A Post on Goal-Setting
Translated from Russian with the help of AI. Original: Russian version
The target of doubling GDP to $450 billion depends heavily on the exchange rate and US inflation; it would be better to target growth in real incomes and labor productivity.
For anything to develop properly, and for it to be clear what to do and how, clear target indicators must be defined.
The Government currently has one clear benchmark: doubling GDP from $225 billion to $450 billion.
This is a nominal figure, and it depends not only on Kazakhstan but also on the parameters of the US economy. Nominal economic growth depends on the deflator (inflation) and on real growth. In our case, that makes the target dependent on US inflation, the tenge-to-dollar exchange rate and real growth. You will agree that this muddies the picture, since the indicator does not depend entirely on the Government's efforts.
Let us analyze 2023. GDP in 2022 was $225 billion and in 2023 it was $261 billion, which is growth of 16% in US dollar terms. Strip out 5.1% of real growth, and the dollar deflator comes to 10.9%. That is absurd, since it should be roughly in line with inflation in the US. It points to only one conclusion: the economy has accumulated an imbalance in the tenge exchange rate against the dollar, and in the short term, because of the exchange rate, nominal growth may turn negative, as it did in 2015, for example.
Let us calculate what nominal growth in dollars would be needed from 2024 to 2029 to go from GDP of $261 billion to $450 billion in nominal terms.
To reach $450 billion in nominal terms, our GDP must grow by 9.5% a year in nominal dollar terms. Given the exchange rate imbalance, and given that the tenge will be under pressure in the coming years, achieving nominal GDP growth in dollars of 9.5% is extremely difficult. The alternative is to keep the tenge strong until 2030, but then the economy would suffer, because our labor productivity growth cannot come close to matching that of our neighbors, and this does not allow us to hold a strong tenge without damaging the economy.
It would be more sensible to set the target in tenge rather than in dollars, because toward the end of 2029 we will be tampering heavily with the exchange rate in an attempt to get anywhere near the coveted $450 billion.
Since the tenge-to-dollar rate also affects our target, I calculated what the exchange rate would have to be at the end of 2029, assuming annual growth of 6% and inflation of 8% this year, 6% next year and 5% thereafter. The result is that the rate would have to be 513 tenge to the dollar in 2029, and then we reach $450 billion.
To defend a rate of 513 tenge with real growth of 6% a year, we need to raise labor productivity in the country, and all programs for economic growth must be aimed at increasing labor productivity.
Labor productivity growth can of course be achieved through various intensification programs, but productivity certainly grows poorly through production localization, because that is not productive growth, and the same goes for measures based on interest rate subsidies and government spending. Probably a greater effect on labor productivity would come from an improved investment climate, infrastructure construction, the development of large cities, economic liberalization, the state's withdrawal from the economy, greater investment in education, the creation of working institutions of government and laws, simpler intergovernmental fiscal relations, and countercyclical fiscal and monetary policy.
But if we proceed from proper goal-setting, then in my view the most accurate indicator would be the growth in real median household income. This indicator depends not only on GDP growth but also on the structure of the economy, the proper distribution of taxes, and so on.