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