Thursday, March 16, 2006

World Bank Report Sees 'Window Of Opportunity' For Belarus To Enhance Competitiveness and Sustain Economic Growth

"Economic growth in Belarus has been genuine and robust, especially in recent years. An analysis based on the comparison of business conditions survey results with the official growth data have revealed rather high correlation in the identified growth trends, supporting the argument that economic growth in Belarus has been real and not just a statistical phenomenon.

Economic growth in Belarus has been broad-based and has been driven primarily by the improvements in labor productivity, increases in energy efficiency and capacity utilization. In contrast to some other CIS [Post Soviet Union] countries, where growth and exports remain concentrated in the extracting sectors with limited employment opportunities, the growth structure in Belarus has been much more beneficial for labor. Growth in labor-intensive sectors coupled with wage and income policies have helped to ensure that the benefits from recent growth were rather broadly shared by population.

The role of external markets (access to the Russian market, Russian transfers, BYR devaluation) has been critical in supporting the initial growth episode by allowing Belarusian producers to capture a certain niche at the Russian market and, thus laying down the base for growth in the next period.

The growth analysis reveals two specific time intervals – 1996-2000 and from end-2000 onwards - during which the Belarusian economy has relied on quite different growth models. Despite various remaining problems, the second growth episode has been based upon more sound macroeconomic policies and improved incentives for investment and restructuring at the enterprise level. At the same time, a policy of accelerated wage growth and import restrictions had supported economic growth by stimulation of domestic demand.

Improved macroeconomic performance since end-2000 has been backed-up by fiscal consolidation and reduction in quasi-fiscal activities, especially in the energy sector.

Export plays a crucial role in Belarus' growth. However, exports remain highly concentrated and not sufficiently diversified both in terms of geographical and commodity patterns, while competitiveness of Belarusian products on CIS and non-CIS markets has been deteriorating.

International experience suggests that high rates of growth in exports and considerable economic growth in general, are impossible without substantial FDI [Foreign direct investment] inflow. Meanwhile, FDI inflow to Belarus remains very low, suggesting Belarus is underutilizing its strategic advantages, such as geographical location, human capital capacity, and privileged access to the Russian market.

Total level of investments is insufficient to sustain high growth rates. This is especially true in relation to industry, which constitutes the backbone of Belarusian economy. Levels of investment are low outside of a few sectors (energy, fuel and metallurgy). A typical Belarusian enterprise, outside these sectors, most probably was affected by considerable under-investments and did not experience any noticeable improvements in investment levels before 2003. Recent increases in industrial investments still can be insufficient to retain the competitive edge.

The fundamental existing competitive advantages of Belarusian industry in Russia and to a lesser extent elsewhere in the CIS relate to both lower wages and lower profit margins, as well as higher labor and management skills. However, it should be noted that the existing cost/price advantage appears to erode rather quickly. An analysis of the developments in Unit Labor Costs (ULC) reveals an erosion of Belarus comparative cost advantages over time. ULC have been increasing since 1999 as compared to Russia. The situation is complicated by high levels of payroll taxes.

Belarus' main comparative disadvantage is associated with high tax burdens and a non-effective tax structure retaining several taxes no longer existent in other transition economies (turnover taxes, emergency payroll tax, etc.), and thus increasing total tax burdens on enterprises.

Expensive subsidization also undermines competitiveness. The complicated and pervasive system of state support to the real sector is a fundamental feature of the Belarus economic model. The aggregate measures of enterprise subsidization show no significant decline in the incidence of annual net state subsidies, which amounted on average to 6 percent GDP. Simultaneous reduction in the scope of state support and in tax burdens could bring substantial welfare gains and should be considered as a priority policy objective.

The absence of a thriving private sector compromises the ability of Belarus to make necessary adjustments to potential changes in market conditions. Private sector developments have been held in by slow progress in privatization, a difficult business environment, and high entry barriers for new businesses. An incentive framework for expansion in real sector investments with the prevailing state ownership in large industry known worldwide for its propensity to under-invest, and high costs of entry for the new private sector, are detrimental for restructuring and investments, thus posing further risks on the country competitiveness.

In the longer term, if aiming for sustained growth, the authorities need to make a determined push for advancing a comprehensive reform program to accelerate its transition to a market economy. These efforts should address a number of pending issues in all the core areas of liberalization, macroeconomic stabilization (including price and exchange rate stability), privatization, and wide-ranging structural reforms. Despite their up-front costs, the structural reforms (including public administration, legal and judicial, social assistance and insurance, and infrastructure reforms) represent a critical element of the sustainable growth strategy."

The World Bank "Belarus: Window of Opportunity to Enhance Competitiveness and Sustain Economic Growth" November 2005.

For The World Bank in cooperation with Belarus Civil Society, see:

"The growth of civil society has been one of the most significant trends in international development. Partnerships between governments, businesses, and civil society organizations (CSOs) are now one of the most effective ways to raise standards of living and achieve sustainable development."

""The manipulation ahead of the [Belarusian] election already makes it unfair and undemocratic," said Georg Schirmbeck, a German parliamentarian and Belarus expert for Chancellor Angela Merkel's Christian Democratic Union. He added that a massive deployment of troops in the Belarusian capital Minsk had already taken place ahead of the election, according to officials at the German embassy." "EU Needs to Step Up Pressure on Belarus, Experts Say" March 16, 2006,2144,1935945,00.html

"Human rights activists are complaining that the German government, which restricts diplomatic ties with Belarus due to its human rights situation, still buys its police uniforms from Europe's last dictatorship." "German Police Uniforms Made in Belarus" July 10, 2005.,2144,1641734,00.html

Photo credit: Associated Press With thanks.


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