Your 15 minutes are up

 

Andy Warhol supposedly said, "In the future, everyone will be world-famous for 15 minutes."  He 

actually didn't, but never mind: It well describes the Internet. The latest fleeting star is Jose Luis Yangali Garay, a Peruvian who posted to LinkedIn a colorful video of extreme-poverty rates in Latin America since 1979. In five days, the video has been reposted at least 439 times.

Unfortunately, there is less to it than meets the eye. Garay hasn’t provided the source for his statistics, or even explained how he defines extreme poverty, despite roughly a dozen questions from readers.  “Extreme poverty” is usually defined as life on $2.15 per day.  For international comparisons, the World Bank computes these amounts using purchasing power parity, which adjusts for changes in the exchange rate. The reason is that foreign exchange rates, as the Mexicans could tell us, often swoop and swoon for reasons that have nothing to do with the structure of the economy.  The “extreme-poverty rate”—the share of the population living on less than $2.15—is a statement about economic structure.

The World Bank’s current estimates of extreme-poverty rates are the gold standard. And Garay’s estimates vary wildly from them.

An example is Venezuela. Garay’s video shows continuous extreme-poverty rates from 1980 through 2021, ending with 68%, more than two-thirds of the population.  But as you can see in Figure 1 below, the World Bank has few estimates for Venezuela, and none beyond 2006. This may be because of problems in calculating 2017 international dollars (that is, dollars that have the same purchasing power everywhere, using 2017 prices) for Venezuela, where data from the government became increasingly unreliable until President Nicolás Maduro, enraged by the high poverty rates reported (and they were high in reality), ordered the statistical agency in 2015 to stop calculating them. (Don’t know what to do in a crisis? Shoot the messenger!) Since then, a consortium of universities in Venezuela has calculated poverty statistics through an annual survey of almost 10,000 residents.

The Survey of Living Conditions (ENCOVI) is a serious effort.  But there are problems in reconciling the estimates of two vastly different statistical organizations, one public and one private. In the video, you will see that the reported extreme-poverty rate jumps from 14% or 15% in 2014 (one cannot ascertain the exact number from the video) to roughly 40% in 2015. Is this due to a deteriorating economy, suffering from low global oil prices and from government mismanagement that stoked an inflation rate in 2018 of 65,000%? Or did the change in surveys play a role? 

The World Bank does not report average income, adjusted for inflation, for Venezuela from 2015 forward, but the International Monetary Fund does: Real GDP fell 6.2% in 2015.  This loss is severe but not likely to be enough to cause the extreme-poverty rate to almost triple in one year.  So the conversion in surveys may have hastened the rise. However, in the long run the economy surely accounted for most of the increase reported in extreme poverty: After 2015, GDP fell faster and faster, diving to a breathtaking minus 30%—nearly a third of the economy—in 2020, as shown in Figure 2.

Figure 1

Data source: World Bank

 

Figure 2 

Data source: IMF

Wait, there's worse.  Venezuela estimates a poverty line, below which people are considered poor. The poverty line varies from nation to nation; in Venezuela, it encompasses those too poor to buy basic food.  Because the poverty line depends on the nation, it is not useful for the kind of international comparisons that Garay attempts. That’s why researchers apply the $2.15 criterion to all nations.  Garay does not seem to realize this.  But it is not clear whether he uses poverty lines for other nations as well; certainly, his numbers do not line up with the poverty lines reported by the World Bank. It is not clear where he gets his data, period.

So, what do we actually know about extreme poverty in Latin America? Surprisingly, the rates are below global averages, although they are not declining as rapidly, as Figure 3 shows.

Figure 3

Data source: World Bank

For the five largest countries in Latin America, rates are volatile—because they are sensitive to average income—but generally declining, as Figure 4 shows. The exception is Argentina, where extreme poverty peaked in 2002, when the government was in the throes of a financial crisis. Rates rose sharply in Colombia and mildly in Peru in the pandemic year of 2020. Remarkably, they fell in Brazil. There is little data for Mexico.

 

Figure 4

Data source: World Bank

Garay has a talent for visuals that may someday benefit scholars of poverty. But at present, his indifference to statistics so pollutes his video that it does, I regret to say, more harm than good.

 –Leon Taylor, Baltimore  tayloralmaty@gmail.com

News brief: Moldova censors opposition

 Moldova shut down six TV channels associated with the political opposition a few days ago, according to the Russian-language service of Deutsche Welle. The government charged them with broadcasting “incorrect information” about Putin's War, which it opposes. They denied the charges. 

Pro-Western President Maia Sandu tied two channels to the opposition party Shore, headed by Ilan Shor, sanctioned by the United States and Great Britain.  He is the husband of the Russian pop singer Jasmin and fled Moldova after Sandu's election in 2019.  He lives in Israel.  The two channels have broadcast content from Russia, which denounced the shutdowns.

Moldova has been in a state of emergency since the outbreak of war in Ukraine, its neighbor, in February. It is a former Soviet state with a population of just 2.6 million and a tiny military. It worries that Russia will forge a path across Ukraine early next year to Transdniestria, which broke away from Moldova three decades ago and stations Russian troops. In October, the Russian energy giant Gazprom threatened to cut off Moldova's natural gas if the utility there did not pay its debt.

Reference

Yulia Semenova.  Почему в Молдове закрыли оппозиционные телеканалы – DW – 19.12.2022

The holiday government

The government of Kazakhstan proposes to add yet another two holidays:  The Day of the Organ for Financial Monitoring (January 28) and the Day of the End of the Soviet War in Afghanistan (February 15). The proposal could take effect December 28.  

It would be simpler if Astana just declared which days were not public holidays.  The country already has at least eight, according to the embassy in Washington: New Year, International Women's Day, Nauryz (the Turkic New Year), Unity Day, Victory Day, Astana Day, Constitution Day, and Independence Day (which was yesterday).  I see that the embassy does not list a holiday for the First President.  Nursultan Nazarbayev was ousted in 2019.

Everyone loves a pradznyk (holiday).  Creating one is a time-honored way for Astana to win over the public. But holidays aren't free.  When the government closes to celebrate, it doesn't issue driver's licenses or respond to complaints about the trash. Moreover, the public servants must still be paid.  Since the government doesn't collect fees on the holiday, it must borrow money that taxpayers must pay back later, with interest. Is the Day of the Organ for Financial Monitoring worth this expense? 

Iran may hold the world record for public holidays, with 26.  The way that things are going, to survive, the government may need a few more.

--Leon Taylor, Baltimore  tayloralmaty@gmail.com

Streaming and screaming

ASCAP (American Society of Composers, Authors, and Publishers), which collects royalties from broadcasters on behalf of musicians, has the right to sing the blues. At least, its members do.  Revenues in 2021 rose only $8 million, or .6 of 1%, far below the rate of consumer inflation, which was 4.7%. (See Figure 1.) In other words, ASCAP lost more than 4% in purchasing power -- a fact that in the midst of glossy photos of ecstatic faces, and oozing self-congratulation ("record-setting financial results...It is so gratifying that ASCAP has delivered more money to our members when they need it most”), its annual report forgot to mention. (In fact, nowhere does ASCAP explain how it derived its statistics, a violation of the ethics of annual reports.)  The average payout for an ASCAP member was only $1,475. 

ASCAP blamed pandemic lockdowns -- a curious claim, since these mainly occurred in 2020. In reality ASCAP revenues have just inched along since 2013 at least (see the table below) -- especially recent international collections.  Even without adjustment for inflation, revenues from foreign societies fell in 2021 by nearly 10%.  ASCAP said this was "due largely to business closures and a lack of vaccinations," without providing a shred of evidence. ASCAP’s rival BMI (Broadcast Music) faces similar trends.

 

Figure 1

Source: musicbusinessworldwide.com

The table below shows ASCAP's annual collection in millions of dollars (Revenue), the growth rate in revenues without adjusting for inflation (Growth), the rate of inflation for urban consumers, which is the standard measure (Inflation), and the growth rate of revenues adjusted for inflation (Adjusted).  Growth rates are in percentages. For example, the growth rate in purchasing power in 2013 was minus 1.2%. Except for three years, ASCAP's growth in purchasing power has been mediocre at best.

Data sources: musicbusinessworldwide.com; Minneapolis Fed

Everyone listens to streaming. So why aren’t musicians getting rich from it?

In the old days, musicians could collect royalties through ASCAP because the government limited the number of broadcasters. Washington asserted rights over the electromagnetic spectrum and auctioned off pieces to radio and TV stations. Seymour, Indiana, for example, had only one radio station, WJCD.

Because there were only so many broadcasters, it was easy for ASCAP to determine who was not paying royalties for the musicians and force him to cough up. And there were few scofflaws, because each broadcaster had a lock on the local market and thus c from itould attract lucrative ads. Paying royalties was not a problem.

That world no longer exists. Today, thanks to the World Wide Web, anybody can broadcast.  I can stream Aimee Mann if I want.  ASCAP can’t possibly collect from billions of broadcasters. Even if ASCAP could, it wouldn’t do any good, because so many broadcasters would compete for ads that they would quickly drive ad rates to zero.  No one would make a dime, and ASCAP wouldn’t be able to collect one.

Take it to the judge

There are legal limits, of course. In the United States, a 2001 federal ruling, in A&M Records v. Napster, found that peer-to-peer file sharing could be held responsible for copyright violations.  ("Peer-to-peer sharing" just means that you can copy my file.) Since then, in the US, estimates of Internet piracy have fallen as streaming platforms like Spotify have become more popular.  See Figure 2.  But a piracy rate of 4% of the population is nothing to sneeze at, and we still face a dilemma that we might call "friendly piracy."  I may email a song to a friend. By itself, this is virtually harmless.  But aggregated over billions of people, it may generate large losses for musicians. I don't know how one can curtail friendly piracy.

The biggest problem is to enforce intellectual property rights the world over. 

Figure 2

Source: Wikipedia.  By Blendersuh19

Streaming does have a few advantages for musicians. Rather than pray for an auction with a major label, a young musician today can post videos cheaply to build her own audience and parlay this into sales of CDs and concert tickets.  But streaming will probably long account for the lion's share of the demand for a musician, who cannot cash in directly on streaming.

In short, it is true that streaming robs the musicians blind. It is also true that streaming enriches billions of lives, especially in poor countries, where people could not have dreamed of such a wealth of music under the old system.

One solution is the convenience of streaming platforms that charge a subscription fee low enough to attract users from piracy. The platforms also attract advertisers by providing specific information about potential customers. But platform users may object to loss of privacy.  And in any event, the platforms will flourish only until someone invents software that makes the pirate sites just as convenient.

Look to the government?

Another solution is to enforce intellectual property rights through the World Trade Organization, which can sanction nations that condone piracy. Under the TRIPS agreement of 1986, musicians and producers can protect their recordings for up to 50 years.  Piracy on a commercial scale is a crime. But sanctions can be onerous for poor nations, and so the WTO may be reluctant to enforce them. For example, it has often let poor countries erect high tariffs for a while. The least-developed nations have until 2034 to comply with TRIPS.  Perhaps, rather than penalize a nation for sheltering pirates, the WTO can reward it with a small subsidy for each violation of property rights reported. But this may lead to the novelty of too much enforcement. 

A last solution, a radical one, may be for the government to levy a stiff tax on all of us and turn over the revenues to the musicians. In exchange, we would get free music. Yes, we get free music now, but the artists are footing the bill. This won’t go on forever:  Sooner or later, talented people who must earn a buck will go into engineering rather than music. We will be deprived of Dylans and Mellencamps.

But the difficulties in a public subsidy of music are almost insuperable.  All nations must join in the subsidy; otherwise, broadcasters in a non-member nation can undermine it. The problem is like that of curtailing global pollutants, and we have had only limited success with climate change policy. Finally, the policy would politicize music.

Is this a long step towards socialism? You bet. But information technology has reforged the rules of the market. It is hard to sustain a laissez-faire policy when anyone around the world can touch you.

--Leon Taylor, Baltimore, tayloralmaty@gmail.com  

 

 Note

This update replaces the December 2020-to-December 2021 calculation of the US Bureau of Labor Statistics for consumer inflation (7%) with the 2021 calendar year calculation (4.7%). 

Reference

Federal Reserve Bank of Minneapolis.  Consumer Price Index, 1913- | Federal Reserve Bank of Minneapolis (minneapolisfed.org)

Tim Ingham.  ASCAP’s revenues grew by just $8m in 2021, and couldn’t catch BMI’s annual collections (musicbusinessworldwide.com)  March 21, 2022.

Dollar-drunk no more

Because economies in Central Asia wobble, firms and households prefer dollars to tenge and som, the currencies of Kazakhstan and Kyrgyzstan. The dollar looks more reliable, a safer way to hold wealth. But dollarization weakens local currencies.  People buy dollars by selling tenge, so the number of tenge that trade for a dollar -- the exchange rate-- rises.  If you hold tenge, their dollar value will fall, and you won't be able to afford as many goods from abroad. This expectation will lead you to sell more tenge for dollars, further weakening the tenge.  Moreover, because people demand dollars, the central bank may run out of them. At that point, anything goes.

Dollarization has unpleasant implications for Central Asia. First, prices may rise.  Suppose that an American book costs $15.  When the exchange rate is 300 tenge for a dollar, the book in Almaty will cost 4,500 tenge. When the rate rises to 500 tenge, the price will go to 7,500 tenge. Dollarization can spur inflation.

Moreover, because the tenge is undermined, the central bank may try to protect it by freezing the exchange rate.  This is a futile exercise in the long run, because people can always trade tenge for dollars on the street at illegal rates.  But even in the short run, the freezing causes conniptions, because it hampers adjustments to global events.  Suppose that world demand for oil falls (just you wait).  This would be grim news for Kazakhstan, which survives by selling oil to the world. The blow would be softened if the exchange rate of tenge for a dollar rose, because this would lower the dollar price of Kazakhstani oil. But if the National Bank fixes the exchange rate, this adjustment is not possible, and Kazakhstan will be in for a hard landing.

Dialing back the dollar

For all of these reasons and more, dollarization can plague Central Asia.  In 2010, after the global financial crisis knocked the props out from under banks in the region, more than 60% of all credit was in dollars, because no one trusted the tenge or the sonomi (the currency of Tajikistan).        

But times are changing, as the International Monetary Fund documented in an intriguing seminar today. Since 2010, central banks throughout Central Asia and the Caucasian region have de-dollarized their economies.  That is, they have substituted local currencies for dollars. In Kazakhstan, as Figure 1 shows, de-dollarization has been especially sharp, from 75% of credit in 2010 to 14% in 2021.  The dollar share of deposits has also fallen, from about 70% to below 40% now. 

Kazakhstan de-dollarized partly by discouraging dollar loans to unhedged borrowers. (“Hedging” here means that the borrower has taken measures to protect herself in case the exchange rate moves against her.)  The periodic strengthening of the tenge (yes, it happens) also limits the use of dollars, because people switch from dollars to tenge as the latter gain value. And the rise in deposit rates for tenge relative to dollars has persuaded depositors to go back to tenge. 

But de-dollarization can go only so far, for two reasons. First, migrants remit dollars, which are easier to send through the international banking system. Remittance accounts for an especially large share of bucks used in Kazakhstan. Second, people would still rather save dollars than tenge, as IMF officials note.

Figure 1

Source: IMF

Although the dollar’s share of Central Asian economies is falling, it is still high for public debt, even in relatively prudent Kazakhstan (Figure 2). This exposes regional governments to high foreign interest rates—especially in Kyrgyzstan, where more than 80% of the government debt is in foreign currencies.  The interest bill rises for Kyrgyzstan, one of the world's poorest countries.  The central bank of the United States, the Federal Reserve, is pumping up rates to curtail inflation (Americans think that 8% is a big deal) -- although it began slowing down today, raising the federal funds rate by half a point rather than three fourths.

Figure 2

In the region, the Central Bank of Georgia leads the way to de-dollarize with creative policy. The Bank sets a low reserve requirement ratio for private banks with deposits that are mainly in lari, the Georgian currency, not in dollars. (The reserve requirement ratio is the share of deposits that the private bank can’t legally lend out.)  A bank with a low such ratio can lend out more money and profit from the interest earned—surging ahead of banks that have high ratios because their deposits are in dollars. Competition among private banks helps de-dollarize what was once the region’s most dollarized economy: In 2010, more than 80% of Georgia’s credit was in those green George Washington portraits.

Putin's era

Nagging questions remain. Should Kazakhstan ban any requirement to pay off mortgages in dollars?  The value of the ban seems political. When the tenge weakens, a requirement to pay the mortgage in dollars becomes more expensive, and people complain. Also: Should Kazakhstan require prices to be expressed just in tenge?  Since everyone knows the exchange rate of tenge per dollar, such a requirement would be meaningless.

Central Asia is not alone in edging away from the dollar. Emerging economies the world over are de-dollarizing (Figure 3).  But the movement is especially sharp in this region.   

Dollarization is not a pure evil.  After all, it merely expresses the preferences of Central Asians for dollars.  And because the dollar is stable, it anchors the economy.  Moreover, corralling the dollar can impose costs. A startup in Almaty may need to borrow bucks to buy accounting software.  Limits on repatriating dollars of profit may discourage foreigners from building factories in the country in the first place.  Indeed, rates of dollarization can be too low. Witness Kazakhstan, a small economy that relies on trade, where dollars comprise only a seventh of credit. 

Even so, extreme dollarization, such as an 80% take of credit, may prevent a country from managing its economy in times of turmoil.  In that sense, the shift away from the dollar in the region, in an era of chaos-spawning “special military operations,” is a sign of hope.

 

Figure 3

Source: IMF

--Leon Taylor, Baltimore, tayloralmaty@gmail.com

     

 

Reference

Selim Cakir, Maria Atamanchuk, Mazin Al Riyami, Nia Sharashidze, and Nathalie Reyes.  Reducing dollarization in the Caucasus and Central Asia.  International Monetary Fund, Middle East and Central Asia Department.  December 14, 2022. IMF WP/22/154 

Swinging for the bleachers

 

The sticker shock keeps getting stickier. The National Bank of Kazakhstan has just announced that the annual rate of consumer inflation in November was 19.6%, up from 18.8% in the previous month.  At the current rate, prices would double in three and a half years.

Monthly changes in inflation don't always mean much, because they reflect such seasonal factors as holiday spending. But Kazakhstan's inflation -- the average rate of increase in prices -- has risen for 12 months and has been in double digits since March.  See the graph.  The rule of thumb is that inflation should be around 2%.

 

                                         Source: Statistical bureau of Kazakhstan

In an informative interview with Forbes.kz, the deputy governor of the National Bank, Akylzhan Baimagambetov, noted that “most of price increases already realized are certainly due to external factors, particularly the disruption in supply chains, pass-through effects, high external prices for food, energy, services. In this sense, the foundation is foreign. This is what caused inflation to accelerate strongly this year.”

Yes, but the “high external prices” and pass-through effects (inflation conveyed through the exchange rate) are based on inflationary expectations.  When people expect prices to rise, they buy now, stoking them right away.  This may be why prices are accelerating.  Moreover, people form expectations out of experience. When they see governments habitually spend their way out of recession, they will anticipate that inflation will follow such recessions as the 2020 pandemic slowdown. Even short-run inflation has long-run causes.  

What did you expect?

To stop inflation, the National Bank must lower expectations.  Otherwise, inflation will continue to be a self-fulfilling prophecy. A central bank cools off expectations by cooling off the economy, that is, by discouraging excess spending.  It raises interest rates to make it expensive for households and firms to spend by borrowing.  

The problem is that the National Bank cannot act on foreign expectations—only on domestic ones.  These have a limited impact on domestic prices, because Kazakhstan has a small open economy, relying heavily on world trade.  Its prices are largely determined by the rest of the world.  Since the Bank has a limited sway over prices, it must raise interest rates sharply: Its lever is small, so it has to give it a good yank.  The same is true for other countries, particularly small ones. Consequently, the aggregate impact of the monetary crackdowns may be an unexpectedly sharp global slowdown.

For Fund and profit

Baimagambetov also discussed the government’s fiscal rule of accumulating oil profits in the National Fund. In principle, this steadies the economy, because Kazakhstan lives and dies by oil export revenues. When oil prices are high, it makes a lot of money and can afford to salt some of it away in the National Fund.  When oil prices are low, its income falls, but it can make up the difference by spending out of the Fund.  “This rule is already embedded in next year’s budget plan, and,” Baimgambetov added prudently, “everything will depend on how it is actually followed.”  Global oil futures prices, which reflect expectations, have exceeded $100 per barrel (for Oklahoma oil) all year. They haven't been this high since 2008. So this might be a good time to save oil revenues.  Yet government spending in Kazakhstan is increasing the money supply by almost a fifth per year.  President Kassym-Jomart Tokayev is spending too much, uncorking inflation. Will he now follow the fiscal rule?

–Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Reference

National Bank of Kazakhstan.  NBK Deputy Governor: Low rate in the current environment will bring us to a vicious circle.  NBK Deputy Governor: Low rate in the current environment will bring us to a vicious circle | News | National Bank of Kazakhstan

Short in the tooth

The masters of the art of political subterfuge are the Russians. In July, when Kazakhstan President Kassym-Jomart Tokayev drew back a bit from the Kremlin over Putin’s War in Ukraine, a minor Russian court suddenly suspended Kazakhstan from using the Caspian Pipeline Consortium, its main oil purveyor, allegedly because of oil spills. After a few suspenseful days, an appellate court overruled and instead fined the Kazakhstani consortium $3,300.  Oil flowed again. But the point had been made.

Astana certainly learns from the best. Last month, the city judge in Talgar, population 46,000 on a good day, issued an opinion affecting all of Kazakhstan, population 19 million. The judge shut down the Web site of the World Health Organization, accusing it of saying the opposite of what it actually said. The judge said the WHO promoted suicide, though the very title of its article is “Suicide Prevention.”  The judge was acting on a complaint filed by the prosecutor in Talgar, where the diplomatic, soft-spoken United Nations agency is undoubtedly a major public menace.

It is hard to escape the suspicion that Astana doesn’t want Kazakhstanis to read certain data on the WHO website.   So I looked around.  And a few recent reports do intrigue, especially on teeth.

Of children aged 1 to 9, 47% have untreated cavities. Among people at least 5 years old, nearly a third are in the same straits. An eighth of people aged at least 20 have lost all their teeth. There are only 2.9 dentists per 10,000 Kazakhstanis, which works out to roughly 36 minutes of dental services per person per year.  Yet dental spending per person is only $3.30 per year.  Productivity losses due to oral disease are nearly $700 million, more than 10 times greater than the amount spent on dentistry. But the government does not have an oral health policy.  

Neither does it tax sweet drinks. Of course, adults should be free to decide how much sugar to eat and how much to learn about it. Their own consumption of sugar should not be taxed as a vice. But their ignorant purchases of sweets for children may create addictions.  One can make a case for taxing these purchases to force parents to take into account the likely health damages to their children -- if they care less about their kids, especially as adults, then they do about themselves.  

Kazakhstan has long been indifferent to health. Health spending is little more than $2 per person per day, and 40% of males older than 15 smoke.  But the WHO reports give you something to, er, sink your teeth into.  Too bad that Kazakhstanis won’t have a chance to read them.

—Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Reference

World Health Organization.  (2022).  Oral Health Country Profile 2022.  Oral Health Kazakhstan 2022 country profile (who.int)    

This one'll kill you

 

A local court in the Almaty oblast has blocked the website for the World Health Organization in Kazakhstan because of its newsletter on suicide.  The court said the WHO provided “information on ways to deprive a person of life, as well as information propagandizing a suicidal mood.” Evidently, any discussion of clinical depression will kill a reader on sight. The October decision, which affects the whole country, has just come to light.

The WHO website (who.int) includes a newsletter, "Suicide prevention."  Quoting from it: “It is estimated that around 20% of global suicides are due to pesticide self-poisoning, most of which occur in rural agricultural areas in low- and middle-income countries. Other common methods of suicide are hanging and firearms. Knowledge of the most commonly used suicide methods is important to devise prevention strategies which have shown to be effective, such as restriction of access to means of suicide.”

The World Health Organization is an agency of the United Nations. Today’s website (who.int) advises on how measles increasingly threatens 40 million children.  It offers advice and data about Covid-19 and the health emergency in Ukraine.  And it provides dozens of large databases, including statistics on “death and disability globally, by region and country, and by age, sex and cause” for 2000 through 2019.  

Why doesn’t the government override this inane decision by a city judge and restore access to a vital resource? 

—Leon Taylor, Baltimore  tayloralmaty@gmail.com

 

Reference

Olga Loginova.  (2022).  World Health Organization website blocked in Kazakhstan.  Vlast’ (Power). November 25.  Власть on Twitter: "В Казахстане был заблокирован сайт Всемирной Организации Здравоохранения по заявлению прокурора Талгарского района Алматинской области. Решение суда было вынесено еще в октябре. Причиной стал информационный бюллетень ВОЗ о суицидах. https://t.co/tKENMpD3sQ" / Twitter

Strolling to the finish line

President Kassym-Jomart Tokayev is running Sunday for re-election, to one and only one seven-year term.  He faces no competition.  Even the rivals sound like they’re voting for him.  But he is looking to his legacy and pondering economic growth. 

This week Tokayev said he recognized that Kazakhstan’s economy must shift in emphasis from oil and gas to knowledge. Of course, that is a wise thing for a political campaigner to say in a college town like Almaty.  Tokayev continued: “I gave instructions to create a research hub for new technologies at Satpayev University (in Almaty). All technical educational institutions will be able to use its infrastructure. The government should consider funding research hubs. This issue can be solved by including hubs in the category of state investment projects.”

“Hubs” has a nice ring. What is the government actually going to do?  How much will it spend, and who will pay? Concerning the Satpayev University hub, Tokayev said: “All technical educational institutions will be able to use its infrastructure.” What does this mean?

To be sure, Tokayev has committed to education before. In 2019, shortly after taking office, he said he would double the salaries of schoolteachers, which were 65% of average national income. He would also expand secondary education from 11 years to 12. Now he is emphasizing the colleges.  That’s interesting: In the last years of the regime of former President Nursultan Nazarbayev, the education ministry was shifting from universities to technical colleges.

To see where Tokayev is headed, a smidgen of history will help.  In the early and mid-Nineties, Kazakhstan’s economy shrank as much as 13% per year in the chaotic transition of post-Soviet countries to markets.  Just as Kazakhstan was beginning to recover, the Russian ruble collapsed in 1998, reducing Kazakhstan’s export demand. The economy then shrank 2%. Not an auspicious start, but by 2000 Kazakhstan was back on its feet and beginning to cash in on rising global oil prices. Since then, the economy has always grown, save in the pandemic year of 2000, when it declined 2.5%, similar to its loss in the ruble crisis.

 

Put the pedal to the metal?

In 2022 dollars, gross domestic product is about $270 billion.  Kazakhstan was a little smaller than Peru, and a little larger than Portugal, in 2021.  In contrast, income in the southern neighbor, Kyrgyzstan, is only about $9 billion, below Malawi and not much above Somalia.  Of the 180 countries and island groups for which we have income data, Kazakhstan ranks 50^th. These comparisons use current exchange rates, so be warned.

 

Figure 1

Data source: World Bank

 

Figure 2 will give you a better idea of why policymakers in Kazakhstan worry.  The country’s economic growth rates are volatile—as for any country—but falling, from double digits in the early 2000s to below 5% after 2014. Some academic analysts have suggested to Tokayev that Kazakhstan can easily spend its way back to double digits.

This is always a great theme for a Presidential campaign. But in my view, it is wild-eyed.  Nations achieving double-digit growth usually fall into single digits after a few years.  Consider the most fierce of the Asian tigers, China, in Figure 3.  It enjoyed annual growth of 10% plus, or close to it, from 2003 through 2011.  No more…although 7% to 8% is nothing to sneeze at.  China was able to grow rapidly because of excess capacity—a huge underemployed labor force, and infrastructure built by renminbi-printing localities in the Eighties. The transition to markets lit the fuel, but the fuel was already there. It is not clear that Kazakhstan today has that much fuel.

Figure 2

Data source: World Bank

Figure 3

Data source: World Bank

The nitty gritty

At any rate, claims that Kazakhstan can double income in seven years (national income or average income, take your pick) are political blarney.  A nation cannot double capacity that quickly.  A college education alone takes 16 to 21 years. To his credit, Tokayev has not repeated the claims.   

They distract attention from a real problem: Kazakhstan’s economy has so slowed that it can barely provide for growth in the population. Normally population growth in Kazakhstan averages 1% to 1.5% per year. The rate in 2021 was 1.3%.  Figure 4 illustrates the problem. Average real income—that is, purchasing power—has been rising no more than 3% per year since 2014.  Now it’s about 2%. At that rate, income per capita won’t double for 35 years. Blameworthy factors include a 19% inflation rate that makes Kazakhstani products too expensive for foreigners to buy (other than oil, for which countries are used to paying ransom prices)—and Putin’s War, which has bollixed logistics and ignited sanctions that curb Russian demand for Kazakhstani exports.  On the other hand, demand is high for Kazakhstani oil, especially since the West no longer buys so much from Russia. On balance, Kazakhstan faces excess demand: Output is growing slowly because the economy is running out of capacity. Hence the stratospheric inflation. 

Tokayev attributes the economic stagnation, at least in Almaty, to “the so-called middle-income trap, to escape which we need a deep diversification of economy. We must focus on development of processing industry, tourism, IT and creative industries.” He cited no evidence for these assertions, probably because there isn’t any.  Processing, tourism, and information technology are sensitive to world income, like Kazakhstan’s mainstay, oil exports.  Not much diversification there: Those industries will tank when oil does. I don’t know what he means by “the creative industries,” and I doubt that he knows, either.  Information technology does raise productivity—at least it did in the United States—but the problem would remain for Kazakhstan of selling that extra product in world recessions.

A sound policy of economic growth should address two problems: Times of deficient supply, and times of deficient demand.  Tokayev has deficient supply in mind.  And yes, development of processing and IT will build capacity. (Tourism is a lost cause.  Kazakhstan is not a tropical island.  And being landlocked, road-scarce, and far from major cities, it is expensive for world travelers to reach.)  But there are also times, like the financial crisis of 2008-9 and the pandemic crisis of 2020, when a nation must boost demand. The usual solution is to have the government spend its way out of the downturn. That makes a certain amount of superficial sense, especially when inflation and interest rates are low. But the spending raises inflationary expectations that are hard later to eradicate. 

In his Almaty meetings this week, Tokayev didn't mention the most important thing that he can do now for economic growth: Fight inflation. Prices are rising much more rapidly than pay for many Kazakhstanis, especially poor workers who lack power to bargain with their employers because of the country's weak unions...the kind of workers who rioted in January over a near-doubling of fuel prices.  The volatile inflation also makes it hard for households and firms to plan ahead, which stunts growth.  By spending freely, the government is working at cross purposes to the National Bank, which is trying to contain inflation by cooling off the over-heated economy. Tokayev could coordinate with the central bank.    

I don’t doubt that Tokayev will survive Sunday. But ask me again in seven years.

--Leon Taylor, Baltimore, tayloralmaty@gmail.com   

  Figure 4

Data source: World Bank

 

Reference

The World Bank.  2022. World Development Indicators.  Retrieved from worldbank.org

 

 

 

 

 

 

 

 

 

 

 

 

 

                                      

Diversity and economic growth

The schools, they are a’changin’…from accountability to inclusion.  In the 1990s, policymakers wanted to boost productivity by compelling students to learn more skills, through rigorous testing.  Today, they worry that the tests were too hard, blocking under-privileged groups from good careers in medicine, science, engineering, and law.  To some degree, this is a debate about diversity, which I define as combinations of ideas.

We are told that new perspectives can solve complex problems. For once, an abstract approach may help.  Suppose that you have an idea, A, and I have another, B.  (A rare event for me.) Now someone adds a third idea, C. If we combine C with A and B, we will have three new ideas: C, AC, and BC. We have 6 ideas altogether, or 3! = 1 + 2+ 3. Generally, the total number of ideas is X! = 1 + 2 + … + X, where X denotes the latest idea. The marginal value of diversity is X, the number of new ideas. (By “marginal value,” I mean the value of one more idea.)  This rises in X. 

But the marginal cost of diversity also rises in X, because the growing complexity of the system of ideas becomes harder to manage.  One reason for the accountability movement was that schools had trouble educating such new groups of students as those for whom English was a second language.  

How much diversity do we want?  The usual answer today is that we want all that we can get. But it really depends on circumstances.  If the marginal value of diversity rises more rapidly than marginal cost and was higher than marginal cost to begin with, then, yes, the optimal amount of diversity is infinite.  This may be the case for problems cutting across many disciplines, such as the prevention of war.

Classroom rebel

But otherwise, the optimal amount of diversity is finite. Suppose that marginal cost rises more rapidly than marginal value.  Eventually, it will exceed marginal value. At that point, a little more diversity will impose a cost. Imagine teaching a classroom in which each student spoke a different language. 

In some cases, the optimal value of diversity may even be zero, because marginal cost always exceeds marginal value.  For example, if we are dealing with a simple problem such as adding two numbers, we need not add a poet to the team.

The accountability movement of the 1990s concerned the marginal cost of diversity.  Today's inclusion movement concerns its marginal value. Of course, we need a balance—specifically, concrete measures of value and cost.

In his 2021 book Rebel ideas, Matthew Syed argues that diversity creates knowledge by drawing together disparate points of view—an idea familiar from the economics of teams. If the contention is correct, more diverse populations should have higher rates of economic growth, because they know more about production. One can test the hypothesis by looking for a positive (and large enough) correlation across countries and time between the rate of GDP growth and the immigration rate—that is, the share of recent immigrants in the population. (GDP is gross domestic product, a measure of the size of the economy.)  In any event, the debate over diversity might benefit from more analyses and fewer anecdotes.

A final note: By diversity, I do not mean differences in traits that do not affect thinking, such as gender and skin color. I mean differences in ways of thinking.  For example, the native Spanish speaker may be harder to educate in an American classroom than a native English speaker; but she also brings a fresh perspective to problems in American history.  

—Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Note: Measuring the impact of diversity on economic growth

Using the Solow aggregate production function, a workhorse of macroeconomics, we can model the rate of economic growth as

Ydot(t) = a + b Kdot(t) + c Ldot(t) + d Tdot(t) + e(t)

where Y is output, K is physical capital, L is labor, T is technology, t denotes time, e is a disturbance term, and a, b, c, and d are parameters. "dot" denotes a rate of growth.

In theory, the growth rate of technology is a positive function of diversity D(t), measured as the ratio of recent immigration to the population:

D(t) = I(t) / P(t)

where I(t) is the number of immigrants at time t (or thereabouts) and P(t) is the population.

Substitute the instrument D for Tdot:

Ydot(t) = a + b Kdot(t) + c Ldot(t) + d D(t) + e(t) 

The test of diversity theory is whether d is positive.

 

Reference

Matthew Syed.  2021.  Rebel ideas.  New York: Flatiron.