Flunking Econ 101

KIMEP University, a major research institution in Central Asia, has just proposed reforms to Kazakhstan President Kassym-Jomart Tokayev for his seven-year tenure.  Its blueprint vividly illustrates common mistakes by non-economists about economics.

“This strategic plan provides a realistic agenda for political, education and economic reforms that will (1) build a full-fledged democracy, (2) modernize the education system and (3) double per capita income within seven years.”  Per capita income means income per person.  Further down the page, “we estimate that a government investment of $12bn annually in priority areas will put Kazakhstan on a growth path, which in turn would double national income within seven years.”  What do we want to double?  National income, or per capita income?

Wait, there’s more. “We estimate that, if the government directly invests $12 billion per annum to remove infrastructure bottlenecks and promote growth sectors of the economy and if, in addition, it provides advance finance to set up a nation-wide house-building program and to set up a venture capital fund, the GDP would be doubled in 2030 in nominal terms.”  If the goal is to double nominal GDP by 2030, we don’t need a blueprint. Kazakhstan is doing that already.  The annualized growth rate in nominal national income is about 21%.  At that rate, nominal income will double in less than four years.  The miracle economy! 

Just one problem: Of the 21% growth, 18% is in prices and only 3% in output.  Unless the authors are advancing the novel proposition that consumers enjoy skyrocketing prices, they mean not nominal income, which is measured in tenge (the currency of Kazakhstan) and hence reflects increases in both prices and output, but real income, which is measured in output.

Moving right along, the plan would build “1,000,000 new apartments in seven years.” Not to worry: “Only a fraction of the overall necessary investment of $100bn will need to come from the government purse: The government will be able to sell land to developers and to recuperate its cost by selling the housing stock to private homebuyers.”

 A few naïve questions:

 (1)   Does the government already own the land? If not, then to save on that $100 billion, it will need to buy private land at below-market prices, by condemning it. In 2014, public protests over a proposal to lease land to foreigners (read: The Chinese) so rocked the government that it put a moratorium on the lease. Would condemning tens of billions of dollars of private land be less controversial?

(2)   So, the government will sell condemned land to developers at market value and then sell “the housing stock to private homebuyers.” (I thought that these were apartments, but never mind.)  What do the developers get?

KIMEP has an excellent economics department that regularly publishes in world-class journals. The authors may wish to take it seriously.  --Leon Taylor, Baltimore, tayloralmaty@gmail.com

Disclosure: I taught economics at KIMEP from 2006 until this year.

Reference

KIMEP University.  A platform for political, education, and economic development in Kazakhstan: How to leave a legacy of transformation in seven years.  Policy paper. Almaty, Kazakhstan.