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.