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
Thursday, July 28, 2011
Sunday, July 17, 2011
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
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
Sunday, July 10, 2011
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
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
Wednesday, July 6, 2011
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
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
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