KIC Report

Fiscal Challenges in Kyrgyz Republic

After reading Alisher Hamidov's piece on Eurasianet.org (http://www.eurasianet.org/node/63760), I felt compelled to write this short rebuttal. Journalists, political scientists, and sociologists generally express their sharply defined feelings about economic problems in good prose. I often prefer their writing style over awkward juxtaposition of dry and jargon-rich statements by economists. Unfortunately, often the juicy articles by non-economists about an economic problem tends to have the same effect on me as the Victoria Secret's "Very Sexy" push-up bra with gel curves has on a boy who reaches the second base with a girl on a prom night.

Hamidov's article can be summarized as follows: (1) Kyrgyz government is on a spending spree; (2) the current fiscal deficit is a sure way to economic crisis; (3) much needed foreign aid may not come if the government fails to be transparent. Where are the gel curves in all of this?

Hamidov provides no reason why this year's fiscal deficit is any different than fiscal crises that Kyrgyz Republic faced back in 1998, 1999, and 2000, when the external debt averaged at about 130% of the GDP and the debt service payments averaged at about 23% of the GDP. If we haven't fallen to oblivion then, why should we expect this time to be any different?

Hamidov implies that increasing wages to teachers and doctors is part of the government's lavish spending spree. According to Hamidov, raising the wages of school teachers from 100 USD to 300 USD ( 300% increase) in the environment where the monthly cost of living for a family of three far exceeds 300 USD is fiscally irresponsible. When one considers rising prices for staple goods, it is understandable why families who are barely making ends meet may disagree with Hamidov's definition of lavish spending. But that is not where we see the gel curves. A responsible commentator would look at the budget and assess what proportion of this deficit spending is attributable to wage increases for teachers and doctors. My guess is this expenditure item makes up less than 5% of the 460 million USD deficit. A better question is to ask, what is new in this budget relative to previous budgets. Then, perhaps, we can talk about 'haram' pork.

The gel curves are most visible in Hamidov's implications that the disbursement of foreign aid--manna from Washington, D.C.-- is being delayed because of 'transparency' and 'poor management of public funds' concerns. Need I remind young Mr. Hamidov that the same organizations have more than doubled grants and subsidized loans in 1999 and 2000 to a corrupt regime of former President Akaev? The same organizations have upped their conditional and unconditional transfers to Bakiev's regime in 2005 and 2006. One needs not a Ph.D. in 'gubnment' studies to understand that delay in release of funds has very little to do with how developing nations manage their public funds.

Mr. Hamidov is right that fiscal discipline, transparency, and responsible management of public funds are important. The problem with Hamidov's article is that it sounds more like a poor adaptation of good op-eds about the US budgetary challenges to a country that has a completely different set of constraints: state the obvious, add few comments by some officials, throw in some meaningless numbers, use some popular words, and you have yourself an American Kyrgyz fiscal apple pie story.

Here is my two cents on fiscal problems in Kyrgyz Republic. The current government is no better or worse than any previous Kyrgyz government in managing public funds. Arguing that the fiscal problems are exacerbated by this government's incompetence is no different from arguing that monkeys throw bananas at zoo visitors because they are not intelligent. Even my grandma knew that governments are incompetent in managing public funds, and she had only two years of schooling. The real problem is this: if the government officials know that in previous cases of budgetary insolvency the financial aid was readily available, what incentives do they have to spend in fiscally responsible manner?

Bride Kidnapping (Ala Kachuu): A serious problem?

Forcing someone to do something against her will is not only morally reprehensible but more importantly it is illegal. Lately, the news media has been flooded with stories of bride kidnapping in Kyrgyz Republic. Moreover, these stories report that bride kidnapping is so prevalent that some even cite specific numbers based on 'scientific' research. Namely, all of these reports cite studies conducted by Professor Kleinbach (mostly coauthored with fellow sociologists or students), which suggest that over 50% of all marriages in Kyrgyz Republic are non-consensual. For someone who doesn't understand statistics, or for that matter scientific methodology, these numbers either make sense or do not raise any suspicion. For others who make a living by using scientific methodology, these numbers are meaningless. The research conclusions, in particular, are non sequitur.

Professor Kleibach, I am sure, is a great scholar in his field. In fact, his analysis of the causes and consequences of bride kidnapping are probably exemplary. That is not what I am concerned about. I have two problems with his research. One, he either intentionally or unintentionally (as a result of his poor scientific training) makes false inferences about the frequency of bride kidnapping to Kyrgyz population. Second, his claim that educational material he introduced led to a reduction in the prevalence of bride kidnapping is careless and deserves proper criticism.

Where did Kleinbach get his numbers? He got them by going out to certain villages (in one of his most cited papers, it was only one village), which he chose based on previously established relationships (where people have had problems and were willing to talk about bride kidnapping), and conducting surveys of households who were willing to tell their stories. Based on these survey responses, he calculated the frequency of non-consensual marriages. Those are the numbers that we consequently see in the newspapers and other media. What is the problem? The problem is that numbers provided by Kleinbach et al. are true for the sample that he investigated, but they are NOT true for the entire Kyrgyz population. It is a classical example of how one can lie with statistics. We will get to the reasons why Kleinbach may want to lie.

Suppose, you are interested in finding out how many people want to keep the current flag of Kyrgyz Republic. Let's assume Mr. X hates the current flag. Suppose, residents in 90% of villages and towns do not want to change the flag. Only in some towns and villages (town A, B, and C) people wish to change the flag. If Mr. X goes out and surveys people in towns A, B, and C, he will get a result that would support his agenda. If he finds that in the sample (responses from towns A, B, and C) about 80% of people want to change the flag, he can announce to the media that the overwhelming majority wants the current flag gone. Similarly, Kleinbach's claim that incidence of bride kidnapping is high in Kyrgyz Republic, based on his surveys, is false.

When I made a fuss about the reported frequency of bride kidnapping in KG, I've heard people say, "If you are so smart, why don't you tell us your number?" I don't have a number, because to generate that 'number' one needs a carefully designed and properly conducted survey, which requires resources that I do not have. Without getting too technical, one needs to understand that statistics (averages, percentiles, variances, etc..) derived from a sample are meaningful if the sample preserves population characteristics. The best and simplest case of sample selection is a method called 'simple random selection'. This method requires that ever person in Kyrgyz Republic has an equal chance of being selected to the sample. In Kleinbach's studies, none of his surveys pass the minimum requirements of a proper sample selection for population inference.

So, what do we know about bride-kidnapping in KG? We know it is bad for those who were kidnapped. But we do not know how often this happens in Kyrgyz Republic. Kleinbach believes otherwise. As if his initial false claims were not enough, he went ahead and conducted similar surveys in subsequent years. Then, he calculated the incidence of bride-kidnapping in those samples. Using these numbers, he made an outrageous claim that bride kidnapping is on the decline, and his educational efforts have something to do with that. This is not only unscientific, but it is simply insulting to anyone who understands research methodology.

Why would he lie about these numbers? One reason is he lacks statistical training. Another reason is money and fame. This guy gets funded year after year. Moreover, the size of his funds is increasing as he makes more outrageous claims. You may ask, "What's your problem?" My problem is that researchers like Kleinbach may re-divert already tight resources in Kyrgyz Republic from problems that we know are afflicting hundreds of thousands of children (orphanages, immunization, education, prevention of child abuse, and many more) to a problem that may not be affecting a large number of people, but have made policy makers to believe that it does. Every time Kleinbach gets a funding boost from an external organizations that are willing to help Kyrgyz Republic with pressing social problems, another problem of no-lesser importance (or of greater importance) gets underfunded. I am not against studying the problem of bride kindapping, but I am against studies based on False Science.

P.S. Here are the links to Kleinbach studies:
http://faculty.philau.edu/kleinbachr/2004_study.htm
http://faculty.philau.edu/kleinbachr/third_paper.htm

Corruption and its impact on Kyrgyzstan

It is not a secret that both regime changes that took place in Kyrgyzstan were set off by rampant corruption in every possible aspect of public sector. Unfortunately, corruption is ingrained so deep into the fabric of our society that it is culturally very much acceptable; and even it can be an object of envy if one gets a public position that allows him/her to exercise corrupt behavior and make personal gains abusing the public position bestowed by the public. At the same time most people do see that this is evil that harms each and every one of us either by depriving equal opportunities or by robbing us openly and without impunity at every instance you deal with the bureaucrat. At the same time we are more inclined to embrace it rather than reject it, mainly because we believe that we are all corrupt and there is no way we can change it.

Not surprisingly, corruption is not bad for everyone. We heard about hundreds of millions of dollars-worth wealth being accumulated by the ruling groups and sent out to other countries. Some people may be being euphoric about kicking those people out and replacing them with others allegedly less corrupt and possessing best intentions for the country. Nevertheless, we incurred huge economic losses, as we never can repatriate that largess gone overseas for the benefit of those who practiced corruption in large scale in the name of god and other nice things.

Interestingly, even if you are not a member of the ruling elite that can benefit from corruption without any doubt, you still may find that some corruption is useful for you. At least it may feel like that. For example, many people are happy to pay bribes and get their driver’s licenses, or commit even worse crime and get away by paying off to the judges. Firms and businesses are happy to pay bribes and ignore safety and environment protection norms. The most important thing is not paying taxes and social security contribution, as one can easily bribe the tax inspector, and save significant amount of money. From this perspective it seems like a good deal to have corrupt bureaucrats around.

However, we know by not paying taxes we reduce government revenues. That means less money to build and maintain infrastructure that really increases private productivity. This means also less money spent by the government to educate people and take care of their health. It is well known that educated and healthy workers are not accidentally turn to be more productive. So the firm or business that believes that corruption is creating gains for them by letting them go with tax evasion and noncompliance to regulations, in fact, are fooling themselves. As government (at least the functional one) not only takes but also gives back.

This effect of corruption is so visible in Kyrgyzstan: you can see many expensive luxury cars and mansions most likely obtained by cheating the government; however, you will be appalled to see the degree of degradation of roads and general infrastructure. Do you think the business is thriving in Kyrgyzstan because of these conditions? No I do not think so. They are losing a lot because of the poor quality of infrastructure and labor force.

Yet, I think, the worst effect of corruption comes through our beliefs that command the way we behave. People distrust bureaucrats as they believe all of them are corrupt; hence, the concept of the public interest does not exist in Kyrgyzstan. Most people do not believe that they can entrust someone to further their common interests, as the experience shows every time you do that you end up being robbed and left behind with the smouldering Government House. That is sad, really.

This distrust then feeds into enforcement of different sorts of informal groupings and clans, as only where one seems like finds some sort of support in hard times. So when one does not believe that we as a society have common interests, then all sorts of opportunism starts blooming and the tough people moves to the vanguard of the events and gain at the expense of weaklings of the society. This is a destructive path. This way we lose our humanity, thus we lose ourselves eventually.

The only way out of this situation, seems to me, is start talking about these issues and trying to find the ways how to re-build the state and replenish trust of the people on which the state draws its powers. The future of our country and our identity is at stake.

Is There a Threat of Aggressive Nationalism in Kyrgyz Republic?

The Open Society report warns of a rising aggressive nationalism, and the head of legal clinic Adilet claims that the "virus of nationalism...has spread in North Kyrgyzstan." This post attempts to detangle the logical knots behind these claims.

A very basic logical statement has the following form: Assertions (A) + Conditions (B)--> Conclusions (C). For example, Germs of type Z lead to a variety of diseases (A) + Washing hands with soap after using a toilet kills Z germs (B) --> Washing hands after using a toilet is a good way to avoid diseases (C). We can apply the same structure to the argument of a rising aggressive nationalism in Kyrgyz Republic. The conclusion is that an aggressive nationalism is on the rise. What are (A) and (B) that lead to the conclusion?

The Open Society report and Cholpon Dzhakupova's statements imply that the conditional assumptions (B) are (i) nationalistic speeches by Ata Jurt leadership, (ii) disproportionate arrests and prosecutions of Uzbeks in the southern regions of the country, and (iii) harassment of civil activists who are expressing concerns over human rights violations. Now, we can establish the initial assertion (A) that will unambiguously lead to the stated conclusion:

Any activity- independent of whether it is localized and driven by a small and unrepresentative group, or nationally representative and driven by an overwhelming nation-wide support-that is repressive to Uzbeks in its nature, directly or indirectly, is an indicator of a nationwide aggressive nationalism.

The argument in the form I laid out is internally consistent, i.e. the conclusion follows from the premises. Arguments are evaluated not only on the basis of internal consistency but also on the validity of the assumptions. If we establish that the assertion (A) is false, then the conclusion will be invalid. But what reasons are there to suspect that the assertion (A) is false? This assumption is a prime example of what is called a Hasty Generalization Fallacy. It is a logical fallacy where one makes a generalization to a larger set from a smaller and unrepresentative subset. Activities of a few do not imply that a broader population will engage in similar activities.

The most frequent error in these so called analytical articles or briefs is confusing sentiment and actions. The sentiment, feelings, or any other term that works for you, can be extremely aggressive but does not necessarily turn into an aggressive action. One may speculate that the overwhelming number of Europeans dislike Jews. Suppose that the speculation is true (Of course, this can never be true. Europeans are too advanced to hold such a low-level primitive sentiments.). Does that sentiment necessarily imply that the Europeans will act upon them? Under Nazi Germany, the overwhelming nationwide sentiment was directed by the state's machinery into inhumane actions. In France, Britain, and the US, where the sentiment toward Jews was no less aggressive, the actions of Nazi SS officers and some common folk, were met with disgust and horror. If politicians and their rhetoric are precursors to such an aggressive behavior, then the recent anti-Muslim hearings led by a Republican Congressman Peter King should indicate that the US is facing a threat of aggressive nationalism (aggressive anti-Islamism?). Feelings of a select few do not represent the feelings of the US population. Furthermore, even if these feelings were commonly shared, it does not mean that the violent or unconstitutional actions of a few will translate into a mass action.

Kyrgyz Republic is facing many challenges. The risk of another turmoil is real in terms of non-negligible probabilities of such an event. A nationwide aggressive nationalism would be disastrous, but the bottom line is that the likelihood of it is (extremely) over-inflated.

Bleeding Heart Fools

On March 11, the Oshika Peninsula of Japan was hit by a magnitude 8.9 earthquake, the largest recorded earthquake the world had ever seen, which subsequently triggered devastating tsunamis. Many lives were lost, buildings destroyed, and as I write this piece it is still unclear whether the explosion at Fukushima Daiichi 1 Reactor poses a serious danger or not. In light of this event, over 60 countries are currently involved in relief efforts. Our poor but generous government announced that it also wants to help the people of Japan.


Young progressive citizens whom I admire greatly organized a campaign to bring a sizable group to the gates of the Embassy of Japan in Kyrgyz Republic. They laid flowers, signed a letter of condolence, and some even held lit candles. One could even watch the live feed of the event. This was a genuine act of compassion where Kyrgyz people expressed their concerns about the affected people of Japan. But when the government announced that it is considering sending relief effort workers over to Japan, I was deeply troubled. The amount of money required to send our Kyrgyz relief effort workers, to feed them, to house them, and to safely returns them home is greater than the dollar equivalent of their help to the people of Japan. If we do want to help the Japanese victims, the sensible thing is to send financial support to those relief effort workers who are more productive on the ground. That would make sense if we had the money. The Japanese government is one of the biggest contributors of financial and technical aid to Kyrgyz Republic. We are net debtor for Japan. To use the borrowed funds to help the Japanese is no different than borrowing 10,000 dollars from your relative in Russia who is in distress and spending 8,000 of it on travel expenses and providing them 'help' worth 2,000 dollars. It just does not make any sense. More sensible alternative is to organize a private fund, privately charter a plane, and send private volunteers over to Japan. To ask for public funds (borrowed) to achieve a private (and very noble) goal is no different than saying "I have strong feelings about this and, even if you don't share my sentiment, I believe I have the right to take your money to get this done."

I admit that I share these young progressives' sentiment to do something, now. This call for public action is likely to have a net positive social gain if one assumes that most of the public funds will be channeled into unproductive (most likely to the black hole) ends. Unfortunately, this assumption is not too far from reality. That makes the issue doubly tragic.

Remittances

I came across an interesting article by a young Kyrgyz scholar, Aziz Atamanov, over at Maastricht Graduate School of Governance. The article is entitled "Determinants of Remittances in Central Asia: Evidence Based on the Household Budget Survey in the Kyrgyz Republic". You can download it here.

Aziz and his co-author investigate the characteristics of sending and receiving parties. Their study compares the motives of the seasonal workers with the permanent migrants. The results are not groundbreaking or something that would be re-tweeted. Nonetheless, I was excited to learn that there are young scholars engaged in empirical investigation of Kyrgyz economy. After reading Aziz's article, a particular thought came to mind, which I tried to suppress all day long. Now that I have some 'free time', I would like to share it with you all. And you decide whether it was worth reading.

The latest reports from the National Bank of Kyrgyz Republic put the remittances for 2010 at about 1.2 billion US dollars. That's a little over 20% of Kyrgyz Republic's official GDP, not a small amount by any count. These remittances primarily help the poor families in the southern provinces of Kyrgyz Republic, where economic activity is the least active. Furthermore, remittances increase monetary base, providing much needed liquidity to remote (poor) parts of the country. According to the estimates from foreigners, the average annual amount that workers send is approximately 1,000 US dollars. Now, my math (I have to admit that I subscribe to George Gamow's principle that 'arithmetic precision is not a mathematician's concern, it is a task for bank accountants') suggests that 500,000 workers in Russia sending 1,000 dollars don't add up to 1.2 billion, but about 2,000 dollars seem to make more sense. The question is how sensitive are these amounts to the economic changes in Russia? If they are sensitive, then at least 20% of consumption and investment expenditures in Kyrgyz Republic arising from these remittances are at stake.

Aziz's work and other reports suggest that the most of these laborers earn their wages in Construction sector. I used the official Russian Statistical Data to see how the construction sector activities relate to the remittances to Kyrgyz Republic. Here is the graph I made (Construction Index has a base value 100 in year 2000):

For many, this picture shows that Russian construction sector and remittances are highly correlated. For others, this picture suggests that 1/5 of expenditures in Kyrgyz republic are extremely sensitive to an extremely volatile sector of the Russian economy. Much can be said about this, but ultimately it is a pretty scary picture. Let's hope oil prices stay high?

Efficient Methods Of Reducing Crime

My previous post may have left some wondering, "If spending more of public funds to catch criminals cannot reduce crime, what will?" To answer this question, we will have to understand why organized crime exists in Kyrgyz Republic, the relevant dimensions of this enterprise, and the organizational structure of the criminal enterprise.

The economic theory of crime suggests that organized crime arises when (1) government fails to provide basic protection and enforcement of law, (2) government exercises excessive bureaucracy, (3) government makes certain goods and services illegal. Generally, it is perceived that organized crime impoverishes the areas that it controls. A careful investigation of the causal link indicates that organized crime does not cause poverty but rather fills the vacuum that the state created by failing to protect citizens and enforce laws. In those conditions, organized crime acts as a de-facto  government by introducing set of rules, enforcing these rules, and collecting fees for their services. Sicilian mafia (for that matter Neapolitan and Calabrian organizations), which was glorified by Hollywood movies and Mario Puzo's Godfather books, had much less romantic upbringing than one may think. According to Professor Anderson, a prominent scholar in the economics of organized crime and mafias, before the Italian unification of 1870, inhabitants of the island of Sicily used private protection services. After the unification, the state's unwillingness or inability to fund centralized enforcement of law led to outsourcing the law enforcement and governance to the private entrepreneurs known as gabelloti. The subsequent mergers of gabelloti under a more efficient organizational structure became what we now refer to as mafia. Mafia or organized crime in Italy in those impoverished areas took on the role of the government, because government had failed to provide social assistance, protection of property rights, and enforcement of legal agreements. They had the local support and improved the living conditions of peasants.

Italy sounds like a distant and irrelevant comparison. A remote mountainous area known as upper Kodori in the border of Georgia and Abkhazia was populated primarily by an ethnic group called Svans. The recent Georgian and Russian/Abkhazian war left that area impoverished, deserted, and effectively worse than it had been before Saakashvilli's attempt to remove Kodori warlord Emzar Kvitsiani. During Shevarnadze's reign over Georgia, the state decided not to meddle in Kodori business as long as Kodori Svan sided with the Georgian government. Effectively, Kvitsiani was the boss of an organized crime group that had the overwhelming local support. According to some estimates about 1/3 of the "Vory V Zakone" in the early 1990s were from that Abkhazia/Georgian overlap regions. One of the reasons for such a high representation of these people in the criminal world has been the fact that Soviet government was unwilling to enforce state laws and prosecute criminals in that area. People in that region had very minimal protection, hence the rise of criminal organizations in that area was inevitable.

Another big reason for the rise of criminal organizations is changing the legal status of certain goods and services. For example, by making alcohol illegal, the US experienced one of the highest crime rates and the rapid growth of criminal organizations during the prohibition period. Professor Jeffrey Miron has the most convincing data and discussion on this matter. Here is the graph of Homicide Rates in the US and the Federal Expenditure to 'fight' the Crime:

 

The graph above shows that the unusual jump in homicide rates came about the same time when the Fed outlawed alcohol and again around 1980's Reagan's war on drugs. I will not elaborate on the mechanisms how these laws led to more crime, but if you are interested you can read Jeffrey Miron's books and articles. Soviet experience around the alcohol prohibition years 1985 to 1987 is another clear examples to this end. I remember as a child that some of our neighbors became active in this business. Brutal fights, knife stabbings, and incidence of alcohol poisoning became quite frequent in my neighborhood (yes, I lived in a poor neighborhood). When the state refuses to extend the law and justice, the private sector steps in to fill that gap. Unfortunately, the only credible way to enforce contracts under these circumstances is the use of brutal force.

So far I have addressed the causes and consequences of criminal enterprise in other parts of the world. What about Kyrgyz Republic? Well, first and foremost, citizens are concerned about the homicide rates. What does the homicide rate look for KG? Here is the graph that I constructed using UN data:

As you can see, the homicide rates are highly correlated with the economic uncertainty and political change. In 1990s, there was a sharp increase in the murder rate as the assets were being divvied up among various criminal groups. In 2005, there was another round of asset redistribution activities with deadly consequences. And of course, though it is not shown in the graph, the recent political turbulence led to massive death toll.

The data suggest that the homicide rate is counter-cyclical, when times are tough the murder rate is higher.

What lessons can we learn from it all? The most efficient way to reduce crime in Kyrgyz Republic is not hunting (scape goat) public enemies but making sure that


TRUST IN LAW ENFORCEMENT AGENCIES
1. Our law enforcement agencies carry out very basic duties such as following their code of conduct, arresting anyone who infringes upon private property, and punishing anyone who commits grave crimes to the full extent of the law. (Here I would advocate that we institute death penalty, but my feeling is that many will not support it. I will address this issue of death penalty in my next entry)
2. Releasing 80% of the law enforcement agents from their duty and start a new hiring process by an independent agency.
3. Reducing the number of militsia but increasing the salary for those who are selected for the job.
4. Creating clear Performance Indicators and rewarding officers for superior jobs.

LEGALIZATION OF PROSTITUTION and DRUGS
5. Legalizing prostitution in order to reduce criminal enterprise's revenue source, and most importantly to provide a better legal protection for young women and men in this sector.
6. Legalizing drugs by following Swedish model. In other words, legalize the sale of drugs but make buyers subject to criminal offense. It will reduce the drug related crimes, reduce drug impurity, bring the industry under public watch and away from criminal underground.

CREDIBLE PUNISHMENT
7. Publicizing the funds allocated to prison system and conditions in the prisons.
8. Address the issue of overcrowding in prisons that tends to further improve the criminal network and skills.
9. Publicly discuss various punishment terms, including the death penalty, for various crimes.

EDUCATION
10. Addressing the retention and improving quality of education for youth in elementary and secondary schools, since these are the ones who are easily recruited by criminal organizations.

Why War On Crime Is Not A Good Idea

Last week, Madam President announced the government's intent to start a war on crime, specifically organized crime. Just as milking a bull will not get you any milk, the government's effort to 'fight' the organized crime by spending more of public resources will not get any results either. And here are the reasons why.

First, the government's approach to fight crime primarily relies on hunting bad guys. For example, a well-known criminal by the name of Kolbaev Kamchy has become a new poster boy. Will catching Kolbaev reduce activities of the criminal enterprise? As you all know, it will do no such thing. Should we let criminals like him roam freely in the country? Of course, the answer is no. The real issue is will this policy that will require more of the very limited public funds get the promised results. The implicit assumption in the government's plan is if you catch a bad guy, there will be a reduction in criminal activities. Or, in technical terms the elasticity of supply of criminal activities with respect to its one particular input is extremely high. Evidence at home and abroad suggests that there is a high degree of substitution. Put it differently, for every Kamchy there are 100s of other talented criminals waiting to replace him.

Second, since corruption is deeply rooted in our country, there is a good reason to believe that some of the key law enforcement agents are in bed with the criminal organization bosses. Even if the policy is implemented with good intentions, the actual consequences are more likely to serve some criminals to eliminate their competition by using public funds.

Third, there is an extensive evidence suggesting that regional crime bosses have a strong local support. Going after crime bosses will further destabilize the fragile political and social equilibrium that we have finally achieved.

In short, this policy is bad because it does not address the underlying problem but rather attempts to cure a particular symptom. Furthermore, the treatment generates more harmful side effects.

Are Fears of Runaway Inflation Justified?

Ultimately, deep and unsustainable imbalance between the productive capabilities of the country and the government's expenditures will result in uncontrollable debasement of the currency. This is not the case in Kyrgyz Republic. What is different about 2010-2011 in contrast to 2009-2010? In terms of physical/human capital and unskilled labor, nothing has really changed. The real source of turbulence comes from the unstable institutional fabric of the country.

The following graph shows the historical debt/gdp, debt service/gdp, and inflation trends in Kyrgyz Republic.

Clearly, increase in the supply of money, backed by foreign borrowing, following the 1998 Russian financial crisis led to a higher rate of inflation, the first spike in the graph above. One of the largest banks went bankrupt, many more firms became insolvent, and the fact that most of the banking system's loan portfolios was made up of irrecoverable loans became public knowledge. The revenues declined as a result of deteriorating tax base, but the expenditure on social services and other government activities did not decrease much. Total foreign trade decreased, though disproportionately greater decline in imports (about 30% drop) than exports (i believe it was about 15% drop). Bottom line, 1999 was not a good year for Kyrgyz Republic. But the country survived, though it accumulated a good chunk of foreign debt.

What is the problem today? Following the second revolt, the economy experienced a slowdown: the trade volume decreased, investment in construction (a good indicator of the health of the economy) fell well below the last year's level, people are hoarding cash (velocity of money decreased and deposits in the banking system is showing a clear sign of slow down), the republican budget is bloated, the revenue numbers are highly questionable, and the rate of emigration is growing, especially from Osh and Chuy oblasts.
Have we seen these problems before in similar magnitudes? The answer is yes. Kyrgyz economy underwent even greater turbulent times and managed to rebound in a relatively short period.

One of the greatest source of annoyance for scholars in economic science is a systematic abuse of the term inflation. Inflation is a sustained growth of the general price level. The empirical investigation of this phenomenon suggests (Milton Friedman and Anna Schwartz's seminal work on monetary history provides the single most convincing evidence) that inflation as defined by economists is a result of the growth of money supply in excess of the amount that people wish to hold in cash and readily available deposits. A sudden rise in prices of some commodities increase the measure of the general price level, but they are never the source of sustained growth of the general prices! Their effect is transitory, and quite often the prices stabilize within a year. Higher prices for imported wheat and vegetable oil will undoubtedly increase the average price level, but these will not lead to uncontrollable hyperinflation. In 2008, prices for food items around the globe rose well over 50% and Kyrgyz Republic was not insulated from that effect either. For certain food items prices jumped over 50%. Did we have a sudden increase in starvation or extreme poverty then? Did we have mass protests? The government was too busy stealing, which worked out to be the lesser of two evils-- intervention that would lead to economy wide shortages and abstinence from price control on the part of the government but greater redistribution of wealth from hard working citizens to Bakiev and his gang. The economy rebounded, prices converged quickly to stable levels, and people did not have to experience shortages.

The lesson is quite simple. The government has never been the source of wealth creation, not during Roman times, not in modern US of A, and certainly not in Kyrgyz Republic. The government's relationship with its citizens is similar to the relationship between husbands and wives. If the objective is to have sex, equivalent to the government's objective to maximize social welfare, the best thing for husbands to do is to create the best possible environment that will encourage friskiness in their wives. By actively forcing themselves on their wives or telling them how to behave, they are sure to end up sleeping in the living room, alone and in front of a tv set.

The Kyrgyz government's rhetoric on the 'necessity' to intervene in price regulations not only will not work but will make the already fragile economic conditions worse. Here is the graph of the real GDP per capita in US dollars.

The latest number is about 1,000 US dollars per person. This number is about 6.5 times lower than that of Kazakhstan and about 8 times lower than that of Russian Federation. One might say, "well, they have oil and gas." My response to that is having oil and gas can be a curse, which we do not have. The standard of living depends not on transitory increases in wealth but on the long-term productivity of labor. The fastest growing economies are the dictatorships, but the slowest growing economies are also dictatorships. The ultimate benefit of a democratic society, which Kyrgyz people seem to demand more than any of their immediate and far neighbors, is ensuring a fertile ground for stable growth of wealth for its members. Kyrgyz Republic's problems lie in failure of the state to provide basic security against physical aggression and protect property rights, even if the government officials do not believe the owners are nice people. The real wealth of our country is its people--not gold, not uranium, and certainly not a 'self-sustaining' agriculture. Kyrgyz labor's comparative advantage lies in the service sector, light manufacturing, and knowledge sector. If our citizens engage in the activities that they have comparative advantage, their productivity will be higher, and subsequently their real standards of living will be higher. The only way the government can ensure such a progress is by creating the most accommodating liberal rules and punishing anyone, including its members, who infringes upon citizens' right to life and private property. As for happiness, I am sure, if the government acts in the least intrusive way, it will be invited to the bedroom at some point down the road.

Social Myopia and Wolves

Kyrgyz government recently announced its intentions to intervene if prices of 'important' commodities rise above the acceptable threshold. This policy will not only fail to achieve its stated objectives but also further exacerbate the shortages of vital commodities. The economists do not agree on many issues, but they all agree that price controls are ineffective, to say the least.

A simple theoretical economic reasoning suggests that price controls will create a wedge between the amount of good supplied and the amount that will be demanded. At lower prices, suppliers have incentives to reduce the amount of goods they will bring to the market and consumers will want to buy more than before. Effectively, the total amount of goods exchanged in the market place will be less than it had been before the price control. This reasoning seems pretty simple to understand, yet governments around the world still attempt to keep the prices artificially low. The real question is who gains from these policies?

Price control is not a novel concept. Historical records indicate that Roman Empire around the time of Emperor Claudius II engaged in massive debasement of the currency to finance large subsidies to welfare recipients that exceeded the productive capabilities of the empire. According to the Professor Prodromidis, the price of Egyptian wheat rose from 19 drachmas to 982 drachmas by the end of the third century. In 301 AD, Emperor Diocletian, who believed that higher prices were primarily caused by price speculations and conspiracy among suppliers to benefit at the expense of the 'good' citizens of Rome, imposed massive price controls on over 900 commodities. The results were less than encouraging: the markets were empty and many violators, often small time tradesmen with little political influence, were punished by horrific executions.

We do not need to delve into far past to understand the real consequences of price controls. Recently, Ethiopian government imposed price caps on primary food items in an attempt to bring the prices down to affordable levels and to fight the inflationary pressures. The results were repetition of Roman experience: empty shelves and more people joining the ranks of starving citizens.

Clearly, these policies do more harm than good. Then why do we see governments systematically employing price controls? Economists Pierre-Richard Agenor and Carlos M. Asilis investigated the historical episodes of price controls in Brazil, Argentina, Uruguay, and Israel and concluded that the immediate political gains to governments were overwhelming, even after controlling for the disastrous economic consequences of these policies.

Kyrgyz government is at the brink of another political reshuffling. Any means to 'buy' the constituents' support, especially if they are relatively easy to implement and their success is hard to assess, will be attractive policy options. These options may be politically feasible but they often have large and permanent economic costs. Mr. Bekov's recent bold claims that the government stands ready to intervene are nothing but a terrifying echoes from the past, Diocletian past of brutal persecution and empty shelves.