Higher miseducation

Has Kazakhstan's educational policy gone astray?

In higher education, Kazakhstan doesn’t harvest the forest because it perceives only a few trees.

During the early years of independence, the government cut back sharply on its funding of colleges, which now amounts to less than a third of a percent of the size of the economy (measured as gross domestic product), according to the Organization for Economic Cooperation and Development, a research group comprising rich nations.  Of this amount, more than a third goes to Nazarbayev University, which the government regards as the country’s flagship among research universities, and to the Bolashak program, which finances advanced study abroad.  This leaves less than a fifth of one percent of GDP of public funds for all other schools of higher education. 

Among them, the government favors vocational and technical colleges. This year it announced its intent to make this education free, which may accelerate the long-term rise in their share of all students of higher education, already above half despite a slight drop in the past few years. Free vocational education may be a step towards diversifying the economy away from oil exports, which account for roughly a fourth of GDP.

The logic behind this policy is a little shaky.  At the margin, graduates of vocational schools will realize most of the value of their education in the form of higher wages.  As long as they can borrow money for school, they seem likely to choose the right amount of education by comparing its value to its cost (such as the wages foregone by studying rather than working for three years).

Wild swings

Yes, vocational education might also confer a value on society, rather than on the graduate, by diversifying the economy, since this mitigates the oscillations in GDP that stem from volatile oil prices. The youth might not take this value into account when she mulls going to college.  But aside from this, the market will provide enough vocational education even if the students pay full tuition.

The area that may be under-funded is liberal arts education, ranging from art history to political science.  This education creates general skills for solving such problems as how to reduce inequality in the nation’s distribution of income – problems that matter to society but that do not necessarily offer high wages motivating anyone to seek a solution.  The OECD notes that general problem-solving skills are much weaker in Kazakhstan than in the West.

Liberal arts also promote a sense of civility among graduates that makes life pleasant for all of us. The youth contemplating college cannot cash in these benefits as higher wages, so he is likely to ignore them when choosing his field of study.  A subsidy to the liberal arts may correct this deficiency.

The OECD has complained that Nazarbayev University’s share of public funds is too large to benefit higher education. “At best, this is an experiment that carries substantial risks: It is an open question whether any excellence that the university may achieve can outweigh reduced funding for the rest of the [higher education] system.” It could have said the same thing about Kazakhstan’s skimpy funding of colleges in general. –Leon Taylor tayloralmaty@gmail.com

References

OECD (2017).  Higher education in Kazakhstan 2017, Reviews of national policies for education. OECD Publishing, Paris.  http://dx.doi.org/10.1787/9789264268531-en

      

Belyanin on tense relations between Kazakhstan and Kyrgyzstan

http://notes-from-the-golden-horde.blogspot.com/2017/11/will-binding-thread-between-astana-and.html.

Make America wait again

Stymied in building the Great Wall of Mexico, the president of the United States is trying to brick up a bigger wall around trade.  Donald Trump berates the Germans for their trade surplus with the US; proposes to rewrite a trade pact to limit the surpluses of Mexico and Canada; and, I presume, would extend the same principle to Kazakhstan’s surplus with the US, totaling $216 million in goods so far this year. Trade deficits, Trump avers, weaken the US economy.

In reality, a trade deficit is a blessing in disguise.  Recall that this deficit is the excess of goods that a nation buys abroad (imports) over what it sells abroad (exports). If Kazakhstan sells $3 million of oil to the US in exchange for $2 million of automobiles, then the US has a trade deficit with Kazakhstan of $1 million. In a sense, this cool million is a gift to the US. It doesn’t have to give up any SUVs for the extra petroleum – just green pieces of paper called dollars, which it can print virtually for free.

Of course, what tees off the Trumpists is the loss of oil jobs in the US: Why shouldn’t America produce oil for itself? The answer is that it’s better at producing cars -- that’s why Kazakhstan buys from Detroit. Shifting derrick workers to auto factories (albeit indirectly) puts them in more productive jobs where they can earn more. But this doesn’t happen overnight, and the workers meanwhile are angry and unemployed.  Hence President Trump.

The Trumpists fail to see that limits on trade deficits harm the rest of the American economy.  To build another factory, Ford must borrow if it doesn’t have a few spare billion bucks at hand. But it can’t borrow from foreigners unless they have dollars, which they earn by selling oil and toys to the US. If Trumpists block these sales, foreigners won’t have dollars to lend. So much for the Trumpists’ vaunted plan for economic growth.

If Trumpists really want US firms to build plants, then they can cut the federal deficit – that is, the amount that Washington spends that it can’t cover with tax revenues. Reducing the deficit will free up money to pay for factories. But in reality, the Trumpists propose tax cuts that will swell the federal deficit. To pay for the new debts, the federal government must borrow money in competition with firms. This will raise the interest rate and thus the cost of building schools and warehouses. Trump’s real motto: Make America Wait Again – wait for growth. 

--Leon Taylor tayloralmaty@gmail.com

Notes

A simple equation makes clear the ties of trade to the rest of the national economy, by showing how the nation can raise money for real investment (i.e., investment to build things, as opposed to financial investment).

People either spend their income on products or taxes, or they save it. Denote income as Y, consumption as C, taxes as T, and savings as S. Then Y = C + S + T.

We can also think of income as the value of what the nation creates. Its goods and services are either for consumers, firms, government or foreigners. Denote products for consumers as C, for firms as I (for real investment), for government as G, or for foreigners as X – M (exports minus imports). So Y = C + I + G + (X - M).

Equate the two expressions for Y:

C + S + T = C + I + G + (X - M).

Simplify and solve for real investment:

I = S + (T - G) + (M - X).

This says three sources can finance investment: Private savings, the government surplus (that is, tax revenues that the government has not yet spent), and foreign savers (who earn dollars by selling more to the US than they buy from it). The term M – X is the trade deficit, which in this appendix includes services as well as goods.

The distinction between goods and services can matter. In the second quarter of 2017, Kazakhstan had a surplus with the world in goods of $4.2 billion – but a deficit in services of $1.1 billion.

References

Steve Munson, Joshua Partlow and Alan Freeman. US neighbors see increasing risk of failure in NAFTA talks. Washington Post. October 7, 2017.

National Bank of Kazakhstan. Balance of payments of the Republic of Kazakhstan: Analytic presentation. http://nationalbank.kz/?docid=199&switch=english

United States Census Bureau.  Trade in goods with Kazakhstan.  https://www.census.gov/foreign-trade/balance/c4634.html 

Don’t just do something – stand there

Why did the National Bank of Kazakhstan cut interest rates?

Reading the press releases of Kazakhstan’s central bank, one thinks of Alice in Wonderland.  This week, the National Bank cut its base interest rate by one-fourth of a percentage point, to 10.25%, with 1% of wiggle room either way. Usually, central banks reduce interest rates in order to stimulate the economy, since lower rates bring down the cost of borrowing money to build homes and factories.  But the Bank notes that the economy is already recovering. “The economic activity continues demonstrating the recovery; the trends in the domestic consumer and investment demand dynamics remain positive. The recovery of economy is confirmed by the trade data, employment and external demand indicators.”

So what is the point of further stimulus? The Bank says mysteriously that “taking into the account the existing uncertainty and the volatility of the external conditions, [it] has reconsidered the possibility of the further reduction of the base rate in the short run.” It seems to be referring to a surge in cereal and dairy prices that raised a United Nations food price index in July. And that’s it. The Bank is acting upon a one-month price change.

The Bank concedes that commodity markets are stabilizing and that in particular food prices are predictable: “The price statistics of both socially important food products and nonfood products and services in general matches the historical dynamics of the price movements in this period.” So where is all this uncertainty?  Well, “the increase of the external pressure was also caused by the change of economic conditions in the countries – main trade partners.” That could mean anything.

Apparently, the Bank cut the base rate just for the sake of doing something, like a bored teenager.  Oddly, for all its professed concern about uncertainty, the Bank does not consider that its own penchant for changing interest rates at the drop of a hat may itself create uncertainty.

Future schlock

In setting interest rates, central banks often recognize a short-run trade-off between unemployment and inflation. If the economy is running at close to full capacity, then an attempt to produce more may drive up input prices and thus output prices. The National Bank isn’t worried about inflation, but it should be. It writes, in its usual garbled English, that “the negative dynamics of the real wages limit the inflationary risks.”  If the Bank means that real wages are falling, then that may increase “inflationary risks,” since workers will try to make up for their loss of purchasing power by negotiating higher wages when the demand for labor is rising. Firms will try to pass the buck to consumers by raising output prices, which will feed inflation.

The Bank also writes: “The gradual credit expansion supports the consumer demand; however the further expansion of the consumer credit will depend on the dynamics of the interest rate for individuals, which currently remains at a rather high level.”  A question for the Bank: If consumers borrow (and spend) a lot when interest rates are high, will they borrow less when interest rates are low thanks to the Bank’s rate cut?

The Bank has no coherent theory of inflation.  For example, the Bank says that it defines the real interest rate as “the nominal interest rate adjusted for the targeted level of inflation – 5-7% in 2018.”  Economists usually define the real rate as the market interest rate plus the expected rate of inflation, which lenders tack on to make up for lost purchasing power when they are finally paid back.  Evidently the Bank defines expected inflation as its own inflation target, implying that it thinks that people are blissfully confident that it will hit its targets. The Bank must think that its monetary policy controls the inflation rate -- and that people recognize this.  But the Bank doesn’t treat the money supply as the driver of the inflation rate; in fact, it nowhere mentions money supply in its statement.  Instead, it attributes inflation to such factors as food prices, which it does not control.

Straight talk:  At the moment, output is not the biggest problem in Kazakhstan.  The economy is growing 4.2% per year, the highest rate since 2013.  The unemployment rate is 4.9%, the lowest since 2006 at least.  But inflation, 7.1%, is more than triple the rate that prevails in the West.  This is not a new problem for Kazakhstan, and the Bank cannot make it vanish simply by picking an unconscionably high rate of inflation for its target and pointing out that the actual rate is below the target. Neither can it control inflation by treating the money supply as an act of God. 

-Leon Taylor tayloralmaty@gmail.com

       

References

National Bank of Kazakhstan. Press release #23: The base rate reduced to 10.25%. August 21, 2017. nationalbank.kz

Statistical Committee of Kazakhstan.  Various statistics on real gross domestic product and the unemployment rate.  stat.gov.kz