The tragedy of the Stalinist commons

 What really caused famine in Communist Kazakhstan?

In the early 1930s, Stalin forced rural Kazakhs to relocate in large state-owned farms.    Historically, Kazakhs had been nomads, driving their herds of cattle and sheep from one grazing area to another.  These animals were now relocated to the collectives.  Over the 1930s, when famines were common, the Kazakhs in collectives slaughtered more than 80% of the cattle and sheep, wrote Martha Brill Olcott.  Too little livestock remained in the late 1930s to sustain growth in the herds.  Famine worsened. 

Why didn’t the Kazakhs consider this when they slaughtered livestock on the collectives in the early 1930s?  In 1968, the biologist Garrett Hardin answered such questions with a parable. 

In a pasture open to all, Hardin wrote, each herdsman would try to keep as many cattle as he could. This would work fine when herdsmen were few.  But as they prospered, their number would grow and eventually strain the pasture's capacity.  "Therein is the tragedy.  Each man is locked into a system that compels him to increase his herd without limit -- in a world that is limited.  Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.  Freedom in a commons brings ruin to all."

As economists interpret the parable (although not Hardin himself), the “tragedy of the commons” lay in its lack of private property rights: All farmers had the same rights to all the livestock.  So it would pay each to slaughter as many cattle as possible, to feed his own family -- even if he understood that an eventual reduction in herds could jeopardize his family.  After all, he could not much affect the future size of herds; this depended on what all the farmers did.  Since each would over-slaughter, the herds would die out.  To rephrase Hardin, “freedom in a collective brings ruin to all.”  --Leon Taylor tayloralmaty@gmail.com

Note

I adapted part of this article from a 1993 post of mine.

Good reading

Hardin, Garrett.  The tragedy of the commons.  Science 162.  1968.

Olcott, Martha Brill.  The Kazakhs.  Second edition.  Stanford, California: Hoover Institute Press.  1995.

An inconvenient number

Kazakhstan’s central bank, the National Bank, has long maintained that inflation here has chiefly a “non-monetary character”, reported a business weekly, Panorama. 

There’s only one problem with the Bank’s claim: It’s probably wrong.  In Kazakhstan, the simple correlation between the supply of tenge (chiefly cash and checkable accounts) and average consumer prices exceeds .97.  That is, the correlation here between money and prices is positive and virtually perfect:  It tells us that more money is almost always associated with higher prices.  The increase in average prices is, of course, inflation.

Correlation need not imply causation; for example, money and prices in Kazakhstan may each relate to a third factor rather than directly to each other.  But in general, “inflation is almost always the result of rapid growth in the money supply” because “no other factor is likely to lead to persistent increases in the price level”, writes a well-known monetary economist, David Romer. 

Consider the impact of two likely factors -- output and the interest rate. 

In principle, a decrease in output could raise prices, since we would be spending the same amount of money as before but on fewer goods.  But statistical estimates indicate that output would have to fall by half if it is to double prices, Romer writes.  Such a large change in output is unrealistic. 

Similarly, an increase in the interest rate could induce people to buy interest-bearing assets, bidding up their prices and thus creating inflation.  But interest rates would have to rise by a factor of 32 if they are to double prices.  That’s almost inconceivable. 

On the other hand, doubling the money supply over a few years – which is what a doubling of prices would require – is rather common.  Just ask the Bank of Japan.

Lots of factors – ranging from earthquakes to elections -- can spark a one-time rise in prices.  But a sustained rise almost always has one cause only:  The central bank, in effect, is revving up the printing presses.  --Leon Taylor, tayloralmaty@gmail.com

Notes

1. The money supply considered here is M1, called "narrow money" because it is quite liquid. 
2. “Average consumer prices” refers to the consumer price level. 
3. The simple correlation coefficient gauges the direction and strength of the relationship between two variables.  The coefficient varies from -1 to 1, where values close to -1 indicate a strong, negative relationship; values close to 1, a strong, positive relationship; and values close to 0, a weak relationship or none.  To estimate the coefficient, I used the Bank’s monthly data for the period from 2000 through 2011.

References

Drozd, Nikolai.  Sytuatsyu na valutnom rinke udalos’ uspokoyt s bolswym trudom.  Panorama.  August 9, 2013.

Romer, David.  Advanced macroeconomics.  McGraw-Hill Irwin.  Third edition. 2006.

News brief: Tenge strengthens

The tenge, which had been weakening to record lows with respect to the United States dollar, reversed course last week, strengthening sharply from 153.8 to 153.1 in three days, a fall of nearly one-half of one percent, reported a Kazakhstani business weekly, Panorama. 

Kazakhstan’s central bank said there were no fundamental reasons for devaluing the tenge.  Devaluation would become more likely if the world price of oil dropped significantly for a long time; or if the currencies of Kazakhstan’s main trading partners – presumably Russia and China – weakened sufficiently, the National Bank said.  At the moment, it regards both scenarios as hypothetical.

Since oil dominates Kazakhstani exports, a fall in the price of crude reduces world demand for the tenge and thus its exchange value.  In principle, a lower price for a product can increase sales revenues, since people will buy more units than before.  But the world demand for oil is not sensitive to price changes in the short run, probably because of the technical difficulty in substituting other energy fuels for the "black gold".  So, a fall in world oil prices reduces Kazakhstan’s export revenues in the short run.

The motivation for the second scenario is this:  Depreciation of the ruble or yuan reduces the amount of Kazakhstani exports that Russians or Chinese can buy.  To revive their demand for our exports, the National Bank would have to devalue the tenge.  

The Bank’s disinclination to devalue has probably helped strengthen the tenge.  But not all private analysts are as tranquil as the Bank’s.  The Royal Bank of Scotland projects that the dollar exchange rate will rise to 156 tenge by the end of the year and to 158 or 160 early next year, reported the business weekly Delovoy Kazakhstan late last month.  --Leon Taylor, tayloralmaty@gmail.com

 References

Delovoy Kazakhstan.  Valutni rinok.  July 19, 2013. 

Drozd, Nikolai.  Sytuatsyu na valutnom rinke udalos’ uspokoyt s bolswym trudom.  Panorama.  August 9, 2013.

Oops

How reliable are data from the National Bank of Kazakhstan?

In some ways, Kazakhstan is lucky to have the central bank that it does.  The National Bank (NBK) is not deliriously reckless, as is the Central Bank of Iran.  Neither is it paranoid about rising prices – unlike the Reserve Bank of New Zealand, where a 1989 law bound the governor to hit the rate of inflation negotiated with the finance minister, or lose his job. 

The NBK handles policy with care; if only it would do the same for statistics.  Exhibit A of its neglect is its estimate of the exchange rate.

First, some background.  Most people are familiar with the nominal exchange rate, since this is reported by the daily press.  For example, yesterday one could sell 153.6 tenge in exchange for a United States dollar.  But this exchange rate is not truly important.  Most of us don’t care about the number of tenge or dollars that we hold; instead, we care about the goods and services that we can buy with them.  The purchasing power of the tenge is expressed by the “real exchange rate”, which adjusts the nominal rate for prices in Kazakhstan and abroad. 

As it is usually defined, a real exchange rate of 2 (say) implies that a foreign bundle of goods costs twice as much as a similar bundle in Kazakhstan.  A rise in the rate to 3 would suggest that the foreign bundle now costs three times as much as ours; that is, the tenge is losing its purchasing power over foreign goods.  That’s depreciation.  We now must sell three domestic bundles in order to buy a foreign bundle; before the depreciation, we had to sell only two domestic bundles.   

We could express the real exchange rate with respect to any other country.  But since we trade with many countries, it makes sense to take into account all of these exchange rates.  We can do this by calculating the weighted sum of all the bilateral rates, where each weight is that country’s share of our total volume of trade.  For example, suppose that we have two trading partners: Country A, which accounts for 60% of our total trade; and Country B, which accounts for 40%.  Suppose that our real exchange rate is 2 with respect to A and 3 with respect to B.  Then our weighted exchange rate is .6*2 + .4*3, or 2.4.

Almost half of our trade is with Russia, China and Italy, in that order.  But we also trade with 16 or 17 other countries that each claim more than 1% of our current account.  In recent years, Uzbekistan has generated 1.6% of our trade, usually exporting fruit, vegetables and textiles.  In terms of its trading weight, Uzbekistan is between the United Kingdom and Poland.  From 2003 through 2012, it was our 14^th largest trading partner.  Its exports to us increased last year by more than $1 million, reported the weekly Kazakhstani newspaper Kapital.

Yet another “coding error”?

Inexplicably, the National Bank excludes Uzbekistan from its estimates of the weighted real exchange rate for the entire 10-year period.  That was discovered by a KIMEP graduate student in economics, Kairat Beisenov.  To double-check on the Bank’s work, he used data from the official source – the Customs Control Committee of the Ministry of Finance.  Uzbekistan doesn’t show up anywhere in the Bank estimates for the top 24 trading partners, although it is in the control committee’s dataset.

One may think this a small error since Uzbekistan accounts for less than 2% of our trade.  The omission matters for three reasons.  Currency traders, as well as import and export dealers, find that their profits are sensitive to small changes in the exchange rate.  Also, we need Uzbekistani data to answer such questions as the impact of Kazakhstan’s customs union (formed with Russia and Belarus in 2010) on trade in Central Asia.  Finally, and most important, the Bank’s failure to discuss anywhere its reasons for excluding the Uzbekistani data for 10 years, raises questions about its diligence in verifying its own estimates.

This is not the first time that the Bank’s calculations have been called into question.  As Beisenov notes, Tengrinews in 2012 noted a $3.6 billion difference between the trade estimates of Kazakhstan and China in 2011.  That was 3.1% of Kazakhstan’s entire trade that year.  Somebody needs a new abacus.  --Leon Taylor, tayloralmaty@gmail.com

 

 

References

Beisenov, Kairat.  Estimation and impact of the real effective exchange rate on the goods market in Kazakhstan.  KIMEP University manuscript.  August 2013.

Bernanke, Ben S., and Frederic S. Mishkin.  Inflation targeting: A new framework for monetary policy?  National Bureau of Economic Research Working Paper #5893.  1997.  Online.  Briefly discusses the Reserve Bank of New Zealand.

Gayfutdynova, Venera.  Uzbekistan uvelychyt eksport v RK bolee chem na $1 million.  Kapital.  July 25, 2013.   

 

Tengrinews.  Raznitsa tamojennoy statistike kazahstana-kitaya sostavila 3.6 milliarda dollarov.   http://tengrinews.kz/kazakhstan_news/  June 30, 2012.       

Jackson’s curse

 Can Central Asia learn from the old American frontier?

In the 1830s, when the United States economy was rural and developing, the populist President Andrew Jackson proposed eliminating all paper money in denominations smaller than $20 and replacing it with gold and silver coins.  This would supposedly protect farmers and laborers. 

The argument sounds strange to us today, because we associate paper money with inflation that favors borrowers.  An unexpected expansion of the supply of tenge leads to an unexpected rise in all prices, due to unexpected spending.  The inflation will reduce the purchasing power of the tenge over time.  Borrowers will gain, because they will pay off their debts with tenge that are worth less than the ones that they had borrowed.  (Lenders can recover the lost value by charging interest, but only if they can anticipate the inflation.)  Since most farmers borrow, one would have thought that Jackson’s proposal of hard money would have proven inimical to their interests.

American economists of Jackson’s day, as inept as they were, did recognize that fluctuations in the money supply led to fluctuations in prices.  But Jackson had something else in mind.  In the frontier states of the West (today’s Midwest), local banks printed their own money.  Since they rarely announced how much they had printed, one could only guess at its value in other areas, relative to the value of moneys circulating there.  A farmer in Indiana who wanted to buy a plow from a manufacturer in Massachusetts had little idea of how many Hoosier bank notes he would need.  This uncertainty inhibited the investments required for economic growth. 

Emboldened by gold

In comparison, the supply of gold and silver was easier to estimate.  And their values as money were bounded below by their values in jewelry and other products; if you couldn’t buy much with a gold ingot, you could always melt it down and fashion bracelets.  Hence using precious metals as money took some of the uncertainty out of frontier investment.

Central Asia faces a similar problem.  Rural areas, like southern Kyrgyzstan and much of Tajikistan and the Ferghana Valley, are short of reliable currencies such as the United States dollar.  They must barter -- or use regional currencies with an uncertain value.  For example, the government of Turkmenistan is so secretive that much basic information about its currency, the manat, is unknown.  (However, economic data for the country has become increasingly available since 1998; and annual data about inflation go back to 1992.  I thank Kairat Beisenov for this point.)  Unless you have a friend in government who can supply you with dollars, you may find it hard to finance a new store or factory.

Er…what is that spinning sound from the Nashville graves?  --Leon Taylor, tayloralmaty@gmail.com

Good reading

Hammond, Bray.  Banks and politics in America:  From the Revolution to the Civil War.  Princeton University Press.  1991.  Winner of the Pulitzer Price.

Remini, Robert.  Andrew Jackson: The course of American democracy, 1833-1845.  Johns Hopkins University Press.  1998.  Volume three of a trilogy by the Tennessean’s leading biographer.

Remini, Robert.  Andrew Jackson: The course of American freedom, 1822-1832.  Johns Hopkins University Press.  1998.  Volume two.

Temin, Peter.  The Jacksonian economy.  W. W. Norton.  1969.  Refutes the traditional view that Jackson’s war on the Bank of the United States instigated a business cycle.    

News brief: Marchenko may step down soon

The head of the central bank of Kazakhstan, Grigorii Marchenko, may step down by the end of the year, ostensibly for personal reasons, reports a business weekly, Kursiv’.  His potential successors include Finance Minister Bolat Zhamyshev and Deputy Prime Minister Kairat Kelymbetov.

The president of Kazakhstan, Nursultan Nazarbaev, appointed Marchenko in early 2009, when overvaluation of the tenge had led to rapid drains of the National Bank’s reserves of foreign currency.  Within days of his appointment, Marchenko devalued the tenge by 25%.  At that time, he vowed to hold the exchange rate to about 150 tenge to the United States dollar.  In the past two years, the tenge has depreciated steadily to an exchange rate of about 153.

Any central banker will eventually collect a respectable number of enemies.  The 2009 devaluation probably protected the tenge from a devastating speculative attack, but it also reduced the wealth of tenge-holders by a fourth (in terms of purchasing power over foreign products).  Particularly caught between a rock and a hard place were commercial banks with dollar-denominated debts and tenge-denominated wealth.    

This year, Marchenko ran afoul of what Americans call the “third rail of politics” – pension reform.  (The term stems from Washington's subway system, in which the middle rail is lethally electric.)  The government suddenly “unified” private pension funds into one to be managed by the National Bank.  Some contributors to the private funds wondered if they would ever see their money again.  And a proposal to delay the retirement age of women cost one labor minister his head.

In addition to his current tenure, Marchenko headed the National Bank in the years following the collapse of the Russian ruble, 1999-2004.  He was replaced by Anvar Saydenov, whom he replaced in turn in 2009. --Leon Taylor tayloralmaty@gmail.com

References

Yana Lee.  Marchenko sdelal svoi delo.  Kursiv’.  July 18, 2013.  

Green garble

Would pollution permits cripple Kazakhstan’s economy?

Kazakhstan plans to control carbon emissions, which create global warning, by issuing pollution permits that can be bought and sold.  To reduce emissions, the government can just issue fewer permits.  Carbon polluters – such as power plants that burn coal in order to generate electricity – protest that the permits cost too much.  That, to put it charitably, is a misunderstanding.

Under reasonable conditions, marketable pollution permits minimize the cost of controlling emissions.  I don’t mean the price paid by the power plant for the permit; its emissions do real damage, so it should pay for the privilege.  I mean the cost to society of pollution control.  For example, some plants may reduce carbon emissions by switching to natural gas or nuclear power.  The cost of this transition may force a plant to layoff workers.  This loss of jobs entails a true cost to society.  We may want to cut carbon emissions, by the given amount, with the smallest possible loss of jobs (or, more generally, with the smallest possible loss of human welfare).  Marketable pollution permits can do this.

To see why, let’s look at how governments usually reduce pollution – “Command and Control”, which orders all polluters to cut emissions by a given percentage (say, 50%).  Consider two power plants that each emit 2 million tons of carbon.  Plant A has equipment designed solely to burn coal.  To halve emissions, it must buy equipment suitable for natural gas.  Reducing carbon emissions by a million tons will cost it $3 million.  Plant B already has equipment for burning either coal or gas, and it can switch to the latter fuel easily.  It can halve emissions for only $1 million.  Under Command and Control, each plant would have to reduce emissions by 1 million tons, at a total cost of $4 million ($3 million for plant A, $1 million for plant B).  It would be cheaper to have plant B cut back by the full 2 million tons, since this would cost only $2 million.  Marketable permits can make this happen.

How?  Suppose that each permit would let its holder emit one carbon ton.  Plant A would want to pay as much as $3 for the permit, since otherwise it would have to pay $3 to avoid emitting the ton.  Plant B would be willing to sell a permit for as little as $1, since it can abate the ton by spending a dollar.  Thus each plant would gain $1 by trading the permit for $2 (B would sell to A).

The gains to polluters are not the issue.  The point is that the exchange enables society to abate the carbon ton as cheaply as possible – for $1, or, more precisely, for a dollar’s worth of physical capital and labor.  Under command and control, the abatement would have cost two dollars’ worth of resources.  The marketable permit frees up a dollar’s worth of resources for producing other things of value, such as research into global warming.

Inflating the facts

A permit system isn’t essential.  The government can achieve the same cost-minimizing outcome by taxing each polluter $2 for emitting a carbon ton.  Plant A will pay the tax and Plant B will abate instead.  But under the tax system, firms can pollute as much as they wish, as long as they pay up.  True, the government can cut pollution by raising the tax rate, but finding the best tax may take several years; meanwhile, the environment may suffer.  Since we are not sure of the damages that global warming may incur, other than that they may be catastrophic, we may prefer permits to taxes, since the government can reduce emissions by a precise amount simply by issuing fewer permits.  That is, the permit system enables the government to control the amount of pollution more precisely than the tax system would.     

Eurasianet.org reports that Kazakhstani business leaders, “including KazEnergy, a powerful alliance of energy producers, is opposing the (permits) plan, arguing that it would stifle economic growth and decrease Kazakh global competitiveness.”  Hogwash.   By saving resources, the permit plan will stimulate growth and competitiveness, when compared to Command and Control. Moreover, the permit system encourages innovations that cut the cost of pollution control, since these increase the innovator’s profit from selling a permit.  If, for example, Plant B can reduce the cost of abating a carbon ton from $1 to $.75, then its profit from selling a permit for $2 increases by $.25.  Command and Control may not induce such innovation, because regulators usually require all polluters to adopt the best available technology.  The innovator will lose his invention to his rivals, so he is less likely to attempt expensive innovation in the first place.    What is costly for Kazakhstan is not the permit scheme but the original decision to reduce emissions.  Given that decision, the permit system is the cheapest way to go.

Eurasianet.org also reports “fears that the (Emission Trading System, i.e.,. permits) can prompt businesses to pass along higher costs to end users, spurring inflation and generating discontent in many communities.”  This argument is confused.  In the past, Kazakhstan exported pollution costs (in the form of global warming) to the rest of the world by permitting its power plants to emit carbon.  Requiring emitters to cut back merely recognizes that firms should pay for the input called pollution.  Undoubtedly a polluter will try to pass on this cost to customers; but since they have enjoyed the benefits of carbon emissions – such as abundant electricity – it seems fair to require them to pay the associated costs.  Anyway, users can avoid these costs by conserving. 

“Inflation” is a rise in prices throughout the national economy.  Technically, it’s the rate of increase in the “price level”.  A onetime increase in energy costs may push up the price level, but not forever.  So, the impact on inflation would be temporary.

Permits enjoy a political advantage over taxes.  Since the government must collect the tax revenues, it may be accused of adopting pollution taxes for financial rather than environmental reasons.  But it need not collect anything under a permits scheme:  It can allocate the permits for free and let their sellers keep the revenues.  Given Astana’s reputation for pecuniary cunning, this advantage is not rhetorical.         

--Leon Taylor, tayloralmaty@yahoo.com

Good reading

Larry E. Ruff.  The economic common sense of pollution.  The Public Interest.  Spring 1970.

Tom Tietenberg.  Environmental and natural resource economics.  Addison-Wesley.  Sixth edition.  2003. 

References

Khamidov, Alisher.  Carbon trade scheme fuels divisions in Kazakhstan.  Eurasianet.org.  July 9, 2013.