Belyanin on redenominating the ruble

http://notes-from-the-golden-horde.blogspot.com/2017/12/the-introduction-will-loaf-of-bread-in.html

Pandora’s revenge

In August 2015, the central bank of Kazakhstan took its mitts off the exchange rate, leaving it to the vagaries of the currency market. From July to September, the number of tenge trading for a dollar rose from 187 to 258 – and averaged 366 in January, a virtual doubling in five months. In other words, the amount of foreign goods that tenge holders could buy nearly halved. Who suffered most in this drastic depreciation?

At first glance, you would think that the rich had more to lose than the poor. Those with tenge wealth saw their dollar value vanish. The poor had no wealth, much less tenge wealth, so they got off scot-free.

At second glance, things are not so simple.  A depreciation raises local prices, since it raises foreign demand for local goods, forcing residents to compete for them by paying more.  Some prices rise faster than others. Who is unlucky enough to face these prices?

A recent study addressed this question by analyzing the 1994 crash of the Mexican peso.  Political violence and other factors that year caused investors to lose faith in the peso.  To keep it from weakening in terms of the dollar, the central bank bought pesos and sold dollars.  Since the peso was overvalued, investors dumped it. By December, the central bank was running out of dollars, so it floated the peso. The currency tanked, prices soared, and a few banks collapsed.  Sound familiar?   

In their careful study of the Mexican crisis, Javier Cravino and Andrei Levchenko concluded that prices paid by the poorest tenth of the population nearly doubled while those paid by the richest tenth rose three fourths. This happened partly because the rich spent more of their income on services than the poor did. Most services are bought at home, not abroad; so when the currency goes south, their prices rise less rapidly than those of traded goods like grain.  Even within a category like food, prices rose more rapidly for the poor, who were accustomed to buying cheap food from abroad.  Overall, in the two years following the swooning of the peso, the purchasing power of the poor fell by half but declined less rapidly – by 40% -- for the rich.

Did the 2015 tenge crisis worsen the income distribution in Kazakhstan as well?  A question, perhaps, for the National Bank. --Leon Taylor, tayloralmaty@gmail.com

Good reading

Aldo Musacchio. Mexico's financial crisis of 1994-1995.  Harvard Business School Working Paper. No. 12–101. May 2012. 

Wikipedia.  Mexican peso crisis.  https://en.wikipedia.org/wiki/Mexican_peso_crisis

References

Javier Cravino and Andrei A. Levchenko.  2017. The distributional consequences of large devaluations.  American Economic Review 107(11): 3477–3509. https://doi.org/10.1257/aer.20151551.

National Bank of Kazakhstan.  Official exchange rates on average for the period.  www.nationalbank.kz

 

Higher miseducation

Has Kazakhstan's educational policy gone astray?

In higher education, Kazakhstan doesn’t harvest the forest because it perceives only a few trees.

During the early years of independence, the government cut back sharply on its funding of colleges, which now amounts to less than a third of a percent of the size of the economy (measured as gross domestic product), according to the Organization for Economic Cooperation and Development, a research group comprising rich nations.  Of this amount, more than a third goes to Nazarbayev University, which the government regards as the country’s flagship among research universities, and to the Bolashak program, which finances advanced study abroad.  This leaves less than a fifth of one percent of GDP of public funds for all other schools of higher education. 

Among them, the government favors vocational and technical colleges. This year it announced its intent to make this education free, which may accelerate the long-term rise in their share of all students of higher education, already above half despite a slight drop in the past few years. Free vocational education may be a step towards diversifying the economy away from oil exports, which account for roughly a fourth of GDP.

The logic behind this policy is a little shaky.  At the margin, graduates of vocational schools will realize most of the value of their education in the form of higher wages.  As long as they can borrow money for school, they seem likely to choose the right amount of education by comparing its value to its cost (such as the wages foregone by studying rather than working for three years).

Wild swings

Yes, vocational education might also confer a value on society, rather than on the graduate, by diversifying the economy, since this mitigates the oscillations in GDP that stem from volatile oil prices. The youth might not take this value into account when she mulls going to college.  But aside from this, the market will provide enough vocational education even if the students pay full tuition.

The area that may be under-funded is liberal arts education, ranging from art history to political science.  This education creates general skills for solving such problems as how to reduce inequality in the nation’s distribution of income – problems that matter to society but that do not necessarily offer high wages motivating anyone to seek a solution.  The OECD notes that general problem-solving skills are much weaker in Kazakhstan than in the West.

Liberal arts also promote a sense of civility among graduates that makes life pleasant for all of us. The youth contemplating college cannot cash in these benefits as higher wages, so he is likely to ignore them when choosing his field of study.  A subsidy to the liberal arts may correct this deficiency.

The OECD has complained that Nazarbayev University’s share of public funds is too large to benefit higher education. “At best, this is an experiment that carries substantial risks: It is an open question whether any excellence that the university may achieve can outweigh reduced funding for the rest of the [higher education] system.” It could have said the same thing about Kazakhstan’s skimpy funding of colleges in general. –Leon Taylor tayloralmaty@gmail.com

References

OECD (2017).  Higher education in Kazakhstan 2017, Reviews of national policies for education. OECD Publishing, Paris.  http://dx.doi.org/10.1787/9789264268531-en

      

Belyanin on tense relations between Kazakhstan and Kyrgyzstan

http://notes-from-the-golden-horde.blogspot.com/2017/11/will-binding-thread-between-astana-and.html.

Make America wait again

Stymied in building the Great Wall of Mexico, the president of the United States is trying to brick up a bigger wall around trade.  Donald Trump berates the Germans for their trade surplus with the US; proposes to rewrite a trade pact to limit the surpluses of Mexico and Canada; and, I presume, would extend the same principle to Kazakhstan’s surplus with the US, totaling $216 million in goods so far this year. Trade deficits, Trump avers, weaken the US economy.

In reality, a trade deficit is a blessing in disguise.  Recall that this deficit is the excess of goods that a nation buys abroad (imports) over what it sells abroad (exports). If Kazakhstan sells $3 million of oil to the US in exchange for $2 million of automobiles, then the US has a trade deficit with Kazakhstan of $1 million. In a sense, this cool million is a gift to the US. It doesn’t have to give up any SUVs for the extra petroleum – just green pieces of paper called dollars, which it can print virtually for free.

Of course, what tees off the Trumpists is the loss of oil jobs in the US: Why shouldn’t America produce oil for itself? The answer is that it’s better at producing cars -- that’s why Kazakhstan buys from Detroit. Shifting derrick workers to auto factories (albeit indirectly) puts them in more productive jobs where they can earn more. But this doesn’t happen overnight, and the workers meanwhile are angry and unemployed.  Hence President Trump.

The Trumpists fail to see that limits on trade deficits harm the rest of the American economy.  To build another factory, Ford must borrow if it doesn’t have a few spare billion bucks at hand. But it can’t borrow from foreigners unless they have dollars, which they earn by selling oil and toys to the US. If Trumpists block these sales, foreigners won’t have dollars to lend. So much for the Trumpists’ vaunted plan for economic growth.

If Trumpists really want US firms to build plants, then they can cut the federal deficit – that is, the amount that Washington spends that it can’t cover with tax revenues. Reducing the deficit will free up money to pay for factories. But in reality, the Trumpists propose tax cuts that will swell the federal deficit. To pay for the new debts, the federal government must borrow money in competition with firms. This will raise the interest rate and thus the cost of building schools and warehouses. Trump’s real motto: Make America Wait Again – wait for growth. 

--Leon Taylor tayloralmaty@gmail.com

Notes

A simple equation makes clear the ties of trade to the rest of the national economy, by showing how the nation can raise money for real investment (i.e., investment to build things, as opposed to financial investment).

People either spend their income on products or taxes, or they save it. Denote income as Y, consumption as C, taxes as T, and savings as S. Then Y = C + S + T.

We can also think of income as the value of what the nation creates. Its goods and services are either for consumers, firms, government or foreigners. Denote products for consumers as C, for firms as I (for real investment), for government as G, or for foreigners as X – M (exports minus imports). So Y = C + I + G + (X - M).

Equate the two expressions for Y:

C + S + T = C + I + G + (X - M).

Simplify and solve for real investment:

I = S + (T - G) + (M - X).

This says three sources can finance investment: Private savings, the government surplus (that is, tax revenues that the government has not yet spent), and foreign savers (who earn dollars by selling more to the US than they buy from it). The term M – X is the trade deficit, which in this appendix includes services as well as goods.

The distinction between goods and services can matter. In the second quarter of 2017, Kazakhstan had a surplus with the world in goods of $4.2 billion – but a deficit in services of $1.1 billion.

References

Steve Munson, Joshua Partlow and Alan Freeman. US neighbors see increasing risk of failure in NAFTA talks. Washington Post. October 7, 2017.

National Bank of Kazakhstan. Balance of payments of the Republic of Kazakhstan: Analytic presentation. http://nationalbank.kz/?docid=199&switch=english

United States Census Bureau.  Trade in goods with Kazakhstan.  https://www.census.gov/foreign-trade/balance/c4634.html