Here’s a nightmare: The Kazakhstani economy in the early 90s. Monthly rates of consumer inflation were as high as 3,300% in the summer of ’94, estimates the National Bank of Kazakhstan.
Post-Soviet nations had printed rubles sans the oversight that Moscow had exercised in the days of the USSR. Each nation in the former Soviet bloc could pass along, to its neighbors, the costs of inflating its own supply of money, since the inflation reduced the value of the money received by foreigners. So each nation printed too much money. Result: Regional hyperinflation. Kazakhstan’s transition to the tenge in 1993 proved rocky.
By comparison to the early 90s, Kazakhstan no longer has a problem with prices. Even so, in the ongoing recovery, the price level has fluctuated quite a bit, tripling in one six-year stretch. Annual consumer inflation has never fallen below 5%, according to Kazakhstan’s central bank.
This sort of persistent inflation, like the hyperinflation of 1994-5, is the fault of the National Bank of Kazakhstan, which is supposed to manage the supply of tenge. Some events, like a labor strike or a bad harvest, can create inflation temporarily by raising production costs, compelling firms to raise prices. But the only cause of continued inflation is an ever-increasing supply of money. When it grows more rapidly than output, it provides more and more currency units per output unit. Prices must rise.
Fooling all of the workers some of the time
In 1968, the Nobel laureate Milton Friedman explained why a central bank tended to print too much money. The bank wants low inflation and low unemployment, but if it has to choose, then it may well prefer the latter.
In Friedman’s vision, the economy usually produces as much as it comfortably can – a level of output called “full employment.” The unemployment rate corresponding to this output is “natural.” To lower the unemployment rate below the natural rate, the bank must over-stimulate production. To do this, it seeks to raise the price level above what people expect, so that the real wage – the cost of a labor hour – falls below what workers think it is.
(The “real wage” expresses the purchasing power of the wage. A higher price level reduces the amount of output that a given wage can buy, diminishing its purchasing power. If prices double, then a wage of 10,000 tenge will buy only half as much as before.)
To raise the price level surreptitiously, the central bank prints money. Producers respond to the cut in wages by hiring more workers, thus increasing output. Workers will provide this additional labor because they don’t realize that their real wage has fallen. Once they do realize this, they will demand higher wages, to pay for the higher prices of the goods that they buy. To pay for the increase in wages, producers will raise output prices throughout the economy. The price level will rise, choking off aggregate demand. The fall in spending will force firms to lay off workers and curtail production until output returns to the full-employment level. Friedman does not explain why workers are slower than producers to discern the initial fall in real wages.
Money rules
What, if anything, should we do about excess in the money supply? Some economists – monetarists and New Classical economists -- argue that the National Bank should adopt a “money rule” that limits either the rate of inflation or the supply of money. For example, the Bank could declare that it would no longer tolerate rates of inflation higher than 2% or lower than 0% (that is, the Bank would not permit deflation). Such a rule would build the confidence of consumers and investors in the national economy. So they would continue to spend and invest even when an external shock, such as a bad harvest, reduced output for a while. The result would be a more stable business cycle – shorter, milder recessions.
The trouble with a money rule is that the National Bank must convince people that it will adhere to it. Otherwise, the rule won’t work. Since the rate of inflation has never fallen below 5% in Kazakhstan, people would have trouble believing that the Bank would now hold it below 2%. The Bank would have to demonstrate its determination, by withdrawing enough money from the economy – enough units of currency per unit of output -- to bring down the rate of inflation. In the short run, this withdrawal probably would reduce spending and create unemployment. If the Bank is not willing to risk a recession, then it might as well not even bring up the subject of a money rule. And so we continue to muddle along.
Scarce knowledge
Supporters of a money rule contend that we don’t know enough about Kazakhstan’s economy to fine-tune the supply of tenge to its daily needs. The National Bank seems to accept this argument. At one time, it used complex computer models, simultaneously solving many equations, in order to forecast economic conditions. Now it appears to rely more than before on back-of-the-envelope models. A money rule would be consistent with such simplicity.
Economist Robert Lucas, a Nobel laureate, points out that the parameters in large computer models are calibrated using past data. But what is relevant to forecasts is how people behave today, not how they behaved in the past. When they draw up their spending plans, they use all the information available to them, not just past information. A central bank acting on a model based on past data is like a general who keeps fighting the last war.
For example, the bank’s model might assume that a consumer spends 60 tenge of every 100 received. This assumption is based on what consumers used to do. But the economy is different now. If people expect a recession, then they may start now to build up a rainy-day fund, by saving more of their income. Today, they spend just 40 tenge of every 100 – and save the other 60. This decision is based on economic expectations. These, in turn, are based on today’s headlines, not on yesterday’s spending.
Do money rules work?
The central banks of New Zealand, the United Kingdom, Sweden and Canada have targeted inflation, with some success. In New Zealand, the Parliament could strip the governor of the central bank of his job if he did not keep inflation between 0 and 3 percent, noted Bennett McCallum. Canada’s economy settled down after the central bank stopped targeting the money supply – which had not stopped inflation – and decided to reduce inflation directly, in 1991, wrote Ben Bernanke (now chairman of the Federal Reserve) and Frederic Mishkin. In Europe, the Bundesbank and the Banque de France provoked recessions so that they could stabilize their prices for the new European Monetary Union, wrote Robert Hetzel. Other countries that have targeted inflation include Australia and Israel, as well as Finland and Spain under their old central banks, according to Bernanke and Mishkin.
Typically, countries target a sort of consumer price index, usually excluding food and energy prices as too volatile to express underlying inflation, wrote Bernanke and Mishkin. When oil prices rose, the Bank of Canada ignored them when calculating inflation, wrote David Dodge.
At the moment, inflation is not a problem. Although bank reserves skyrocketed in the United States after 2008, the commercial banks there have yet to dole out most of this money to borrowers. Since no one is spending the vault cash, it doesn’t push up prices.
But according to monetarists, the time to worry about inflation is before it happens. As a famous joke has it, the job of the central bank is to take away the punch bowl before the party begins to swing. Is the National Bank of Kazakhstan allowing itself enough time to confiscate the good stuff? – Leon Taylor, tayloralmaty@gmail.com
Good reading
Ben S. Bernanke and Frederic S. Mishkin. Inflation targeting: A new framework for monetary policy? Journal of Economic Perspectives. Spring 1997. Analyzes the policies of various central banks.
David A. Dodge. Untitled remarks. Economic Review. Federal Reserve Bank of Kansas City. Fourth quarter 2002. About Canada’s central banking.
Milton Friedman. The role of monetary policy. American Economic Review 58: 1-17. May 1968. Readable and influential.
Robert L. Hetzel. German monetary history in the second half of the twentieth century. Economic Quarterly. Federal Reserve Bank of Richmond.
Juliet Johnson. A fistful of rubles: The rise and fall of the Russian banking system. Ithaca, New York: Cornell University Press. 2000. Discusses the early years of post-Soviet banking.
Mankiw, N. Gregory. Macroeconomics. New York: Worth Publishers. Fourth edition, 2011. Chapter 15 analyzes policy rules.
Bennett T. McCallum. Recent developments in monetary policy analysis: The roles of theory and evidence. Economic Quarterly. Federal Reserve Bank of Richmond. Winter 2002. Discusses New Zealand’s central bank.
Thursday, February 3, 2011
Tuesday, February 1, 2011
Who cares about inflation?
Quietly, the supply of tenge has been rising more rapidly than has Kazakhstani output. This may presage a general rise in prices – inflation. The number of tenge in cash, checkable accounts, and small savings accounts – economists call this supply M2 – has doubled since early 2008, according to data from the National Bank of Kazakhstan.
At the moment, we haven’t noticed this excess supply of money, because people aren’t spending it. But with oil prices rising, Kazakhstan’s economy is on the threshold of another strong recovery. Sometime in the next few years, production here may increase to the point where no excess capacity in the economy remains. When that happens, additional spending must drive up prices, since the economy won’t be able to produce any more than it already does. As a result, the annual rate of inflation in Kazakhstan, now under 7%, may spike – just as it did in 2008, when consumer prices rose 17%. So maybe this is the right time to ask: Who cares about inflation?
Few studies in Kazakhstan have addressed this question. But the work in the United States indicates that the public may worry more about inflation than do economists. In surveys, Americans typically named inflation as a more serious problem than unemployment, although they were not willing to accept higher unemployment in exchange for lower inflation, wrote Rebecca Hellerstein. Maybe that’s because unemployment has never affected more than a tenth of the labor force since the Great Depression, while inflation affects us all.
Americans particularly worry about inflation when it rises above 5 or 6 percent, because they believe that prices will rise before their wages do, Hellerstein noted. When the rate rose above 10 percent in the Seventies, Americans named inflation as “public enemy number one.” President Gerald Ford crusaded to “whip inflation now” (WIN for short; Ford lost the 1976 presidential election, anyway).
You could argue that the American experience does not pertain to Kazakhstan, since the United States has never seen a rate of inflation anywhere near 3,000% (which Kazakhstan suffered in 1994). But it’s reasonable to think that if Americans worry about a 5% rate of inflation, then so will people in Kazakhstan, where annual inflation has never been below 5% ever since the country became independent in 1991.
Hyperactive prices
In other countries, hyperinflation (in which prices rise by more than 100% per year) has left the public chary of even moderate inflation. The Brazilians have an historical fear of inflation, for good reason. A good with a price of $1 in 1912 would have had a price of $1,000 trillion in the Nineties, noted Gerald Dwyer Jr. and R.W. Hafer. Before it adopted the euro, Germany avidly fought inflation of the deutschmark, because it remembered the hyperinflation of 1923 that helped bring Hitler to power.
You would think that the National Bank of Kazakhstan, which manages the supply of tenge, would make moderating inflation a top priority, if only to placate a public that remembers 1994. In fact, the Bank’s stance toward inflation does not seem as clear as it did in 2004, when it said its main job was to stabilize prices.
Germany in the 1920s provides a vivid example of what can happen when the central bank ignores rising rates of inflation. Robert Hetzel and Thomas Sargent have analyzed the incident separately.
Germany had entered World War I thinking that the war would be short, as had been the Franco-Prussian War a few decades earlier. So the Germans tried to finance WWI by borrowing (in particular, by issuing bonds); Germany had no income tax to help pay for the war. By the 1918 armistice, the Reich’s debt was half of national wealth. On top of that, the Allies demanded 132 billion gold marks; at the time, the total currency in Germany was 6 billion marks.
Until 1922, Germany struggled with the reparations, paying a tenth of its national income. Finally it decided to print money. The Reichsbank engaged nearly 1,800 printing presses.
Prices rose nearly a trillion-fold. In Berlin, a loaf of bread in 1923 cost 428 billion marks, or 71 billion times more than Germany’s total currency before World War I. A kilogram of butter cost almost 6 trillion marks.
Eventually Germany fixed the exchange rate at 4.2 trillion marks to the dollar. It brought the hyperinflation to a sudden end in 1924 by limiting increases in the money supply.
Meanwhile, hyperinflation had broken down the rule of law. “Lenin was certainly right,” Keynes had written in 1919. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” When the government set the price of bread at 140 billion marks, crowds raided stores and attacked Jews. Hyperinflation paved the way, 10 years later, for the Nazis. Hitler promised to hold down retail prices. That, he smirked, was what his storm troopers were for.
Nothing so drastic is likely to occur in Kazakhstan, where the government is more stable than the Weimar regime was in 1920s Germany. Even so, we might do well to remember that steep rates of inflation entail a political cost. – Leon Taylor, tayloralmaty@gmail.com
Good reading
Gerald P. Dwyer Jr. and R.W. Hafer. Are money growth and inflation still related? Economic Review. Federal Reserve Bank of Atlanta. Second quarter 1999, pages 32-43. http://www.frbatlanta.org/filelegacydocs/dwyhaf.pdf Discusses the Brazilian experience.
Rebecca Hellerstein. The impact of inflation. Regional Review. Federal Reserve Bank of Boston. Winter 1997. http://www.bos.frb.org/economic/nerr/rr1997/winter/hell97_1.htm Reviews surveys of Americans concerning inflation.
Robert L. Hetzel. German monetary history in the first half of the twentieth century. Economic Quarterly. Federal Reserve Bank of Richmond. Winter 2002, pages 1-35. http://www.richmondfed.org/publications/research/economic_quarterly/2002/winter/pdf/hetzel.pdf
John Maynard Keynes. Economic consequences of the peace. London: Macmillan. 1919. A famous analysis of reparations and inflation.
National Bank of Kazakhstan. Overview of the monetary police of the National Bank of Kazakhstan. October 2004. www.nationalbank.kz . States the Bank’s anti-inflation policy at that time.
Thomas J. Sargent. The ends of four big inflations. Federal Reserve Bank of Minneapolis Working Paper No. 158. May 1981. http://www.minneapolisfed.org/research/WP/WP158.pdf . Explains how Germany ended hyperinflation.
At the moment, we haven’t noticed this excess supply of money, because people aren’t spending it. But with oil prices rising, Kazakhstan’s economy is on the threshold of another strong recovery. Sometime in the next few years, production here may increase to the point where no excess capacity in the economy remains. When that happens, additional spending must drive up prices, since the economy won’t be able to produce any more than it already does. As a result, the annual rate of inflation in Kazakhstan, now under 7%, may spike – just as it did in 2008, when consumer prices rose 17%. So maybe this is the right time to ask: Who cares about inflation?
Few studies in Kazakhstan have addressed this question. But the work in the United States indicates that the public may worry more about inflation than do economists. In surveys, Americans typically named inflation as a more serious problem than unemployment, although they were not willing to accept higher unemployment in exchange for lower inflation, wrote Rebecca Hellerstein. Maybe that’s because unemployment has never affected more than a tenth of the labor force since the Great Depression, while inflation affects us all.
Americans particularly worry about inflation when it rises above 5 or 6 percent, because they believe that prices will rise before their wages do, Hellerstein noted. When the rate rose above 10 percent in the Seventies, Americans named inflation as “public enemy number one.” President Gerald Ford crusaded to “whip inflation now” (WIN for short; Ford lost the 1976 presidential election, anyway).
You could argue that the American experience does not pertain to Kazakhstan, since the United States has never seen a rate of inflation anywhere near 3,000% (which Kazakhstan suffered in 1994). But it’s reasonable to think that if Americans worry about a 5% rate of inflation, then so will people in Kazakhstan, where annual inflation has never been below 5% ever since the country became independent in 1991.
Hyperactive prices
In other countries, hyperinflation (in which prices rise by more than 100% per year) has left the public chary of even moderate inflation. The Brazilians have an historical fear of inflation, for good reason. A good with a price of $1 in 1912 would have had a price of $1,000 trillion in the Nineties, noted Gerald Dwyer Jr. and R.W. Hafer. Before it adopted the euro, Germany avidly fought inflation of the deutschmark, because it remembered the hyperinflation of 1923 that helped bring Hitler to power.
You would think that the National Bank of Kazakhstan, which manages the supply of tenge, would make moderating inflation a top priority, if only to placate a public that remembers 1994. In fact, the Bank’s stance toward inflation does not seem as clear as it did in 2004, when it said its main job was to stabilize prices.
Germany in the 1920s provides a vivid example of what can happen when the central bank ignores rising rates of inflation. Robert Hetzel and Thomas Sargent have analyzed the incident separately.
Germany had entered World War I thinking that the war would be short, as had been the Franco-Prussian War a few decades earlier. So the Germans tried to finance WWI by borrowing (in particular, by issuing bonds); Germany had no income tax to help pay for the war. By the 1918 armistice, the Reich’s debt was half of national wealth. On top of that, the Allies demanded 132 billion gold marks; at the time, the total currency in Germany was 6 billion marks.
Until 1922, Germany struggled with the reparations, paying a tenth of its national income. Finally it decided to print money. The Reichsbank engaged nearly 1,800 printing presses.
Prices rose nearly a trillion-fold. In Berlin, a loaf of bread in 1923 cost 428 billion marks, or 71 billion times more than Germany’s total currency before World War I. A kilogram of butter cost almost 6 trillion marks.
Eventually Germany fixed the exchange rate at 4.2 trillion marks to the dollar. It brought the hyperinflation to a sudden end in 1924 by limiting increases in the money supply.
Meanwhile, hyperinflation had broken down the rule of law. “Lenin was certainly right,” Keynes had written in 1919. “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” When the government set the price of bread at 140 billion marks, crowds raided stores and attacked Jews. Hyperinflation paved the way, 10 years later, for the Nazis. Hitler promised to hold down retail prices. That, he smirked, was what his storm troopers were for.
Nothing so drastic is likely to occur in Kazakhstan, where the government is more stable than the Weimar regime was in 1920s Germany. Even so, we might do well to remember that steep rates of inflation entail a political cost. – Leon Taylor, tayloralmaty@gmail.com
Good reading
Gerald P. Dwyer Jr. and R.W. Hafer. Are money growth and inflation still related? Economic Review. Federal Reserve Bank of Atlanta. Second quarter 1999, pages 32-43. http://www.frbatlanta.org/filelegacydocs/dwyhaf.pdf Discusses the Brazilian experience.
Rebecca Hellerstein. The impact of inflation. Regional Review. Federal Reserve Bank of Boston. Winter 1997. http://www.bos.frb.org/economic/nerr/rr1997/winter/hell97_1.htm Reviews surveys of Americans concerning inflation.
Robert L. Hetzel. German monetary history in the first half of the twentieth century. Economic Quarterly. Federal Reserve Bank of Richmond. Winter 2002, pages 1-35. http://www.richmondfed.org/publications/research/economic_quarterly/2002/winter/pdf/hetzel.pdf
John Maynard Keynes. Economic consequences of the peace. London: Macmillan. 1919. A famous analysis of reparations and inflation.
National Bank of Kazakhstan. Overview of the monetary police of the National Bank of Kazakhstan. October 2004. www.nationalbank.kz . States the Bank’s anti-inflation policy at that time.
Thomas J. Sargent. The ends of four big inflations. Federal Reserve Bank of Minneapolis Working Paper No. 158. May 1981. http://www.minneapolisfed.org/research/WP/WP158.pdf . Explains how Germany ended hyperinflation.
A snapshot of Kazakhstan’s economy
Smile for the camera...
Since independence in 1991, Kazakhstan has been in one long business cycle, according to World Bank data. Annual output fell 60% until after the crash of the Russian ruble in 1998. Then output recovered, in tandem with rising oil prices. Some private estimates assert that Kazakhstan was in a mild recession in 2008-09, due to collapsing banks and falling oil prices. World Bank data indicate that income stagnated in those years but did not fall significantly.
Real wages in Kazakhstan have risen 7.5% per year since 2003, according to raw data from the government's statistical agency. At that rate, the worker's purchasing power would more than double every decade. Wages in Almaty and Astana are 40% higher than the national average, but the urban wage premium has been diminishing.
The unemployment rate has been dropping slowly for more than three years (Note 1). The rate was 7.3% for 2007 and 6.6% for both 2008 and 2009. The first half of 2010 improved upon that of 2009: The rate dropped from 6.9% to 6.2% in the first quarter and from 6.7% to 5.8% in the second.
What is most visible in the unemployment rate is not its sectoral decline but its strong seasonality. The rate is highest in the first quarter of each year, probably because of winter.
Most striking is the steep decline in unemployment among youths aged 15 to 24. Winter unemployment of youth fell by nearly half from 2007 to 2010, from 11% to 6.1%.
Over the long haul
The economy’s capacity to produce may be growing. The “long-term” rate of unemployment – referring to those who have looked futilely for work for a year -- is falling more sharply than is the general rate. The long-term rate reflects the difficulty of matching workers to jobs (“structural” unemployment), so the allocation of labor may be improving.
If indeed labor is becoming more mobile in Kazakhstan, then we should see a decrease in the dispersion of unemployment rates across oblasts and cities over time. Workers unemployed in one region would have an easier time than before of finding work in another region. As it happens, one measure of dispersion in unemployment rates across oblasts and cities – the standard deviation -- has fallen by more than two-thirds since 2003, with most of the decline occurring before the 2008-2009 slowdown of the national economy.
As the economy becomes more efficient, the relative importance of short-term unemployment grows apace. It accounted for nearly two-thirds of all unemployment by early 2010.
Most short-term unemployment – which has comprised about 4% of the labor force since 2007 – probably arises either from the business cycle or from economic “friction.” Sources of friction include logistical delays in beginning a job as well as short searches for better jobs. As a matter of fact, the rate of short-term unemployment has been relatively stable across phases of the business cycle. Since early 2007, it has varied only from 3.6% to 4.2%, with most values clustering around 3.9% (Note 2). This indicates that most short-term unemployment may be frictional. The government may want to take a closer look at the short-run labor market.
Urban doldrums
Kazakhstan’s major cities, Almaty and Astana, have not recovered from the 2008-09 slowdown as fully as has the nation. The unemployment rate in Almaty was one-sixth higher than the national rate in 2009 – and this ratio has been increasing steadily since 2003.
Unemployment rates are also higher in Astana than in the nation, and the trend since 2003 has not been in Astana’s favor. Perhaps migrants to the two cities are over-estimating their chances of employment there.
Wage trends also indicate a sluggish recovery in the cities. While real wages remain higher in Almaty and Astana than for the entire nation, the urban wage premium is diminishing. For Almaty, the premium has fallen from nearly 50% in 2007 to 40% in early 2010.
In most years since 2003, real wages have been higher in Astana than in Almaty. Is the government becoming a more lucrative sector of the economy than are finance and education? – Leon Taylor, tayloralmaty@gmail.com
Notes
1. The source of GDP data is the World Bank (www.worldbank.org). All other raw data are from the statistical agency of Kazakhstan (www.stat.kz).
Government data for monthly wages that are ostensibly real, from 2003 through 2010, suggest an annual rate of increase of 16.4% over that period, but the statistical agency has apparently confused nominal wages for real wages.
2. One measure of dispersion in a given variable is the ratio of the standard deviation to the mean. This measure is .04 for the rate of total unemployment, .071 for the rate of long-term unemployment, and just .018 for the rate of short-term unemployment.
Since independence in 1991, Kazakhstan has been in one long business cycle, according to World Bank data. Annual output fell 60% until after the crash of the Russian ruble in 1998. Then output recovered, in tandem with rising oil prices. Some private estimates assert that Kazakhstan was in a mild recession in 2008-09, due to collapsing banks and falling oil prices. World Bank data indicate that income stagnated in those years but did not fall significantly.
Real wages in Kazakhstan have risen 7.5% per year since 2003, according to raw data from the government's statistical agency. At that rate, the worker's purchasing power would more than double every decade. Wages in Almaty and Astana are 40% higher than the national average, but the urban wage premium has been diminishing.
The unemployment rate has been dropping slowly for more than three years (Note 1). The rate was 7.3% for 2007 and 6.6% for both 2008 and 2009. The first half of 2010 improved upon that of 2009: The rate dropped from 6.9% to 6.2% in the first quarter and from 6.7% to 5.8% in the second.
What is most visible in the unemployment rate is not its sectoral decline but its strong seasonality. The rate is highest in the first quarter of each year, probably because of winter.
Most striking is the steep decline in unemployment among youths aged 15 to 24. Winter unemployment of youth fell by nearly half from 2007 to 2010, from 11% to 6.1%.
Over the long haul
The economy’s capacity to produce may be growing. The “long-term” rate of unemployment – referring to those who have looked futilely for work for a year -- is falling more sharply than is the general rate. The long-term rate reflects the difficulty of matching workers to jobs (“structural” unemployment), so the allocation of labor may be improving.
If indeed labor is becoming more mobile in Kazakhstan, then we should see a decrease in the dispersion of unemployment rates across oblasts and cities over time. Workers unemployed in one region would have an easier time than before of finding work in another region. As it happens, one measure of dispersion in unemployment rates across oblasts and cities – the standard deviation -- has fallen by more than two-thirds since 2003, with most of the decline occurring before the 2008-2009 slowdown of the national economy.
As the economy becomes more efficient, the relative importance of short-term unemployment grows apace. It accounted for nearly two-thirds of all unemployment by early 2010.
Most short-term unemployment – which has comprised about 4% of the labor force since 2007 – probably arises either from the business cycle or from economic “friction.” Sources of friction include logistical delays in beginning a job as well as short searches for better jobs. As a matter of fact, the rate of short-term unemployment has been relatively stable across phases of the business cycle. Since early 2007, it has varied only from 3.6% to 4.2%, with most values clustering around 3.9% (Note 2). This indicates that most short-term unemployment may be frictional. The government may want to take a closer look at the short-run labor market.
Urban doldrums
Kazakhstan’s major cities, Almaty and Astana, have not recovered from the 2008-09 slowdown as fully as has the nation. The unemployment rate in Almaty was one-sixth higher than the national rate in 2009 – and this ratio has been increasing steadily since 2003.
Unemployment rates are also higher in Astana than in the nation, and the trend since 2003 has not been in Astana’s favor. Perhaps migrants to the two cities are over-estimating their chances of employment there.
Wage trends also indicate a sluggish recovery in the cities. While real wages remain higher in Almaty and Astana than for the entire nation, the urban wage premium is diminishing. For Almaty, the premium has fallen from nearly 50% in 2007 to 40% in early 2010.
In most years since 2003, real wages have been higher in Astana than in Almaty. Is the government becoming a more lucrative sector of the economy than are finance and education? – Leon Taylor, tayloralmaty@gmail.com
Notes
1. The source of GDP data is the World Bank (www.worldbank.org). All other raw data are from the statistical agency of Kazakhstan (www.stat.kz).
Government data for monthly wages that are ostensibly real, from 2003 through 2010, suggest an annual rate of increase of 16.4% over that period, but the statistical agency has apparently confused nominal wages for real wages.
2. One measure of dispersion in a given variable is the ratio of the standard deviation to the mean. This measure is .04 for the rate of total unemployment, .071 for the rate of long-term unemployment, and just .018 for the rate of short-term unemployment.
Wednesday, January 12, 2011
The economy in 2011: Three crystal ball s
Will we see a replay of the financial crash of 2008?
Modern macroeconomics arose from attempts to explain severe inflations and deflations after World War I – just as classical macroeconomics had tried to make sense of the British price swings following the Napoleonic wars of the early 19th century. So it is no surprise to find that macroeconomics still focuses on explaining puzzling events.
Exhibit I is the strange spurt in national economies around the world as 2011 begins. Most seem to be growing more rapidly than was anticipated a year ago. Global output may rise 5% this year, according to The Economist, with developing economies like China’s and India’s outstripping Western economies.
A few trouble spots blur the crystal ball. The fourth-largest economy in Europe, Spain, may crash just as Greece and (to a lesser extent) Ireland have. Unemployment remains near depression levels in the United States and hinders its ability to fuel the world economy by importing from it. Throughout the world, including in Kazakhstan, banks remain weak. Are we truly out of the financial woods?
The answer to this question depends on the framework that we apply to it.
When Irish eyes are frowning
Keynesian economists worry mainly about incipient pessimism in weak economies. In addition to restrained spending in the United States, consumers may also cut back in Greece, Ireland, Spain, Portugal, and even in the United Kingdom, in anticipation of crashes to come, which may thus become rather self-fulfilling prophecies. The solution is to calm the public’s nerves with public spending. If the government spends freely, reviving factories and jobs, then consumers will surely follow.
On the other hand, monetarist economists regard economies as inherently stable. Some, like Ireland’s, may suffer for the moment from overextended banks, but this is just a correction needed to bring the banks back to snuff; it is not a psychological crisis among consumers that requires the consolation of government. The government should not spend its way out of the crisis but instead punish wayward banks and let the industry recover on its own.
To monetarists, the Keynesian policy of free public spending just adds fuel to economies already basically healthy. Sooner or later, the extra money will fuel spending when the economies already are producing as much as they can. Since output cannot rise, prices will. The Keynesian stimuli will just lead to inflation. In the United States, much of the bitter debate over the chairman of the central bank, the Federal Reserve, Ben Bernanke, turns on the fact that he is an apparent monetarist now pursuing a Keynesian increase of the money supply. Keynesians counter that Bernanke is coping with high unemployment and his seeming reversal vindicates Keynes.
The New Classical Economists, maligned for failing to predict the crash of 2008, reinforce the monetarist point that economies are basically sound; sooner or later, they return to full employment. In fact, New Classical economists go further than monetarists, arguing that economies almost always remain at full employment unless
government tampers with them. The crash of banks and asset markets in 2008 was mainly the fault of governments that encouraged bad lending, for political reasons, and hence prolonged it.
In summary, Keynesian economists see lasting psychological flaws in the economy; monetarists see a sound economy that is vulnerable to fluctuations in the supply of money; and New Classical economists see almost-always sound economies that can be overturned only by government incompetence. The three schools differ basically on whether government intervention is a necessity or an evil.– Leon Taylor, tayloralmaty@gmail.com
Modern macroeconomics arose from attempts to explain severe inflations and deflations after World War I – just as classical macroeconomics had tried to make sense of the British price swings following the Napoleonic wars of the early 19th century. So it is no surprise to find that macroeconomics still focuses on explaining puzzling events.
Exhibit I is the strange spurt in national economies around the world as 2011 begins. Most seem to be growing more rapidly than was anticipated a year ago. Global output may rise 5% this year, according to The Economist, with developing economies like China’s and India’s outstripping Western economies.
A few trouble spots blur the crystal ball. The fourth-largest economy in Europe, Spain, may crash just as Greece and (to a lesser extent) Ireland have. Unemployment remains near depression levels in the United States and hinders its ability to fuel the world economy by importing from it. Throughout the world, including in Kazakhstan, banks remain weak. Are we truly out of the financial woods?
The answer to this question depends on the framework that we apply to it.
When Irish eyes are frowning
Keynesian economists worry mainly about incipient pessimism in weak economies. In addition to restrained spending in the United States, consumers may also cut back in Greece, Ireland, Spain, Portugal, and even in the United Kingdom, in anticipation of crashes to come, which may thus become rather self-fulfilling prophecies. The solution is to calm the public’s nerves with public spending. If the government spends freely, reviving factories and jobs, then consumers will surely follow.
On the other hand, monetarist economists regard economies as inherently stable. Some, like Ireland’s, may suffer for the moment from overextended banks, but this is just a correction needed to bring the banks back to snuff; it is not a psychological crisis among consumers that requires the consolation of government. The government should not spend its way out of the crisis but instead punish wayward banks and let the industry recover on its own.
To monetarists, the Keynesian policy of free public spending just adds fuel to economies already basically healthy. Sooner or later, the extra money will fuel spending when the economies already are producing as much as they can. Since output cannot rise, prices will. The Keynesian stimuli will just lead to inflation. In the United States, much of the bitter debate over the chairman of the central bank, the Federal Reserve, Ben Bernanke, turns on the fact that he is an apparent monetarist now pursuing a Keynesian increase of the money supply. Keynesians counter that Bernanke is coping with high unemployment and his seeming reversal vindicates Keynes.
The New Classical Economists, maligned for failing to predict the crash of 2008, reinforce the monetarist point that economies are basically sound; sooner or later, they return to full employment. In fact, New Classical economists go further than monetarists, arguing that economies almost always remain at full employment unless
government tampers with them. The crash of banks and asset markets in 2008 was mainly the fault of governments that encouraged bad lending, for political reasons, and hence prolonged it.
In summary, Keynesian economists see lasting psychological flaws in the economy; monetarists see a sound economy that is vulnerable to fluctuations in the supply of money; and New Classical economists see almost-always sound economies that can be overturned only by government incompetence. The three schools differ basically on whether government intervention is a necessity or an evil.– Leon Taylor, tayloralmaty@gmail.com
Friday, November 19, 2010
Kazakhstan's business cycle: Deja vu all over again?
The government of Kazakhstan paints a rosy picture of the national economy. The value of production is to grow 7% per year, a torrid pace compared to those of most nations that are several times richer than any in Central Asia. Since the population has been growing 1% to 2% annually for several years, income per capita in Kazakhstan would rise 5% to 6% per year. At that rate, your means for buying things would double every 14 years or so (Note 1).
This forecast is not entirely detached from reality. Global oil prices have doubled over two years – always good news (for a few years, anyway) for an oil exporter like Kazakhstan. Some speculate that rising demand for automobiles in China may push the global price of a barrel over $100 again. This winter, the price for West Texas Intermediate crude should average $83, estimates the U.S. Department of Energy.
Unfortunately, Kazakhstan’s economy remains basically the same, warts and all, as during the 2008 financial crash. Although the government has pumped billions of dollars into the commercial banks, they are still as weak as kittens. This May, bad loans totaled $17 billion, over a fourth of the nation’s bank portfolio, said the International Monetary Fund (which lends foreign currency to countries in emergencies). At that time, the IMF projected 4% growth for Kazakhstan’s economy but conceded that it might manage 6% in years to come if the banks would get their act together, presumably orchestrated again by Astana. (The IMF has since raised its 2010 forecast to 5%.) In a gallant gesture to the government, the IMF in public forebode enlarging clearly upon the possibility that the bank bailout, and the increased deposit insurance, might tempt banks to return to go-go lending someday. At the moment, Kazakhstani banks aren’t lending.
Well, OK, the press release from the IMF actually said: “The ongoing sharp increase in nonperforming loans (NPLs) across banks and economic sectors reflects banks’ excessive exposure to currency induced credit risk stemming from the combination of a low and dollarized deposit base, the reliance on foreign funding, and risky lending practices.” Perhaps the IMF would favor us with a translation into English. It might have meant that Kazakhstani bank loans were going bad because, after the tenge lost a fourth of its value in February 2009, borrowers paid banks back in weaker tenge than they had received; the foreigners who dominated loans to the banks were demanding stronger dollars than they had lent; and, the devaluation aside, the banks lent recklessly.
The IMF is not the only moderate skeptic of the claim of robust economic health here. A few months ago, the Asian Development Bank – which addresses long-run prosperity – put economic growth in Kazakhstan at just 2.5% this year and 3.5% next year, contingent on $80 oil barrels. The ADB noted weak banks, over-reliance on oil and gas exports, and a stubborn government deficit.
If you live on the eastern shore of the Caspian Sea, then you may share the government’s enthusiasm. In Atyrau, home of the Kashagan oil project, investment in immobile assets rose a fourth over the year, accounting for more than a third of the nation’s fixed investment. In the oblasts of Mangistau and Western Kazakhstan, pay in the first half of this year rose more than 8% (even adjusting for price changes) compared to 2009. Atyrau and Mangistau also had the nation’s highest pay rates -- 140,000 and 120,000 tenge per month, respectively.
What about Almaty, the central nervous system for the economy? Prosperity is, er, just around the corner.
In the first quarter of 2010, fixed investment in the city had dropped by a seventh over a year, or twice as much for Kazakhstan.
Construction in the city also disappointed. In the first three quarters of 2010, the number of apartments started in Almaty rose only 6% from 2009, a year of world recession. The increase in square feet here was 3%. On both dimensions, Almaty lagged Astana.
Homebuilding in Almaty fell 30% over a year, although it had risen slightly for the nation -- and sharply for Astana, where the value of construction exceeded Almaty's by nearly a third.
The rising star is not the city of Almaty but the oblast. It accounted for more than a fifth of the nation's homebuilding value in early 2010, rising by a fourth over a year.
Pay in the city of Almaty remained high in early 2010 at 100,000 tenge per month -- more than a fourth above that of the oblast and the nation. Adjusted for inflation, pay in the city rose less than 4% over a year, about the same pace as for the nation.
To some extent, such trends would hold for even a healthy economy. High pay rates often rise less rapidly than low rates, because of their larger base. A 10% rate of growth is easier to achieve on a wage of 20 tenge (add two tenge) than on 20 million tenge (add two million). The outskirts of a mature city grow more rapidly than the downtown because of more abundant, and hence cheaper, land. Almaty’s new subways may strengthen the temptation to move to the sticks, by helping suburbanites commute in comfort to downtown. Finally, Almaty has many vacant residences; why build more?
All this notwithstanding, Almaty’s economy still relies on ailing banks. Rising oil prices in 2007 obscured the banks’ weakness and so made their plunge more precipitous. Here we go again? – Leon Taylor, tayloralmaty@gmail.com
Good reading
Asian Development Bank. 2010. Outlook 2010: Macroeconomic management beyond the crisis, pages 117-8. Kiyoshi Taniguchi and Asset Nussupov wrote the chapter on Kazakhstan. www.adb.org/Documents/Books/ADO/2010/ado2010.pdf
Baskin, Brian. 2010. China's oil demand is poised to push up prices. The Wall Street Journal. November 8. www.wsj.com
International Monetary Fund. 2010. Regional Economic Outlook: Middle East
and Central Asia. October. www.imf.org/external/pubs/ft/reo/2010/mcd/eng/10/mreo1024.pdf
References
Silk Road Intelligencer. 2010. IMF ups growth forecast. June 11. www.silkroadintelligencer.com
Silk Road Intelligencer. 2010. Kazakhstan adjusts growth forecast as GDP grows by 7.6 percent in first four months. May 12. www.silkroadintelligencer.com
The Statistical Agency of Kazakhstan. 2010. Source of raw data used here on construction, investment and pay. www.stat.kz
The United States Energy Information Administration. 2010. Short-Term Energy Outlook. November 9. www.eia.doe.gov/steo/contents.html
Notes
1. Given some continuous rate of growth r, income follows an exponential function over time t: Y(t) = Y(0) e^(rt), where 0 indexes the initial time. We want to know how quickly income will double, so we seek t* that satisfies Y(t*) =Y(0)e^(rt*) = 2Y(0). Simplify the last equation to get e^(rt*) = 2. Taking natural logs, rt* = nl 2. Roughly, t* = 70/r%, the Rule of 70. In our example, r is 5% or 6%, so income doubles in 70/5 to 70/6 – 14 years or a little less.
This forecast is not entirely detached from reality. Global oil prices have doubled over two years – always good news (for a few years, anyway) for an oil exporter like Kazakhstan. Some speculate that rising demand for automobiles in China may push the global price of a barrel over $100 again. This winter, the price for West Texas Intermediate crude should average $83, estimates the U.S. Department of Energy.
Unfortunately, Kazakhstan’s economy remains basically the same, warts and all, as during the 2008 financial crash. Although the government has pumped billions of dollars into the commercial banks, they are still as weak as kittens. This May, bad loans totaled $17 billion, over a fourth of the nation’s bank portfolio, said the International Monetary Fund (which lends foreign currency to countries in emergencies). At that time, the IMF projected 4% growth for Kazakhstan’s economy but conceded that it might manage 6% in years to come if the banks would get their act together, presumably orchestrated again by Astana. (The IMF has since raised its 2010 forecast to 5%.) In a gallant gesture to the government, the IMF in public forebode enlarging clearly upon the possibility that the bank bailout, and the increased deposit insurance, might tempt banks to return to go-go lending someday. At the moment, Kazakhstani banks aren’t lending.
Well, OK, the press release from the IMF actually said: “The ongoing sharp increase in nonperforming loans (NPLs) across banks and economic sectors reflects banks’ excessive exposure to currency induced credit risk stemming from the combination of a low and dollarized deposit base, the reliance on foreign funding, and risky lending practices.” Perhaps the IMF would favor us with a translation into English. It might have meant that Kazakhstani bank loans were going bad because, after the tenge lost a fourth of its value in February 2009, borrowers paid banks back in weaker tenge than they had received; the foreigners who dominated loans to the banks were demanding stronger dollars than they had lent; and, the devaluation aside, the banks lent recklessly.
The IMF is not the only moderate skeptic of the claim of robust economic health here. A few months ago, the Asian Development Bank – which addresses long-run prosperity – put economic growth in Kazakhstan at just 2.5% this year and 3.5% next year, contingent on $80 oil barrels. The ADB noted weak banks, over-reliance on oil and gas exports, and a stubborn government deficit.
If you live on the eastern shore of the Caspian Sea, then you may share the government’s enthusiasm. In Atyrau, home of the Kashagan oil project, investment in immobile assets rose a fourth over the year, accounting for more than a third of the nation’s fixed investment. In the oblasts of Mangistau and Western Kazakhstan, pay in the first half of this year rose more than 8% (even adjusting for price changes) compared to 2009. Atyrau and Mangistau also had the nation’s highest pay rates -- 140,000 and 120,000 tenge per month, respectively.
What about Almaty, the central nervous system for the economy? Prosperity is, er, just around the corner.
In the first quarter of 2010, fixed investment in the city had dropped by a seventh over a year, or twice as much for Kazakhstan.
Construction in the city also disappointed. In the first three quarters of 2010, the number of apartments started in Almaty rose only 6% from 2009, a year of world recession. The increase in square feet here was 3%. On both dimensions, Almaty lagged Astana.
Homebuilding in Almaty fell 30% over a year, although it had risen slightly for the nation -- and sharply for Astana, where the value of construction exceeded Almaty's by nearly a third.
The rising star is not the city of Almaty but the oblast. It accounted for more than a fifth of the nation's homebuilding value in early 2010, rising by a fourth over a year.
Pay in the city of Almaty remained high in early 2010 at 100,000 tenge per month -- more than a fourth above that of the oblast and the nation. Adjusted for inflation, pay in the city rose less than 4% over a year, about the same pace as for the nation.
To some extent, such trends would hold for even a healthy economy. High pay rates often rise less rapidly than low rates, because of their larger base. A 10% rate of growth is easier to achieve on a wage of 20 tenge (add two tenge) than on 20 million tenge (add two million). The outskirts of a mature city grow more rapidly than the downtown because of more abundant, and hence cheaper, land. Almaty’s new subways may strengthen the temptation to move to the sticks, by helping suburbanites commute in comfort to downtown. Finally, Almaty has many vacant residences; why build more?
All this notwithstanding, Almaty’s economy still relies on ailing banks. Rising oil prices in 2007 obscured the banks’ weakness and so made their plunge more precipitous. Here we go again? – Leon Taylor, tayloralmaty@gmail.com
Good reading
Asian Development Bank. 2010. Outlook 2010: Macroeconomic management beyond the crisis, pages 117-8. Kiyoshi Taniguchi and Asset Nussupov wrote the chapter on Kazakhstan. www.adb.org/Documents/Books/ADO/2010/ado2010.pdf
Baskin, Brian. 2010. China's oil demand is poised to push up prices. The Wall Street Journal. November 8. www.wsj.com
International Monetary Fund. 2010. Regional Economic Outlook: Middle East
and Central Asia. October. www.imf.org/external/pubs/ft/reo/2010/mcd/eng/10/mreo1024.pdf
References
Silk Road Intelligencer. 2010. IMF ups growth forecast. June 11. www.silkroadintelligencer.com
Silk Road Intelligencer. 2010. Kazakhstan adjusts growth forecast as GDP grows by 7.6 percent in first four months. May 12. www.silkroadintelligencer.com
The Statistical Agency of Kazakhstan. 2010. Source of raw data used here on construction, investment and pay. www.stat.kz
The United States Energy Information Administration. 2010. Short-Term Energy Outlook. November 9. www.eia.doe.gov/steo/contents.html
Notes
1. Given some continuous rate of growth r, income follows an exponential function over time t: Y(t) = Y(0) e^(rt), where 0 indexes the initial time. We want to know how quickly income will double, so we seek t* that satisfies Y(t*) =Y(0)e^(rt*) = 2Y(0). Simplify the last equation to get e^(rt*) = 2. Taking natural logs, rt* = nl 2. Roughly, t* = 70/r%, the Rule of 70. In our example, r is 5% or 6%, so income doubles in 70/5 to 70/6 – 14 years or a little less.
Tuesday, November 16, 2010
Trends in major economies, 2010-2011: The winter of our discontent?
By Dmitriy Belyanin
An exporter of natural resources, Central Asia prospers only if the world economy does. What shape is the globe in? Dmitriy gives us a Cook’s tour
Two years after the financial crash, the global economy has yet to recover everywhere. Some economies in the West are picking up speed – as well as China and India, of course. But the economies of the United States and many European countries still look wobbly, with unemployment rates more reminiscent of a depression than of a recovery.
Exchange rates manifest the economic unevenness. For at least two months, the euro has been strengthening and the dollar weakening. Why these puzzling trends? A survey of national economies may clue us in.
The U.S.: Unemployment continues
The government's attack on virtual depression has created more income than jobs. The unemployment rate -- i.e., the share, in active adults, of those who look futilely for work -- in the U.S. is rising from 9% in 2009 to 10% this year, estimates the International Monetary Fund (IMF). Whatever its merits, the government's program was expensive. It spent $700 billion to shore up commercial banks via the Troubled Asset Relief Program. The public debt is $13 trillion, almost 90% as much in value as the American economy produces when running on all cylinders.
While such a debt burden may look modest to the Japanese, it has eviscerated political support in the U.S. for more spending by Washington to stimulate the economy. The American central bank, the Federal Reserve, has taken charge, printing money to encourage spending. The bloated supply of dollars is pushing down the foreign value of a buck. In the short run, investors won’t add dollars to their portfolios.
In the long run, a weaker dollar should make U.S. exports cheaper for the world to buy. The rise in demand should create U.S. jobs. This has yet to happen, although U.S. export prices probably won’t rise sharply for at least another year.
China: Conflicting interests
The People’s Republic has pegged its exchange rate to the dollar since 1948, when the gold-backed buck became the standard currency for the postwar world under the Bretton Woods system. (True, in the 1970s, the Communists let the yuan appreciate from 2.5 per dollar to 1.5.) During the 1980s, Beijing gradually devalued the yuan to make exports more competitive. China’s economy grew at double-digit rates in the early 1990s. It slowed during the Asian financial crisis of the late 1990s but took off again after China joined the World Trade Organization in November 2001. To pay for the increasing exports from China, world demand grew for the yuan, tending to raise its exchange rate. Catering to exporters, the Chinese government held the yuan's value below market levels.
The U.S. has long pressed China to let its currency strengthen. This would help the U.S., and much of the rest of the West, to sell more to the world, relative to what it buys from it. (In shop talk, the U.S. balance of trade would improve.) In July, China allowed some floating but not enough to satisfy the U.S. So the Fed is weakening the dollar.
By helping foreign producers, a floating yuan could alleviate damages done by the global financial crisis. And it would relieve the People’s Bank from the need to spend in order to support the exchange rate. But China’s exports are diverse, and its exports exceed its imports. China may fear that a stronger yuan would endanger its trade surplus in many industries. Economic growth and employment might tailspin.
In coming months, the yuan will strengthen only mildly against currencies other than the U.S. dollar and those pegged to the dollar. Against the dollar itself, the yuan won’t fluctuate much.
Europe in turmoil
Unemployment is increasing in almost all countries of Western Europe. In Spain, the unemployment rate forecasted for 2010 is 20%; in Greece, 12%; Portugal, 11%. Norway, an oil exporter, has performed comparatively well; unemployment there is to increase slightly to 4%, well below the European average. Germany, Austria and Switzerland are recovering mildly, though unemployment in Germany remains high (7%).
When the dollar depreciates in terms of the euro, investors switch to the latter, which indeed has been appreciating since mid-September. A stronger euro reduces export sales in many European countries, slowing their economies and destroying jobs. Effects on debt are mixed: Dollar debts are easier to pay, but governments might have to borrow to fight the slowdown.
The European Central Bank may be the most independent of major central banks. It largely ignores groups that pursue their vested interests at society’s expense. But balancing the interests of 16 nations is hard. If the Bank strengthens the euro, export-led countries like Norway will object. If it weakens the euro, the inflation-phobic like Germany will complain -- as will countries with debts that must be repaid in foreign currency.
Prospects for the euro-dollar exchange rate are uncertain. In the short run, the euro will keep appreciating, thanks to the easy-money policy of the Fed. Fears that the Eurozone will dissolve (though it probably won’t) may reduce the euro's value. Both currencies are risky, so investors might consider the dollars of Australia and Canada.
Fortunate economies
In a rarity for the West, Australia and Canada are clearly recovering. For Australia, the IMF projects a growth rate in gross domestic product (GDP, the value of domestic production) of 3% in 2010, compared to 2% in 2009. (The IMF lends foreign currencies to countries facing emergencies.) Unemployment is to fall from 6% in 2009 to 5% in 2010. In Canada, unemployment decreased slightly to 8% in 2010. Real GDP (that is, adjusted for price changes), which had declined by 2% in 2009, is to increase by 3%.
Unlike the U.S., Australia managed to create workplaces. High and rising world demand for farm products boosted its exports but thus sent the Aussie dollar soaring to its record peak, in October.
Canada benefited from well-regulated banks. Unlike Europe and the U.S., Canada did not loosen regulations. Regulators know personally the top executives of the five dominant banks. Canada was the first country to increase interest rates, which pushed up its dollar.
The Asian tigers are even more impressive. The IMF forecasts growth in real GDP of 9% in Taiwan and 15% in Singapore, compared to declines of 2% in 2009 for Taiwan and 1% in Singapore. Unemployment fell from 6% to 5% in Taiwan and from 3% to 2% in Singapore. South Korea is recovering as well, with unemployment falling to 3%, from 4% in 2009. Real GDP, stagnant last year, is rising by 6%.
The Pacific Rim – Asia’s chunk of it, anyway – is cashing in on the globe’s growing reliance on computers. Electronic sales are clicking along for Taiwan, South Korea and Singapore. Early recovery in Asia feeds back into it: Taiwan sells 40% of its exports to the surging economies of China and Hong Kong. Because exports account for half of its GDP, Taiwan may be more vulnerable to external shocks than are economies more oriented towards sales to domestic households, such as China's.
Technically advanced, Singapore profits from the growing global market for drugs. In yearly terms, the economy grew by nearly a fifth in the first half of 2010. The Singapore dollar strengthened by 8%, peaking at about 1.3 per U.S. dollar in October. Manufacturing in Singapore began to contract this autumn. But, fearing inflation, the Monetary Authority of Singapore said it would not rein in its dollar.
South Korea benefited from higher demand at home and abroad, but its economy is to grow more slowly in 2011 (4%), due in part to rising global risks. To some degree, this slowdown may be deliberate. In July, the Bank of Korea raised the interest rate by a fourth of a percent to 2.25%, fearing that volatile global markets might fuel inflation. [Sang Lee addresses this point in next week’s blog. – lt]
Less fortunate is Japan, South Korea’s neighbor and the world’s third largest economy (after the U.S. and China). Its public debt is twice as large as GDP; its population is aging and shrinking. The Bank of Japan held the interest rate to zero throughout the year. The IMF forecasts economic growth of 3% this year; last year, GDP fell 5%. Although unemployment rose slightly to 5.2%, the yen appreciated in September and October.
Conclusions
The economies of the U.S. and Europe remain troubled by unemployment, growing public debt, and uncertainty in foreign exchange markets. China and the U.S. clash over undervaluation of the yuan. Australia, Canada, and the Asian tigers perform better than most Western countries but remain in heavy weather due to fluctuations in export demand.
Dmitriy Belyanin, an MBA graduate of KIMEP, assists the associate dean of KIMEP’s MBA program in research. He writes often about economics and finance in Central Asia.
Coming issues: If Almaty is the engine of Kazakhstan’s economy, why isn't it firing on all cylinders?
References
Adam, Shamim. October 14, 2010. Singapore to allow stronger currency even as economy contracts. www.bloomberg.com/news/2010-10-14/singapore-s-economy-shrinks-as-manufacturing-slows-currency-band-widened.html
The Associated Press. June 21, 2010. Canadian economy: The envy of the world. www.cbsnews.com/stories/2010/06/21/business/main6602637.shtml
BBC News. September 1, 2010. Australian economy picks up pace to three-year high. www.bbc.co.uk/news/business-11149283
Bloomberg. 2010. Government bonds: Japanese government bonds. www.bloomberg.com/markets/rates-bonds/government-bonds/japan/
Chinability. July 13, 2010. Renminbi (Chinese yuan) exchange rates, 1969-2010.
www.chinability.com/Rmb.htm
Eisen, Sara and Allison Bennett. February 17, 2010. European Union should limit appreciation of euro, Mundell says. www.businessweek.com/news/2010-02-17/italy-is-biggest-threat-to-euro-nobel-winner-mundell-says.html
Froomkin, Dan. October 15, 2010. Job Creation Idea No. 10: A lower dollar would level the playing field. www.huffingtonpost.com/2010/10/15/jobcreation-idea-no-10-a-_n_763862.html
International Monetary Fund. October 2010. World economic outlook database. www.imf.org
Lee, Sang H. November 15, 2010. E-mail message on South Korea’s monetary policy.
OANDA. 2010. Historical exchange rates. www.oanda.com/currency/historical-rates
Sim, William and Eunkyung Seo. July 25, 2010. South Korea economy expanded faster-than-expected 1.5% in second quarter. www.bloomberg.com/news/2010-07-25/south-korea-economy-grew-1-5-in-second-quarter-from-three-months-earlier.html
Sung, Chinmei and Jay Wang. February 18, 2010. Taiwan economy probably exited deepest recession, survey shows. www.businessweek.com/news/2010-02-18/taiwan-economy-probably-exited-deepest-recession-survey-shows.html
An exporter of natural resources, Central Asia prospers only if the world economy does. What shape is the globe in? Dmitriy gives us a Cook’s tour
Two years after the financial crash, the global economy has yet to recover everywhere. Some economies in the West are picking up speed – as well as China and India, of course. But the economies of the United States and many European countries still look wobbly, with unemployment rates more reminiscent of a depression than of a recovery.
Exchange rates manifest the economic unevenness. For at least two months, the euro has been strengthening and the dollar weakening. Why these puzzling trends? A survey of national economies may clue us in.
The U.S.: Unemployment continues
The government's attack on virtual depression has created more income than jobs. The unemployment rate -- i.e., the share, in active adults, of those who look futilely for work -- in the U.S. is rising from 9% in 2009 to 10% this year, estimates the International Monetary Fund (IMF). Whatever its merits, the government's program was expensive. It spent $700 billion to shore up commercial banks via the Troubled Asset Relief Program. The public debt is $13 trillion, almost 90% as much in value as the American economy produces when running on all cylinders.
While such a debt burden may look modest to the Japanese, it has eviscerated political support in the U.S. for more spending by Washington to stimulate the economy. The American central bank, the Federal Reserve, has taken charge, printing money to encourage spending. The bloated supply of dollars is pushing down the foreign value of a buck. In the short run, investors won’t add dollars to their portfolios.
In the long run, a weaker dollar should make U.S. exports cheaper for the world to buy. The rise in demand should create U.S. jobs. This has yet to happen, although U.S. export prices probably won’t rise sharply for at least another year.
China: Conflicting interests
The People’s Republic has pegged its exchange rate to the dollar since 1948, when the gold-backed buck became the standard currency for the postwar world under the Bretton Woods system. (True, in the 1970s, the Communists let the yuan appreciate from 2.5 per dollar to 1.5.) During the 1980s, Beijing gradually devalued the yuan to make exports more competitive. China’s economy grew at double-digit rates in the early 1990s. It slowed during the Asian financial crisis of the late 1990s but took off again after China joined the World Trade Organization in November 2001. To pay for the increasing exports from China, world demand grew for the yuan, tending to raise its exchange rate. Catering to exporters, the Chinese government held the yuan's value below market levels.
The U.S. has long pressed China to let its currency strengthen. This would help the U.S., and much of the rest of the West, to sell more to the world, relative to what it buys from it. (In shop talk, the U.S. balance of trade would improve.) In July, China allowed some floating but not enough to satisfy the U.S. So the Fed is weakening the dollar.
By helping foreign producers, a floating yuan could alleviate damages done by the global financial crisis. And it would relieve the People’s Bank from the need to spend in order to support the exchange rate. But China’s exports are diverse, and its exports exceed its imports. China may fear that a stronger yuan would endanger its trade surplus in many industries. Economic growth and employment might tailspin.
In coming months, the yuan will strengthen only mildly against currencies other than the U.S. dollar and those pegged to the dollar. Against the dollar itself, the yuan won’t fluctuate much.
Europe in turmoil
Unemployment is increasing in almost all countries of Western Europe. In Spain, the unemployment rate forecasted for 2010 is 20%; in Greece, 12%; Portugal, 11%. Norway, an oil exporter, has performed comparatively well; unemployment there is to increase slightly to 4%, well below the European average. Germany, Austria and Switzerland are recovering mildly, though unemployment in Germany remains high (7%).
When the dollar depreciates in terms of the euro, investors switch to the latter, which indeed has been appreciating since mid-September. A stronger euro reduces export sales in many European countries, slowing their economies and destroying jobs. Effects on debt are mixed: Dollar debts are easier to pay, but governments might have to borrow to fight the slowdown.
The European Central Bank may be the most independent of major central banks. It largely ignores groups that pursue their vested interests at society’s expense. But balancing the interests of 16 nations is hard. If the Bank strengthens the euro, export-led countries like Norway will object. If it weakens the euro, the inflation-phobic like Germany will complain -- as will countries with debts that must be repaid in foreign currency.
Prospects for the euro-dollar exchange rate are uncertain. In the short run, the euro will keep appreciating, thanks to the easy-money policy of the Fed. Fears that the Eurozone will dissolve (though it probably won’t) may reduce the euro's value. Both currencies are risky, so investors might consider the dollars of Australia and Canada.
Fortunate economies
In a rarity for the West, Australia and Canada are clearly recovering. For Australia, the IMF projects a growth rate in gross domestic product (GDP, the value of domestic production) of 3% in 2010, compared to 2% in 2009. (The IMF lends foreign currencies to countries facing emergencies.) Unemployment is to fall from 6% in 2009 to 5% in 2010. In Canada, unemployment decreased slightly to 8% in 2010. Real GDP (that is, adjusted for price changes), which had declined by 2% in 2009, is to increase by 3%.
Unlike the U.S., Australia managed to create workplaces. High and rising world demand for farm products boosted its exports but thus sent the Aussie dollar soaring to its record peak, in October.
Canada benefited from well-regulated banks. Unlike Europe and the U.S., Canada did not loosen regulations. Regulators know personally the top executives of the five dominant banks. Canada was the first country to increase interest rates, which pushed up its dollar.
The Asian tigers are even more impressive. The IMF forecasts growth in real GDP of 9% in Taiwan and 15% in Singapore, compared to declines of 2% in 2009 for Taiwan and 1% in Singapore. Unemployment fell from 6% to 5% in Taiwan and from 3% to 2% in Singapore. South Korea is recovering as well, with unemployment falling to 3%, from 4% in 2009. Real GDP, stagnant last year, is rising by 6%.
The Pacific Rim – Asia’s chunk of it, anyway – is cashing in on the globe’s growing reliance on computers. Electronic sales are clicking along for Taiwan, South Korea and Singapore. Early recovery in Asia feeds back into it: Taiwan sells 40% of its exports to the surging economies of China and Hong Kong. Because exports account for half of its GDP, Taiwan may be more vulnerable to external shocks than are economies more oriented towards sales to domestic households, such as China's.
Technically advanced, Singapore profits from the growing global market for drugs. In yearly terms, the economy grew by nearly a fifth in the first half of 2010. The Singapore dollar strengthened by 8%, peaking at about 1.3 per U.S. dollar in October. Manufacturing in Singapore began to contract this autumn. But, fearing inflation, the Monetary Authority of Singapore said it would not rein in its dollar.
South Korea benefited from higher demand at home and abroad, but its economy is to grow more slowly in 2011 (4%), due in part to rising global risks. To some degree, this slowdown may be deliberate. In July, the Bank of Korea raised the interest rate by a fourth of a percent to 2.25%, fearing that volatile global markets might fuel inflation. [Sang Lee addresses this point in next week’s blog. – lt]
Less fortunate is Japan, South Korea’s neighbor and the world’s third largest economy (after the U.S. and China). Its public debt is twice as large as GDP; its population is aging and shrinking. The Bank of Japan held the interest rate to zero throughout the year. The IMF forecasts economic growth of 3% this year; last year, GDP fell 5%. Although unemployment rose slightly to 5.2%, the yen appreciated in September and October.
Conclusions
The economies of the U.S. and Europe remain troubled by unemployment, growing public debt, and uncertainty in foreign exchange markets. China and the U.S. clash over undervaluation of the yuan. Australia, Canada, and the Asian tigers perform better than most Western countries but remain in heavy weather due to fluctuations in export demand.
Dmitriy Belyanin, an MBA graduate of KIMEP, assists the associate dean of KIMEP’s MBA program in research. He writes often about economics and finance in Central Asia.
Coming issues: If Almaty is the engine of Kazakhstan’s economy, why isn't it firing on all cylinders?
References
Adam, Shamim. October 14, 2010. Singapore to allow stronger currency even as economy contracts. www.bloomberg.com/news/2010-10-14/singapore-s-economy-shrinks-as-manufacturing-slows-currency-band-widened.html
The Associated Press. June 21, 2010. Canadian economy: The envy of the world. www.cbsnews.com/stories/2010/06/21/business/main6602637.shtml
BBC News. September 1, 2010. Australian economy picks up pace to three-year high. www.bbc.co.uk/news/business-11149283
Bloomberg. 2010. Government bonds: Japanese government bonds. www.bloomberg.com/markets/rates-bonds/government-bonds/japan/
Chinability. July 13, 2010. Renminbi (Chinese yuan) exchange rates, 1969-2010.
www.chinability.com/Rmb.htm
Eisen, Sara and Allison Bennett. February 17, 2010. European Union should limit appreciation of euro, Mundell says. www.businessweek.com/news/2010-02-17/italy-is-biggest-threat-to-euro-nobel-winner-mundell-says.html
Froomkin, Dan. October 15, 2010. Job Creation Idea No. 10: A lower dollar would level the playing field. www.huffingtonpost.com/2010/10/15/jobcreation-idea-no-10-a-_n_763862.html
International Monetary Fund. October 2010. World economic outlook database. www.imf.org
Lee, Sang H. November 15, 2010. E-mail message on South Korea’s monetary policy.
OANDA. 2010. Historical exchange rates. www.oanda.com/currency/historical-rates
Sim, William and Eunkyung Seo. July 25, 2010. South Korea economy expanded faster-than-expected 1.5% in second quarter. www.bloomberg.com/news/2010-07-25/south-korea-economy-grew-1-5-in-second-quarter-from-three-months-earlier.html
Sung, Chinmei and Jay Wang. February 18, 2010. Taiwan economy probably exited deepest recession, survey shows. www.businessweek.com/news/2010-02-18/taiwan-economy-probably-exited-deepest-recession-survey-shows.html
Thursday, October 7, 2010
Lies, damned lies, and government statistics
Are the numbers what they seem?
Among culinary arts in Central Asia, the cooking of government statistics is one of the most entertaining. Here are a few favorite recipes:
The student-faculty ratio. The Ministry of Education and Science wants colleges to reduce the number of students taught by a typical instructor because it regards smaller classes as better. Recently, a Ministry official threatened to suspend KIMEP’s license, largely for a student-faculty ratio of allegedly 20 (that is, 20 students per professor). KIMEP estimates its ratio as below 2 for graduate students and as 15 or 16 for undergraduates. Probably the official was confused by a rule-of-thumb here that an undergraduate class with 20 students will earn enough tuition to pay for itself. In principle, classes with fewer than 20 registrants would lose money, so KIMEP would cancel them. That rule is honored in the breach. KIMEP often approves a small class that students need in order to graduate or that they express a strong interest in taking. The modus operandi here is the same as at most universities – large introductory classes subsidize small, advanced classes and classes (such as in foreign languages) that require a lot of attention to each student. (A large class makes money because the teacher’s pay is spread over more students, each of whom pays the same tuition for this class as for a small one.)
In his newspaper interview, the official’s tone of shocked outrage suggested that scheduling a college class of 20 students was a venal sin. In reality, scholars have debated the impact of class size on student performance for more than a half century. Twenty years ago, the consensus of economists, from statistical studies, was that class size did not affect learning systematically.
Since then, as often happens in empirical research, studies taking new approaches have qualified the original blunt conclusion. The impact of class size in colleges may differ from that in primary and secondary schools -– the settings for most studies -- since college class sizes vary a lot. Third-graders rarely sit in 300-student lecture halls. Standardized test scores -– the usual proxy for student achievement -- may not measure learning well, since instructors often teach the test and nothing else; perhaps we should use the graduate’s wages. Class size may matter more in poorer countries, where students cannot afford such aids as Cliff’s Notes to cope with monster classes.
Warm bodies, cold statistics
Despite such caveats, one cannot ignore the sheer weight of scores of estimates that have failed to find that class size matters much. Of 112 estimates surveyed by Hanushek in 1986, 89 found no statistically significant effect of class size on student achievement. Only nine were statistically significant and carried the negative sign -- that is, students learned less in larger classes. (In a general comment on Hanushek’s work, econometrician Alan Krueger asserts that drawing several estimates from the same flawed study may give it undue weight in the survey of all studies. This particular survey was of 33 publications.) The idea that large classes stunt learning may merit the Scots’ Verdict – “Not proven.” I am not a specialist, but my impression is that the one durable conclusion from econometric studies of student achievement is that students with richer and more educated parents do better.
In any event, the Ministry wanted KIMEP to cut its student-to-faculty ratio to 8. Unfortunately, the Ministry apparently calculates this ratio in terms of warm bodies. A student who takes one course every year counts just as much as a student who takes 15. Consequently, the ratio may mean virtually anything. Suppose that a school has one professor and eight students. Then the student-faculty ratio is eight if every student takes one course per year. It is also eight if every student takes 15 courses per year. Obviously, the professor can devote more time to a student in a given class in the former scenario. In the latter, he would be overwhelmed by preparations of 15 times as many classes.
The Ministry could get a more accurate picture of the quality of learning at, say, Java College by calculating its ratio in terms of full-time equivalents, which is what experts do. At KIMEP, a fulltime professor teaches eight courses per year, and a fulltime student takes 10 courses. Two students, each taking five courses per year, would count as one fulltime-equivalent student. In our two earlier scenarios, the first has .8 of a fulltime-equivalent student, and the second has 12. If the professor teaches fulltime, then the student-faculty ratio is .8 in the first scenario and 12 in the second. Now it’s clear which school is truly crowded.
As is its wont, the Ministry has neglected the likely consequences of its policy. If only warm bodies matter, then schools will satisfy the student-faculty maximum by hiring the cheapest warm bodies around. Those would be adjuncts, who receive a fraction of the salaries, and none of the benefits, of regular faculty. Since adjuncts often have only a fraction of the learning of regular professors, the Ministry’s policy may torpedo its stated intent of improving education.
Consider an English class of 24 students, taught by a native speaker for $900. To satisfy the Ministry’s mandate, Java College replaces the teacher with three adjuncts, each willing to teach eight students for $300. Now each student can receive thrice as much time from a teacher as before. Unfortunately, his new teacher knows only a few words of English.
Shrinking classes isn’t cheap. The college must either cut back on something else, like teacher quality, or pass on the cost to someone else, namely, the student. The cost may be justified, but in any event it must be considered.
One reason for the continuing controversy over class sizes is that they affect much of what a school does. Reducing class size changes other school traits, which themselves affect learning. When we ask whether class size matters, do we mean just its direct effect on learning? Or also its indirect effects?
“…While class size always affords opportunities for increased investment in each child’s learning, it is not obvious that every school takes up such opportunities,” writes economist Caroline Hoxby. “The actual effect of reducing class size will depend on the incentives a school faces.”
Understating unemployment
The unemployment rate. Most people think that this is the share of potential workers who don’t have jobs. In that light, the rate may approximate one’s chances of going jobless. In reality, the unemployment rate is the share of the labor force that seeks work but can’t find it. (The labor force is the sum of the employed and unemployed.) What if you’re so discouraged that you quit even looking for a job? Does the government count you as unemployed? Nope: It counts you out of the labor force. Consequently, the unemployment rate understates joblessness. This is useful to keep in mind, because Kazakhstan’s government often attributes falls in the rate of unemployment entirely to its own programs to create jobs.
Some governments try to estimate the number of discouraged workers. In the United States, the Bureau of Labor Statistics telephones or personally interviews 60,000 households each month. In August 2010, 1.1 million Americans were too discouraged to look for work -– about one-sixth of the number who still sought jobs although they had been unemployed for at least half a year (“chronic” unemployment). About as many Americans drop out of the labor force in order to go to school, recover from illness, or to look after their families, or for similar reasons, as because they give up on finding jobs.
Employment rates. It’s logical to define the employment rate as 1 minus the unemployment rate. Kazakhstan, with an unemployment rate of 6%, would have an employment rate of 94%; i.e., 94% of the labor force has jobs. However, economists rarely use this statistic, because it adds nothing to what we already know from the unemployment rate.
More interesting is the share of those able to work who have jobs. The employment-to-population ratio is defined in terms of those aged 15 or older. This statistic gives us a sense of whether the economy is operating at full capacity. When the ratio is high, then employers may have trouble finding workers and thus will raise their wage offers. A general increase in wages will force up prices as employers try to pass on their costs to consumers. Hello, inflation.
In Kazakhstan, the employment-to-population ratio is just under two-thirds, according to the World Bank. It is significantly higher for men (roughly 70%) than for women (below 60%).
A way to gauge a nation’s willingness to work is to look at the share of the labor force in the working-age population, called the “labor force participation ratio.” In 2008, this ratio in Kazakhstan was 75% for men and 63.5% for women, according to the United Nations. In the United States, the long-run rate has been about two-thirds and declining (to 65% in August 2010). In August 2010, it was 71.7% for men and 58.6% for women, according to the U. S. Bureau of Labor Statistics. Severe recession has undoubtedly lowered the American rates for August, and they are not seasonally adjusted. Still, one wonders whether Kazakhstanis work harder than Americans.
People sometimes argue that a fall in the unemployment rate -– or, if you will, a rise in the employment rate -– must boost production. That argument confuses the rate of employment with the number employed. An example may clear this up. Suppose that 100 adults comprise the labor force; of them, 50 work and 50 look for work. The unemployment rate is 50%, and so is the employment rate (when defined as 1 minus the unemployment rate). Now, 25 of the unemployed stop searching for jobs; so they drop out of the labor force. Seventy-five remain in the labor force. The new rate of unemployment is 33% (25/75), and the rate of employment is 67% (50/75). The employment rate has risen sharply -- but output remains unchanged, because we still have just 50 on the job.
Labor statistics. Employment and unemployment rates are usually calculated in terms of workers. The government counts you as employed even if you work only one hour per week. You will count as much as does someone who works 60 hours a week.
But the 60-hour worker provides 60 times as much employment as the one-hour worker. Thus employment ratios distort our view of the economy’s performance. In a recession, when firms put workers on a part-time basis, the ratios overestimate the economy’s use of labor. In a strong recovery, when firms pay overtime because they have trouble finding new workers, employment ratios underestimate labor use. Policymakers who rely on these ratios to signal impending inflation may be in for a nasty surprise. Measuring employment in terms of hours worked would correct these faults; the underemployed worker would be recognized as such.
Maybe someday Astana’s chinovikii chefs will consider serving up statistics that are less piquant and more nourishing. -- Leon Taylor, tayloralmaty@gmail.com
Disclaimer: I don’t speak for KIMEP.
Good reading
Angrist, Joshua D. and Victor Lavy. 1999. Using Maimonides’ rule to estimate the effect of class size on scholastic achievement. Quarterly Journal of Economics 114: 2, May, pages 533-575. In the 1100s, the Talmudic scholar Maimonides wrote: “Twenty-five children may be put in charge of one teacher. If the number in the class exceeds 25 but is not more than 40, he should have an assistant to help with the instruction. If there are more than 40, two teachers must be appointed” (page 534). Public schools in Israel still use the rule. This gives researchers an unusually clear chance to study the impact of class size on student performance, because Maimonides’ rule can affect performance only through class size -- not through other factors that are hard to control for. The study finds that making classes smaller will increase test scores for fourth and fifth graders but not for third graders.
Card, David, and Alan Krueger. 1992. School quality and black-white relative earnings: A direct assessment. Quarterly Journal of Economics 107, February, pages 151-200.
Card, David and Alan B. Krueger. 1996. School resources and student outcomes: An overview of the literature and new evidence from North and South Carolina. The Journal of Economic Perspectives 10:4, autumn, pages 31-50. This innovative analysis links smaller classes to greater adult earnings.
Hanushek, Eric A. 1997. Assessing the effects of school resources on student performance: An update. Educational Evaluation and Policy Analysis 19: 2, summer, pages 141-164. “The close to 400 studies of student achievement [in the literature on educational production] demonstrate that there is not a strong or consistent relationship between student performance and school resources, at least after variations in family inputs are taken into account” (page 141).
Hanushek, Eric A. 1996. Measuring investment in education. The Journal of Economic Perspectives 10:4, autumn, pages 9-30. Spending may fail to boost student achievement because of diminishing returns to spending and because of a lack of incentives for teachers like merit pay. (By “diminishing returns,” I mean that spending another dollar does less and less good.)
Hanushek, Eric A. 1986. The economics of schooling: Production and efficiency in public schools. Journal of Economic Literature 24: 3, September, pages 1141-1177. This influential survey of 147 econometric estimates concludes that “differences in [school] quality do not seem to reflect variations in expenditures, class sizes, or other commonly measured attributes of schools and teachers. Instead, they appear to result from differences in teacher ‘skills’ that defy detailed description but that possibly can be observed directly” (page 1142).
Hoxby, Caroline M. 2000. The effects of class size on student achievement: New evidence from population variation. Quarterly Journal of Economics 115: 4, November, pages 1239-1285. This study of 649 elementary schools controls for some factors that determine class size. It finds no statistically significant effect of class size on student achievement. The quote in the text above is from page 1240.
Kazakhstan Today. 2009. Unemployment rate in Kazakhstan to decline. June 8. The government credited its own anti-recession policies with halving the rate of unemployment.
Krueger, Alan B. 2002. Economic considerations and class size. National Bureau of Economic Research Working Paper 8875, April. “…Hanushek’s pessimistic conclusion [in his 1997 survey] about the effectiveness of schooling inputs results from the fact that he inadvertently places a disproportionate share of weight on a small number of studies that frequently used small samples and estimated misspecified models” (page 2). When one gives all studies the same weight, or a weight that increases with the quality of the journal, then class size affects student achievement significantly.
United Nations Statistics Division. Online at data.un.org . International statistics, including economic data for Kazakhstan.
United States Bureau of Labor Statistics. Online at www.bls.gov . Labor data and explanations.
Revised on October 9, 2010.
Among culinary arts in Central Asia, the cooking of government statistics is one of the most entertaining. Here are a few favorite recipes:
The student-faculty ratio. The Ministry of Education and Science wants colleges to reduce the number of students taught by a typical instructor because it regards smaller classes as better. Recently, a Ministry official threatened to suspend KIMEP’s license, largely for a student-faculty ratio of allegedly 20 (that is, 20 students per professor). KIMEP estimates its ratio as below 2 for graduate students and as 15 or 16 for undergraduates. Probably the official was confused by a rule-of-thumb here that an undergraduate class with 20 students will earn enough tuition to pay for itself. In principle, classes with fewer than 20 registrants would lose money, so KIMEP would cancel them. That rule is honored in the breach. KIMEP often approves a small class that students need in order to graduate or that they express a strong interest in taking. The modus operandi here is the same as at most universities – large introductory classes subsidize small, advanced classes and classes (such as in foreign languages) that require a lot of attention to each student. (A large class makes money because the teacher’s pay is spread over more students, each of whom pays the same tuition for this class as for a small one.)
In his newspaper interview, the official’s tone of shocked outrage suggested that scheduling a college class of 20 students was a venal sin. In reality, scholars have debated the impact of class size on student performance for more than a half century. Twenty years ago, the consensus of economists, from statistical studies, was that class size did not affect learning systematically.
Since then, as often happens in empirical research, studies taking new approaches have qualified the original blunt conclusion. The impact of class size in colleges may differ from that in primary and secondary schools -– the settings for most studies -- since college class sizes vary a lot. Third-graders rarely sit in 300-student lecture halls. Standardized test scores -– the usual proxy for student achievement -- may not measure learning well, since instructors often teach the test and nothing else; perhaps we should use the graduate’s wages. Class size may matter more in poorer countries, where students cannot afford such aids as Cliff’s Notes to cope with monster classes.
Warm bodies, cold statistics
Despite such caveats, one cannot ignore the sheer weight of scores of estimates that have failed to find that class size matters much. Of 112 estimates surveyed by Hanushek in 1986, 89 found no statistically significant effect of class size on student achievement. Only nine were statistically significant and carried the negative sign -- that is, students learned less in larger classes. (In a general comment on Hanushek’s work, econometrician Alan Krueger asserts that drawing several estimates from the same flawed study may give it undue weight in the survey of all studies. This particular survey was of 33 publications.) The idea that large classes stunt learning may merit the Scots’ Verdict – “Not proven.” I am not a specialist, but my impression is that the one durable conclusion from econometric studies of student achievement is that students with richer and more educated parents do better.
In any event, the Ministry wanted KIMEP to cut its student-to-faculty ratio to 8. Unfortunately, the Ministry apparently calculates this ratio in terms of warm bodies. A student who takes one course every year counts just as much as a student who takes 15. Consequently, the ratio may mean virtually anything. Suppose that a school has one professor and eight students. Then the student-faculty ratio is eight if every student takes one course per year. It is also eight if every student takes 15 courses per year. Obviously, the professor can devote more time to a student in a given class in the former scenario. In the latter, he would be overwhelmed by preparations of 15 times as many classes.
The Ministry could get a more accurate picture of the quality of learning at, say, Java College by calculating its ratio in terms of full-time equivalents, which is what experts do. At KIMEP, a fulltime professor teaches eight courses per year, and a fulltime student takes 10 courses. Two students, each taking five courses per year, would count as one fulltime-equivalent student. In our two earlier scenarios, the first has .8 of a fulltime-equivalent student, and the second has 12. If the professor teaches fulltime, then the student-faculty ratio is .8 in the first scenario and 12 in the second. Now it’s clear which school is truly crowded.
As is its wont, the Ministry has neglected the likely consequences of its policy. If only warm bodies matter, then schools will satisfy the student-faculty maximum by hiring the cheapest warm bodies around. Those would be adjuncts, who receive a fraction of the salaries, and none of the benefits, of regular faculty. Since adjuncts often have only a fraction of the learning of regular professors, the Ministry’s policy may torpedo its stated intent of improving education.
Consider an English class of 24 students, taught by a native speaker for $900. To satisfy the Ministry’s mandate, Java College replaces the teacher with three adjuncts, each willing to teach eight students for $300. Now each student can receive thrice as much time from a teacher as before. Unfortunately, his new teacher knows only a few words of English.
Shrinking classes isn’t cheap. The college must either cut back on something else, like teacher quality, or pass on the cost to someone else, namely, the student. The cost may be justified, but in any event it must be considered.
One reason for the continuing controversy over class sizes is that they affect much of what a school does. Reducing class size changes other school traits, which themselves affect learning. When we ask whether class size matters, do we mean just its direct effect on learning? Or also its indirect effects?
“…While class size always affords opportunities for increased investment in each child’s learning, it is not obvious that every school takes up such opportunities,” writes economist Caroline Hoxby. “The actual effect of reducing class size will depend on the incentives a school faces.”
Understating unemployment
The unemployment rate. Most people think that this is the share of potential workers who don’t have jobs. In that light, the rate may approximate one’s chances of going jobless. In reality, the unemployment rate is the share of the labor force that seeks work but can’t find it. (The labor force is the sum of the employed and unemployed.) What if you’re so discouraged that you quit even looking for a job? Does the government count you as unemployed? Nope: It counts you out of the labor force. Consequently, the unemployment rate understates joblessness. This is useful to keep in mind, because Kazakhstan’s government often attributes falls in the rate of unemployment entirely to its own programs to create jobs.
Some governments try to estimate the number of discouraged workers. In the United States, the Bureau of Labor Statistics telephones or personally interviews 60,000 households each month. In August 2010, 1.1 million Americans were too discouraged to look for work -– about one-sixth of the number who still sought jobs although they had been unemployed for at least half a year (“chronic” unemployment). About as many Americans drop out of the labor force in order to go to school, recover from illness, or to look after their families, or for similar reasons, as because they give up on finding jobs.
Employment rates. It’s logical to define the employment rate as 1 minus the unemployment rate. Kazakhstan, with an unemployment rate of 6%, would have an employment rate of 94%; i.e., 94% of the labor force has jobs. However, economists rarely use this statistic, because it adds nothing to what we already know from the unemployment rate.
More interesting is the share of those able to work who have jobs. The employment-to-population ratio is defined in terms of those aged 15 or older. This statistic gives us a sense of whether the economy is operating at full capacity. When the ratio is high, then employers may have trouble finding workers and thus will raise their wage offers. A general increase in wages will force up prices as employers try to pass on their costs to consumers. Hello, inflation.
In Kazakhstan, the employment-to-population ratio is just under two-thirds, according to the World Bank. It is significantly higher for men (roughly 70%) than for women (below 60%).
A way to gauge a nation’s willingness to work is to look at the share of the labor force in the working-age population, called the “labor force participation ratio.” In 2008, this ratio in Kazakhstan was 75% for men and 63.5% for women, according to the United Nations. In the United States, the long-run rate has been about two-thirds and declining (to 65% in August 2010). In August 2010, it was 71.7% for men and 58.6% for women, according to the U. S. Bureau of Labor Statistics. Severe recession has undoubtedly lowered the American rates for August, and they are not seasonally adjusted. Still, one wonders whether Kazakhstanis work harder than Americans.
People sometimes argue that a fall in the unemployment rate -– or, if you will, a rise in the employment rate -– must boost production. That argument confuses the rate of employment with the number employed. An example may clear this up. Suppose that 100 adults comprise the labor force; of them, 50 work and 50 look for work. The unemployment rate is 50%, and so is the employment rate (when defined as 1 minus the unemployment rate). Now, 25 of the unemployed stop searching for jobs; so they drop out of the labor force. Seventy-five remain in the labor force. The new rate of unemployment is 33% (25/75), and the rate of employment is 67% (50/75). The employment rate has risen sharply -- but output remains unchanged, because we still have just 50 on the job.
Labor statistics. Employment and unemployment rates are usually calculated in terms of workers. The government counts you as employed even if you work only one hour per week. You will count as much as does someone who works 60 hours a week.
But the 60-hour worker provides 60 times as much employment as the one-hour worker. Thus employment ratios distort our view of the economy’s performance. In a recession, when firms put workers on a part-time basis, the ratios overestimate the economy’s use of labor. In a strong recovery, when firms pay overtime because they have trouble finding new workers, employment ratios underestimate labor use. Policymakers who rely on these ratios to signal impending inflation may be in for a nasty surprise. Measuring employment in terms of hours worked would correct these faults; the underemployed worker would be recognized as such.
Maybe someday Astana’s chinovikii chefs will consider serving up statistics that are less piquant and more nourishing. -- Leon Taylor, tayloralmaty@gmail.com
Disclaimer: I don’t speak for KIMEP.
Good reading
Angrist, Joshua D. and Victor Lavy. 1999. Using Maimonides’ rule to estimate the effect of class size on scholastic achievement. Quarterly Journal of Economics 114: 2, May, pages 533-575. In the 1100s, the Talmudic scholar Maimonides wrote: “Twenty-five children may be put in charge of one teacher. If the number in the class exceeds 25 but is not more than 40, he should have an assistant to help with the instruction. If there are more than 40, two teachers must be appointed” (page 534). Public schools in Israel still use the rule. This gives researchers an unusually clear chance to study the impact of class size on student performance, because Maimonides’ rule can affect performance only through class size -- not through other factors that are hard to control for. The study finds that making classes smaller will increase test scores for fourth and fifth graders but not for third graders.
Card, David, and Alan Krueger. 1992. School quality and black-white relative earnings: A direct assessment. Quarterly Journal of Economics 107, February, pages 151-200.
Card, David and Alan B. Krueger. 1996. School resources and student outcomes: An overview of the literature and new evidence from North and South Carolina. The Journal of Economic Perspectives 10:4, autumn, pages 31-50. This innovative analysis links smaller classes to greater adult earnings.
Hanushek, Eric A. 1997. Assessing the effects of school resources on student performance: An update. Educational Evaluation and Policy Analysis 19: 2, summer, pages 141-164. “The close to 400 studies of student achievement [in the literature on educational production] demonstrate that there is not a strong or consistent relationship between student performance and school resources, at least after variations in family inputs are taken into account” (page 141).
Hanushek, Eric A. 1996. Measuring investment in education. The Journal of Economic Perspectives 10:4, autumn, pages 9-30. Spending may fail to boost student achievement because of diminishing returns to spending and because of a lack of incentives for teachers like merit pay. (By “diminishing returns,” I mean that spending another dollar does less and less good.)
Hanushek, Eric A. 1986. The economics of schooling: Production and efficiency in public schools. Journal of Economic Literature 24: 3, September, pages 1141-1177. This influential survey of 147 econometric estimates concludes that “differences in [school] quality do not seem to reflect variations in expenditures, class sizes, or other commonly measured attributes of schools and teachers. Instead, they appear to result from differences in teacher ‘skills’ that defy detailed description but that possibly can be observed directly” (page 1142).
Hoxby, Caroline M. 2000. The effects of class size on student achievement: New evidence from population variation. Quarterly Journal of Economics 115: 4, November, pages 1239-1285. This study of 649 elementary schools controls for some factors that determine class size. It finds no statistically significant effect of class size on student achievement. The quote in the text above is from page 1240.
Kazakhstan Today. 2009. Unemployment rate in Kazakhstan to decline. June 8. The government credited its own anti-recession policies with halving the rate of unemployment.
Krueger, Alan B. 2002. Economic considerations and class size. National Bureau of Economic Research Working Paper 8875, April. “…Hanushek’s pessimistic conclusion [in his 1997 survey] about the effectiveness of schooling inputs results from the fact that he inadvertently places a disproportionate share of weight on a small number of studies that frequently used small samples and estimated misspecified models” (page 2). When one gives all studies the same weight, or a weight that increases with the quality of the journal, then class size affects student achievement significantly.
United Nations Statistics Division. Online at data.un.org . International statistics, including economic data for Kazakhstan.
United States Bureau of Labor Statistics. Online at www.bls.gov . Labor data and explanations.
Revised on October 9, 2010.
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