Selected comments on selected issues …

February 25th, 2016 Sections: Economy, From an Expat, News
 International Monetary Fund

International Monetary Fund

The IMF, (International Monetary Fund), have just issued their latest Country Report for the Kyrgyz Republic, (that is, Kyrgyzstan), prepared by a team of their staff members as a background paper for the regular consultation with the government.

It costs USD18 for a copy but the text is freely available online in pdf format … which is where I saw it … and I thought it was worth a few observations and comments.

Some general observations first of all:

First off … It’s an internal document that is made available to the public … so it has not been discussed with the government and subject of any agreement … although it is hard to imagine that the government has had no input at all …

Secondly … It is not a full survey of the situation in the country … its economy and place in the world … but is described as a “Selected Issues” paper.  As such it concentrates on

  • Income Inequality – and poverty;
  • Government policies on financing – Tax revenues and Expenditures;
  • the Financial system – such as loans and credits and the ‘dollarization’ of the economy;
  • Linkages;
  • Remittances from migrant workers – and their impact on the economy; and
  • the impact of the country’s accession to Eurasian Economic Union.

Thirdly … it carries a warning/proviso on the front page that it is “based on the information available at the time it was completed”  – which was on November 19, 2015 – which seems fair enough … as it gives the document a definite historical context and time stamp … but, I have to admit that this form of legalese does seem to be a bit like ‘covering one’s back’ and the use of such terms always makes me feel uneasy and to want to look closer …

… which is why I thought it merited greater attention.

Furthermore … some of the data presented in graphics and table seem to end well before 2015, when the report was finalized.  In theory, I have no problem with that … the data may not have been available … but even the author comment at one point that the latest information available was the result of a survey made in 2002 (!).

Situations change, and can change rapidly … and we need to recognize that even the best informed conclusions drawn in November last year, may well be based on information that is already ‘out of date’.

Fourthly … some of the document is technical, which means that certain sections will have little meaning for the uninitiated … and look like ‘double dutch’ …

For example: what is a GINI index?  Yes, I did look it up … so, I now have a basic understanding of what it is …

Finally … I am not going to try and comment on everything in the document, on all the questions that came to my mind … but to concentrate on a few ‘selected topics’ that screamed out at me as I read through the document … in fact, I’ll restrict myself, today, to concentrate on just the first section – Income Equality,

… which, I suppose, would once have been called “income redistribution”.

As it happens, this is perhaps the longest section in the document (7 pages with 24 points) and is a fundamental general theme which also has a bearing on several of the other sections.

For the record: the section on the Financial sector is also 7 pages long … but is much more detailed and specific – which is, perhaps, not surprising given that it is an IMF paper.

The section is divided into three parts, the first setting the scene and identifying trends in reducing income inequality; the second examining the obstacles which impede further improvement in alleviating income inequality and the third considering policies designed to reduce income inequality and promote inclusive growth.

It’s important for me to make clear to say that I am not questioning the conclusions that the authors come to or any recommendations they make in the third part … they are specialists and have a wealth of experience and evidence that I don’t have access to …  I simply want to draw attention to some points and raise some questions that immediately jumped into my mind as I read through the document.

 

The Income Inequality section opens with the phrase: “While extreme poverty has declined, overall poverty remains relatively high …”

Now, I understand that some benchmark is needed, especially when trying to establish a trend across a period of time or internationally, across borders … but “extreme poverty” is defined as having an income of less than USD1.25 a day, and I couldn’t help wondering where this figure came from.

What concerned me was that such a definition has its limitations … it may provide a fixed point on an agreed scale … but, for the people leading their lives, it represents a ‘moving goalpost’.

When we consider the exchange rate fluctuations over the last year, when, by 19th November 2015,the income received in Kyrgyz Som had seen a devaluation in dollar terms of 23% from just the beginning of the year …  and that is without the impact on their purchasing power of inflation … yet alone compared to 2008 … or 2001, as in the graphic.  To achieve an income of USD1.25 a day meant a person would have to be paid 73 som a day at the start of the year … but to maintain that same USD1.25 on 19th November, they would have to earn just over 90 som a day.

For the record: the paper also considers poverty at less than USD2 per day and at less than USD5 per day, at nationally defined levels (but without saying what benchmark is used)

 

As, I said, that’s without taking into account the effects of inflation … which, as the authors point out, “the burden of which is typically borne disproportionately by those in lower income brackets.”

Incidentally, when I saw the phrase, “… inflation is a regressive and arbitrary tax“, I thought that they must have a different understanding of the word “tax” … or do they know something that I don’t … how is inflation funding the government?

 

A little further on, the paper comments on how the situation has changed since Independence in 1991 … the first decade seeing some progress but that later progress slowed and even experienced some reverses … so that in 2011 the poorest 20% of the population received just 7.7% of the income in the country and the richest 20% accounted for just over 20% of the income.

It seems clear that, as the author’s note, any benefits accrued from the growth of the economy has not “trickled down” to the poorest segment of the population.

The poorest segment of the population includes the unemployed – which is technically recorded as 8.5% of the population … which is relatively high compared to similar economies.  So, although the paper doesn’t explicitly say so, there is obviously a need for a job creation programme.

A bit more worrying is the fact that, according to the authors, unemployment is concentrated among “young people and women“.

That’s important because Kyrgyzstan has a young population with high growth rates – currently increasing by about 2.5% a year resulting in a population where about a third are below the age of 15 (and only 6 percent over the age of 65).

Interestingly the paper also says that the average family size has increased over the past decade … but it does give any specific figures … The other day, however, I did see a vox pop. survey which suggested that the average family looked for four children.

Those that do find work may still be relegated to the lower percentiles of income distribution … as illustrated by the following sentence in the report, (which did not really come as a surprise … but did seem to be an indictment): “… the ratio of female to male salaries is 74.3 percent, even though women are more educated.”

I suppose a corollary of this could well be that, when they do find work, it is only in jobs that are less well paid?

Many people do find work … abroad … as migrant workers, usually in Russia or Kazakhstan … and that brings it’s own problems.  In fact the issue of remittances, (money some home by these migrant workers for the support of their families), gets special treatment and analysis later in the document.

There, it is noted that the Kyrgyz labour force is expected “to have more secure access to the Russian market“, as a result of Kyrgyzstan joining the Eurasian Economic Union, which has simplified procedures and abolished quotas as well as improving conditions for migrant workers … and that seems to have enabled a growth in the number of people seeking such work.

The economic crisis which has seen the devaluation of the Ruble and the Tenge has had a significant impact on the sum that is being remitted … which amounts for over a quarter of the country’s GDP … when converted to USD equivalent.  In fact, the authors tell us, the number of remittances has stayed relatively stable suggesting that the employment situation (the number of migrant workers, for example), also remains stable … but their value, as represented in USD equivalent, has fallen significantly … thus hitting the poorest section of the population a further blow – a double whammy  in what is beginning to look like a ‘perfect storm’ … at least in terms of the economy.

Interestingly, the paper suggests that most Microfinance institutions (MFIs) have stopped considering remittances as income when considering a loan application.

 

 

There was little new in the section discussing the obstacles to addressing the issue of income inequality.  The paper goes to outline several factors which create difficulties in the business environment.

Although the business climate has seen some improvement since the revolution in 2010, they say that there is still an abundance of burdensome regulations which actively discourages the development of new businesses … (and, I suppose, can cause problems for existing ones as well …).

They also say that ‘political instability and corruption remain important obstacles‘ inhibiting the development of business.

They also highlight the impact of  limited access to finance, particularly for those in remote areas where banking services are less well developed

… and hence the concentration in the section on the financial system that I referred to earlier.

It was interesting to see the comments on the ‘dollarization‘ of the economy – especially the conclusion that the fall of the som against the dollar has reversed an improvement that had been seen, with the som beginning to break free from the dominance of the dollar.

It was particularly interesting to see the conclusion “De-dollarization measures that have failed in the past in other countries include the forced conversion of foreign currency deposits and the suspension of access to foreign currency deposits … should be avoided” and “In developing new de-dollarization policies, it is important to encourage market-based solutions as opposed to forced de-dollarization” … which seem to be the opposite of what the government is proposing.

In the face of all of these factors which handicap to the development of  businesses – many people prefer to work in what the authors call, the “informal economy” … thus creating a viscous circle of weak governance, provided by weak institutions operating burdensome regulation and unable to control corruption, together with a paucity of financial services, encourages the development of a substantial informal (shadow) economy which is typified by poorer productivity, working conditions, employment protection, wages and benefits – not to mention – paying less in tax revenue to the government … which limits the state’s capacity to deliver good governance and strong institutions … ad infinitum.

 

Perhaps the biggest surprise in the whole section was provided by the data from the National Statistics Committee … which showed the distribution of poverty, (presumably as determined by the ‘national’ definitions), across the different regions of the country as measured in 2011, 2012 and 2013.

Although the national figure was remarkably stable across the three years (at 36% in 2011, 38% in 2012  and 37% in 2013), there were considerable variations across the country … and the statistics for each oblast showed considerable fluctuation over the three years with no overall pattern emerging.  Except, that is, in the case of Talas which saw a consistent reduction from 50.2% in 2011, to 39.6% in 2012 and 23.1% in 2013.

Now that looks impressive … and made me want to ask: Why? … what is the backstory?  Had they done something ‘right’?, (and if so, what?), or was it pure chance?, or had they ‘exported’ their poor as migrants … to Bishkek, to Kazakhstan or to Russia?

 

 

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