Does Tajikistan’s Economy Need Automatic Stabilizers?

Landlocked, post-Soviet Tajikistan’s economic prospects have been looking up. The Asian Development Bank estimates that the Tajik economy will grow by 7.5% in 2012 (the World Bank offers a higher forecast of 7.9%), with slower (but no less impressive) growth of 6.5% and 6% in 2013 and 2014 respectively. Despite this, Tajikistan’s economy remains minuscule – according to the World Bank, its total GDP was smaller than Afghanistan’s in 2010 (around $6 billion : $15 billion), and it is heavily dependent on remittances which account for almost half of the economy (ADB). Tajikistan’s position as a pivot in the Central Asian narcotics trade network also qualifies any apparent significant progress as belated efforts to root out the well-entrenched narcotics underworld proceed sluggishly and amid formidable obstacles (institutionalized corruption and trade-infiltrated clan networks to name a few). According to UNODC, between 80-85% of opium flows in Central Asia pass through Tajikistan annually, fueling official corruption, rent-seeking and distorting the regular economic dynamics in this nascent developing country.

As Tajikistan leaves the divisive legacy of a 5-year civil war behind, economic development and good governance have begun to color Tajik social discourse. Tajikistan has yet to make a significant generational transition from the generation that experienced the post-1991 civil wars to a younger generation with no collective memory of armed conflict (in fact, according to the NGO Population Reference Bureau, the rate of Tajik demographic natural increase between 1998, a year after the civil wars’s end, and 2008 fell to 3:2), but the relative peace of the last decade has shifted intra-generational demands from security to better employment opportunities, infrastructure and service delivery. Poverty remains a major concern: although the poverty rate dipped from 72% in 2003 to 47% in 2009, structural deficiencies, notably poor job creation and a crumbling Soviet-era infrastructure, are stymieing sustainable growth and forcing growing numbers of Tajiks to move to neighboring countries in search of economic opportunities. Admittedly, the 21-year old government of President Emomali Rakhmon has forged durable working relationships with the World Bank and IMF towards achieving macroeconomic stabilization and structural reform and it brought Tajikistan into the WTO in 2013. Nonetheless, extricating Tajikistan from its Soviet-era developmental milieu will require consistent, more invigorated and deeper reforms.

The contemporary features of Tajikistan’s socio-economy promote a pro-cyclical macroeconomic trajectory or patterns of government spending and taxes that increase business cyclical fluctuations, real macroeconomic instability and growth volatility. Although many of the sources of this procyclicality (such as a high dependence on foreign remittances, the centrality of narcotics-related income and a high exposure to changes in Russian labor market conditions and oil prices) will take a long time to be “made safe”, the Tajik government can contemporaneously build automatic stabilizers into the economy which would smoothen the business cycle and offset potentially harmful procyclicality. Automatic stabilizers would also leave less policy discretion to officials who, for a variety of reasons (corruption, lack of expertise, bureaucratic constraints, contradictory considerations/competing interests) would not be able to offer an effective diagnosis of or remedy to emerging problems. Although stabilizers are not end solutions to structural economic  deficiencies, they can precede a more complete reform program, and complement as well as fine-tune such programs as they come into existence.

But what are automatic stabilizers? They are essentially built-in policies that automatically and immediately change certain government revenue and expenditure items -namely income tax, welfare payments, unemployment insurance and other transfer payments- in order to smoothen out or reduce the intensity of business cycles. Unlike discretionary government fiscal policy, automatic stabilizers work independently of government action and act as an automatic “self-correcting fiscal response” to shifts in economic indicators – the idea is that they would counteract malignant movements in the economy free of the implementation lags that affect discretionary fiscal policy. Moreover, unlike discretionary policy, automatic stabilizers are aimed at intervening in specific areas of the macroeconomy, and they generally therefore do not disrupt other fiscal policy and stabilization goals.

Are automatic stabilizers appropriate for Tajikistan?

Because of their intended countercyclical effect, automatic stabilizers may be appropriate for economies such as Tajikistan’s which are susceptible to asymmetric business cycle patterns. Business cycle asymmetries may increase Tajik economic volatility:

  • A high dependence on remittances may procyclically induce volatility. Remittances accounted for $2.5 billion or 50% of Tajik GDP in 2008. Jernish (2013) suggests that remittances may induce volatility if the sector(s) in the host economy in which the home country’s nationals are employed is (/are) vulnerable to shocks. Observing that the majority of Tajik migrants are employed in Russia in the construction sector, Jernish notes that “the construction sector is more sensitive than the services sector to changes in economic conditions, so the extent of remittance fluctuations persistence is greater in Tajikistan”. Moreover, a disproportionately high reliance on Russia as a migration destination exposes the Tajik economy to shocks in the Russian economy. A slash in Russian economic growth from a +7% average to just over 2% in 2008 (followed by a 7.9% contraction in 2009) precipitated a depreciation in the ruble. Coupled with growing Russian unemployment, this resulted in a 30% decline in Russian remittance flows to Tajikistan in 2009. The follow-on effects would have been a depreciation in Tajik household income, reduced tax revenue and a decline in public services delivery by the state.
  • Chami, Barajas, Cosimano et al (2008) on the other hand find that remittances may have a countercyclical, positive effect on economic development, and they believe that this is due to the stable (Chami et al argue that remittances are the least volatile among four categories of balance of payments inflows: remittances, official aid, FDI, non-FDI private capital inflows and export revenue), direct (they are received by their intended recipients without any intermediation) and compensatory (in that they tend to increase when the migrant’s home country undergoes economic stress) character of remittance income. There are two caveats to this assessment though, both to which the Tajik experience can relate. First is the argument by Acemoglu, Jonhson, Robinson and Thaicharoen (2002) that economic volatility is caused by weak institutions (“political institutions that do not constrain politicians and political elites, ineffective enforcement of property rights for investors, widespread corruption, and a high degree of political instability”) and that rather than independently shaping economic outcomes as is commonly believed, poor macroeconomic policies are in fact symptoms of underlying institutional weaknesses. In this regard, Tajikistan’s institutional quality
  • Tajikistan is heavily dependent on exports of aluminium, electricity and cotton (all three items collectively account for over 70% of Tajik exports). According to Nakaya (2008), the state has a monopoly over the production of aluminium (through the state steelmaking concern, Tajikistan Aluminium Company or TadAZ) and electricity (through the state energy company Barqi Tojik), while cotton production is dominated by a small number of politically-connected individuals. On the one hand, consolidation of economic activity in the state crowds out private sector participation and encourages procyclical government and economic policies. On the other hand, Tajikistan’s entry into the WTO has severely limited its use of traditional trade restructuring tools such as tariffs and import substitution, leaving the exchange rate as the only means of balance of payments management; this is seen as exposing the somoni to balance of payments pressures resulting from possible external price shocks (such as a decline in cotton or aluminium prices). Fortuitously for Tajikistan, a combination of sensible policy choices (the IMF has commended Dushanbe’s commitment to a flexible and responsive exchange rate during the global recession) and structural factors (the concentration of Tajik exports in cotton and aluminium limits the impact of exchange rate fluctuations on export competitiveness) has largely cushioned the economy from the more pernicious effects of the global recession.
  • narcotics

In addition, certain structural characteristics amplify and deepen business cycle asymmetries:

  • Significant implementation lags . Again, Jernish states that the Tajik government’s fiscal policy is inclined to lag business cycle movements by 3 months (within Central Asia, better than only Kyrgyzstan, where the lag is 6 months). Such a lag increases the potential for misdiagnoses , leading to policy mismatches.
  • Inadequate revenue administration policies. Tajikistan has introduced three tax codes since independence (in 1991, 1999 and 2004), with the number of tax categories levied increasing with each new code (15 in 1991, 17 in 1999 and 21 in 2004). The lack of consolidation however has   too many tax categories, not to pay. Tax yields shrank to a miserable 0.89% of GDP between 1999 and 2004, before dipping to 0.85% in 2007. In 2012, the Tajik parliament introduced a leaner tax code that halved the number of taxes from 21 to 10, either through the provision of exemptions or through the consolidation of categories. The Tajik government expressed hopes that, despite an “initial” annual shortfall of $170 million, the new tax code would broaden the tax base and increase the number of taxpayers.
  • Poverty amplifies and exacerbates   . Despite gains   , Tajikistan remains the poorest

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 Source: World Bank (2005)

  • The lack of revenue-generating natural resources, particularly hydrocarbons, which can contribute toward a “rainy day” or stabilization fund. Konimansur in Tajikistan contains the world’s second largest silver deposits (annual production is estimated at some 50 tons), while gold deposits in Djilali and Taror and mercury and antimony deposits in the Jalalabad province add to the country’s rich lead, zinc, copper, bismuth, tungsten, strontium, iron and tin content. Yet

Laying out a system of automatic stabilizers

Effective automatic stabilizers depend on several factors. The first is a tax system that can respond to the shifting reality:

The automatic stabilizers depend on the size of government and the cyclical responsiveness of the tax system—a rule of thumb is that the size of the stabilizers approximately equals the share of government in the economy times the output gap. In turn, the size of government and the design of the tax system reflect societal, philosophical, and political views on the role of the state, equity, and social safety nets. (IMF, 2009)

In addition, the responsiveness of automatic stabilizers will also depend on the breadth and depth of the welfare   – transfer payments such as unemployment insurance, pension funds and    . To have the desired countercyclical effect, automatic adjustments to government revenue and expenditure must    all strata of society , and must not be arbitrary or    in ways that induce procyclicality.

Tajikistan’s   is lacking in this respect: its aggregate expenditure on social protection (defined by the ADB as programs designed to “enable vulnerable groups -poor and nonpoor- to prevent, reduce or cope with risks”) ranked among the lowest in the entire Asian region in 2009, at just 1.2% of GDP. As an example, the World Bank reports that between 1994-2002 Tajikistan spent an average of 1% of GDP on healthcare – roughly on par with Kyrgyzstan but below Turkmenistan (3.1%) and Uzbekistan (2.7%). Breadth     Starr (2011) reveals that Tajikistan’s transfer payments and subsidies are unevenly   geography, with Sughd province in the Ferghana Valley being largely overlooked  . Given that Sughd has highest poverty

As with other developing countries however, Tajikistan’s introduction of a responsive automatic stabilizers system could be impaired by lack of capacity   and other financing constraints. Lack of access to international finance markets means that Tajikistan relies on aid and IMF

The Tajik government’s 2005-2015 National Development Strategy

http://siteresources.worldbank.org/INTECA/Resources/complete-eca-poverty.pdf

http://www.irex.org/sites/default/files/Nakaya.pdf

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