Will a weaker tenge weaken the colleges?
In August, the National Bank of Kazakhstan decided to
let the market set the tenge’s exchange rate.
English speakers call this a “float”; Russian speakers, a “swim.” In any
case, it was a deep dive. In a few weeks, the currency fell from just under 200
tenge per US dollar to nearly 300, until the National Bank waded into the forex
market to haul the tenge back to about 270 to 275.
What does this mean for you? Well, each tenge has less foreign purchasing
power than before, so import prices – which are expressed in tenge -- should
rise. A $1 pencil that had cost 200
tenge will now cost 275. The price hike will
tempt domestic producers, who compete with importers, to add a few zeroes to
their pricetags, too. The given income of a typical Kazakhstani -- the monthly wage averages 125,000 tenge -- will buy fewer CDs, steaks, and
college courses than before. Are the universities
headed for trouble?
The usual answer is yes. People buy less education when they are poor
rather than rich. But this is only half of the argument: Although the tenge
depreciation will eventually reduce income for a while, it may lower the price of an education. Folks may sign up for more courses. I’ll explain.
Buyers choose between apples and oranges, Beatles
and Bach, good A and good B. Their
decision depends on the price of A relative
to the price of B. If an apple costs as
much as an orange, then we may divide our spending equally between them. But if an apple costs as much as two oranges,
then we may buy more oranges than apples.
A college education is like that orange. Many sellers – like hotels and grocers – can
raise their prices whenever they want, but colleges are not so privileged. They set their tuition rates before the fall
semester, since a student who enrolls in the autumn is pretty likely to stick
around for the spring semester, too. As
it happens, the National Bank put the tenge on a float after the usual time
when universities announce their new rates.
Depreciation may not affect tuition rates much until next fall. Meanwhile, since tuition rates hold constant
and hotel rates rise, the price of a course may fall relative to the price of a
holiday. Youths may study more and surf
less. And they may study in Kazakhstan
rather than abroad, because the tenge buys less of foreign education than it
had before. Foreign education is an
import.
All
in the family
So are the pessimists wrong to foretell trouble for
campuses? Not necessarily. The depreciation does lower real income in
Kazakhstan, and poorer people do cut back on classes. But this “income effect” is offset by the
“substitution effect.” The net effect is not clear.
Early in the 20th century, the Russian economist
and mathematician Eugen Slutsky thought about the general problem. He pointed out that the size of the income
effect depends on the commodity’s importance to the household budget. If you spend half of your income on food,
then a rise in food prices may squash your purchasing power. But a price hike of a commodity that you
never buy (used toothbrushes?) may have no income effect for you.
So, whether depreciation of the tenge is bad news
for campuses depends on the share of the household budget dedicated to
education. For the average Kazakhstani
family, the share is small; spending on all education amounted to 3.4% of gross
domestic product in the first half of 2015. But for a family with
potential college students, the expected share may be distressingly large. In the latter case, yes, depreciation may induce families
to cut back on a lot of purchases, including higher education. Cap-and-gown manufacturers, take note. – Leon
Taylor tayloralmaty@gmail.com
Good
reading
Mark Blaug. Great economists before Keynes: An
introduction to the lives & works of one hundred great economists of the
past. Cambridge University
Press. 1986. Includes a brief article about Slutsky.
References
Kazakhstan Committee on Statistics. This government agency provided the estimate
of the share of education in income. www.stat.gov.kz
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