Belarusian Industrial Sector: Performance, Trends and Issues. Belarus Economic Policy Note July 8, 2010, Minsk

Transcription

1 Belarusian Industrial Sector: Performance, Trends and Issues Belarus Economic Policy Note July 8, 2010, Minsk

2 Outline Industrial performance in : sources of growth Below the surface: warning signs and emerging concerns The role of policy: could government intervention substitute for market-based resource allocation? Conclusions and some policy implications

3 Industrial performance remained strong in High rate of industrial output growth High productivity growth Improved financial performance Strong investment growth Average growth rate in output Average growth rate in labor productivity Average profitability for the period Average real wage growth Average investment growth Memo: End-period industrial employment, index: 2000=

4 Factors of strong industrial growth Favorable global demand and export prices Strong import demand from Russia Macroeconomic policies (e.g. exchange rate) Softer price controls at producer level System of state support and lower incidence of corruption High capacity for policy implementation (e.g. energy efficiency programs) Some improvements in business environment

5 Below the surface: warning signs Increased concentration of output (export and tax base) in a handful of large, capital-intensive firms Industrial growth increasingly driven by fuel sector expansion Productivity growth slowing down and driven within-firms improvements Wage growth exceeded productivity growth and affect competitiveness Capacity utilization rate is high, shortages of equipment and qualified staff increasingly binding Number of loss-making enterprises remained high even in very good times

6 Contribution to industrial growth by sub-sector

7 Total industry Electric power generation Fuel Ferrous metals Chemical Petrochemical Machine building and Timber, wood processing, Construction materials Light industry Food processing Productivity growth slowing down since 2004 TFP dynamics, industry total Labor productivity growth industry total and by sector, % 2004/ /2004

8 Labor reallocation is persistently within the industry sector

9 Labor costs have affected competitiveness Unit Labor costs (Belarus & Russia) Unit labor costs across industrial sectors (Belarus and Russia) Average monthly real wage (Rbl) Labour productivity Average monthly real wage (ForEx)

10 High capacity utilization, shortage of equipment and qualified staff Capacity utilization Rating of the growth obstacle for Belarus, Russia and Ukraine, Sufficiency capacity Capacity utilization (right axis) Shortages of equipment Belarus Russia Ukraine Shortages of qualified staff Belarus Russia Ukraine I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

11 Persistent Soft Budget Constraints Share of loss-making enterprises, % total Customer non-payments 80 Belarus Russia

12 The role of policy 12.0% Total government support in percent to GDP Tax benefits State support: issues High tax burden 10.0% 8.0% 6.0% 4.0% 2.0% Non-interest budget subsidies Budget spending on repayment of guaranteed credits (called guarantees) Bank recapitalization program High costs on budget and well-performing companies Factor markets are distorted Managerial incentives are not efficiency-oriented Restructuring is delayed 0.0% Other programs Innovation is low Low attractiveness for FDI

13 Inefficient resource allocation: the case of dairy sector Factors Intensity of Availability of credit Employment growth (Investment per unit Factors of output in 2007) (Credit outstanding per unit of output in 2007) relation significance relation significance relation significance Employment in *** - n/s Employment in n/s Labor productivity in * + n/s Wage growth, n/s Productivity growth, *** - n/s Av Profitability, ** - * Av Profitability, * Constant + * + * Constant + * R R Number of observations Number of observations 47 Note: (*) stat significance at 1%, (**) - at 5%, (***) - at 10%, n/s not significant (Increase in the staffing in 2007 relative to 2001)

14 Labor market rigidities Local redundancy costs Variation in the average real wage in industry Coeff. variation, %, left axis Av wage, in 1995 Rbl, right axis Hiring and attrition rates in industry BEL hiring BEL attritions RUS hiring Belarus Russia Latvia Poland Ukraine Kazakhstan RUS attritions

15 Managers incentives

16 Increasing reliance on factor accumulation while innovation and technological adaptation remains low and slow risk of entering extensive growth path

17 USD FDI inflows are lower than in comparable countries FDI inflow, per capita cumulative (average for the period) Belarus Lithuania Poland Russia Ukraine

18 Major conclusions Industrial performance in remained strong Growth successes of the recent past may became a source of non-critical perceptions. But. There are a number of warning signs regarding the quality and sustainability of Belarus s industrial growth Unchanged industrial structure is becoming a source of vulnerability Growth is becoming increasingly extensive and there is an increasing need for product and process innovations

19 Growth prospects and need for structural reforms Short-term prospects for the global economy and Belarus are uncertain The medium-term prospects for Belarusian industrial growth deteriorate because of (i) phasing-out of underpriced energy supplies, (ii) lower world oil prices and global demand in medium term, and (iii) only gradual economic recovery in Russia with lower growth in imports of Belarusian industrial exports than before the crisis. In this more constrained environment, achieving sustained high growth rates will require increased productivity, investments in new skills, development of better services and the attraction of foreign direct investment. It would be very difficult to achieve this shift under the current economic model. There is no alternative to deepening structural reforms!

20 Strategic question: What role should the state play in facilitating upgrading and boosting competitiveness of Belarus s industrial sector while exiting current distortions?

21 And preliminary policy recommendations: SOE sector Lifting excessive regulations: stepwise elimination of quantitative targets and remaining price and wage controls; Tightening budget constrains: curtailment of subsidies, starting with the most inefficient; Restructuring: divestiture of non-core assets and acceleration of labor shedding; Strengthening managerial incentives: review functions and responsibilities, encourage changes in motivation towards profit maximization and innovation, link remuneration to profit and advancement in career; Promoting privatization and FDI: reducing state ownership in utilities, banking, telecommunications, transport, and logistics; differentiated approach to the path and speed for privatization of industrial sub-sectors with different degree of backward and forward linkages.

22 And preliminary policy recommendations: Private Sector Leveling the playing field for SOEs and the private sector: eliminating/cutting industrial and agricultural subsidies and preferential loans, ensuring equal access to financing, land, real estate and other inputs; Eliminating red tape: cutting back regulations and licensing requirements, simplifying entry and exit.

23 And preliminary policy recommendations: State Removing barriers to functioning markets and competition: deregulating products markets, liberalizing prices; Reducing credit market distortions: downsizing the scope of directed credit programs and expanding credit opportunities for SMEs; Ensuring greater labor market flexibility: wage and staffing policy liberalization; aligning vocational training, training programs, and higher education programs to meet demand from new sectors; Functioning markets for publicly financed services: ensuring cost-effective production of public services though public-private partnerships, competitive and transparent procurement; Advancing tax reform: gradual and fiscally prudent reduction in tax burden while expanding the tax base, eliminating distortionary taxes and reducing high marginal rates on direct taxes.