Modernization Traps for Belarus
The Belarusian government has announced its plans to modernise the national economy. However, the content of the policy package is far from clear. Given the experience accumulated by Belarus and other transition economies, there are reasons to warn about possible traps that modernization policy could set, if implemented unwisely.
The government has announced a new course for modernization to strengthen weakening economic growth. In October 2012, Prime Minister Myasnikovich emphasised that “modernization of the national economy is a priority”.
When reporting to Aleksandr Lukashenka on 14 January 2013, Myasnikovich has been warned that the pace of modernization shall not be slackened. The target of modernization is apparently the state sector of the economy, which still produces about two-thirds of Belarus’ GDP.
Lukashenka summarised his vision of modernization policy at a press-conference on 15 January 2013. According to him, modernization is about “the installation of new equipment to the available production facilities”. Modern equipment is supposed to boost productivity and output growth as the stock of capital is increased – a necessary step to sustain a growth trajectory, which has been declining since from 2011.
In 2012, real GDP growth amounted to 1.5 per cent, while real investment dropped by 13.8 per cent (see Figure 1 below). Without investment growth, GDP dynamics is in danger of further enfeeblement.
Figure 1: Real GDP growth and real investment dynamics, 2000–2012
Both workers and managers of state-owned enterprises understand that the stakes in the “modernization game” are high. In particular, workers of the wood-processing plants are not allowed to leave their enterprises unless modernization is over.
Independent trade unions – supported in their claims by their Russian and international colleagues – criticised the emergence of “new serfdom” at the Belarusian labour market. Furthermore, a CEO and three managers of Mogilevdrev, a company with modernization underway, are being persecuted for the misuse of public funds granted for it.
Experience of Early Modernizers
In fact, intentions to revive poorly performing economies by the means of technological renovation of industries are not novel for the post-socialist world. In the late 1980s, Poland, Hungary, and Bulgaria and other countries tried to revamp their economies by using foreign money to purchase equipment from abroad. However, export revenues were not sufficient to pay back foreign loans.
First, extensive trading within the socialist block by using convertible roubles had resulted in the lack of hard currency. Second, a more fundamental challenge came from the weak capacity of socialist enterprises to innovate. Foreign equipment was insufficient to substitute a whole system of incentives for managers and workers.
Export-oriented growth of East Asia type failed to materialise. As a result, socialist economies were forced to start their transition to capitalism with considerable levels of foreign indebtedness. This fact allowed international financial institutions as the IMF to exert leverage upon reform, as, for instance, it happened in Poland.
This experience is worth to have in mind when thinking about the design and likely effects of modernization policies in Belarus. In a nutshell, Belarusian authorities see modernization as a task for the state, realised by the means of state investments to state-owned enterprises. Seeing in this light, these policies are not novel, but a continuation of lasting state investment policies.
Predecessors of Modernization
Before the currency crisis of March 2011, investment programmes were a major tool to support technological renovation. These programmes were implemented with the help of cheap loans from state-owned banks. The 2012 World Bank memorandum on Belarus reveals that directed loans are typically three times cheaper than market loans.
At the same time, the gap between factor productivity of state-owned and private companies vary from 20 to 30 per cent on average. Private firms tend to be more efficient than state-owned enterprises.
This fact implies that the efficiency of state investments is lower than private ones. Prior to the currency crisis, directed loans amounted to a half of the total volume of loans, granted typically to agriculture and housing production.
According to a study, conducted by the BEROC researchers in December 2012, the expansion of these loans has not contributed to the improvements in total factor productivity, which reflects the efficiency use of capital and labour in the economy.
Modernization appears to be a call for a more productive use of funds, but there is little evidence in favour of changes in incentives of recipients of state financial aid. Moreover – and this is probably the crucial aspect – private domestic and foreign investors are not considered seriously as major actors of modernization. If foreign borrowing, and not a foreign investment, continues to be one of the sources of foreign cash to purchase equipment from abroad, then macroeconomic stability can be threatened.
The Adverse Effects
Apparently, private investors can be more efficient in implementing modernization plans without state guidance. However, some recent steps of the authorities might keep them away from entering the scene. In particular, nationalisation of two confectioneries and planned amendments to privatisation legislation, stipulating the reservation of special places for state representatives to vote for the absent minority shareholders are the measures that lie far from improving domestic business climate.
There is a worrisome tendency that increase in real investment is associated with higher foreign indebtedness and lower net exports (see Figure 2).
Figure 2: Investment, net exports, and debt, 2000-2012 (3rd quarter)
Source: National Bank, Belstat
Therefore, modernization – even it is understood narrowly as a mere technological upgrade – might bring temporary gains in the form of higher output growth rates, but it contains considerable risks. It is too early to make conclusive statements, but suspicions come from the lower capacity of state-owned enterprises to function as efficiently as enterprises in the private sector.
Without expansion of the private sector and incentives to private investment, the Belarusian economy might continuously require injections of liquidity in the form of state-guaranteed loans. These injections would increase the economy’s volatility without addressing the fundamental efficiency problem. Instead, a vicious circle of more funds–more growth could emerge, with severe inflationary repercussions and high costs of breaking with it.
To summarise, contemporary modernization plans look so far as “old vine in new glasses”. If that is the case, then seemingly new policies would have a limited success. However, if compounded by the measures to support the development of private sector, economic growth can be made more sustainable and less volatile.
Kiryl Haiduk
Senior Research Fellow at the Belarusian Economic Research and Outreach Centre
This article is a part of a new joint project between Belarus Digest and Belarusian Economic Research and Outreach Centre (BEROC) – a Minsk-based economic think tank.
Belarus Struggles with the West on the Ideological Front
Vladimir Makei, Minister for Foreign Affairs of Belarus
The Belarusian Ministry of Foreign Affairs recently presented a report named "Human Rights Violations in Certain Countries in 2012". The report blames 25 Western states of serous human rights violations. Belarus is trying to attack the West in the field where the Belarusian regime is aware of its own weaknesses.
The frequent accusations of Alexander Lukashenka, multiple TV programmes and now the report are the main tools which the Belarusian government uses against the West to win an ideological war. As with many other parts of state propaganda, the accusations have little factual support or are deliberately misleading. But on the domestic level, they seem to serve their purpose well.
The Best Defence is a Good Offense
The practice of blaming western democracies for human rights violations is rather wide-spread among authoritarian regimes. It helps to divert attention from domestic problems to foreign problems and at the same time to respond in kind to those governments that dared to criticise them.
For instance, take the case of Iran. In October 2011 one of the Iranian leading Ayatollahs responsible for judicial system of the country held a long TV-speech explaining why it was time to bring an action before the international courts against the USA for multiple human rights violations.
In May 2012, North Korea took the initiative and officially blamed the West for abusing human rights all over the world by organising revolutions and suppressing the protests.
In December 2012 Russian Ministry of Foreign Affairs issued a statement criticising European governments and the United States for mistreatment of ethnic minorities and brutally dispersing mass demonstrations.
Now Belarus has officially joined the club. It is true that even the best functioning democracies deserve criticism. But when the criticism is made by the country with the worst human rights record in Europe, it is nothing but pure politics.
Belarusian Report With Numerous Mistakes and Distortions
The report seems to be prepared in haste. Some data is simply inaccurate, sometimes the Belarusian Ministry of Foreign Affairs deliberately misrepresents what "human rights" are.
Some "accusations" from the Belarusian report seem comic rather than serious. Belgium, for example, is said to discriminate those over 45 years old 8% more often than the other groups while applying for a job. In several countries high unemployment among youth and migrants, poverty, low salaries are also considered human rights violations by Belarusian governmental specialists.
Sometimes western governments are accused of human rights violations when they were actually protecting them. The Danish government is guilty for not censoring the cartoons about Prophet Mohammed.
The US government, in order to respect the rights of Muslims, should have banned "the Innocence of Muslims" movie and prosecute its director. The Norwegian courts were too soft on Anders Breivik.
Perhaps these numerous mistakes attracted more international attention than the report itself. "Foreign Policy" magazine has showed several mismatches in it. For example according the the Belarusian report, Jill Stein, candidate for presidency from the Green Party, was a man but in fact she is a woman.
The authors of the report think that the USA should have also allowed Texas to become independent. As "Foreign Policy" magazine’s columnist Joshua Keating sharply put it: "It appears that if Texas ever did secede, Belarus might be the first to recognise it".
Opportunities to Protect Abused Rights
One must be honest and admit that some of the human rights violations, described in the report indeed took place. This concerns mistreatment of migrants, brutal crackdown on the "Occupy" movement demonstrations, torture in American and European prisons etc.
But what Belarusian officials tend to omit is the possibility of western victims of human rights abuses to defend themselves in courts effectively. What seems exotic in Belarus often happens in democratic states: incorrect governmental or judicial decisions are later overruled.
This concerns, for instance, the case of the Lithuanian journalist Dainius Radzevicius, who was unlawfully accused of libel by the city district court. But the Belarusian report does not mention that this decision was overruled by the appeal court afterwards.
Citing the decisions of the European Court for Human Rights is a moment of a pure hypocrisy in the Belarusian report. The authors make use of one of the greatest European institution’s decisions, although Belarusians are not allowed to use it themselves in reality. Belarusians are the only European nation for whom the doors of this Court are closed.
Describing the cases of torture in American prisons, the Belarusian Ministry of Foreign Affairs forgets to mention that most were subsequently punished for it. In Belarus such justice seldom prevails. For example, ex-candidate for the presidential elections, Ales Mihalevich, reported about torture in Belarusian prisons (as did many other political prisoners) and had to leave the country fearing for his life. Naturally, "the independent" investigation did not confirm any of these allegations.
Tool in an Ideological War
Belarusian political analyst and journalist Aleksander Klaskovski in his comment to Belarus Digest said: "This document was made by the [Ministry of Foreign Affairs] officials without any enthusiasm. That is why there are so many silly mistakes in it. The purpose was to show Lukashenka, that the MFA will fight back against its ideological foes".
Referring to human rights is a tool of the government's propaganda within the country and towards it's foreign opponents. It became one of the legitimate battlefields for the regime. The Belarusian ruler himself several times mentioned western human rights abuses during his last press-conference.
Belarusian state media keeps pace with its master. For example, Belarusian state television features a weekly programme called "Human Rights: World Outlook". Week after week Soviet-style state propaganda "breaks the myths" about western democracies.
Some of the programme's revelations are that the USA control the world media, the West is obsessed with plans to occupy all oil-producing countries and to overthrow governments who do not want to follow their orders. The West according to the Belarusian television is also waging an information war waged against Belarus and its allies – Iran, Venezuella and Cuba and finances global terrorism.
Belarusian authorities deliberately seem to have put human rights on the chessboard of this ideological struggle. They aim not so much to show how bad the West is, but rather to ridicule and undermine the whole idea of human rights violations.
Artyom Shraibman
