Fun with your new bank

Why does inflation remain high in Kazakhstan?

In Kazakhstan, the most predictable thing about money is that it’s unpredictable. 

In the past few years, the National Bank of Kazakhstan has hit the brakes on the printing presses, slowing growth in the supply of tenge (see the table).  Normally, this would slow inflation, which is the average rate of increase in prices.  With fewer tenge to chase every kefir bottle, kefir prices should fall.

Year	Growth rate of M2 money
2011	22%
2012	12%
2013	5%
2014	3%
2015*	1.5%

*Based on data for January through May, compared to the same period in 2014

In reality, the rate of inflation has remained stuck between 6% and 8% for several years, despite the slowdown in money (the figure shows annual inflation rates for consumers).  To the National Bank’s credit, inflation has been far less volatile in Kazakhstan than in conflict-ridden Kyrgyzstan and Tajikistan, and it is lower than in Russia, but it still rises far more rapidly than in the United States.  What gives?

Perhaps people pay more attention to the Bank governor’s statements than to patterns in money supply.  Kairat Kelimbetov, who came to power in late 2013, has made clear that he intends to maintain inflation between 6% and 8%.  So, people may base their decisions on that vow rather than on the sharp decline in money growth – a decline that would justify far lower rates of inflation.  Their decisions determine the rate of inflation; if all workers demand a 7% cost-of-living increase, their employers will raise output prices proportionally in order to cover the cost. 

Maybe Kelimbetov has credibility with the public, despite his turnabout in depreciating the tenge by about a fifth in February 2014. Or maybe the public will believe anything.     – Leon Taylor tayloralmaty@gmail.com

Notes

Inflation data are from the World Bank, at the Web site www.worldbank.org . M2 data are from the National Bank of Kazakhstan, at www.nationalbank.kz.  M2 encompasses currency, checkable accounts, and small savings accounts.

Why Stalin rued the ruble

How to asphyxiate a recovering economy

In the true spirit of a dictator, Stalin paid for World War II by printing money.  When peace broke out, 59 billion rubles were circulating, more than enough to pay for what little there was to buy.  Prices rose.

Stalin’s cure for this headache of his was characteristically drastic.  In December 1947, the Politburo voted to replace every 10 old rubles in circulation with one new ruble.  The devaluation-tax rates on bank deposits were more merciful – either a third or a half, with the larger bite on larger accounts – but only deposits below 3,000 rubles were spared.  And the Politburo would cancel ration cards.  These reforms would occur overnight.

Now for Excedrin Headache #2: The devaluation was not the world’s best-kept secret.  The government had been planning it since 1943 and had printed the new rubles throughout 1946, shipping them in guarded railcars to 46,000 “secret” exchange stations, with 170,000 workers,  throughout Russia.  Weeks before the devaluation, savvy bureaucrats exchanged old rubles for durable goods.  Sofa and piano prices soared.

Where’s the blue-light special?

Hundreds of Muscovians – not to mention swarms of shoppers from other oblasts -- lined up in front of department stores hours before they opened.  The shelves emptied and the stores closed.  Frantic Russians turned to groceries for nonperishable foods like smoked sausages, until the government stopped these sales, too.  Nothing was left but perishables, and sometimes not even them.  “Today is the sixth day in a row that my wife stood in line for bread from 2 in the morning to 10,” said one citizen of Belgorod. “But alas, all six days she came home without bread.”

Russians had no better luck with financial bread.  Panicked withdrawals forced savings banks to padlock their doors, since they could not have paid out all the deposits demanded by depositors; some of that money had been lent elsewhere.

Stalin had meant to contain inflation.  And he succeeded, of course.  It’s pretty hard for the price level to rise when the money supply is down 93%.  But the disinflation came at a price.  News of the coming devaluation stoked high prices for durables, endangered banks, and wiped out the paltry savings of poor Russians.  Dear Generalissimo had thought that the devaluation would harm only the rich.  In reality, it bludgeoned everyone but.  The wealthy could protect themselves with durables and dollars.

“…More than 2000 officials, including senior party and law enforcement officials, were prosecuted for violating the currency reform law,” wrote historian Oleg Khlevniuk.  Store directors hoarded durables for resale when the price was right.  “...(But) ‘a significant proportion of senior party and government officials (have) essentially escaped punishment.’” 

A dictator’s reign over an economy is never absolute, since he cannot suppress all information.  A word to the wise in Central Asia.  – Leon Taylor tayloralmaty@gmail.com

Good reading 

Oleg V. Khlevniuk.  Stalin:  The biography of a dictator.  Yale University Press.  2015.  The source of the material used here.

Robert Lucas.  Understanding business cycles.  1976.  How information – or the lack of it – affects a national economy.

The great race

Are Kazakhstanis catching up with Russians in income?

The first shall be last, and the last….

Today, the average Kazakhstani is nearly as rich as the average Russian.  On the eve of independence in 1992, the gap in their incomes per capita (adjusted for inflation) was nearly a third.  Since then, the gap has steadily dwindled to less than 5% in 2013, according to World Bank data.  Continuing Western sanctions against Russia probably reduced the gap in 2014 as well.  

Indeed, the gap will probably disappear this year or next, as the graph below makes clear.  It shows the ratio of real income per capita in Kazakhstan to that of Russia.  (For example, Kazakhstani income was 68% of Russia’s in 1992.)

The gap has sometimes grown in response to economic events, but rarely for longer than a year.  Three incidents are conspicuous:

(

      1)    In 1995, Kazakhstani income fell to 67% of Russian income, down from 69% in 1994.  This was probably due to the hyperinflation surrounding introduction of the tenge, which replaced the Russian ruble here.  In 1996, the ratio was back up to 71%.

(     2)   In 1999, the ratio fell to 74% -- from 76% in 1998, about the time of the ruble crash.  Perhaps the ratio fell because Russia was recovering from the crisis. The ratio in 2000 held steady at 74% but surged to 79% in 2001.

(     3)   In 2008, the ratio fell to 83%, down from 86% in 2007.  Did Russia handle the global financial collapse in 2008 more astutely than Kazakhstan? In any event, the 2009 ratio was 89%.

      Political independence was not an economic panacea in Central Asia – although it may have been one for Russia, which has gained ground on the West since 1992.  The ratio of income per capita of the euro area to that of Russia fell from 1.86 in 1992 to 1.56 in 2013. The US-to-Russia ratio also declined, though not as severely, from 2.38 to 2.18.

     

Kazakhstan is the only country in Central Asia to creep up on the Russians economically until breathing down their necks.  In 2013, average income in Kyrgyzstan was only 13% of Russia’s.  It had been 17% at the dawn of independence, in 1992.  The corresponding figure for Tajikistan was 10% in 2013 (15% in 1992); for Turkmenistan, 58% (41%); and for Uzbekistan, 21% (16%).  Did civil war ruin the economies of Kyrgyzstan and Tajikistan?  

Which brings us to the 64 thousand tenge question: What is Kazakhstan doing better than Russia or the rest of Central Asia?  And the 128 thousand tenge question:  Is Russia shoehorning Kazakhstan into an economic union in order to control a potential rival? --Leon Taylor tayloralmaty@gmail.com

Notes

To calculate average income, I used gross domestic product per capita from the World Bank’s World Development Indicators (worldbank.org).  To adjust for inflation, I used purchasing power parity, expressed in 2011 international dollars.  An international dollar is the amount of local currency that will buy the same amount locally as a dollar would in the United States. 

It is more common to use the current exchange rate to express purchasing power in international comparisons.  For example, if the current exchange rate is 200 tenge per US dollar, and if income in Kazakhstan is 200,000 tenge, then the conversion is $1,000. 

But this conversion is sensitive to changes in the exchange rate that have nothing to do with the nation’s productive capacity, which ultimately determines a resident’s purchasing power.  For example, Kazakhstan’s central bank devalued the tenge by 25% and 19% in 2009 and 2014 respectively.  But Kazakhstan’s capacity to produce did not suddenly fall by that much.  So economists prefer measures based on purchasing power parity.