Is the recovery as sturdy as it looks?
The government of Kazakhstan estimates that the economy this year would grow by 7%. That rate is respectable. True, it falls short of the torrid 10% pace that preceded the financial collapse in 2008. But it still would double income per person every decade or so.
Two problems are evident in the estimate, however. First, government agencies in Astana often disagree publicly about the rate of increase in economic activity (gross domestic product, or GDP). Estimates from the prime minister have been more generous than those from the Economy ministry.
Second, growth estimates seem based on oil prices, which are notoriously volatile. From the statistics, can we discern signs of the underlying health of the Kazakhstani economy?
Perhaps we can, from leading and lagging indicators of economic activity. For the former, let’s look at real investment (i.e., the amount of new manmade inputs, adjusted of price changes); for the latter, at the labor market. To focus on longer-run trends, let’s compare the performance in 2009 to that of earlier years.
This comparison suggests that real investment remained in the doldrums for Kazakhstan, especially in its two major cities, except in new apartments. Real wages in 2009 were still below 2007 levels and, in Almaty, slightly below 2008 levels as well. But the unemployment rate has fallen steadily since 2003, largely because job-seekers in Kazakhstan usually find work soon. In short, the recession of 2008-2009 affected income more than employment.
Leading indicators
Real investment. Investment in durable goods – especially fixed capital such as office buildings and heavy equipment – discloses the expectations of companies for the national economy for the next few years. Since buildings have an expected life of 40 years or so, this expectancy does not affect the company’s decision of when to start construction; the long-run performance of physical capital is about the same whether construction began in 2010 or 2012. Instead, the company will start construction at the time that minimizes capital costs, which is substantially the present discounted value of the loan. This value, in turn, depends on the prime interest rate, which relates directly to the ratio of expected GDP to potential GDP, for the next few years. I assume a fixed interest rate for a given corporate loan.
By this indicator, companies in Kazakhstan did not seem to expect a strong economic recovery in 2010 or 2011. Adjusting for inflation, total investment in fixed capital for January through August 2009 was down by 5% from the same period for 2008.
This stagnation was mainly due to pessimism in the city of Almaty. This, with the oblast surrounding Almaty as well as the oblast of Atyrau, accounted for more than 40% of the total investment in fixed capital in Kazakhstan. While investment in 2009 was up 10% in Atyrau, and up 41% in the oblast of Almaty, it was down by more than a third in the city of Almaty.
Construction. The pessimism suggested by data on fixed-capital investment is reinforced by data on total construction. Adjusting for inflation, construction in Kazakhstan for January through August of 2009 was down by a fifth compared to the same period of 2008. In the three areas that accounted for almost half of all construction – the oblast of Atyrau and the cities of Astana and Almaty – building was also down significantly. In Astana, it had decreased by almost half. The hot spots for fixed capital, and for construction in particular, were Zhambyl and South Kazakhstan. These were minor shares of the nation’s stock of fixed capital.
Home construction in 2009 had all but collapsed. For January through August, the value of such building was only half of that in the same period for 2008. This decline disproportionately affected Astana, as well as the city and oblast of Almaty, because these areas accounted for three-fourths of home construction in Kazakhstan. Adjusted for inflation, home construction in Astana fell by three fourths; in the city of Almaty, by half.
The bright spot in this dismal picture of investment was apartment construction. Throughout Kazakhstan, builders added as much new residential space in the first eight months of 2009 as in the same period of 2008. Hammers were especially busy in Astana as well as in the city and oblast of Almaty. These areas added half again as much new space in 2009 as in the prior year. They accounted for more than half of all new residential space in the country. The same basic pattern held for the number of new apartments.
Given the lack of economic activity in other industries, one might suspect an oversupply of apartments in the two cities. In that event, we might face another financial collapse in a year or two.
Lagging indicators
Wages. These indicators usually lag the business cycle, because they are fixed for a while. The most important wages are generally set in annual contracts, which then guide more informal wages. Even potentially flexible wages are slow to respond to an incipient recovery, since workers hesitate to risk losing their jobs in an economy with excess capacity, particularly when the social safety net is primitive.
We might interpret these trends most clearly through Keynesian theory. Factor owners won't demand pay raises until the economy is operating close enough to full capacity to enable them to hold up the boss for ransom, as it were. As long as excess capacity is substantial, factor owners won't press employers to raise input and output prices.
The pattern of wages in Kazakhstan in 2009 was largely consistent with this theory. Real wages gained slightly on those in 2008 but remained an eighth below wages in 2007. Probably, contracts in 2008 failed to adjust wages for inflation in that and the prior year. Despite cost-of-living adjustments by 2009, wages remain 12% below those of 2007 due to recession beginning in 2008.
Nominal monthly wages look deceptively strong because of the failure to correct for inflation. In Almaty, real wages in 2009 dropped 3% since 2008. Over the long run, however, pay in Almaty has performed well. Its 2009 premium, relative to national pay, doubled to 20,000 tenge per month since 2002. This was probably due to the importance of finance, real estate, and foreign-owned organizations to Almaty’s economy. Even so, like Astana, Almaty lags the oil regions in nominal pay, by as much as 40%.
Employment. The employment rate, generally a lagging indicator of recovery, responds more quickly than the wage rate.
The unemployment rate in Kazakhstan is seasonal, generally peaking in the first quarter of each year, probably due to weather. Since 2003, it has fallen steadily.
With a first glance at the data, one might think that the unemployment rate is dropping because jobless workers become discouraged and drop out of the labor force. (Recall that a worker is “unemployed” if he is looking unsuccessfully for work. If he isn’t looking, then he is deemed a “discouraged” worker -- not even in the labor force, which comprises the employed and the job-seekers.) In fact, the number of unemployed workers since 2003 had dropped 20% by 2009, while the number of adults no longer in the labor force had risen 10%. Since the number of the inactive is five to six times larger than the number of unemployed, conceivably the unemployment rate is falling because discouraged job-seekers are withdrawing from the labor force. As circumstantial evidence, consider that the number of self-employed workers is subject to increasing volatility but seems to be falling over the long run.
But regressions give the lie to these speculations. The relationship of the number of the unemployed to the concurrent number of the employed is negative and highly significant in a statistical sense. An increase of eight in the number of employed workers corresponds to a reduction of about one in the number of unemployed workers. This suggests that the rate of unemployment may be dropping primarily because of newly created jobs. Had instead the rate of unemployment been dropping primarily because discouraged workers were leaving the labor force, then the number unemployed would not have related to the number employed; instead, it would have related negatively to the number of inactive workers.
The relationship of the number of the unemployed to the number of the economically inactive is positive and somewhat significant statistically. One would expect this direct correlation as a result of the business cycle. During a recession, the number of unemployed workers and that of discouraged workers are both likely to rise. There is no evidence here that many unemployed workers become so discouraged as to drop out of the labor force.
Composition of the economy
In December 2009, the government announced a drive to diversify the economy away from the primary industries. In reality, the private sector is already diversified in terms of employment. The industry that hires the greatest number of workers, agriculture, accounts for no more than a fourth of all employees. Services account for half of all private employment, an unusually large share for a developing economy.
Summary and reflections
Kazakhstan is recovering slowly from the global recession that reduced oil demand and deflated real estate values. But its long-term prospects remain strong, since it continues to create a lot of jobs.
Of course, the crystal ball is not always right. With four banks defaulting, and several smaller ones in danger in 2009, Kazakhstan is still vulnerable to a banking crisis. Some international events, especially a revaluation of the renminbi, can still dispel a fragile recovery. The reason is that China is one of the four largest markets for Kazakhstani exports. A stronger renminbi would reduce Chinese exports and Chinese income, decreasing demand for imports from Kazakhstan. – Leon Taylor, tayloralmaty@gmail.com
For the technical version of the paper, write tayloralmaty@gmail.com
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