A riddle in the labor market

Why is the unemployment rate among youths dropping steeply in Kazakhstan?

In the queue for jobs, youths are almost always at the rear. In the United States, the rate of unemployment among those aged 16 to19 is about 24%, almost three times higher than the rate for the general population (about 8.1% to 8.5%). In Greece, Italy and Spain, high rates of youth unemployment may thwart austerity programs.  Economists attribute the disparity to youths’ lack of education and work experience. In Kazakhstan, however, the unemployment rate is lower among youths than adults.

The unemployment rate – the share of the workforce that is seeking futilely for jobs – has been falling in Kazakhstan since 2001 at least. The decline is especially sharp for youths. In 2001, the unemployment rate for those aged 15 through 24 was almost twice as high as that for the population in general (19.1% and 10.4% respectively). By 2010, the unemployment rate for youths had fallen beneath the general rate (5.2% and 5.8%). That trend continued in 2011 (4.6% and 5.4%). Youth unemployment is no longer a special problem in Kazakhstan. Why not?

Service with a smile

One clue may lie in the changing nature of work in Kazakhstan. Like unemployment in general, that among youths has been seasonal, with the peak in the first quarter and the trough in the third. But seasonality has virtually disappeared in both unemployment rates since 2010. The most likely explanation is that outdoors work has become less common than it was. The economy is shifting from farming to services.

Some services – such as education, health and finance – require skills acquired only in school. If youths are better educated than adults, then the demand to hire them, rather than adults, may be increasing. But this would imply that areas where production is relatively intensive in these skills -- the cities – might see a drop in relative unemployment. In reality, the unemployment rates in Almaty and Astana were higher than the national rate from 2005 through 2010. Almaty's rate was a sixth higher in 2009 and remained a tenth higher in 2010. Astana's rate has been consistently lower than Almaty's but was still a twentieth higher than the national rate in 2010. Among the oblasts, the only unemployment rate that was consistently as high as those of the cities was Mangistau's.

The unemployment rate might also drop among youths because they are leaving the labor force in order to return to school. After all, the unemployment rate is the ratio of unemployed workers to the labor force. When an unemployed worker stops looking for work, thus departing the labor force, the relative reduction in the numerator of this ratio exceeds the one in its denominator, so the ratio falls. (An example might make this clearer. Begin with the fraction 4/5, or .8. Subtract 1 from the numerator and the denominator. The resulting fraction is ¾, or .75 – lower than before.)

But in general, dropping out of the labor force does not dominate the unemployment rate. If it did, then the fall in the number of unemployed workers should exceed the rise in the number of employed workers. But in Kazakhstan, the annual number of newly employed workers is seven times the annual reduction in the number of unemployed workers. The economy tends to create jobs rather than discourage workers.

The rising tide lifts the smallest boats

A final possibility is that the labor force creates more jobs for the young than for adults, so that the unemployment rate falls more steeply among youths than among older workers. In Kazakhstan, the rate of increase in jobs is not impressive -- an average of 2.2% from 2003 through 2010, only a fraction of the growth rate of the national economy. However, the population is also growing slowly – generally from 1% to 2% per year – so that growth in the labor force might easily cover growth in the population.

Perhaps the unemployment rate among youths is falling because economic growth creates jobs especially for the “first hired, last fired.” In a recession, firms lay off youths because these are their most inexperienced workers. When recovery ensues, firms hire them back. But this applies to most market economies, where the youth unemployment rate usually exceeds the adult rate.  Perhaps the longevity of the economic recovery here – 15 years, except possibly for 2009 – increases relative demand for young workers, since most adult workers who are capable have already been hired.  Such speculation aside, the mystery of the missing jobless among Kazakhstani youths continues. --Leon Taylor, tayloralmaty@gmail.com


Notes

All Kazakhstani figures are from the national statistical agency (www.stat.kz). The U.S. data are from the U.S. Bureau of Labor Statistics (www.bls.gov).

The economy after

Why is the world economy still weak?

Virtually all analysts blame the global recession of 2008-9 on the financial collapse at that time – and for good reason.  In Kazakhstan, the government took over some of the largest financial institutions – including BTA and Allianz banks – to dissuade foreign investors from yanking their funds out of the finance sector, which could have brought on a general default.      

Yet, five years later, the world’s largest economies still ail.  The United States economy grows by less than 2% per year; Japan’s is stagnant; the euro area is contracting slightly.  Even the BRICs are disappointing: Brazil, 1.4%; Russia, 2.9%; India, 4.5%; China, 7.9%.  What gives?

In the gloomy postwar period, the idiosyncratic  economist Joseph Schumpeter suggested that capitalism would so succeed that it would fail. 

For economic growth, we should thank the entrepreneur who newly organizes production, Schumpeter said.  Price competition is anemic; it is the entrepreneur who blasts markets wide open. The airplane, the telephone, the automobile, the computer: Those remake the economy, not Red Tag Specials.

Economists are not always cognizant of this.  “…The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them,” Schumpeter wrote.  “….A theoretical construction which neglects this essential element of the case neglects all that is most typically capitalist about it; even if correct in logic as well as in fact, it is like Hamlet without the Danish prince.”

Let’s play ‘Monopoly’

Far from the economist’s paragon of an economy of many small firms, entrepreneurs construct monopolies.  Innovation in the rayon industry enabled three firms to control 90% of U.S. production soon after World War I, noted Schumpeter, an economic historian.  With a lockhold on the market for a unique product, the entrepreneur will sock the consumer with high prices.  Schumpeter thus doubts the neoclassical conclusion that economic profits are a sign that resources – what we use in production – are allocated inefficiently.  If Microsoft makes economic profits by selling Windows – which used to be a given -- then it must not face enough competition, say the neoclassical economists; the profits, which are due to scarcity, signal that the market is not producing enough operating systems to satisfy consumers.  Schumpeter counters that the entrepreneur must anticipate economic profits before he will risk innovation.  Profits that look inefficient in the short run may stimulate economic growth in the long run.  The very precariousness of these profits leads the monopoly to erect barriers to entry in the short run; the barriers do not create the profits but result from them.  Even if a hurdle could somehow generate profits, these would attract the debilitating attentions of rivals soon enough.   

In a sense, we become creatures of the entrepreneur.  “It is…the producer who as a rule initiates economic change, and consumers are educated by him if necessary; they are, as it were, taught to want new things….” So it may not be surprising that we don't really want the entrepreneur.  He doesn't fit into the comfortable society that he has made possible for us.  Unlike us, he is not a hedonist, since the diminishing satisfaction of another dollar consumed would long ago have discouraged his pursuit of billions.  He is instead driven by the terrifying desires to conquer others and to found a dynasty comparable to a “medieval lordship.”  “Successful innovation is…a task sui generis.  It is a feat not of intellect, but of will.  It is a special case of the social phenomenon of leadership.”

Even his “joy of creating” threatens the comfort that we take in familiar surroundings.   His independence, his penchant for taking risks, frighten us; we just want to hang onto our pleasant lives.  “…Stabilized capitalism is a contradiction in terms.” 

So, over time, we drive him out of existence, probably through government regulation.  “There would be nothing left for entrepreneurs to do.” Profits would vanish.  The rate of interest would fall to zero, since the only function of interest is to divert resources from conventional uses toward entrepreneurial ones; rentiers would pass from the scene.  Capitalism would lead to affluence, but affluence would lead to timidity – and that, in turn, to socialism.  “The true pacemakers of socialism were not the intellectuals or agitators who preached it but the Vanderbilts, Carnegies and Rockefellers.”  Although Schumpeter thought that socialism would survive, he did not enthuse over the prospect. For him, socialism was the land of the lotus eaters.

For whom the bell tolls

The entrepreneur colludes in his own extinction by providing the means of replacing him – information about innovating that can generate a routine.  “The more accurately…we learn to know the natural and social world, the more perfect our control of facts becomes; and the greater the extent, with time and progressive rationalization, within which things can be simply calculated, and indeed quickly and reliably calculated, the more the significance of [the entrepreneurial] function decreases.”  “…Innovation itself is being reduced to routine.”  The rise of the corporation was evidence of this trend; divested of managerial duties, the owner’s attitude becomes “more distant, less personal, more rationalized.”  In not the most prescient of comparisons, Schumpeter suggests that the entrepreneur will become enervated, “just as the importance of the military commander has already diminished.”  Business management will resemble a bureaucracy. Most important, the leader will yield to the mundane: “The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and ‘expropriates’ its owners, but in the end it also ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function.”  Capitalism would destroy the old order just as surely as it had created it.

The decline of the entrepreneur will gentle the business cycle and retard economic growth.  Output also stabilizes because the number of large firms grows with cumulative innovations over time.  New entrepreneurs can then introduce their innovations by taking over existing large firms rather than by driving small ones into bankruptcy. 

When the entrepreneur finally was dead, then the affluence of the society that he had created could easily provide a surplus from which to support those who could no longer find the jobs that had once been created by his gambles.

Schumpeter summarizes his argument: “Capitalism, whilst economically stable, and even gaining in stability, creates, by rationalizing the human mind, a mentality and a way of life incompatible with its own fundamental conditions, motives and social institutions, and will be changed, although not by economic necessity and probably at even some sacrifice of economic welfare, into an order of things which it will be merely matter of taste and terminology to call Socialism or not.” The Keynesian notion that more consumption could salvage an economy from depression was, in fact, a product of capitalism itself, which had created a class too affluent to worry about saving for the future.

Schumpeter – a failed banker himself -- did not deny the importance of banks.  The entrepreneur must turn to them to create credit for her; otherwise, she will not be able to bid away resources from normal production.  It is the banker, not the entrepreneur, who truly assumes risk – and maybe too much of it, judging from 2008.  At the same time, the re-regulation of banks ensuing from 2008 may block entrepreneurial breakthroughs that could resuscitate a comatose economy – in a Schumpeterian perspective, at least. 

The most contrarian argument of this contrarian Austrian is that we should view today’s economy against the long sweep of social forces and history.     -- Leon Taylor, tayloralmaty@gmail.com

Notes

1.  The reported rates of economic growth are in gross domestic product, adjusted for inflation, and come from the back pages of The Economist.

2.  All quotes are from Schumpeter’s writings.

“…Danish prince”: Capitalism, socialism and democracy, pages 84-6

Rayon industry: Business cycles, page 316.

“want new things”:  The theory of economic development, page 65.

 

“medieval lordship”:  The theory of economic development, page 93

“phenomenon of leadership”: “The instability of capitalism,” page 379

“joy of creating”:  The theory of economic development, pages 93-4

“contradiction in terms”:  Business cycles, page 405.

“entrepreneurs to do”:  Capitalism, socialism and democracy, page 131

“Carnegies and Rockfellers”: Capitalism, socialism and democracy, page 134 

“function decreases”:  The theory of economic development, pages 85-6

“more rationalized”:  Business cycles, page 282

“military commander has already diminished”:  The theory of economic development, page 86

“infinitely more important, its function”:  Capitalism, socialism and democracy, page 134

Driving small firms bankrupt:  “The explanation of the business cycle”, page 299.

“call Socialism or not”:  “The instability of capitalism”, 385-386.

Good reading (all from Schumpeter)

Business cycles: A theoretical, historical, and statistical analysis of the capitalist process.. New York: McGraw-Hill.  Abridged.  1964 [1939].

Capitalism, socialism and democracy.  New York: Harper.  Third edition.  2008 [1950].

“The explanation of the business cycle”.  Economica 21.  December 1927.  

“The instability of capitalism”.   The Economic Journal 38.  September 1928

The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle.  New Jersey: Transaction.  1982 [1911].

Cash ‘n tarry

How will Uzbekistan’s debit policy affect its economy?


Uzbekistan is moving toward a cash-free economy, by asphyxiating it with red tape. Now a typical worker in the country’s bulimic government can spend his paycheck only by using a debit card at approved stores, reports EurasiaNet.org, a Soros offshoot. This policy is supposed to discourage tax evasion by eliminating cash income. But it may have a few other effects as well.

Consumer spending may fall, because it is more troublesome than before. This may slow the economy. Not by much, perhaps: To keep its economy afloat, Uzbekistan relies heavily on sales to foreigners; exports are almost a third of the economy (as measured by gross domestic product), estimated the World Bank. But at a time when residents of most countries still seem to spend too little, yet another constraint on consumption is hardly welcome.

The debit policy may affect financial markets in curious ways. Initially, the amount of money supplied need not change, since this is the sum of cash and checking accounts. The government is just substituting the latter for the former. But the banks may lend out the money that is added to checking accounts, and this will increase money supply. Moreover, if the banks lend to producers rather than consumers, then a rise in real investment – such as expansions of factories and farms -- may offset the fall in consumption. The economy’s capacity to produce will grow; but as long as world demand for Uzbek products remains anemic, the new capacity will go unused.

Because spending has become inconvenient, the demand for Uzbek money will fall. This will pull down the price of holding a som – the amount of interest that the som could have earned had it been lent out rather than held. Interest rates will fall; borrowing will become cheaper. Producers may borrow more to finance new capacity, even if they can’t use it right away.

In short, the debit policy may tilt the Uzbek economy toward investment and away from private consumption. Since the government still controls much production, its new policy may increase the state’s presence in the economy over time. Tashkent, which has never welcomed markets with as much verve as Astana has, thus delays its transition to a Western-style economy, just as it has for 20 years. Foreign investors won’t rejoice. –Leon Taylor, tayloralmaty@gmail.com


References

Joanna Lillis. Malls muscling out markets in Tashkent. February 28, 2013. EurasiaNet.org

World Bank. World Development Indicators. www.worldbank.org

The ABCs of GDP

Is gross domestic product a worthy estimate of our worth?


How should we gauge our well-being? One economist suggests opening the mouths of residents and inspecting their teeth. A less equine measure is the value of all that we produce on our soil, when we’re ready to use it. That’s gross domestic product (GDP).

Consider a simple economy – a soccer stadium that sells only tickets and doners. For a match, that stadium sells 10,000 tickets at 500 tenge apiece as well as 1,000 doners for famished fans at 150 tenge apiece. The value of the economy is 500T*10,000 + 150T*1,000 = 5.15 million tenge.

In general, GDP is the annual market value of final goods and services produced in the nation. In a year that was typical of its golden period, 2004, GDP in Kazakhstan was 5.5 trillion tenge, .3% of GDP in the United States. Kazakhstan’s economy grows more slowly now. Adjusted for inflation, GDP in 2012 was only a fifth higher than in 2008. This lackluster performance was mainly due to a 3% drop in GDP in 2009, in the wake of a bank crisis.

A “final good” is a good at the point of use. For example, you can drive an automobile right off the dealer’s lot. The steel that goes into the car is not a final good but an input, the value of which is reflected in automobile’s price. Suppose that $8,000 of steel is used to produce an SUV that sells for $15,000. Then we will count only the $15,000 vehicle towards GDP. We won’t separately count the $8,000 of steel, since it is part of the $15,000.

We’ll use market value to avoid messy subjective judgments about what other people do. Maybe cigarettes are a form of assisted suicide, but we won’t supplant the smoker’s acuity with our own. If he paid 450 tenge for a pack of coffin nails, then we will assume that the pack was worth at least 450 tenge.

GDP includes foreign-owned enterprises. When foreigners help us produce more, they contribute to our well-being. China is an owner of some oil wells and pipelines in Kazakhstan. Despite its involvement, we will credit the full market value of this oil extraction and transport to Kazakhstan’s GDP.

Before the Nineties, economists calculated the value of what Kazakhstanis produced, whether here or abroad. That’s gross national product. For Kazakhstan, GNP includes operations in Kyrgyzstan that Kazakhstanis own, and it excludes oil operations here that are undertaken by only the Chinese.

If we worry about jobs, then GDP would seem the more accurate measure of our well-being. If instead we focus on income, then let’s try GNP. For a nation like Tajikistan, which sends a large share of its workers to Russia, GNP exceeds GDP.

Calculating GDP raises conundrums worthy of the hoariest philosopher. It should count just what we produce for the final user. But it includes what Almaty spends on its police force. Is police protection a final product or an input? You go to Ramstore because you trust the cops to keep your car from getting lifted. There, you spend 1,500 tenge on a trunkload of bread. If policing is just an input into your purchase, then we shouldn’t count, in GDP, the salary of the officer who patrols Furmanov Street while you’re shopping. Ramstore paid taxes for that protection and presumably passed on the cost to you (or to its owners).

Indeed, suppose that Ramstore can avoid paying its taxes and can contract with private guards. Its costs of production won’t change, since it now pays to the rent-a-cops what it had paid in taxes. The police services are just as valuable as before. Yet GDP will drop by the amount of public spending on the police that Ramstore now avoids.

Vagueness and vagaries

In some ways, GDP underestimates how much that we produce. A woman marries her gardener, who now labors for love. Her garden is still beauteous, but GDP will fall.

Also, GDP won’t account immediately for improvements of goods when competition among firms restrains the price. Half a million tenge buy a more powerful computer now than before, but GDP won’t reflect that until the number of sales rises.

In other ways, GDP overestimates our quality of life. Runoff from construction sites of one to five acres is a leading cause of water pollution. The sales value of the site is part of GDP, but the full costs of the pollution are not. Your drinking water may taste funny, and so you would value it less. But the price that you pay for the water remains the same. You may pick up an intestinal disease over the weekend from drinking the water. You are worse off, but GDP will rise by the value of the medical services that you procured.

The amount that we spend on clothing does enter GDP, but an American economist early in the 20th century, Thorstein Veblen, thought the money wasted. As he saw it, people buy clothes just to demonstrate how little that they must work. The rich wear top hats and coattails to show that they no longer need to dig ditches. The corset was a “mutilation” that sapped the woman’s vitality and “[rendered] her permanently and obviously unfit for work.” Clothes have no redeeming social value.

Does leisure suit?

GDP’s largest underestimate of the value of our product arises from its failure to account for what we do after punching out from work. You may enjoy writing haikus at home. But since you never sell them, they don’t boost GDP. In the recession of 2009, the number of workdays per employee in Kazakhstan fell more than 5% as compared to 2001. This reduced income but increased leisure, which is worth something even when it’s forced.

The American economist Robert Eisner estimated that unpaid labor at home would raise US GDP by a third. This includes cooking, wringing out dirty underwear, and looking after the tykes – as well as “connubial bliss,” which, valued on the market, would count as illegal activity except in places like Nevada.

Unpaid labor services are massive. In the US, married couples report spending almost as much time on housework as upon paid work. Households actually purchase more durable goods – presumably for household production – than firms do. GDP models typically ignore household production, but those that include it do a better job of explaining our economy. For example, in a recovery, households buy more goods for consumption. The usual model has trouble explaining why, because it assumes that people spend at a given rate over time; supposedly, they don’t buy many more goods during a recovery. In fact, however, people work more during booms, so they conserve leisure time by buying dishwashers. A model that includes household production will predict correctly that people spend more in recoveries, writes Jeffrey Wrase.

Because GDP doesn’t value housework, it may overestimate the output gain due to women taking jobs. But it may also overestimate the drop in the amount produced per worker – “productivity” – because the share of inexperienced workers of the labor force has increased. Even had the new workers been experienced, productivity would have dropped anyway, because more workers now shared the same number of machines. But suppose that we account for the woman’s productivity at home. She chose the factory over the kitchen, so she must have judged that the value of what she did would rise, notes Eisner. The flocking of women to the labor market may increase productivity, even though the surge in workers will increase competition for jobs and thus cut market wages for a while.

Although GDP may underestimate the size of our economy, increases in GDP generally benefit people. They live longer, go to school longer, and are more likely to read in nations with higher GDP per person. The figures on infant deaths tell the story. In the West, about six babies die out of every 1,000 live births. In the least developed countries, 100 babies die, note Robert Frank and Ben Bernanke (who now heads the central bank of the US). Also, in the poorest countries, children are less likely to go to school, perhaps in part because they could work on the farm instead and earn income for the family. GDP increases now, at the expense of foregone later gains in GDP that would have stemmed from education. The obsession with GDP of political leaders in the Third World is myopic. –Leon Taylor, tayloralmaty@gmail.com


Good reading

Robert Eisner. Extended accounts for national income and product. Journal of Economic Literature. Pages 1611-1684. December 1988.

Robert Eisner. The misunderstood economy: What counts and how to count itT. Harvard Business Press. 1995.

Robert H. Frank and Ben S. Bernanke. Principles of macroeconomics. McGraw-Hill. 2008.

Thorstein Veblen. The theory of the leisure class. Various editions. 1899.


References

Statistical Agency of Kazakhstan. Real monetary income. www.stat.kz

Statistical Agency of Kazakhstan. Use of labor time as of November 2010. www.stat.kz

Jeffrey M. Wrase. The interplay between home production and business activity. Business Review. Pages 23-29. The second quarter of 2001. Federal Reserve Bank of Philadelphia. www.phil.frb.org

The big push

How will history judge Kazakhstan’s industrial policy?


The government of Kazakhstan has made industrialization its top economic priority for the next few years, hoping to rev up economic growth and to create jobs for all, reports Kursiv’. Political leaders claim that only industrialization can vault Kazakhstan into the ranks of the top 30 nations. Turkmenistan’s president has also said that he wishes to industrialize. How likely, in Central Asia, is success?

History may provide a clue. In his cogent survey, Global economic history: A very short introduction, Robert Allen of Oxford University suggests this: While careful (or lucky?) planning may ignite economic growth, it cannot ignore the resource – workers, machines, or land – that the nation holds in relative abundance.

Consider Japan of the late 19th century. In the West, the ratio of capital to labor was unusually high, because workers were relatively few. This scarcity drove up the value of another worker and consequently wages. To hold down costs, Western firms innovated ways to produce that relied more on capital than on labor. Their production of silk used metal machines powered by a steam engine. But in Japan, the ratio of capital to labor was low. The relative abundance of workers reduced their wages, rendering labor-intensive methods of production the cheapest. To reel silk, firms used wooden machines powered by men who turned cranks.

Labor scarcity played a key role in the West’s Industrial Revolution. By 1820, Europeans were rich in part because their high wages had expanded demand for their own products. Manufacturers sought to satisfy the new demand by substituting cheap capital – buildings and machines -- for expensive labor. This raised the capital-labor ratio and consequently wages, creating a virtuous circle. Karl Marx had thundered that increasing reliance on capital would destroy jobs, but in reality the ascent of wages raised the worker’s standard of living over the long run in the West. “The countries that were richest in 1820 have grown the most,” Allen writes. This may not surprise you, since richer nations have more wealth for financing expansions of economic capacity.

Standard model, sluggish performance

Early in the 20th century, economists, observing the economic growth of the United States and Western Europe, recommended to poorer nations the “standard model” – “railways, tariffs, banks and schools,” as Allen puts it. Tsarist Russia illustrates the pitfalls and opportunities of this approach. Russia built rail links to the rest of Europe and raised tariffs (import taxes) on pig iron to encourage domestic production of it. Also, education expanded: By World War I, almost half of Russia’s adults could read.

Yet the nation still depended on the West for stimuli to growth. Rather than adapt Western technology (knowhow) to its own peculiar mix of inputs, Russia simply imported it, by permitting foreigners to build plants of their own design on its soil. “Tsarist economic growth was mainly an agricultural boom, souped-up with some tariff-induced industrialization.” The nation still had far more workers than could be employed, so wages remained at rock-bottom. Any gains from industrialization went to the owners of firms and land. Add a world war, stir vigorously, and you have 1917.

In the wake of World War II, the need to quickly rebuild European and Asian economies led to tinkering with the standard model. “Big Push” industrialization, as Allen calls it, emphasized timing. “The only way large countries have been able to grow so fast is by constructing all of the elements of an advanced economy – steel mills, power plants, vehicle factories, cities, and so on – simultaneously.” The glaring example of the Big Push, Stalin’s Soviet Union, demonstrated its limits. Markets lack time to adjust to consumer wants, so a dictator must impose his own preferences (and will be none too shy).

Kazakhstan seems to have embarked upon a variant of the Big Push, and the impact on the transition to markets remains to be seen. The only verity is that consumers will not have the last word but may have the last laugh. -- Leon Taylor, tayloralmaty@gmail.com


Good reading

Robert C. Allen. Global economic history: A very short introduction. Oxford University Press. 2011.


References

Aleksandr Constantinov. Razgovor nachyctotu. Kursiv’. Page 1. January 24, 2013.

Catherine A. Fitzpatrick. Turkmenistan: President concedes need to industrialize. Eurasianet.org. January 10, 2012.

How to force industrialization

Is Astana’s industrial policy bound to fail?


The government of Kazakhstan has embarked upon an $80-billion campaign that it calls “the program of forced industrial-innovative development.” That term includes a misnomer. The Russian word that was translated into English as “forced” -- forSEERovanniy -- is a false cognate that means “accelerated”. (Then again, maybe “forced” is more honest.) The program – which government leaders vow will eliminate all unemployment -- also involves a misunderstanding: That industrialization is always the key to economic growth. This notion went out the economists’ window more than a half-century ago.

In poor countries, governments usually try to industrialize by protecting home factories from foreign competition. Officials argue that in such industries as automobile manufacturing, plants produce a unit most cheaply when they produce a lot of units – because the expense of buying equipment can be spread over more units, or because workers learn from experience. To reach such scale economies, a home plant should have the home market all to itself. So the government should deny entrée by foreign producers, even though they produce more cheaply than the home plant. Or so the story goes. Last year, the deputy prime minister of Kazakhstan said the government should not buy imports when domestic substitutes “of similar quality” were available, reported Kazinform.

In reality, such protectionism rarely pays off, because in a developing economy the home market by itself is rarely large enough to enable the plant to produce as cheaply as possible. The textbook example is Argentina. To minimize the cost of producing an auto engine or transmission, the plant should manufacture a million units per year, noted the economic historian Robert Allen. In recent decades, Argentine auto demand has amounted to only a few hundreds of thousands of autos per year. Thus the national market may be too small to support a single competitive plant, much less the baker’s dozen that popped up in Argentina. Kazakhstan is vulnerable to the same problem: The ninth largest country, in terms of land, has a population that would fit quite snugly into metropolitan New York City. Preventing Kazakhstanis from buying cheap imports will raise their cost of living while creating jobs in only the protected industries and in industries related to them.

With so much land per capita, Kazakhstan has a natural advantage in such land-intensive industries as oil and gas extraction and agriculture. Automaking, which is capital-intensive, is a delicate transplant here that may not survive a severe economic “winter” like that of 2009. It would make sense for Kazakhstan to export oil and food to the West – since these countries, being capital-intensive, find extraction and farming costly in the sense that their workers and machines could have been more profitably employed in industries using lots of capital.

At this point in the tale, the friends of protectionism usually break in to warn that export-led growth will someday prove pernicious. The prices of manufactured goods usually rise over time relative to the prices of natural resources and food, they say. Kazakhstan’s earnings from exports of oil and wheat will buy fewer and fewer imported autos. That is, the “terms of trade” will go against us. Ironically, export-led growth will impoverish us.

Who should pay? Who should pray?

In reality, Kazakhstan’s terms of trade with the United States have been moving sharply in our favor for more than a decade. But the protectionists have a point, even if they don’t make it explicitly: Drilling for oil and farming may impoverish us intellectually because workers must repeat mind-numbing tasks. That’s why Adam Smith urged the government to pay for educating laborers who were unable to pay for themselves (see the Notes). Moreover, knowledge is the source of sustained economic growth, since it increases the amount produced by a typical worker, given the number of laborers, buildings and machines.

And that’s where Astana is missing the boat. Since the chaotic mid-1990s, when Kazakhstan began shifting from colonial socialism and toward markets, the government has cut sharply the share of its budget that pays for higher education, to the equivalent of 4% of the economy (gross national product) by 1999. Meanwhile, the share of the eligible-age population entering colleges in the country was rising from 25% in 1999 to 48% in 2004, reported the United Nations Educational, Scientific and Cultural Organization (UNESCO).

True, if the student herself receives most of the fruits of her education, in the form of a higher salary, then it may make sense to let her pay her own college expenses, if she can borrow easily against her future expected income. But this condition does not hold in Kazakhstan. Youths from families with little wealth, and therefore with little to pledge as collateral, have trouble obtaining college loans from private banks. The government – and probably only the government – can address this market failure by guaranteeing these loans. Astana should compare the cost of inevitable loan defaults against the benefits to the nation of a work force that, being well-educated, rapidly introduces and diffuses innovations of production.

The Ministry of Education and Science has taken a step in the right direction – but only a step. Last year the ministry introduced a program paying 5% to 7% annual interest on a family bank account earmarked for a child’s education. That’s the State Educational Savings System, reported Centralasiaonline. But the program is small; the ministry projects that 17,000 Kazakhstanis – roughly one-tenth of one percent of the population -- will use it. And it doesn’t address what may be the prime problem in financing college education: College expenses can claim a larger share of wealth than parents are willing to set aside – particularly if they undervalue the child’s education.

Perhaps the government should subsidize far more college students than this plan does. It is hard to think of any other policy that could increase the long-run rate of economic growth so surely. – Leon Taylor, tayloralmaty@gmail.com


Notes


1. “Gross national product” is the market value of goods and services produced each year by Kazakhstanis, regardless of where in the world they are working.

2. Adam Smith writes: “The expense of the institutions for education and religious instruction, is likewise, no doubt, beneficial to the whole society, and may, therefore, without injustice, be defrayed by the general contribution of the whole society. This expense, however, might perhaps with equal propriety, and even with some advantage, be defrayed altogether, by those who receive the immediate benefit of such education and instruction, or by the voluntary contribution of those who think they have occasion for either the one or the other.

“When the institutions or public works which are beneficial to the whole society, either cannot be maintained altogether, or are not maintained altogether by the contribution of such particular members of the society as are most immediately benefited by them, the deficiency must in most cases be made up by the general contribution of the whole society.” (The wealth of nations, book 5, chapter 1.)


Good reading


Robert C. Allen. Global economic history: A very short introduction. Oxford University Press. 2011. A concise discussion of the sources of economic growth.

H. W. Brands. American colossus: The triumph of capitalism, 1865-1900. New York: Anchor Books. This lively history discusses the impact of scale economies on American industries. 2010.

Milton Friedman. Capitalism and freedom. University of Chicago Press.  1962.  Analyzes the economics of student loans.

Adam Smith. An inquiry into the nature and causes of the wealth of nations. Edited by Edwin Cannan. The University of Chicago Press. 1976 [1776].


References


Alexandra Babkina. College savings plan to be launched in Kazakhstan. April 2, 2012. centralasiaonline.com

Kazakhstan Today. Government confirmed plan of measures for realization of forced industrially-innovative development program. April 13, 2010. Online.

Kazinform. Carrying out forced industrial innovative development program is top government priority. February 6, 2012. Online.

Kazinform. Kazakhstan can eliminate unemployment through industrial program – Nazarbayev. January 16, 2012. Online.

Kazinform. Kazakhstan's Industrial Innovative Development Program to be fulfilled ahead of schedule – Nazarbayev. May 20, 2011. Online.

Kazinform. 389 new manufacturing facilities opened in Kazakhstan in the past two years. January 16, 2012. Online.

United Nations Educational, Scientific and Cultural Organization (UNESCO). Statistical tables. 2009. Online.

Get real

What is the tenge really worth?


On the surface, the central bank of Kazakhstan seems to have stabilized the tenge. The exchange rate has been within a tenge or two of its target rate, 150 tenge to the United States dollar, for nearly four years. But appearances can mislead. In terms of the U.S. products that it can buy, as compared to Kazakhstani products, the tenge has been gaining value since 2002.

The “real exchange rate” expresses the foreign purchasing power of a unit of some currency, relative to its power to buy local goods. Suppose that last year 1,000 tenge could buy either two U.S. newspapers or two Kazakhstani papers. This year, however, 1,000 tenge can buy only one Kazakhstani paper, although they can still buy two U.S. papers. Then, in relative terms, the foreign purchasing power of the tenge has increased: Last year, when you bought a U.S. paper, you had to give up a Kazakhstani paper; but this year, you give up only half of a Kazakhstani paper. The tenge has “appreciated”.

In practice, the real exchange rate is often expressed in terms of its value at some point in the past. The National Bank of Kazakhstan arbitrarily sets the December 2000 rate at 100. With respect to the dollar, the tenge in 2011 had appreciated 82% since December 2000, so the real exchange rate in 2011 was 182 (as defined by the National Bank; not everyone takes this approach). Thus the tenge could buy substantially more of U.S. goods in 2011 than in late 2000.

If people care about what they can buy with their tenge, and not just about the number of tenge in hand, then the real exchange rate better measures the currency’s value, in terms of foreign goods, than does the rate usually quoted in the media, i.e., 150T = $1. The latter rate just expresses the number of dollars that you can buy with a given number of tenge. Economists call this the “nominal exchange rate”.

Watch out for wedges

With respect to U.S. goods, the tenge has been appreciating for years largely because prices have risen roughly four times faster here than in the U.S. Over time, American-made imports into Kazakhstan look more like bargains.

In terms of European goods and the euro, the tenge has appreciated about 20% since 2002. Like the U.S., Europe has not suffered much inflation recently.

This should please Kazakhstani consumers, but the flip side of the coin is that producers here lose domestic and foreign demand. Local consumers substitute some U.S. imports for goods made here. And American consumers buy some of our exports rather than goods made there, since the dollar can’t buy as many Kazakhstani goods as before.

This is not a general problem for the tenge. With respect to the Russian ruble, the real rate for the tenge has fallen 20% since 2001; that is, the tenge has depreciated. (In fact, it has weakened steadily ever since the ruble crashed in 1998.) With respect to our chief trading partner, our imports have become more expensive over time, and our exports have become cheaper. This would tend to increase the difference between our exports and imports -- our “balance of trade” with Russia. The tenge has depreciated compared to the ruble largely because prices rose faster in Russia than here from 2009 through 2011.

How has the National Bank’s stabilization of the nominal exchange rate of the tenge (with respect to the United States) affected the real rates? Let’s take 2009 as a starting point, since the Bank in February of that year weakened the tenge by 25% and announced that it would maintain thereafter an exchange rate of 150 tenge to the dollar. Relative to the West, the tenge has appreciated – by 11% or 12% in 2011 (compared to 2009) for both the United States and the euro region. Relative to the non-West, the picture is mixed. The real value of the tenge was virtually unchanged in 2011 relative to China, Kyrgyzstan and Ukraine. However, it had risen 23% relative to Belarus and fallen 7% relative to Russia.

In general, a wedge is developing in Kazakhstan’s trade picture. In terms of purchasing power, the tenge is strengthening relative to the currencies of rich nations and often weakening, or holding its own, relative to poorer nations. This would tend to reduce our trade balance with the rich and to maintain or increase it with the poorer.  Over time, Kazakhstan may rely less and less on Western economies, which grow more slowly than developing economies.

The wedge may occur for several reasons. Countries that rely on exports of natural resources have similar price patterns, so their real exchange rates may follow similar paths over time (Kazakhstan, Kyrgyzstan, Ukraine and Russia). Developing countries tolerate more inflation than does the West; when their prices rise faster than Kazakhstan’s, the tenge with respect to them will depreciate. Last, and perhaps not least, the National Bank holds the nominal exchange rate close to 150 tenge for a dollar, whatever the dollar’s foreign value, so that movements in the real rate depend entirely on price changes. In this sense, Kazakhstan’s true currency is not the tenge but the almighty buck. –Leon Taylor, tayloralmaty@gmail.com


Notes

In Kazakhstan, the Consumer Price Index (CPI) for December to December increased 6.2% in 2009, 7.8% in 2010, 7.4% in 2011, and 6% in 2012, according to data from the National Bank of Kazakhstan. In the United States, the annual CPI increased 0% in 2009, 2% in 2010, 3% in 2011, and 2% in 2012, according to data from the Bureau of Labor Statistics of the U. S. Department of Labor. The four-year average of the annual rate of change in the CPI was 6.85% in Kazakhstan and 1.75% in the U.S., a ratio of 3.9.


References

National Bank of Kazakhstan. Data on the price level and the real effective exchange rate. The Bank defines an increase in the real tenge rate as appreciation. But some economists define the real exchange rate in such a way that an increase in the rate denotes a depreciation. www.nationalbank.kz

Tradingeconomics.com . Offers an interactive graph for CPI inflation in Russia and other countries, using government data.

United States Department of Labor, Bureau of Labor Statistics. Data on the price level. www.bls.gov