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.