Swinging for the bleachers

 

The sticker shock keeps getting stickier. The National Bank of Kazakhstan has just announced that the annual rate of consumer inflation in November was 19.6%, up from 18.8% in the previous month.  At the current rate, prices would double in three and a half years.

Monthly changes in inflation don't always mean much, because they reflect such seasonal factors as holiday spending. But Kazakhstan's inflation -- the average rate of increase in prices -- has risen for 12 months and has been in double digits since March.  See the graph.  The rule of thumb is that inflation should be around 2%.

 

                                         Source: Statistical bureau of Kazakhstan

In an informative interview with Forbes.kz, the deputy governor of the National Bank, Akylzhan Baimagambetov, noted that “most of price increases already realized are certainly due to external factors, particularly the disruption in supply chains, pass-through effects, high external prices for food, energy, services. In this sense, the foundation is foreign. This is what caused inflation to accelerate strongly this year.”

Yes, but the “high external prices” and pass-through effects (inflation conveyed through the exchange rate) are based on inflationary expectations.  When people expect prices to rise, they buy now, stoking them right away.  This may be why prices are accelerating.  Moreover, people form expectations out of experience. When they see governments habitually spend their way out of recession, they will anticipate that inflation will follow such recessions as the 2020 pandemic slowdown. Even short-run inflation has long-run causes.  

What did you expect?

To stop inflation, the National Bank must lower expectations.  Otherwise, inflation will continue to be a self-fulfilling prophecy. A central bank cools off expectations by cooling off the economy, that is, by discouraging excess spending.  It raises interest rates to make it expensive for households and firms to spend by borrowing.  

The problem is that the National Bank cannot act on foreign expectations—only on domestic ones.  These have a limited impact on domestic prices, because Kazakhstan has a small open economy, relying heavily on world trade.  Its prices are largely determined by the rest of the world.  Since the Bank has a limited sway over prices, it must raise interest rates sharply: Its lever is small, so it has to give it a good yank.  The same is true for other countries, particularly small ones. Consequently, the aggregate impact of the monetary crackdowns may be an unexpectedly sharp global slowdown.

For Fund and profit

Baimagambetov also discussed the government’s fiscal rule of accumulating oil profits in the National Fund. In principle, this steadies the economy, because Kazakhstan lives and dies by oil export revenues. When oil prices are high, it makes a lot of money and can afford to salt some of it away in the National Fund.  When oil prices are low, its income falls, but it can make up the difference by spending out of the Fund.  “This rule is already embedded in next year’s budget plan, and,” Baimgambetov added prudently, “everything will depend on how it is actually followed.”  Global oil futures prices, which reflect expectations, have exceeded $100 per barrel (for Oklahoma oil) all year. They haven't been this high since 2008. So this might be a good time to save oil revenues.  Yet government spending in Kazakhstan is increasing the money supply by almost a fifth per year.  President Kassym-Jomart Tokayev is spending too much, uncorking inflation. Will he now follow the fiscal rule?

–Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Reference

National Bank of Kazakhstan.  NBK Deputy Governor: Low rate in the current environment will bring us to a vicious circle.  NBK Deputy Governor: Low rate in the current environment will bring us to a vicious circle | News | National Bank of Kazakhstan

Short in the tooth

The masters of the art of political subterfuge are the Russians. In July, when Kazakhstan President Kassym-Jomart Tokayev drew back a bit from the Kremlin over Putin’s War in Ukraine, a minor Russian court suddenly suspended Kazakhstan from using the Caspian Pipeline Consortium, its main oil purveyor, allegedly because of oil spills. After a few suspenseful days, an appellate court overruled and instead fined the Kazakhstani consortium $3,300.  Oil flowed again. But the point had been made.

Astana certainly learns from the best. Last month, the city judge in Talgar, population 46,000 on a good day, issued an opinion affecting all of Kazakhstan, population 19 million. The judge shut down the Web site of the World Health Organization, accusing it of saying the opposite of what it actually said. The judge said the WHO promoted suicide, though the very title of its article is “Suicide Prevention.”  The judge was acting on a complaint filed by the prosecutor in Talgar, where the diplomatic, soft-spoken United Nations agency is undoubtedly a major public menace.

It is hard to escape the suspicion that Astana doesn’t want Kazakhstanis to read certain data on the WHO website.   So I looked around.  And a few recent reports do intrigue, especially on teeth.

Of children aged 1 to 9, 47% have untreated cavities. Among people at least 5 years old, nearly a third are in the same straits. An eighth of people aged at least 20 have lost all their teeth. There are only 2.9 dentists per 10,000 Kazakhstanis, which works out to roughly 36 minutes of dental services per person per year.  Yet dental spending per person is only $3.30 per year.  Productivity losses due to oral disease are nearly $700 million, more than 10 times greater than the amount spent on dentistry. But the government does not have an oral health policy.  

Neither does it tax sweet drinks. Of course, adults should be free to decide how much sugar to eat and how much to learn about it. Their own consumption of sugar should not be taxed as a vice. But their ignorant purchases of sweets for children may create addictions.  One can make a case for taxing these purchases to force parents to take into account the likely health damages to their children -- if they care less about their kids, especially as adults, then they do about themselves.  

Kazakhstan has long been indifferent to health. Health spending is little more than $2 per person per day, and 40% of males older than 15 smoke.  But the WHO reports give you something to, er, sink your teeth into.  Too bad that Kazakhstanis won’t have a chance to read them.

—Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Reference

World Health Organization.  (2022).  Oral Health Country Profile 2022.  Oral Health Kazakhstan 2022 country profile (who.int)    

This one'll kill you

 

A local court in the Almaty oblast has blocked the website for the World Health Organization in Kazakhstan because of its newsletter on suicide.  The court said the WHO provided “information on ways to deprive a person of life, as well as information propagandizing a suicidal mood.” Evidently, any discussion of clinical depression will kill a reader on sight. The October decision, which affects the whole country, has just come to light.

The WHO website (who.int) includes a newsletter, "Suicide prevention."  Quoting from it: “It is estimated that around 20% of global suicides are due to pesticide self-poisoning, most of which occur in rural agricultural areas in low- and middle-income countries. Other common methods of suicide are hanging and firearms. Knowledge of the most commonly used suicide methods is important to devise prevention strategies which have shown to be effective, such as restriction of access to means of suicide.”

The World Health Organization is an agency of the United Nations. Today’s website (who.int) advises on how measles increasingly threatens 40 million children.  It offers advice and data about Covid-19 and the health emergency in Ukraine.  And it provides dozens of large databases, including statistics on “death and disability globally, by region and country, and by age, sex and cause” for 2000 through 2019.  

Why doesn’t the government override this inane decision by a city judge and restore access to a vital resource? 

—Leon Taylor, Baltimore  tayloralmaty@gmail.com

 

Reference

Olga Loginova.  (2022).  World Health Organization website blocked in Kazakhstan.  Vlast’ (Power). November 25.  Власть on Twitter: "В Казахстане был заблокирован сайт Всемирной Организации Здравоохранения по заявлению прокурора Талгарского района Алматинской области. Решение суда было вынесено еще в октябре. Причиной стал информационный бюллетень ВОЗ о суицидах. https://t.co/tKENMpD3sQ" / Twitter

Strolling to the finish line

President Kassym-Jomart Tokayev is running Sunday for re-election, to one and only one seven-year term.  He faces no competition.  Even the rivals sound like they’re voting for him.  But he is looking to his legacy and pondering economic growth. 

This week Tokayev said he recognized that Kazakhstan’s economy must shift in emphasis from oil and gas to knowledge. Of course, that is a wise thing for a political campaigner to say in a college town like Almaty.  Tokayev continued: “I gave instructions to create a research hub for new technologies at Satpayev University (in Almaty). All technical educational institutions will be able to use its infrastructure. The government should consider funding research hubs. This issue can be solved by including hubs in the category of state investment projects.”

“Hubs” has a nice ring. What is the government actually going to do?  How much will it spend, and who will pay? Concerning the Satpayev University hub, Tokayev said: “All technical educational institutions will be able to use its infrastructure.” What does this mean?

To be sure, Tokayev has committed to education before. In 2019, shortly after taking office, he said he would double the salaries of schoolteachers, which were 65% of average national income. He would also expand secondary education from 11 years to 12. Now he is emphasizing the colleges.  That’s interesting: In the last years of the regime of former President Nursultan Nazarbayev, the education ministry was shifting from universities to technical colleges.

To see where Tokayev is headed, a smidgen of history will help.  In the early and mid-Nineties, Kazakhstan’s economy shrank as much as 13% per year in the chaotic transition of post-Soviet countries to markets.  Just as Kazakhstan was beginning to recover, the Russian ruble collapsed in 1998, reducing Kazakhstan’s export demand. The economy then shrank 2%. Not an auspicious start, but by 2000 Kazakhstan was back on its feet and beginning to cash in on rising global oil prices. Since then, the economy has always grown, save in the pandemic year of 2000, when it declined 2.5%, similar to its loss in the ruble crisis.

 

Put the pedal to the metal?

In 2022 dollars, gross domestic product is about $270 billion.  Kazakhstan was a little smaller than Peru, and a little larger than Portugal, in 2021.  In contrast, income in the southern neighbor, Kyrgyzstan, is only about $9 billion, below Malawi and not much above Somalia.  Of the 180 countries and island groups for which we have income data, Kazakhstan ranks 50^th. These comparisons use current exchange rates, so be warned.

 

Figure 1

Data source: World Bank

 

Figure 2 will give you a better idea of why policymakers in Kazakhstan worry.  The country’s economic growth rates are volatile—as for any country—but falling, from double digits in the early 2000s to below 5% after 2014. Some academic analysts have suggested to Tokayev that Kazakhstan can easily spend its way back to double digits.

This is always a great theme for a Presidential campaign. But in my view, it is wild-eyed.  Nations achieving double-digit growth usually fall into single digits after a few years.  Consider the most fierce of the Asian tigers, China, in Figure 3.  It enjoyed annual growth of 10% plus, or close to it, from 2003 through 2011.  No more…although 7% to 8% is nothing to sneeze at.  China was able to grow rapidly because of excess capacity—a huge underemployed labor force, and infrastructure built by renminbi-printing localities in the Eighties. The transition to markets lit the fuel, but the fuel was already there. It is not clear that Kazakhstan today has that much fuel.

Figure 2

Data source: World Bank

Figure 3

Data source: World Bank

The nitty gritty

At any rate, claims that Kazakhstan can double income in seven years (national income or average income, take your pick) are political blarney.  A nation cannot double capacity that quickly.  A college education alone takes 16 to 21 years. To his credit, Tokayev has not repeated the claims.   

They distract attention from a real problem: Kazakhstan’s economy has so slowed that it can barely provide for growth in the population. Normally population growth in Kazakhstan averages 1% to 1.5% per year. The rate in 2021 was 1.3%.  Figure 4 illustrates the problem. Average real income—that is, purchasing power—has been rising no more than 3% per year since 2014.  Now it’s about 2%. At that rate, income per capita won’t double for 35 years. Blameworthy factors include a 19% inflation rate that makes Kazakhstani products too expensive for foreigners to buy (other than oil, for which countries are used to paying ransom prices)—and Putin’s War, which has bollixed logistics and ignited sanctions that curb Russian demand for Kazakhstani exports.  On the other hand, demand is high for Kazakhstani oil, especially since the West no longer buys so much from Russia. On balance, Kazakhstan faces excess demand: Output is growing slowly because the economy is running out of capacity. Hence the stratospheric inflation. 

Tokayev attributes the economic stagnation, at least in Almaty, to “the so-called middle-income trap, to escape which we need a deep diversification of economy. We must focus on development of processing industry, tourism, IT and creative industries.” He cited no evidence for these assertions, probably because there isn’t any.  Processing, tourism, and information technology are sensitive to world income, like Kazakhstan’s mainstay, oil exports.  Not much diversification there: Those industries will tank when oil does. I don’t know what he means by “the creative industries,” and I doubt that he knows, either.  Information technology does raise productivity—at least it did in the United States—but the problem would remain for Kazakhstan of selling that extra product in world recessions.

A sound policy of economic growth should address two problems: Times of deficient supply, and times of deficient demand.  Tokayev has deficient supply in mind.  And yes, development of processing and IT will build capacity. (Tourism is a lost cause.  Kazakhstan is not a tropical island.  And being landlocked, road-scarce, and far from major cities, it is expensive for world travelers to reach.)  But there are also times, like the financial crisis of 2008-9 and the pandemic crisis of 2020, when a nation must boost demand. The usual solution is to have the government spend its way out of the downturn. That makes a certain amount of superficial sense, especially when inflation and interest rates are low. But the spending raises inflationary expectations that are hard later to eradicate. 

In his Almaty meetings this week, Tokayev didn't mention the most important thing that he can do now for economic growth: Fight inflation. Prices are rising much more rapidly than pay for many Kazakhstanis, especially poor workers who lack power to bargain with their employers because of the country's weak unions...the kind of workers who rioted in January over a near-doubling of fuel prices.  The volatile inflation also makes it hard for households and firms to plan ahead, which stunts growth.  By spending freely, the government is working at cross purposes to the National Bank, which is trying to contain inflation by cooling off the over-heated economy. Tokayev could coordinate with the central bank.    

I don’t doubt that Tokayev will survive Sunday. But ask me again in seven years.

--Leon Taylor, Baltimore, tayloralmaty@gmail.com   

  Figure 4

Data source: World Bank

 

Reference

The World Bank.  2022. World Development Indicators.  Retrieved from worldbank.org

 

 

 

 

 

 

 

 

 

 

 

 

 

                                      

Diversity and economic growth

The schools, they are a’changin’…from accountability to inclusion.  In the 1990s, policymakers wanted to boost productivity by compelling students to learn more skills, through rigorous testing.  Today, they worry that the tests were too hard, blocking under-privileged groups from good careers in medicine, science, engineering, and law.  To some degree, this is a debate about diversity, which I define as combinations of ideas.

We are told that new perspectives can solve complex problems. For once, an abstract approach may help.  Suppose that you have an idea, A, and I have another, B.  (A rare event for me.) Now someone adds a third idea, C. If we combine C with A and B, we will have three new ideas: C, AC, and BC. We have 6 ideas altogether, or 3! = 1 + 2+ 3. Generally, the total number of ideas is X! = 1 + 2 + … + X, where X denotes the latest idea. The marginal value of diversity is X, the number of new ideas. (By “marginal value,” I mean the value of one more idea.)  This rises in X. 

But the marginal cost of diversity also rises in X, because the growing complexity of the system of ideas becomes harder to manage.  One reason for the accountability movement was that schools had trouble educating such new groups of students as those for whom English was a second language.  

How much diversity do we want?  The usual answer today is that we want all that we can get. But it really depends on circumstances.  If the marginal value of diversity rises more rapidly than marginal cost and was higher than marginal cost to begin with, then, yes, the optimal amount of diversity is infinite.  This may be the case for problems cutting across many disciplines, such as the prevention of war.

Classroom rebel

But otherwise, the optimal amount of diversity is finite. Suppose that marginal cost rises more rapidly than marginal value.  Eventually, it will exceed marginal value. At that point, a little more diversity will impose a cost. Imagine teaching a classroom in which each student spoke a different language. 

In some cases, the optimal value of diversity may even be zero, because marginal cost always exceeds marginal value.  For example, if we are dealing with a simple problem such as adding two numbers, we need not add a poet to the team.

The accountability movement of the 1990s concerned the marginal cost of diversity.  Today's inclusion movement concerns its marginal value. Of course, we need a balance—specifically, concrete measures of value and cost.

In his 2021 book Rebel ideas, Matthew Syed argues that diversity creates knowledge by drawing together disparate points of view—an idea familiar from the economics of teams. If the contention is correct, more diverse populations should have higher rates of economic growth, because they know more about production. One can test the hypothesis by looking for a positive (and large enough) correlation across countries and time between the rate of GDP growth and the immigration rate—that is, the share of recent immigrants in the population. (GDP is gross domestic product, a measure of the size of the economy.)  In any event, the debate over diversity might benefit from more analyses and fewer anecdotes.

A final note: By diversity, I do not mean differences in traits that do not affect thinking, such as gender and skin color. I mean differences in ways of thinking.  For example, the native Spanish speaker may be harder to educate in an American classroom than a native English speaker; but she also brings a fresh perspective to problems in American history.  

—Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Note: Measuring the impact of diversity on economic growth

Using the Solow aggregate production function, a workhorse of macroeconomics, we can model the rate of economic growth as

Ydot(t) = a + b Kdot(t) + c Ldot(t) + d Tdot(t) + e(t)

where Y is output, K is physical capital, L is labor, T is technology, t denotes time, e is a disturbance term, and a, b, c, and d are parameters. "dot" denotes a rate of growth.

In theory, the growth rate of technology is a positive function of diversity D(t), measured as the ratio of recent immigration to the population:

D(t) = I(t) / P(t)

where I(t) is the number of immigrants at time t (or thereabouts) and P(t) is the population.

Substitute the instrument D for Tdot:

Ydot(t) = a + b Kdot(t) + c Ldot(t) + d D(t) + e(t) 

The test of diversity theory is whether d is positive.

 

Reference

Matthew Syed.  2021.  Rebel ideas.  New York: Flatiron.

Nevada's cliffhanger

 

Nevada, the gambler’s haven, paid off big for the Democrats Saturday when Democratic Senator Catherine Cortez Masto edged out Adam Laxalt, a fervent supporter of former President Donald Trump, in her bid for re-election. Her win extends the Democrats’ control of the United States Senate by guaranteeing them at least half of the 100 seats.  Vice President Kamala Harris, president pro tempore of the Senate and a Democrat, can vote to break ties. 

Although Masto’s margin was only half a percentage point, the Associated Press called the race for her since the mail ballots being counted were going her way in a big way.

Her victory was not ordained.  The first Latina in the US Senate, she lacked even the fervent support of likely Hispanic voters, according to The New York Times/Siena College poll of 885 likely voters in the Silver State in late October.  Of Hispanic respondents, only 19% took a “very favorable” view of her; 31%, a “very unfavorable” one. As the table below shows, Laxalt’s numbers were actually better. 

Masto had a more pronounced advantage among women.  Of female respondents, about the same number regarded her very favorably as very unfavorably.  This may not sound like a hit parade; but regarding Laxalt, twice as many women held a dim view as a bright one. Nevada is pro-choice in capital letters—voters in 1990 approved abortion up to 24 weeks—and Laxalt has long opposed abortion although he has not proposed a national ban.  Of poll respondents, 55% preferred a candidate who wanted most or all abortions legal and only 22% one who favored mostly or all illegal.

After the Supreme Court struck down the constitutional right to abortion in June, the Democrats made the voiding of Roe versus Wade their battle cry for the midterms. Apparently, in Nevada, their gamble paid off in gold doubloons.  Strikingly, women polled indicated that they were no more likely to vote in the midterms than men. Perhaps abortion motivates Nevada voters across gender—which would have been a blessing for Masto, because men otherwise disapproved of her (see the table below).

As in the Georgia Senate race, national politics pervaded. Nevada respondents who voted for Democrat Joe Biden in the 2020 Presidential race loved Masto and hated Laxalt; the reverse was true for 2020 Trump voters.  Some analysts suggested that Masto won partly because she held on to voters who disapprove of Biden today, since they disapproved of her only slightly. But The Times pre-election poll does not bear this out.  Yes, of Biden critics, the share of those with a slightly unfavorable view of her was not much larger than the share with a similar view of Laxalt. But the share with a slightly favorable view of Laxalt well exceeded the counterpart view of Masto. If the argument is that Masto won because of support from mild voters, the numbers don’t bear it out.

It is more likely that she won because Biden supporters outvoted Biden critics. In The Times poll, of respondents who approve of Biden now, 60% said they were almost certain to vote.  Among those who disapprove of Biden, the share was just 50%. Get-out-the-vote drives can matter, especially when you have an issue like abortion.

—Leon Taylor, Baltimore  tayloralmaty@gmail.com

 

View	All (D)	All (R)	Male (D)	Male (R)	Female (D)	Female (R)	Hispanic (D)	Hispanic (R)
Very favorable	26%	23%	21%	27%	32%	19%	19%	22%
Very unfavorable	36%	32%	39%	28%	33%	37%	31%	25%

 

 

View	Biden 20 (D)	Biden 20 (R)	Trump 20 (D)	Trump 20 (R)	Biden App (D)	Biden App (R)	Biden Dis (D)	Biden Dis (R)
Very favorable	58%	4%	1%	49%	60%	3%	6%	37%
Very unfavorable	4%	63%	73%	6%	4%	68%	58%	11%

 

 

View	Biden App (D)	Biden App (R)	Biden Dis (D)	Biden Dis (R)
Slightly favorable	24%	7%	6%	23%
Slightly unfavorable	6%	13%	17%	11%

 

All: All respondents

Biden 20: Respondents who voted for Biden in 2020

Trump 20: Respondents who voted for Trump in 2020

Biden App: Respondents who approved of Biden in October

Biden Dis: Respondents who disapproved of Biden in October

D: Democrat (Masto)

R: Republican (Laxalt)

 

Reference

Jonathan Weisman.  2022.  Catherine Cortez Masto, one of Democrats’ most vulnerable senators, eked out a win in Nevada.  The New York Times, November 12.