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.
Is Europe Losing Interest in Belarus?
On 24-26 October the political directors of the Swedish and Polish foreign ministries – Torbjorn Sohlstrom and Jaroslaw Bratkiewicz – visited Minsk.
They came instead of their bosses Karl Bildt and Radoslav Sikorski, who preferred to go to Chisinau, Kyiv and Tbilisi. This shows Europeans' apathy and disappointment towards Belarus.
This situation has developed following long but unsuccessful attempts to influence the Belarusian regime. The European Union tried sanctions, engagement and combination of both, but nothing has really worked. Combined with Belarusian authorities’ unwillingness to make any concessions,
a trend of European apathy is becoming rather dangerous not just for those in Belarus depending on the European Union, but for the geopolitical choices of the nation and its own independence.
Shallow Hopes and Predictable Disappointments
In recent years the intensity of European officials’ visits to Belarus has indicated the condition of its relations with the West.
From 1996 to 2008 the relations were tense with recurrent periods of further decaying. By August 2008 the EU included more than 40 Belarusian officials (including Alexander Lukashenka) on "black lists", prohibiting them from travelling to European countries. Three political prisoners, including ex-candidate for presidency Alexander Kazulin, were serving prison terms.
However, after the Russian-Georgian war in August 2008, the status quo has changed. Geopolitical risks caused by Russian aggression in Georgia made Russia's neighbours, including Belarus, seek for a thaw in relations with the West. As a result, all the political prisoners were set free by the end of August 2008.
Despite the fact that the European observers declared the parliamentary elections of 28 September 2008 undemocratic, the EU suspended sanctions against Belarusian officials.
In May 2009 Belarus became a member of EU Eastern Partnership project, together with Ukraine, Armenia, Moldova, Azerbaijan and Georgia.
Since then several other top European officials, including heads of states, visited Belarus with only one main message – the EU is ready for a breakthrough in relations with Belarus. Polish and German foreign ministers Radoslav Sikorski and Guido Westerwelle even promised $3bn to the Belarusian ruler, given he would hold transparent and fair elections.
But after brutal crackdown on an opposition rally on election day, 19 December 2010, led to the detention of nearly 700 people and launch of criminal cases against more than forty of them (including seven ex-candidates for the presidency) Belarusian-European relations fell into long-standing state of crisis. The Council of the EU introduced new visa sanctions against Belarusian officials (currently – 243 persons) including several some businessmen considered to be affiliated with Lukashenka.
The 19 December setback caused serious reputational harm to those experts and politicians who believed in the strategy of engagement of Belarusian authorities and discouraged European officials from making any further visits to Minsk.
Failure of Three Approaches
At the same, time political prisoners remained behind bars. Light visa sanctions could not influence the regime’s policy. At the same time, the doubtful effectiveness of tough economic sanctions and lack of political will amongst EU members to impose them made the launch of a new stage of political dialogue inevitable.
Europeans took a new approach, called "critical engagement": leaving the door open for cooperation with certain political limitations. Naturally, the release and rehabilitation of all the political prisoners became a precondition of any serious political dialog.
On the other hand, Belarusian authorities, driven to the wall by economic crisis and stagnation in relations with Europe, started forcing imprisoned activists to sign pardoning pleas and releasing them. On 11 August nine of them went free, including Dmitri Drozd, Artsiom Gribkou, Syarhey Kazakou, Vasil Parfiankou, Yauheni Secret, Uladzimir Yaromenok, Alexander Kvyatkevich, Vital Matsukevich and Uladzimir Hamichenka.
At the end of August 2011, the Bulgarian Minister of Foreign Affairs Nikolai Mladenov came to make secret negotiations with Lukashenka. As Reuters reported afterwards, Lukashenka promised to release all prisoners of conscience. On 1 September four more people were set free. Ten days later – eleven political prisoners left their cells. However, the public disclosure of Mladenov’s visit details together with Lukashenka's unfulfilled expectations of EU’s reciprocal concessions hampered the further release of any political prisoners.
the level of mistrust between Minsk and Brussels, one that leaves the door practically closed for those in Europe willing to go on engaging the Belarusian authorities in any sort of dialogue Read more
Since then no important European "message carriers" have visited Belarus for more than two years at this point, except for occasional visits by second-rate diplomats preparing reports for their respective states and organisations. This passiveness, besides its implications for their reputation, is a result of the level of mistrust between Minsk and Brussels, one that leaves the door practically closed for those in Europe willing to go on engaging Belarusian authorities in any sort of dialogue.
Given that political prisoners remain in the authorities' custody, democratic changes failed to take place, one may conclude the overall failure of all three European policies applied to Belarus: sanctions, engagement and their mixture – critical engagement.
Belarus Risks Being Left Alone
Belarus appeared as one of three Eastern Partnership countries Polish and Swedish foreign ministers refused to visit. The EU seems to have divided the Eastern Partnership members into two groups of "leaders" and "losers", with Belarus being in the forefront of the second bench.
Europeans have simply grown tired of all their approaches to Belarus not bearing any notable results, which in its turn has caused a decrease in enthusiasm for in actively engaging Belarus.
In addition, the Belarusian government (joined by Armenia) have consciously and publicly chosen Eurasian integration, unlike Ukraine, Moldova and Georgia, who are striving for an European path. This only deepened the EU’s apathy and disappointment in its efforts to engage Minsk.
Dzyanis Melyantsou, a senior analyst with Belarusian Institute of Strategic Studies, suggests one more reason for this trend. "European politicians, – he says, – depend on electoral cycles and need success stories, not failures". Hence, they prefer to leave aside such problematic cases as Belarus where several policies have failed and no swift or effective recipe is on the table.
This seems especially relevant on the eve of the coming Eastern Partnership summit, where all the attention will be drawn to Ukraine and its association agreement chances.
Belarusian civil society, opposition and active pro-Western youth might be the first to suffer from the closing of the proverbial 'European window", caused by the lack of political interest in Belarus. It can also damage the country’s independence prospects, when facing the Eurasian union’s challenges to its sovereignty.
Insofar as Europe has little to propose to Lukashenka, he will hardly concede anything, unless new conflicts with Russia will force him to do so. But for now the Kremlin seems quite interested in its Eurasian integration project, that it is ready to concede in minor fights with Minsk to reach its ultimate objective. European indifference can only facilitate Russia's grand project.