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