The Belarusian Economy: The Challenges of Stalled Reforms

emerging europe belarus outlook ebrd

Read the Outlook on Belarus special report

.

Rumen Dobrinsky

About Rumen Dobrinsky

Rumen Dobrinsky is Senior Research Associate at the Vienna Institute for International Economic Studies (WIIW) and country expert for Bulgaria and Belarus. His main research areas include processes of transformation, growth and convergence and European integration. He was Head of Economic Cooperation and Integration Division, UN Economic Commission for Europe and President of the Centre for Economic and Strategic Research and has provided advisory services for the EC, OECD. He holds a PhD in economics from IMA, Sofia.

Belarus stands out as a special case in transition blending. On one hand, there are the signs of relative prosperity, the socially oriented policies and the buds of entrepreneurship and then, on the other hand, its remnants of the Communist past. Belarus has embarked on a transition path of its own, different from what is happening in other countries but still delivering a particular path to economic transformation.

Over the past 25 years Belarus has established an opaque model of state capitalism that is backed by a highly centralised political system and a decision-making pyramid that features excessive powers, concentrated at the top. In contrast to other transition economies, Belarus has put the brakes on the large-scale privatisation of state-owned firms, inherited from Soviet times, in fact only a handful of experimental privatisation deals were launched. Consequently, the state sector still dominates many areas of the economy in Belarus, especially manufacturing. 

At the other end of the spectrum are the retail trade and business services sectors. While privatisation has also been largely absent in these sectors, the private sector is already the dominant one in most business services by far, thanks to the organic growth of de novo private firms and the entrance of foreign firms into the Belarusian market.

A closer look at firms’ performance reveals the absence of hard budget constraints on the operation of state-owned firms. Additionally, and over the years, Belarus has benefited from privileged access to Russian energy sources at below world market prices. Thus the core of the Belarusian economic model was a combination of external rents and soft budget constraints on the state-owned part of the economy. In periods of favourable external conditions, this mixture provided for relatively high rates of economic growth and allowed the authorities to maintain a ‘social contract’ with the population that targeted close to full employment. 

The availability of employment opportunities has been an important part of this social contract. Another was the raising of personal incomes through wage growth. The main policy instrument to target the desired wage levels is a wage scale that regulated salaries for every profession. At the same time, Belarus lacks proper unemployment insurance or benefits. Technically unemployment benefits for the registered unemployed do exist, but they are very low and do not depend on the previous wage level. 

Traditionally, Belarus’ external economic relations have been closely associated with its strong economic link with Russia and, more recently, with the Russia-led Eurasian integration project. FDI in Belarus is mainly of Russian origin, amounting to nearly 60% of the stocks.

Things started to change around 2007, when Russia began claiming back part of the Belarusian export oil duties and doubled the gas export prices for Belarus. The combination of a policy focused on demand-driven growth and diminishing external incomes resulted in a persistent widening of external imbalances and fast growth of foreign debt.

One of the root sources of the macroeconomic imbalances was the quasi-fiscal deficit that was a result of inefficient directed lending to state-owned firms and soft budget constraints on their operations. Directed credit, one way or another, entailed contingent fiscal liabilities as it was de facto underwritten by the Belarusian state. The bad loans resulting from this inefficient directed lending ultimately accumulated as a quasi-fiscal deficit.

The other main source of macroeconomic imbalances was the populist income’s policy which prevailed through most of the period of high growth. Mandated wage increases resulted in losses in competitiveness as real wage growth outstripped productivity’s growth. This was also a source of inflationary pressure as there were no checks on the pro-inflationary effect of wage growth. In effect, monetary policy accommodated the upshots of expansionary incomes policies; plus, the quasi-fiscal deficit was gradually transformed into an open deficit and was also monetised.

The macroeconomic imbalances and the accumulated quasi-fiscal deficit came to the surface time and again, and its subsequent monetisation provoked macroeconomic and currency turmoil. Between 2009 and 2015, Belarus experienced three episodes of currency crisis which epitomised the inconsistency of the macroeconomic policy mix. 

At present, Belarus’ economic model has come up against its limits. Economic policy cannot continue as it has, and major changes in the policy course are needed. As concerns Belarus’ economic model per se, it needs to be revamped in order to survive. The key test of the viability of the model of ‘state capitalism’ would be the willingness of the authorities to impose hard budget constraints on state-owned firms and banks.

 

Click here to access the entire WIIW Research Report No. 413, November 2016, authored by Amat Adarov, Kateryna Bornukova, Rumen Dobrinsky, Peter Havlik, Gabor Hunya, Dzmitry Kruk and Olga Pindyuk.

_______________

The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.

RELATED ARTICLES

“e-Belarus”: Embracing the Internet and its Possibilities

Encouraging SME’s Development Will Help Build Belarusian Economy

The EU’s Benign Neglect of Eastern Europe

UK Shores: the New Frontier, a View on a Series of Fortunate Events

IMF Believes State-Owned Enterprises Must Be Reformed

Image of the banknotes of new Belarusian banknotes five rubles put into circulation July 1 2016

A Strategic Asset for Regional Growth and Development in the EU

Pier bridge crane and cargo handling cargo trains transported away.

Putin Urges Belarus to End Oil Transit Through Lithuania

Athens Greece - May 27 2016: Russian President Vladimir Putin delivers

‘No’ To a Monetary Union With Russia

The EU Is Encouraging Belarus to Join the World Trade Organisation

Brexit Makes Waves Across the European Union and Beyond

Young Well-Paid IT Specialists Are Making Belarus Known Internationally

Long-time Neighbours Need to Share Awareness, Plus Trade & Investment

Belarus and the EBRD:
Working to Expand the Country’s Strengths and Success

Lukashenka seeks to avoid commitment to Russia’s geostrategic goals

Brexit Is a Great Opportunity to Attract Foreign Investors to Belarus

Outsourcing in Germany: Stop Talking at and Start Talking to

Belarus Serves up Some Recipes for Success

Business in Belarus Recipe Book

Serbia, Belarus and Ukraine Ranked Lowly by Wharton Business School

Kyiv Ukraine - April 172017: The postal square in Kiev on Podol the Dnipro river. view of the square from the river panorama

Minsk International Airport Widens its International Reach

Belavia

Belarusian Economy on a Diet to Change its Financial Outlook

Is the CEE Region About to Steal the Outsourcing Crown From India?

Amazing view on the Taj Mahal in sunset light with reflection in water. The Taj Mahal is an ivory-white marble mausoleum on the south bank of the Yamuna river. Agra Uttar Pradesh India.

The Belarusian real estate market is on the up

Belarusian Economic Recovery May Downgrade Intended Reforms for Competitiveness

Innovation Brings Great Opportunities to the Belarusian Economy

Belarus 2020: Turning the Vicious Circle Into an Upward Spiral

Belarus: MOST Builds a Bridge to the Future

Belarus Has To Make an Extra Effort To Change Investors’ Perceptions

World Bank’s Doing Business Report 2016 Resume For Emerging Europe

Why Is Belarus Tech Booming?

From Denmark to Belarus — A Personal Experience of Business

Belarus and Singapore Share the Same Factors for Economic Success

Belarus Is Making the First Steps onto the International Finance Floor

HTP: Belarus’ Engineers Are Leading a Cool Revolution

Central And Eastern Europe At the World Property Market

The Proof of a Country’s Readiness to Attract Foreign Investors Lies in the Development of the Insurance Market

Emerging Europe Live: Life in Belarus As Seen by Foreigners

Under Promise, Over Deliver: Prospects for the EU’s Eastern Partnership in 2018

Eastern partnership

Bringing Belarus’ Cultural Past to Life for Belarusians and the World

Using Words to Paint a Picture – Belarus’ Nobel Prize Winning Novelist

21st century Manufacturing Arrives at Great Stone

Great stone

Germany and Belarus: Thinking Globally Acting Locally

Emerging Europe and the EBRD host the Outlook on Belarus conference in London

Cautious Upturn in Emerging Europe Haunted by the Spectre of Uncertainty

Donald Trump

The Deep Roots of Currency Crises in the Former Soviet Union

Belarus is Bringing Opportunities for European Companies

Great Stone

The UK and Belarus: A Partnership to Introduce the Real Belarus to Europe

While the EU Makes Plans for CEE China Makes Investments

Nuclear Security Summit In Washington, 2016

Business Opportunities in Belarus Encourage Outside Interest

New investors interested in Belarus’ Great Stone Industrial Park

Belarus US Business Relations Thrive as Conditions Improve

Belarus-Turkey Investment Forum to increase investment and trade between the two countries

Belarus: Navigating the geopolitical storm

The Country Shows Promise but Needs Some Reforms

EBRD Emerging Europe Outlook on Belarus 2016

The essence of the Customs Union is protectionism

The Reality Is More Interesting Than the Misconceptions

FocusEconomics: Belarusian Economy to Grow in Q4 2016 and Onwards

The Great Stone Industrial Park — Making Doing Business Easy in Minsk

Belarusian Journalists Still Face Huge Problems

Not All Quiet on the Eastern Front

More EU Help for Belarus SMEs

GRODNO BELARUS - DECEMBER 13 2013: Seamstress in textile factory sewing with a industrial sewing machine .

Office Space Vacancy is Currently Low but Building Standards Cause Concern

Minsk Belarus - March 23 2017 modern architecture business center Pokrovsky on Pobediteley Avenue editorial

Belarus is the most creative EEU country

Germany Is Not Letting Belarus’ Small Downturns Put it off Looking for Investment Opportunities

Belarus: On the Way to a Market Economy?

Veni, Vidi, Vici, Or My Personal Experience of Doing Business in Belarus

Foreign Investors: Belarus Offers Opportunities But Further Improvements Are Needed

Belarus Has Set an Example for Others to Follow

Are Labour Shortages Driving Economic Growth?

High-Tech Park in Minsk is growing rapidly

Smart, reliable and promising

PandaDoc — Rolling Sales Procedures Together So Everyone Succeeds

Belarus: The Importance Of Diversification

Business Mentors Helping to Solve Business Development Problems First

Portrait of confident business people interacting in the office

The EU’s Benign Neglect Of Eastern Europe

The Next Four Months Crucial For the Belarus-EU Relations

EY: Belarus’ IT Scene Is Thriving

High tech park minsk

Belarusian Tech Companies Lead a Global Technological Advance in Outsourcing and Product Development

Italy and Belarus: A Relationship Based on Complementarities and History

Belarus Is Ready to Begin With Venture Capital Investments

Breaking trade barriers with CIS has never been easier

Belarus Is One of the Top Outsourcing Destinations of 2016

The Belarusian Financial Sector: An Industry in the Process of Restructuring

Will the New Five-day Visa-free Regime Encourage More Visitors to Belarus?

Feel the Vibe of the City of Minsk

Trinity suburb in Minsk (Nemiga) Belarus on 20 May 2017

Invest in Belarus: looking beyond politics to the future

Belarus: Changing Old Ideas And Mixing With the New in Belarus’ Export Market

Winds of Change for Belarus’ Reinsurance Industry?

Falling Student Numbers and Declining R&D Result From Lack of Funds

Will European Business and Institutions Bolster the New Trends That Have Appeared in Belarus?

The Belarusian Banking Sector Moving Towards Modernisation Despite Some Challenges

Rolling Sales Procedures Together so Everyone Succeeds

Coworkers

Belarus’s Election Tests the EU’s Global Strategy

Emerging Europe Live: CEE — The Outsourcing Destination

The Eurasian Economic Union Fails to Bring Belarus Closer to Big Brother

One Belt One Road: a Big Task for Europe

Belarus’ Economy Is Slowly Recovering From Past Declines

Foreigners choose Minsk and Gomel as Belarus’ most attractive FDI destinations

A New Modern Mall Hopes to Draw Belarusians Back to the Home Market

RRY Capital

OECD: Belarus Has to Find Its Own Belarusian Model to Emerge

The Shopping Experience Is Set To Go Global in Belarus from 2017 Onwards

Belarus Is Where the New Silk Road Heads For Europe

Leave a Reply

Your email address will not be published. Required fields are marked *