhound.
This may seem like enough integration for the nonce. But policymakers are discussing a further step – a common currency. Kazakhstan would replace the tenge with the ruble.
Unfortunately, the central bank of Kazakhstan would no longer be free to counter economic downturns peculiar to this country. In a small, open economy like ours, the central bank can salubriously stimulate global demand for our goods by weakening the tenge -– say, from 150 tenge to the dollar to 160. This lowers the cost to foreigners of getting their hands on tenge to buy our exports. For example, the 25% devaluation of the tenge in February 2009 might have kept the economic slowdown that year from being much more severe than it was.
But devaluations can drive up prices in general -– that is, they can engender inflation. The world demands more of our goods, forcing Kazakhstanis to compete for them by bidding higher prices. If exporters can sell Caspian oil to China for the new high price of $70 a barrel, then they will demand at least $70 from a Kazakhstani buyer. Also, the increased demand for our goods raises the demand of home producers for workers. Wages will rise, propelling prices anew. Such sudden inflation catches buyers and sellers unawares, causing them to err.
The demerit of a devaluation depends on how quickly and sharply prices will subsequently rise. In principle, a 25% devaluation should lead to a 25% increase in prices. Otherwise, Kazakhstan’s exports will remain cheap compared to those of other nations. This will stimulate demand for our exports, and thus bid up their prices, until our price advantage disappears.
But in fact, prices throughout Kazakhstan have risen only 15% (as an annualized rate) since February 2009 -- despite price spikes, immediately after the devaluation, of 9% throughout the nation and up to 15% in Almaty. Even given last year’s standstill economy, that pace of inflation is surprisingly sedate. What happened?
Rate expectations
Kazakhstanis are not alone in wondering. Around the world, evidence amasses that devaluations often stimulate small, slow adjustments in price. Under what conditions does this occur? Would this be the usual case for Kazakhstan? If it would, then we may think twice about turning over monetary autonomy to the Bank of Russia.
In 2000, John Taylor offered an intriguing explanation for an incomplete “pass-through” of inflation via the exchange rate. Price increases depend on what people think will happen in the economy. If they believe that the central bank will prevent severe, sustained inflation, then they will be less inclined to raise their own prices to ward off such consequences. The owner of a pizzeria in Almaty will shrug off the tenge devaluation, since he is not worried that his workers will demand a sudden pay raise in order to pay higher prices for nan and fermented mare’s milk. In turn, this reluctance to raise prices will help restrain inflation. The prophecy of low inflation happily fulfills itself.
A bit of evidence suggests that this prophecy may hold for Kazakhstan. Since 1994, soon after the tenge was introduced, the pass-through stemming from changes in its exchange rate have seemed modest, concludes a student in the economics graduate program at KIMEP, Meruyert Beisenbayeva. A 1% weakening of the tenge, with respect to either the ruble or the Chinese yuan, leads to an increase in consumer prices in Kazakhstan of a sixth of 1% or less. Perhaps the National Bank of Kazakhstan has convinced people that it won’t tolerate the episodes of rampant inflation that have ravaged other economies in Central Asia.
Perhaps. Another possibility is that producers in Kazakhstan are loathe to raise prices for fear of losing market share to importers. The Chinese, world champs in cutthroat pricing, are rapidly gaining ground in Kazakhstan. They sell us a seventh of our imports -- outstripped only by Russia, which accounts for just under a third of imports. Kazakhstani firms would be prudent to match Chinese pricing -– cutting prices when the Chinese do, and raising them only after the Chinese raise theirs.
Ms. Beisenbayeva finds evidence consistent with such strategizing. A 1% increase in Chinese consumer prices seems to induce a quick rise in ours of more than half of a percent. In contrast, the impact of Russian prices on ours is muted and quite possibly zero. Perhaps Russian exporters to Kazakhstan have become so familiar that our firms no longer worry about losing customers to them.
Ms. Beisenbayeva’s work raises several possibilities. First, the National Bank of Kazakhstan may already have done about all that it can to contain short-term inflation. Any future gains would have to come from an antitrust policy that keeps big Kazakhstani firms from charging the highest prices that the market will bear.
Long-run inflation, of course, remains the responsibility of the central bank. Prices can rise for years only if fueled by new money. The National Bank manages the tenge supply.
Second, adopting the ruble could endow Kazakhstan with unexpected inflation, since Russia’s central bank has trouble keeping the lid on the price level. Inflation rates in Russia double those of Kazakhstan’s (for Russia, 14% in 2008, 12% in 2009). If firms don’t trust the National Bank of Russia, then they may quickly counter ruble devaluations by raising their own prices before their suppliers can. The pass-through value will close in on that predicted by theory, 1. Economic theorists will chortle; Kazakhstani consumers and lenders won’t. – Leon Taylor, tayloralmaty@gmail.com
Full disclosure: I advised the thesis -- along with Aleksandr Vashchilko, Altay Mussurov, and Eldar Madumarov, all economics professors at KIMEP.
References
Beisenbayeva, Meruyert. 2010. The exchange rate pass-through to the CPI in Kazakhstan. Thesis for the master’s of arts in economics. Almaty, Kazakhstan: KIMEP, Department of Economics.
Organisation for Economic Co-Operation and Development. 2010. Source of data on Russian inflation. stats.oecd.org
Mishkin, Frederic S. 2008. Exchange rate pass-through and monetary policy. Speech to the Norges Bank Conference on Monetary Policy in Oslo, Norway. March 7. A readable survey.
National Bank of Kazakhstan. 2010. Source of data for consumer price inflation. www.nationalbank.kz
Taylor, John B. 2000. Low inflation, pass-through, and the pricing power of firms. Working paper. Stanford University. Influential.
Tuesday, July 13, 2010
Saturday, July 3, 2010
Arkonomics
Does economics endanger species?
To economists, “sustainability” means leaving no generation worse off than ours. This may conduce us to preserve unique species. Kazakhstanis think of the snow leopard, endangered partly by poaching for pelts and for bones prized in Chinese folk medicine.
Species preservation may be getting harder. The number of species becoming extinct each year may be 10 to 1,000 times higher than in past eons. In Kazakhstan, sturgeon are in dangerous decline, partly due to poaching. Catches in 2003 were but half of the quota, although the fishing season was a month longer than usual. Most sturgeon caught in scientific studies of the Caspian Sea are juveniles, so maybe the fish old enough to reproduce have dwindled dangerously. Of 835 vertebrates in Kazakhstan, the government lists 15% as endangered, including falcons, eagles and vultures.
It’s tempting to try to save all species. This goal is enshrined in the Endangered Species Act, probably the most extreme of United States environmental laws. “It is clear from the Act’s legislative history,” wrote the Supreme Court, “that Congress intended to halt and reverse the trend toward species extinction -– whatever the cost.” The federal government banned a firm from cutting timber on a site because a pair of northern spotted owls had appeared on public land 1.6 miles away.
In reality, not all species can be preserved. In the distant past, five episodes of mass extinction claimed up to 84 percent of the genera in existence. Which species should we try hardest to preserve? How?
"What is biodiversity? In what units is it to be measured?” write two economists, Andrew Metrick and Martin Weitzman. “…At the end of the day, all the brave talk about ‘win-win’ situations, which simultaneously produce sustainable development and conserve biodiversity, will not help us to sort out how many children’s hospitals should be sacrificed in the name of preserving natural habitats.”
Metrick and Weitzman seek a way to preserve biodiversity cheaply, so that we can build more hospitals with the saved money. Of course, we should spend another tenge on biodiversity, and another, as long as the benefit of doing so exceeds a tenge. But what is the benefit?
It’s information. A species is like a library, with genes for books. A library generates direct value, from the building itself; and indirect value, from the diversity of shelf books. As aesthetes, we might like diversity in novels (science fiction, stream-of-consciousness), just as in the colors of a painting. As pragmatists, we might like diversity in print for creating ideas about new medicines and foods.
Here’s our goal, as Metrick and Weitzman see it: Maximize the degree of diversity (plus direct value), given our limited budget. Noah’s special case was an ark in which to save species from an impending flood. The Book of Genesis saith the ark was just 450,000 cubed cubits large (77,000 cubic yards or 101,000 cubic meters). How should Noah choose species to save?
First, measure the direct and indirect value of each species, encompassing commercial, recreational and emotional values. Then rank each species by its expected increase in direct value per cubed cubit in the Ark.
To measure diversity, consider three cases for each species:
1. For each “library” (species), acquire books by sampling an infinite number of them. Each species is isolated, so gene pools don’t mix. Genes evolve on their own.
2. Create a library by photocopying all books of the main branch. Again, each book is isolated from others.
3. Close a library. If we lose a species, we will lose all of its genes.
What is a species’ contribution to “diversity,” its distinctiveness from other species? To find out, measure its distance from its “neighbor,” a species with similar genes (a library with books like ours). In terms of an evolutionary tree, measure the species’ addition to diversity by the length of its branch from the trunk. When a species becomes extinct, this length measures the loss of diversity, as if the branch had snapped off.
In short, the total value of a species sums its direct utility and its contribution to diversity.
Finally, Noah must determine how much his attempts to save a species will increase its chances for survival. Can a giraffe endure the stormy voyage?
Now, to rank every species, multiply the change in the probability of its survival by its total value. Divide these expected gains of boarding the species on the Ark by the boarding cost. This is the expected gain per dollar spent.
The costs of any preservation project include the value of foregone development. Recently, entrepreneurs spent $1 billion in western Ukraine to build a ski resort with 26 lifts and 75 miles of trails. One cost of converting the area to a natural preserve instead would be the foregone value of skiing.
Noah, master bureaucrat
Noah’s formula captures four factors that should affect conservation plans: Utility, diversity, increase in survivability, and the cost of that increase. Do governments actually weigh these factors? Metrick and Weitzman look at how the U.S government ranks species.
To characterize the public decision, they consider: The number of public comments favoring a proposal to save an endangered species; the government’s decision of whether to list the species as endangered (yes or no); and the amount spent by the government to recover the species.
Now consider the variables that, according to Noah, should influence the decision to preserve. To gauge direct utility, categorize each species as mammal, bird, reptile, amphibian or fish. Presumably, people prefer large mammals. To measure diversity, note whether the species is the sole representative of its genus; and, if not, whether it is actually a subspecies. Finally, to measure the species’ prospects for survival, use a ranking, from 1 to 5, of the degree of endangerment of each vertebrate species. The ranking comes from a private conservation group.
Metrick and Weitzman find that large mammals and birds are especially likely to be listed as endangered. (Amphibians need not apply.) The government spends more to save larger animals -– but less, curiously, to save the most endangered species. Evidently, Noah is not running the U.S. Fish and Wildlife Service. -– Leon Taylor, tayloralmaty@gmail.com.
References
Bo, Wen. Undated. Illegal trade in snow leopards in China: An overview. http://www.snowleopardnetwork.org/bibliography/bwit02.pdf .
Brown, Jr., Gardner M., and Jason F. Shogren. 1998. Economics of the Endangered Species Act. Journal of Economic Perspectives 12(3): pages 3-20 (summer). Reprinted in Robert N. Stavins, editor, Economics of the environment: Selected readings, New York: W.W. Norton, fifth edition, 2005, pages 514-532. The source of the Supreme Court quote.
Caveat Emptor. 2003. Letter to the U.S. Fish and Wildlife Service on whether to list the beluga sturgeon as endangered under the Endangered Species Act, September 2, Caviar Emptor project, http://www.caviaremptor.org/sep03_letter.html. Data on sturgeon catches.
Metrick, Andrew, and Martin L. Weitzman. 1998. Conflicts and choices in biodiversity preservation, Journal of Economic Perspectives, 12(3): pages 21-34, summer. Reprinted in Economics of the environment: Selected readings, fifth edition, pages 533-546.
Pohl, Otto. 2006. Ukraine sees bright future on ski slope. The New York Times, March 6.
United Nations Environment Programme. 2005. http://enrin.grida.no/htmls/kazahst/soe/soee/nav/biodiv/typediv.htm. Data on endangered species in Kazakhstan.
To economists, “sustainability” means leaving no generation worse off than ours. This may conduce us to preserve unique species. Kazakhstanis think of the snow leopard, endangered partly by poaching for pelts and for bones prized in Chinese folk medicine.
Species preservation may be getting harder. The number of species becoming extinct each year may be 10 to 1,000 times higher than in past eons. In Kazakhstan, sturgeon are in dangerous decline, partly due to poaching. Catches in 2003 were but half of the quota, although the fishing season was a month longer than usual. Most sturgeon caught in scientific studies of the Caspian Sea are juveniles, so maybe the fish old enough to reproduce have dwindled dangerously. Of 835 vertebrates in Kazakhstan, the government lists 15% as endangered, including falcons, eagles and vultures.
It’s tempting to try to save all species. This goal is enshrined in the Endangered Species Act, probably the most extreme of United States environmental laws. “It is clear from the Act’s legislative history,” wrote the Supreme Court, “that Congress intended to halt and reverse the trend toward species extinction -– whatever the cost.” The federal government banned a firm from cutting timber on a site because a pair of northern spotted owls had appeared on public land 1.6 miles away.
In reality, not all species can be preserved. In the distant past, five episodes of mass extinction claimed up to 84 percent of the genera in existence. Which species should we try hardest to preserve? How?
"What is biodiversity? In what units is it to be measured?” write two economists, Andrew Metrick and Martin Weitzman. “…At the end of the day, all the brave talk about ‘win-win’ situations, which simultaneously produce sustainable development and conserve biodiversity, will not help us to sort out how many children’s hospitals should be sacrificed in the name of preserving natural habitats.”
Metrick and Weitzman seek a way to preserve biodiversity cheaply, so that we can build more hospitals with the saved money. Of course, we should spend another tenge on biodiversity, and another, as long as the benefit of doing so exceeds a tenge. But what is the benefit?
It’s information. A species is like a library, with genes for books. A library generates direct value, from the building itself; and indirect value, from the diversity of shelf books. As aesthetes, we might like diversity in novels (science fiction, stream-of-consciousness), just as in the colors of a painting. As pragmatists, we might like diversity in print for creating ideas about new medicines and foods.
Here’s our goal, as Metrick and Weitzman see it: Maximize the degree of diversity (plus direct value), given our limited budget. Noah’s special case was an ark in which to save species from an impending flood. The Book of Genesis saith the ark was just 450,000 cubed cubits large (77,000 cubic yards or 101,000 cubic meters). How should Noah choose species to save?
First, measure the direct and indirect value of each species, encompassing commercial, recreational and emotional values. Then rank each species by its expected increase in direct value per cubed cubit in the Ark.
To measure diversity, consider three cases for each species:
1. For each “library” (species), acquire books by sampling an infinite number of them. Each species is isolated, so gene pools don’t mix. Genes evolve on their own.
2. Create a library by photocopying all books of the main branch. Again, each book is isolated from others.
3. Close a library. If we lose a species, we will lose all of its genes.
What is a species’ contribution to “diversity,” its distinctiveness from other species? To find out, measure its distance from its “neighbor,” a species with similar genes (a library with books like ours). In terms of an evolutionary tree, measure the species’ addition to diversity by the length of its branch from the trunk. When a species becomes extinct, this length measures the loss of diversity, as if the branch had snapped off.
In short, the total value of a species sums its direct utility and its contribution to diversity.
Finally, Noah must determine how much his attempts to save a species will increase its chances for survival. Can a giraffe endure the stormy voyage?
Now, to rank every species, multiply the change in the probability of its survival by its total value. Divide these expected gains of boarding the species on the Ark by the boarding cost. This is the expected gain per dollar spent.
The costs of any preservation project include the value of foregone development. Recently, entrepreneurs spent $1 billion in western Ukraine to build a ski resort with 26 lifts and 75 miles of trails. One cost of converting the area to a natural preserve instead would be the foregone value of skiing.
Noah, master bureaucrat
Noah’s formula captures four factors that should affect conservation plans: Utility, diversity, increase in survivability, and the cost of that increase. Do governments actually weigh these factors? Metrick and Weitzman look at how the U.S government ranks species.
To characterize the public decision, they consider: The number of public comments favoring a proposal to save an endangered species; the government’s decision of whether to list the species as endangered (yes or no); and the amount spent by the government to recover the species.
Now consider the variables that, according to Noah, should influence the decision to preserve. To gauge direct utility, categorize each species as mammal, bird, reptile, amphibian or fish. Presumably, people prefer large mammals. To measure diversity, note whether the species is the sole representative of its genus; and, if not, whether it is actually a subspecies. Finally, to measure the species’ prospects for survival, use a ranking, from 1 to 5, of the degree of endangerment of each vertebrate species. The ranking comes from a private conservation group.
Metrick and Weitzman find that large mammals and birds are especially likely to be listed as endangered. (Amphibians need not apply.) The government spends more to save larger animals -– but less, curiously, to save the most endangered species. Evidently, Noah is not running the U.S. Fish and Wildlife Service. -– Leon Taylor, tayloralmaty@gmail.com.
References
Bo, Wen. Undated. Illegal trade in snow leopards in China: An overview. http://www.snowleopardnetwork.org/bibliography/bwit02.pdf .
Brown, Jr., Gardner M., and Jason F. Shogren. 1998. Economics of the Endangered Species Act. Journal of Economic Perspectives 12(3): pages 3-20 (summer). Reprinted in Robert N. Stavins, editor, Economics of the environment: Selected readings, New York: W.W. Norton, fifth edition, 2005, pages 514-532. The source of the Supreme Court quote.
Caveat Emptor. 2003. Letter to the U.S. Fish and Wildlife Service on whether to list the beluga sturgeon as endangered under the Endangered Species Act, September 2, Caviar Emptor project, http://www.caviaremptor.org/sep03_letter.html. Data on sturgeon catches.
Metrick, Andrew, and Martin L. Weitzman. 1998. Conflicts and choices in biodiversity preservation, Journal of Economic Perspectives, 12(3): pages 21-34, summer. Reprinted in Economics of the environment: Selected readings, fifth edition, pages 533-546.
Pohl, Otto. 2006. Ukraine sees bright future on ski slope. The New York Times, March 6.
United Nations Environment Programme. 2005. http://enrin.grida.no/htmls/kazahst/soe/soee/nav/biodiv/typediv.htm. Data on endangered species in Kazakhstan.
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