Economic growth in Belarus (1996-2004): Main drivers and risks of the current strategy

Abstract

The Belarusian economy has experienced steady and sizable growth since 1996. In 1996-2004 overall GDP growth averaged 6.6 percent per annum or 77.4 percent cumulatively. This makes Belarus one of the best performing economy in the region. At the same time, the country is lagging behind most of the transition economies in various aspects of post-socialist transformation. The Belarusian government reacted to the economic declines of the early transition by introducing policies aimed at slowing down further liberalization and strengthening its role in the economy. According to the EBRD, Belarus made the least progress among all transition economies in such reform areas as enterprise restructuring, large scale privatisation, and infrastructure reform. For instance, price and trade liberalization remain far from being completed. After the initial liberalization, which took place in the early years of independence, little progress was made during 1996-2000. While some additional steps towards liberalization were undertaken since 2001, they were not yet sufficiently radical and consistent. For, instance, in a number of fundamental dimensions of reforms in the energy sector Belarus lags almost all other FSU countries, which have recently moved more decisively toward private sector involvement in the energy sector, as well as enhanced their institutional framework to make it more transparent and accountable. Small-scale privatisation is yet to be completed, while large scale privatisation has been minimal and practically stalled recently. Even those corporations that have been either partially or completely privatized are usually subject to a high degree of administrative control. The "golden share" provisions are excessive and they are exercised in relation to a number of privatized enterprises. As documented in recent global studies134, small private businesses and individual entrepreneurs in Belarus face one of the most hostile business environments among the European transition economies. Not surprisingly, the share of private sector in GDP is about 25 percent-the lowest among all transition economies135-and the FDI inflow is much lower than needed and predicted, given Belarus' strategic geographical location, privileged access to the Russian market, educated and skilled labour force, and a relatively good infrastructure. This combination of high growth and slow reform makes the Belarusian experience somewhat at odds with the standard transition paradigm and the relative stability of the Belarusian economy was even called a "puzzle"136. In contrast to other better performing transition economies, nine years of growth in Belarus have not been backed by sound and consistent macroeconomic policies, advanced structural and institutional reforms, and a thriving private sector. In fact, the Belarusian economy now has a number of features that make it quite different from most transition economies. These include: (i) dominance of traditional firms (state-owned or quasi-private) in production and exports; (ii) high degree of government interventions in enterprise operations (that cover both SOEs and privatised firms), including preserving some elements of central government planning of output, wages, and employment; (iii) high level of tax burden and major budget redistribution of funds aimed at supporting traditional firms and employment; and (iv) high dependence on trade with Russia and a slow pace of geographic diversification of exports. This chapter takes stock of growth trends in Belarusian economy since 1996, reviews the evidence of accumulated challenges and risks within the existing growth patterns, and provides policy recommendations aimed at strengthening growth sustainability. In sum, while economic growth in Belarus in the last nine years was impressive, the chapter argues that sticking with the current growth strategy would lead to a gradual erosion of economic competitiveness. The Government of Belarus (GOB) should make significant policy adjustments by reorienting its policies toward ensuring a better business environment and a lower size of government. The chapter has the following structure. The next section presents a summary of growth and macroeconomic progress, as well as alternative growth estimates. Section 3 discusses the main growth drivers, while distinguishing between two particular phases in growth dynamics. Sections 4 and 5 show the trends in industrial competitiveness and trade performance respectively. This follows by the analysis of peculiarities of both the investment climate and trade regime that are largely responsible for the current performance trends. Section 7 presents policy recommendations regarding improvements in competitiveness. The concluding section contains a summary of risks that the existing growth strategy is facing. © Springer Berlin · Heidelberg 2006.