The events we see in both Europe and the U.S. reflect the problem of inequality
The past two years were difficult for Kazakhstan’s economy: the falling oil prices, the decreasing GDP, the shrinking of the public budget, the reduced real income, and high inflation. These are just a part of the challenges the country has faced. However, in the future, with the development of technology and alternative energy sources, Kazakhstan may face serious misalignment in its economic paradigm, to which it got used and has been living with over the past 25 years. The potential of raw materials as growth sources will lower and technology development can change seriously the methods of production and labour management. Vlast continues with the series of interviews How to Re-Launch Economy, in which it talks with economists, experts, officials, businesspeople and bankers about where Kazakhstan’s economy is at the moment, what external and internal risks it is exposed to, how the world and Kazakhstan’s place in it change, and what needs to be done to prevent the country from lengthy stagnation.
The second interview of the series is with Yaroslav Lissovolik, Chief Economist at Eurasian Development Bank. He told how economic inequality had become one of the causes of the crisis of global democratic institutions, why globalisation might even expand after it, how the Eurasian Economic Union will feel in these conditions, and why Kazakhstan should try to become closer to the BRICS countries.
Experts continue to discuss the crisis of democratic institutions which has become evident after Brexit and Donald Trump’s election as the president. In your opinion, how important is it to the global economy and how strongly can it distort it?
This risk is becoming very important. New assessment methods are even being developed. Citibank has created the Vox Populi approach to measure political and geopolitical risks in financial markets. They are very difficult to forecast and we will yet need to understand how they influence the economy and financial indicators. However, we do see already that new risks emerge in the trade policy, including on the part of the U.S., which are linked to the growing protectionism. The closed nature of economies may change the global picture of investment and trade flows. I believe that the events we were observing in several recent months, including the U.S.’ withdrawal from the Trans Pacific Partnership, which was quite a landmark for the beginning of Trump’s presidency, strengthen Asia’s positions as the driver of global economic growth and an incubator of investment and business processes.
This creates additional opportunities for the Eurasian Economic Union countries. It is very important to use them while the gravity centre of the global economy is moving towards our borders. While the processes of regional integration and the opening of markets were previously shaped by Western countries, now they will be determined by the East, including our countries if we – I mean the economic diplomacies of Kazakhstan, Russia and other EAEU countries – capitalise on the situation. I believe that the chances to take the lead here are very significant, including as regards the determination of economic rules in the framework of global institutions such as the World Trade Organisation and associations such as BRICS. I think that it would be interesting to watch more active interaction between Kazakhstan and Russia in the expanded BRICS when, besides its main players, the group is joined by their most important regional partners.
Nevertheless, the economic rearrangement and the decrease in investment flows from the West can affect the region. Asian markets were growing thanks to them, to a significant extent. Who can help them realise their potential?
In this, as paradoxical as it sounds, lies the beauty of this situation. The uncertainty about what countries will give an impetus to global economic growth is higher than ever. As for the previous decade, everything was obvious: these were the developed countries, which were the sources of technology, investment, institutions and liberalisation – everything that is important to global economic development. Now, however, most developed countries are living through controversial trends, if not a step back as concerns the openness of their markets and economic growth rates. The paradigm of BRICS, or whether it can become that very source, also raises many questions. As you know, in the beginning it was China and its positions seemed unshakeable. However, it has slowed down over the recent years and attention has turned to India, which became to demonstrate higher growth than China. There, however, we also see controversial signals in recent months, which relate to some monetary policy measures. They have raised controversies among the public and given rise to concerns that the country’s investment climate is worsening. Some researchers suggest that the BRICS paradigm is already the past. Using their criteria, they try to identify a new group of countries to become the source of this growth. In this context a very interesting figure is the economist Ruchir Sharma. Several years ago he published a best-selling book, Breakout Nations. He selected countries from very different parts of the world, including Asia, Europe and Latin America. The countries he chose included, for example, Poland, Turkey and some others. A few years will show whether he was right. In my opinion, the time of the BRICS paradigm has not passed yet. These economies still preserve their weight. If they manage to realise their potential they will become the key drivers of economic growth. A lot will depend here on how the relationships within the China–India–Russia triangle progress.
Do you expect an economic crisis because of imbalances in global trade and worsening political ties? How can this influence the current pattern of globalisation?
This is a very interesting question and my answer is that the philosophy and orientation of globalisation institutions should change. In recent decades globalisation was about convergence in economic development, or moving towards a single model. This was the Washington Consensus model, which consisted of a set of rules of good conduct. Its principle was that if all countries adhere to it it will foster common economic growth. The model turned to be inviable and, if globalisation continues, the new model will be aimed at divergence or, in other words, the co-existence of different models of national capitalism. In these conditions, I think, the success of a country will depend on its understanding of and benefiting from its economic peculiarities. The Eurasian countries should now understand their peculiarities in terms of geography. They should understand that we are continental countries and that our future development should be determined by the advancement of transport corridors, the enhancement of trade opportunities, and exports. Many followers of the idea of Eurasianism emphasised these geographic peculiarities. Gumilyov also wrote about this – the unique continental position of Russia and Kazakhstan. If to return to the new rules of global trade and globalisation in the context of diverging economic models, I believe we will see new development institutions, new reserve currencies and new global financial centres, which are beginning already to concentrate in Asia and developing economies. We will also observe greater equality in relationships between developed and developing countries. Another important aspect is how regional integration groups are functioning. What we see today is the weakening, to a certain extent, of global institutions. The World Trade Organisation is obviously losing weight compared to the emerging regional integration projects, the number of which, as estimated by the IMF and WTO, has already exceeded 400. In addition, countries are actively forming bilateral free trade zones. Bilateral rules are needed to regulate these processes, streamline them and help avoid disagreements and controversies between their participants. I believe that we will devise a code of conduct to set forth common principles and prevent discrimination of countries. The openness of regional unions will be pronounced as a principle, which is partly covered by the WTO regulations and has been included in the TPP regulations.
Do I get it right that you support regional cooperation more than globalisation?
I would say I am for globalisation, but in another form. And I believe that, to promote it, global institutions should be strengthened. To this end it is every important to consolidate and strengthen the WTO. As an economist I believe that globalisation will go on, but it should be on a fairer basis for all countries. To put it shortly, the main controversy in the global economy, and international financial institutions tended to agree with this in recent years, is inequality. They view inequality as the main constraint for economic growth. They talk about imbalances in the relationships between developed and developing countries, which also create obstacles to further development. The recent attenuation of global economic rates has been largely caused by inequality inside countries, between countries and between regions and this inequality should be overcome. And the new rules, the new institutions I talk about – they should, in the first place, provide solutions to these structural and deep obstacles. The recipe is in that we may need not less, but even greater globalisation, but on other terms, as before – as I see it – some countries had more of it and some less. Those who needed it more could not get it for different reasons. Protectionism was one of them.
What you are talking about is quite applicable to the EAEU: Russia is setting limits on trade with Belarus and Kazakhstan. Where should the solution be found? Should it be also in enhancing freedoms and equality?
The Eurasian Union should not be aside in any case. As regards the development of different processes in it, I believe there are a number of positive moments. Yet, there are also problems we should talk about. However, my perception is that now there is no intention to drive the union into a narrow framework, to make all countries suit common standards. The attempt to fulfil this integration project is flexible and realistic to a certain extent. The example of the European Union has also been giving us certain warnings in recent years. The U.K.’s withdrawal from it suggests that the lack of flexibility can produce such negative results. In this context, the possibility to fulfil certain initiatives at different paces and the understanding that certain benchmarks such as the single currency, for example, are possible in a very distant future (if possible at all) are very good. It is understood that the focus should be on realistic and important goals for our region. I mean coordination of monetary policies. Decisions on these and budget policies should be made with the interests of our neighbouring countries factored in. Such coordination should lead to common inflation rates that we will be able to maintain for a long time. The benchmark is 4% and if we achieve it our countries’ people and businesses will trust our policies more. Then other opportunities will also emerge.
If to refer to the risk of global warming and the global decision to cut hydrocarbon consumption, how should our economies get ready for this?
We should understand that environmental standards are a long haul. This will be the most important element of countries’ competitiveness. Environmentally-friendly production and products are becoming an important component in terms of both demand and costs. If to consider economic aspects, diversification is talked about a lot in Kazakhstan and other EAEU countries. However, this is happening as part of governmental programmes or attempts to stimulate a certain sector by creating special conditions for it. Often, the situation does not get better after this: government-funded manufacturers begin to depend on this funding and lose motivation for competition and approaching other markets. One of the solutions here is to try to integrate with the global economy, not through agreements with other countries but at the micro-level – with certain businesses or within certain sectors. You have definitely heard about the development of value chains. In this sphere I see opportunities for diversification and sustainable development of the processing sector, agriculture and services. It is very important to use the opportunities offered by regional projects such as, for example, the Silk Road Economic Belt. It envisions not only infrastructure development, but also an inflow of investments, the establishment of joint enterprises, and the creation of such value chains. I think that it is very important that Kazakhstan and Russia make use not only of these regional projects, but also the opportunities offered by free trade agreements the EAEU will enter into with South Korea and Israel. And it is very important that these should be not simply agreements about the opening of markets, but arrangements that at early stages certain manufacturers will share experience or investment projects and consider possibilities for creating joint chains.
However, to fulfil all this there should form a normal institutional environment, which will ensure equality and predictability for all investors, at least in Kazakhstan. Yet, the country has problems with this. The situation is changing but the measures taken are merely cosmetic. In your opinion, where were mistakes made and how can they be remedied?
You are right about the importance of the investment component. I believe that the growth in investments is very important to all our countries, given their geography and the critical importance of infrastructure development. Here, it is surely important that the countries use their own resources and involve their own investors. However, they also must not neglect foreign investors. In the past year we saw a significant inflow of investors to the EAEU countries; the growth in Russia exceeded 60%. Kazakhstan also has significant potential here. What should the countries orient to? The key things for investors were always stability and predictability. The system should be definitely changed towards more openness, however with the understanding that excessive transformations, excessive changes of the rules of the game can also negatively affect the investment climate. In principle, I believe that the situation in the country has been changing for good in recent years, in part due to internal economic policies. We’ve witnessed a rather successful use of budget funds to prevent recession. And I believe that maintaining a stable macroeconomic background is also a part of improvements in the investment climate. The reforms relating to economic regulation improvements under the 100 Steps Programme and measures to improve the country’s investment attractiveness as part of the EAEU will also play a certain part here. If we improve trade turnover between the EAEU countries, including in terms of investment flows, this will make our region more attractive. One always wants something more, but I would say once again that what is needed here is a certain balance of openness, stability and predictability. In my opinion, Kazakhstan manages to maintain this balance, although it still has capability to speed up economic reforms.
You’ve already said that one of the main problems in global economy is inequality. And its degree in Kazakhstan witnesses, in my opinion, to serious drawbacks in the institutional environment. How can this be remedied?
As for inequality, the situation has many different patterns, even within the EAEU. We have Russia where the level of inequality has been growing steadily over the recent ten to fifteen years. By now it has almost reach the U.S. indicator. Here we have serious structural problems we’ve talked about before. We need to look for different measures to eliminate them. I believe that tax instruments are worth attention in this case. I am personally for introducing progressive income taxation. I also need to say that some Eastern and Central European countries plan to set aside flat taxes. Slovakia and the Czech Republic have already done this. And it seems that Slovakia is performing well. As for Kazakhstan and Belarus, the World Bank suggests these countries have a lower level of income inequality within the region. This does not mean that it is not possible or not necessary to improve opportunities for people. The previous experience should be used as a basis to develop economy in the future. I believe that a common target in creating both political and economic equal opportunities will help to develop human capital. This is about education and health which must be accessible for the widest possible range of people. The entire world is working on this now because the problem of inequality has become acute in many countries and even to a greater degree in developed ones. To some extent, the events we see in both Europe and the U.S. reflect the problem of inequality.