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
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