The great race

Are Kazakhstanis catching up with Russians in income?

The first shall be last, and the last….

Today, the average Kazakhstani is nearly as rich as the average Russian.  On the eve of independence in 1992, the gap in their incomes per capita (adjusted for inflation) was nearly a third.  Since then, the gap has steadily dwindled to less than 5% in 2013, according to World Bank data.  Continuing Western sanctions against Russia probably reduced the gap in 2014 as well.  

Indeed, the gap will probably disappear this year or next, as the graph below makes clear.  It shows the ratio of real income per capita in Kazakhstan to that of Russia.  (For example, Kazakhstani income was 68% of Russia’s in 1992.)

The gap has sometimes grown in response to economic events, but rarely for longer than a year.  Three incidents are conspicuous:

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      1)    In 1995, Kazakhstani income fell to 67% of Russian income, down from 69% in 1994.  This was probably due to the hyperinflation surrounding introduction of the tenge, which replaced the Russian ruble here.  In 1996, the ratio was back up to 71%.

(     2)   In 1999, the ratio fell to 74% -- from 76% in 1998, about the time of the ruble crash.  Perhaps the ratio fell because Russia was recovering from the crisis. The ratio in 2000 held steady at 74% but surged to 79% in 2001.

(     3)   In 2008, the ratio fell to 83%, down from 86% in 2007.  Did Russia handle the global financial collapse in 2008 more astutely than Kazakhstan? In any event, the 2009 ratio was 89%.

      Political independence was not an economic panacea in Central Asia – although it may have been one for Russia, which has gained ground on the West since 1992.  The ratio of income per capita of the euro area to that of Russia fell from 1.86 in 1992 to 1.56 in 2013. The US-to-Russia ratio also declined, though not as severely, from 2.38 to 2.18.

     

Kazakhstan is the only country in Central Asia to creep up on the Russians economically until breathing down their necks.  In 2013, average income in Kyrgyzstan was only 13% of Russia’s.  It had been 17% at the dawn of independence, in 1992.  The corresponding figure for Tajikistan was 10% in 2013 (15% in 1992); for Turkmenistan, 58% (41%); and for Uzbekistan, 21% (16%).  Did civil war ruin the economies of Kyrgyzstan and Tajikistan?  

Which brings us to the 64 thousand tenge question: What is Kazakhstan doing better than Russia or the rest of Central Asia?  And the 128 thousand tenge question:  Is Russia shoehorning Kazakhstan into an economic union in order to control a potential rival? --Leon Taylor tayloralmaty@gmail.com

Notes

To calculate average income, I used gross domestic product per capita from the World Bank’s World Development Indicators (worldbank.org).  To adjust for inflation, I used purchasing power parity, expressed in 2011 international dollars.  An international dollar is the amount of local currency that will buy the same amount locally as a dollar would in the United States. 

It is more common to use the current exchange rate to express purchasing power in international comparisons.  For example, if the current exchange rate is 200 tenge per US dollar, and if income in Kazakhstan is 200,000 tenge, then the conversion is $1,000. 

But this conversion is sensitive to changes in the exchange rate that have nothing to do with the nation’s productive capacity, which ultimately determines a resident’s purchasing power.  For example, Kazakhstan’s central bank devalued the tenge by 25% and 19% in 2009 and 2014 respectively.  But Kazakhstan’s capacity to produce did not suddenly fall by that much.  So economists prefer measures based on purchasing power parity.  

Inflation – a blast from the past

The West doesn’t worry about inflation.  So why should the East?

In rich countries, the rate of inflation – the average rate of increase in all prices – is so small that it has almost vanished from the economist’s radar screen.  In the United States, Europe and Japan, annual inflation is in the neighborhood of 2% or less.  From 2010 through 2014, the average rate of inflation was 2% in the US and .42% (that is, four-tenths of 1%) in Japan, according to the World Bank.  In the euro area, inflation averaged a mere .2% in 2014. 

Western inflation was generally placid as well as low.  A common measure of volatility, the ratio of the standard deviation to the mean, was just .36 (or 36%) in the US.  The exception was Japan, which suffered deflation in 2010-12; the ratio there was 3.2 (320%), mainly because inflation suddenly rose to 2.7% in 2014.    

But developing economies don’t even need radar:  Inflation is visible to the naked eye.  In Kazakhstan, it averaged 6.6% from 2010 through 2014.  In Kyrgyzstan and Tajikistan, inflation averaged 8.3% and 7.1% respectively.  Moreover, inflation in those two countries gyrated.  The ratio of the standard deviation to the mean was .61 in Kyrgyzstan and .42 in Tajikistan.  Kazakhstan, on the other hand, has tended to follow Russia’s pattern for inflation.  Russian inflation (7%) is slightly higher than Kazakhstan’s, and both countries have little volatility.  The ratio of the standard deviation to the mean was .19 in Kazakhstan and .18 in Russia.

The World Bank provided no data for inflation in Turkmenistan and Uzbekistan, perhaps because the governments didn’t provide reliable statistics.  According to tradingeconomics.com, the statistical committee in Uzbekistan reports an average rate of inflation of 4.3% for the period from 2006 to 2014 and a rate of 2.6% in the first quarter of 2014.  But the Asian Development Bank forecasts an inflation rate of 9.5% in 2015 and 10% in 2016.  I searched for inflation data in English or Russian on the Web site of Uzbekistan’s statistical committee but found nothing recent.

In short, inflation in Central Asia may be high and erratic.  Some economists shrug and point out that the transition to markets has whipped up a tempest of uncertainty.  In learning how to price, producers will err.  Given the Soviet legacy, they often face little competition, so they will tend to err on the high side.  Maybe 6% inflation isn’t so bad.

Where’s the rub?

Maybe.  But post-Soviet governments often fail to report reliable inflation rates in a prominent place.  There’s the rub.  The lack of information generates uncertainty in economies that already have too much of the stuff.  Pricing errors accumulate and may even lead to a downturn.

A half-century ago, most economists thought that moderate inflation was harmless.  The restaurants would have to print new menus with new prices, and gourmands might wear out their shoes looking for cheap restaurants.  But that was it.  Inflation was not nearly as bad as unemployment.

But in the 1970s, maverick economists, notably the Nobel laureate Robert Lucas, pointed out that uncertainty about inflation could cause unemployment, by obscuring the ability of prices to signal changes in demand.

Among non-economists, this point remains obscure, partly because newspapers misreport inflation.  If the price of oil rises from $60 to $66, reporters say inflation in the oil industry is 10%.  In reality, inflation is the average price rise for all industries, not just one.

Let’s do the numbers

For example, suppose that a typical Kazakhstani buys five pounds of meat and five bottles of kefir each month.  (Yes, in reality she buys more groceries than that, but let’s keep things simple.). The price of a pound of meat is 200 tenge; the price of a bottle of kefir, 100 tenge.  Then the price of the bundle is 1,500 tenge (5*200 + 5*100 = 1,500).

That was last year’s price.  Now suppose that this year the price rises to 2,000 tenge – an increase of 33%.  Then the rate of inflation is 33% (see the Notes).  But this is an average price, not the price of a particular product.  In our example, perhaps the price of meat rose from 200 to 300 tenge – a 50% increase -- and the price of kefir did not change.

In reality, consumer baskets include hundreds or thousands of goods and services, none of which is likely to dominate the basket price.  So we can think of a change in the basket price as an average change for all commodities over time.

The price of a product may rise because of higher demand, lower supply, or inflation.  If inflation hit all prices at the same time, then we could easily observe it and determine whether it accounted for the rise in the price of our own commodity.  For example, if the price of horsemeat rises 10%, and we observe an inflation rate of 10%, then we might infer that neither the demand for, nor the supply of, horsemeat has changed.

But if we don’t know the rate of inflation, then our habitual optimism may mislead us into concluding that the demand for our horsemeat has risen, so we’d better process a few more nags.  Only after we see our inventories of horsemeat rising will we conclude that demand hasn’t actually risen; that our price rose because of inflation.  Now poorer and wiser, we will cancel our orders for additional edible equines.

If enough industries follow this pattern, then output and employment will rise and fall.  That’s a business cycle.

In short, uncertainty about inflation can destabilize an economy.  The central bank can take a long step toward stability by reporting inflation rates and, if they fluctuate too much, by targeting them.

The National Bank of Kazakhstan does that, but not all central banks in the region are so fastidious.  Like Kazakhstan’s, the central bank in Tajikistan publishes monthly inflation rates right on its home page.  The Kyrgyzstani bank also publishes inflation data but not conspicuously.  The bank in Uzbekistan doesn’t provide inflation rates in English or Russian.  And getting economic data from the government in Turkmenistan is like pulling teeth from a crocodile.  The Web page of its central bank doesn’t even provide a search button.

Until our radar systems improve, economic instability may remain the order of the day in Central Asia. Or maybe we just need somebody in the control tower who isn’t asleep at the switch. – Leon Taylor tayloralmaty@gmail.com

Notes

Governments usually express price indices, like the Consumer Price Index, in terms of a base year.  In our example, suppose that the price of the Kazakhstani basket was 1,500 tenge in 2014 and 2,000 tenge in 2015. Then the price index is 100 in 2014 (the base year) and 133 in 2015.  The rate of inflation is calculated as the rate of change in this index – that is, (133 – 100) / 100, or 33%. 

The World Bank’s estimates assume a fixed consumer basket over time; that is, the quantity purchased of each commodity does not change, although the price does.  This is the Laspeyres method.

References

Asian Development Bank.  Asian development outlook.  www.adb.org

Governmental Committee on Statistics in the Republic of Uzbekistan.  www.stat.uz

World Bank.  World Development Indicators.  www.worldbank.org