The saving grace

Does Kazakhstan save enough to ensure future growth?

A student radical once asked the philosopher Sidney Morgenbesser if he agreed with Mao Zedong’s pronouncement that a statement could be both true and false. Morgenbesser replied, “I do and I don’t.”

In the same way, Kazakhstan is poor and it isn’t. Adjusted for prices and exchange rates, its income per person is less than a sixth of that of an American, according to World Bank data. But the nation saves a much larger share of income than does the U.S. (Any income that is not spent or paid in taxes is “savings.”) National savings – deducting the amount needed to replace worn-out capital – have increased steadily in Kazakhstan, from 4% of gross national income in 2000 to 20% and higher after 2006. Mr. Micawber, in Charles Dickens’s David Copperfield, would have approved. “Annual income twenty pounds, annual expenditure nineteen, nineteen six, result happiness,” the clerk intoned. “Annual income twenty pounds, annual expenditure twenty ought and six, result misery.”

Savings pay for expansion of stores and plants, for education, and for other ways to increase the amount that we can produce in the future. Such additions to our means of production are what economists mean by “real investment.” Thus, Apple invests when it builds a factory. When you buy a stock share of Apple for $80, you don’t invest; you save. When Apple spends the $80 on its plant, then it becomes investment.

The way that household savings pay for investment is simple: Kazakhstanis stash their savings into accounts at the bank, which lends them out to businesses (or, for that matter, to college students who borrow in order to pay tuition – yet another form of investment).

Since the slowdown of the global economy in 2008-9, however, real investment has stagnated in Kazakhstan. In Almaty, investment in fixed capital – immobile assets such as office towers -- in the first half of 2011 was 2% below that of early 2010. One problem is that household income in Kazakhstan remains too modest to provide huge savings.

Treasure chests of tenge

Another way to pay for investment is through businesses themselves. Firms save by hanging on to profits rather than paying them out as dividends to shareholders. In the U.S. before the Great Recession, these retained earnings came to a trillion dollars a year and were the country’s largest source of funds for investment. In Kazakhstan, retained earnings are anemic, partly because our market economy is only two decades old – not enough time for firms to build up their coffers of profit.

A sort of hybrid of the household and the firm is the venture capitalist. She lends savings to the entrepreneur directly, as a general partner who owns part of the funded project. Once the project sells its shares to the public, he sells his own shares for a profit. Only one project of every ten ever gets that far, but they include Microsoft, Apple Computer, Intel and Federal Express, note two American researchers, Edgar Parker and Phillip Todd Parker. Venture capital is less visible in Kazakhstan than in the U.S.

Aside from households and firms, who else can provide savings to finance investment in Kazakhstan? The remaining possibilities are the government and foreigners. We can quickly rule out the latter. To accumulate savings, foreigners must sell more products to Kazakhstan than they purchase from it. But the reality is the opposite. Kazakhstan has long had a trade surplus; its exports exceed its imports. (On the other hand, foreigners do invest in Kazakhstan. As a share of Kazakhstan’s economy -- measured by the market value of Kazakhstan’s annual production, called “gross domestic product” -- the net inflow of foreign direct investment increased 24-fold after 1992 to 12% in 2008, according to World Bank data.)

That leaves the government. Its National Fund of oil export taxes holds $45 billion, the rough equivalent of a third of Kazakhstan’s income. It is the obvious potential source for financing investment in health and education. – Leon Taylor, tayloralmaty@gmail.com


Good reading


Jagdish Bhagwati. Don’t cry for Cancún. Foreign Affairs. January/February 2004. The source of the story about Mao Zedong. Online.

Edgar Parker and Phillip Todd Parker. Venture capital investment: Emerging force in the Southeast.  Economic Review. Federal Reserve Bank of Atlanta.  Fourth quarter 1998.  Pp. 36-47. Online.


References

World Bank. World Development Indicators. Online.

Bank shot

Does Lombard Street have any news for the National Bank of Kazakhstan?


Who calls the shots at a central bank – and why?

The historical answer of economists has been that the bank’s governor makes the key decisions in order to benefit the public. “…We ought to be able to assume that the Central Bank will be at least as intelligent as a Member Bank and more to be relied on to act in the general interest,” wrote John Maynard Keynes in 1930, in A treatise on money. The Bank of England was “the conductor of the orchestra [which] sets the tempo.”

Unlike Keynes, Walter Bagehot -- editor of the London newspaper The Economist -- viewed the structure of the Bank of England as an exercise in politics. In the 1870s, the Bank’s board of directors consisted mainly of merchants. They, quite naturally, sought profit: So they instructed the Bank to minimize its reserves, since money in the vault earns no interest. This kept the Bank from managing economic panics. Hefty reserves of gold would have pacified people who worried that paper money would lose its value, since the Bank was prepared to exchange gold for cash. Without the gold, the Bank could not assure the public that it could always maintain the going exchange rate for cash; and so people would dump their money anywhere that would give them a little gold. The exchange rate for cash would collapse. Those left holding the money-bags would realize their worst fears.

Bagehot proposed that the Bank maintain an announced minimum of reserves that was high enough to mollify people in panics. To enforce this rule, the Bank should appoint a sort of managing director who handled day-to-day matters. To protect him from political pressure, this director could hold his position for life. At the time, the two top officers of the Bank were political appointees on two-year terms, with the deputy governor automatically relieving the governor at the end of each term.

Bagehot’s reforms would have required a new vision of the central bank. “…The distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the Banking Department of the Bank [of England],” wrote Bagehot in Lombard street, “that, for banking purposes, it is only a joint stock bank like any other bank; that its managers should look only to the interest of the proprietors and their dividend; that they are to manage as the London and Westminster Bank or the Union Bank manages.”



Buy low, sell high



Would the structures of central banks in Central Asia satisfy Bagehot?

Consider the National Bank of Kazakhstan. The enabling legislation says the Bank is “accountable” to the president of Kazakhstan, who appoints (and removes) the governor and four deputy governors to six-year terms, with the consent of the ever-obliging Senate. The Bank’s 10-member board includes an assistant to the president as well as the ministers of finance and of economic development and trade.

A few real-world details may bring the picture into focus. In 2007, the National Bank of Kazakhstan had set its exchange rate at 120 tenge to a United States dollar. In the global slowdown of the following year, demand weakened for Kazakhstani products; so, demand for the tenge weakened as well. Since the official value of the tenge was now above its market value, speculators could profit by purchasing tenge cheaply on the street and essentially selling them back to the central bank at the high official value, in exchange for dollars. (On the street, buy 150 tenge for a dollar, then sell the tenge to the Bank for $1.25. Repeat until rich.) As a result, dollars began to drain out of official reserves. The National.Bank faced the prospect of soon having too few dollars with which to defend the official exchange rate.

At this point, the president of Kazakhstan, Nursultan Nazarbayev, stepped in. He appointed a new governor of the Bank, Grigoriy Aleksandrovich Marchenko, who quickly devalued the currency to 150 tenge per $1. That gutted any speculative attack on the official dollar reserves.

Devaluation was probably the correct decision, but that is not my point here. My point is that the decision was basically political. It had not been made by a civil-service director of the Bank, which is what Bagehot had in mind. It had been made by politicians.

Bagehot would ask: What would prevent Astana in the future from appointing a Bank governor who acted in the interests of politicians -- say, by inflating the money supply in order to create spending and jobs just before an election, regardless of eventual inflation? Granted, the legislation states that the Bank’s prime aim is price stability; but what would happen if stable prices would jeopardize the re-election of an incumbent president? Bagehot would probably propose a Bank charter that mandated longer-term appointments on the basis of merit, not of politics. -- Leon Taylor, tayloralmaty@gmail.com


Good reading

Walter Bagehot. Lombard Street. Various publishers. 1873.

Nariman Gizitdinov. Kazakh central bank devalues tenge 18%, ends support. Bloomberg News. February 4, 2009. www.bloomberg.com

Silk Road Intelligencer. Marchenko’s appointment clears path to devaluation. January 26, 2009. www.silkroadintelligencer.com


References

John Maynard Keynes. A treatise on money. London: Macmillan. 1930.