By Dmitriy
The Tumble of Post-Industrial Society
By Dmitriy Belyanin
The sub-prime mortgage crisis in the United States of America and the beginning of recession in Europe have created doubts about the sustenance of the economic power of the West as such. Although the economies of the United States of America and that of Kazakhstan are drastically different in size, scope, and goods produced, they share one thing in common: the share of manufacturing in these economies is comparatively low. This factor can be detrimental in terms of sustaining their economic performance during the crisis.
The Pros and Cons of a Post-Industrial Economy
Over the last few decades, the economies of the United States and European countries have gradually turned away from manufacturing to services, due to outsourcing. Manufacturing was shifted to developing countries of East Asia, particularly India and China. The justification behind this move was the lower costs of labor in these countries.
The change caused many manual laborers in the United States and Europe to retrain to specialize in the provision of services. At the same time, workers in East Asia gained new jobs. Initially, the salaries offered for performing these jobs were grossly low by world standards. By the time the sub-prime mortgage crisis began in the United States, China and India evolved into rapidly developing economies.
The shift of the economies of the U.S. and Europe towards the provision of services, however, proved to be less of a blessing in the long run. On the positive side, the provision of services may be less costly than the production of goods. This implies that many more people can create or run facilities that provide services. The more successful entrepreneurs there are in an economy, the larger the middle class, since each entrepreneur must hire laborers to keep the enterprises running. As employment increases, so do wages.
However, many services can only be consumed at the point of production. This implies that a service cannot be exported unless foreign citizens visit the country where the service is produced, or unless a physical good that backs the service is shipped abroad. For years and decades, the United States and countries of Western Europe benefited from tourists, students, and other visitors and temporary residents making use of their services. Another source of revenue was online sales, but the costs of Internet connection in developing countries tends to be much higher than in developed ones, so most customers of goods sold online were citizens of developed countries.
The high-tech boom of the 1990s enabled many people of these countries to enjoy a period of stable economic growth. Once the high-tech boom ended, more industrial production was outsourced to be produced in East Asia. The anticipated recession in the United States and the European Union is likely to be reinforced by the prevalence of services in these economies. Consumers in these countries, overburdened with debts, will be less willing to make use of many services. Many service-producing enterprises will have to lay off workers to stay in business.
The Faultiness of Kazakhstan’s Neglect of Manufacturing
Since the collapse of the Soviet Union, manufacturing in Kazakhstan and many other CIS countries declined. This decline was caused by the inability of enterprises in these countries to compete with those in the West, as well as by the emergence of other business opportunities that appeared profitable. New service facilities were created, but the export of petroleum became the basis of the new economy.
The immediate effect of the transition was an increase in unemployment and a decrease in real incomes for a large portion of the population. During the economic boom in the first seven years of the 21st century, most people working in sectors unrelated to oil, finance, or construction, gained little from the economic growth.
There are many reasons why Kazakhstan has been unable to diversify its economy. These reasons include: various barriers to entry for firms, such as administrative barriers, lack of available high-quality business education for many people, lack of well-functioning financial markets, and many others. In spite of the increase in the number of universities providing education in the field of business administration, tuition fees in prestigious universities remain high. There is also a shortage of specialists in science and technology.
The agricultural sector in Kazakhstan had produced a fine harvest in the year 2007, and some hopes existed that the sector would enable diversification of the economy. However, this sector continues to face problems related to access to agricultural technology, lack of a detailed, long-term strategy of development, and many others. Kazakhstan continues to depend on imports from its neighbors Uzbekistan and Kyrgyzstan.
Many new service facilities that have developed in Kazakhstan over the years of transition, such as supermarkets, restaurants, entertainment complexes, and many others – face substantial risks or may face risks in the future, especially if banks of Kazakhstan, which provide well-paying jobs, begin filing for bankruptcy. As in the case of the United States and Europe, under-emphasizing the importance of manufacturing will add to the severity of the recession in Kazakhstan. The major difference, however, is that many service facilities in Kazakhstan are in even greater danger than those in the United States, as most people in Kazakhstan earn much lower real incomes. The high oil prices may cushion the economy for a while, but a world recession can put a downward pressure on these prices.
Unlike American borrowers, Kazakhstani borrowers have been suffering from much higher interest rates on loans. These higher interest rates can be attributed to the risks of investing into the economy of Kazakhstan. Thus, many firms have been suffering not only from declines in sales, but from debt as well. The economic situations in the two countries are thus similar in nature, and differ only in scope and size of the gross domestic product to start with.
Who Wants to Live in a Superpower Today?
For centuries, to achieve some degree of economic power, many countries have had to demonstrate their political authority and military power as well. However, by the middle of the 20th century, it became apparent that neither is a necessity for achieving economic prosperity in a well-functioning market economy. Many countries today have achieved a high standard of living without having to show off their military power or political authority. In nearly every continent, except Africa, there are countries that have achieved a comparatively high standard of living for many citizens without taking part in conflicts or international controversies.
The increase in the number of terrorist attacks in the 21st century shows that the general well-being of a country’s citizens is no longer dependent on whether their country of residence is a superpower, or simply a well-functioning economy. Among those nations, which are relatively highly developed economically, it is the countries that have tried to show off their political authority and superiority of political systems to other countries – the United States, Russia, Israel, the United Kingdom, to name a few – that have been threatened the most by terrorism. Meanwhile, the “quiet” nations, such as the Scandinavian nations and many countries of East Asia, have continued to enjoy relative stability.
Attempts to compensate economic problems in the minds of citizens by displaying political superiority through propaganda and militarization, are by no means a new invention. After World War II, the Soviet government used the expansion of the Eastern bloc to demonstrate the superiority of Communism. Even though the post-war Soviet economy was facing severe hardships, and a lot of resources were being spent to support the new regimes, it was very easy to refer to the “popularity” of Communism among the peoples of Eastern Europe as a proof of the success of the system.
To many western economists, it is obvious that the existing financial and economic systems in the West require some revision. To prevent further defaults on loans, risk diversification is necessary. But to achieve this diversification, investments into sectors, comparatively less risky than real estate, construction, or services, are necessary. In addition, measures to discourage speculation are necessary.
The issue of increasing the share of manufacturing and the production of physical goods in general, in developed countries thus arises. Nothing is wrong with producing many different kinds of services, but economies should be diversified to include manufactured consumer goods as well, to enable exports abroad during harder times. No demonstration of political influence or military operations will permanently compensate for this decline, though these approaches may sometimes be justified for non-economic reasons. Increases in defense spending can boost economic growth, but they result in increases in the tax burden or government debt. The dispute between Russia and the United States over the independence of South Ossetia does not free either country from the necessity to pay attention to its economy, regardless of whose position on the issue is closer to reality.
Fortunately for Kazakhstan, the government did not assume the role of a government of a world power, reserving this role for Russia. Hence, Kazakhstan has been able to retain political and economic stability. While the government of Kazakhstan may rightfully hold and voice a position on this issue, it is not desirable for the country to take active measures to support either side. The government should pay more attention to its internal problems instead, especially because few companies of Kazakhstan are large enough to have significant interests in the region where the conflict takes place.
Conclusion
Any country that failed to take the appropriate measures to sustain the production of physical goods is likely to be affected by the world subprime mortgage crisis more severely than major exporters of manufactured goods. Kazakhstan and many other CIS countries are under a serious threat, especially because these countries lack well-diversified economies. In this situation, it is advisable for Kazakhstan not to participate actively in international disputes, reserving this role for countries that have bigger economies to start with. The economic well-being of the nation should take precedence over conflicts abroad, to the extent that this approach enables Kazakhstan to remain in good relations with its neighbors and trading partners, which is necessary to keep the economy functioning under globalization.
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