Black gold as an asset
The relevant measure of an industry’s profitability is not the absolute level of its output price, or even of its price minus the average out-of-pocket cost of production (“net price”). The best measure is its rate of return to capital, relative to the rates of return on alternative assets. The government pondering nationalization is in the same position as a financial investor who is contemplating whether to buy more Google stock: To increase the value of his portfolio, he will shift his wealth to the asset with the highest rate of return. He will buy Google stock only if its rate of return exceeds that of the best alternative asset – another stock, perhaps, or a bond or even money. The current net price of the stock is neither here nor there. Similarly, a government should view natural resources as assets in the nation’s portfolio.
A former newspaper reporter in the United States, Harold Hotelling, explained this 80 years ago. (According to legend, Hotelling had to give up journalism for mathematical economics because he was a slow writer.) The opening of the article could have been written today: “Contemplation of the world’s disappearing supplies of minerals, forests, and other exhaustible assets has led to demand for regulation of their exploitation.”
As Hotelling sees it, the owner of an oil deposit may choose either to leave part of his wealth in the ground or to convert it to some other asset such as a security. Of the two options, he will choose the one with the higher return.
For simplicity, suppose that oil extraction incurs no out-of-pocket costs; the oil price is thus pure profit. The expected return to the oil in the ground is the expected increase in its price over time. If we anticipate that the price of an oil barrel will rise from $100 now to $108 next year, then our expected return is 8%. Suppose that the alternative asset is a savings account with an interest rate of 4%. Then the owner of oil should leave it in the ground, where it will earn the higher return. Extracting and selling the oil now, banking the money at 4% interest, is foolish. The investor could have realized eight cents on a dollar of wealth by waiting until next year to cash in on high oil prices, but instead he has chosen four cents. Whether the current spot net price of a barrel of oil happens to be $1 or $1 million should be of interest only to the newspapers.
The government should not treat oil as just another perishable commodity. Were we talking about apples, then relating the level of production directly to the current price would be appropriate. Apples harvested today will spoil next year; there is no opportunity cost of foregone future use to take into account. Only harvest costs matter. But oil is a durable asset. Forty gallons in the ground will not vanish next year, and they may well be worth more then than now. The current price should not determine the decision of when to extract, since the oil can be sold either now or later.
In our example, owners of oil deposits will leave oil in the ground for another year, since this will earn the higher return. The rate of extraction will fall. The current supply of crude on the spot market will decrease. This scarcity will force up the current price of crude until the expected return on the oil deposit falls to 4%. (This would occur when the current spot price rises to $103.85, given that the price next year will be $108.) At this point, there is no longer an incentive for owners of oil deposits to cancel more plans to extract the crude; the rate of return to holding oil in the ground equals that of the alternative asset. Consequently, we would expect oil prices to rise over time at the rate of interest.
All for the best
This allocation of crude oil to users over time is the most valuable available. Although we assumed away out-of-pocket extraction costs, a vital cost of extracting today still remains – the loss of that oil to future users. To take that opportunity cost into account, current users of oil should pay higher prices than they otherwise would. When oil producers compete for customers, they will bid down the current price of oil to the point that it just covers the costs of producing another barrel. In addition to the out-of-pocket expense of paying workers and buying derricks, we must add the profit foregone by selling another barrel of oil now rather than next year. That opportunity cost is the price that the oil would have fetched in 2012. But the price next year of another barrel of oil must equal its value to the buyer, since otherwise that price must change: Either the price would rise (because the value to a buyer of another barrel is greater than the price that he would pay, which would compel buyers to compete for the barrel by bidding up the price), or it would fall (because the barrel’s value falls below the price that the buyer must pay, generating excess supply). Consequently, the current price of oil equals the value foregone by consuming it now rather than later. If consumers today are willing to pay this price, then they must value another barrel at least as much as would future users. The resulting allocation of oil over time is efficient in the sense that it ensures that each barrel goes to the users who would value it the most.
The real world imposes complications galore. The global oil market is not perfectly competitive, thanks to the Organization of Petroleum-Exporting Countries, and so the OPEC cartel may set the spot price above the cost accruing to another barrel, without fearing that rivals will undercut it in price. Oil extraction may also incur environmental costs – costs that the spot market does not take into account, since neither the buyer nor the seller of oil has to pay them. Incorporating these details into the analysis does not change the tenet that the owner of oil should view it as just another asset.
The model predicts that the net price of oil (adjusted for inflation) should rise over time at the rate of interest. Adjusting for inflation, the global rate of return to physical capital may be roughly 2% to 4% over the very long run.
The interest rate also provides a measure of how rapidly resource prices should rise, remarked Hotelling. “…The rate of interest is set by a great variety of forces, chiefly independent of the particular commodity and industry in question, and is not greatly affected by variations in the output of the mine or oil well in question. It is likely, therefore, that in deciding questions of public policy relative to exhaustible resources, no large errors will be made by using the market rate of interest.” -– Leon Taylor, tayloralmaty@gmail.com
Good reading
Hotelling, Harold. The economics of exhaustible resources. Journal of Political Economy, April 1931.
Solow, Robert M. The economics of resources or the resources of economics. American Economic Review, May 1974. Reprinted in Robert and Nancy S. Dorfman, editors, Economics of the environment: Selected readings. Third edition. New York: W. W. Norton.
Parts of this post draw upon an article of mine published by the Caspian Digest in 2008.
Tuesday, March 29, 2011
Friday, March 25, 2011
Where there’s oil, there’s fire
Is Kazakhstan taking foreign investors for a ride?
The world’s woe is Kazakhstan’s wealth. In the past few weeks, the spot price of an oil barrel on global markets has been above $100 for the first time since September 2008, according to data from the United States Energy Information Administration. For most products, a higher price reduces unit sales, so that revenues do not climb as rapidly as the price. But oil is so vital to production that unit sales decline only a little – until, at least, firms can find a cheaper way to produce. Meanwhile, Kazakhstan’s revenues from exports will capture much of the 28% increase in oil prices that has occurred since early 2010.
The benefits to Kazakhstan don’t stop there. When oilmen respend the export revenues in Kazakhstan, their demand for services will create jobs in one of the country’s fastest-growing sectors. In that sense, the share of oil and gas production in the nation’s economy (roughly 30%) underestimates the industry’s importance here. The back of my envelope says that a 10% sustained increase in the global spot price of oil may relate to a 4% or 5% increase in the size of Kazakhstan’s economy.
As in 2008, $100+ prices may tempt the government of Kazakhstan to cash in assets that have presumably peaked in value. The government has pressed the foreign-dominated consortium at Kashagan to hurry up and produce; and it has moved slowly toward a degree of de facto nationalization by insisting that foreign energy enterprises here turn over more ownership to the state energy firm, KazMunaiGaz. KMG has a pre-emptive right to buy oil assets, and it usually participates in the joint ventures that have replaced production-sharing agreements in the oil and gas industry.
All this should surprise no one. Around the world, developing countries confiscated natural resources from foreign owners in the 1970s, when the prices of those resources were unusually high.
Rebuilding reputation
Still, nationalization may not be sensible. Governments that seize lucrative industries will stop attracting so much foreign-owned capital. They may try to attract it again by promising to forgo taxes, but investors will regard this as cheap talk.
To convince investors that they’re for real, governments may have to show that they’ll penalize themselves in the event of another tax renege. This may help explain why Kazakhstan builds pipelines and Caspian port facilities. KMG is a major shareholder of the pipeline that delivers oil from the Tenghiz field to a Russian port on the Black Sea, Novorossiysk, as well as of the pipeline that runs from a Caspian port, Atyrau, to the Xinjiang region of China, according to the United States Energy Information Administration. If this construction fails to bring in Western investors, then the government may be wasting some of its money, since home industries are not likely to fully use the oil and gas infrastructure. (The main energy fuel for Kazakhstani production is coal).
Government spending on infrastructure comes at the expense of that on health and education. Of course, this expense is essential to the competitive strategy; if the strategy would cost the government nothing, then it is just more cheap talk.
Not only is Kazakhstan’s competitive spending on infrastructure expensive; it probably won’t work. The government’s “forced industrialization-innovation program” might be interpreted in the West -- understandably -- as a new tax on foreign investment. The sprawling legislation for the program, to cost 6.5 trillion tenge (over $43 billion), says it will draw upon funds from “private domestic and foreign investors” as well as other sources. This cryptic statement may undermine any credibility that the government has obtained from building infrastructure for particular foreign investors. -– Leon Taylor, tayloralmaty@gmail.com
References
Government of Kazakhstan. 2010-2014 National Program of forced industrial and innovative development of the Republic of Kazakhstan and cancellation of certain decrees of the President of the Republic of Kazakhstan. Presidential decree. 2010. www.invest.gov.kz
United States Department of Energy, Energy Information Administration. Country analysis briefs: Kazakhstan. www.eia.gov
United States Department of State. Background notes: Kazakhstan. www.state.gov
The world’s woe is Kazakhstan’s wealth. In the past few weeks, the spot price of an oil barrel on global markets has been above $100 for the first time since September 2008, according to data from the United States Energy Information Administration. For most products, a higher price reduces unit sales, so that revenues do not climb as rapidly as the price. But oil is so vital to production that unit sales decline only a little – until, at least, firms can find a cheaper way to produce. Meanwhile, Kazakhstan’s revenues from exports will capture much of the 28% increase in oil prices that has occurred since early 2010.
The benefits to Kazakhstan don’t stop there. When oilmen respend the export revenues in Kazakhstan, their demand for services will create jobs in one of the country’s fastest-growing sectors. In that sense, the share of oil and gas production in the nation’s economy (roughly 30%) underestimates the industry’s importance here. The back of my envelope says that a 10% sustained increase in the global spot price of oil may relate to a 4% or 5% increase in the size of Kazakhstan’s economy.
As in 2008, $100+ prices may tempt the government of Kazakhstan to cash in assets that have presumably peaked in value. The government has pressed the foreign-dominated consortium at Kashagan to hurry up and produce; and it has moved slowly toward a degree of de facto nationalization by insisting that foreign energy enterprises here turn over more ownership to the state energy firm, KazMunaiGaz. KMG has a pre-emptive right to buy oil assets, and it usually participates in the joint ventures that have replaced production-sharing agreements in the oil and gas industry.
All this should surprise no one. Around the world, developing countries confiscated natural resources from foreign owners in the 1970s, when the prices of those resources were unusually high.
Rebuilding reputation
Still, nationalization may not be sensible. Governments that seize lucrative industries will stop attracting so much foreign-owned capital. They may try to attract it again by promising to forgo taxes, but investors will regard this as cheap talk.
To convince investors that they’re for real, governments may have to show that they’ll penalize themselves in the event of another tax renege. This may help explain why Kazakhstan builds pipelines and Caspian port facilities. KMG is a major shareholder of the pipeline that delivers oil from the Tenghiz field to a Russian port on the Black Sea, Novorossiysk, as well as of the pipeline that runs from a Caspian port, Atyrau, to the Xinjiang region of China, according to the United States Energy Information Administration. If this construction fails to bring in Western investors, then the government may be wasting some of its money, since home industries are not likely to fully use the oil and gas infrastructure. (The main energy fuel for Kazakhstani production is coal).
Government spending on infrastructure comes at the expense of that on health and education. Of course, this expense is essential to the competitive strategy; if the strategy would cost the government nothing, then it is just more cheap talk.
Not only is Kazakhstan’s competitive spending on infrastructure expensive; it probably won’t work. The government’s “forced industrialization-innovation program” might be interpreted in the West -- understandably -- as a new tax on foreign investment. The sprawling legislation for the program, to cost 6.5 trillion tenge (over $43 billion), says it will draw upon funds from “private domestic and foreign investors” as well as other sources. This cryptic statement may undermine any credibility that the government has obtained from building infrastructure for particular foreign investors. -– Leon Taylor, tayloralmaty@gmail.com
References
Government of Kazakhstan. 2010-2014 National Program of forced industrial and innovative development of the Republic of Kazakhstan and cancellation of certain decrees of the President of the Republic of Kazakhstan. Presidential decree. 2010. www.invest.gov.kz
United States Department of Energy, Energy Information Administration. Country analysis briefs: Kazakhstan. www.eia.gov
United States Department of State. Background notes: Kazakhstan. www.state.gov
Wednesday, March 16, 2011
A tight spot
How effective can the National Bank be?
The central bank of Kazakhstan, which manages the supply of tenge, is trying to hold the lid on rising prices. At present, prices in general are rising at an annualized rate of 21%. (In contrast, the rate of inflation for 2010 was 7.8%.) Some price increases are due to winter, which increases transport costs; they will fade with the spring. Food prices, which are rising more steeply than others, may also moderate in the next harvest. Even so, Kazakhstan has good reason to worry about inflation.
To avert further inflation, the National Bank of Kazakhstan has raised the interest rate at which it lends money to commercial banks. The idea is that banks will respond by borrowing less from the National Bank. This will leave them with less money to lend to the public – loans that could have expanded the supply of tenge and consequently could have fueled inflation.
The increase in the Bank’s interest rate – the “refinancing” rate – looks steep: From 7% to 7.5% per year. However, note that the new rate is much smaller than that of inflation. If this inflation continues, then those borrowing from the National Bank will be able to pay it back in tenge that are weaker than those borrowed. In other words, the borrowers will be able to spend the loans now on goods while their prices are still low – and then pay the money back later, when prices are high and reduce the money’s purchasing power. The borrowers can borrow good tenge and then pay back bad ones. In that light, the Bank’s new policy is less restrictive than it may seem. The Bank may be pushing on a string: Its new interest rate may not cool off the economy by much.
Toolin’ around
Unfortunately, the National Bank doesn’t have better tools. Western central banks usually fight inflation by selling paper loans, like government bonds, in exchange for cash and checks. These “open market operations” reduce the supply of money available for spending, thus reducing the pressure on prices to rise. Their advantage is in enabling the central bank to change the money supply with some precision. Over the past few years, the National Bank has turned more and more to open market operations. But it cannot rely on them in a big way because Kazakhstan’s market for securities is thin: Few bonds and notes trade here. As Kazakhstan’s fast-growing economy continues to develop, so will its market for securities. For now the market is too small to support major operations.
The remaining possibility for the National Bank is to discourage banks from lending by requiring them to lock up a larger share of their deposits. But at the moment, commercial banks already are sitting on a lot of cash and assets that they can convert easily to cash. They aren’t lending as much as they could. To raise the share of reserves that they must set aside would simply confirm what they already are doing.
The weakness of strength
Not only is the National Bank hampered by weak tools; it also faces a paradox. Over the past year, global oil prices have risen by almost a fourth. To pay these prices, buyers of Kazakhstani oil must have more tenge. This increase in the demand for tenge raises their foreign exchange value. Two years ago, you needed 151 tenge to buy a United States dollar; today, you need only 146 tenge. (The exchange rate last December was 147.5.) This strengthening of the tenge enables Kazakhstanis to buy imports more cheaply than before, since the imports are priced in dollars (or other foreign currencies). To buy more imports, Kazakhstanis will cut back on purchases of domestic goods. Meanwhile, Kazakhstani exports will become more expensive for foreigners to buy, since these goods are priced in tenge that are more costly to buy than before. In short, a stronger tenge reduces the demand, here and abroad, for Kazakhstani goods.
To keep tenge from becoming too strong, the National Bank has been selling them in exchange for foreign currencies, to the tune of a few billion dollars’ worth per month. This may have contributed to the increase of nearly 19% in net international reserves for Kazakhstan from December to February.
The Bank chair, Gregory Marchenko, views these operations as successful. The European euro, the Russian ruble and the Chinese yuan all have been strengthening against the dollar more rapidly than the tenge has, he notes. In fact, the tenge is weakening against the ruble, from 4.85 tenge to the ruble in late December 2010 to 5.05 tenge in late February. And it is weakening against the euro, from 193.8 tenge to 199 over the same period, according to National Bank data.
“That is why we can strengthen tenge against US dollar under the control of the National Bank, which will not adversely affect the competitiveness of Kazakhstan’s economy,” Marchenko says, according to Interfax’s account of a presidential news release this week.
The Bank’s interventions in currency markets are becoming habitual. “We see no need and no sense in sharp exchange rate swings,” Marchenko said last year, according to Silk Road Intelligencer.
The sale of tenge eventually puts more of them in circulation, increasing their overall supply. This, in turn, pressures Kazakhstani prices to rise, since there are more tenge chasing domestic goods than before. The Bank could wind up feeding the very inflation that it has pledged to fight.
Marchenko denies that the operations have increased either the tenge supply or the rate of inflation, according to Interfax. Certainly, banks might have bought many of the tenge sold by the National Bank and stowed them in reserves rather than make them available for spending. But banks won't hold large excess reserves forever; once they regain their confidence, they will put the money to work, in the form of loans.
The Bank is aware of the problem. It offset many of the new tenge by selling short-term notes for tenge, according to Delovoy Kazakhstan. Such sterilization is common among central banks. But once creditors are back in a lending mood, they will sell their notes for tenge to lend –- tenge now being stashed away. Spending will rise, pressuring prices upward.
The long-run monetary trend is clear: A broad measure of the tenge supply (M2) increased 24% in January 2011 over the previous year, according to National Bank data. The supply of money is rising faster than output. Until the Bank mops up the excess tenge, the potential for inflationary spending will exist. The Bank’s dilemma is that more purchases of tenge may strengthen the currency's value in foreign exchange. In monetary policy, all blessings are mixed. – Leon Taylor, tayloralmaty@gmail.com
Good reading
Zhanbota Tolegen. Grigoriy Marchenko: “Tenge snova vstupyl v period ukrepleniya.” Delovoy Kazakhstan. March 11, 2011. Page 1.
References
Interfax-Kazakhstan. Kazakh National Bank has purchased $6 billion in year to date to stabilize tenge exchange rate. Online. March 14, 2011.
Silk Road Intelligencer. Tenge to appreciate against dollar – Marchenko. Online. January 14, 2010.
Silk Road Intelligencer. Kazakhstan raises key refinancing rate. Online. March 10, 2011.
The central bank of Kazakhstan, which manages the supply of tenge, is trying to hold the lid on rising prices. At present, prices in general are rising at an annualized rate of 21%. (In contrast, the rate of inflation for 2010 was 7.8%.) Some price increases are due to winter, which increases transport costs; they will fade with the spring. Food prices, which are rising more steeply than others, may also moderate in the next harvest. Even so, Kazakhstan has good reason to worry about inflation.
To avert further inflation, the National Bank of Kazakhstan has raised the interest rate at which it lends money to commercial banks. The idea is that banks will respond by borrowing less from the National Bank. This will leave them with less money to lend to the public – loans that could have expanded the supply of tenge and consequently could have fueled inflation.
The increase in the Bank’s interest rate – the “refinancing” rate – looks steep: From 7% to 7.5% per year. However, note that the new rate is much smaller than that of inflation. If this inflation continues, then those borrowing from the National Bank will be able to pay it back in tenge that are weaker than those borrowed. In other words, the borrowers will be able to spend the loans now on goods while their prices are still low – and then pay the money back later, when prices are high and reduce the money’s purchasing power. The borrowers can borrow good tenge and then pay back bad ones. In that light, the Bank’s new policy is less restrictive than it may seem. The Bank may be pushing on a string: Its new interest rate may not cool off the economy by much.
Toolin’ around
Unfortunately, the National Bank doesn’t have better tools. Western central banks usually fight inflation by selling paper loans, like government bonds, in exchange for cash and checks. These “open market operations” reduce the supply of money available for spending, thus reducing the pressure on prices to rise. Their advantage is in enabling the central bank to change the money supply with some precision. Over the past few years, the National Bank has turned more and more to open market operations. But it cannot rely on them in a big way because Kazakhstan’s market for securities is thin: Few bonds and notes trade here. As Kazakhstan’s fast-growing economy continues to develop, so will its market for securities. For now the market is too small to support major operations.
The remaining possibility for the National Bank is to discourage banks from lending by requiring them to lock up a larger share of their deposits. But at the moment, commercial banks already are sitting on a lot of cash and assets that they can convert easily to cash. They aren’t lending as much as they could. To raise the share of reserves that they must set aside would simply confirm what they already are doing.
The weakness of strength
Not only is the National Bank hampered by weak tools; it also faces a paradox. Over the past year, global oil prices have risen by almost a fourth. To pay these prices, buyers of Kazakhstani oil must have more tenge. This increase in the demand for tenge raises their foreign exchange value. Two years ago, you needed 151 tenge to buy a United States dollar; today, you need only 146 tenge. (The exchange rate last December was 147.5.) This strengthening of the tenge enables Kazakhstanis to buy imports more cheaply than before, since the imports are priced in dollars (or other foreign currencies). To buy more imports, Kazakhstanis will cut back on purchases of domestic goods. Meanwhile, Kazakhstani exports will become more expensive for foreigners to buy, since these goods are priced in tenge that are more costly to buy than before. In short, a stronger tenge reduces the demand, here and abroad, for Kazakhstani goods.
To keep tenge from becoming too strong, the National Bank has been selling them in exchange for foreign currencies, to the tune of a few billion dollars’ worth per month. This may have contributed to the increase of nearly 19% in net international reserves for Kazakhstan from December to February.
The Bank chair, Gregory Marchenko, views these operations as successful. The European euro, the Russian ruble and the Chinese yuan all have been strengthening against the dollar more rapidly than the tenge has, he notes. In fact, the tenge is weakening against the ruble, from 4.85 tenge to the ruble in late December 2010 to 5.05 tenge in late February. And it is weakening against the euro, from 193.8 tenge to 199 over the same period, according to National Bank data.
“That is why we can strengthen tenge against US dollar under the control of the National Bank, which will not adversely affect the competitiveness of Kazakhstan’s economy,” Marchenko says, according to Interfax’s account of a presidential news release this week.
The Bank’s interventions in currency markets are becoming habitual. “We see no need and no sense in sharp exchange rate swings,” Marchenko said last year, according to Silk Road Intelligencer.
The sale of tenge eventually puts more of them in circulation, increasing their overall supply. This, in turn, pressures Kazakhstani prices to rise, since there are more tenge chasing domestic goods than before. The Bank could wind up feeding the very inflation that it has pledged to fight.
Marchenko denies that the operations have increased either the tenge supply or the rate of inflation, according to Interfax. Certainly, banks might have bought many of the tenge sold by the National Bank and stowed them in reserves rather than make them available for spending. But banks won't hold large excess reserves forever; once they regain their confidence, they will put the money to work, in the form of loans.
The Bank is aware of the problem. It offset many of the new tenge by selling short-term notes for tenge, according to Delovoy Kazakhstan. Such sterilization is common among central banks. But once creditors are back in a lending mood, they will sell their notes for tenge to lend –- tenge now being stashed away. Spending will rise, pressuring prices upward.
The long-run monetary trend is clear: A broad measure of the tenge supply (M2) increased 24% in January 2011 over the previous year, according to National Bank data. The supply of money is rising faster than output. Until the Bank mops up the excess tenge, the potential for inflationary spending will exist. The Bank’s dilemma is that more purchases of tenge may strengthen the currency's value in foreign exchange. In monetary policy, all blessings are mixed. – Leon Taylor, tayloralmaty@gmail.com
Good reading
Zhanbota Tolegen. Grigoriy Marchenko: “Tenge snova vstupyl v period ukrepleniya.” Delovoy Kazakhstan. March 11, 2011. Page 1.
References
Interfax-Kazakhstan. Kazakh National Bank has purchased $6 billion in year to date to stabilize tenge exchange rate. Online. March 14, 2011.
Silk Road Intelligencer. Tenge to appreciate against dollar – Marchenko. Online. January 14, 2010.
Silk Road Intelligencer. Kazakhstan raises key refinancing rate. Online. March 10, 2011.
Wednesday, March 2, 2011
Crunch
Why are Central Asian governments stingy?
Some observers attribute to recession the tightwad policies for social welfare in Central Asia. In 2009, Newsweek explained that “last year's crash in oil prices [led to a] fall in populist spending that Central Asia's petrocrats use to buttress their popularity.” By implication, social welfare spending here is an economic problem, not a political one. In economic slowdowns, governments here have trouble raising money, so they must cut back spending. Don’t blame the petrocrats.
In reality, “populist spending” fell more than 15 years ago, thanks to vicissitudes in collecting tax revenues in the chaotic transition to markets. After independence, income per capita (measured as purchasing power) dropped by 40% or more in this region by 1998, when the collapse of the Russian ruble temporarily curbed export markets here. Torn by civil war, Tajikistan fared the worst, with a drop of 29% in 1992 alone.
As tax revenues fell, government books went into the red. Over the Nineties, governments in Central Asia cut spending in order to reduce their deficits and qualify for Western loans. In Kazakhstan, the share of government spending in national income fell from 26% in 1995 to 19% in 1997. Kyrgyzstan followed a similar pattern (28% to 22%). The fiscal reduction in Tajikistan took longer to play out, but its government became the smallest in Central Asia (13% in 2000), although it probably has the greatest social needs in the region.
Central Asian governments are still lean. A good measure of a government's influence in the national economy is the ratio of its cash payments -- including salaries, purchases and grants -- to the size of the economy (measured by gross domestic product). For Central Asia, World Bank data are available only for Kazakhstan and Kyrgyzstan. From 2006 through 2008, their respective ratios averaged 14.5% and 16.9%. These were far below the ratios for Sweden (32.7%), the United Kingdom (41%), and even of the United States (21.8%), which has a small government by Western standards.
The pink of health?
In short, the size of governments in Central Asia is an economic issue: Governments have trouble collecting taxes and borrowing abroad. But their social welfare spending, given their revenues, is another matter. In 2002, before the global slowdown, the U.S. government spent nearly $4,300 per person on health. Kazakhstan spent $62. Health spending by the other four governments in the region varied from $30 to $11 (Tajikistan). Thanks to public frugality, Central Asians must pay out of pocket for survival. In the United States, 55% of total health spending in 2002 was private. In Tajikistan, it was 72%. Were governments here acting in the interests of their typical citizens, the public share of health spending probably would be far higher in Tajikistan than in the U.S., since Tajikistanis can’t afford a doctor on their own -- their average income is less than 4% that of the U.S.
One could argue that governments in the region are simply following the preferences of their constituents; Central Asians choose not to spend on health. Total health spending as a share of national income here ranged from 3.5% in Kazakhstan to 5.5% in Uzbekistan in 2006. In contrast, the figure in the European Union was 7.3% in 1998, rising to 8.3% in 2008, according to the Organisation for Economic Co-Operation and Development (OECD).
But at times a government should act on information that its citizens don’t have. Life expectancies have dropped significantly since these five nations became independent. Total life expectancy at birth was 78 in the U.S. in 2007. For males in Central Asia, it was 62 to 69. From 1991 to 1998, male life expectancy fell by 5% in Kyrgyzstan and 6% in Kazakhstan. These are sharp changes to occur in such an enduring characteristic over only seven years. Life expectancy for women also declined sharply but remained above that for men, ranging in 1998 from 70 in Uzbekistan to 72 in Kyrgyzstan.
Death rates are especially high for some groups that lack political power. In the U.S., of every 1,000 live births, seven or so result in death within a year. In Kazakhstan and Kyrgyzstan, the respective figures are 31 and 37. In Kazakhstan, the government in the Nineties cut back sharply upon rural clinics and hospitals -- as well as on the number of once-ubiquitous trained midwives in rural areas, known as the feldshari.
To some extent, the government cuts in health spending were justified by the Soviet oversupply of hospitals and specialist doctors. But Central Asian governments may have cut away the bone as well as the fat. Tuberculosis has spread in recent years.
The taxman cometh
One way to judge a government’s commitment to future generations is to look at how much public spending goes into education. In the U.S. in 2000 through 2002, it was about 17%. In Tajikistan and Kyrgyzstan, the shares were similar -– 18% and 19%, respectively. These allocations may fail to recognize that private commitments to education in the region are weaker than elsewhere, putting the ball in the government’s court. In the U.S., total spending on education is nearly 6% of GDP. In Kazakhstan and Kyrgyzstan, the figures are only half as high. Yet education is a vital determinant – probably the most vital –- of sustained economic growth, which matters even more to a poor region like Central Asia than it does to the U.S.
Populism in Central Asia is most evident in the one area where it may hurt the most -– business climate. Averaged over 2008 and 2009, the ratio of business taxes to profits was 92.3% in Uzbekistan and 85.7% in Tajikistan, estimated the World Bank. (As usual, no data were available for Turkmenistan.) In Kyrgyzstan, the ratio was a milder 60.4%, still higher than in Sweden (54.6%), the United States (46.5%), and the United Kingdom (35.6%). To some extent, these ratios may reflect the government’s difficulty in taxing citizens. Even so, the ratios cut off two vital sources of economic growth: Physical capital and technology from abroad. There is not much point investing in a country that will claim 92% of the profits.
The conservative taxer in Central Asia has the most successful economy, Kazakhstan (38.8%). But even Kazakhstan has reneged in recent years on commitments to hold down taxes on foreign investment. The Karachaganak project to extract Caspian oil and gas has been fighting off for months the government’s attempts to become an owner of it. Meanwhile, it faces government claims exceeding $2.5 billion, reports an online portal, Silk Road Intelligencer.
In general, I’m having a spot of trouble identifying the free-handed populism that, according to Newsweek, has kept Central Asian dictators in power. The fiscal patterns suggest instead that governments here may often act contrary to the long-run interests of their constituents. The government budget is a consequence of political power, not a source of it. -- Leon Taylor, tayloralmaty@gmail.com
Statistical sources and notes
a. Government spending as a share of gross domestic product. Sources: Richard Pomfret, The Central Asian economies since independence, Princeton, 2006, page 12, Table 1.4; and the United States Bureau of Economic Analysis, online at www.bea.gov .
b. Government expenses (i.e., cash payments) as a share of GDP. Source: World Bank at http://data.worldbank.org/indicator/ .
c. Life expectancy for males at birth. Sources: The CIA World Factbook, 2008; World Health Organization, data for the Nineties. Life expectancy for females at birth: World Health Organization. Total life expectancy at birth for the United States in 2007: World Bank, World Development Indicators.
d. Government spending on health per capita. Source: The World Bank’s World Development Indicators for 2002. These are 1998 dollars. That is, they are expressed in terms of the purchasing power of a dollar in 1998. The figures are also adjusted so that a dollar would have the same purchasing power in any country when converted into the domestic currency (“purchasing power parity”).
e. Infant mortality rates. Source: The CIA World Factbook, 2005.
f. The private share of all health spending. Sources: The World Health Organization, 2002; William Aaronson, Health care finance, online.
g. The share of total health spending in GDP. Source: World Health Organization, World health report 2006. For the European Union: OECD, Health at a glance: Europe 2010, page 12. http://ec.europa.eu/health/reports/docs/health_glance_2010_exs_en.pdf . 2010.
h. Educational spending as a share of government spending. Source: The United Nations Human Development Programme (UNHDP).
i. Educational spending as a share of GDP. Source: The UNHDP, 2000-2002.
j. Business taxes as a share of profits. Source: http://data.worldbank.org/indicator/
References
A.Maratov. U.S. concerned over revision of oil contracts in Kazakhstan. Trend, online. January 5, 2011.
Owen Matthews. Beware of big ideas. Newsweek. www.newsweek.com . August 1, 2009.
Silk Road Intelligencer. Kazakhstan recovers $143 million from Karachaganak venture - customs committee. Online. January 20, 2011.
Some observers attribute to recession the tightwad policies for social welfare in Central Asia. In 2009, Newsweek explained that “last year's crash in oil prices [led to a] fall in populist spending that Central Asia's petrocrats use to buttress their popularity.” By implication, social welfare spending here is an economic problem, not a political one. In economic slowdowns, governments here have trouble raising money, so they must cut back spending. Don’t blame the petrocrats.
In reality, “populist spending” fell more than 15 years ago, thanks to vicissitudes in collecting tax revenues in the chaotic transition to markets. After independence, income per capita (measured as purchasing power) dropped by 40% or more in this region by 1998, when the collapse of the Russian ruble temporarily curbed export markets here. Torn by civil war, Tajikistan fared the worst, with a drop of 29% in 1992 alone.
As tax revenues fell, government books went into the red. Over the Nineties, governments in Central Asia cut spending in order to reduce their deficits and qualify for Western loans. In Kazakhstan, the share of government spending in national income fell from 26% in 1995 to 19% in 1997. Kyrgyzstan followed a similar pattern (28% to 22%). The fiscal reduction in Tajikistan took longer to play out, but its government became the smallest in Central Asia (13% in 2000), although it probably has the greatest social needs in the region.
Central Asian governments are still lean. A good measure of a government's influence in the national economy is the ratio of its cash payments -- including salaries, purchases and grants -- to the size of the economy (measured by gross domestic product). For Central Asia, World Bank data are available only for Kazakhstan and Kyrgyzstan. From 2006 through 2008, their respective ratios averaged 14.5% and 16.9%. These were far below the ratios for Sweden (32.7%), the United Kingdom (41%), and even of the United States (21.8%), which has a small government by Western standards.
The pink of health?
In short, the size of governments in Central Asia is an economic issue: Governments have trouble collecting taxes and borrowing abroad. But their social welfare spending, given their revenues, is another matter. In 2002, before the global slowdown, the U.S. government spent nearly $4,300 per person on health. Kazakhstan spent $62. Health spending by the other four governments in the region varied from $30 to $11 (Tajikistan). Thanks to public frugality, Central Asians must pay out of pocket for survival. In the United States, 55% of total health spending in 2002 was private. In Tajikistan, it was 72%. Were governments here acting in the interests of their typical citizens, the public share of health spending probably would be far higher in Tajikistan than in the U.S., since Tajikistanis can’t afford a doctor on their own -- their average income is less than 4% that of the U.S.
One could argue that governments in the region are simply following the preferences of their constituents; Central Asians choose not to spend on health. Total health spending as a share of national income here ranged from 3.5% in Kazakhstan to 5.5% in Uzbekistan in 2006. In contrast, the figure in the European Union was 7.3% in 1998, rising to 8.3% in 2008, according to the Organisation for Economic Co-Operation and Development (OECD).
But at times a government should act on information that its citizens don’t have. Life expectancies have dropped significantly since these five nations became independent. Total life expectancy at birth was 78 in the U.S. in 2007. For males in Central Asia, it was 62 to 69. From 1991 to 1998, male life expectancy fell by 5% in Kyrgyzstan and 6% in Kazakhstan. These are sharp changes to occur in such an enduring characteristic over only seven years. Life expectancy for women also declined sharply but remained above that for men, ranging in 1998 from 70 in Uzbekistan to 72 in Kyrgyzstan.
Death rates are especially high for some groups that lack political power. In the U.S., of every 1,000 live births, seven or so result in death within a year. In Kazakhstan and Kyrgyzstan, the respective figures are 31 and 37. In Kazakhstan, the government in the Nineties cut back sharply upon rural clinics and hospitals -- as well as on the number of once-ubiquitous trained midwives in rural areas, known as the feldshari.
To some extent, the government cuts in health spending were justified by the Soviet oversupply of hospitals and specialist doctors. But Central Asian governments may have cut away the bone as well as the fat. Tuberculosis has spread in recent years.
The taxman cometh
One way to judge a government’s commitment to future generations is to look at how much public spending goes into education. In the U.S. in 2000 through 2002, it was about 17%. In Tajikistan and Kyrgyzstan, the shares were similar -– 18% and 19%, respectively. These allocations may fail to recognize that private commitments to education in the region are weaker than elsewhere, putting the ball in the government’s court. In the U.S., total spending on education is nearly 6% of GDP. In Kazakhstan and Kyrgyzstan, the figures are only half as high. Yet education is a vital determinant – probably the most vital –- of sustained economic growth, which matters even more to a poor region like Central Asia than it does to the U.S.
Populism in Central Asia is most evident in the one area where it may hurt the most -– business climate. Averaged over 2008 and 2009, the ratio of business taxes to profits was 92.3% in Uzbekistan and 85.7% in Tajikistan, estimated the World Bank. (As usual, no data were available for Turkmenistan.) In Kyrgyzstan, the ratio was a milder 60.4%, still higher than in Sweden (54.6%), the United States (46.5%), and the United Kingdom (35.6%). To some extent, these ratios may reflect the government’s difficulty in taxing citizens. Even so, the ratios cut off two vital sources of economic growth: Physical capital and technology from abroad. There is not much point investing in a country that will claim 92% of the profits.
The conservative taxer in Central Asia has the most successful economy, Kazakhstan (38.8%). But even Kazakhstan has reneged in recent years on commitments to hold down taxes on foreign investment. The Karachaganak project to extract Caspian oil and gas has been fighting off for months the government’s attempts to become an owner of it. Meanwhile, it faces government claims exceeding $2.5 billion, reports an online portal, Silk Road Intelligencer.
In general, I’m having a spot of trouble identifying the free-handed populism that, according to Newsweek, has kept Central Asian dictators in power. The fiscal patterns suggest instead that governments here may often act contrary to the long-run interests of their constituents. The government budget is a consequence of political power, not a source of it. -- Leon Taylor, tayloralmaty@gmail.com
Statistical sources and notes
a. Government spending as a share of gross domestic product. Sources: Richard Pomfret, The Central Asian economies since independence, Princeton, 2006, page 12, Table 1.4; and the United States Bureau of Economic Analysis, online at www.bea.gov .
b. Government expenses (i.e., cash payments) as a share of GDP. Source: World Bank at http://data.worldbank.org/indicator/ .
c. Life expectancy for males at birth. Sources: The CIA World Factbook, 2008; World Health Organization, data for the Nineties. Life expectancy for females at birth: World Health Organization. Total life expectancy at birth for the United States in 2007: World Bank, World Development Indicators.
d. Government spending on health per capita. Source: The World Bank’s World Development Indicators for 2002. These are 1998 dollars. That is, they are expressed in terms of the purchasing power of a dollar in 1998. The figures are also adjusted so that a dollar would have the same purchasing power in any country when converted into the domestic currency (“purchasing power parity”).
e. Infant mortality rates. Source: The CIA World Factbook, 2005.
f. The private share of all health spending. Sources: The World Health Organization, 2002; William Aaronson, Health care finance, online.
g. The share of total health spending in GDP. Source: World Health Organization, World health report 2006. For the European Union: OECD, Health at a glance: Europe 2010, page 12. http://ec.europa.eu/health/reports/docs/health_glance_2010_exs_en.pdf . 2010.
h. Educational spending as a share of government spending. Source: The United Nations Human Development Programme (UNHDP).
i. Educational spending as a share of GDP. Source: The UNHDP, 2000-2002.
j. Business taxes as a share of profits. Source: http://data.worldbank.org/indicator/
References
A.Maratov. U.S. concerned over revision of oil contracts in Kazakhstan. Trend, online. January 5, 2011.
Owen Matthews. Beware of big ideas. Newsweek. www.newsweek.com . August 1, 2009.
Silk Road Intelligencer. Kazakhstan recovers $143 million from Karachaganak venture - customs committee. Online. January 20, 2011.
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