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.
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