Measure for measure

Is Kazakhstan's public debt a danger -- or merely mismeasured?

Kazakhstan built its reputation among foreign investors on fiscal austerity. Now that the government is running deficits, will it lose investors? A major oil firm, ConocoPhillips, reportedly considers whether to leave. If this rumor is not just a strategic leak, then to what extent does Conoco’s itchiness result from doubts about the government’s self-discipline?

Kazakhstan’s debt is not the only one to matter to Kazakhstan. In the United States, the new Tea Party demands that Washington cut its annual deficit (the addition to debt), now a tenth of GDP. How would this affect our trade with the U.S.?

To the extent that it is measured, public debt in our neck of the woods appears modest compared to that of the United States, according to data from the World Bank. The share of government debt in the economy fell in Kazakhstan from 7% in 2005 to 6.3% in 2008, despite an incipient economic slowdown. (“Economy” refers to the value of domestic production, or gross domestic product). Russia pared its debt even more sharply, from 16.6% in 2005 to 6.5% in 2008. By comparison, the debt of the United State remained large and increasing, from 47.2% in 2005 to 54.6% in 2008. The World Bank reported no recent debt figures for Kyrgyzstan, Tajikistan, Turkmenistan or Uzbekistan.

But the history of the region’s debt is not reassuring. Earlier in the first decade of the 21st century, some ratios were disturbingly high: 99% for Kyrgyzstan and 80% for Tajikistan in 2001. Even in Russia and Kazakhstan, which subsequently brought down their debt ratios to manageable levels, the ratios were 41% in 2002 and 13% in 2003, respectively. (Even for this earlier time period, the World Bank reports no ratios for Turkmenistan and Uzbekistan.)

Perils of prudence

When the debt ratio is high, one may wish to think twice about adding to it. The ratio of the annual deficit to GDP was 7% in Tajikistan for 2004; and 1% in Kyrgyzstan for 2001, falling to 0 in 2008. (In the U.S., it was 3% in 2005 and 10.2% in 2009.) On the other hand, Kazakhstan had no deficit in 2004 and a 4.3% surplus in 2008; Russia racked up a 5% surplus in 2004 and 5.6% in 2008.

Kazakhstan and Russia may look prudent, but some reported data raise the possibility that they have defined the public debt to their advantage. Russia in 2008 had a debt of state-owned enterprises that amounted to 28% of GDP, although it reported a public-sector debt of only 6.5%, reported the business weekly Kursiv this March. In Kazakhstan, the corresponding figures were 9% and 6.3%. In China, the enterprise debt amounted to nearly a third of GDP.

We may misgauge debt in other ways as well. We should adjust our estimates for general trends in prices, since we want to know how much purchasing power that the government is diverting to its own purposes. For example, Kazakhstan’s nominal debt was $5.6 billion in 2007 and $8.4 billion in 2008, an increase of $2.8 billion, according to data from the World Bank. In 2008, the general rate of price increases (i.e., inflation) was 17% in Kazakhstan. Inflation thus accounts for .17*$2.8 billion = $470 million of the debt increase. The increase in real debt was $2.8 billion minus $470 million, or $2.33 billion.

Another problem with government’s usual accounting is its failure to consider the value of spending. When the government spends $10 million to build a road, it budgets an expense of $10 million. But in reality, financing roadwork is not like paying out $10 million for pensions. The new road is a public asset; it saves drivers valuable time. Rather than charge off the $10 million immediately, the government should do so over the life of the road – say, 20 years – as the annual loss of road value due partly to wear and tear (“depreciation”). Treating all new assets as cash expenses creates “budget bias” against adding capital, pointed out the watchdog agency of the U.S. Congress, the General Accounting Office.

“Capital budgeting” would account for gains as well as losses from new assets. When the government built its capitol at Astana, the expense normally would have increased its deficit and debt. Capital budgeting would credit the new office buildings as assets, offsetting construction costs. Another example is the bank bailout of 2009. Depending on the type of bank stock that the government acquired, in principle it could have collected dividends eventually -- and perhaps capital gains by selling the stock later at a higher price. In its accounts, should the government book the stock purchases as current expenses – or as financial investments?

Capital budgeting is not risk-free. We cannot determine the value of an asset by snapping our fingers. A U.S. economist, Robert Eisner, noted that asset values change “quite aside from current capital expenditures and depreciation. The changes may stem from alterations in income flows, absolute and relative prices of inputs and outputs both within the country and vis-à-vis other nations, technology, discount rates and risk.” If cash accounting creates a bias against new assets, capital budgeting creates a bias for them. The same government that gave itself a new capitol may be tempted to budget creatively in order to pile on the goodies. Even so, capital budgeting is worth a look, if only to remind us that not all deficits need be cardinal sins. – Leon Taylor, tayloralmaty@gmail.com

Notes

1. To measure the debt of the central government, the World Bank counts all contract obligations, including currency as well as loans. These liabilities are offset by “equity and financial derivatives held by the government.” Generally, the Bank measures the debt on the last day of the fiscal year.

2. The World Bank defines government surplus as “revenue (including grants) minus expense, minus net acquisition of nonfinancial assets.”

Good reading

N. Gregory Mankiw. Macroeconomics. New York: Worth Publishers. Seventh edition. 2001. Chapter 16, “Government debt and budget deficits,” clearly explains measurement problems.

Robert Eisner. Extended accounts for national income and product. Journal of Economic Literature 26:4. December 1988. Pages 1611-1684. Suggested improvements in national income accounting. The source of the Eisner quote above.

Robert Eisner. The misunderstood economy: What counts and how to count it. Harvard Business Press. 1995. Issues in national income accounting, written for the lay reader.

United States General Accounting Office. Budget issues: Capital budgeting for the federal government. Washington, D.C. July 1988. The “budget bias” quote is on page 1.


References

Silk Road Intelligencer. ConocoPhillips mulling exit from Kazakhstan – analyst. March 30, 2011. Online at www.silkroadintelligencer.com.

World Bank. World development indicators. Online at www.worldbank.org