"I Don’t Think We’re in Kansas Anymore"
=======================================
By Mitchell Wiener (in Contingencies - an actuary magazine)
Businesses and government agencies in Kazakhstan don’t operate under the
same rules as the do at home. In fact, actuary Mitchell Wiener found
that at times, consulting there could be a little like doing business in
the Land of Oz.
For the past 18 months, my two children and I have been living in
Almaty, Kazakhstan, where I have been working as a consultant funded by
the United States Agency for International Development. I’m here on a
pension reform project to redesign the Republic of Kazakhstan’s social
security system.
It’s a system that badly needs redesigning, but the challenge is to do
it in a country that’s in the midst of trying to reinvent itself. To
give you some idea of what this is like, imagine riding a wild horse on
the steppes of Kazakhstan. The horse is charging across the vast open
plains, doing its best to get rid of its rider. The goal of the rider
is to stay on the horse and keep it from running over the edge of a
cliff and killing itself. If these two objectives are accomplished, the
rider wins.
Our goal as consultants is to keep the government from throwing us off
and running of the cliff. We know with certainty that it will make many
mistakes along the way, but it’s up to us to keep the mistakes from
being fatal. If we can prevent the most serious mistakes as the
government rushes down the path of reform, we count ourselves successful
and we all live to fight another day.
Kazakhstan, as it exists today, is only six-years old. For the
preceding 75 years, the country followed a socialist economic philosophy
and was part of a much larger entity - the former Soviet Union.
Suddenly, and quite unexpectedly, the country finds itself independent
and trying to make the transition to a completely different economic
philosophy. Though the old economic system is gone, the new one is
still under construction. And all the regulatory institutions we take
for granted (the Internal revenue Service, the Securities and Exchange
Commission, or their equivalents) don't exist or are virtual new-borns.
It’s truly a wide-open, unregulated environment.
The best way I know to describe the chaos of the current situation is
with another analogy. Imagine you’re part of a family living in an old
house. You’ve been living in this house for three generations. There
are many things wrong with it, and you know it: The heat isn’t very
good; doors don’t close properly; all the pipes leak; and there isn’t
enough insulation. All the appliances are old, but if you jiggle the
wires and kick the pipes, they’ll work.
One day the government comes along and tells you it’s going to bulldoze
your house to the ground the next day. But it promises it will quickly
build a new, modern house for you and your family to take its place.
The bulldozer comes the next day, right on time, and knocks down the
old house. But five years later, the new house still isn’t finished.
You know that when it’s done, it’ll be much better than the old house,
but now there are only a few walls, part of the roof, and one or two
appliances. You can see possibilities and they’re tantalizing, but
you’re not sure when or if it will ever be finished, and whether it will
work when it is. Many days you wish you could just have your old house
back.
This is daily life for the people of Kazakhstan. For my part, I’m an
observer, on the outside, looking in. I’m studying a specimen in a
cage, and I can leave whenever I want. For me, what’s going on is a
fascinating intellectual study. But for the citizens of Kazakhstan,
this is their life and they just can’t run away.
The King’s Donkey
The pace of change in Kazakhstan is astonishing. The government
studied and implemented a new national social security system in about
18 months - less time than most medium-sized U.S. corporations would
take to implement a change in their corporate pension program.
Consequently, everything moves at frantic pace and yesterday’s news in
quickly out-dated. Many officials are working 14-hour days, seven days
a week to implement the changes. Several visiting businessmen asked me
how it’s possible to make these types of changes so quickly. The answer
is simple: Kazakhstan is a dictatorship. One of the most interesting
things I ever did was to read the Kazakh constitution. The three
branches of government are there, but there are no checks and balances,
and the power of the president is astonishing.
If the president issues a decree, either it happens when he says or the
relevant individuals find themselves unemployed. So the modus operandi
is to do the best job possible in the time frame provided. This
inevitably leads to incomplete laws, insufficient regulations,
half-built administrative systems, and a fix-it-on-the-fly mentality.
The Kazakh government is trying to accomplish in a few years what it’s
taken us 200 years to do.
The current pension system was inherited from the old Soviet Union, and
it no longer functions properly in a market economy based on private
ownership. The old system is a pay-as-you-go affair, just as we have in
the United States. There are, however, several significant
differences. The retirement age for men is 61; 56 for women, and many
workers can retire even earlier based on their occupation. Payroll tax
rates are considerably higher and must be supplemented from general
revenues. Disability benefits are more liberally available.
In the past, pension payments were as much as eight months in arrears
in many parts of the country and many pensioners never got pair at all.
Why? In addition to the huge number of early retirees, there’s also a
huge underground economy operating in Kazakhstan. Whatever tax laws
there are aren’t enforced, and nobody bothers to comply with them
anyway.
The pension system that went into effect on January 1, 1998, is
probably closer to the Chilean system than any other social security
system in the world. This means that the new system is predominantly
based on private accounts funded by individual contributions to pension
fund companies. The prior system is being phased out by essentially
providing individuals with a projected unit credit benefit at
retirement, based on their final average pay and service credits as of
January 1, 1998, in addition to the value of their individual account.
Also, disability and survivor benefits remain on a defined benefit
basis. If the value of the individual account is insufficient to
provide the benefit, it’s topped up by payments directly from the
Republican budget.
In general, the older Kazakh citizens get the short end of the stick.
Retirees will never reap the benefits of the new system, and the value
of their pensions is generally inadequate, if they’re paid at all. For
younger people just graduating from university, the new system will
probably be to their benefit. They’ll have far more opportunities and
freedoms than their parents ever had.
A very cynical man here in Almaty told me a story that he said
illustrated how pension funds would operate in his country. It was the
story of the king who promises to give his kingdom to anyone who could
teach his donkey to speak English. Failure to produce the desired
result, however, would mean death.
Finally, at the end of a long search, the king finds one man who agrees
to teach the donkey English. But he has certain conditions. One, he
requires 20 years to succeed. Two, during all that time he will issue
no reports. And three, no one will be able to see the donkey for those
20 years.
The king agrees to the conditions, but the man’s friends still think he
is a fool. "You’ll surely be put to death, they tell him. "It’s
possible", he replies, "but 20 years is a long time. Either I, the
king, or the donkey will probably be dead by then. Or the donkey just
might actually learn how to speak English."
This, according to the story teller, is how pension funds will work in
Kazakhstan. Give the government your money, ask no questions, expect no
reports, and in 20 years, come and get your money back.
The Columbo Approach
Kazakhstan, like other FSU countries (Former Soviet Union, not Florida
State University), is in very poor financial condition. The last six
years make the Great Depression seem like a picnic. Gross Domestic has
been cut in half since independence, and real wages are down almost 40
percent. During 1993 and 1994, the country experienced hyperinflation,
with rates over 1,000 percent! Since then, rates have declined to about
18 percent in 1997, and a projected 12.5 percent for 1998.
Unemployment is very difficult to measure due to the underground
economy and moonlighting, but it’s officially at about 12 percent. This
is incredibly high for Kazakhstan, because unemployment in the FSU was
zero.
Perhaps the most shocking thing for an American is the all-cash
economy. There are no credit cards here, no checking accounts, and no
credit. Everything must be paid in cash, including salaries and
pensions, cars, apartments, houses, furniture, etc. Every time I come
here, I normally have to carry about $5,000 in brand-new $100 bills with
me. Exchanging money is easy, however. There are exchanges all over
the city with fairly similar rates, and the bid/ask spread is quite
narrow. Unlike other FSU countries, the currency is freely traded and
stable. So whenever I need cash, I just bring a brand-new $100 bill to
the closest exchange.
Financial institutions are very unstable, so most people don’t have
(and don’t want bank accounts. Banks fail regularly, and hundreds have
been closed in the last two years. Also, in order to get a bank
account, you must have a tax ID number. And since no one wants to have
to pay taxes, everyone avoids the banks.
To learn what is really going on in Kazakhstan requires the adoption of
what I call the Colombo approach - play stupid, ask lots of questions,
and show absolutely no reaction to what ever you’re told. An example,
"So you don’t know who your shareholders are but you still have an
annual stockholders meeting? I don’t quite understand how that works.
Could you tell me how you do that?" (Your tone of voice shows obvious
awe at the incredible ability to make this happen.) The secret is to
never show shock no matter what anyone says and keep asking for further
explanations. It’s amazing how eager people are to tell you about how
clever they are in ripping off the system.
Tax withholding in Kazakhstan is another fascinating issue, and
explains why everyone moonlights at the end of the year. There is no
universal tax filing in Kazakhstan, so all employers withhold taxes from
wages. The tax rates are progressive, as in the United States, and
quickly increase from five percent to 40 percent. There are no
deductions, so the appropriate percentage of wages is withheld each
month. The first paycheck of the year has only five percent withheld,
and by the end of the year 40 percent is being withheld. Of course, no
one here saves money, so at the end of the year people are far poorer
than they were in the beginning of the year - and everyone has to
moonlight to make ends meet.
Town and Country
Kazakhstan may sound like the Wild West, but in many ways it’s not like
that at all. Most of my friends back home think I’m living in some
backwater wasteland with no roads, electricity, or running water.
They’re shocked when I show them my pictures of the area I live in.
The country of Kazakhstan itself, which no one has ever heard of, is
huge. It’s two-thirds the size of the United States and is the ninth
largest country in the world. However, it has a population of only 17
million people. It’s bounded on the east by China, on the west by the
Caspian Sea (the largest inland sea in the world), on the north by
Russia, and on the south by Kyrgyzstan, Uzbekistan, and Turkmenistan.
The former Soviet nuclear test site is located in Semipalatinsk in
Northern Kazakhstan. The Soviet space flight center is still located in
Kazakhstan. And one of the world’s biggest ecological disaster areas,
the Aral Sea, is located in Southwest Kazakhstan on the Uzbek border.
Almaty is a city of about 1.2 million people located in Southeast
Kazakhstan, about 150 miles from the western border of China. Its
climate is very similar to Denver’s. The city is about 3,000 feet above
sea level, sitting on the plains at the base of the 15,000-foot Tien
Shan mountain range. The climate is very dry, and there’s virtually no
wind. The summers are hot and the winters are relatively long but
pleasant because of the low humidity. And there’s great skiing and
hiking in the mountains, along with several nice nearby lakes and rivers
for summer recreation. The city also has dozens of beautiful parks
filled with statues and fountains.
The main problem with winter in Almaty in that the streets and
sidewalks are not cleared after snowstorms. Sidewalks turn to glare ice
and remain that way from December through April. Skill in ice walking
is essential for survival. Were once talking with the head of the
National Securities Commission (the fledgling equivalent of our SEC) and
he jokingly suggested a Soviet-style solution to all weather problems.
It’s simple, he said. Appoint an administrator of weather and make him
responsible for all the weather in country. When crops die or there are
floods, you simply execute the administrator and appoint a new one.
Almaty’s broad streets are full of cars and lined with wide sidewalks
and beautiful old trees. There are probably more fancy cars here than
on the streets of Washington D.C. The cars of choice are the
Mercedes-Benz and any type of four-wheel drive. Many people fly to
Germany to buy a used Mercedes, and then drive it 3,500 miles all the
way back to Almaty.
Even in good weather, the condition of the roads leaves a lot to be
desired. Some of the potholes are so large we’ve given them names.
("There goes another Mercedes into Big George.") The streets themselves
often have two names - the old Russian name and the new Kazakh name. So
to get around town, it’s essential to know both names for every street.
Using seat belts in Kazakhstan is strictly taboo. Every car has them,
but no one uses them. In fact, all the drivers on my project get mad at
me when I use them, and I just tell them that’s how we do things in
America. Luckily, because of the potholes, no one can go fast enough to
get too badly injured anyhow. People drive all over the road here.
About six months ago, we were shocked to discover that someone had
painted lane lines on the roads for the first time. They look pretty,
but everyone just ignores them. Shockingly, there are now four left
turn arrows in Almaty.
Which makes it very easy to get lost in Almaty. Even though the city
is laid out in square blocks, almost all the buildings look the same
regardless of whether they’re apartments, office buildings, or stores.
Consequently, there are very few landmarks to navigate by. The one
clear landmark is the mountains south of the city. So uphill is south
and downhill is north, which is counterintuitive and drives everyone
crazy who visits the city. Especially actuaries.
There are many nice (but expensive) restaurants and dozens of flashy
nightclubs. Most ordinary citizens, of course, can’t afford them.
These places serve the expatriate community, rich Kazakh businessmen,
criminals, and corrupt government officials. Surprisingly, the
nightlife here doesn’t start until about midnight, and the club’s are
all open until just about 5 a.m. There’s one pizza joint, Capos, which
would fit in just fine in Washington, D.C. It has the only real
American-style salad bar in Almaty, good pizza, excellent barbecued
chicken wings, pool tables, and dart boards. It’s also one of the only
places where all the staff speak good English.
Because the transition to a market economy has proceeded further in
Kazakhstan than in other former Soviet republics, there’s a wide variety
of foreign goods available here. America’s primary contribution is soft
drinks, candy, and cigarettes. The very first American fast-food place
(Kentucky Fried Chicken) just opened here in December. And because the
volume of cigarette smoking here is incredible, Phillip Morris is about
to build a huge new plant to meet the demand. In exchange, all we want
is their oil. (Sounds reminiscent of a certain island we purchased for
beads).
A Kazakh Thing
Though the overall infrastructure (roads, electricity, heating, gas)
outside the capital tends to be atrocious, the infrastructure is
relatively good in Almaty. There are several things, however, that are
hard for American to get used to. First of all, the street lights and
office building lights in the city are generally turned off early in the
evening, so it gets very dark outside. One piece of advice often given
to foreigners is to carry a flashlight at all times. When you get here,
however, most locals advise you not to use a flashlight because it
immediately marks you as a foreigner.
The heating system is also quite interesting, and illustrates the
Soviet fascination with big, centralized everything. All the heat in
the city, which uses a hot water system, is turned on sometime in
October and turned off in April. If it gets cold or hot before then,
too bad. How do you regulate the heat, you might ask? (Pause while I
wait for you to ask.) Answer: You don’t. There are no thermostats in
Kazakhstan, and however hot your apartment gets is how hot it gets. If
you’re too warm, you open the windows. If you’re too cold, you put on
more clothes. That’s it. And for about one week before the heat is
turned on, the centralized system is shut down to prepare it for
winter. Because buildings don’t contain their own hot water heating
systems, there’s not hot water in the city for that week.
The difficulties compound. The common areas in apartments and offices
are very poorly maintained, so stairwells are often dark, elevators are
tiny and may not work, and there’s really no such thing as a lobby.
(The apartment themselves, however, once you get inside, can be quite
nice.) And it seems there’s a rule in Kazakhstan that no two steps can
have the same rise, so all the stairs are uneven. The top or bottom
step of every set of stairs may be slightly smaller or larger than the
rest. It’s usually hard to tell ahead of time because the stairwell is
so dark and the stairs are covered with carpeting. (Note from local
Peace Corps Volunteer who typed out this article: I don’t know what the
hell he is talking about. I have never seen carpeted stairs anywhere in
Kazakhstan!).
There in nothing that resembles a huge U.S. supermarket in Kazakhstan.
Instead, there are various alternative places to shop. The smallest are
the kiosks, little metal houses that are all over the streets of
Almaty. There’s always one close to the house, and each kiosk seems to
sell mostly the same items - cigarettes, alcohol, candy, other snack
food, and soft drinks. Next are little neighborhood grocery stores and
the upscale "expat" grocery stores. These contain more foreign goods,
are about the size of a 7-11, and are vastly overpriced.
Generally, it’s impossible to get everything you need in one place.
Usually I have to go to three or four separate stores to get
everything. There are virtually no processed foods or foods with
preservatives in Kazakhstan, but there’s an abundance of fresh
vegetables and fruits available year round. So you must buy fresh
ingredients and make everything from scratch, which is not such a
terrible concept. The bread is also terrific. About 20 different
varieties are made fresh daily. But there are no bagels!
Finally, there’s the large and colorful main bazaar. This is the
cheapest place in town to shop, and bargaining is possible. To avoid
being ripped off, however, you should know how much things should cost,
and you should he able to speak some Russian. Almost everything is sold
in the bazaar - food, toys, clothing, hardware, and particularly meat,
available in large quantities. Each section of the meat department is
marked by a real animal head - a real horse head presides over the horse
meat section, for example, a real pig’s head sits above the pork
section. The Kazakhs love to eat lamb, and it’s considered a great
honor to any host for a guest to bring a live lamb to a major occasion
like a wedding or a funeral. The lamb is then slaughtered on the spot
and cooked at the event.
No wedding, funeral, or party in complete without beer and vodka, the
primary alcoholic beverages of Kazakhstan. Of particular delight to me
is Black Death Vodka. It’s available only in cans and has a skull and
crossbones on the front. Vodka is an essential part of the country. At
all parties, multiple toasts with vodka are required, and an inability
to give a proper toast is a terrible social shortcoming. Kazakhs
believe that American parties are terribly boring. Parties should be
filled with food, alcohol, music, and dancing. Standing around holding
a drink and talking about business is not a party.
Living and doing business in Kazakhstan is not like doing business, in
say, Kansas. The rules of the game are still being made up, even as we
play it, and often the playing field seems as treacherous and surprising
as Kazakh staircase. To succeed in this environment requires a positive
attitude and the ability to laugh at problems and things that just don’t
work. Successful consulting in a place like Kazakhstan requires the
flexibility to deal with a frantic work environment, the lack of needed
information, political decisions that may be impossible to understand,
and the daily difficulty and frustration of not being able to
communicate with the citizens of the country. Especially frustrating to
actuaries are those events that just seem to defy logic, even after
receiving an explanation. When things like this occur (and they occur
frequently), we’ve learned to look at the sky and roll our eyes.
"It’s a Kazakh thing," we say. Then we shrug, shake our heads, and get
down to business.