Kazakhstan had about 60 percent of its total consumption in cash transactions.
The large amount of cash transactions also affected the formation of the underground economy, which accounted for about 30 percent of the total economy.
Economic reform was intended to bring such underground economies to the surface to secure tax revenues and ultimately lay the foundation for economic growth.
In order to draw cash from the underground market, Youngho and the Kazakh administration decided to use a card called currency exchange.
Behind the reason for doing so was the confidence that each family’s household finances were stable, so there would be minimal impact from currency exchange.
The savings rate was high at around 30 percent, while household debt was low at around 10 percent. Compared to the OECD average savings rate of 5.7 percent, its stability was quite high.
It was a shocking measure, but as growth was expected in many ways in the future, there was room for the national income to rise.
The job market was also stable that people in other Central Asian countries rushed to Kazakhstan in search of work, contributing to the currency exchange.
The economic reforms announced by the government this time included reform policies in a wide range of fields, including monetary policy, industrial policy, tax policy, environmental policy, immigration policy, education policy, and social security policy.
In short, it was a major innovation that completely changed Kazakhstan’s constitution.
People were dumbfounded by the sudden economic reforms as they were carried out without notice, and the aftermath was indeed huge.
The currency exchange was conducted immediately as it was arranged under careful planning for a long time.
The measure was taken to make the current Kazakh currency available only for the next three months, and if it was not exchanged for new bills, the tenge, the old ones would become a piece of paper.
It was situated so that any black money would have to be exposed.
And what was crucial was that when it came to goods sales, all transactions traded in dollars would be considered illegal unless it was dealt in tenge. This would essentially block the dollar’s circulation.
Foreign investors who entered Kazakhstan would have to exchange their money in tenge to trade or use credit cards. And regardless of whether they were Kazakhs or foreigners, anyone who needed to bring out or bring in the amount of more than 5,000 dollars to and from the country must only do so by banking transactions.
A person with a lot of cash could not circulate more than 5,000 dollars in any case without going through a bank.
The Chinese, who dominated the traditional markets in Almaty, was in the same position.
“What is the reaction of the people?”
Asked by Youngho, the head of Kazakhstan’s central bank, Murat, changed his stance.
“Most people welcome the currency reform because it is not a currency reform but an exchange, Your Highness.”
“I thought we’d have a lot of trouble, but I’m surprised.”
“It’s evidence that there were many people who felt a relative deprivation because there was too much black money going on. They say this is the right kind of reform.”
“Was there ever been a reform before?”
“The former administration has vowed to improve the underground economy, but for some reason, it has always been canceled. So every time, the people were disappointed.”
“I don’t understand why the former president didn’t carry out the currency reform. Our economic scale is quite small that we can do as much as we can.”
“Isn’t that evidence that the leader and his aides had so much dark money? The bureaucracy was very much opposed to the reform as well.”
“All of them must have stored dollars or tenges in their homes, too.”
“The current reform must be keeping them up all night. If they don’t bring the money, they’ll lose everything they have. So is the dollar.”
Central bank Governor Murat seemed to be enjoying the current reform.
High officials in the former administration had all been stripped of their positions, but no legal action was taken against their irregularities. It was because all officials in Kazakhstan would also be put behind bars if legal actions were taken against them, so the current administration stopped after only disclosing their irregularities open to the public.
Some of them wanted to leave Kazakhstan but they had to stay since there was no way for them to take their assets out of the country.
“In the meantime, please have a thorough understanding of how much old cash has been issued and recovered to the bank.”
“We’re looking at it closely. I’m sure many of those who are reluctant to reveal their dirty linen will turn their money into scraps without reporting it.”
“Wouldn’t that affect our economy?”
“We don’t appreciate or devalue the currency, but it’s a one-to-one exchange, so there’s no problem at all. We can issue extra money if we’re short of money. And with most people saving more than 30 percent of their income, there is little confusion.”
The usual currency reform was aimed at raising funds for economic revival, as well as a reform to control the overblown currency and subsequent inflation on the market.
However, the current Kazakh government was not trying to reform the currency but to retrieve the old money through exchange and bring the underground market out. In a way, it was an exquisite policy.
Since all of the money that flowed into neighboring countries would also be exchanged, it also had the effect of preventing data-free transactions that had been rampant.
There was nothing as good as this to get rid of the underground economy.
***
“Your Grace, I didn’t know you’d make an announcement so hastily.”
“When will it be possible if we held a public meeting and listened to opinions from all walks of life? It’s best to be abrupt.”
Eriksson, who came back from his week-long vacation in Sweden, shook his head as he talked about the reforms.
He was surprised to see that Youngho had announced a currency exchange policy so abruptly which he thought would happen by the end of the year after looking at the economic situation.
“If it were me, I’d never have tried.”
“What’s wrong with it?”
“There’s so much I know that I would’ve put off doing it all the time.”
“You’re saying that not having too much economic knowledge was rather brave?”
“I think so. It’s also great that economic officials didn’t oppose it.”
“You know there’s a saying that ignorance is brave.”
“Hahaha… I guess that’s right. By the way, I heard the royal family said they would pay the taxes.”
“I’ve been paying for it so far, but it’s nothing new.”
In fact, the royal family had been paying taxes to the royal territory for all businesses it ran. Youngho just announced it to the public to emphasize the importance of paying taxes and become a role model for all Kazakh people.
“It was a timely announcement. The people should know what the royal family is doing. Why don’t we take this opportunity to open up the royal family’s defense spending?”
“No, I’d rather not.”
“I don’t mean that you should brag it to the people, I mean to let the neighboring countries know. It would be frightening for them if they knew about the cost of arms from the royal treasury, in addition to the government’s budget.”
Last year alone, the royal family spent more than 10 billion dollars on arms purchases.
It was the first year, so there was excessive spending, but foreign countries would believe that about the same amount would be put in every year for defense.
Eriksson encouraged Youngho to let the people know to target such effects.
“Well, alright. If so, give it a try. There’s no reason to hide our power.”
“It has the effect that is equal to bringing in a few fleets of fighter jets without spending money. I’ll announce that most of the money went into reinforcing air force and air defense networks.”
“Are you trying to hide our naval power?”
“We should keep our hidden card hidden. Wouldn’t other countries also follow us to increase their number of warships? We’re better off the ocean when we have fewer competitors.”
***
Tax reforms were also carried out.
The corporate tax rate had been slashed to 9 percent from the current 16 percent, improving the investment environment of domestic and foreign investors.
And the unemployment insurance rate was raised from 5.5 percent to 7 percent.
The resulting deficient tax revenue was to be collected from the so-called wealth tax. For high-income earners with an annual income of more than 150,000 dollars, the highest income tax rate was raised to 35 percent now.
In addition, the probationary period for new employees was extended from the current six months to one year due to labor market reform and unemployment measures while job training programs for youths were also strengthened.
Moreover, annuity insurance was actualized.
This reflected the reality that a few pennies of annuity insurance did not bring the lowest living standards, which only led to the slumming of the elderly population.
Lastly, the government had also strengthened measures to support families of children and encouraging births in preparation for low birth and aging population.
Since at least 100 million people were required to join the ranks of superpowers, the policy of population had been pushed by Youngho who believed the population was a national power.
Starting next year, the government would pay a monthly basic parental allowance of 300 dollars to all childbirth families and a maximum of 800 dollars per month for twelve months if any parent needed to take a maternity or paternity break.
It was one-third the level compared to advanced countries in Europe, but it was a great aid measure considering the country’s gross national income.
In another measure, the government would be spending about one billion dollars on expanding childcare facilities to expand all-day schools, reducing the burden of double-income couples with jobs by expanding the scope of income deductions for child care fees and improving the conditions for childbirth for women.
It seemed to be a huge reform, but it was only a more realistic version of what was already in place.
“I thought about your suggestion, Eriksson. I don’t know if foreign investors would find this fascinating. Shouldn’t we give more benefits to foreign investors?”
“Kazakhstan has a geographical advantage since it is close to Europe. It’s a huge benefit just to provide free land and infrastructure. No other country in Europe will be able to provide large-scale land for free.”
There must be other countries that provide land for free to attract global companies and to create jobs, but Kazakhstan’s unlimited supply of raw materials at affordable prices would be quite attracting to foreign investors.
Another advantage would be that the time to bring goods to Europe would be shorter than in Southeast Asia or India.
Eriksson was adamant that the geographical advantage of Western Kazakhstan was enough to make global companies drool.
Although it did not have a rich labor market like China or Southeast Asia, he was confident that the labor shortage could be overcome with an automated system.
