Kastrychnicki Economic Forum: Why the Belarusian Economy Stagnates

Slow economic growth, inefficient capital accumulation and the steady outflow of its labour force from Belarus became the hottest topics at the Kastrychnicki Economic Forum (KEF) held on 5 November in Minsk. 

For many years authorities responded to the criticism toward the Belarusian economic model using the argument that the Belarusian economy is growing. Today even official economists would agree that the economy is stagnating. At the forum, experts discussed the reasons why the economy grew and why it is now stagnating.  

Three key economic think-tanks in Belarus organised the event: The Research Centre of the Institute for Privatisation and Management (IPM Research Centre), the Belarusian Economic Research and Outreach Centre (BEROC) and the Centre for Social and Economic Research - Belarus (CASE-Belarus). Belarus Digest broadcasted the conference live.

Belarus has exhausted its potential for economic growth 

The global economic crisis had a decidedly negative influence on economic growth throughout Europe, but it was not the global economic crisis alone that became the impetus for the economic hardship faced by Belarus. According to research carried out by BEROC experts Dmitry Kruk and Katerina Bornukova: “Factors of economic growth in Belarus: Analysis of productivity by sectors”, the productivity of the economy continues to stagnate and the level of economic growth in recent years was in part due to the country's accumulation of capital. The authors claim that it is a systemic problem and such growth cannot be sustainable. 

They also noted that Belarus lost its exporting competitiveness as a result of inefficient capital accumulation and its overall lack of productivity. Comparing the growth of productivity in Belarus with the Czech Republic and Sweden the researchers found out that the productivity gap with developed countries is declining very slowly and has even grown in comparison to other leading economies. 

When analysing economic growth by certain sectors, it became evident that only three sectors demonstrated any strong growth in productivity. Growth in fuel, chemistry and petro-chemistry industries with ties to preferential access to Russian oil were the clear leaders. The growth in productivity in the  construction materials industry and hotel business occurred due to the artificial stimulation of internal demand. 

Kruk and  Bornukova suggested that the quickest and cheapest way to increase productivity would be to ensure free redistribution of resources. But it is almost impossible for a "welfare state" like Belarus. The Belarusian government has too made too many promises and commitments to inefficient industries, structures and other economic actors to be able to change the situation at present. 

Low income differentiation stimulates emigration

Approximately 130–180 thousand Belarusians works in Russia. An expert from CASE Belarus, Uladzimir Valetka, researched how money transfers from migrants influence the Belarusian economy. He claims that in 2012 economy received from migrants around USD 950 million. The actual sum is likely much higher. 

Valetka concluded that the most productive and active citizens migrate from the countryside. This is the consequence of low income differentiation in Belarus and a significant difference in income between Belarus and Russia. Under these conditions qualified professionals decide to work in Russia instead staying in Belarus and earn less money.

The effect of migrant remittances influences the economy both positively and negatively. On the one hand, this causes an increase in domestic consumption and brings in investment. On the other hand, it leads to brain drain and a reduction in incentives for government agencies to change their policies - in other words, the unemployment problem has solved itself. 

Valetka believes that the state needs to increase income inequality to retain the most active labour force and to give them an opportunity to earn at home.  In addition, he proposed to establish a bureau of remittances within the National Bank to allow the Diaspora to invest their capital in the country with privileges and preferences. This would effectively increase the amount of investment coming into the country. 

Improvements may come through reforms

The Institute for Privatisation and Management researchers Ihar Pelipas and Iryna Tachytskaya claim that to improve the investment climate, Belarus needs reforms and only the state authorities can these initiate changes. 

Their research project entitled "Assessment of the Competitiveness of Belarusian Regions" ranked Belarusian regions competitiveness using the methodology employed by the World Economic Forum, which regularly prepares a global competitiveness index.  Taking a poll of 403 state and private enterprises, the researchers measured competitiveness by measuring three indicators.

The first group of factors describes the basics of competitiveness. It includes the country's transportation infrastructure, macroeconomic environment, institutions and public health – and these factors dominate in the regions. The second group of factors estimates the effectiveness of growth: higher education, commodities, labor and financial markets. The third includes the innovation potential and business skills of the country.

The results showed that Minsk and the Minsk region have become the most competitive regions. The Homel and Hrodna regions closely trail the capital in this regard. The Brest region was last on the list of competiveness. The differences between the Belarusian regions' competitiveness at appears to be insignificant. On a seven-point scale all of them are situated between 3.5 and 4.

According to Ihar Pelipas, if Belarus participated in the international ranking of the World Economic Forum the country would be located between 60th and 80th place. To move up in the rankings Belarus needs to improve the key problems for generating business.

Primarily they should solve the issues related to legislative and legal instability, inflation, tax rates and the complexity of the tax code. Local authorities do not have the power to deal with these issues, as only the central government can initiate reforms for improving the investment climate. 

The inevitability of reform? 

For a long time many experts have proclaimed the necessity of economic reform in Belarus. The Kastrychnicki Economic Forum once again demonstrated that the Belarusian economy faces challenges and needs to undergo a process of transformation.

Belarus features a poor business climate and substandard public administration. With a large public sector, the lack of development of its financial markets, a lack of human capital, restrictions on foreign investment, populism and an excessive social policy burden – this partial list of issues that the Belarusian economy has to deal with, if solved, could help Belarus overcome its own economic downturn.

The real question is if the Belarusian political elite are capable of initiating these economic reforms. Nothing they have done has stakeholders their intentions to do so at the moment. Reforms would mean the transformation of its management system, unpopular economic measures and liberalisation which can lead to the disruption of the status quo in Belarusian politics. Under these conditions one can expect only half-measures and partial reforms.

Vadzim Bylina is a researcher at the Institute of Political Studies 'Political Sphere' based in Minsk and Vilnius.

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