Jackson’s curse

 Can Central Asia learn from the old American frontier?

In the 1830s, when the United States economy was rural and developing, the populist President Andrew Jackson proposed eliminating all paper money in denominations smaller than $20 and replacing it with gold and silver coins.  This would supposedly protect farmers and laborers. 

The argument sounds strange to us today, because we associate paper money with inflation that favors borrowers.  An unexpected expansion of the supply of tenge leads to an unexpected rise in all prices, due to unexpected spending.  The inflation will reduce the purchasing power of the tenge over time.  Borrowers will gain, because they will pay off their debts with tenge that are worth less than the ones that they had borrowed.  (Lenders can recover the lost value by charging interest, but only if they can anticipate the inflation.)  Since most farmers borrow, one would have thought that Jackson’s proposal of hard money would have proven inimical to their interests.

American economists of Jackson’s day, as inept as they were, did recognize that fluctuations in the money supply led to fluctuations in prices.  But Jackson had something else in mind.  In the frontier states of the West (today’s Midwest), local banks printed their own money.  Since they rarely announced how much they had printed, one could only guess at its value in other areas, relative to the value of moneys circulating there.  A farmer in Indiana who wanted to buy a plow from a manufacturer in Massachusetts had little idea of how many Hoosier bank notes he would need.  This uncertainty inhibited the investments required for economic growth. 

Emboldened by gold

In comparison, the supply of gold and silver was easier to estimate.  And their values as money were bounded below by their values in jewelry and other products; if you couldn’t buy much with a gold ingot, you could always melt it down and fashion bracelets.  Hence using precious metals as money took some of the uncertainty out of frontier investment.

Central Asia faces a similar problem.  Rural areas, like southern Kyrgyzstan and much of Tajikistan and the Ferghana Valley, are short of reliable currencies such as the United States dollar.  They must barter -- or use regional currencies with an uncertain value.  For example, the government of Turkmenistan is so secretive that much basic information about its currency, the manat, is unknown.  (However, economic data for the country has become increasingly available since 1998; and annual data about inflation go back to 1992.  I thank Kairat Beisenov for this point.)  Unless you have a friend in government who can supply you with dollars, you may find it hard to finance a new store or factory.

Er…what is that spinning sound from the Nashville graves?  --Leon Taylor, tayloralmaty@gmail.com

Good reading

Hammond, Bray.  Banks and politics in America:  From the Revolution to the Civil War.  Princeton University Press.  1991.  Winner of the Pulitzer Price.

Remini, Robert.  Andrew Jackson: The course of American democracy, 1833-1845.  Johns Hopkins University Press.  1998.  Volume three of a trilogy by the Tennessean’s leading biographer.

Remini, Robert.  Andrew Jackson: The course of American freedom, 1822-1832.  Johns Hopkins University Press.  1998.  Volume two.

Temin, Peter.  The Jacksonian economy.  W. W. Norton.  1969.  Refutes the traditional view that Jackson’s war on the Bank of the United States instigated a business cycle.    

News brief: Marchenko may step down soon

The head of the central bank of Kazakhstan, Grigorii Marchenko, may step down by the end of the year, ostensibly for personal reasons, reports a business weekly, Kursiv’.  His potential successors include Finance Minister Bolat Zhamyshev and Deputy Prime Minister Kairat Kelymbetov.

The president of Kazakhstan, Nursultan Nazarbaev, appointed Marchenko in early 2009, when overvaluation of the tenge had led to rapid drains of the National Bank’s reserves of foreign currency.  Within days of his appointment, Marchenko devalued the tenge by 25%.  At that time, he vowed to hold the exchange rate to about 150 tenge to the United States dollar.  In the past two years, the tenge has depreciated steadily to an exchange rate of about 153.

Any central banker will eventually collect a respectable number of enemies.  The 2009 devaluation probably protected the tenge from a devastating speculative attack, but it also reduced the wealth of tenge-holders by a fourth (in terms of purchasing power over foreign products).  Particularly caught between a rock and a hard place were commercial banks with dollar-denominated debts and tenge-denominated wealth.    

This year, Marchenko ran afoul of what Americans call the “third rail of politics” – pension reform.  (The term stems from Washington's subway system, in which the middle rail is lethally electric.)  The government suddenly “unified” private pension funds into one to be managed by the National Bank.  Some contributors to the private funds wondered if they would ever see their money again.  And a proposal to delay the retirement age of women cost one labor minister his head.

In addition to his current tenure, Marchenko headed the National Bank in the years following the collapse of the Russian ruble, 1999-2004.  He was replaced by Anvar Saydenov, whom he replaced in turn in 2009. --Leon Taylor tayloralmaty@gmail.com

References

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

Green garble

Would pollution permits cripple Kazakhstan’s economy?

Kazakhstan plans to control carbon emissions, which create global warning, by issuing pollution permits that can be bought and sold.  To reduce emissions, the government can just issue fewer permits.  Carbon polluters – such as power plants that burn coal in order to generate electricity – protest that the permits cost too much.  That, to put it charitably, is a misunderstanding.

Under reasonable conditions, marketable pollution permits minimize the cost of controlling emissions.  I don’t mean the price paid by the power plant for the permit; its emissions do real damage, so it should pay for the privilege.  I mean the cost to society of pollution control.  For example, some plants may reduce carbon emissions by switching to natural gas or nuclear power.  The cost of this transition may force a plant to layoff workers.  This loss of jobs entails a true cost to society.  We may want to cut carbon emissions, by the given amount, with the smallest possible loss of jobs (or, more generally, with the smallest possible loss of human welfare).  Marketable pollution permits can do this.

To see why, let’s look at how governments usually reduce pollution – “Command and Control”, which orders all polluters to cut emissions by a given percentage (say, 50%).  Consider two power plants that each emit 2 million tons of carbon.  Plant A has equipment designed solely to burn coal.  To halve emissions, it must buy equipment suitable for natural gas.  Reducing carbon emissions by a million tons will cost it $3 million.  Plant B already has equipment for burning either coal or gas, and it can switch to the latter fuel easily.  It can halve emissions for only $1 million.  Under Command and Control, each plant would have to reduce emissions by 1 million tons, at a total cost of $4 million ($3 million for plant A, $1 million for plant B).  It would be cheaper to have plant B cut back by the full 2 million tons, since this would cost only $2 million.  Marketable permits can make this happen.

How?  Suppose that each permit would let its holder emit one carbon ton.  Plant A would want to pay as much as $3 for the permit, since otherwise it would have to pay $3 to avoid emitting the ton.  Plant B would be willing to sell a permit for as little as $1, since it can abate the ton by spending a dollar.  Thus each plant would gain $1 by trading the permit for $2 (B would sell to A).

The gains to polluters are not the issue.  The point is that the exchange enables society to abate the carbon ton as cheaply as possible – for $1, or, more precisely, for a dollar’s worth of physical capital and labor.  Under command and control, the abatement would have cost two dollars’ worth of resources.  The marketable permit frees up a dollar’s worth of resources for producing other things of value, such as research into global warming.

Inflating the facts

A permit system isn’t essential.  The government can achieve the same cost-minimizing outcome by taxing each polluter $2 for emitting a carbon ton.  Plant A will pay the tax and Plant B will abate instead.  But under the tax system, firms can pollute as much as they wish, as long as they pay up.  True, the government can cut pollution by raising the tax rate, but finding the best tax may take several years; meanwhile, the environment may suffer.  Since we are not sure of the damages that global warming may incur, other than that they may be catastrophic, we may prefer permits to taxes, since the government can reduce emissions by a precise amount simply by issuing fewer permits.  That is, the permit system enables the government to control the amount of pollution more precisely than the tax system would.     

Eurasianet.org reports that Kazakhstani business leaders, “including KazEnergy, a powerful alliance of energy producers, is opposing the (permits) plan, arguing that it would stifle economic growth and decrease Kazakh global competitiveness.”  Hogwash.   By saving resources, the permit plan will stimulate growth and competitiveness, when compared to Command and Control. Moreover, the permit system encourages innovations that cut the cost of pollution control, since these increase the innovator’s profit from selling a permit.  If, for example, Plant B can reduce the cost of abating a carbon ton from $1 to $.75, then its profit from selling a permit for $2 increases by $.25.  Command and Control may not induce such innovation, because regulators usually require all polluters to adopt the best available technology.  The innovator will lose his invention to his rivals, so he is less likely to attempt expensive innovation in the first place.    What is costly for Kazakhstan is not the permit scheme but the original decision to reduce emissions.  Given that decision, the permit system is the cheapest way to go.

Eurasianet.org also reports “fears that the (Emission Trading System, i.e.,. permits) can prompt businesses to pass along higher costs to end users, spurring inflation and generating discontent in many communities.”  This argument is confused.  In the past, Kazakhstan exported pollution costs (in the form of global warming) to the rest of the world by permitting its power plants to emit carbon.  Requiring emitters to cut back merely recognizes that firms should pay for the input called pollution.  Undoubtedly a polluter will try to pass on this cost to customers; but since they have enjoyed the benefits of carbon emissions – such as abundant electricity – it seems fair to require them to pay the associated costs.  Anyway, users can avoid these costs by conserving. 

“Inflation” is a rise in prices throughout the national economy.  Technically, it’s the rate of increase in the “price level”.  A onetime increase in energy costs may push up the price level, but not forever.  So, the impact on inflation would be temporary.

Permits enjoy a political advantage over taxes.  Since the government must collect the tax revenues, it may be accused of adopting pollution taxes for financial rather than environmental reasons.  But it need not collect anything under a permits scheme:  It can allocate the permits for free and let their sellers keep the revenues.  Given Astana’s reputation for pecuniary cunning, this advantage is not rhetorical.         

--Leon Taylor, tayloralmaty@yahoo.com

Good reading

Larry E. Ruff.  The economic common sense of pollution.  The Public Interest.  Spring 1970.

Tom Tietenberg.  Environmental and natural resource economics.  Addison-Wesley.  Sixth edition.  2003. 

References

Khamidov, Alisher.  Carbon trade scheme fuels divisions in Kazakhstan.  Eurasianet.org.  July 9, 2013.

152

Why does the tenge weaken?

Since February 2009, the National Bank of Kazakhstan has held the daily exchange rate close to or below 150 tenge per United States dollar, with little difficulty – until now.  In the past two weeks, for the first time since early 2000, the currency has weakened to 152 tenge per dollar.   

In principle, the National Bank should be able to strengthen the tenge by exchanging dollars for it.  But recent shrinkage of the Bank’s reserves of foreign currency suggests that it may have some trouble defending its target rate.  Net international reserves fell by 8.06%, the largest monthly decline since June 2012, according to Bank data.  By comparison, these reserves fell 8.1% in January 2009, just before the Bank devalued the tenge by 25%.  They were $18.2 billion at that time and $25.6 billion last month (roughly $19 billion,  adjusting for inflation in Kazakhstan).   Moreover, gold reserves this June declined by 13.75%, the largest monthly fall since January 1994, in the wild woolly days of Kazakhstan’s transition to markets.  The main reason is probably the steep fall of 12% in late June in gold prices, which are now recovering.  Even so, the overall pattern of growing weakness in the tenge and in reserves is troubling.  What gives?

An eventual depreciation was probably inevitable, due to expectations of rising prices (i.e., inflation).  The unemployment rate in Kazakhstan has been falling steadily ever since 2000, indicating that the economy is using up its excess capacity.  When it reaches full capacity, deploying all of the workers and machines that it comfortably can, then additional demand for its products will drive up prices rather than output.  This would make its exports more expensive for foreigners to buy – and imports cheaper for Kazakhstanis to buy.  Since the country relies on net exports (the value of what it sells to foreigners, minus what it buys from them) for economic growth, the National Bank would surely have let the exchange rate rise above 150 someday, in order to make exports cheaper.  (If a buck can buy 165 tenge, rather than just 150, then the dollar price of Kazakhstani exports will fall by a tenth.)  And, in fact, the tenge has been depreciating fairly steadily since early 2011, when it was just above 145, according to Bank data.  The foreign exchange market in the Kazakhstan Stock Exchange has not been unusually active, but the average exchange rate for the tenge has been rising steadily since 2011 at least.  Which brings us back to the $64 question: Why is the tenge depreciating to above 152, a record level, now?  At the moment, the rate of inflation in Kazakhstan is falling.  The annual inflation rate in consumer prices is 5.9%, the lowest since November.

The depreciation is particularly mysterious because it may put the Bank on dangerous ground.  If the Bank cannot hold the exchange rate below 152, which is something of a bright line, then it may have to announce a new target – say, 153 or 155.  If speculators anticipate this, then they will sell tenge now while they’re still worth something.  This would raise the exchange rate on the street (i.e., the tenge would weaken), forcing the Bank to act sooner than it would like.  In short, the Bank may face a speculative attack.  To avoid volatility, it should make its intentions clear.

Who yearns for the yen?

Some reasons for the tenge’s depreciation are obvious enough.  The world oil market has been anemic this year, and the quantity of crude sold may surpass that of 2012 by less than 4%, reports a business weekly, Panorama.  (The ischemia may be temporary: Futures prices for crude have been rising since April.)  Also, all things are relative: The tenge may be depreciating in terms of the dollar because the latter is strengthening.  The Federal Reserve has now made clear that it may weaken its stimulus of the U.S. economy someday, although it is in no hurry to pull back.  This hint is enough to convince speculators that growth in the supply of dollars may slow down. The dollar would become scarcer, so its expected value, in terms of foreign currencies, would rise.  With respect to the euro and the yen, the buck is strengthening at the moment -- albeit in the latter case partly because the Bank of Japan is doubling its money supply in a campaign to escape deflation.

Another factor in the tenge depreciation, if only a remote one, may be that pension reform has compromised Astana’s financial credibility.  The sudden decision this spring to “unify” private pension funds into one controlled by the government suggests that it had earlier underestimated the cost to it of future pensions.  In addition, some analysts contend that the pension nationalization will impede embryonic financial markets in Kazakhstan, reported Panorama.  In that case, the tenge will lose value relative to currencies used in financial markets that flourish. 

In brief, tenge may be weakening for the same reason that I can’t sell my used toothbrushes: No one wants them, particularly in such abundance.   –Leon Taylor, tayloralmaty@gmail.com

References     

NASDAQ.  Gold prices; crude oil futures prices.  www.nasdaq.com

National Bank of Kazakhstan.  Statistics.  www.nationalbank.kz 

Panorama.  Aktyva Natsbanka v zolote sokratylys’ za mesyats na 13.6%.  July 12, 2013.    

Fifty shades of gray dictators

 What motivates authoritarian rulers in Central Asia?

Paul R. Gregory.  The political economy of Stalinism: Evidence from the Soviet secret archives.  Cambridge University Press.  2004.  308 pages.

More than two decades after the massive heart attack of the Soviet Union, scholars debate the reasons for the collapse.  To Austrian economists like Friedrich Hayek, a planned economy cannot induce the information from individuals that generates trade.  Had Steven Jobs not known the prices and quantities bought of personal computers, he might not have been able to gauge the potential profits in a pocket-sized device (assuming that he could have kept them).  Socialist economists blame the men rather than the blueprint.  Planning might have worked had the politically powerful not been intent on pocketing gains.  To use Joseph Berliner’s analogy, did the Soviet economy implode because of the jockey or the horse?  “What we know for certain,” writes Paul Gregory, who has studied Soviet economies and their progeny for four decades, “is that the administrative-command system survived longer than Hayek and [Ludwig von] Mises would have expected and, at its peak in the 1960s and 1970s, it constituted a credible military threat as a world superpower.”

The Austrians failed to anticipate this qualified success because their model was too simple, Gregory argues.  Bureaucrats had incentives to gather information informally, but not necessarily to share it with ostensible superiors.  Brezhnev faced the same problem that torments main shareholders today in the United States – the agent may not do the bidding of the principal.

The two-arm bandit

To explain Stalin, Gregory puts forth four models of a dictator – models that may apply in Central Asia today.  The first and least likely is the “scientific planner”, who merely defines benevolent rules for divvying up resources among the population and leaves the decisions to the technocrats.  In contrast, the “stationary bandit” manages the economy in order to ensure its long-run growth and subsequently the nation’s political stability.  (Gregory attributes this model to the late, great American economist Mancur Olson.)  

Both types of dictators may engender economic growth; but clearly other types proliferate, somewhat in the manner of stinkweeds.  The “selfish dictator” cements his political support by bribing or bullying the powerful.  Finally, the “referee-dictator” presides over the internecine struggles of interest groups in order to make himself indispensable to them.  (Yet another Olsonian concept.) 

With respect to Stalin, we can dispose of the scientific-planner model rather quickly.  Also, his iron grip on the Soviet economy and politics would rule out the referee-dictator model.  Choosing between the two remaining models is complicated by the lack of reliable statistics, Gregory argues.

From specialized studies of output, investment, rubles and other topics, Gregory concludes that the Kremlin horse had thousands of jockeys, some of whom were superiors to others and all of whom were elbowing for position..  “Each superior faces an uncooperative and untruthful subordinate who can only be moved to positive action by force.  One dictator alone could bring little force to bear.  Each dictator requires minidictators under him to coerce action at the next level.”  This inelasticity in the economy reduced output.  “Virtually all economic instructions were based on the principle that this year’s activity would be last year’s plus a minor adjustment.  The massive imbalances were resolved by arbitrary interventions by the thousands of ‘dictators’ empowered to intervene.  There could be no general rules because they would have interfered with the authority of officials to intervene….In effect, the economy was frozen in place as the other world economies progressed.”  Regardless of its motivation, the dictator’s urge to command inhibited economic growth.  Perhaps this principle is not entirely alien to Central Asia.   -- Leon Taylor, tayloralmaty@gmail.com

        

Good reading 

Hayek, F. A.  The use of knowledge in society.  American Economic Review 35.  1945.  Argues that only free markets can collect essential economic information from individuals, through millions of their exchanges.

Olson, Mancur. The logic of collective action: Public goods and the theory of groups.  Harvard University Press.  1971.  Small interest groups may dominate large ones because their benefits per member are larger and their organizational costs smaller.   

Olson, Mancur.  The rise and decline of nations: Economic growth, stagflation, and social rigidities.  Yale University Press.  1982.