Economic growth is not an indicator of success
2024 has become a year of economic growth for Kazakhstan at 4.8%, the country's prime minister recently stated. Such statements are heard like a mantra every year. Economic growth remains the main indicator of success for the authorities, but the citizens of the country do not feel this growth de facto. Instead, they feel a decline in income, an increase in the cost of living, and an overall deterioration in the quality of life. It seems that the Left Bank of Astana lives in its own reality, while the population lives in another, where food prices rise almost every week, and salaries do not keep pace with this growth. If we look at the state as a business, it has beneficiaries (shareholders) - the population. They should be the ultimate beneficiaries of the authorities they have chosen. Accordingly, the goal of state management should not be the increase of the economy as such (in business, this is the increase in turnover). One can lend to the economy as much as one wants and inflate turnover in numbers, but this does not benefit the shareholders. Shareholders need profit, benefits, improved conditions, security of funds, and good management; their ultimate goal is to raise the standard of living. That is, target documents should specify not economic growth, but, for example, the growth of purchasing power parity, the average income level of the population, etc. So why do we have what we have, and how can we change the status quo? We will find out the opinion of experts.
Playing on two fields
The head of Kursiv Research, Sergey Domnin, believes that at the level of goals declared in state strategic documents, the goal-setting of the authorities of Kazakhstan is excellent.
“If we look at the National Development Plan until 2029, we will see targets for 39 goals, including not only macroeconomic, fiscal, and demographic indicators (which are indispensable when calculating econometric models), but also indicators reflecting the standard of living of the population and the quality of the services they receive,” emphasizes the analyst.
These include the share of household spending on food, the share of the population with incomes below the subsistence level, life expectancy, the quality of secondary education, the level of satisfaction with the environment, and many others.
“Of course, the list of targeted indicators concerning the life of the Kazakhstani citizen can be expanded, but the existing ones are sufficient to track how changes at the macro level translate into an increase in the quality of life. It is naive to believe that as soon as GDP growth and investment in fixed capital are removed from the list of national development goals, and indicators such as the growth of real incomes of the population are included, an unstoppable rise in the standard of living will begin. Firstly, there is a risk that the statistics will be modernized to fit the targeted indicators. Secondly, these plans - if they are drafted without regard to the real situation - can be “shifted to the right” just like the current ones based on GDP: remember what happened with the president's instruction to ensure a six percent growth in the economy,” says the channel's interlocutor.
The growth of the standard of living ensures the growth of labor productivity and the effective distribution of national income, he continues.
“The first is the responsibility of key economic agents, who can be coordinated by the government. The second is solely the responsibility of the government. The game is played on two fields. I am confident that we will achieve significant progress even if we focus on the second field: we will learn to plan better and effectively administer tax revenues, optimize regulation, and subsequently - the number of civil servants, determine the set of investment projects that are truly necessary for everyone (and not just for the initiating national companies) and which cannot be implemented by private investors for less money,” believes Sergey Domnin.
Sergey Domnin - head of Kursiv Research
The quality of play on the first field in the case of a developing industrial economy like Kazakhstan's will only be improved by a consistent and balanced industrial policy, the analyst emphasizes.
“With mandatory public assessment of the quality of the measures applied and adjustments to the set of tools used. But this is a topic for another conversation,” clarifies the expert.
Reasons change, goals do too
The head of the analytical center 'DESHT', Kuanish Zhaikov, is convinced that viewing the state as a business is categorically wrong.
“This is not only incorrect but also dangerous. Business is a hierarchical structure, where everyone has their place, determined by higher-level managers. And there is competition between businesses, so you can at least switch from one to another. For example, as a consumer or as an employee. The state does not compete with anyone within the territory of the country. The state has a monopoly on violence. The only alternative is to emigrate to another state,” says the economist.
By imposing a hierarchical business structure on states, you get a dictatorship. The goals will always be noble - from 'catching up and surpassing America' to 'increasing the average income level.'
“But in the end, directly or indirectly, your basic civil rights will be taken away from you. Or, for example, part of your property, in the form of taxes,” describes a possible scenario the interlocutor of TAJ.report.
There are two views on the state, he states. The first is the 'stationary bandit' who takes your money and does what he wants. Because he can afford it.
“The second is the 'social contract', when as a result of elections representatives of some group of the population win with a clear plan for a short period. This is goal-setting - it is not invented behind closed doors, it is chosen. And it periodically changes, like a swing. If stagnation in incomes and high prices are a concern, then the state should be minimized as much as possible so that private business can breathe and rev up the economy,” notes the analyst.
Kuanish Zhaikov - head of the analytical center 'Desht'
If poverty and inequality are a concern, then the wealthy should be heavily taxed and simply give to the lower layers. Like 'Robin Hood.'
“If the quality of life is a concern - poor air, healthcare, etc. - then the middle class should be taxed and regulation tightened. But prices will rise, this will have to be accepted. If there is a concern about a potential war with a neighboring country and crime within, then all rights and money are given to the 'strong hand' to restore order. Then the reason for concern changes and another goal-setting appears. Everything else is the fantasies of people who have never dealt with the issues of state planning. They are all built on social conflicts - doing good for some, you infringe on others,” notes Kuanish Zhaikov.
Citizens pay for reforms
The General Director of the LLP "Applied Economics Research Centre" (AERC) Zhanibek Aigazin emphasized in a conversation: we are discussing clear and obvious things, but we are unable to cope with them.
“Economic growth increases the welfare of the people. This can be debated, but the question is about the correct distribution of national income or GDP. In Kazakhstan, the problem is the not very fair distribution of the created national income. It is obvious that the growth of welfare is based on economic growth - first, it is necessary to achieve it to obtain a product that must then be fairly distributed,” notes the economist.
He reminds that GDP is calculated by three methods. Our main method is the production method, or gross value added method; the second is the expenditure method - through aggregate demand; the third is the income method of the main institutional agents (government - taxes, population - salaries, business - gross mixed income or profit).
“In 2005-2006, the oil boom and super-profits from raw material exports led to a sharp increase in real incomes of the population. But from 2000 to the present day, the share of wages - what the employer pays to its employees - has significantly decreased, while the share of taxes has increased, and the share of business has remained the same. That is, more than 20 years of tax innovations have been paid for by the wages of workers. De facto, citizens paid for the reforms,” says the expert.
The share of labor compensation in the GDP structure was 36%, now it is 30%. The share of taxes has hardly changed. The share of profits and investments has increased from 54% to 61%.
“From which we conclude: the tax burden has been shifted onto the population, while business has increased its profits. Marx's thesis on the growing exploitation of labor by capital is confirmed in our case. And for the fair distribution of national income, there is a budgetary and tax policy, which aims to prevent excessive income inequality between citizens: people who earn below the minimum wage receive targeted social assistance, preferential loans, subsidies for various expenses, etc.,” continues the channel's interlocutor.
There are two main ideologies - laissez faire or non-interference of the state in the economy and, on the contrary, its active and direct participation, he develops the comment further.
“The first assumes the principle 'let everyone pay the same', but in absolute terms, the rich pay more. Then, through the so-called trickle-down effect, the money will reach the poor. But here the question of the effective functioning of institutions arises, which should facilitate the fair distribution of income, including through tax legislation. Unfortunately, this model does not work in our case. Once again - I say as an economist - the budgetary and tax policy should level the position of all layers in society (including through progressive taxation). The rich should pay more,” emphasizes Zhanibek Aigazin.
The antithesis of this model is the active intervention of the state. Here we see how the authorities move towards the differentiation of taxes, including VAT.
Zhanibek Aigazin - general director of the 'Applied Economics Research Centre' (AERC)
“For myself, I understand two types of differentiation: vertical and horizontal. The latter is implemented between industries, and those that are priorities for the state are given reliefs or a lower tax burden. The tax burden is shifted to industries where there are non-renewable resources. In our case, this is oil, gas, metals. It turns out that the manufacturing industry and agriculture need tax incentives - lower fiscal rates. Especially considering that we want to move away from the resource curse. And for extractive industries, there should be a higher rate,” believes the head of AERC.
Approaches need to be changed
The director of the 'TALAP' applied research center, Askar Kysykov, is convinced that the state's approaches to assessing the success of development need to be changed.
“Currently, the main indicator of economic success is GDP and indirect indicators - GDP growth, GDP per capita. Although there are already many studies and reports from the WEF, OECD stating that this indicator is imperfect and - most importantly - does not reflect the welfare and quality of life of the population. The OECD introduced an alternative to this approach by launching the Better Life Index. The indicator is calculated based on 11 directions: housing conditions, income, work; quality of life (social connections, education, environmental quality, civil rights, health status, life satisfaction, personal safety, work-life balance). The data is formed based on sociological surveys,” says the economist.
In 2017, the first president of Kazakhstan proposed to change the methodology for assessing the parameters of the country's welfare and to apply the methodology indicated by the OECD, he reminds.
“Despite the criticism of the approach, GDP remains the dominant indicator in the republic - it is convenient to calculate, compare. The government also targets GDP growth as a key indicator of economic development, with the goal of doubling the country's GDP. It should be understood that GDP is the volume of the economy, the goods and services produced in the country, and in our case, a significant part of the economy consists of oil revenues. Part of these revenues, according to the production sharing agreement, goes to foreign investors, essentially not reaching Kazakhstan at all. Accordingly, the country produces a large volume of GDP, but a smaller volume is distributed within the country,” emphasizes Askar Kysykov.
Indicators such as gross national product, gross national income are currently not used, and the GDP per capita indicator does not mean that every citizen of the country receives an income of $10,000.
And again about the unfair distribution of income
Like his colleague Aigazin, the economist noted the unequal distribution of income: about 60% of GDP is the profit of entrepreneurs, while labor compensation is only 30%.
“In developed countries, on the contrary, 60% of GDP goes to labor compensation, while 30% is the profit of entrepreneurs. The structure of GDP by the income method used in our case is imperfect. There is primary income inequality, then the redistributive mechanism kicks in. In theory, there is a more even distribution of income, but in fact, it is unfair. In our economy, the redistributive role of the state is much lower than in developed countries. As a result, the main drawback of the GDP measurement system manifests itself, which does not reflect the income level of the population,” says Askar Kysykov.
At the same time, he believes that the GDP indicator will remain - many countries will measure their success by it, and for us, international comparison is important.
“But there is a GDP indicator by purchasing power parity, which more adequately assesses the level of GDP produced taking into account prices within the country. Overall, I believe we need to use composite indices tested in developed countries. In addition to GDP, we should target the welfare and quality of life of the population, and one of the components of these indices should be sociological surveys on various areas: healthcare, education, employment, etc.,” states the CEO of the analytical center.
Askar Kysykov - director of the 'TALAP' applied research center
He again cites the OECD and its Better Life Index, where the component of healthcare asks whether you feel healthy.
“Depending on the answers, conclusions are drawn about how healthy the citizens of the country are. Unfortunately, we do not have such indicators, although they should be implemented and focused on. Because concentrating only on statistics is wrong - it has a lot of distortions, there are many adjustments. For example, 20,000 households are surveyed about the income of the population, and based on this, conclusions about incomes are made. And this is in modern times, when with a high level of digitalization, data can be collected from alternative sources - banks, ENPF, and off-budget funds, and more accurate indicators can be determined,” says the economist.
The same applies to GDP, the data for which is collected from the bottom up.
“There are large and medium enterprises that provide reports, but there is also small business - about 2 million entities, where selective research is also conducted and many adjustments are made. There is a shadow economy. The GDP indicator itself is evaluative, inaccurate, so it is not worth relying entirely on it in the implementation of economic policy. We need to create composite indices, including surveying the population on the main components of quality of life and making judgments about the mood of citizens. There are different indices - human development, happiness. The level of income can be average, but the population can be very happy, or in a rich country, people can be unhappy. A high GDP does not mean that everything is good in that country,” emphasizes the director of TALAP.
In conclusion
In conclusion, we tell the readers of the channel about different indices used around the world to assess welfare and the leading countries in the corresponding rankings. The largest database in the world on the cost and quality of life of people, Numbeo, presents the quality of life index. It assesses the quality of life in countries and cities based on purchasing power, pollution levels, housing availability, cost of living, safety, quality of healthcare, commute time, and climate. The ranking is formed based on data and surveys from users of the Numbeo website, who share their experiences and perceptions of life in various countries. The leaders of the ranking are Luxembourg, the Netherlands, and Denmark. Kazakhstan ranked 73rd out of 88. Belarus is in 54th place, Russia - 67th, Ukraine - 68th. According to the Human Development Index - an indicator developed by the UN (which includes life expectancy, education level, income per capita), the champions are Switzerland, Norway, and Iceland. The Legatum Prosperity Index, developed by the Legatum Institute in the UK, assesses the level of prosperity of countries based on a wide range of social and economic criteria: safety, social support, personal freedom, and opportunities for entrepreneurship. Here, the top three are Denmark, Sweden, and Norway. The countries with the highest happiness index from the UN are Finland, Denmark, and Iceland. Last year, Kazakhstan was ranked 49th out of 143, surpassing Japan and South Korea. And the highest Better Life Index, or OECD's best life index for such a parameter as income level, is demonstrated by Luxembourg, the USA, and Sweden. This year, Kazakhstan intends to apply for OECD membership; it will be interesting to see where we rank in the measurements...