The Pretender

 

                                         KIMEP's Chan Young Bang: Macro or snake oil?

                                         Photo source: The Org

The forced resignation a month ago of the president of Harvard University, Claudine Gay, a plagiarist, reminds us that the gales of politics pervade the groves of academe. And not only in Cambridge. The politicization of the search for truth can be severe in poor countries and transition economies.

A glaring example is Kazakhstan. The president of a Western-style university in Almaty, Chan Young Bang, became Economic Adviser to the first president of Kazakhstan, Nursultan Nazarbayev, as well as vice chairman of Nazarbayev’s Expert Committee, which Nazarbayev chaired, in 1990. Three years later, Kazakhstan went into a hyperinflation of thousands of percent annually.

Nazarbayev was ousted in the deadly riots of January 2022, which were spurred by the government’s sharp and sudden increase of fuel prices. He was replaced by his erstwhile protégé, Kassim-Jomart Tokayev.

Bang would love to become an economic aide to Tokayev. So he presents himself as an expert macroeconomist who knows how to boost Kazakhstan’s rate of economic growth, from 4.5% to 7% per year. But Bang has never published a paper in a decent refereed journal of economics. In 2020, Palgrave Macmillan published his book, Transition beyond denuclearisation: A bold challenge for Kim Jong Un.  But it was heavily rewritten by others, including me, a fact that the book does not mention. His only academic credential as a macroeconomist is that he is the principal investigator for the DPRK Strategic Research Center at KIMEP University, where Bang is President. He was named principal investigator, at his own request, by a board of KIMEP trustees whom he appointed.  He created the center himself.  

Our expert macroeconomist wants to immediately boost Kazakhstan’s growth rate by more than half through the magic of the multiplier. This refers to an endless sequence of ever-diminishing amounts of spending that add up to a tidy sum. I spend $1 at the grocer, who saves 20 cents and spends 80 cents at the pleasure palace. After only two rounds of spending, we have generated $1.80. Another 64 cents is generated in the third round, and so forth. In this story, the amount spent from each additional dollar, the marginal propensity to consume, is 80 cents.

Bang thinks that every industry has a multiplier and a marginal propensity to consume. By allocating funds across the industries with the highest multipliers and marginal propensities to consume, the government can achieve any growth rate it wants.

Rubbish. Bang hasn’t the foggiest idea of what a multiplier is, or of what constitutes macroeconomics.

The multiplier, and the marginal propensity to consume, apply to all consumers in a national economy. The idea is that they all feel confident enough of the economy’s future to keep spending at their usual rate. If someone fears for the future, she will save rather than spend, and the sequence of spending will lose a link. Th success of the multiplier in generating a lot of income rests on the public’s confidence that the government will avert recession. The charm of a President like Franklin Roosevelt may be critical to such Keynesian economics, named after the English economist John Maynard Keynes who proposed that the government encourage people to spend their way out of the Great Depression.

To believe that the government will avert recession is not necessarily logical. An opposing assumption in macroeconomics is that people act rationally in their own interest. The notion of rational expectations discounts Presidential charm and focuses on the facts. In this story, people will often have occasion to  save. The multiplier does not play the same powerful role in rational expectations as in Keynesian economics.

Bang confuses the multiplier with the rate of return.  Suppose that you spend $100 million building a computer platform that generates $120 million in revenues. Your rate of return is a $20 million profit on a cost of $100 million, or 20%. The rate of return varies across industries, depending on such factors as market demand and the productivity and abundance of inputs. If the government has $100 million to spend throughout the economy, and if it is sure that there is enough capacity to absorb this much spending, then it would make sense to allocate the money to the industries with the highest rates of return. But there is no guarantee that the government can target any growth rate it wants.  It must have the needed inputs – labor, physical capital, and production know-how called technology.

Bang’s list of “key investment-target industries” was

“1. real estate

2. agricultural

3. tourism

4. education

5. IT Technology

6. financial industry.”

The list does not include the industry that dominates Kazakhstan, oil and natural gas. Over the long run, oil and gas exports account for a fourth of Kazakhstan’s GDP.

Bang strong-armed the economists at KIMEP into backing his project, demanding estimates in two days that normally would take months. To get him off their backs, they proposed “multipliers” to sectors that he regards as promising industries, such as infrastructure and electronic products. It would make better sense to think of infrastructure as a form of physical capital in all industries, but never mind. The point is that the estimates were proposed more to mollify Bang than to satisfy rigorous standards of accuracy. And they were rates of return, not multipliers.

Below is the table of “multipliers” that KIMEP’s economists proposed, with a rationale:

“Since government investment is subject to budget deficit, the multiplier should be lower than that for private investment, and assume it to be 2. In contrast, the constraint of investment is likely to be relaxed for the case of foreign investment and investment made from the national sovereign fund. Therefore, we assigned the multiplier for these investments to be 4, adding more points from the general case."

 

	Multiplier	Investment (billion $)	Impact on economy with multiplier effects (billion $)
Private	3.3	0.87	3.3 * 0.87 = 2.87
Government	2	0.30	2.0 * 0.30 = 0.60
Sovereign Fund	4	0.30	4.0 * 0.30 = 1.20
Foreign	4	0.60	4.0 * 0.60 = 2.40
Total		2.07	7.07

The proffered justification of a low fiscal multiplier is obviously wrong. That the government would spend without constraint suggests that its multiplier is larger, not smaller, because no tax payments are deduced from the spending. Never mind. The key point is that the whole table is nonsense.  A rate of return is not a multiplier. 

To make matters worse, the government does not have a rate of return in the conventional sense, since it is not out to make a profit. As it happens, the fiscal multiplier for Kazakhstan may be about 4.8. See the appendix below for calculations.  

In short, the table is incoherent. But, not to worry: An economist at KIMEP writes that Bang “was happy with the numbers for investment amounts, and the suggested distribution of these additional investments into the seven key target-industries.” Another gushes: "This is great news!" Accuracy? Who cares?

In pursuit of a political career, Bang is betting KIMEP’s reputation on a ludicrous proposal.

This story does have a moral. The deans and central administrators at KIMEP should have set Bang straight, but they feared for their jobs. Neither have the university trustees (appointed by Bang), or the Kazakhstan Ministry of Education and Science, objected vigorously to Bang’s politicization of the academe. The most likely agent to stop politicization is the faculty, because its mission is to discover and disseminate ideas and facts – the “truth,” if you will. But in this case, the profs were more interested in protecting their jobs, and understandably so. The episode does not attest to high academic integrity.

In general, the case exists for establishing a faculty panel or senate at a university in its check and balance system, and to insist upon the faculty's freedom of academic speech. Otherwise, there is an incentive for a man (or woman) on the make to harness the university's reputation to political purposes, thereby destroying it. – Leon Taylor, Baltimore tayloralmaty@gmail.com

 

 

Notes

The total spending generated by the multiplier from $1 when the marginal propensity to consume is c is

S = $1 + c*$1 + c^2*$1 +… +

To find the multiplier, rewrite this geometric series:

cS = c$1 + c^2*$1 + … +

if c is less than 1, then its power terms will eventually go to zero. The geometric series thus has a finite total.

Subtracting the second series from the first,

S – cS = $1 - c$1 + c$1 - c^2 $1 + c^2 $1 - ... = $1

Thus S = 1/(1 – c). The multiplier for $1 can be written as 1/(1-c), if we include the original dollar. In the example of this article, the multiplier is 5. 

Appendix

Denote GDP as

Y = C + I + G + (X – M)

where

C = a + b*(Y – T)

M = c + d*(Y – T)

Y = GDP

I = investment

G = government

X = export

M = imports

and

T = taxes

where all terms are real.

Solving,

Y = [a + I + G + X – (b+d)T]/(1 – b – d)

The government multiplier is

dY/dG = 1 / (1 – b – d)

The regression below uses annual data from 1990 through 2022 to estimate the consumption function for Kazakhstan in 2015 international dollars (that is, with adjustments for inflation and exchange rate changes). The marginal propensity to consume is .645.
Regression Statistics
Multiple R	0.976
R Square	0.953
Adjusted R Square	0.951
Standard Error	8182465472.708
Observations	33
ANOVA
	df	SS	MS	F	Significance F
Regression	1	4.2E+22	4.2E+22	626.679	3.98E-22
Residual	31	2.08E+21	6.7E+19
Total	32	4.4E+22
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	-1349964245	3.56E+09	-0.37895	0.707308	-8.6E+09	5.92E+09
GDP	0.644902953	0.025762	25.03356	3.98E-22	0.592362	0.697444

 The next regression is for imports.  I derived this import function for Kazakhstan from World Bank data for 1990 through 2022, again using 2015 international dollars. Normally the import function includes an argument for exchange rates.  But in this case the variables already are in international dollars, which adjust for exchange rates. The marginal propensity to import is .148.   

Regression Statistics
Multiple R	0.630014
R Square	0.396918
Adjusted R Square	0.377464
Standard Error	1.04E+10
Observations	33
ANOVA
	df	SS	MS	F	Significance F
Regression	1	2.22E+21	2.22E+21	20.40265	8.53E-05
Residual	31	3.37E+21	1.09E+20
Total	32	5.59E+21
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%
Intercept	1.93E+10	4.54E+09	4.242744	0.000185	1E+10	2.85E+10
GDP	0.148334	0.03284	4.516929	8.53E-05	0.081357	0.215311

With these two estimates of marginal propensities, we can calculate the government multiplier as 1 / (1 - .645 - .148) = 4.8.

War cry

             Tower 22 in Jordan: The beginning of a regional war? Photo source: Reuters

Three US soldiers were killed and more than 30 injured, some critically, in a kamikaze drone attack last night on a small US post in northeast Jordan, according to news reports. Aside from a heart attack suffered by a contractor in a false alarm of an attack months ago, these were the first US military deaths in the area since the spate of more than 150 rocket assaults on US posts in Syria and Iraq began October 17. Probably they had been precipitated by false charges that the Israelis had bombed a hospital in Gaza City that day. The Islamic Resistance in Iraq, essentially a Web site for Iran-linked militias, took credit for the attack. But no militia would have dared a campaign on this scale without Tehran's approval. Tehran pays the militias' bills.

Tower 22 is about 13 miles from the al-Tanf garrison in southeast Syria near the highway between Baghdad and Damascus; see the map below. Iran and its militias use the highway to transport troops and supplies, especially to and from the Lebanon Hezbollah. Tower 22 is tiny, and one wonders if it even had an air defense system worthy of the name. That might account for the heavy casualties. The single drone hit near the barracks. 

Tower 22 can supply al-Tanf and Jordanian sites but otherwise has no strategic importance that I know of.  Al-Tanf does have strategic importance: It trains recruits in the Kurdish-led fight against the terrorist Islamic State in Iraq and The Levant.  Had the Islamic Resistance had a tactical purpose in mind, it would have attacked al-Tanf. But this garrison is protected by US jet fighters. The most likely reason for sending a drone into Tower 22 instead would have been to kill US troops.

Probably Iran believes that Americans are too weak to respond to a deadly attack with one of their own.

Khamenei has often called Americans weak. "The main enemy of the Islamic Republic is arrogance which is manifested by the transgressing US regime....their people and their youth suffer from [an epidemic of] depression and suicide," he said in a 2019 speech .".....Politicians – or as you mentioned, first-rate imbeciles – become furious against the people of Iran and show this by abusing and insulting our people. 

"All these are signs of the enemy’s weakness....When this Revolution was a weak sapling, all of them joined hands to uproot that weak sapling, but they failed. Today, that weak sapling has turned into this strong, pure and great tree and therefore, they will not be able to do a damn thing."

 The well-publicized isolationist arguments of the Republicans, especially of former President Donald Trump, and the restrained responses of the US military Central Command to militia assaults so far, might have misled Iran's Supreme Leader, Ali Khamenei, into a miscalculation that the US would respond by withdrawing its 900 troops from Syria and perhaps even its 2500 troops in Iraq, which are there only at Baghdad's invitation. A US retreat would substantially extend the regional influence of Iran -- and of the other ally of the Syrian President and dictator, Bashar al-Asad, Russia. 

If so, Khamenei erred. The US must retaliate in strength. Its honor in the Middle East is at stake. One possibility may be a Tomahawk attack on an Iranian military site like the centers of the Islamic Revolutionary Guards in Syria and Iran, perhaps launched from the USS Florida submarine in the region. Iran would find a Tomahawk ballistic missile hard to defend against: It flies below radar.

Khamenei's error, if that is what it was, could draw the US into a regional war. But it is even less likely that the Pentagon's policy of restraint will avoid war if it continues. US President Joe Biden says America will respond at a time and place of its choosing.

Reading between the lines, I suspect that Khamenei double-crossed Biden: That Biden offered restraint as long as Iran didn't kill American troops. Now that Iran has gone for the barracks, all bets are off. 

The unwinnable war

Iran does not have an air force worthy of the name. It can't long fend off US air attacks. Can it afford to fight a war thar it can't win? 

The answer isn't clear to me. On one hand, the unemployment rate has been rising in Iran for two years, to 11%; see the figure below. A war might take this excess labor off the restive streets. This could reduce public protrsts against Tehran'sOn the other hand, Iran is still a lower-middle class economy, with an average income below $4,700. Although gross domestic product, the value of domestic production, has risen for three years, much of this is due to inflation, now 43% per year; see the figure below. I doubt that the typical employed Iranian can afford an expensive war. The political benefits to Tehran of a war are likely to hold only in the short run. This is not to say that it might not try it, anyway. Jingoism distracts from a troubled economy.

Or Biden could toughen the sanctions on Iranian oil already on the books.  This would hit the Iranians where it hurts. True, the absolute poverty rate in Iran is low -- less than 1% of the population lives on less than $2.15 per day, according to the World Bank (it says here). But the economy's growth rate fluctuates wildly, thanks largely to inflation; see the figure below. Cutting off oil exports would impoverish many Iranians. The central bank would undoubtedly respond by printing rials, maybe supplemented by a little foreign counterfeiting (it's happened before). Public protest could force Tehran to cave in without so much as a Tomahawk. In addition, sanctions avoid the deaths of the innocent that are unavoidable in any large air assault. 

Sanctions have two problems relative to military attacks as a form of retaliation.  First, they are unfair. They punish the typical Iranian, who had nothing to do with the Tower 22 assault. In contrast, a ballistic missile launched into a Revolutionary Guards center reaches the right folks. Second, sanctions are slow. The full reduction in output, and the full increase in inflation, may not appear for months or even years. Meanwhile, Tehran has no reason to lay off attacks on US posts. To the contrary: It may step them up, trying to blackmail the US into suspending the sanctions. 

The main virtue of sanctions is that they are a long-run solution to a problem --Iran's mischief -- that the US finally recognizes as persistent. -- Leon Taylor, Baltimore tayloralmaty@gmail.com

                                        Source: AP

                                           GDP, current US dollars, 2000-2023. Source: World Bank

                                         Unemployment rate, 2000-2023. Source: World Bank

                                          Annual real growth rates of GDP.  Source: World Bank.

Notes

For useful comments, I thank, but do not implicate, Annabel Benson.

References

Khamei]ni, I. Why we believe the U.S. is weak - Khamenei.ir

Zeke Miller and Lolita C. Baldor. 3 U.S. troops killed in drone attack in Jordan by Iran-backed militia | AP News   January 28, 2024

Phil Stewart, Steve Holland, and Idrees Ali.  Three US troops killed, up to 34 injured in Jordan drone strike linked to Iran | Reuters  January 28, 2024.