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.