Lord, it’s hard to be humble

People’s Daily, the Chinese equivalent of an enemy of the people, cautions the nation not to boast of its economic prowess, lest it be misunderstood.  “This month,” writes Amanda Erickson of the Washington Post, “a professor who dared suggest that China’s economy had already surpassed the United States’ faced a social media backlash of students and alumni suggesting he should be fired.”

I’m afraid that I have bad news for the Chinese: Their economy really is the world’s largest and has been for several years.  Look at the table below. In 2017, China’s gross domestic product – the value of what the country produces on its soil – was 23.3 trillion international dollars.  This easily surpassed the United States mark of 19.4 trillion international dollars. No other nation came close: The third largest economy was India, with 9.4 trillion international dollars.

The global economy looks nothing like it did in the postwar days of Allied hegemony.  Of the 10 largest economies last year, only five were in the West: the United States, Japan, Germany, the United Kingdom and France. The rest, including two of the three largest, were from the Second or Third World.

            Data source: World Bank

But wait: what are international dollars?  I’ll explain. Most comparisons of national income in the news media convert the GDP of other nations to US dollars by using current exchange rates. Consider a ridiculous but simple example: if the GDP in Kazakhstan is 600 tenge, and the exchange rate is 300 tenge per dollar, then the dollar value of Kazakhstan’s GDP is $2. 

One problem with this approach is that the exchange rate may change for reasons that have nothing to do with the nation’s ability to produce.  For instance, when the National Bank of Kazakhstan put the tenge on a float in August 2015, the exchange rate more than doubled in a few months to nearly 400 tenge per dollar.  If you held your wealth as tenge, your ability to buy goods priced in dollars fell by more than half.  Yet Kazakhstan’s ability to produce certainly didn’t halve: most of the tenge depreciation was just a correction in currency prices. In early 2016, using the current exchange rate to measure the country’s economic capacity would have underestimated it grossly, when compared to early 2015.

Were this the only problem with using the exchange rate to compare the incomes of nations, we could solve it easily by using a three-year average of the exchange rate, which smooths out fluctuations. That’s the Atlas method.  The World Bank uses it regularly to measure GDP across nations.

Does China still go to town?

Unfortunately, life is not that simple. As Keith Pilbeam points out, prices for nontraded goods and services – like perishable fruits, apartments and dental work -- are often lower in poor countries than in rich ones. So a hundred dollars, when converted into tenge, may buy more in Kazakhstan than they would have bought in the US. Using the market exchange rate, even when averaged over time, to estimate the dollar value of Kazakhstan’s economy may underestimate its output.

One solution to this problem is to measure GDP in output, not in dollars.  Suppose that a hamburger costs $1 in the US and 100 tenge in Kazakhstan.  Then we could measure both economies in terms of the hamburgers that they could produce, by using the exchange rate of 100 tenge per dollar.  This exchange rate is an “international dollar”: The number of tenge (or whatever) that buys the same amount of goods as a dollar does in the US.  In 2015-2016, although the tenge tanked, using the international dollar would have given us the right picture: Kazakhstan’s GDP did not shrink as much as the market exchange rate suggested, because the tenge price of a hamburger did not rise as quickly as the exchange rate did.

An example may help.  Suppose that US GDP equals $3 and Kazakhstan GDP equals 200 tenge.  Using the international dollar, we find that US GDP equals three hamburgers ($3 divided by $1) and Kazakhstan GDP equals two hamburgers (200 tenge divided by 100 tenge).  The international dollar enables us to compare output of the two countries, in terms of burgers.

Of course, the hamburger is just a simple example.  We should calculate the international dollar by using the price of a basket of common goods.  But specifying a common basket for two nations as different as the US and Kazakhstan can be a bit of a trick.  That’s one shortcoming in using the international dollar to compare national economies. (The approach is also known as “purchasing power parity.”)     

Moving On Department: The economic adviser to US President Donald Trump, Larry Kudlow, says China’s economy “looks terrible.…[It] is just heading south. Business investment is just collapsing.”

According to the World Bank’s World Development Indicators, output in China grew at an average rate of 9.6% per year from 2000 through 2015. It grew even during the global financial crash of 2008-2009.  Chinese growth rates peaked at 14.2% in 2007, when the global economy was as overheated as a Dodge radiator in the Mojave Desert, and they fell to 6.9% in 2015.  Yes, growth has been slowing for a decade; see the figure below. And the slowdown may well continue: The International Monetary Fund puts the 2017 rate at 6.9% and anticipates 6.6% for 2018.  But I know of a lot of countries, including the one that elected Kudlow’s boss, that would love to have an economic growth rate as terrible as China’s. – Leon Taylor tayloralmaty@gmail.com

  Data source: World Bank

Good reading

Keith Pilbeam.  International finance. Fourth edition. Palgrave Macmillan. 2013.

References

Associated Press.  The Latest: Kudlow: Chinese economy is ‘terrible.’  Washington Post.  August 16, 2018.

Amanda Erickson.  China has a new message for the U.S.: Don’t be alarmed, we’re not that great.  Washington Post.  August 16, 2018.

World Bank.  World Development Indicators. worldbank.org

Whose bank is it?

Last week, Donald Trump, President of the United States, rapped the country’s central bank for raising interest rates. Immediately pundits called him to account for endangering the political independence of the Federal Reserve. Criticism was so fierce that the US Treasury Secretary, Steven Mnuchin, found it necessary to explain that Trump was merely expressing a personal opinion – which, of course, is impossible for a President to do.

Meanwhile, Nursultan Nazarbaev, President of Kazakhstan, was lecturing the head of the country’s central bank on how to regulate commercial banks. Nazarbaev said there were too many banks, which increased insolvency and fraud. No one claimed that this was just a personal opinion; Nazarbaev was giving the National Bank of Kazakhstan its marching orders. (“I request: after this, you should not permit any more outrages.”)

Western central banks have prized their political independence for decades. When US President Harry Truman asked the Federal Reserve to hold down interest rates so that the government could finance the Korean War cheaply, the Fed told him to take a hike. After all, caving in to the Oval Office has consequences: The high inflation of the Seventies in the US is often attributed partly to the decision of Fed Chairman Arthur Burns to print dollars – under pressure from President Richard Nixon, who wanted to jack up the economy long enough to get re-elected in 1972.

Burns might have preferred Central Asia to Washington, D.C. The central banks here don’t pretend to be free of the presidents. Of course, Nazarbaev was targeting bank regulation, not monetary policy (although he did say that he wanted a stable exchange rate). But a scolding like his of the central bank would have led the nightly newscast in the West. In Kazakhstan, it barely made the bottom of page 1 of the business weekly newspaper Kursiv’. –Leon Taylor tayloralmaty@gmail.com

Good reading

Burton A. Abrams. How Richard Nixon pressured Arthur Burns: evidence from the Nixon Tapes.  Journal of Economic Perspectives.  Fall 2006.  Pages 177-188.

References

Alan Rappeport. After Trump’s Fed comments, Mnuchin offers a clarification. New York Times.  July 21, 2018

Madiya Torebaeva. N. Nazarbaev: Nam ne nuzhno stol’ko bankov. [We don’t need so many banks.] Kursiv’. July 18, 2018.

  

Belyanin on revolutions

https://notes-from-the-golden-horde.blogspot.com/2018/06/a-review-of-anatomy-of-revolution-by.html

Belyanin on the anatomy of color revolutions

https://notes-from-the-golden-horde.blogspot.com/2018/06/a-review-of-anatomy-of-revolution-by_27.html.

Belyanin on the Kemerovo fire

https://notes-from-the-golden-horde.blogspot.com/2018/04/fire-prevention-in-russia-competition.html.

Does oil truly rule Kazakhstan's economy?

As the oil patch goes, so goes Kazakhstan. Roughly a fourth of its economy depends directly on its global sales of oil and gas; so it rises and falls with oil prices, which are as volatile as gasoline fumes. Kazakhstan should steady its economy by diversifying. Or so people argue.

But a new study suggests that Kazakhstan already has a bulwark against the flighty oil sector. It’s called “the government.”

That’s surprising. Since becoming independent in 1991, Kazakhstan has chopped away at the government’s role in the economy. Today government consumption accounts for only about 12% of the economy (measured as gross domestic product, or GDP), according to the national Committee on Statistics. By Western standards, that’s low. But when the government does spend, it may make every tenge count, by concentrating on such strategic industries as banking. Kazakhstan gets slightly more bang per buck from the government than from oil.

Those ruminations arise from a statistical study of the effects of oil prices on Kazakhstan’s economy over time. In her master’s thesis at KIMEP University, Aliya Zhanadil finds that a 10% rise in oil prices relates to a 5.3% rise in GDP per capita (adjusted for price changes). That’s in line with other studies. What’s new is that government spending has a slightly bigger impact on the economy than oil does. A 10% rise in government spending increases GDP in the next quarter by 6%.  

These are direct effects.  Of course, oil prices also affect the government’s revenue, since it taxes exports; so they may influence GDP indirectly. But this effect looks small.  A 10% increase in oil prices raises government spending over nine months by only six-tenths of a percent, perhaps because Astana saves much of the oil revenue in its rainy-day account, the National Fund.  In any case, the indirect effect on GDP of the 10% oil-price increase is a boost of only four-tenths of a percent. 

Zhanadil’s results control for the labor force and the average level of prices (which may proxy for economic instability), neither of which had much additional effect on the size of the economy. The dataset covered all quarters in the period from 2000 through 2016.

The man on the street would probably tell you that oil matters more to Kazakhstan’s economy than the government does.  One reason for this mistaken impression may be that black gold has an oversized immediate impact on GDP. The impact fades in the next two quarters, so that the net effect after nine months is more modest than we realize. On the other hand, government spending has a sustained impact on GDP for at least six months, perhaps because it is less chaotic than oil prices.  People spend most of the 100,000-tenge check from the government because they know that they will get another check on the next payday.  Oil prices, on the other hand, come and go, so people may save much of any windfall. 

That's true for Astana, too. By banking windfalls, the National Fund can offset dips in GDP due to falling oil prices -- presuming that the government hasn't raided the Fund in the meantime as if it were a behemoth refrigerator that one can pilfer for midnight snacks.

In sum, more than a quarter-century after independence, Kazakhstan still has an economy with a few socialist tics, like a conspicuous government.  – Leon Taylor tayloralmaty@gmail.com

Disclosure: I advised Zhanadil’s thesis in the Master’s of Arts in Economics program.

References

Committee on Statistics of the Ministry of National Economy.  Various statistics.  2018.  www.stat.gov.kz 

Zhanadil, Aliya.  The effects of oil price shocks on real GDP in Kazakhstan.  Master’s thesis.  2018.  KIMEP University.

 

Belyanin on reforms in Uzbekistan

https://notes-from-the-golden-horde.blogspot.com/2018/03/how-far-will-tashkent-go-in-lifting.html