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Belarusian Path to Transition: Lessons for Georgia?

“The lobby of the Metropole, Moscow's lovingly restored grand hotel a few blocks from Red Square, is almost deserted on this gray spring afternoon. That's just fine with Jeffrey D. Sachs, a boyish-looking 38-year-old Harvard professor who is now probably the most important economist in the world. He has appropriated a cluster of comfortable armchairs for a meeting with two members of his team, Americans who work full time in Russia. The agenda is Russia's safety net or, more precisely, whether unemployed workers will be able to make ends meet. Russia is plunging out of Communism, if not directly into a capitalist free market.” – wrote the New York Times in a 1993 article entitled “Dr. Jeffrey Sachs, Shock Therapist”.

Even though Sachs himself was not a fan of the term shock therapy, the media managed to label him a shock therapist. This approach, according to the IMF, consisted of three radical policies to be carried out quickly: liberalization, financial stabilization, and privatization. In contrast, gradualism1, while arguing for similar reforms, advocated for a less rapid approach, especially when it came to privatization.

Gradualists worried that sudden privatization would result in the collapse of many formerly inefficient large state enterprises. As a result, assets would be stripped and huge wealth would go outside the former Soviet Union. More importantly, unemployment would soar and huge social costs would be imposed on the populations. For shock therapists, though they anticipated the same results, social pain was the reason why privatization should have been sudden and large-scale as, due to painful reforms, people might have demanded a return to communism. Rapid large-scale privatization in turn would hinder the reversal of capitalism by demolishing inefficient state-owned enterprises, and at the same time creating vested interest in capitalism.

“The need to accelerate privatization in Eastern Europe is the paramount economic policy issue facing the region. If there is no breakthrough in privatization in large enterprises in the near future, the entire process could be stalled for political and social reasons for years to come, with dire consequences for the reforming economies of the region”2wrote Jeffrey Sachs at the time.

Among post-Soviet countries, Belarus was one of the slowest in transforming its economy.3 According to World Bank estimates, the share of the state in Belarusian GDP is still 47% and 75% in industrial output, though to this point no dire economic consequences have been detected. On the contrary, apart from largely preventing social pain of transition, Belarusian economy has doubled since 1990. Moreover, Belarus boasts very low poverty rates even when compared to most EU nations. That is why young Georgian leftists often bring up the example of Belarus, hinting it was because of delayed privatization that Belarus could lessen the pain of transition and alleviate poverty, and therefore it might have been better for Georgia to have followed suit. In Georgia, the share of the population living in poverty (defined as $5.50/day or less) is 42.6% while in Belarus it is only 0.8%. In 1999, both countries stood at the same level — 72%.4


COULD GEORGIA HAVE FOLLOWED THE BELARUSIAN PATH?

Attributing achievements of Belarus solely to delayed privatization seems to be misleading, as there are a number of other important factors which should be taken into account:

• Belarus has a very different geographical location than Georgia, giving it a different political as well as economic stance both in the present and during Soviet times;5

• Its production structure during Soviet times was more advanced and export-oriented;6

• Belarus’s national sentiments do not seem to be as strong (see discussion below);

• The factor of a ‘strongman’ Lukashenko seems to be of high importance both in internal and external affairs.

After the Soviet collapse, these factors together have helped Belarus enjoy advantageous external circumstances, such as favorable energy trade policy and capital flows from the Russian Federation. When it comes to energy, Belarus benefited from importing gas and oil at below world market prices, while exporting oil products at world market prices. From 2001-2010, the benefits from these gas and oil trade arrangements averaged 13.3% of Belarus’s GDP annually7, which could be used to subsidize state-owned enterprises (state-owned enterprises created 75% of the total value-added at the time8), which in turn prevented the lay-off of thousands of people working there. However, transferring the benefits of these subsidies to wages and employment was a political choice. And such a political choice had its own reasons.

There was only one commercially rewarding substance — potassium — in Belarus, which did not compare, for example, with Russia’s wealth of oil, gas, and metallic ores.9 Thus, loss-making state-owned enterprises would most likely collapse in Belarus without state subsidies at least in the initial phase, implying that the status-quo was beneficial to the nomenklatura in Belarus. In contrast, in Russia, privatization enabled huge personal fortunes to be created due to the existence of extractive industries as oil, gas, and non-ferrous metals.

That also explains why the pro-transition reforms by the first leader of independent Belarus Stanislav Shushkevich, who directed the country in a way to become free of its Soviet past and try to look towards the West, were stalled due to the opposition of a hostile parliament.10 Soon, in 1994, the first direct presidential elections were held in Belarus and a ‘strongman’, also known as the ‘last dictator of Europe’, Alexander Lukashenko came to power. Shushkevich wrote in an interview with The Guardian that “Lukashenko’s first win was honest, he was a populist and he won properly”. Often, the sentiments behind the term “populism,” and even the term itself, are obscure. The fact is that Lukashenko won because both the so-called elites and the vast majority of the people were in favor of the status quo by then. The results of the first and the last referendum on the Soviet Union showed that 83% of Belarusians (with an 83% voter turnout rate) were in favor of the preservation of the Soviet Union. This means that economic pragmatism was chosen over independence and that approach, right or wrong, at that time seems to have worked for Belarus. At his accession, Lukashenko stopped voucher privatization (which had barely begun) and secured subsidized transport and utilities and free health care and education. He also managed to restore industrial ties with Russia: by 1996 most industrial giants had resumed their full-capacity work schedule. Belarus was not stripped of its assets.

Economic pragmatism has endured in Belarus. The National IISEPS survey in November 2003 asked, “What is more important to you, economic improvement or national independence?” The result was 62% versus 25% in favor of economic improvement.11 Economic pragmatism also turned out to be pivotal when choosing allies: according to the results of the survey administered in 2010-2013 by The Belarusian Institute for Strategic Studies, economic motives dominated among both pro-European citizens and those oriented towards a union with Russia. Over the three years between these surveys, the economic motivation became even stronger, mentioned by 73%, an increase from 55%.


DELAYED PRIVATIZATION – DELAYED VISIT TO THE DENTIST?

Was delaying privatization like delaying a visit to the dentist? i.e. did it get harder the longer Belarus waited? It seems to have been on the contrary. According to an interview with the World Bank Country Manager for Belarus, Alex Kremer, “…today Belarus has advantages over the countries of the former USSR, which undertook reforms in the 1990s. The transformation process will be less painful for Belarus, as half of the workers are already engaged in the private sector of the economy. Thus, public sector reform will have a less serious impact on the overall social situation than it would have been ten years ago. Additionally, Belarus has developed strong trade relations with the European Union in the west and with Russia in the east, which is incomparable with the situation in the 1990s, when the countries were left alone with their difficulties. Finally, Belarus has budgetary resources to build a system of social protection and provide an acceptable standard of living for the most vulnerable segments of the population”.

At this time, the World Bank does not insist on large-scale privatization. Kremer thinks that some firms might remain state-owned, while others might be privatized and the rest shut down. It should also be noted that state-owned enterprises seem to be surviving with less state money: according to the IMF, in 2019 the amount of budget support for state-owned enterprises was only 3.5% of GDP, while in 2015 this figure was about 9.5%.

Meanwhile, the private sector has begun to emerge, albeit slowly: from 40% in 1995, the share of employment in the private sector has increased to 56%.12 In order to support the private sector, one instrument from the government side was creating free economic zones (FEZ). The first FEZ was set up in 1996 and now six zones are strategically located around the country.

One of the most globally well-known, vibrant FEZs in Belarus is Hi-tech Park, which was created in 2005 with the active involvement of the government. Nowadays, the park employs over 30,000 employees and the IT sector’s share of GDP is 5.1%. Applications like Viber, MSQRD, MAPS.ME, PandaDoc, and Flo have been created there. Hi-tech Park is also known for the global hit video game World of Tanks, as well as IT outsourcing company Epam Systems Inc., listed on the New York Stock Exchange with a market cap of more than $12 billion.

However, state dominance does not come without a cost. “If you can find an economic area, where the state encourages rather than hinders private business, and an industry where you will not overlap with the interests of state-owned enterprises, then Belarus is a great country where you can experience all the advantages of having a highly skilled workforce and excellent geographical location,” — writes Kremer.


DELAYED PRIVATIZATION – MISSED OPPORTUNITIES?

One might perceive delayed privatization as a preference for an egg today over a hen tomorrow. An egg is a sure thing, while a hen — the possibility of more in the future. Counterfactual analysis is very hard to do, but it still makes sense to ask the following questions: What would have happened if Belarus had embarked on a rapid large-scale privatization plan back then? Would it have followed the path of, say, Ukraine? In that case, presumably, business oligarchs would be the ones limiting competition, the difference being that their main interest would be economic (profitmaking) rather than political (employment). Alternatively, would it have been feasible to follow the path of, say, the Baltic states which were the fastest in making progress towards a market economy and at the same time attained the highest living standards among FSU countries?

While it is not clear whether large-scale privatization would have led to higher living standards, it is almost certain that Belarus, by delaying privatization, together with all other factors in place, could lessen the social pain of transition.


1 Some of the economists favoring gradualism are John McMillan, Barry Naughton, Peter Murrell, Aghion Philippe and Olivier Blanchard.
2 Source: Sachs, J.D., 1991. Accelerating privatization in Eastern Europe: the case of Poland. The World Bank Economic Review, 5(suppl_1), pp.15-30.
3 According to EBRD, “laggard countries” in making progress towards a market economy are Belarus, Turkmenistan, and Uzbekistan
4 Source: The World Bank Indicators
5 Nowadays, Belarus is a gateway to the European Union; during Soviet times, after World War II, the newly obtained cordon sanitaire of satellite states along the Western border of the Soviet Union changed Moscow’s perception of Belarus’ location.
6 At the beginning of the 1990s, Belarus’s industry was the most technologically advanced in the Soviet Union.
7 Source: World Bank. 2012. Belarus Country Economic Memorandum: Economic Transformation for Growth. Washington, DC: World Bank.
8 Source: National Statistical Committee of the Republic of Belarus
9 Source: Ioffe, G., 2004. Understanding Belarus: economy and political landscape. Europe-Asia Studies, 56(1), pp.85-118.
10 Ibid
11 Ibid
12 Source: National Statistical Committee of the Republic of Belarus


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Thursday, 29 October 2020

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