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.