Free utilities in Turkmenistan: Ending the bluff



Introduction



When governments consider economic solutions to various problems, a possible remedy may be worse than the disease. For example, due to problems in regulating natural monopolies, some Kazakhstani people ask, “Our country is rich in natural resources, but why are utilities so expensive here?” However, there is a counterexample in Central Asia, where utility services used to be free - Turkmenistan. This article shows how free utilities made Turkmenistanis worse off than they could have been, if they paid for their usage.

The benefits and their elimination

Turkmenistan has been transitioning to a market economy very gradually and used to provide generous welfare. According to a decree of the passed-away President Saparmurad Niyazov, since September 1992 and until 2014, Turkmenistanis were receiving 600 cubic meters of free natural gas and 25 kilowatts of free electricity per person.

Gurbanguly Berdymukhamedov, the current President of Turkmenistan, cut the benefits. In 2014, he ordered installing gas meters in homes. All natural gas, consumed beyond the 50 cubic meter allowance per person, was charged at 7 U.S. dollars per individual. Most urban residents still use free natural gas, but villagers, who heat their homes and barns with it, now have to pay. The President also restricted electricity provision. A 1-2 person household is provided 90 kilowatt hours of free power each month. For larger households, each resident receives a monthly allowance of 35 kilowatt hours, reports EurasiaNet.org.


The costs of free utilities


Turkmenistan’s welfare system is inefficient. For individuals, consuming just the free amount or more, in-kind benefits (provision of free goods, rather than cash) have the same effect, as a cash benefit for the market price the utilities have, i.e. they only increase quantity demanded of normal goods and services, as more money is available for spending. Economists call this increase the income effect. Individuals, who use less utilities than the norms require, substitute more expensive goods and services. Economists call this change in preferences the substitution effect. This increase in purchasing power would be cheaper for the government, if it provided cash, instead of in-kind benefits.

Some argue that consumers may spend cash unwisely. This paternalistic view is common in the CIS countries. Most economists, however, believe that the government should generally permit consumers to choose what to buy, if the purchase does not violate the rights of or impose costs on third parties, including the children of recipients. The government cannot determine, what’s best to consume. Groups with vested interests may dominate over other people.

A free utility is charged at a zero price floor, below the market price, since the cost of an additional unit is above zero. Without subsidies, the price control creates shortages, as demand exceeds supply. The subsidy must be sufficient to cover the shortage. In practice, shutoffs in Turkmenistan were frequent. According to Farid Tukhbatullin, Chair of the “Turkmen Initiative on Human Rights”, a Turkmenistani independent human rights organization, utilities lack funds to conduct repairs of pipelines and power lines, so they malfunction, reports the Chronicles of Turkmenistan, the organization's website.

Nevertheless, Turkmenistan’s subsidies were burdensome. According to Bairam Annameredov, former Representative of the regional department of the Ministry of Economic Development and current Minister of Railroad Transportation, they amounted to over 22% of Turkmenistan’s GDP in 2015, reports Jumaguly Annayev, of CA-portal, a political and economic website, focusing on Central Asia.

Combining market power of natural monopolies and subsidies of utility services enable gaining at the expense of the rest of the population. In a perfectly competitive market without externalities, profit-maximizing firms generate the maximum net social benefit. Subsidies induce producing more than that amount, at lower prices, with a portion of government expenditures that nobody claims. With no competitors to undercut its price, an unregulated or inadequately regulated monopoly produces more expensive goods, and in lower qunatities, than the efficient amount. Combining monopoly power and subsidies yields higher profits for monopolists, at the expense of consumers and taxpayers, than would exist under a properly regulated natural monopoly.

One may argue that access to utilities should not depend on income. However, universally distributed in-kind benefits help the rich, as well as the poor. For example, since the rich can afford to buy larger housing and more appliances, they consume more electricity.


Charging fees


A botched transition to market-based utility pricing still burdens Turkmenistani people. In early 2015, the total annual cost of utility services, included in the rent for a typical 2-room apartment (an equivalent of a 1-room apartment in the U.S., since in the CIS region, a living room is counted as a room) in a new district of Ashgabat rose 15 times over 2014, reports the Alternative News of Turkmenistan, an online project, founded in February 2010 “to promote openness in Turkmenistan and develop a strong civil society that believes in freedom of speech and values justice.” The increase could have been smoother if utilities were not initially free, since their managers would have more funds and better incentives to modernize and conduct repairs. Even now, the government still subsidizes a portion of the fees, so the road to a market-based pricing is incomplete.


Conclusion 


Turkmenistani society has been paying a high price for free welfare benefits. Not only were they inefficient and inequitable, but getting off their hook has also been a challenge.


References

Alternative News of Turkmenistan. A “surprise”, which no one had expected. https://habartm.org/archives/2070. 2015.

Annayev, J. Turkmenistan will reduce utility subsidies. CA-Portal. http://www.ca-portal.ru/article:21865. 2015.

Bing, S. Dictator of the week. Fortune. http://fortune.com/2007/08/28/dictator-of-the-week/. 2007.

Chronicles of Turkmenistan. How much does free natural gas in Turkmenistan cost? http://www.chrono-tm.org/2013/04/skolko-stoit-besplatnyiy-gaz-v-turkmenistane/. 2013.

EurasiaNet.org. Turkmenistan set to scrap core welfare benefits. http://www.eurasianet.org/node/75016. 2016.

Providing an equitable and efficient tertiary education in Kazakhstan 

Introduction

Should richer taxpayers pay to enable the poor to study in universities? What factors must be considered in choosing the educational policy? Here is some food for thought, based on educational policies in Kazakhstan. 

Grants, vouchers or educational loans? 

Education is not a pure public good. Individuals can be excluded from receiving it and the cost of educating each additional student is not zero, though it is small in an uncongested college, where no new rooms, desks or equipment are needed for the additional student. Taxpayers bear all the costs, if the government charges no tuition.

Higher education is more competitive than primary and secondary education are. Schoolchildren usually study in the city or town of residence, which can enable a single private school to monopolize education. A university student may leave his or her home town to study elsewhere. Distance education adds to the competition, lowering tuition fees.

Education yields positive externalities, benefitting those who do not receive it. For example, educated people are usually more informed citizens and more active voters. They can help improve political processses in the country. (Since the opposition in Kazakhstan is weak, this benefit of education is largely yet to be realized.) Education also enhances social stability, by increasing familiarity with and acceptance of common values. The bias in teaching and indoctrination of students is the flip side of the coin.

Too few people would study if only private educational institutions existed. Yet the above-mentioned benefits are hard to quantify, making it difficult to determine how much the government should spend. Also, some classes may not help achieve the above-mentioned goals. Nevertheless, in most countries, the state owns some or all universities (which may or may not charge tuition), and supports outstanding or poor students through educational grants or loans.

Supporters of educational grants argue that incomes of parents should not dictate students’ opportunities. Yet children of wealthy parents are still more likely to apply to universities. If grants are provided, based on merit, they subsidize the rich. The rich also usually pay more in taxes, making their net effect ambiguous.

Opponents of grants argue that too many people get a higher education. Prospective applicants compare the increment to their income with the extra costs, including the income that they could earn if they worked instead. Since the government subsidizes their education, their personal costs will be less than the social cost, inducing some to stay in school, even though the increment is less than the marginal social cost. This model assumes that the relevant positive externalities are small, compared to the subsidies. If students received loans instead of grants, they and their parents would weigh the costs and benefits. Only those skilled enough for universities would study, for most demanded specializations, to repay loans.

Supporters of grants deny that they are inefficient or inequitable. They argue that schools and universities themselves screen out the skilled students from the unskilled ones. Also, grants are cheap, compared to total expenditures on education. In Kazakhstan, grants for 2014-15 amounted to 28.3 billion KZT ($153 million), while total educational expenditures in 2014 amounted to 1.47 trillion KZT ($7.94 billion), reports Daniyar Kuanshaliyev, of the Forbes magazine. Poorer borrowers may not pay off the debt without delays and penalties, so loans exacerbate inequality.

Both measures are less equitable in Kazakhstan than in developed countries. Kazakhstan has a proportional individual income tax rate of 10%, compared to the top individual income tax rate of 39.6% under the progressive income tax system in the U.S., reports Heritage Foundation. Thus, less money returns to the government in taxes from the former recipients of grants than in the U.S. However, since students and their parents in Kazakhstan are poorer and less financially literate, they are more likely to delay repayment and be penalized.

University corruption prevents screening out the more skilled students from the less skilled. According to Nurlan Sydykov, former executive secretary of the youth branch of the ruling “Nur Otan” Party, the bribe for passing an exam session in 2014 in an average university amounted to 29,000 KZT, dissertations and theses sold for 60,000 KZT, and tuition grants cost 500,000 KZT. These results were collected, using anonymous surveying of 1,200 college and university students of Kazakhstan, from 62 higher educational instutitions. Among the students surveyed, 93.4% were undergraduate students, 5.2% were enrolled in Master Programs, and 1.4% were enrolled in doctoral programs. The overwhelming majority (90%) confirmed the existence of corruption in their educational institution, reports Tengri News.

Bribes discredit education in the eyes of private employers, who need to check applicants for actual skills during the probation period, rely on credible recommendations, or both. Many students treat education as a formality, and the teaching quality suffers. These factors perpetuate the vicious cycle of corruption. In the above-mentioned survey, 20.8% of respondents said that the lack of interest of students in education is the main cause of corruption. Another 12.6% of students said that the lack of professionalism among instructors was the main cause.

Bribes make educational grants inefficient. Substituting loans may make borrowers think twice before spending on a corrupt university, where the skills, necessary for debt repayment, would not be taught well enough. If a bank “forgets” to collect the debt, favoring some borrowers over others, its financial performance will suffer, and it may face penalties from the National Bank. The desirability of grants versus loans thus depends on the effectiveness of financial regulation compared with that of detecting and penalizing bribery in grant provision. If the National Bank bails out the creditor, it may continue to extend corrupt loans.

The Ministry of Education considered an alternative to grants that may be implemented as early as this year. Vouchers, containing a fixed amount that students can spend on any university, would replace traditional tuition grants, tied to a specific university. If tuition in the university exceeds the voucher, the student will be allowed to pay the rest in cash. Outstanding students and students from poor families may also receive university or state scholarships and grants, in addition to vouchers. Vouchers exist in schools (not universities) of Georgia, another former Soviet republic, reports Aidana Usupova, of Tengri News. Fourteen states offer traditional student vouchers, according to EdChoice, a school choice advocacy group based in Indianapolis: Arkansas, Florida, Georgia, Indiana, Louisiana, Maine, Maryland, Mississippi, North Carolina, Ohio, Oklahoma, Utah, Vermont and Wisconsin, plus Washington, D.C,” reported National Public Radio.

The voucher system is a two-edged sword. Supporters argue that vouchers improve education through competition between state and private educational institutions. When students can choose how to spend the voucher, most choose well-paying specializations. Other factors staying constant, education becomes more expensive for most students, as top universities take advantage of increased demand. Over time, however, higher tuition causes more colleges and universities to open.

Critics of school vouchers argue that they stratify society: students from richer families go to some schools and students from poorer families go to other schools. Nevertheless, university students are adults, who may work to pay for their education themselves, so the system may work better for universities than for schools. However, like with traditional grants, bribes may distort their effect.


Conclusion


Not every country fits the mold in educational policy.For example, corruption plagues education in Kazakhstan. Other factors, such as financial literacy and taxation, must also be accounted for, in choosing whether to rely on grants, loans or vouchers. 

References

Heritage Foundation. 2016 Index of Economic Freedom: Kazakhstan. http://www.heritage.org/index/country/kazakhstan. 2016.

Heritage Foundation. 2016 Index of Economic Freedom: United States. http://www.heritage.org/index/country/unitedstates. 2016.

Kuanshaliyev, D. Top 10 universities, which earned the most on grants in 2014-15. Forbes. https://forbes.kz/leader/znaniya_dengi_2. 2015.

Tengri News. The volume of bribes in the universities of Kazakhstan was named. https://tengrinews.kz/kazakhstan_news/razmer-vzyatok-v-vuzah-nazvali-v-kazahstane-261792/. 2014.

Turner, C. School vouchers 101: What they are, how they work - and do they work? National Public Radio. http://www.npr.org/sections/ed/2016/12/07/504451460/school-choice-101-what-it-is-how-it-works-and-does-it-work. 2016.

Usupova, A. Vouchers may replace tuition grants in Kazakhstan. Tengri News. https://tengrinews.kz/kazakhstan_news/grantyi-v-kazahstane-hotyat-zamenit-na-vaucheryi-291915/. 2016.