Rude Questions Department

Why does a private medical center in Almaty reportedly hold the Kazakhstani monopoly on DNA testing, undertaken by a Moscow lab, at a profit rate of 44%? --Leon Taylor, tayloralmaty@gmail.com

How cool is this?

Is Kazakhstan’s economy worse off than the government reports?

Kazakhstan -- which less than a decade ago was one of the world’s hottest economies -- is cooling faster than a bowl of borsch in a viga.

Or: Kazakhstan is rolling along with its usual cheery growth.

Take your pick.  The national agency on statistics tells both tales.

In a recent news briefing, KazStat announced that the economy was growing 6% per year, according to the business weekly Panorama.  Meanwhile, the agency’s online database tells a darker story.  Compared to 2012, for the period from January through October, Kazakhstani income grew only 2.4% -- the slowest rate since the financial crash of 2009, when the economy shrank by more than 3%.  (This is in terms of the amount of goods and services that the income can buy – a measure called “real income”.)  Per person, income this year grew by less than 1%.  Even the Europeans would grumble about a pace that torpid.

These are not revelations.  KazStat’s data have been showing a similar slowdown for all of 2013, in both the Russian and English versions of the database.  And its reports of nominal income – which is not adjusted for price changes – are consistent with those for real income. 

What’s going on?

Conceivably, both stories are right.  Statisticians measure the economy in terms of the amount of goods and services produced on Kazakhstani soil, called “real gross domestic product”.  This is not exactly the same as income earned by Kazakhstanis.  Some work in other countries, so their income does not show up in Kazakhstan’s GDP.  On the other hand, the contribution of immigrants to our GDP does not show up in Kazakhstani income.  In the oil and gas industry, foreigners build most of the extraction facilities, and much of the resulting income goes overseas.

Cooks and books

Still, it’s odd to see a drop of two-thirds in the growth rate of income and, at the same time, a substantial rise in the growth rate of GDP.  According to KazStat’s database, GDP fell one-half of a percent in 2012 and rose only 1.6% in the first half of 2013, compared to the corresponding period of the previous year.  One might suspect that KazStat is now gilding the lily and that, in truth, an economic slowdown continues. 

Circumstantial evidence supports this hunch:  KazStat’s estimates don’t add up.  The head of the agency, Alikhan Smailov, said GDP grew 6% over the period of January through November, compared to the same period for 2012, reported Panorama.  But the headlines on KazStat’s home Web page say the “short-term economic indicator” was an annual growth rate of 4.8% over the period of January through October this year.  To reconcile these estimates, GDP in November, normally too cold for outdoor work, would have had to have grown two and a half times faster than in the average (and warmer) month of 2013.  This is barely believable. 

So are KazStat’s headlines.  They report growth rates exceeding 10% for agriculture, trade and communications as well as of 7.5% for transport.  But growth rates were only 2.9% for construction, an economic bellwether -- and 2.3% in industry, which includes mining, the traditional engine of economic growth in Kazakhstan.  These are strange lapses for a supposedly robust economy, especially since these two sectors comprise from 35% to 40% of the economy. 

It’s hard to tell what’s happening in construction, because KazStat’s estimates are all over the map.  Compared to the corresponding period of a year earlier, output in this industry reportedly grew 3.1% in 2012, shrank 4.9% in the first quarter of 2013, and grew only .7% in the first half of 2013.  Either construction is a yo-yo or KazStat’s figures are unreliable.

Finally, KazStat’s latest estimate is out of synch with earlier ones.  The agency had calculated that real GDP per capita in 2012 grew only 3.5%, the slowest pace since 2009.     

Okun’s Law

Of course, statistical agencies correct their estimates as time goes by.  That’s normal.  But for an agency to tell simultaneously two stories as contrasting as these – hearty growth in GDP and stomach-churning decline in income -- is disconcerting.   

Finally, KazStat’s estimates flout economic principles.  Although the growth rate of GDP supposedly has risen about 6.5% since 2012, the reported unemployment rates for the two years -- for the nation and for individual oblasts – are virtually unchanged.  For the first three quarters of 2013, the national unemployment rate was 5.2%.  That was just a tenth of one percentage point lower than for 2012.  For no oblast did the unemployment rates for the two periods differ by more than a fifth of a percentage point.

This too is weird.  Usually, the unemployment rate moves in the opposite direction of GDP, and proportionally so.  After all, a growing economy creates jobs, cutting unemployment.  By a hoary rule of thumb, a fall in the rate of economic growth of two percentage points may raise the rate of unemployment by one percentage point.  For Kazakhstan, the year’s reported rise in economic growth of more than six percentage points would lower the unemployment rate by three percentage points.  Of course, this is just a rule of thumb, but the principle matters more than the point estimates:  A large change in the rate of economic growth should induce a large change in the rate of unemployment.  The latter should not stand still.

 

Anomalies also appear in the data across oblasts at a given time.  In 2013, the unemployment rate varied only from 5.6% (in the city of Almaty) to 4.9% (in Akmolinskaya and Aktubinskaya oblasts).  One measure of dispersion in these unemployment data -- the ratio of the standard deviation to the mean -- is only 4.4%.  But the corresponding figure for GDP growth rates is 68% (for the first half of 2013).  Are the unemployment figures even more bogus than the GDP ones?

Let’s lurk in the economic murk

Here's the point:  Foreign investors don’t want perennially rosy numbers.  They want the truth.  They already know that Kazakhstan has educated workers, some political stability and, definitely not least, oil and gas.  KazStat does not have to promise them the Brooklyn Bridge to get them to come.  To the contrary, the agency’s refusal to provide sound statistics discourages investors from committing their dollars for the long run.

KazStat could do a lot to help.  As other major providers of economic data, such as the World Bank and the International Monetary Fund, already do, it could document its figures with care.  Every spreadsheet available to the public should define in detail each data series and its unit of measurement as well as name the original sources. 

For foreign users, KazStat should clean up its English.  Users should not have to tussle with definitions such as this:  “Households’ monetary incomes represent the sum of the money resources received by household’s members in the form of a wages, the income of enterprise activity, social payments (pensions, scholarships, grants and other payments), percent, dividends and other incomes of the property, other monetary receipts.”

KazStat should provide balanced news briefings, noting ambiguities in the data.  And, of course, it should reconcile estimates.

Maybe KazStat will make a New Year’s resolution.  But don’t bet the farm on it.  – Leon Taylor, tayloralmaty@gmail.com

 

Notes

1. Viga is Russian for a blizzard.
2. According to KazStat, the annual growth rate in income fell from 6.9% in 2012 to 2.4% in 2013, for the period of January through October, compared to the same period in the previous year.
3. Here are calculations for the GDP growth rate in November.  In annual terms, the average growth rate was 4.8% for January through October but 6% for January through November.  Denote the average monthly contribution to annual GDP growth as Xi, where i indexes the month (1 for January, 2 for February, etc.).  Then X1 + X2 + … + X10 = 4.8%.  And X1 + X2 + …  + X10 + X11 = 6%.  Solving these two equations gives us X11 = 1.2%.  The average of X1 through X10 is 4.8% / 10 = .48%.  So the November contribution to annual GDP growth, compared to the average of the earlier 10 months, is 1.2% / .48% = 2.5. 
4. A well-known regularity in economics, Okun’s Law, holds that changes in the rate of unemployment is a linear function of changes in the rate of economic activity.  In particular, Y = a – bX, where Y is the change in the unemployment rate and X is the change in GDP (both changes measured in percentage points); and a and b are positive constants.  Clearly, dY/dX = -b:  An increase of one percentage point in GDP reduces the unemployment rate by b of a percentage point for any levels of the two variables.  Changes in X and Y are proportional to one another.   The American macroeconomist N. Gregory Mankiw gives a typical estimate:  Y = 1.5 - .5X.  In this model, a decrease in the rate of economic growth of two percentage points would raise the rate of unemployment by one percentage point.

Good reading

Mankiw, N. Gregory.  Macroeconomics.  Worth Publishers.  Seventh edition.  2010.

References

Agency on Statistics of Kazakhstan.  Various data series.  www.stat.kz

Oksana Kononenko.  BBP Kazakhstana viros na 6%.  Panorama.  December 20, 2013. 

Hot Havana nights

Does anybody really know what time it is?

Michael Dobbs.  One minute to midnight: Kennedy, Khrushchev and Castro on the brink of nuclear war.  Alfred A. Knopf. 2008.  426 pages.

In the Cold War, the most famous eyeball-to-eyeball showdown was the American naval blockade in the Cuban missile crisis of 1962.  This fame, of course, is circumstantial evidence that no eyeball-to-eyeball showdown occurred.  Michael Dobbs of The Washington Post provided the evidence.  Unlike prior historians, he charted the paths of the two Soviet ships carrying nuclear missiles with a 2,800-mile range to Cuba, 90 miles south of Florida.  On the day following President John Kennedy’s televised ultimatum, the Kimovsk and the Yuri Gagarin reversed course more than 500 miles east of the blockade, at the behest of Soviet Premier Nikita Khrushchev. 

Believing that a confrontation was minutes away, the secretary of state in Washington, Dean Rusk, had observed, “we’re eyeball to eyeball, and the other fellow just blinked.”  One hates to eviscerate a great quote like that, so no one did.  In the best-known account of the crisis, Thirteen days, Kennedy’s brother wrote that U.S. and Soviet ships had come within a few miles of each other.  John Stuart Mill would not have been surprised by the mass addiction to error: The tales that no one disputes, he wrote in 1859, are the ones most apt to be myths.

Dobbs, more interested in facts than in theories, may subscribe to a few urban legends himself.  He writes that the crisis did not erupt into war, because both leaders were prudent though ill-informed.  “[Their] initial reactions…had been bellicose.  Kennedy had favored an air strike; Khrushchev thought seriously about giving his commanders on Cuba authority to use nuclear weapons.  After much agonizing, both were now determined to find a way out that would not involve armed conflict.  The problem was that it was practically impossible for them to communicate frankly with one another.  Each knew very little about the intentions and motivations of the other side, and tended to assume the worst.  Messages took half a day to deliver….Once set in motion, the machinery of war quickly acquired its own logic and momentum.”

MAD math

I think that Kennedy and Khrushchev had the vital facts.  For each, the question was whether to launch missiles.  Suppose that Kennedy concluded that whether or not the USSR launched, the best American option was to attack.  Also suppose that Khrushchev concluded that whether or not the U.S. launched, the best Soviet option was to attack.  Then both leaders would have attacked, even though both would have preferred a joint peace.  Even had they spent all day on the telephone, reassuring one another of their commitment to peace, this would not have changed the logic of immediate attack. 

In reality, neither leader struck because it was neither’s best option.  An all-out assault would have left the rival with scores or hundreds of nukes to launch.  The certainty of retaliation deterred attack.  MAD worked.

Dobbs makes clear that Kennedy understood this irony.  When the Pentagon told him that one Soviet missile could kill 600,000 Americans, he noted that this would be more deadly than even the Civil War.  “As he later acknowledged, the 24 intermediate-range Soviet missiles in Cuba constituted ‘a substantial deterrent to me.’  He had privately concluded that nuclear weapons were ‘only good for deterring.’  He thought it ‘insane that two men, sitting on opposite sides of the world, should be able to decide to bring an end to civilization.’” 

That last sentence is a non sequitur.  What is truly disturbing – if not insane – is that a man sitting in Central Asia today can plant a dirty bomb in New York City without fear of an instant and proportionate retaliation. –Leon Taylor, tayloralmaty@gmail.com

Note

A few days after Kennedy’s TV speech, the spaceport in Kazakhstan, Baikonur, prepared to launch a missile to a U.S. metropolis like Chicago, Dobbs reported.  The only rocket available was the antiquated R-7, which had boosted Sputnik.  In October 1960, a more advanced rocket, the R-16, blew up on the launch pad, killing 126.  How another explosion, this time with a nuclear warhead of 2.8 megatons, might have affected the Baikonur environs is, fortunately, a question that never had to be answered, since the rocket was never launched.           

             

Good reading

Mill, John Stuart.  On liberty.  1859.  On line.

Schelling, Thomas C.  Arms and influence.  Yale University Press.  2008.  Readable game theory.

References

Robert F. Kennedy.  Thirteen days: A memoir of the Cuban missile crisis.  W. W. Norton.  1969.

Wham, bam -- thank you, Uncle Sam

How would a default in D.C. affect Astana – and Almaty?

One hates to be the gloomster in the season of good cheer.  But the chances that the United States government will soon default on its loans -- or, what is just as bad, that people will expect a default – are greater than Panglossians think.  Fiscal conservatives in Congress – call them the Tea Partygoers -- lost their T-shirts in the last bout over the budget.  One more whipping like that and they’ll be out of business.  So they may resist pressure to continue the lift in the debt ceiling, which expires February 7.  And before then, the road takes a couple of tricky turns: The deadline for agreeing on a long-run fiscal plan is December 13, and funding for the government ends January 15.  What would an expected default mean for Kazakhstan?

Global interest rates may soar.  A security from the U.S. government – a bill, note or bond – is essentially an IOU.  If you, the potential creditor, suspect that the borrower will renege, then you will demand a higher return – the interest rate – to compensate you for the risk of lending.  Since Uncle Sam’s bonds are among the world’s safest assets (at least, they used to be), perceived risk for assets around the world will rise.  There go the interest rates, including Kazakhstan’s.

Enthusiasm will fade for building plants and homes here, since builders cannot afford to borrow at exorbitant interest rates.  They will cancel projects on the drawing board.  Output will fall, and unemployment will rise.

This will pressure the National Bank of Kazakhstan to try to resuscitate spending by printing tenge.  But the Bank has a new chair, Kairat Kelimbetov, who has yet to establish his reputation.  A sudden increase in money supply on his watch may destroy his credibility as a foe of inflation.  Prices might not rise in the likely recession, but they will later.

Let’s do the tenge tango

A spike in interest rates will also affect the tenge.  In the foreign-exchange market, you profit by buying and selling currencies until each pays off at the same rate of return.  Were this not the case, then you could make money by selling a low-return currency (say, the Japanese yen) in exchange for a high-return one (the tenge).  But this would drive up the price of the tenge – its exchange rate for a yen – and thus lower its rate of return. 

Normally, the rate of return to the tenge equals the global return plus an adjustment for risk.  An American default would increase the risk of holding currencies rather than safer assets like gold.  The return to the tenge would have to rise, or no one would want to hold it. 

Most of this return consists of the domestic interest rate, since assets denominated in tenge (like government bonds issued by Astana) pay off at this rate.  But the return to the tenge has another component – the rate at which the currency is expected to strengthen.  If you think that the tenge will appreciate, in terms of the amount of foreign goods that it will be able to purchase, then you may decide to hold tenge despite their mediocre interest rate.  The impact on Kazakhstan of the American default may show up partly as a rise in our interest rate and partly as a strengthening of our currency. 

The latter cuts the tenge price of imports, since each tenge can buy more of them than before.  So, Kazakhstanis will demand more imports – sedans from Germany, bottled water from Georgia.  Similarly, the world will demand fewer of our exports; we’ll sell less oil.  Our “balance of trade” -- the difference between our exports and imports of goods -- will deteriorate.  Although this is not a fatal disease, it will shrink our economy for a while.

The trade imbalance

But not right away.  In fact, perversely, the immediate balance of trade will improve.  This is because most exports and imports are delivered under contracts that fix the price and quantity for a few months.  Suppose that an export contract of ours fixes the price of an oil barrel in tenge.  Now strengthened, the tenge will be able to buy more foreign goods than before, improving our trade balance.  Here’s a hypothetical example.  Before the tenge appreciated, we could buy 100 books from Russia in exchange for a barrel of oil.  Now we can buy 200 books.  In terms of goods, our balance will look better.  (Economists call this the “real” balance of trade, because it is expressed in terms of output rather than of money.)

As time passes, traders will update contracts to reflect the new exchange rates, and our trade balance will finally tip against us.  As even more time passes, firms will revise their product prices – increasing them for our imports, decreasing them for our exports – in order to cope with the effects of the strengthened tenge.  The trade balance will improve again – and will even return to its old position if nothing fundamental has changed.  Meanwhile, the senseless default in Washington will distort decisions about investment and foreign exchange around the world -- even though it is just a political mirage, telling us nothing about the U.S. economy’s capacity to produce.  --Leon Taylor, tayloralmaty@gmail.com

Good reading

Krugman, Paul R.  The J-curve, the fire sale, and the hard landing.  American Economic Review, May 1989.  Reprinted in Krugman, Currencies and crises, MIT Press, 1992.  A formal yet readable analysis of how risk affects the interest rate and the exchange rate.         

Weisman, Jonathan and Ashley Parker.  Republicans back down, ending crisis over shutdown and debt limit.  The New York Times.  October 16, 2013.

Going, going, gone

 How will Marchenko’s farewell affect Kazakhstan’s central bank?

In a warm but vague press release two weeks ago, the President’s office announced the exit of the well-regarded governor of the central bank in Kazakhstan, Grigorii Marchenko.  The English-language media in Central Asia, to the extent that it exists, treated the departure as a surprise.  And it probably was, for anyone who doesn’t read the newspapers.  In July, the business weekly Kursiv’ predicted that Marchenko would be out by October 1, which is exactly what happened.  Even back then, Marchenko’s departure had been bruited in the Russian-language media for months.

Speculation is rife as to why Marchenko got the boot.  The weekly Kapital said he had failed to develop a rapport with journalists, which is a rather odd reason for an ouster.  Why not just turn over the National Bank’s news conferences to a press secretary?  A more likely factor is that Marchenko had recently ventured into the political minefield called “pension reform”.   

An English newsletter, The Conway Bulletin, hinted that Nazarbayev installed at the Bank a former deputy prime minister, Kairat Kelymbetov, because he was more pliable than Marchenko.  (Kursiv’ had predicted this appointment, too.)  The subsequent loss of central bank independence may disturb foreign investors, Conway mused.  For its conclusions, it didn’t provide a shred of evidence.  Typical.

Fables for children

In reality, central bank independence is a pleasant fiction in Kazakhstan regardless of who heads the Bank, since he serves only at the pleasure of the President.  Neither would a complaisant governor necessarily trouble foreign investors.  In 2009, after a 25% devaluation of the tenge, Nazarbayev pledged in public to hold the exchange rate to 150 per United States dollar.  Even so, in general, central banks that are politically controlled tend to print money whenever the government wants to spend.  In 2009, the resulting annual rate of inflation in Zimbabwe soared into quadrillions of percent, according to some estimates, reported The New York Times.   

Some of these newsletters seem to do their research at the water cooler.  A more systematic way to measure the political independence of a central bank is to see whether it responds to rising inflation by tightening the money supply.  A myopic government might welcome unexpected inflation, and abundant money, because these cut the cost (in terms of goods foregone) of paying off its loans.  The government borrows expensive dollars and pays back cheap ones.  If the central bank is willing to cross the government, in order to stabilize prices, then the growth rate of the money supply should relate negatively to the past growth rate of prices (which is inflation). 

For the period of Q1 2000 through Q4 2011, the rate of money growth did relate negatively to the rate of inflation in the prior quarter, but the correlation was weak (-.028).  The correlation was stronger though still moderate (-0.32) for the years of Marchenko’s predecessor, Anvar Saydenov, and for Marchenko’s second term as governor (-0.39).  This may be evidence, albeit crude and limited evidence, that in these two regimes, the central bank was modestly independent politically, at least in the short run.  More troublesome was Marchenko’s first term as governor, from 1999 to 2004, following the collapse of the Russian ruble. For the period of Q2 2001 through Q4 2003, the correlation was positive (.24).  You may not be surprised to hear that annual consumer inflation in this period averaged over 30%.

Some Russian-language newspapers may be minimizing the importance of Marchenko’s departure.  Drawing upon the Presidential press release, the business weekly Panorama said the changes under the new governor would be more in style than in substance.  Let us ignore the fact that, for a central bank, style is substance -- and consider three issues:

(1)    Will the National Bank soon devalue the tenge?  Over the past two years, the exchange rate has risen to 154 to the dollar and, this year, has been more volatile than usual.  In recent weeks, Marchenko introduced a currency basket of euros and rubles as well as dollars in order to diversify against volatility due to the buck, but that measure will only buy time.  Will Kelymbetov announce a maximum exchange rate at which he would intervene to keep the tenge from weakening any more?

Tenge tangle

The question is not whether the Bank will devalue the tenge but when.  Kazakhstan has the makings of a labor shortage: The unemployment rate has been dropping for years and now stands at about 4%, even for youths.  Within a year or two, employers seeking more workers will have to raise wages – and, subsequently, prices in order to cover labor costs.  This will reduce demand for Kazakhstan’s exports unless the Bank weakens the tenge in order to lower their price in terms of foreign currencies.  And the Bank undoubtedly would.  But recent wages (in terms of their purchasing power) have not been rising steeply enough to engender inflation.

(2)    Did Marchenko fend off inflation?  The answer depends on the benchmark.  Annual consumer inflation under Marchenko was far milder than it had been under his predecessor at the National Bank, Anvar Saydenov, from 2004 through 2008 (10.2% over the four-year period, peaking at 17% in the final year).  And relative to its two partners in the customs union, Kazakhstan has enjoyed low rates of inflation since 2009.  For the period through early 2013, the annual rate of increase in consumer prices averaged 7% in Kazakhstan, as compared to 11.7% in Russia and 13% in Belarus, according to data from the International Monetary Fund.  Kazakhstan also performed well relative to Central Asia, where the inflation rate for the period from 2009 through early this year averaged 7.9%.  On the other hand, the corresponding rate for all post-Soviet countries was 5.3% and was as low as 1.8% in Slovenia. 

Inflation tends to be giddy in resource-intensive countries.  The post-Soviet countries with the steepest rates of inflation were Belarus, Uzbekistan (11.9%), Kyrgyzstan (8.5%) and Serbia (8.4%); the first three of those nations specialize in producing or transporting minerals or food.  Even so, the National Bank's attempt to contain inflation was, at best, only a qualified success.  The Bank usually managed to stay within its declared corridor of 6% to 8%, but those bounds were generous to begin with.

A bite out of Alma-Ata

  

(3)    Will the Bank move to Astana?  As long as we’re on the subject of political pliability.…If the Bank relocates, then much of the financial sector in Almaty may follow.  The city would lose its most important industry, with implications for such of its firms as – just to pick one at random – KIMEP University, which draws half of its students from Almaty and environs, many of whom train for local financial careers.  Almaty has been recovering from the 2008-9 financial crisis more slowly than the rest of Kazakhstan; losing the National Bank won’t help. --Leon Taylor, tayloralmaty@gmail.com

References

The Conway Bulletin.  Central banker sacked.  October 2, 2013.

Drozd, Nikolai.  Smena rykovodstva Natsbank menyaet skoree stylystyku, chem polytyku.  Panorama.  October 4, 2013.     

Dugger, Celia W. Zimbabwe’s inflation drops, a little.  The New York Times.  March 24, 2009.

International Monetary Fund.  World Economic Outlook.  Various years.

Lee, Yana.  Marchenko sdelal svoi delo.  Kursiv’.  July 18, 2013.  

Taybas, Alena.  A kak vi budete vcpomynat’ Marchenko?  Kapital.  October 3, 2013.

Valykov,Yuriy.  Grigorii Marchenko ushel v chasthuu zhyzn’.  Kursiv’.  October 3, 2013.        

      

The cigarette conundrum

Is the customs union a success?

In 2010, Kazakhstan formed a trade union with Russia and Belarus to spur regional trade.  The three countries would lower their trade barriers to one another (barriers to other countries were another matter) and thus begin to integrate their economies.  Or…did they?

Here’s a simple-minded answer.  If the three economies are merging, at least with respect to traded goods, then the international price differentials for those goods should dwindle.  Eventually, the prices of two identical goods – say, a tomato in Russia and one in Kazakhstan, both from the same farm – should differ only by the costs of transporting the exported fruit and of arranging the sale.  If the price differential exceeds these costs, then an entrepreneur can profit by purchasing tomatoes at the cheaper Site A and selling them at the more expensive Site B.  Supply will decrease at A, raising its price, and increase at B, lowering its price.  The price differential (the B price minus the A price) will diminish until it just covers the transport and transaction costs.

For example, suppose that a tomato in Kazakhstan costs five tenge to grow and one tenge to ship to Russia.  If the two economies are integrated, then the tomato should sell for the equivalent of six tenge in Russia and for five in Kazakhstan.  If the Russian price is seven tenge, then the prospect of a tenge of profit will induce exports to Russia until that price falls to six.  But if the two economies are still separate, then the price differential may persist, since a trade entrepreneur cannot easily attempt arbitrage.

Pricing puffs

Do such price differentials actually exist?  To answer this question, consider the cigarette.  It may be ideal for trade (more so than cement, anyway) since its value well exceeds its transport cost.  Some brands may carry a higher price than others, because smokers think them better.  But the cost of transporting a cigarette by a given distance is pretty uniform across all brands.  If the Russian and Kazakhstani economies are integrating, then the price differential for a cigarette of a given brand in the two countries should be about the same for all brands.  If the differential is six tenge for a Winston, then it should also be about six for a Parliament.

A few weeks ago, the Kazakhstani business weekly Kursiv’ published cigarette prices for eight brands in Russia, Kazakhstan and Kyrgyzstan.  For the first two countries, the price differential for a pack varied sharply over the brands, from 69 tenge for the brand LD West to 146 tenge for Parliament.  Relative to the average price differential, a measure of the dispersion in the price gap – the standard deviation – was 27%.

Curiously, the price differential for Kazakhstan and Kyrgyzstan was not as large  – just from 48 tenge (for Parliament) to 86 (Marlboro).  Relative to the average price differential, the standard deviation was only 18%.                  

Moreover, Russian and Kazakhstani cigarette prices are diverging.  On average across brands, a one-percent increase in the price of a Russian pack relates to a rise of just over one-half of one percent in the price of a Kazakhstani pack (controlling for the prices in Kyrgyzstan).  Since the Russian price is already higher than our price, the gap between the two may well widen when they rise in response to a hefty cigarette tax that Russia plans for the next few years.  The two national markets may not merge; they may drift apart.  But the data are too scanty to permit us to be sure of this.                    

As I said, this approach is simple-minded.  We can’t draw hard-and-fast conclusions about the customs union from a sample of prices of only eight cigarette brands at a particular time.  But the data do raise a larger question:  What has the union accomplished, aside from tightening Russia’s grip on Kazakhstan’s economy?  --Leon Taylor, tayloralmaty@gmail.com

References

Murtazyn, Azat.  Dim s ‘dordoya’.  Kursiv’.  August 29, 2013.  Page 2.

The tragedy of the Stalinist commons

 What really caused famine in Communist Kazakhstan?

In the early 1930s, Stalin forced rural Kazakhs to relocate in large state-owned farms.    Historically, Kazakhs had been nomads, driving their herds of cattle and sheep from one grazing area to another.  These animals were now relocated to the collectives.  Over the 1930s, when famines were common, the Kazakhs in collectives slaughtered more than 80% of the cattle and sheep, wrote Martha Brill Olcott.  Too little livestock remained in the late 1930s to sustain growth in the herds.  Famine worsened. 

Why didn’t the Kazakhs consider this when they slaughtered livestock on the collectives in the early 1930s?  In 1968, the biologist Garrett Hardin answered such questions with a parable. 

In a pasture open to all, Hardin wrote, each herdsman would try to keep as many cattle as he could. This would work fine when herdsmen were few.  But as they prospered, their number would grow and eventually strain the pasture's capacity.  "Therein is the tragedy.  Each man is locked into a system that compels him to increase his herd without limit -- in a world that is limited.  Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.  Freedom in a commons brings ruin to all."

As economists interpret the parable (although not Hardin himself), the “tragedy of the commons” lay in its lack of private property rights: All farmers had the same rights to all the livestock.  So it would pay each to slaughter as many cattle as possible, to feed his own family -- even if he understood that an eventual reduction in herds could jeopardize his family.  After all, he could not much affect the future size of herds; this depended on what all the farmers did.  Since each would over-slaughter, the herds would die out.  To rephrase Hardin, “freedom in a collective brings ruin to all.”  --Leon Taylor tayloralmaty@gmail.com

Note

I adapted part of this article from a 1993 post of mine.

Good reading

Hardin, Garrett.  The tragedy of the commons.  Science 162.  1968.

Olcott, Martha Brill.  The Kazakhs.  Second edition.  Stanford, California: Hoover Institute Press.  1995.

An inconvenient number

Kazakhstan’s central bank, the National Bank, has long maintained that inflation here has chiefly a “non-monetary character”, reported a business weekly, Panorama. 

There’s only one problem with the Bank’s claim: It’s probably wrong.  In Kazakhstan, the simple correlation between the supply of tenge (chiefly cash and checkable accounts) and average consumer prices exceeds .97.  That is, the correlation here between money and prices is positive and virtually perfect:  It tells us that more money is almost always associated with higher prices.  The increase in average prices is, of course, inflation.

Correlation need not imply causation; for example, money and prices in Kazakhstan may each relate to a third factor rather than directly to each other.  But in general, “inflation is almost always the result of rapid growth in the money supply” because “no other factor is likely to lead to persistent increases in the price level”, writes a well-known monetary economist, David Romer. 

Consider the impact of two likely factors -- output and the interest rate. 

In principle, a decrease in output could raise prices, since we would be spending the same amount of money as before but on fewer goods.  But statistical estimates indicate that output would have to fall by half if it is to double prices, Romer writes.  Such a large change in output is unrealistic. 

Similarly, an increase in the interest rate could induce people to buy interest-bearing assets, bidding up their prices and thus creating inflation.  But interest rates would have to rise by a factor of 32 if they are to double prices.  That’s almost inconceivable. 

On the other hand, doubling the money supply over a few years – which is what a doubling of prices would require – is rather common.  Just ask the Bank of Japan.

Lots of factors – ranging from earthquakes to elections -- can spark a one-time rise in prices.  But a sustained rise almost always has one cause only:  The central bank, in effect, is revving up the printing presses.  --Leon Taylor, tayloralmaty@gmail.com

Notes

1. The money supply considered here is M1, called "narrow money" because it is quite liquid. 
2. “Average consumer prices” refers to the consumer price level. 
3. The simple correlation coefficient gauges the direction and strength of the relationship between two variables.  The coefficient varies from -1 to 1, where values close to -1 indicate a strong, negative relationship; values close to 1, a strong, positive relationship; and values close to 0, a weak relationship or none.  To estimate the coefficient, I used the Bank’s monthly data for the period from 2000 through 2011.

References

Drozd, Nikolai.  Sytuatsyu na valutnom rinke udalos’ uspokoyt s bolswym trudom.  Panorama.  August 9, 2013.

Romer, David.  Advanced macroeconomics.  McGraw-Hill Irwin.  Third edition. 2006.

News brief: Tenge strengthens

The tenge, which had been weakening to record lows with respect to the United States dollar, reversed course last week, strengthening sharply from 153.8 to 153.1 in three days, a fall of nearly one-half of one percent, reported a Kazakhstani business weekly, Panorama. 

Kazakhstan’s central bank said there were no fundamental reasons for devaluing the tenge.  Devaluation would become more likely if the world price of oil dropped significantly for a long time; or if the currencies of Kazakhstan’s main trading partners – presumably Russia and China – weakened sufficiently, the National Bank said.  At the moment, it regards both scenarios as hypothetical.

Since oil dominates Kazakhstani exports, a fall in the price of crude reduces world demand for the tenge and thus its exchange value.  In principle, a lower price for a product can increase sales revenues, since people will buy more units than before.  But the world demand for oil is not sensitive to price changes in the short run, probably because of the technical difficulty in substituting other energy fuels for the "black gold".  So, a fall in world oil prices reduces Kazakhstan’s export revenues in the short run.

The motivation for the second scenario is this:  Depreciation of the ruble or yuan reduces the amount of Kazakhstani exports that Russians or Chinese can buy.  To revive their demand for our exports, the National Bank would have to devalue the tenge.  

The Bank’s disinclination to devalue has probably helped strengthen the tenge.  But not all private analysts are as tranquil as the Bank’s.  The Royal Bank of Scotland projects that the dollar exchange rate will rise to 156 tenge by the end of the year and to 158 or 160 early next year, reported the business weekly Delovoy Kazakhstan late last month.  --Leon Taylor, tayloralmaty@gmail.com

 References

Delovoy Kazakhstan.  Valutni rinok.  July 19, 2013. 

Drozd, Nikolai.  Sytuatsyu na valutnom rinke udalos’ uspokoyt s bolswym trudom.  Panorama.  August 9, 2013.

Oops

How reliable are data from the National Bank of Kazakhstan?

In some ways, Kazakhstan is lucky to have the central bank that it does.  The National Bank (NBK) is not deliriously reckless, as is the Central Bank of Iran.  Neither is it paranoid about rising prices – unlike the Reserve Bank of New Zealand, where a 1989 law bound the governor to hit the rate of inflation negotiated with the finance minister, or lose his job. 

The NBK handles policy with care; if only it would do the same for statistics.  Exhibit A of its neglect is its estimate of the exchange rate.

First, some background.  Most people are familiar with the nominal exchange rate, since this is reported by the daily press.  For example, yesterday one could sell 153.6 tenge in exchange for a United States dollar.  But this exchange rate is not truly important.  Most of us don’t care about the number of tenge or dollars that we hold; instead, we care about the goods and services that we can buy with them.  The purchasing power of the tenge is expressed by the “real exchange rate”, which adjusts the nominal rate for prices in Kazakhstan and abroad. 

As it is usually defined, a real exchange rate of 2 (say) implies that a foreign bundle of goods costs twice as much as a similar bundle in Kazakhstan.  A rise in the rate to 3 would suggest that the foreign bundle now costs three times as much as ours; that is, the tenge is losing its purchasing power over foreign goods.  That’s depreciation.  We now must sell three domestic bundles in order to buy a foreign bundle; before the depreciation, we had to sell only two domestic bundles.   

We could express the real exchange rate with respect to any other country.  But since we trade with many countries, it makes sense to take into account all of these exchange rates.  We can do this by calculating the weighted sum of all the bilateral rates, where each weight is that country’s share of our total volume of trade.  For example, suppose that we have two trading partners: Country A, which accounts for 60% of our total trade; and Country B, which accounts for 40%.  Suppose that our real exchange rate is 2 with respect to A and 3 with respect to B.  Then our weighted exchange rate is .6*2 + .4*3, or 2.4.

Almost half of our trade is with Russia, China and Italy, in that order.  But we also trade with 16 or 17 other countries that each claim more than 1% of our current account.  In recent years, Uzbekistan has generated 1.6% of our trade, usually exporting fruit, vegetables and textiles.  In terms of its trading weight, Uzbekistan is between the United Kingdom and Poland.  From 2003 through 2012, it was our 14^th largest trading partner.  Its exports to us increased last year by more than $1 million, reported the weekly Kazakhstani newspaper Kapital.

Yet another “coding error”?

Inexplicably, the National Bank excludes Uzbekistan from its estimates of the weighted real exchange rate for the entire 10-year period.  That was discovered by a KIMEP graduate student in economics, Kairat Beisenov.  To double-check on the Bank’s work, he used data from the official source – the Customs Control Committee of the Ministry of Finance.  Uzbekistan doesn’t show up anywhere in the Bank estimates for the top 24 trading partners, although it is in the control committee’s dataset.

One may think this a small error since Uzbekistan accounts for less than 2% of our trade.  The omission matters for three reasons.  Currency traders, as well as import and export dealers, find that their profits are sensitive to small changes in the exchange rate.  Also, we need Uzbekistani data to answer such questions as the impact of Kazakhstan’s customs union (formed with Russia and Belarus in 2010) on trade in Central Asia.  Finally, and most important, the Bank’s failure to discuss anywhere its reasons for excluding the Uzbekistani data for 10 years, raises questions about its diligence in verifying its own estimates.

This is not the first time that the Bank’s calculations have been called into question.  As Beisenov notes, Tengrinews in 2012 noted a $3.6 billion difference between the trade estimates of Kazakhstan and China in 2011.  That was 3.1% of Kazakhstan’s entire trade that year.  Somebody needs a new abacus.  --Leon Taylor, tayloralmaty@gmail.com

 

 

References

Beisenov, Kairat.  Estimation and impact of the real effective exchange rate on the goods market in Kazakhstan.  KIMEP University manuscript.  August 2013.

Bernanke, Ben S., and Frederic S. Mishkin.  Inflation targeting: A new framework for monetary policy?  National Bureau of Economic Research Working Paper #5893.  1997.  Online.  Briefly discusses the Reserve Bank of New Zealand.

Gayfutdynova, Venera.  Uzbekistan uvelychyt eksport v RK bolee chem na $1 million.  Kapital.  July 25, 2013.   

 

Tengrinews.  Raznitsa tamojennoy statistike kazahstana-kitaya sostavila 3.6 milliarda dollarov.   http://tengrinews.kz/kazakhstan_news/  June 30, 2012.