By Zuzana Brixiova 1. Introduction

Size: px

Start display at page:

Download "By Zuzana Brixiova 1. Introduction"

Elfreda Ramsey
6 years ago
Views:

1 PROMOTING ECONOMIC TRANSITION IN BELARUS By Zuzana Brixiova 1 Introduction I would like to thank the organizers of this seminar for the opportunity to speak about how to promote economic reforms in Belarus. I will first briefly review the recent economic polices and performance of Belarus, then discuss the challenges that the country is facing at present, and conclude with summarizing the lessons from experiences of other transition economies. Over the past few years, Belarus has taken some positive steps towards stabilizing its economy, resulting in a decline of the average inflation from almost 300 percent in 1999 to about 40 percent in Belarus was also relatively successful in containing output decline (Figure 1). Among structural reforms, the main achievements of the past three years include liberalization of the exchange market, progress with the removal of administrative price controls, and sharply reduced energy sector cross subsidization. Nevertheless, Belarus remains among the least reformed of the transition economies. 2 While some macroeconomic stabilization was achieved, Belarus continues to have the highest inflation among the countries of the former Soviet Union. At the same time, if internationally accepted methodology was used, real output growth in 2002 was likely to have been significantly lower than the official GDP figure would suggest. The economy remains predominantly state owned as there has been relatively little foreign direct investment, while impediments to private sector development are overwhelming. For a number of years now, the IMF and the other international organizations have been concerned about slow pace of macroeconomic stabilization and transition to the market economy in Belarus. The authorities have chosen a slow path of economic reforms as a means of ensuring that important social objectives are not undermined during the transition to a market economy. While the IMF shares the authorities concerns about the social consequences of transition, we believe that in Belarus the costs of gradualism, which include lower growth and deteriorating living standards over longer run and missed opportunities for joining in growing regional prosperity, outweigh the costs of accelerated market reforms. 3 1 The author is the IMF resident representative for Lithuania and Belarus. She thanks Thomas Richardson and Julia Lyskova for helpful comments. This note was prepared for the IMF seminar for parliamentarians from transition economies held in the Joint Vienna Institute on March 10-14, EBRD Transition Report 2002 ranks Belarus 26 th out of 27 transition economies in overall progress with structural and institutional reforms. Belarus also had a very high inflation in 2002 (Figure 2). 3 For arguments why continued gradualism is not an advisable strategy for Belarus growth, see Appendix I.

2 - 2 - The urgency of speeding up macroeconomic stabilization and relevant structural reforms is also highlighted by the authorities plan to peg the Belarusian rubel to the Russian ruble in The imminent challenges ahead of Belarus are significant. In order to successfully peg to the Russian ruble in 2004, the country needs to considerably tighten fiscal and monetary policies already in With general government expenditures accounting for almost 50 percent of GDP, the budget imposes undue tax burden on the economy and especially on the business environment. 4 Direct central bank credits to finance the government budget deficit contribute directly to inflation, while the housing construction program they support needs to be made more efficient, probably through downsizing. Further, directed credits (where the stateowned banks are pressed to lend to help enterprises clear wage arrears, for instance) have recently reappeared, despite a commitment by the authorities under the 2001 Staff Monitored Program to eliminate this practice. 5 Moreover, Belarus does not have a viable growth strategy and the key challenge in the area of structural reforms is streamlining the procedures for privatization and creation of new businesses. Accordingly, I will now focus on the following issues: First, effective macroeconomic management to enhance stability and to promote high quality growth; and second, reducing institutional and regulatory obstacles to privatization and creation of new businesses. Macroeconomic Policy Management Let me begin with an issue currently debated actively in Belarus monetary integration with Russia. 6 While one could try to address this issue using the theory of optimal currency areas (see, for example, Mundell 2001 and Alesina, Barro, and Tenreyro 2002), it is largely a political decision, and on that basis, the IMF does not take a view as to whether or not it should be accomplished. However, the recent IMF mission to Belarus stressed that in order for the announced peg of the Belarusian rubel to the Russian ruble in January 2004 to be sustainable, monetary and fiscal policies need to be significantly adjusted already this year. The mission also underscored that tighter monetary and fiscal policies are necessary, but not sufficient, conditions for a successful peg structural reforms that ensure that the economy 4 According to Mitra and Stern (2002), tax revenues in transition countries should account for 22 to 31 percent of GDP, depending on the countries level of development. Preliminary estimates indicate that in Belarus it accounted for about 37 percent in 2002, highest among the CIS countries (Figure 3). 5 This practice creates incentives for enterprises to hide their profits and claim financial difficulties, in order to receive subsidized credit from state-owned banks. 6 The Belarusian and Russian authorities signed a joint plan of action on monetary union that foresees a peg of the Belarusian rubel to the Russian ruble as of January 1, 2004, and introduction of the Russian ruble as a single currency as of January 1, The two sides have not yet reach an agreement on international reserves management, and where and how to carry out money emission.

3 - 3 - would be flexible enough to adjust to changing international conditions are also needed. 7 Without these measures, the peg to the Russian ruble would not be sustainable and the Belarusian economy is likely to endure exactly those costs low output growth, high unemployment, wide income disparities that the authorities are trying to avoid by adopting gradual approach to economic reforms. It will not be possible to tighten monetary policy sufficiently to support peg if the fiscal policy is not adjusted accordingly. With the general government spending of nearly half GDP (largest share among the countries of the former Soviet Union), much of the fiscal adjustment should come from expenditure cuts, especially in light of the already high tax burden in Belarus. The areas of possible reductions include scaling back on the housing construction program, implementing more modest road construction, and limitation of budgetary lending. Private Sector Development The successful transition from plan to market requires the emergence of a dynamic private sector that would serve as the engine of growth, job creation and competitiveness. In Belarus, progress with private sector development has been very slow: in 2001 and 2002 only 20 percent of GDP was produced in the private sector, the lowest among the CIS countries (Figure 4). At the same time, the enterprise sector in Belarus has been experiencing difficulties (increasing inventories, accumulating arrears, declining profitability), pointing to the need to accelerate privatization and restructuring, and to promote creation of new businesses. a. Privatization The authorities have made some headway with corporatization during the past decade: over 1500 enterprises were transformed into joint stock companies from 1991 to January 1, The following methods were used for (mostly partial that is private acquiring of some shares) privatization of more than 2000 enterprises during the same period: (i) employee ownership (34 percent), tenders (20 percent) and auctions (46 percent). Since the laws guiding privatization consider both corporatized and partially privatized enterprises to be privately owned, the official statistics greatly overestimate the size of the private sector and claim that it accounted for almost 50 percent of GDP at the end of A nontransparent and unstable legal framework has been one of the main impediments to faster progress with private sector development. The golden share (the right of the state for taking part in joint-stock companies' management), which in Belarus can be introduced into any company where the state owns at least one share, has been a particular deterrent to 7 For example, there is an asymmetry between the countries with respect to shocks to energy prices, with Russia being net exporter and Belarus net importer of energy. In case of an increase in energy prices, labor markets in Belarus (currently very rigid) need to be flexible to help absorb the shock.

4 - 4 - foreign investment. 8 We are convinced that the possible use of the golden share should be sharply restricted, if not eliminated. To ensure prudent and transparent use of privatization revenues, and therefore public support for large scale privatization, several transition economies have set up privatization funds. 9 The experience of Lithuania, where the overall progress with privatization was good, indicates that in addition to establishment of the privatization fund, other factors contributed to the success of privatization and attracting foreign investment in the late 1990s: offering majority stakes in state owned enterprises (including in strategic industries such as telecommunications, energy, transport); creation of a sole agency in charge of management and privatization of the state property; and involvement of independent, reputable consultants -- especially when privatizing large enterprises in strategic industries. b. Business environment for small and medium enterprises According to the recent World Bank study, with less than three small and medium-sized enterprises per 1,000 people, Belarus has the lowest number of these enterprises in the region. Moreover, the number of small and medium sized-enterprises declined in past three years. The main barriers to entrepreneurship and private sector activity in Belarus seem to be (i) the unstable legal and administrative framework; (ii) the excessive and again unstable tax system; and (iii) the culture of state interventions and inspections, which creates a scope for corruption. These barriers clearly discourage private sector development, which rests on confidence of investors and their ability to assess risks of different projects. Concluding Remarks The Belarusian authorities have implemented some positive economic measures during the past three years: the system of multiple exchange rates was eliminated; restrictions on convertibility of the rubel for current transactions were removed, cross subsidization in the energy sector has been reduced, and price liberalization has expanded. Still, Belarus 8 So far, the golden share has been introduced in 20 enterprises. The most disputed case of its introduction happened in March 2000, when the government introduced golden share at confectionery factory Kommunarka to block sale of 51 percent stake to the Russian confectionery concern Babaevski on the grounds that economic interests of the state need to be protected. At that time, the government owned only 2.6 percent of the shares. 9 Privatization funds are established to mitigate volatility and unpredictability of privatization revenues ( stabilization funds) and/or save part of the revenues for future generations, for example for financing pension reforms ( savings funds). If Belarus chooses to set up such a fund as well, the experience of other countries shows that it would be important to make it an integral part of the budget, with all transactions recorded on a gross basis, and with privatization-related expenditures listed explicitly. Given the need for a pension reform, the proceeds of the fund could be used to finance the transition to the funded system.

5 - 5 - continues to have the highest inflation among the countries of the former Soviet Union and structural reforms lag far behind the other countries in the region. The Belarusian economy lacks flexibility, and the unstable legal framework and an unfavorable business environment have undermined the growth of small and medium enterprises and foreign investment, as evidenced by the small share of the private sector in GDP and employment. Looking ahead, we believe it is time for Belarus to launch fully-fledged market reforms, while utilizing the ten years of experience with reforms undertaken in other transition economies. This experience shows that key measures include: (i) ensuring macroeconomic stabilization; (ii) increasing transparency and efficiency of budget management, also through reduction of unproductive expenditures; (iii) abolishing directed credits and imposing market conditions on state-owned enterprises, (iv) improving the environment for new businesses by reducing state interventions and stabilizing the legal framework, (v) undertaking financial and labor market reforms to promote growth and broaden sharing of its benefits; and (vi) reform social safety net to adjust it to new conditions, making it both more affordable and effective. These reforms, while not without economic and social costs, are crucial for attaining high and sustainable economic growth and increasing living standards of the Belarusian people over the longer term. References Alesina, Alberto; Barro, Robert, and Tenreyro, Silvana (2002), Optimal Currency Areas, National Bureau for Economic Research, Working Paper No European Bank for Reconstruction and Development (2003), Transition Report International Monetary Fund (2002), Republic of Belarus: Article IV Consultation Staff Report, Country Report No. 02/23. International Monetary Fund (2002), Republic of Belarus: Selected Issues, Country Report No. 02/22. Mitra, Pradeep and Stern, Nicholas (2002), Tax Systems in Transition, paper prepared for a conference on Beyond Transition: Development Perspectives and Dilemmas, Warsaw. Mundell, Robert (2001), Currency Areas and International Monetary Reform at the Dawn of A New Century, Review of International Economics, Volume 9, Issue 4, Nuti, Mario (2000), Belarus: A Command Economy without Central Planning, Russian and East European Finance and Trade, vol. 36, No. 4, July-August 2000, World Bank (2001), Transition--The First Ten Years: Analysis and Lessons for Eastern Europe and the Former Soviet Union. World Bank (2003), Improving the Business Environment in Belarus, a preliminary draft.

6 - 6 - Figure 1. Changes in Real Output, Index (1989 = 100) Central and Eastern Europe, Baltics Southeastern Europe Commonwealth of Independent States Belarus

7 - 7 - Figure 2. Average Inflation in 2001 and in percent Central and Eastern Europe, Baltics Southeastern Europe Commonwealth of Independent States Belarus

8 - 8 - Figure 3. General Government Tax Revenues in the CIS in in percent of GDP Belarus Ukraine Russia Moldova Uzbekistan Kazakhstan Kyrgyz Republic Armenia Azerbaijan Georgia Tajikistan

9 - 9 - Figure 4. Private Sector Share of GDP among the CIS countries in (in percent) Belarus Turkmenistan Uzbekistan Moldova Tajikistan Azerbaijan Kyrgyz Republic Georgia Kazakhstan Ukraine Armenia Russia

10 GROWTH IN BELARUS Two questions one often hears regarding Belarus and growth are: Can Belarus Adopt Gradualism And Replicate the Chinese Growth Experience? China, which started its economic reforms in 1978, has adopted a gradual strategy and continued to support loss-making state enterprises through the budget and the banking system. Still, between 1978 and 1995, the average annual growth of GDP per capita amounted to an impressive 8 percent, driven by a rapid emergence of new private enterprises and inflow of foreign investment. Proponents of gradualism point to this experience and suggest that Belarus can also maintain relatively high growth by protecting the state sector through transfers from the other sectors of the economy, until a sufficient mass of private enterprises emerges. This view does not seem to assign a proper role to differences in initial conditions and policies of the two countries: Initial conditions: (i) share of the state sector in the economy was much smaller in China, and hence less transfers were needed to support it and (ii) different levels of development -- growth in China was driven by the sizeable agricultural sector (and rural industry, absorbing the surplus labor); this option did not exist in Belarus Policies: Unlike Belarus, China has established an investment climate conducive to creation of new private firms and inflows of foreign investment What Explains the Relatively Good Growth Performance, Given the Lack of Reforms? Proponents of gradualism also point that the country s relatively good growth performance contradicts the reccomendations about the necessity of macroeconomic stabilization and structural reforms. World Bank (2001) emphasizes the following: The issue of statistical accuracy aside, Belarus growth performance is favorable only when compared with the Commonwealth of Independent States and South and Eastern Europe countries, not in comparison with the Central and Eastern Europe and Baltics (CEEB). CEEB countries did stabilize their economies faster and implemented relevant structural reforms sooner than the other countries. Rather than due to lack of reforms, keeping state-owned enterprises afloat was possible because of direct energy import subsidies from Russia. These subsidies also kept Belarusian exports tied to Russia, instead of being reoriented towards the western markets (and Belarus thus avoided output decline during this reorientation).

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

Belarusian Industrial Sector: Performance, Trends and Issues Belarus Economic Policy Note July 8, 2010, Minsk Outline Industrial performance in 2005-08: sources of growth Below the surface: warning signs