On the Harm of Cheap Money and State Programs

The easiest recipe, and one that many governments rely on, is to flood the economy with cheap money in the belief that it will help the economy develop. Unfortunately, cheap money will not change the structure of the economy in any fundamental way. Moreover, money priced below the market rate does not build a sustainable economy. On the contrary, any cheap money redistributes resources from the poor to the rich through the mechanism of accelerated inflation. This means that under such an approach, certain narrow groups of the population become beneficiaries, while others suffer at their expense. But this is hard to see in the short term, because, unfortunately, we measure everything not by income per person across groups, but by absolute figures, without establishing cause-and-effect relationships. For example, we take pride in the amount of housing commissioned on the market. We take pride in the number of cars assembled at our plants. But we rarely assess how affordable these goods are for the population. Because of higher prices and various recycling fees and duties, they have become less affordable for part of the population, have fueled inflation by putting pressure on the tenge exchange rate, and have no multiplier effect for the country's economy.

The same can be said of the various programs. For example, we provide cheap money, but we do not know how effective that money is, or how this or that tenge has affected the economy. I have always been surprised by the argument that a particular rate is unaffordable for business. Here it is important to understand that the sustainability of a business is determined by its return on capital. If a business earns less than the cost of money, the entrepreneur will put his money into risk-free instruments, and there is no point in running a business that does not yield more than the risk-free rate. Judging by the state programs, we are encouraging low-profitability businesses that cannot move us forward in terms of labor productivity and technological sophistication. Of course, there may be programs aimed at food security (and food security does not necessarily mean production). All this means that we are encouraging unsustainable growth and unproductive, inefficient enterprises that simply would not survive in an ordinary competitive market. What we need is to create conditions specifically for enterprises with high value added, and a market rate is precisely what makes that possible.

Any imbalances that build up in the country will lead to unpleasant consequences down the road. For example, we hold down tariffs, the price of fuels and lubricants, and so on, trying to support certain segments of the population, but this leads to even greater price increases in the future, because such sectors simply stop developing. Take any of our oil refineries: in terms of efficiency it lags far behind any Russian or European one, where the depth of refining has long been above 90%.

Over 30 years, a great many imbalances have accumulated. We need a dedicated program to reduce these distortions and move to market mechanisms, which is not easy under current conditions. We have to take each area, go through it and clear out the inefficiency; otherwise we will not climb out of this hole for another 30 years.