The wheel deal

Which is more dangerous – the steering wheel or the driver?


In 2006, Kazakhstan banned the use of cars with the steering wheel on the right-hand side. It argued that such vehicles, designed for countries in which people drive on the left-hand side of the road, lead to accidents here, where we drive on the right-hand side. Banning the cars would lower the rate of accidents per mile driven.

In 1975, a Chicago economist, Sam Peltzman, identified the flaw in this argument: Drivers decide for themselves how much risk to take. They buy cars with a right-hand steering wheel because they cost a few thousand dollars less. They understand that the cars are dangerous on Kazakhstani roads, and so they take precautions. If they are forced to buy cars with a left-hand steering wheel, then they will no longer have reason to drive like the little old lady from Pasadena. They may press the pedal to the metal in order to reach their destination more quickly. This is risky driving, but risk has benefits as well as costs. In short, a ban on right-hand steering wheels might not avert accidents.

Here’s the intuition. A driver will speed a bit more if the benefit to him (getting to the concert on time) exceeds the cost (a possible crash). Requiring him to drive a safer car reduces the cost for every speed. So he will drive faster.

Peltzman was writing about the decision of the United States government in the 1960s to mandate seat belts and other safety features that reduce the chances of injury in a given accident. He pointed out that wearing the seat belt may tempt the driver to speed, making an accident more likely. The overall chance of injury to the driver may not fall. In fact, if speeding endangers pedestrians, then the total number of injuries – to drivers, passengers and pedestrians – may rise.

From his statistical work, Peltzman concluded that requiring seat belts, and steering columns that absorbed energy, had not saved lives.  “The one result of this study that can be put forward most confidently is that auto safety regulation has not affected the highway death rate.”


Building a safer driver


Peltzman’s analysis was sophisticated, but a few technical glitches may be more apparent now than in 1975. The dataset contained observations that varied with time: An accident rate for 1961, another for 1962, and so forth. Some of his estimated models assumed that the relationships between accidents and variables representing potential causes were stable over time. In reality, the relationships might not have been stable, because the underlying variables – e.g., the accident rate, vehicle speed and income – might have been changing over time independently of one another. In addition, the dataset included observations for each state in the U.S. The unique characteristics of a state may affect auto safety on its roads in ways that a statistical model cannot capture explicitly.

These small potential flaws do not blunt Peltzman’s basic point: Regulation too often takes human behavior for granted. Auto regulators viewed safety as an engineering problem. Build a safer car, and fewer people will die in accidents. Peltzman showed that a regulation – such as requiring safer cars – may itself affect the driver’s behavior, and in perverse ways.

If drivers demand more safety, then they may indeed drive the safer car with care. In that case, the regulation may have the desired effects. But it will be superfluous, since the drivers would have wanted to buy safe cars on the market. Regulators would not have had to force automakers to produce them; the profit motive would have seen to that.

At times, regulation benefits us. The driver may not consider that his ill-maintained engine generates air pollution, since he does not suffer most of this pollution himself. Requiring annual inspections of engines may clear the air.

Even here, regulators could borrow a few tricks from the market. They could issue among drivers the number of permits to pollute (by skipping inspections) that corresponds to the level of pollution that they are willing to tolerate. Drivers who find it easy to reduce engine emissions – perhaps because they have new cars – would sell their permits to drivers who cannot afford to clean up. Thus the government would cut pollution to the tolerable level as cheaply as possible. Peltzman’s point – that regulators must consider behavior – holds again.

In 2007, Kazakhstan’s government canceled the ban on right-hand steering wheels just before elections, noted an English newspaper, The Telegraph. The reason was presumably political. But an economic reason exists as well. -- Leon Taylor, tayloralmaty@gmail.com



Good reading

Sam Peltzman. The effects of automobile safety regulation. Journal of Political Economy 83(4): Pages 677-726. August 1975. Online at www.jstor.org. Fun to read.


References

Gethin Chamberlain. Kazakhstan election a 'foregone conclusion'. The Telegraph. August 12, 2007. Online.

Who makes money?

The central bank doesn't print money.  So what?

Conservative critics of the central bank blame it for increasing prices in general, by “printing money.” The usual liberal response – among non-economists – is that the bank doesn’t print dollars and so isn’t responsible for a surfeit of them.

Of course, the bank doesn’t literally have a printing press. Creating coins and paper money is the job of the government mint. Nevertheless, the central bank determines the money supply, especially in the long run, although its influence is indirect.

The simplest way for the bank to affect money is to cut a deal with the public Treasury, the agency that raises the amount of money that the government has decided to spend. If tax revenues don’t suffice, then the Treasury must borrow. It issues I.O.U.'s -- bills, notes and bonds -- through which it usually pays interest periodically in exchange for loans upfront. It would like to borrow as cheaply as possible, by holding down the interest rate that it must pay. A congenial central bank can make the Treasury’s dream come true by buying the government’s bonds. This increases the overall demand for the bonds -- and thus increases their value for their seller, by reducing the interest that it must pay on them.

Where does the central bank get the dollars (or tenge, or whatever) for buying the bonds? Out of its “reserves,” which essentially are safes holding dollars. These reserves are not truly money, since their locked-up dollars are not available for spending. But once the central bank takes the dollars out of reserves and exchanges them for public bonds, the government can spend them on anything.  So they now become money. The central bank has just increased the supply of dollars, even though it didn’t print them. Similarly, if the bank wants to reduce the money supply, then it can sell bonds in exchange for dollars and stash these back in reserves.

The mild, mild West

Most central banks in the West resort to purchases and sales of bonds – “open market operations” – in order to manipulate the money supply. These days, they rarely cut explicit deals with the Treasury. The central bank in the United States, the Federal Reserve, declared its independence of the Treasury Department more than 60 years ago; the charters of some other central banks prevent them from lending directly to their governments. Nevertheless, in a recession, the central bank may buy bonds – and even commercial paper, a form of short-term loans to businesses – in order to give people more spending money, revving up the economy.

The central bank can also increase the money supply by encouraging commercial banks to loan out their reserves. Again, the lent dollars now qualify as money, either as cash or checking accounts. To coax these private banks into lending, the central bank may lower the share of their reserves that it forbids them to lend – the “required reserve ratio.” Or it may lend them its own reserves at a reduced rate of interest, known as the “discount rate.”

The National Bank of Kazakhstan has usually taken this route when it wanted to encourage spending. In recent years, it has increasingly resorted to open market operations. But it faces the same constraint as do central banks in other transition economies – the financial markets in Kazakhstan are still too thin to absorb a lot of bond trades. The consequences of a major bond purchase are not easy to predict.  So the National Bank tended to stick to the tool that it knew best -- the rediscount rate, which has risen slightly to 7.5% in order to contain inflation. 

The Bank's 2011 guidelines identify notes and commercial bank deposits with itself as its "main tools" for stabilizing interest rates.  It has increased slightly the required reserve ratios for commercial banks, which are higher for foreign deposits than domestic ones; but the ratios remain close to zero. 

Even if a central bank did run the mint, it would not control the money supply perfectly, especially in the short run.  The supply depends on the alacrity of private banks in lending and on the share of money that individuals hold as cash rather than as checking accounts.  If banks lend eagerly, and if households prefer bank accounts to fat wallets, then the money supply may increase sharply.  That's because the bank may lend much of Smith's checking deposit to Jones, creating (say) $1.80 for every $1 in the account. 

In Kazakhstan, commercial banks were scorched by the 2008 crisis and remain reluctant to lend today.  Also, Kazakhstanis prefer to pay with cash than with checks.  These facts restrict some factors affecting the tenge supply that are beyond the National Bank's control.  Thus the Bank can manipulate the money supply more precisely than is usual for central banks.  This may help account for its relatively good record of inflation (relative, anyway, to some other countries in the Commonwealth of Independent States, like Georgia): about 9% per year, just outside the Bank's target range of 6-8%.  -- Leon Taylor, tayloralmaty@gmail.com


References

National Bank of Kazakhstan.  Monetary policy guidelines for 2011.  Online.

The charge of the Austrian brigade

Austrian economics and the Real McCoy


Conservative politicians often identify themselves with something that they call “Austrian economics.” This, in their mouths, boils down to the proposition that inflating the money supply will inflate prices.  (One exception is the U.S. presidential candidate Ron Paul, a disciple of Ludwig von Mises; Paul has advocated competition among currencies in order to improve them.)

The link of money supply to inflation is not uniquely Austrian. Most economists accept that when the economy produces at full capacity, attempts to spend additional money will raise only prices since long-run output cannot be increased. They also accept that when the economy is below capacity, a boost in spending may induce producers to hire more workers and reopen factories, increasing output. Competition among these firms will hold down prices. In today’s anemic economies, an increase in the money supply may not hitch up prices right away – but just you wait.

What is Austrian macroeconomics? What does it mean for central Asia?

Austrians -- particularly the late Nobel laureate Friedrich Hayek -- focus on how money affects the structure of the national economy. In principle, any industry should expand to the point that a little more expansion will earn the same rate of return as it would in any other industry. An industry that earns a lower rate of return than others has over-expanded. It should release some men and machines to industries where they would be more valuable.

This process is painful for the bloated industry – and for industries that depend on it. When the faulty industry happens to be finance, its sudden curtailment will slow down the economy in general, since any firm must rely on finance to pay for expansion. (In the United States, firms often pay out of their own pockets – i.e., out of retained earnings – rather than borrow from banks or sell shares of stock. But finance still determines American expansion, since the firm will spend its retained earnings on its own project rather than lend to someone else’s only if it anticipates a higher rate of return to the former.) Austrians want to reduce the corpulent industry as quickly as possible – even if this would trigger a national recession – since delay would distort the economy further and make the inevitable adjustment more painful. Do we want a one-year recession now or a 10-year depression later?

Increasing the money supply may obscure identity of the industries that need to slim down, because the new money does not affect all industries at the same time. The first industries to receive the money may interpret it as an increase in demand for their products – and so may expand. Later, when their input prices rise, they will discover that the supposed increase in “demand” was, in fact, an increase in money supply that will eventually raise all prices. Then they will cut back, laying off workers and padlocking factories.  Inflation leads to mistakes that touch off a business cycle.

Austrian castor oil

To Austrians, the problem with printing dollars is not that it raises all prices. This would increase the household’s income by as much as it did the cost of its groceries (since the wage is also a price), so the household could buy as many goods as before. The problem is that inflation is not general in its early stages. The fact that most prices do not rise immediately after an expansion of money – which seems the case today -- is small comfort; to the contrary, it may lead to mistakes that induce recession.

For example, global oil prices rose 65% from 2009 ($60 per barrel) to early 2011 ($95), according to the United States Energy Information Administration. Does this increase merely signal the rise in demand for oil that one would expect from a recovering world economy? Or is part of it due to the early effects of a monetary expansion that occurred because national governments fought the 2008-9 crisis by printing money?

Conservative politicians are quicker to accept the Austrian mantle than its implications. It’s easy to blame central bankers for “debasing our money.” It’s not so easy to point out that the Austrian medicine – let bad firms fail – may cost millions of voters their jobs.

Nevertheless, the Austrian model may have anticipated correctly the economic twists and turns around the world for the past five years. The current eurocrisis may have arisen in large part because commercial banks lent to profligate governments that today cannot pay them back.

The Austrian model may also pertain to Central Asia in the long run. To what extent are the region’s economies inefficient because of lingering effects of Soviet policy? In Kazakhstan, has the farm sector contracted to its efficient size? To what extent are monetary policies in the region disguised attempts to prop up faltering industries like banking? The Austrians are politically correct; are they therefore wrong? – Leon Taylor, tayloralmaty@gmail.com


Good reading

F. A. Hayek. The collected works of F. A. Hayek. Volume 5: Good money. Part I: The New World. Edited by Stephen Kresge. The University of Chicago Press. 1999.


References

Paul Krugman. G.O.P. monetary madness. The New York Times. December 15, 2011.

Ron Paul.  Mises and Austrian economics: A personal view. Auburn, Alabama: Ludwig von Mises Institute.  1984.  Online.

The declaration of dependence

Is the National Bank of Kazakhstan independent of politicians?


Should politicians control the central bank, which manages the nation’s money supply?

Proponents of a political bank argue that it would enable the government to coordinate monetary policy (how much money should we print?) with fiscal policy (how high should taxes be?). An apolitical bank might work at cross-purposes with the legislature. Suppose that the solons try to resuscitate a sluggish economy by taxing less and spending more. The central bank could squash this attempt by raising interest rates, discouraging firms and households from borrowing money to spend. William Greider, a journalist who wrote a searing -- if populist -- history of the American central bank, Secrets of the temple, argued that the Federal Reserve should seek the approval of a Congressional oversight committee before doing anything serious.

Most economists oppose a political central bank. They reason that voters vote their pocketbooks. A political bank may inflate the money supply in order to juice up spending, creating jobs and wealth for just long enough to re-elect incumbents. Prices will rise later, destroying purchasing power and leading to layoffs, but who cares? That’s a headache for future politicians.

There is a little evidence of such a political business cycle. United States Democrats accused Arthur Burns of inflating the money supply before the Presidential re-election bid of his friend Richard Nixon in 1972. In South Korea, the government loosened regulations on household loans in time for the presidential election of December 2002. Consumption boomed. After the election, the government clamped down again on household borrowing. Consumption swooned, and Korea entered into its second recession ever, wrote Jahyeong Koo.

Harry’s woodshed

One problem with policy coordination is that it may outlive its purpose. The Federal Reserve had kowtowed to the U.S. Treasury during and after World War II, when it agreed to buy federal bonds in order to keep interest rates below 2½ percent, noted Marvin Goodfriend. (Purchases of bonds raise their price and thus lower their rate of return to the buyers. This yield is essentially the interest rate.) In effect, the Fed had agreed to pay the federal debt by printing dollars, which it exchanged for the Treasury’s bonds. Thus the Fed surrendered to the Treasury the management of the money supply. The Fed had intended to cut the government’s cost in fighting the war, but its understanding with the Treasury continued for years after peace had broken out.

In 1951, the bank declared its political independence when it said it would no longer create money to pay Uncle Sam’s debt. Alarmed, President Harry Truman tried to strong-arm the Fed into financing the ongoing Korean War. He summoned to the White House the Fed panel that oversaw the bank’s bond trades. Truman told members of the Open Market Committee that they had to cut the government’s borrowing costs since it might face a world war. Boosting interest rates instead would help “Mr. Stalin.” After this woodshed rendezvous, Truman announced that the Fed had agreed to pay the debt. The Fed quickly set him straight. Truman reluctantly gave in, because he was in an imbroglio over firing General Douglas MacArthur for seeking to invade China, wrote Robert Hetzel and Ralph Leach.

In creating the Fed in 1913, Congress made it independent in order to keep politics out of the regulation of commercial banks. Each Fed governor serves one term of 14 years (unless she is filling in for an unexpired term). The Fed need not worry that Congress will cut its budget, because it pays its own way. It earns interest on government securities, returning its considerable profits to the Treasury.

Don’t RSVP, please

Not all presidents twist bankers’ arms. In the early years of the Federal Reserve, Woodrow Wilson wouldn’t invite its governors to his White House get-togethers, for fear of influencing them, noted Fed historian Allan Meltzer in an interview.

Some guarantors of bank independence have been more subtle than Wilson. The European Central Bank exists by treaty with the nations of the European Union. They must unanimously agree to any change in the treaty -– a difficult provision that helps ensure the bank’s independence, noted Nobel laureate Finn Kydland and Mark Wynne. In the early Nineties, before the European Central Bank had set up shop, the central banks of Spain, Portugal and Greece were obliged to buy some fraction of the governments’ bonds, thus risking inflation, wrote Joydeep Bhattacharya and Joseph Haslag. Judging from the news of the past year, old proclivities die hard.

Since World War II, it has been evident that countries with political central banks tend toward much higher rates of inflation -– with no gain in output -- than countries with independent banks. In 1956, when the ornery Bundesbank raised its discount rate by one percentage point, Chancellor Konrad Adenauer chastised it: “The guillotine falls on the man in the street.” But the German Miracle followed, noted Hetzel.

In the early 1990s, Kazakhstan’s annual rate of inflation soared above 2,100 percent. Later, when the National Bank of Kazakhstan became independent, it brought down inflation to single digits within seven years, asserted the Bank.

Nevertheless, the government here is conspicuously authoritarian, and questions about the Bank’s independence linger. In her MBA thesis at KIMEP early this year, Ainur Rakhisheva looked at how changes in the inflation rate might have affected changes in the tenge supply from 2000 to 2011. Presumably, if the National Bank is politically independent, then it will tend to respond to accelerating inflation by increasingly tightening the money supply in order to bring prices back down. Looking at monthly data and three-month averages, Ms. Rakhisheva did not find a systematic relationship.

Clearly, this research is a beginning. The Bank may respond to inflation data after a lag of more than three months. Its decision of whether to tighten money may depend partly on whether the economy is already operating at full capacity, forcing it to respond to new money only with higher prices, not higher output. Nevertheless, given the evidence at hand, perhaps one may give the claim of Bank independence the Scots’ verdict: “Not proven.” -– Leon Taylor, tayloralmaty@gmail.com

Disclosure: I reviewed the thesis along with Dr. Mujibul Haque, a KIMEP finance professor. The adviser was Dr. Dana Stevens, also a KIMEP finance professor.

Good reading


Joydeep Bhattacharya and Joseph H. Haslag. Reliance, composition, and inflation. Federal Reserve Bank of Dallas: Economic and Financial Review, pages 20-7. Fourth quarter, 2000.

Douglas Clement. Interview with Allan H. Meltzer interview. The Federal Reserve Bank of Minneapolis: The Region. September 2003.

Marvin Goodfriend. The phases of U.S. monetary policy: 1987-2001. Federal Reserve Bank of Richmond: Economic Quarterly, pages 1-17. Fall 2002. Online.

Robert L. Hetzel. German monetary history in the second half of the twentieth century: From the Deutsche mark to the euro. Federal Reserve Bank of Richmond: Economic Quarterly, pages 29-64. Spring 2002.

Robert L. Hetzel and Ralph F. Leach. The Treasury-Fed Accord: A new narrative account. Federal Reserve Bank of Richmond: Economic Quarterly, pages 33-55. Winter 2001. Online.

Jahyeong Koo. Nature of recent economic distress in South Korea. Federal Reserve Bank of Dallas: Expand Your Insight. April 16, 2003. Online.

Finn E. Kydland and Mark A. Wynne. Alternative monetary constitutions and the quest for price stability. Federal Reserve Bank of Dallas: Economic and Financial Policy Review 1:1, pages 12-13. 2002. Online.

Allan H. Meltzer. A history of the Federal Reserve. Volume 1: 1913-1951. The University of Chicago Press. 2003. Definitive.

References


Federal Reserve Bank of San Francisco. U.S. monetary policy: An introduction. 2004. Online.

National Bank of Kazakhstan. Overview of the monetary policy of the National Bank of Kazakhstan. October 2004. Online.

Ainur Rakhisheva. Independence and central bank efficiency in a case study of Kazakhstan. KIMEP: MBA thesis. Spring 2011.

Going for broke

Could the Magistau strike spread?

The oil workers’ strike in western Kazakhstan, which began in the spring, has heated up in the past several weeks. So far, the two companies facing the strike – Kazmunaigaz Exploration Production (KMGEP) and Karazhanbasmunai, half owned by KMGEP and half by the Chinese – have fired 1,400 workers. Last month, the workers’ lawyer was condemned to six years in prison, allegedly for promoting public unrest. A few weeks later, the teen daughter of a strike leader was found in a rural field, dead with injuries. Earlier that month, a union member in the area was also killed. The police have not identified killers in either case, according to news reports.

Some journalists speculate that the strike may spread to other industries. At first, this may seem unlikely. Unions may target the oil industry partly because people buy oil almost regardless of the price. In the short run, a 1% increase in the price of crude usually reduces the number of barrels demanded by a small fraction of a percent, according to John C. B. Cooper, whose elasticity estimates for 23 countries range from almost a tenth of a percent (South Korea) to virtually zero (China). Thus companies can pass on an industry-wide increase in wage costs to consumers without losing much business. But while this may describe the global oil industry, it is less likely to describe an oil firm. If the firm raises its price above that of the market, then it may lose substantial business to rivals. If it does continue to sell oil at the market price, the increase in its costs will eat away at its profits, which are not always as profligate as they are now. (In the late 90s, an oil barrel sold for as little as roughly $15 to $20, in 2011 dollars.) Ironically, a continuing loss of revenues may force the firm to lay off workers if it no longer has the option of cutting their wages.

The bitterness enveloping the strike suggests that neither the companies nor the union has handled it well. In principle, both sides to a labor dispute can gain – or, at least, avoid a loss -- by agreeing upon a trade-off of jobs for wages. In the oil strike, the companies’ intransigence seems based upon the assumption that a tenge gained by the union is a tenge lost to the firms. Perhaps it is, but the fact that the firms have replaced so many strikers indicates that they may have had enough flexibility in the level of employment to have offered the union an attractive trade-off.

Unions are an endangered species in the Commonwealth of Independent States. As transition economies move toward markets, they replace (albeit slowly) the old state-owned monopolies with many small firms. Since it costs more to organize 10,000 workers at 1,000 firms than 10,000 at one firm, the transition may tend to reduce the unions’ share of the labor force, all else being equal. Conceivably, this could attract foreign firms looking for new countries in which to set up shop. But the notoriety of the companies’ take-no-prisoners stance in the strike at hand seems more likely to dampen investors’ enthusiasm for Kazakhstan than to ignite it. – Leon Taylor, tayloralmaty@gmail.com



Good reading

Ronald G. Ehrenberg and Robert S. Smith. Modern labor economics: Theory and public policy. Boston: Pearson Education. Ninth edition. 2006. Chapter 13 analyzes the economic impact of unions, noting that many small firms cost more for unions to organize than a few big firms.

Clare Nuttall. Kazakhstan simmers as striking oil workers sacked. Business New Europe. September 13, 2011. Online.

Walter J. Wessels. Do unions contract for added employment? Industrial and Labor Relations Review 45 (1): 181-193. October 1991. Finds mixed evidence that unions negotiate for additional jobs in exchange for lower wages. www.jstor.org


References

John C. B. Cooper. Price elasticities of demand for crude oil: Estimates for 23 countries. OPEC Review. March 2003. Online.

Fox News. Kazakh Court Jails Labor Union Lawyer for 6 Years. September 8, 2011. http://www.foxnews.com

Toil and trouble: A statistical snapshot of labor in Kazakhstan

Is Kazakhstan’s booming economy creating as many jobs as it should?

Real investment in Kazakhstan is floundering, probably because the economy has yet to work off the excess supply of buildings that it had accumulated in the real estate bubble that burst in 2007. But the labor market is mildly encouraging. In the first half of 2011, the national rate of unemployment was 5.5%, well below the 6% of early 2010. Indeed, the nation’s unemployment rate has been dropping steadily since 2003, when it was 8.8%. Employment looks almost as good: Since early 2010, the number of employed persons in the first half of 2011 had increased 1.2% to 8.2 million.

Nevertheless, some puzzles about Kazakhstani labor are troubling. Although Almaty's unemployment rate has been dropping for years, it has been increasing relative to the nation's unemployment rate, peaking at a sixth higher in 2009. Almaty’s rate has also been consistently higher than Astana's. In fact, Almaty's rate has generally been among the highest in Kazakhstan since 2006, rivaled only by the Mangistau area. Among the lowest unemployment rates since 2006 is that in the Aktubinskaya oblast.

These facts suggest that unemployment in Kazakhstan may be mainly urban. Perhaps Almaty’s unemployment rate is high because it attracts overly optimistic migrants. But in reality, the areas with the highest rates of unemployment over the long run are not concentrated heavily in any particular region or industry, although they emphasize the south of the country a bit: Kyzylordinksaya oblast (14% above the national unemployment rate, both expressed as averages for 2003-2010), in the Aral Sea region and near the Uzbek border; Mangistauskaya oblast (13% above the national rate), east of the Caspian Sea in oil country; Zhambylskaya oblast (11% above), southwest of Lake Balkhash and bordering Uzbekistan; and the city of Almaty as well as Akmolinskaya oblast which surrounds Astana (each 7% above).

Similarly, the areas with the lowest rates of unemployment for 2003 through 2010 do not suggest any clear trends beyond a mild emphasis on northern Kazakhstan: Karagandiskaya oblast (10% below the national average), concentrated in
manufacturing and processing southeast of Astana; East Kazakhstan (9% below); Almatinskaya oblast (6% below), the large region including the area north of Almaty;
Pavlodarskaya oblast (5% below), east of Astana; and North Kazakhstan oblast (5% below).

Persistence and subsistence

These long-run trends may be somewhat stable. In 2010, the five areas with the highest rates of unemployment relative to Kazakhstan included three with high long-run rates: Mangistauskaya oblast (10% percent above the national rate in 2010); the city of Almaty (9% above); and Kyzylordinskaya oblast (2%). The five areas with the lowest rates of relative unemployment in 2010 included two with low long-run rates: Karagandiskaya oblast (5% below the national rate in 2010) and Pavlodarskaya oblast (3% below).

Despite these persistent regional effects, the disparity across regional rates may be diminishing: Their standard deviation (a popular measure of dispersion) was .053 in 2010, lower than for the period from 2003 through 2010 on average (.075). Perhaps the national labor market is improving: Workers may be more likely now to migrate from areas of high unemployment to areas of low unemployment, thus decreasing the unemployment rate in the former areas and increasing it in the latter. But one would still like to know why unemployment rates are stubbornly high in Mangistauskaya and Kyzylordinskaya oblasts as well as in Almaty.

In principle, the unemployment rate in Kazakhstan may fall partly because people become so discouraged that they cease looking for work, thus dropping out of the labor force. In that case, a falling rate of unemployment would hardly be a sign of economic health. We can check statistically for such a possibility. The labor force is the sum of employed and unemployed workers. A worker may lose his unemployment status either because he gets a job (increasing the number of employed workers) or because he drops out of the labor force (reducing the number of unemployed workers but not increasing the number of employed workers). If an increase in the number of discouraged workers dominates the labor market, then the labor force must become smaller (see the Notes). But in Kazakhstan, the annual number of newly employed workers is seven times as large as the annual reduction in the number of unemployed workers. This suggests that the economy tends to create jobs rather than discourage workers.

But the rate of increase in jobs is not impressive -- an average of 2.2% from 2003 through 2010. This may provide enough jobs for youths entering the labor market; the rate of population growth in 2009 was 1.6%. But it is just a fraction of the growth rate of the national economy, and it occurs in spite of the fact that the burgeoning sector of services is labor-intensive. In Kazakhstan’s economy, all is not as well as it seems. -- Leon Taylor, tayloralmaty@yahoo.com


Notes

1. To determine the importance of “discouraged workers” (that is, people who no longer look for work) to Kazakhstan’s economy, let’s measure their impact on the labor force, which sums employed and unemployed workers.

Denote the labor force as LF; the number of employed workers, as E; and the number of unemployed workers, as UN. Then LF = E + UN. Using dX to denote a change in X, dLF = dE + dUN. Considering these changes, we may ignore movements from the unemployed ranks to the employed, or in the reverse direction, since they do not affect the overall size of the labor force.

The number of employed workers may change in either of two ways that affect the size of the labor force: An entrant gets a job; or a worker loses his job and decides not to look for another (i.e., he leaves the labor force). In the first case, dE > 0; in the second case, dE< 0. The number of unemployed workers may also change in either of two ways that affect the size of the labor force: An unemployed worker leaves the labor force (dUN < 0); or an entrant begins looking unsuccessfully for work (dUN > 0).

If the increase in the number of discouraged workers dominates other changes in the size of the labor force, then dLF < 0. From 2003 through 2010, the size of Kazakhstan’s labor force has never decreased. But its growth has been slow, at the average annual rate of 1.7% over this period. References

Statistical Agency of Kazakhstan. www.stat.kz The source of all raw data used in this article.

Smile, please: A statistical snapshot of investment in Kazakhstan

Is the economy as strong as it looks?

Kazakhstan’s economy is developing along the lines of richer economies. The fastest growing sectors emphasize services: Trade (growing 14.3% in the first half of 2011, compared to the same period in 2010) and communications (16.5%), according to data from the national statistical agency. Construction (1.7%) still stagnates, as it has since the bursting of the real estate bubble in 2007. Vacancy rates may be high. Agriculture (1.5%) continues its 20-year decline relative to the rest of the economy. Despite the government’s “forced industrialization” program, industry (5.8%) grew less rapidly than did the economy on average. In general, although Kazakhstan is best-known as an oil exporter, it is shifting toward services and may already verge on a post-industrial era.

Despite a yearly growth rate of 6.8%, the economy may still be coping with an excess supply of buildings and equipment that arose from the real estate boom. In 2007, housing construction in Kazakhstan was eight times higher than in 2003, peaking at 490 billion tenge ($4 billion) -- 4% of the entire economy (measured as gross domestic product). The boom was most conspicuous in Almaty, where construction value was 12 times higher in 2007 than in 2003 and accounted for 30% of all housing construction in Kazakhstan. The bubble burst quickly: In 2009, housing construction decreased 39% in Kazakhstan and by more than 50% in Almaty and Astana, which had accounted for nearly two-thirds of all such construction in 2007. Kazakhstani construction began to recover slowly in 2010, when it had increased 3.4% since 2009. But in Almaty, the slump continued. In 2010, housing construction there had fallen by a fifth since 2009 and by nearly two-thirds since 2007.

Peanuts in Pavlodar

Even now, real investment -– the addition of physical capital to the economy – remains anemic. Normally, June is one of the busier months in Kazakhstan for investment in “fixed capital” – hard-to-move things used in production, such as office towers and factories. But this June, fixed-capital investment had fallen 2% since the previous June. In the city of Almaty, investment in the first half of 2011 was 2% below that of early 2010.

Growth rates for investment in fixed capital vary sharply across regions. For the oblast around Karaganda, a manufacturing and processing center, investment in the first half of 2011 was almost a fifth above that for early 2010. For West Kazakhstan, investment fell by nearly two fifths, reflecting the long-run decline of agricultural regions. One reason for such sharp fluctuations is that investment in many rural areas was small to begin with, so a change of given size looks relatively large. For example, housing construction in Pavlodar in 2010 came to only 3 billion tenge ($21 million).

Contract work tells the same dismal story but in broader terms. It totaled 166 billion tenge ($1.1 billion) in May 2011, a fall of nearly 3% from the previous May. Throughout the first half of 2011, contract work came to 711 billion tenge ($4.9 billion), down by 3% since early 2010. It was up by nearly a third in the Pavlodar region, and down by more than two-fifths in West Kazakhstan. Work in the city of Almaty had declined by more than a fifth. Most active was the Atyrau area –- oil country -- which accounted for a fourth of all contract work in the nation. Historically, the Atyrau oblast and Almaty city have each accounted for a fifth of national investment in non-financial assets. In general, Kazakhstani investment in early 2011 fell by about 5% from early 2010.

The one bright spot in construction may be for homes. Throughout Kazakhstan, home construction in the first half of this year came to 171 billion tenge ($1.2 billion), or under 2% of the national economy. The absolute amount was a fifth higher than in early 2010. Regional growth rates varied from an increase of nearly two-thirds in South Kazakhstan to a fall of two fifths in the Pavlodar oblast. In the city of Almaty, home construction was up by more than a third, to 31 billion tenge ($212 million). By June 2011, however, national homebuilding was slowing again. It was 43 billion tenge ($300 million) that month, an increase of just over 2% from the slump in the previous June.

In terms of floor space, residential construction ready for occupancy was stagnant in 2010 at 6.4 million square meters, the same as in 2009. Such construction was also at a standstill in Almaty, which (with Astana) comprises almost two-fifths of all such building in Kazakhstan. How to fully recover from the real estate bubble remains a nagging –- and unasked -– question in Kazakhstan. -- Leon Taylor, tayloralmaty@gmail.com


Notes

1. All output figures are adjusted for price changes, usually via a construction cost index.

2. Dollar conversions use the official exchange rate.



References

Statistical Agency of Kazakhstan. All data are from the agency’s Web pages at www.stat.kz . Warning: The agency’s work is unreliable. Its English is misleading, mistaking "contraction" for "contract." And it often miscalculates statistics -– for example, computing the annual change in fixed investment by dividing the 2010 estimate by the 2011 one rather than the reverse.

Unreal estate

Why does Almaty’s economy lag the nation’s?

What’s afoot in the Almaty market for real estate?

Four years ago, its price bubble burst. In 2007, the price of a new square meter of residential space in the city was nine times higher than in 2000, according to the national statistical agency. Then the price slid by a third. This presaged the collapse of several of Kazakhstan’s largest banks, which had lent for mortgages as if tomorrow would never come (and it almost didn’t).

The problem lay in the nature of a real estate price, which has two components. One is for improvements to the land, such as buildings, roads, and water pipes; the other, purely for the location. Rents in the center of the city are much higher than those on the outskirts, because people pay for convenience. The central business district is close to colleges, hospitals and workplaces. Growth of the national economy increases these rents by raising labor productivity and wages. You’ll pay more to be able to commute comfortably to a better job. In 2007, “land rents” (as economists refer to location value) had been rising far more rapidly than the expected rate of national economic growth. Being unreasonably high, they were headed for a crash that summer.

Construction costs in Kazakhstan are rising by only 3% per year, so land rents in Almaty probably account for the bulk of the continuing decrease in residential prices. But new-home prices here remain two-thirds above the nation’s. Probably that’s largely because of the convenience of living in the nation’s largest city.

Almaty banks are about as exposed to real estate now as in 2009. Construction loans still account for nearly a fifth of all bank loans, totaling 18.8% of all loans in June 2011. The figure for June 2009 was 19.7%, according to data from the country’s central bank, the National Bank of Kazakhstan. Of all bank loans, only a fourth are in “standard” shape, according to the National Bank’s latest Statistical bulletin. More than half are “doubtful,” and a fifth are outright “losses.”

With a record like that, it’s easy to understand why bank lending in Kazakhstan remains, to put it mildly, sluggish. Total lending in June 2011 was only 3.2% higher than in June 2010, according to data from the National Bank. Adjusting for inflation, lending has fallen 5%. Compared to June 2009, lending has declined 19.7% (again adjusting for price changes). One apparent consequence is an anemic construction industry, which has grown only 1.7% since the first half of 2010, according to the national statistical agency. In Almaty, construction value (adjusting for inflation) is down by a fourth since the first half of 2010. In terms of space, new residences have declined by a fifth since early 2010. Sluggish banking and construction have created a quagmire for the economy of Almaty, home to two thirds of all bank loans in Kazakhstan.

Though lending is declining, its composition has not changed much. Short-term loans in June 2011 amounted to 1.3 trillion tenge ($9 billion) -- just 7.4% above that of the previous June, according to National Bank data. Adjusting for inflation, short-term lending was stagnant.

Medium- and long-term lending was 6.6 trillion tenge ($46 billion) -- 5.3% above that of the previous June. Adjusting again for inflation, that lending had fallen by 3%. This may be prudent behavior. Our banks must finance their long-term loans partly with short-term money obtained abroad, so when one of their loans suddenly goes soft, they may find themselves short of money to pay off their own creditors. Nevertheless, medium- and long-term lending still comprised more than 83% of all lending, according to National Bank data. Should a price bubble recur, banks in Kazakhstan could again be at risk.

Bubble trouble

Why would land rents rise too rapidly? Well, real estate lenders often finance a price bubble because they do not have to pay all the costs of doing so. Suppose that the bubble bursts, reducing the collateral of the bank’s loans and endangering its own net worth. If the bank is big enough, the government will bail it out, thus insuring its managers against their own mistakes. In fact, since 2007, the government of Kazakhstan has acquired large stakes in several leading banks. (True, in a few cases, it has also pursued charges of mismanagement.) Also, a commercial bank here could sell shaky loans to an arm of the central bank, the Kazakhstan Mortgage Company.

Housing bubbles may also form because lenders and borrowers do not consider the actual value of the land. Instead, they will create a loan whenever the land rent seems to be rising rapidly enough –- for whatever reason –- to enable them to sell the land (or the loan) at profit. The English macroeconomist John Maynard Keynes pointed to this possibility in 1936. It may explain why a financial bubble appears and disappears rapidly. People buy assets when the bubble is growing, stimulating it to grow faster; and they sell assets when the bubble is bursting, hastening its demise. Never a dull moment in the real estate market. -- Leon Taylor, tayloralmaty@gmail.com


Good reading

John Maynard Keynes. The general theory of employment, interest and money. London: Macmillan. 1936. Chapter 12 analyzes financial speculation.

Arthur O'Sullivan. Urban economics. Sixth edition. New York: McGraw-Hill. 2006. Analyzes land rents.


References

National Bank of Kazakhstan. Monetary and credit statistics. www.nationalbank.kz

National Bank of Kazakhstan. Statistical bulletin. 2011. www.nationalbank.kz

Statistics Agency of Kazakhstan. Various series. 2011. www.stat.kz The pages in Russian are more informative than those in English.

Double-A trouble

What does the debt-limit controversy in the United States mean for Central Asia?

The bonds of the United States government were long regarded as solid as the Rock of Gibraltar; but in squalls, the Rock erodes. After August 2, the government may not be able to pay all its bills because laws prevent it from borrowing more –- a possibility that may lead the ratings agencies to downgrade Uncle Sam’s bonds from their traditional AAA. Financial investors may respond to this risk by demanding slightly higher yields before purchasing the bonds.

So what? Well, according to The New York Times, “analysts warn” that “in the broader economy, if money that might have gone to new purchases or increased investment were instead diverted to higher interest payments, the result could be slower economic growth and a higher jobless rate for the remainder of the year.”

No wonder that the “analysts” are anonymous. In reality, the economy need not shrivel just because money changes hands. The recipient of the interest may spend it or lend it, just as the payer of the interest might have done.

The complexion of the economy may change, yes. If the recipient of interest saves a greater share of his income than does the payer of interest, then the economy might eventually produce fewer consumption goods than before –- and more capital goods (such as machines and factories) that are financed by savings borrowed from the bank. The new factories will increase the economy’s capacity for producing. Eventually, the rate of economic growth may rise for a while, creating jobs. Of course, if the recipient of interest spends more of his income than does the payer, then consumption’s share of the economy will increase, at the expense of eventual economic growth. But the conventional assumption is that the buyer of government bonds is rich and thus will save a larger share of his income than is usual.

The certainty of uncertainty

The more pertinent question is: How will people interpret a downgrading of US government bonds to AA? The novelty of this event may create uncertainty, inducing people to hoard money as a precaution. Spending on consumer and capital goods will fall. The economy will slow, destroying jobs.

Some consequences of failing to raise the government’s debt limit are more direct. First, the government may spend less, which would reduce national income. Second, higher interest rates on government bonds may also raise rates on related assets -– private bonds, bank loans -– that are also perceived to be in hotter water than before. The increase in interest rates will discourage firms from borrowing to finance expansions of their capacity to produce.

For Central Asia, the real danger is that another slowdown in the U.S. may coincide with one in Europe, where the probable default of Greece -– and the likely bailout of Cyprus -– may create more uncertainty and hoarding. There is a small but growing chance that the world economy may face another 2008. “The market is far more intelligent and resilient than a lot of politicians realize,” Lee C. Buchheit, a lawyer experienced in national defaults, told The New York Times. “Investors realize that sometimes you make money and sometimes you don’t. But they can’t abide prolonged uncertainty.”

The fallout from global recession would rain on Central Asia, where the national economies depend on exports. In Kazakhstan, exports have accounted for more than half of the economy (or close to half) since 2000 -- except in 2009, when falling oil prices helped cut the export share of gross domestic product to 45.9%, according to World Bank data.

Similar trends hold for the region. For 2000 through 2009, the average export share was 73.2% in Turkmenistan, 50.4% in Kazakhstan, 45.4% in Tajikistan, 42.9% in Kyrgyzstan, 35.6% in Uzbekistan, and (for comparison) 34.4% in Russia, according to World Bank data. All of these shares are well above the world average of 26%: Central Asia is unusually vulnerable to global downturns. Since 2000, the export shares have generally been rising throughout the region except in Uzbekistan and Russia, which recorded slight declines. Hold on to your hat; August 2 is coming. -- Leon Taylor, tayloralmaty@yahoo.com


Good reading

Michael Cooper and Louise Story. Q. and A. on the debt ceiling. The New York Times. July 27, 2011


References

Julie Creswell and Louise Story. On all levels of the economy, concern about the impasse. The New York Times. July 26, 2011. www.nyt.com

Steven Erlanger and Rachel Donadio. Beyond Greece, Europe fears financial contagion in Italy and Spain. The New York Times. July 19, 2011. www.nyt.com Quotes Buchheit.

Paul Krugman. The lesser depression. The New York Times. July 21, 2011. www.nyt.com Argues that simultaneous slowdowns in the U.S. and Europe could endanger the world economy.

Oakley, David. Fitch warns Greece of “selective default.” The Financial Times. July 22, 2011.

Peter Spiegel. Moody’s downgrades Cyprus bonds. The Financial Times. July 27, 2011. www.ft.com

World Bank. World Development Indicators. Various years. www.worldbank.org

Free speech for sale

Can its suppression of speech endanger a government?

Any Western visitor to Central Asia is struck by the strictures on speech. Newspapers must obtain licenses, and opposition journalists live in fear of physical abuse from whatever source. In late June, two journalists protesting censorship in Uzbekistan were arrested and fined for trying to launch a hunger strike outside of the president’s residence, reported Radio Free Europe/Radio Liberty, which is financed by the United States government.

Ironically, restraints on speech can destabilize a government. The English economist and philosopher John Stuart Mill explained why, in his 1859 essay “On liberty.”

Mill begins with a passing note that must jolt modern readers. “The time, it is to be hoped, is gone by, when any defense would be necessary of the ‘liberty of the press’ as one of the securities against corrupt or tyrannical governments.” Evidently, Mill had never been to Central Asia.

Taking as given that free speech weakens tyrants, Mill addresses what he sees as the modern problem: That a society may suppress certain ideas. Such censorship is at the bidding, not of the dictator, but of the democracy. Mill condemns this censorship as strongly as the other. “If all mankind minus one were of one opinion, and only one person were of the contrary opinion, mankind would be no more justified in silencing that one person, than he, if he had the power, would be justified in silencing mankind….

“If the opinion is right, [people] are deprived of the opportunity of exchanging error for truth; if wrong, they lose, what is almost as great a benefit, the clearer perception and livelier impression of truth, produced by its collision with error.”

Suppose that the suppressed opinion is right. Its suppressors “have no authority to decide the question for all mankind,” for they are not infallible. Politicians should not think themselves infallible when even a wise leader like Marcus Aurelius wound up persecuting the Christians.

Society may repress an opinion because it does not fit the popular ideas of the day. “Yet it is…evident in itself…that ages are no more infallible than individuals.” Today’s popular ideas may be wrong, but men may censor themselves out of fear of social intolerance. “The price paid for this sort of intellectual pacification is the sacrifice of the entire moral courage of the human mind…. No one can be a great thinker who does not recognize that as a thinker it is his first duty to follow his intellect to whatever conclusions it may lead.”

Does censorship make sense?

Mill entertains a counter-argument: We all recognize that governments sometimes levy bad taxes or wage unjust wars. But we don’t argue that governments therefore should levy no taxes, wage no wars. So why should we deny them the right to censor opinion?

Mill answers that censorship is the most serious offense that a government can inflict on a society. “Where there is a tacit convention that principles are not to be disputed; where the discussion of the greatest questions which can occupy humanity are considered to be closed, we cannot hope to find that generally high scale of mental activity which has made some periods of history so remarkable.” Consider the Reformation, the classical period of Voltaire in the late 18th century, and the period of Goethe in Germany around the turn of the 19th century. “All three impulses are well nigh spent.”

When we unanimously agree in a belief -– such as a religious precept, or the sanctity of a presidency -– it ceases to be real to us, because we no longer discuss it. “The fatal tendency of mankind to leave off thinking about a thing when it is no longer doubtful, is the cause of half their errors.” As time passes, we will agree about more ideas, but these will no longer be alive for us. The ideas of capitalism are more vivid to the residents of Kazakhstan today, where they are daily debated, than they are to Americans.

We must permit expression of all ideas, because otherwise we cannot ascertain the truth of our own opinions. “Complete liberty of contradicting and disproving our opinion is the very condition which justifies us in assuming its truth for purposes of action.” When we censor opinions, we can no longer assume the truth of the permitted opinion, because it is not subject to correction. “Why is it…that there is on the whole a preponderance among mankind of rational opinions and rational conduct? If there really is this preponderance -– which there must be unless human affairs are, and have always been, in an almost desperate state -– it is owing to a quality of the human mind, the source of everything respectable in a man either as an intellectual or as a moral being, namely, that his errors are corrigible.” Acts of censorship are “exactly the occasions on which the men of one generation commit those dreadful mistakes which excite the astonishment and horror of posterity.”

It is not enough to learn dissenting views from one’s teachers: “He must be able to hear them from persons who actually believe them; who defend them in earnest, and do their very utmost for them.” The Catholic Church used to permit its priests to read heretical books, in order to correct their views; but it would deny ordinary Catholics access to those books.

The truth, the whole truth, and something but the truth

In Central Asia, some politicians in power have argued that the government should not permit opposition newspapers to charge that the government silences dissidents. In Mill’s analysis, if we censor that opinion, then we can no longer accept that the government does not suppress dissidents, because this opinion can no longer be corrected. Moreover, if the opposition’s view is wrong, then censorship provides no way to correct it; and so it will always fester. Mainstream politicians should appeal to facts, not to the censor.

We rarely know the whole truth. “Popular opinions, on subjects not palpable to sense, are often true, but seldom or never the whole truth.” Often the heretical opinion holds a piece of missing truth. “Truth, in the great practical concerns of life, is so much a question of the reconciling and combining of opposites, that very few have minds sufficiently capacious and impartial to make the adjustment with an approach to correctness, and it has to be made by the rough process of a struggle between combatants fighting under hostile banners.”

In short, Mill argues that we shouldn’t censor an opinion, because it may be true; even if it is mainly wrong, it may be partly true; and even if the received opinion is wholly true, it will lose its meaning unless we continue to dispute it. Friend Caroline Fox explained that Mill “lays in one as a tremendous duty to get oneself well contradicted, and admit always a devil’s advocate into the presence of your dearest, most sacred Truths, as they are apt to grow windy and worthless without such tests, if indeed they can stand the shock of argument at all.”

A modern economist might add a practical point: When the government suppresses free speech, then it signals potential foreign investors that it is too fragile to withstand robust debate. Investors seeking political stability may sidle out through the back door. -– Leon Taylor, tayloralmaty@gmail.com


Good reading

John Stuart Mill. On liberty. Republished in Jeremy Bentham and John Stuart Mill, The utilitarians. Garden City, New York: Anchor Press. 1973 [1859]. Online at http://www.constitution.org/jsm/liberty.htm

Richard Reeves. John Stuart Mill: Victorian firebrand. London: Atlantic Books. 2007. Chapter 11 discusses “On liberty” and is the source of the Caroline Fox quote above (page 274).


References

Radio Free Europe Radio Liberty. Second Uzbek journalist ends hunger strike. July 15, 2011. www.rferl.org

Two strikes and you’re out?

How will two oil-worker strikes affect Kazakhstan’s economy?

Since May 10, more than a thousand workers have been on strike against an arm of the state oil company, KazMunaiGaz Exploration Production (KMG EP), according to a Web news gatherer, Silk Road Intelligencer. The company reports a potential loss of 600,000 barrels, roughly 4% of its planned annual output at the Uzen field. The strike began at the Karazhanbas field, where the company claims that it has lost little output.

At issue is whether the purchasing power of wages is too low in the Mangistau region, east of the Caspian Sea, where the strike broke out. Mangistau wages remain well above the national average, but the gap is diminishing. Without price adjustments, wages in Mangistau grew at an annual average of 16% from 2003 through 2009, according to data from the national statistical agency. The Kazakhstani rate was 19%. In 2009, Mangistau wages were two-thirds higher than Kazakhstani wages; they had been nearly twice as high in 2003. (I don’t have wage data for KMG EP.) But the rate of consumer inflation in Mangistau is usually below the national average, according to data from the national statistical agency. Since 2003, Mangistau inflation has exceeded the national rate in only one year (2007).

What matters to the worker is the purchasing power of his wage, called the "real wage." Is the wage high enough to cover inflation, with enough left over to let him buy more goods and services than before? In Kazakhstan, yes. From 2004 through 2009, the real national wage grew by 9.7% per year, judging by data from Kazakhstan's statistical agency. In Mangistau, the answer is a fainter yes. The real wage in the region almost always grows from year to year, but not as rapidly as in the nation -- just 7.4%. In 2007, Mangistau inflation was so high (21%) that the real wage fell 7%. Striking workers may have memories of that.

Since the national real wage is lower, but growing faster, than the Mangistau one, the two are converging. This may indicate that the labor market is humming. People in low-wage areas move to Mangistau for higher pay. Competition for jobs there grows, driving down the area wage. Meanwhile, the loss of workers in low-pay areas increases the wage there as bosses vie for hired hands. The national economy gains, because workers are going to where they'd be most valuable -- Mangistau. (That workers would receive higher pay there reflects their value.) Understandably, longtime workers in Mangistau may not see it that way.

Workers are particularly sensitive to food prices, which are rising rapidly. Throughout Kazakhstan, prices of agricultural products in the first half of 2011 were more than a third higher than in the first half of 2010, according to the national statistical agency. Crop prices were more than half as high as before.

Prospects of propagation

Might the strike spread? Few long-run trends suggest that it would. The unemployment rate in Kazakhstan has been declining fairly steadily since 1999. Despite the slowdown of 2008-9, unemployment in the first quarter of 2011 was just 5.5%, according to the national statistical agency. This is well below the annual unemployment rates of the late 1990s, which had ranged from 11% in 1995 to 13.5% in 1999, according to World Bank data. The rate of increase in consumer prices in general has been rather volatile over the past decade, ranging from 13% in 2000 to slightly declining prices in 2008-9. But this is nothing compared to the hyperinflation of the mid-90s -- nearly 1,900% in 1994, according to World Bank data. The 2010 rate was 7.1%, according to data from the national statistical agency.

Growing inequality in the distribution of income can frustrate workers to the point of protest. By one measure, income equality in Kazakhstan has followed an erratic pattern but seems to have improved since 1996. In that year, the poorest fifth of the population received only 16% as much national income as did the richest fifth. By 2007, this fraction had risen to 22%, according to World Bank data.

The most worrisome trend is a slowdown in the national rate of economic growth. In terms of purchasing power, income per capita grew at 13.7% in 2001 and at 8% to 10% in subsequent years until 2007, when growth began diminishing. Real income per capita dipped slightly -- by about a seventh of a percentage point -- in 2009, according to World Bank data. The current rate is about 7%.

Workers may strike if they sense a narrowing of their economic options: What, after all, would they have to lose? An indirect measure of the economic choices of Kazakhstani workers may be the pay to Kazakhstanis who work abroad, relative to the size of Kazakhstan’s economy (GDP). A larger share may indicate that Kazakhstanis are more dissatisfied with their own economy and so choose to work elsewhere. This ratio has fluctuated from .8% in 2002 to .1% in 2009, according to World Bank data (see the Notes below). But it has been falling, steadily and sharply, since 2002. Moreover, it tends to be low in years of economic slowdown (.3% in 1998, .1% in 2009). These figures do not suggest that typical Kazakhstani workers are becoming so disgruntled as to vote with their feet, even in hard years.

On the other hand, consider the share of Kazakhstan’s GDP that is paid to immigrants. A larger share may suggest growing competition for native workers, sharpening their discontent. As it happens, immigrants' share of GDP here has doubled from 2% in 1996 to 4.1% in 2007, according to derivations using World Bank data. But these numbers remain small. They provide no grounds for fearing a national labor strike.

The big picture

How might the oil-labor strikes affect Kazakhstan’s economy?

A large strike in a key industry may raise prices throughout the economy. Firms in Kazakhstan must pay more than before for the now-scarce oil, so they’ll raise prices to recover costs. The higher prices will discourage consumers, so purchases will fall. Producers will cut back accordingly. On a small scale, the strike may induce stagflation -– a combination of higher inflation and unemployment.

Whether these effects will outlive the strike is unclear. If workers simply return to their jobs, then the strike will not affect the long-run performance of the economy. Long-run output depends not on prices but on means of production -– workers, machines, land and knowledge -- since firms will eventually put these means to work rather than let them waste away. If the strike doesn’t affect these means permanently, then it won’t affect output. Conceivably, the strike could result in higher pay that raises eventual output by improving worker morale and subsequent productivity.

But reports of police abuses of workers -– not to mention Sting’s cancellation of a concert here -- may raise questions in the minds of foreign investors about political stability in Kazakhstan. Workers at the Uzen field complain that “their salaries had been cut and their lawyer imprisoned on false charges,” reported Reuters. Some news reports indicate that Mangistau residents feel intimidated by jet fighters at a new air base in Aktau, wrote Joshua Kucera of EurasiaNet.org. A loss of foreign direct investment -– of factories that could have been built or oil fields that could have been developed -– reduces permanently the amount that Kazakhstan could have produced in the long run. Foreign direct investment now amounts to more than a tenth of the economy (measured as gross domestic product, with adjustment for prices), according to World Bank data.

In short, while the strike hinders the economy in the short run, its permanent effects are not clear. -- Leon Taylor, tayloralmaty@gmail.com

Notes

1. For the emigrant share of GDP, I use “workers' remittances and compensation of employees” received by Kazakhstan, in the words of the World Bank. These “comprise current transfers by migrant workers and wages and salaries earned by nonresident workers.”
2. For income per capita, I use real GDP divided by the population.

Good reading

N. Gregory Mankiw. Macroeconomics. Seventh edition. New York: Worth Publishers. Chapter 7 develops a simple model of the national economy.

References

Kucera, Joshua. Kazakhstan opens naval air base, intimidates strikers? The Bug Pit. July 6, 2011. www.EurasiaNet.org

Reuters. Sting cancels Kazakh concert over oil worker dispute. July 3, 2011. www.silkroadintelligencer.com

Silk Road Intelligencer. KMG EP reduces output forecast due to strike. June 29, 2011. www.silkroadintelligencer.com

Silk Road Intelligencer. Number of striking workers increases at KMG EP facility. July 14, 2011. www.silkroadintelligencer.com

Silk Road Intelligencer. Strikes cripple oil production at major KMG EP oil fields. June 23, 2011. www.silkroadintelligencer.com

Statistical agency of Kazakhstan. Wage and price time series. www.stat.kz The Russian-language pages have more statistics than the English-language ones.

World Bank. World Development Indicators. www.worldbank.org

Household consumption in Kazakhstan: I can’t get no satisfaction

Why doesn’t consumption give more ballast to the national economy?

In Western economies, the household consumer is often identified as the key agent of stability and short-run growth. In the United States, household consumption generally comprises around 70% of the economy (measured as gross domestic product, or GDP) and is less volatile than such components as changes in inventory. Milton Friedman explained that people plan their consumption over the long run. Habit determines their spending, suggested Alfred Marshall.

In Kazakhstan, household consumption plays a smaller and more erratic role than in the West. Its share of GDP here has fallen steadily from 78% in 1998 to 36% in 2008, according to World Bank data. Households do consume more than does the government; for every tenge spent by households, the government has consumed a seventh or a fifth of a tenge from 1990 to 2007, with no clear trend of increase. But the instability of household consumption may inhibit the government’s use of total consumption -- that is, by households and the government -- to stabilize the economy. Annual growth rates of total consumption have varied from a 20% decline in 1994 to a 13.4% increase in 2004. Fortunately, all years of decline came before 1997, during the shaky transition to markets.

The consumption rate in Kazakhstan is sensitive to external shocks. As a share of GDP, total consumption peaked at 89% in 1998, according to World Bank data. This may have been due to the collapse of the Russian ruble that year; Kazakhstani exports became too expensive for Russians to buy, so the relative importance of domestic consumption to our economy increased. As a share of GDP, exports fell to 30% in 1998, the lowest ratio recorded since 1991. After that, the consumption rate fell steadily to 45.4% in 2008, probably due largely to the growing importance to Kazakhstan of oil exports. In 2009, global oil prices fell in the world recession, so export revenues fell here; the GDP share of exports declined to 46%. Meanwhile, the government stepped up spending to mitigate the nation’s recession. After 2008, the decline in oil revenues and the rise in public-sector spending may have increased the GDP share of total domestic consumption. But the economy remains vulnerable to shocks in investment, especially in investment by foreigners. As a share of Kazakhstan’s GDP, the net inflow of foreign direct investment has grown from less than a half of a percent in 1992 to 12% in 2008, according to World Bank data.

The telly tally

Why doesn’t household consumption account for a larger share of our economy? One reason may be that, since the economy is still developing, consumers are not yet buying as many services as they would in the West. The United States provides an historical example, which Jane Katz has detailed. I draw below upon her 1997 article.

In 1918, when the typical American household was far less affluent than today, it spent two of five dollars on food. African-Americans devoted half of their spending to victuals. The American diet was grim those days: Bread, hot cereal, potatoes, beans and rice. Meat was reserved for dinner, and fresh fruit was rare. Today, the American household spends only one of seven dollars on food. Its share of spending on clothes has also dropped sharply, from 15% in 1918 to 4% today. Most household consumption in the United States --– about 60% – is for services, nearly three-fourths of it for housing or health care. (In Kazakhstan, services have accounted for just over half of GDP ever since 2000.)

At the turn of the century, economists assumed that when people had satisfied their creature needs – for clothing, food and shelter –- that they would simply stop spending, causing the economy to stagnate. Instead, U.S. households today account for seven of ten dollars spent in the economy. The amount that Americans estimate that they need to get by on has risen over time, from $15,000 for a family of four in 1950 to $25,000 in 1990. Evidently, “getting by” does not mean just meeting the creature needs; it may also include a second car, owned by nearly half of all U.S. households; or a color television, owned by 85 percent of households. (In 1999, 99% of households in Kazakhstan owned a TV, according to the World Bank, using data from the International Telecommunication Union. It is not clear whether this estimate included black-and-white sets as well as color ones.)

Americans have hardly enough hours in the day to spend their money -– and so they often spend on devices that extend their time. Three of four households have washing machines; nearly half have dishwashers. Americans in 1929 stepped up their spending on electricity, to extend their night lives. Surprisingly, they were far less likely to spend more on medical care, because it did not extend their lives much at the time, argued Stanley Lebergott. Spending on medical care took off after penicillin and advanced surgery added years to life, concluded Katz.

Until recently, most U.S. recessions were mild, in part because consumers mainly bought services; the demand for many of these remains strong even when income falls. For example, workers who can’t find jobs in a recession may return to school.

In countries poorer than the United States, services matter less -– and farming and manufacturing matters more. In Kazakhstan, agriculture accounts for one-twentieth of GDP, having declined steadily from more than a fourth in 1992, according to World Bank data. About 40% of manufacturing is devoted to metallurgy and to finished metal products. Undoubtedly, as Kazakhstani households grow richer, they will demand more luxurious services. The services sector will grow, as may economic stability. -– Leon Taylor, tayloralmaty@gmail.com



Good reading


Jane Katz. The joy of consumption. Regional Review. Winter 1997. www.bos.frb.org

Ronald A. Wirtz. Gross domestic product: Understanding news from noise. The Region. June 2002. http://minneapolisfed.org/pubs/region/02-06/

References

World Bank. World Development Indicators. Various years. www.worldbank.org

Steady as she goes

Does Central Asia need automatic stabilizers?

To smooth out fluctuations of income over time, a national government may rely on programs, called “automatic stabilizers,” that spend more in recessions and less in recoveries. For example, most nations pay benefits to the unemployed. This props up national spending -– and thus national income – in recessions, when unemployment rates are high. When the jobless have enough to put greens and soup on the table, they help preserve jobs at the grocery store.

On the other hand, when national spending and prices are too high, the stabilizers work in reverse. Unemployment compensation drops when few people are out of work, thus averting overspending.

Compared to the West, Central Asia has few automatic stabilizers. For example, Kazakhstan does not offer unemployment insurance to most workers. These benefits are aptly named; one can think of the taxpayer as paying “premiums” to the government in exchange for partial replacement of her wages lost during unemployment. But “the unemployment benefit scheme, to which [workers] previously contributed and earned the right to benefits, was abolished in their time of need,” remarked Martina Lubyova of the International Labour Organization in 2009. Now only the poorest of the jobless qualify for benefits.

In general, post-Soviet governments in this region cut back on social spending in the mid-Nineties, partly to qualify for Western loans. Because this spending usually goes to poorer households, it often acts as an automatic stabilizer. In 2002, welfare spending by the government of Kazakhstan amounted to 5.4% of the size of the economy (gross domestic product). Throughout Europe and Central Asia, the average ratio was 10.1%, noted the World Bank.

The lack of stabilizers in Central Asia may aggravate swings in its business cycles. For the period from 1998 through 2009, one measure of income volatility in the region was more than triple that for major economies in the West (see the Notes). In Central Asia, volatility was lowest in Kyrgyzstan and highest (by far) in Turkmenistan. Stabilizers are not the only factors in Central Asia’s volatility; the region depends on exports of such natural resources as oil, gas and gold, which oscillate wildly in their global prices. But this price volatility may strengthen the case for stabilizers.

Central Asia does share with the West some stabilizers that mitigate the business cycle indirectly. For example, when income falls in a recession, so do income tax payments. Unless the government spends all tax revenues on domestic output -– which is not the case in Kazakhstan -– then some part of tax payments leak out of the national economy. A fall in national income reduces this leak. In the United States, taxes absorb as much as 8% of an economic shock to gross domestic product, estimated economist Carl Walsh.

Stabilizers cannot eliminate economic downturns, but it can gentle them. The U.S. economy had few automatic stabilizers in the 1930s –- which is overlooked by paperback authors who predict another Great Depression just around the corner in America. In the Thirties, U.S. welfare was mainly left to the states and localities. Herbert Hoover had rejected a plan to provide federal welfare as “fascist and monopolistic.” By 1933, the states and localities were out of money, so Congress passed a New Deal bill to provide relief. Since then, the U.S. has never suffered unemployment rates as high as occurred in the early Thirties.

Automatic stabilizers may be more effective than discretionary policy, because they take effect right away, noted Nobel Laureate Joseph Stiglitz. In the U.S., carefully planning and carrying out a federal budget usually take the President and Congress at least 20 months. Kazakhstan may not need so much time, since the President dominates the Parliament, but automatic spending still would save time.

Automatic stabilizers can work only if the central bank tolerates them. When the central bank is intent upon tightening the money supply, then it can blunt the stimulus due to spending on unemployment insurance. In the Nineties, the Bank of Canada sometimes overrode the stabilizers to demonstrate its commitment to low inflation, noted David Dodge. In Central Asia, central banks are not as independent of national political leaders as is the Bank of Canada. -- Leon Taylor, tayloralmaty@gmail.com

Notes

To measure the volatility of a national economy, I gathered data on real gross domestic product per capita – in 2005 international dollars, using purchasing power parity – for the five post-Soviet nations of Central Asia, three major Western economies, and for Russia. The period studied was from 1998 (when the Russian ruble crashed) to 2009 (a year of global slowdown). I chose recessionary years for the endpoints to try to compute descriptive statistics over complete business cycles; but the strength of the slowdowns in those two years varies with the country. I measured volatility as the ratio of the sample standard deviation to the mean. It was 4.1% in France, 4.5% in Germany, 28% in Kazakhstan, 13% in Kyrgyzstan, 23.1% in Russia, 23.6% in Tajikistan, 41.5% in Turkmenistan, 5.1% in the United States, and 18.3% in Uzbekistan. All data are from the World Bank’s World Development Indicators.


Good reading

David A. Dodge. Untitled remarks. Economic Review. Fourth quarter 2002. www.kansascityfed.org.

Martina Lubyova. Labour market institutions and policies in the CIS: Post-transitional outcomes. Working paper 4. International Labour Organization. 2009. www.ilo.org

Joseph E. Stiglitz. The roaring Nineties. W.W. Norton. 2003.

Carl E. Walsh. The role of fiscal policy. Economic Letter. September 6, 2002. www.frbsf.org

World Bank. Dimensions of poverty in Kazakhstan. Report No. 30294-KZ, volume 1. Poverty Reduction and Economic Management Unit, Europe and Central Asia Region. 2004. www.worldbank.org The source of the estimates of the ratio of social spending to GDP.


References

World Bank. World Development Indicators. Various years. www.worldbank.org

Wheelers, dealers, and other public servants

If the government parties now, will it be hungover in the morning?

Central Asia is relying increasingly on presidents and legislators, not on the central banks, to guide the economy. In 2009, the governments of Kazakhstan and Kyrgyzstan stimulated their languishing economies by spending more than they collected in taxes. The resulting deficits amounted to 2% of the size of the economy (gross domestic product) in Kazakhstan and 1.4% in Kyrgyzstan, according to the World Bank. (Data were not available for Tajikistan, Turkmenistan and Uzbekistan.) Is this trend healthy?

Keynesians may sympathize. As an antidote to recession, they tend to favor fiscal policy to monetary. Tax cuts and government spending may create jobs when the economy is operating below capacity. On the other hand, printing money might not work. When people are scared, they might simply hide the new money rather than spend it. That other tool of monetary policy -– the interest rate -– might also fail. In principle, lower interest rates enable firms to borrow more money in order to expand. But in a depression, the interest rate is already low; the central bank can't push it much lower. If it is zero, then banks will see no point in loaning out more money, even if the central bank does provide it for a song. Welcome to the liquidity trap.

Even in normal times, firms don't pay much attention to the interest rate when contemplating their investment projects, according to Keynesians. True, they would profit by giving the green light to a project with a rate of return exceeding the interest rate. But firms don't always know what rate of return to expect. Executives base their investment decisions partly on "animal spirits" -- on their gut sense of where the economy is headed. They might pay high interest rates if they think that the economy is headed for a boom. And they might pass up a chance to build a factory at bargain-basement interest rates if they think that the economy is headed for a fall.

Even Keynesians would concede that monetary policy is not always impotent. Printing money doesn't always revive the economy, but destroying money seems a sure-fire way to cool it off for a while. We can't be sure that increasing the money supply will encourage investment, since the central bank can't force firms to borrow money. But reducing the money supply will discourage investment. Firms can't build factories if they can't borrow money to pay the builders. Loans are especially important to firms in Central Asia, which have not been operating long enough to build up war chests of cash (“retained earnings”). In the West, the Federal Reserve and the European Central Bank must worry that their attempts to ward off inflation may succeed all too well.

To Keynesians, government spending in a recession will raise output, not prices, because firms will not mark up their prices when demand is anemic. In the United States, prices were indeed stable during the 1950s -– but not in the 1960s. Economists then took more interest in inflation, noted a macroeconomist at the U.S. central bank, Marco Espinosa-Vega. Nobel laureate Milton Friedman argued that a temporary increase in the money supply can affect output in only the short run, by tricking workers into producing more; eventually, they will realize what has happened and will act accordingly. By spending more, the government just confiscates more of the economic pie for itself.

Economists worry when the government borrows in order to spend. The competition with firms for loans forces up the interest rate, crowding out private investment. For example, the U.S. government mainly paid for the Civil War by borrowing money. The new federal debt claimed nearly one-sixth of the gross national product of the North –- large enough to crowd out all new investment during the war, wrote economic historians Jeremy Atack and Peter Passell.

Until recently, however, the bond markets didn’t worry about the deficit, perhaps because it does not claim as large a share of gross domestic product as it did in the Civil War -– or, for that matter, in the 1980s. You could argue that the U.S. deficit was not quite Brobdingnagian – not until recently, anyway.

But Americans really have foreign investors to thank, reported The New York Times. Asian central banks tried to weaken their currencies by selling them for dollars. (They want weaker currencies in order to boost exports.) To put their dollars to work, the central banks reinvested them in U.S. Treasury bonds, even when their rate of return was minuscule, according to The Wall Street Journal. (In May, net foreign assets for Kazakhstan were worth 10.7 trillion tenge, up by more than a third from the previous May, according to the National Bank of Kazakhstan.) Should the central banks stop buying dollars, the U. S. government would have trouble selling bonds. Bond prices would drop, and interest rates would rise. That would compound the difficulty of paying off Washington’s debt. And it would tend to raise interest rates paid by borrowers in Kazakhstan.

For an extreme example of what could happen in developing countries, let’s go to Argentina. A decade ago, the country’s mounting deficit convinced investors that they would never see their money again. They demanded higher interest rates before they would buy the country’s bonds. Over 2001, the interest rate on a 10-year bond rose by 20 percentage points to 35 percent, although the country had tried to reduce its deficit by raising income taxes, wrote Mark Spiegel. Argentina did not earn enough foreign currency from its exports to cover its interest payments, so the government eventually defaulted on its loans. Although Argentina became the second fastest-growing economy in the Western Hemisphere -– second only to oil-rich Venezuela –- it remained virtually the last place in the world in which investors would park their dollars, concluded a Federal Reserve economist, Ramon Moreno, in 2002.

The third-largest economy in the world, Japan’s, was in a similar predicament. Japan’s national debt amounts to 150 percent of its gross domestic product -– the highest ratio among leading industrial nations. In 2005, Moody’s ranked Japan’s bonds below those of Botswana. The fear was that Japan, having run deficits for 15 years, would simply keep issuing bonds, increasing the supply and forcing down the price, reported The New York Times. There was no point in speculating on the bond. The nuclear-power disaster at Fukushima this year has revived this economic problem.

The “in” crowd

Fortunately, the government can “crowd in” investment by paying off its debt. This enables savers to put their money instead into private investment. When the United States government paid off the Civil War debt, interest rates dropped, encouraging private investment and industrialization, concluded Atack and Passell.

The deficit might actually mean something if we could express the net cost of government to you over your lifetime. That’s the idea behind generational accounting. Due partly to the growing burdens of Medicare and Social Security, a 25-year-old male American could expect to pay nearly $200,000 more to government than he would receive in benefits, reported economists Roy Ruffin and Paul Gregory at the turn of the 21st century. On the other hand, the grandparents made out like bandits. Seventy-year-olds received over $50,000 more than they paid in taxes. And Uncle Sam was kinder to the 25-year-old female than to her male Significant Other; she could expect to pay only $90,000 more than she would receive. Women live longer than men, so they can expect to receive benefits for longer. They may also receive benefits as survivors of their husbands.

Kazakhstan is on a similar trajectory. For nearly 30 more years, the pension program will continue its transition from a pay-as-you-go system, in which current workers finance payments to current retirees, to fully-funded liabilities, in which each worker provides for her own eventual retirement. Future generations of workers will have to shift for themselves, unlike workers of 15 years ago.

Sustaining the unsustainable

If we can shift the burden of taxes to future generations, then we may spend too much today. That may help explain why the young bear a larger net burden than the old. It remains to be seen whether the young will pass on their spending to their progeny, too.

If the young perceive that they must pay higher taxes, then they may invest less in education and training, since they would take home a smaller share of the paycheck. The lack of education would strip our economy of growth. And that’s not the end of the story. Higher taxes might also discourage skilled immigrants from moving to the United States; and they might dissuade foreign investors from staking their wealth here, speculated The Financial Times.

Because the government must pay interest on the debt, we can expect it to grow at the rate of interest, unless we run up a surplus that diminishes it. The government cannot run deficits forever if the interest rate exceeds the rate of economic growth. Eventually, we would have to devote the entire economy to paying the interest. Even before interest payments overwhelm, foreigners may refuse to lend us money, for fear that we won’t pay it back. Adjusting for inflation, the annual interest rate at which the National Bank of Kazakhstan lends money, a benchmark for the economy, is roughly zero -- well below the national rate of economic growth, 7% or 8%. The government’s securities amount to 1.8 trillion tenge, according to the National Bank of Kazakhstan. Is cheap money addictive? – Leon Taylor, tayloralmaty@gmail.com

Good reading

Jeremy Atack and Peter Passell. A new economic view of American history. New York: W.W. Norton. Second edition. 1994.

Marco A. Espinosa-Vega. How powerful is monetary policy in the long run? Economic Review. Third quarter 1998.

Milton Friedman. The role of monetary policy. American Economic Review. March 1968. Pages 1-17.

Jagadeesh Gokhale. Tomorrow’s generation will foot the bill. The Financial Times. February 13, 2004. Page 13.

David Leonhardt. That big fat budget deficit. Yawn. The New York Times. February 8, 2004.

Ramon Moreno. Learning from Argentina’s crisis. Economic Letter. October 18, 2002.

Roy J. Ruffin and Paul R. Gregory. Principles of macroeconomics. Seventh edition. Addison-Wesley. 2000.

Michael R. Sesit. The hazard of currency reserves. The Wall Street Journal. February 11, 2004. Page C4.

Mark M. Spiegel. Argentina’s currency crisis: Lessons for Asia. Economic Letter. August 23, 2002.

Todd Zaun. After 100 years, Japanese will go abroad to sell bonds. The New York Times. January 15, 2005. Page B3.


References

World Bank. World Development Indicators. Online at http://data.worldbank.org/indicator

Don’t take the A train

Is a subway system the way to go?

After more than two decades of work, Almaty’s subway system is to open in December, reported Business New Europe. Will it prove worth the wait?

Perhaps not. In the United States, subways cost so much to build and run that they almost always lose money – even in crammed San Francisco, where Marlon Boarnet found that rush-hour traffic was nearly twice the normal capacity of the highways. In 1985, President Ronald Reagan said Miami could have saved money on its transit system by scotching it and buying a limo for each user. Metrorail, in Washington, D.C., was so expensive that the city could have bought a BMW for each daily passenger and saved money, wrote Tony Snow.

Mass transit is expensive, because not enough people use it to drive down its per-rider cost by much. The problem is not the fare. Offering mass transit for free could draw only a third more riders (judging from the American experience), because the demand to ride does not respond strongly to changes in the fare, concluded economists Gerald Kraft and Thomas Domencich. The problem is that people don’t want to walk to the station and wait for the train. Per hour, they value their walking and waiting time at as much as one and half times their wage. Their time within the vehicle – be it a car, bus or train – is valued at only half their wage, reported an urban economist, Arthur O’Sullivan. Mass transit consumes more time than the automobile in the journey from home to the vehicle, and from the vehicle to work. Because people value this time highly, they prefer driving to riding.

San Francisco’s subway system, BART, illustrates how mass transit can go wrong. The train speeds 80 miles per hour between stations spaced 2.5 miles apart. The rider spends little time on the train but must take a while to reach the station and wait for the vehicle. Since the rider values this time highly, he prefers to drive, albeit at only 40 miles per hour. Studies suggested that buses were cheaper than BART at all levels of traffic; and that the auto was cheaper than BART for traffic levels of up to 22,000 passengers per hour, noted Melvin Webber in his case study of the subway system. For a fourth of BART’s construction cost, San Francisco could have bought enough buses to carry all subway riders.

Even so, mass transit may decongest highways and thus save money – lots of it. Bangkok may lose a third of its output to congestion, estimated Japan’s international cooperation agency in 1990. In the United States, congestion may have accounted for .7 of a percent of the value of domestic output in 1994, estimated economists Richard Arnott and Kenneth Small. In Europe, congestion may claim 2 percent of GDP, calculated the transport directorate for the European Union. In Los Angeles, commuting takes so much time that the average household there is willing to take a pay cut in order to take a job that avoids congestion, found urban economists Edward Glaeser and Janet Kohlhase.

Cash or crash?

Suppose that transit helps us avoid just 1 percent of traffic accidents. Then, judging from Urban Institute estimates, cities in the United States would have saved $3.3 billion in 1989, nearly half of the total operating subsidy for public transit that year, said Janet Rothenberg Pack. Mass transit also helps us shorten the auto trip – a value that we can measure as the increase in the worth of a house that is nearer the work site and that thus avoids a longer commute. In addition, mass transit decongests alternate routes and reduces noise and pollution downtown. Finally, the riders themselves get something out of it. Pack figured that the total benefits of transit in Philadelphia exceeded the costs for each of the three years that she studied – 1981, 1982 and 1989. The largest benefits were the welfare gains to riders of transit and commuter rail. Estimates of the net benefits over the three years varied from $70.3 million to $140.3 million.

To justify the subsidy, the city can argue that the price of driving an automobile is too low, since it does not reflect the congestion imposed on other drivers; so the city must lower the price of transit to make it relatively attractive. But the subsidy also lowers the cost of travel; with low prices for both the car and the bus, we may get too much travel.

In recent years, fares from mass transit have covered less than 40 percent of costs. One problem is that transit systems pitch their fares low to attract riders. Since fare cuts attract relatively few riders in the short run, they reduce fare revenues. Moreover, transit systems must pay escalating labor costs. Wages have risen while the productivity of a worker –- the number of transit rides per employee – has dropped.

To save money, the city could contract out transit services to the lowest private bidder. Phoenix, Arizona, hired a taxi firm for dial-a-ride service on Sundays, at one-sixth of the cost of running buses.

Other possibilities include small buses, called jitneys, running to the station or to work; and buses picking up riders more often and at more stops. In Ottawa, a fleet of 850 buses accounted for more than 70% of all rush-hour trips to the downtown, reported the Transportation Research Board in the United States.

Rather than build subways or roads, the government could attack congestion directly, by taxing it. A study of California counties inferred that taxing congestion might prove more productive than building highways. Relieving congestion bore a strong, and positive, statistical relationship to output per worker across counties in the Seventies and Eighties. Constructing highways lacked this relationship. The author, Marlon Boarnet, concluded that taxing vehicles during rush hour would do more to increase output than would building roads. Relieving congestion helps workers get to their jobs quicker and thus produce more.

Building highways may fail to decongest roads by much, because it attracts new drivers, argued Small, an urban transportation economist. Taxing congestion, on the other hand, discourages all drivers. Moreover, it is a cheap measure for the government to undertake. One need only find a way to collect the toll – which may be fairly easy, with electronic monitoring. In New York, New Jersey and Pennsylvania, toll authorities equipped millions of cars with detection gadgets, so that drivers could pay their tolls monthly or with prepaid magnetic cards. The government can either return the money to taxpayers or use it to improve roads and transit. Small figured in 1993 that, in greater Los Angeles, a congestion fee of 15 cents per vehicle-mile during peak hours would raise nearly $3 billion a year.

In principle, the congestion tax should equal the cost that the motorist imposes on other drivers. It compels the motorist to weigh the true costs of his decision before deciding whether to drive. The tax is flexible. The government can experiment with the right tax to levy, raising it on the congested road until the road becomes slightly less congested than alternative routes, noted Small. It can charge a higher tax during peak hours, when the road is more jammed.

Governments are slowly adopting the congestion tax. Singapore has levied it since 1975; and, in 1992, France began taxing congestion on Sundays on its A1 highway into Paris, according to Small.

The case for a congestion tax is not unchallenged. Perhaps the time lost to congestion is not a true social cost, because the driver consents to bear it. Moreover, some congestion may be optimal, as a practical matter. In principle, one may maintain an even flow of traffic on the road; in practice, however, traffic ebbs and flows. If the road is not congested in its peak hour, then it may be underused at other times. In the Netherlands, highway use seemed optimal when 2 percent of each day’s traffic encountered congestion, reported The Economist. But even a little congestion can seem like too much of a good thing. -– Leon Taylor, tayloralmaty@gmail.com

Good reading

Alan Altshuler, editor. Current issues in transportation policy. Lexington, Mass.: LexingtonBooks. 1979.

Marlon G. Boarnet. Infrastructure services and the productivity of public capital: The case of streets and highways. National Tax Journal50 (1): 39-57. March 1997. Online. Reprinted in Wassmer (2000).

The Economist. Why motorists always outsmart planners, economists, and traffic engineers: The unbridgeable gap. May 9, 1998. Reprinted in Wassmer (2000). Reported the estimate of European congestion.

Matthew Edel and Jerome Rothenberg, editors. Readings in urban economics. New York: Macmillan. 1972.

Edward L. Glaeser and Janet E. Kohlhase. Cities, regions and the decline of transport costs. Harvard Institute of Economic Research Discussion Paper 2014. Online. 2003.

Gerald Kraft and Thomas A. Domencich. Free transit. In Edel and Rothenberg (1972).

Edwin Mills and Bruce Hamilton. Urban economics. Upper Saddle River, New Jersey: Prentice Hall. Fifth edition. 1997. Discusses urban transportation.

Arthur O’Sullivan. Urban economics. New York: McGraw-Hill. Seventh edition. 2009. Discusses mass transit.

Janet Rothenberg Pack. You ride, I’ll pay: Social benefits and transit subsidies. The Brookings Review 10(3). Summer 1992. Online. Reprinted in Wassmer (2000).

Kenneth A. Small. Urban traffic congestion: A new approach to the Gordian knot. Brookings Review 11: 6-11. Summer 1993. Online. Reprinted in Wassmer (2000).

Transportation Research Board, of the National Academy of Sciences. Case study of bus rapid transit in Ottawa. Online. Undated.

Robert W. Wassmer, editor. Readings in urban economics, Malden, Mass.: Blackwell. 2000.

Melvin E. Webber. The BART experience – what have we learned? In Altshuler (1979).

References

Clare Nuttall. Almaty metro nears end of line. Business New Europe. May 31, 2011. Online.