Location: Belarus
Laissez-faire Covid-19: Economic Consequences in Belarus
Despite its traditional paternalistic role, the Belarusian government chose minimal reaction to the Covid-19 pandemic. No meaningful economic or social measures were taken in response to the pandemic. We explore a unique dataset to document how major Covid-related shocks affected the earnings of Belarusians in 2020. We utilize the differential timing and sectoral effects of the shocks to identify the impact of Covid-19 on individual socioeconomic outcomes. Not surprisingly, we find that Covid-related shocks increase the probability of an income reduction. This effect is most pronounced for those employed in the private sector. In the absence of a social security net, vulnerable groups had to cope with the economic consequences of the pandemic on their own.
Introduction
Belarus had its first official case of Covid-19 registered on February 27 and its first death on March 31. At first, the increase in newly registered cases was slower than in most other countries, but at the beginning of April Belarus started to catch up. The peak of the first wave was recorded on May 18 with 943 new daily cases. According to the official statistics, the second wave started in September 2020 and was much more severe than the first one, reaching 1,890 new daily cases by the end of December.
Belarusian authorities did not undertake any substantial interventions, such as lockdowns, to fight the spread of the pandemic. Nevertheless, there were several other key mechanisms through which Covid-19 affected the Belarusian economy. The population’s reaction to the risks of contamination led to a substantial fall in mobility that resulted in decreased sales in retail and services requiring physical interaction. For example, sales in the restaurant industry decreased by 20% in 2020. Lockdowns in major international trade partners such as Russia have led to a decrease in demand for Belarusian exports of goods and transportation services. In the face of these economic challenges, the government focused its attention on supporting full employment and production in state-owned enterprises while ignoring the rest of the economy.
In this brief, we present evidence of the economic effects of Covid-19 in Belarus. We employ a unique dataset on socioeconomic outcomes collected by BEROC to study how individuals are affected by Covid-related shocks in mobility and exports. In order to isolate the effects of these shocks on the well-being of Belarusians, we exploit their timing and sectoral differences.
Measuring Covid-related Shocks
Figure 1 depicts changes in the Yandex self-isolation index which measures the use of Yandex services, including Yandex traffic monitoring and customer mobility compared to the average pre-pandemic day (Yandex DataLens, 2021). Individual everyday mobility started to decline in mid-March, and as the first wave of the pandemic gained momentum, mobility reached its lowest point at the end of April. It started to decline again in November-December 2020 following the second wave.
Figure 1. Yandex self-isolation index in Belarus, 2020
Source: Yandex. The average value during 24 Feb-8 March 2020 set to 100. Seven-day rolling average.
Belarus is a small and open economy with Russia as its main trading partner. The lockdown in Russia that lasted from the end of March until mid-May along with the spring lockdowns in Europe caused a major contraction in external demand for Belarusian goods. Figure 2 shows total physical exports and non-energy physical exports in 2020. The largest difference between total and non-energy exports can be observed in January, February, and March during which Russia and Belarus had an oil-supply dispute. To focus on the effects of the pandemic we use non-energy physical exports to approximate Covid-related exogenous shocks to the economy.
Figure 2. Physical export indices, Belarus
Source: Belstat. December 2019=100.
Income Dynamics
To measure the impact of Covid-19 on Belarusian society, BEROC, in cooperation with the marketing and opinion research company SATIO, conducted a series of online surveys representative of the urban population of Belarus (Covidonomics, 2021). The five waves of the 2020 survey were carried out on April 17-22, May 8-11, June 8-15, September 11-16, and November 25-30.
Respondents were asked about recent changes to their income, and also to specify the reasons for income reduction (if this was the case), including depreciation of the ruble, salary cut, furlough, etc. Figure 3 depicts the percentage of individuals who reported an income reduction in the previous month for reasons other than currency depreciation by sector of employment. The income reductions peaked in April-June, with the situation relatively stabilizing by September.
Figure 3. Income dynamics by sector
Percentage of respondents reporting income reductions in the previous month for reasons other than currency depreciation, Source: BEROC/SATIO data
The fact that the share of respondents reporting termination peaked at 2.9% in May indicates that firms did not use employment reduction to adapt to the pandemic environment. A big share of respondents employed in the service sector reported domestic demand contraction (fewer orders/clients) as a key factor for their income reduction. The industries that took the hardest hit were hospitality-retail and transportation. In early spring, manufacturing appeared to be one of the most affected industries. However, as exports started to recover in June, the share of manufacturing workers that reported an income reduction decreased significantly, becoming one of the lowest across industries.
Identifying the Effects of Covid-19 Shocks
In this section, we estimate the probability of facing a reduction in individual income as well as the likelihood of being furloughed due to the Covid-19 pandemic.
In 2020, the Belarusian economy suffered due to the oil-supply dispute with Russia, the Covid-19 pandemic, and the national political crisis. To isolate the effects of Covid-19 from those driven by the oil dispute and the political crisis, we add interactions between Covid-related shocks and dummies indicating industries affected by those shocks. This implies three interactions with different binary indicators: exports and manufacturing, exports and transportation, and mobility and hospitality/retail.
To estimate these effects, we use a fixed-effects probit regression controlling for sector of employment, education, age, and gender.
Table 1. Probability of income reduction and furlough
Source: Own estimates from BEROC/Satio data. Controls include age, sector of employment, and education level.
Table 1 shows that individuals employed in the hospitality and retail industry face higher risks of an income reduction due to decreased mobility caused by self-isolation behavior. A 10-percentage-point increase in the self-isolation index is associated with a 1.3 percentage point increase in the probability of income reduction for those employed in the retail and hospitality industry. The interaction term between exports and the manufacturing dummy also appears to be statistically significant for various specifications. A 10-percentage-point decline in physical volumes of exports is associated with a 8.6 percentage point increase in the probability of income reduction for manufacturing workers.
Notably, the private sector employment coefficient shows strong statistical significance which highlights the choice of the authorities to support SOEs, with little to no support for the private sector. Being employed in the private sector increases the probability of facing an income reduction by 7.9 percentage points.
The Gender Dimension
Despite concerns that women experience larger economic losses due to consequences of the pandemic (Dang and Nguyen, 2021; Alon et al., 2020b), we do not find a statistically significant effect of gender in our sample. In particular, our results offer no evidence of women being more likely to experience an income reduction during the pandemic, similar to findings in Germany (Adams-Prassl et al. 2020c).
While job losses were uncommon during the Covid-19 crisis in Belarus, being furloughed was one of the most common reasons for an income reduction (11.3% of respondents reported being furloughed in May). We also investigate the separate channels through which individuals lose income due to the Covid-related shocks. Notably, the only channel of income reduction that is more prevalent among women than men is through furlough. This finding is consistent with Adams-Prasslet al. (2020a) who argue that this discrepancy can be explained by gender differences in childcare responsibilities.
Conclusion
Belarus is close to unique in having almost no government response to the Covid-19 pandemic. Despite the absence of lockdowns and other restrictions, the Belarusian economy has experienced several Covid-associated shocks. Due to the economy’s openness to trade, it was seriously affected by export contractions. Belarusians have voluntarily reduced their mobility to minimize health risks which has affected the hospitality and retail industry.
We utilize the differential timing and sectoral impact of Covid-related shocks to estimate the pandemic’s effect on the socioeconomic outcomes of individuals. By using a unique dataset, we find evidence that the pandemic increased the likelihood of income reductions for Belarusians, mainly due to the effects of decreased mobility and fall in exports. We also find that those employed in the private sector were more likely to suffer from negative shocks, reflecting the policy choice of the Belarusian government to only provide economic support to the state sector. Finally, we show that, while women are as likely as men to see their income reduced, they are significantly more likely to be furloughed.
Many Belarusians saw their well-being deteriorating as a result of the Covid-19 pandemic. In the absence of unemployment benefits and other social protection mechanisms (Umapathi, 2020), those economically affected had to bear the cost of the shocks on their own.
References
- Adams-Prassl, A., Boneva, T., Golin, M., and Rauh, C. (2020a). Furloughing. Fiscal Studies, 41(3):591–622.
- Adams-Prassl, A., Boneva, T., Golin, M., and Rauh, C. (2020b). Inequality in the impact of the coronavirus shock: Evidence from real time surveys. Journal of Public Economics, 189:104245.
- Covidonomics project (2020). BEROC and Satio. http://covideconomy.by/
- Dang, H.-A. H. and Nguyen, C. V. (2021). Gender inequality during the Covid-19 pandemic: Income, expenditure, savings, and job loss. World Development, 140:105296.
- Umapathi, N. (2020). Social protection system in Belarus: perspective. Bankovskiy Vestnik, (3):75–80. (in Russian).
- Yandex (2021) Yandex DataLens, https://datalens.yandex.ru/
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Circular Economy in Belarus: What Hinders the Transformation?
The transition towards a circular economy has accelerated in response to increasing environmental challenges and the need for more sustainable and cleaner production. Many countries are mainstreaming a circular economy into their policy agenda. In particular, the European Commission’s new Circular Economy Action Plan, adopted in March 2020, will be a key element of the EU Industrial strategy. In Belarus, similar policy agendas that promote circular economy have not been developed yet, however, this concept is now attracting increasingly more attention. Therefore, it is essential to identify barriers that hamper the implementation of circular economy business practices in the country. This policy brief presents the results of a survey that studied 452 Belarusian companies and their prospects and opportunities of circular transformation both within enterprises and at the national level. The findings show that high levels of capital and technology spending and lack of state-provided economic incentives are the most pressing barriers to circular economy development in Belarus. When it comes to enterprises’ own prospects for circular transformation, lack of funding is ranked as the main impediment.
Barriers to Circular Economy Development in Belarus
Despite the fact that there has been an increased interest in the circular economy, evidence suggests that its implementation has been hampered by a variety of barriers. Based on academic literature and business case studies, these barriers can be categorized into several groups (Rizos, et al., 2015; Rizos, et al., 2016; Kirchherr et al., 2018; Ritzén and Sandström, 2017):
- Cultural barriers (e.g. social, behavioral, and managerial) – a lack of interest, environmental awareness, and/or existing differences in personal values, which hinder the development of a circular economy.
- Information constraints – a lack of consumer and producer awareness about the key principles and best practices of circular economy implementation;
- Inadequate regulatory environment – a lack of consistent legal framework, policy support, and incentives for circular economy transition (e.g., through tax relief, fiscal measures, or public procurement);
- Technological barriers – an absence of a well-managed logistic infrastructure for the collection, extraction, and processing of secondary raw materials (SRM); the lack of standardization and, as a result, lower quality of goods produced from SRM; the absence of knowledge on how circularity can be implemented in a particular industry;
- Economic impediments – barriers to circular economy transition that are due to low prices for primary raw materials and high investment costs for the implementation of circular business models, as well as lack of funding and restricted access to finance.
This categorization served as the basis for the development of our questionnaire. We surveyed enterprises on the prospects and opportunities relating to their own circular transformation as well as factors constraining the more general development of a circular economy in Belarus. The survey was conducted in 2020 by BEROC and IBB Dortmund and included 452 companies from the Belarusian regions of Brest and Mogilev. The results show that businesses view economic, regulatory, and informational barriers as the most hindering to a circular transformation of Belarus. In particular, the respondents stated that the main impediments are high levels of capital and technology spending (62.8% of respondents), as well as lack of state-provided economic incentives (50.4%). Information constraints are also important as enterprises are not aware of circular technologies and believe that they do not exist (50.4%). Furthermore, there is a lack of knowledge on how to implement circularity in their industry (33.8%) (see Figure 1).
Figure 1. Barriers to circular economy development in Belarus, % of respondents
Source: Figure compiled by the authors based on the survey results.
Respondents also identified barriers that hamper a shift of their own enterprise – rather than that of the entire Belarusian economy – from a linear to a circular business model. According to the survey, the lack of funding is considered as the main barrier to circular transformation among Belarusian companies, as 83.5% of respondents characterized its impact as high or medium. This impediment is followed by the absence of circular technologies that can be applied at the surveyed enterprise (64.9%) and the lack of information and best practice examples with regard to the implementation of circular business models (62.4%). Half of the respondents also indicated that the shift from a linear economy is hampered by the lack of consulting on how to implement circularity (see Figure 2).
Figure 2. Barriers to the circular transformation of the Belarusian enterprises, % respondents
Source: Figure compiled by the authors on the basis of the survey results.
Enterprises identified specific technical challenges associated with possible supply chain constraints. In particular, 40% of respondents raised concerns about the absence of an online database on waste and secondary raw materials, and 39.3% of them worried about possible interruptions in the supply of secondary raw materials.
Stimulus for Circular Transformation in Belarus
Respondents also expressed their views on potential stimulus measures that could be implemented to encourage a transition towards a circular economy in Belarus. Tailored support programs (83.9%), tax incentives (78.5%), and development of infrastructure for the processing of secondary raw materials (76.4%) were identified as the strongest motivators for enterprises’ decision to opt for a circular business model. Other important measures listed by the respondents were revisions of the legislative framework to prioritize the use of secondary raw materials, prevent waste generation, etc. (67.4%) as well as access to consulting on how to implement circularity in a business (62.8%) (Figure 3).
Figure 3. Stimulus for the circular economy development in Belarus, % of respondents
Source: Figure compiled by the authors on the basis of the survey results.
Surveyed enterprises stated that they had already incorporated some circular economy elements in their business model. More than 35% of respondents have used recycled materials in the production process, 19% have recycled products in the production of new materials or products, and around 19% have reused products or embedded raw materials. Moreover, more than 35% of enterprises would be ready to introduce reusage and recycling in their business within the next three years. However, they emphasized that existing regulations should be revised, and economic incentives provided in order to encourage these efforts.
Conclusion
The results confirm that Belarus has potential for circular economy development. Yet, its implementation might be hampered by economic, regulatory, informational, and technological barriers. In particular, the surveyed enterprises stated that high upfront costs, e.g., for technology and equipment, as well as the lack of state economic incentives, are the most pressing impediments to the circular transformation of Belarus. At the company level, lack of funding is seen as the main obstacle in shifting from a linear to a circular business model. Another important barrier is lack of information, as enterprises are not aware of circular technologies and best practice examples.
The results of our survey suggest that, in order to encourage a transition towards a circular economy in Belarus, a tailored support program should be developed, existing regulations revised, and economic incentives provided. The transition will not be possible without mainstreaming a circular economy into Belarus’ policy agenda.
References
- European Commission, 2020. “Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the regions, A New Circular Economy Action Plan for Cleaner and More Competitive Europe”, Brussels, COM/2020/98 final.
- Rizos, Vasileios, et.al., 2015. “The Circular Economy: Barriers and Opportunities for SMEs”,CEPS Working Document, No. 412.
- Kirchherr, Julian, et al., 2018. “Barriers to the Circular Economy: Evidence from the European Union (EU)”, Ecological Economics, V. 150, pp. 264-272.
- Rizos, V. et al., 2016. “Implementation of Circular Economy Business Models by Small and Medium-Sized Enterprises (SMEs): Barriers and Enablers”, Sustainability, No. 8 (11), 1212.
- Ritzén, Sofia; and Gunilla Ölundh, Sandström, 2017. “Barriers to the Circular Economy – integration of perspectives and domains”, Procedia Cirp, No. 64, pp. 7-12.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Does Political Illegitimacy in Belarus Imply New Economic Risks?
Today’s political crisis in Belarus has given rise to the phenomenon classified in political science as political illegitimacy. However, this is not a pure political phenomenon. It causes adverse and severe economic adjustments. In a short-term perspective, it gives rise to numerous risks of financial destabilization. Moreover, it is likely to deepen the current recession and make it protracted. In the long-term, political illegitimacy causes adverse institutional adjustments and erosion of human capital, which is likely to lead a country into a long-lasting depression. We argue that resolving the political crisis in a way that revives trust and legitimacy is the only ‘good’ solution.
Short-term Economic Effects of Political Illegitimacy
Since August 9, 2020, Belarus has been widely discussed worldwide in mass media because of the country’s political crisis. Political scientists classify the current situation in Belarus as a case of political illegitimacy, i.e. there is no consensus in the Belarusian society concerning the recognition and acceptance of a new term for the governing regime.
In turn, the governing regime prefers to ignore the illegitimacy issue. There is an implicit assumption behind this: illegitimacy is an intangible issue that can hardly result in any tangible threat to the sustainability of the governing regime.
We oppose this view and argue that, at least in an economic dimension, there are numerous channels through which illegitimacy transforms into tangible problems. Inasmuch as the stance of the economy affects political sustainability, it will undermine the latter.
From a short-term perspective, the issue of political illegitimacy has become part of the information accounted for in the decision-making of economic agents in Belarus. Hence, in their economic decisions they either try to struggle against it, or at least to hedge against corresponding adverse effects.
Most evident, the adjustments in decision-making has already visualized in households’ savings behavior. Directly, illegitimacy considerations gave rise to deposit withdrawals from the banking system and enlarged demand for hard currency. Consequently, this led to a rise in depreciation-/inflation-expectations and lowered public trust in the banking system, which in turn has amplified these patterns of the households’ behavior. In August, Belarus experienced historical peaks in deposit outflows and international reserves were depleted as a result. This has substantially amplified the risks of financial turmoil.
So far, the authorities have curbed the financial stress by implementing a restrictive monetary policy. However, this does not suppress adverse patterns in households’ behavior. It only somewhat allows for a shift of adverse adjustments from financial markets towards the real economy. Moreover, it weakens but does not completely remove the threat of full-fledged financial turmoil, taking into account the systemic financial fragility in Belarus.
In addition to the illegitimacy issue itself, other adverse expectations are likely to give rise to unfavourable trends in households’ consumption behaviour as well. First, household consumption is likely to be dampened as a result of poor consumer confidence and sentiment. Second, additional losses in consumption are likely to occur due to tightening access to credit and progressing financial fragility.
Similar mechanisms are likely to be in place with respect to investment demand. First, poor confidence and sentiment undermine the investment activity of businesses. In Belarus, this channel is likely to be more powerful for private businesses, as investment plans of SOEs (due to their directive nature) are less sensitive to confidence and expectations. Second, investment activity is likely to decline due to deteriorating financial conditions and consequent contraction of credit. This linkage is especially important for the SOEs and housing investments.
The power of adverse consumption and demand trends is still questionable. However, preliminary estimates (introducing negative shocks in addition to scenarios in Kruk, 2020) show that they will reduce the output growth rate by at least 1.5-2.0 percentage points in 2020 Q3-Q4. In other words, they are expected to deepen the current recession and are likely to make it more long-lasting.
Deteriorating payment discipline is one more expected outcome from political illegitimacy. Being amplified by deteriorating financial conditions and economic activity, it can turn into a full-fledged payment crisis and fiscal instability.
Adverse Institutional Adjustments and Effects on Labor Market
Human-to-human interactions based on mutual benefit and trust are the core of a modern market-based economy. Key institutions created to support this interpersonal trust are laws and law-enforcement agencies. If a person does not trust her counterpart in a deal and does not think that she can take him to court to defend her rights, no deal will be signed. When an individual observes unrightful and politically-motivated court decisions in criminal cases, the distrust is also passed on to her beliefs that she would be able to defend her economic rights in the same court. As we observe police violence, tortures, and criminal charges of protesters with no attempt to prosecute those responsible, public trust in the law-enforcement system fades away, and thus all kinds of deals previously supported by a contract-enforcement system cease to exist.
The quality of a judicial system is widely recognized as a powerful determinant to overall institutional quality and the business environment. Hence, poor trust in it would likely undermine business activity directly. Existing businesses are to re-orient towards shorter-term strategies, being reluctant to initiating long-term and risky projects. Moreover, their inclination to geographical diversification of their business activity or even full migration is likely to rise. New entrants – that are extremely important to achieve productivity gains (Foster, Haltiwanger, and Syversen, 2008) – are less likely to start business in the country.
An increase in emigration is a usual consequence of political crisis, especially if it is accompanied by violence and politically-motivated incarcerations. What is unique about the current Belarus crises is that the list of potential emigrees include not only individuals but also firms, especially those working in the IT sector. After 11 August 2020, many IT companies found their employees detained, beaten and tortured. The offices of Yandex, Google and PandaDoc were searched and four top managers working at the latter were detained on tax evasion charges which are likely to be politically-inspired. As of the 18th of September, around 200 IT companies are considering relocation from Belarus and many more are considering partial relocation of their employees to already established foreign offices (Dev.by(2020a)). Results from a recent survey show that 33% of IT specialists have already decided to leave Belarus and the rest indicated that they will leave if the situation worsens (Dev.by(2020b)).
There are several major reasons for why the IT-sector is affected more by the current crises compared to traditional sectors of the Belarusian economy. Firstly, IT companies rarely own physical capital and thus can change their location in a matter of days by simply relocating their employees and laptops. Secondly, the IT labor market is global and mobile, and companies compete for the workers. Therefore, if many workers hold similar strong views on a particular situation, employers are bound to support them to a certain extent. As a result of the latter, many IT companies have openly voiced their disagreement with the election results and the politically motivated violence following the election. High-level employees and owners of major companies have participated in various opposition initiatives and as a result, now face retribution from Lukashenko’s government.
In addition to politically-motivated emigration, we can expect an increase in economically-driven emigration rates as the economy is expected to shrink (Bornukova and Lvovskiy, 2020).
What Is the Way Forward?
The political crisis in Belarus has triggered multidimensional adverse economic adjustments. Nevertheless, the authorities prefer to ignore the links between politics and economics. Hence, they try to overcome the problems with economic policy tools only. However, the room to maneuver with these tools is considerably restricted, and in some cases completely ineffective in suppressing adverse trends.
With respect to the short-term agenda, the authorities cannot offset the adverse trends. They can just mitigate challenges in one dimension and try to re-direct it to another one. For instance, currently the authorities focus on mitigating the probability of a full-fledged financial crisis. This consideration requires restricting monetary conditions. Otherwise, the exchange rate is likely to depreciate, which would be problematic from a corporate debt sustainability perspective. Although being somewhat effective in this regard, this policy mix dampens economic activity. From a financial dimension, the challenge is being re-directed to the real economy.
A similar picture might soon emerge in a fiscal sphere as well. An economic downturn and political crisis can result in a widening income gap. At the same time, the room for maneuver on the expenditure side is constrained. The funds accumulated from the previous periods have to a large extent already been spent to support SOEs. Hence, a further expansion of expenditures is hardly possible, as it would undermine fiscal and public debt sustainability. Therefore, fiscal stimulus is likely to fade away and can gradually even become negative.
Based on estimations in Kruk (2020), before the issue of illegitimacy appeared, the economy was developing according to a scenario of about a 3% drop in GDP in 2020 and a meagre recovery (if any) in 2021. Adding the assumptions associated with adverse adjustments due to the illegitimacy issue into the Kruk (2020) estimates, we show that the recession is likely to deepen by at least 1 percentage point in 2020. In 2021, output losses are likely to expand considerably. In regard to the long-term agenda, the situation is even worse. Conceptual decisions on economic activity by firms and households are closely linked with the issues of trust and legitimacy (Bornukova et al., 2020). Having lost them, the authorities are unlikely to have any effective tools for standing against adverse institutional adjustments and the erosion of human capital. Hence, we may expect that today’s poor growth potential of the Belarusian economy – up to 2.5% of per annum growth (Kruk, 2020) – is likely to weaken further and could even become negative. This means that the stagnation over the recent decade is likely to turn into a long-term depression.
Conclusions
The political crisis and the arising issue of political illegitimacy in Belarus impose severe economic challenges for the country. In a short-term perspective, there are numerous channels that are likely to deepen the recession and make it long-lasting. Moreover, risks to financial stability are progressing rapidly. Hence, there is little room for securing macro stabilization in the near future.
In a long-term perspective, the country is likely to suffer from the disruption of productivity enhancers. It will stem from lower business initiatives and the erosion of human capital. This is a way to a long-term depression.
Standard economic tools are mainly ineffective against both the short-term and long-term challenges. Resolving the political crisis in a way that revives trust and legitimacy is the only ‘good’ solution.
References
- Bornukova, K. and Lvovskiy, L. (2020). Demography as a Challenge for Economic Growth, Bankauski Vesnik, 680 (3), PP. 31-35.
- Bornukova, K. Godes, N., and Shcherba, E. (2020). Confidence in the Economy: What is It, How it Works and Why We Need it?, Bankauski Vesnik, 680 (3), PP. 95-99.
- Foster, L., Haltiwanger, J., and Syversen, Ch. (2008). Reallocation, Firm Turnover, and Efficiency: Selection on Productivity of Profitability? American Economic Review, 98(1), PP. 394-425.
- Kruk, D. (2020). Short-term Perspective for the Belarusian Economy, BEROC Policy Paper No. 92.
- Dev.by. (2020a). https://dev.by/news/pochti200-relocate
- Dev.by. (2020b). https://dev.by/news/opros-relocate-september2020.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Supporting Measures for Belarusian SMEs: the Context of the Covid-19 Pandemic
In the context of the evolving global economic crisis, governments are “competing” with each other in the complexity and scale of measures to support the economy and, in particular, small and medium-sized enterprise (hereafter SMEs). The main goal of these measures is, on the one hand, to prevent a significant increase in unemployment and a consequent social strain, and, on the other hand, to ensure economic recovery driven by the most efficient enterprises.
Belarusian SMEs, which currently employ more than 1.3 million people, usually respond faster and more extensively than the state companies to the downturn in the economy by laying off employees. At the same time, they are also expected to be more sensitive reacting to governmental support policies. In this regard, the policy brief discusses the role and response of SMEs in the period of crises and delineates short- and medium-term measures.
Why are SMEs in the Focus During Economic Downturns?
SMEs often become the focus of state policy in a period of adverse and unstable economic situations and the recent pandemic is not an exception. This special attention can be motivated by the following basic assumptions:
1) SMEs are more flexible and respond faster to both negative and positive trends in the economy (Muller at al., 2018);
2) the activity of SMEs is more labor-intensive compared to large enterprises (Beck et al., 2005; Cravo et al., 2012);
3) a period of economic uncertainty creates new opportunities (new niches, exits of competitors from the market) that can be used by the most proactive SMEs (Cowling et al., 2015).
Based on these assumptions, a large share of SMEs on the one hand makes the economy more resilient in crises and, on the other hand, contributes to the volatility of unemployment. As a result, governments try to support SMEs to prevent a rapid increase in unemployment due to staff cuts and bankruptcy and, simultaneously, to maintain a competitive environment that creates incentives for innovation.
Typically, governments have substantial experience and proven tools to uphold large public and too-big-to-fail private enterprises, while supporting a heterogeneous population of SMEs requires additional study and field tests.
At the same time, the design, the scope, and the coverage of support policies should be introduced having in mind the possible reactions of various types of SMEs to the economic hardship. Indeed, during an economic decline even in the worst hit sectors, businesses and SMEs in particular may react by implementing three basic strategies:
1) reducing costs by firing employees, cutting wages and by increasing productivity;
2) increasing revenue by introducing innovations (product, process, organizational, marketing), diversification, and entering new markets;
3) suspension of activities or liquidation of an enterprise (OECD, 2009).
Definitely, any government aims for the largest possible share of enterprises that pursue the second strategy leading to job creation and significant added value.
Policy Responses in the Period of the Pandemic
Due to the urgency of adoption and the weak predictability of the epidemiological situation, most of the proposed SME-support packages around the world are designed for the short term and are poorly targeted. Based on the study of already announced measures, the OECD (2020) has developed a comprehensive classification and sequence of SME-support measures undertaken by governments:
1. Health measures, and information for SMEs on how to adhere to them;
2. Measures to address liquidity by deferring payments (taxes, social security & pension contribution, rental, utilities);
3. Measures to provide extra and more easily available credit to strengthen SME resilience;
4. Measures to mitigate the consequences of lay-offs by extending possibilities for temporary redundancies and wage subsidies;
5. Structural policies (digitalization, training and education for SMEs, support in finding and entering new markets etc.).
Unfortunately, the government of Belarus has started discussing and implementing some of these measures only partially and in a rather non-specific way. Instead of this, we argue that all the measures should be targeted and adjusted to different sectors. To further expand and analyze our point, BEROC developed and commissioned an express random-sample survey of 100 Belarusian SMEs on April 13-27 in order to elaborate and justify relevant support measures (BEROC, 2020).
Belarusian SMEs in the Pandemic
The financial situation of Belarusian SMEs by sector and their response to the crisis manifested in implementing innovative approaches and new business models are illustrated in Figure 1.
Figure 1. Decrease of revenues and response of SMEs
Note: Area of circles is proportional to the number of SME employees in a sector.
Source: Own elaboration based on the survey.
SMEs operating in hotels, restaurants, catering (HoReCa), education, sport & leisure as well as transportation (the right lower rectangle) are characterized by a substantial decrease of revenues and low adaptability. At the same time SMEs in the communication and IT sector and scientific, technological and consulting sectors demonstrate a high degree of adaptability that may be related to some extend to managerial competencies and human capital in general which is concentrated in these sectors.
As an implication for policy makers and SMEs’ leaders, possible support measures (based on OECD classification) and business strategies are summed up in Table 1.
Table 1. Support measures and business strategies for Belarusian SMEs
| Group | Sectors | Recommended strategy | Relevant Measure (number in the OECD classification) |
| A. Decrease of revenues + slow adaptation | Construction,
wholesale trade & retail manufacturing |
Re-configuring supply chains, entering new niches, business process optimization | 2,3,5 |
| B. Decrease of revenues + active adaptation | Communication & IT
Scientific, technological, consulting services |
Focusing on development of anti-crisis solutions in B2B and B2C segments | 2,4 |
| C. Substantial decrease of revenues + slow adaptation | Transportation
HoReCa Education Leisure, beauty & sport |
«Conservation» or liquidation of a business | 2,3,5 |
| D. Substantial decrease of revenues + active adaptation | Not identified in the survey | Diversification to adjacent market segments | 2,4,5 |
| E. No changes or growth of revenue | Agriculture & Forestry
E-commerce, pharmacy, online services, online games… |
Expansion to new markets while competitors are on quarantine. | 5 |
Source: Own elaboration based on the survey.
The main measure to support SMEs in the short term (items 2-4 in the OECD classification) can be:
- Deferral, reduction or suspension of contributions to the social security fund (groups B, C) – this will save jobs in the short term;
- Wage subsidies that will allow paying minimum wages and keeping staff (groups A, C)
- Rent and utility deferrals or at least payment in arrears – for groups A, C – combined with the support of building owners. This will significantly reduce costs in the face of falling revenues instead of reducing labor costs;
- Loan holidays and preferential conditions for SMEs (group D). This will provide liquidity for enterprises that according to banks’estimates will be able to develop in the medium term;
- Temporary repeal of fines for late payment of taxes and contribution to the social security fund (groups A-D).
As for the medium-term measures, the most relevant ones are as follows:
- Expanding the coverage and improving the quality of business education (including digitalization of business) by means of providing vouchers and/or grants;
- Subsidies to unemployed people for starting up a business combined with basic training on entrepreneurship;
- Export support by developing infrastructure for certification and international marketing as well as providing export loans (Marozau et. al., 2020).
Conclusion
The Belarusian government is substantially restricted in terms of financial resources, fiscal and external debt opportunities to extensively support businesses suffering from the economic crisis. Therefore, formal and economically justified criteria for selecting sectors, as well as individual businesses and individual entrepreneurs should be developed. Meanwhile, the beneficiaries of the state support should not be the most affected businesses, but rather the most forward-looking ones. This so-called “picking winners” approach (Gonzalez-Pernia et al., 2018) would conduce to faster economic recovery and job creation driven by the private sector and, particularly, by SMEs. This is probably the main argument in favor of supporting small and medium-sized businesses in the crisis.
References
- Beck, T., Demirguc-Kunt, A., Levine, R. (2005). “SMEs, Growth and Poverty: Cross- country evidence.” Journal of Economic Growth, 10(3), 199-229.
- BEROC. (2020). “SME Survey Results”, Access mode http://covideconomy.by/business. Access date: May 19, 2020).
- Cowling, M., Liu, W., Ledger, A., & Zhang, N. (2015). “What really happens to small and medium-sized enterprises in a global economic recession? UK evidence on sales and job dynamics.” International Small Business Journal, 33(5), 488-513.
- Cravo, T.A., Gourlay, A., Becker, B. (2012). “SMEs and Regional Economic Growth in Brazil.” Small Business Economics, 38 (2), 217-230.
- González-Pernía, J. L., Guerrero, M., Jung, A., & Pena-Legazkue. (2018). “Economic recession shake-out and entrepreneurship: Evidence from Spain.” BRQ Business Research Quarterly, 21(3), 153-167.
- Marozau, R., Akulava, M., Aginskaya, H., (2020). “Measures to support small and medium-sized businesses in Belarus in the context of the pandemic and global recession.” BEROC Policy Paper Series, PP no.89.
- Muller, P., Mattes, A., Klitou, D., Lonkeu, O., Ramada, P., Ruiz, F.A., Devnani, S., Farrenkopf, J., Makowska, A., Mankovska, N., Robonn, N., Steigertahl, I. (2018). Annual report on European SMEs 2017/2018. The 10th Anniversary of the Small Business Act. European Commission.
- OECD. (2020). “COVID-19: SME Policy Responses.” OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE). Access mode https://read.oecd-ilibrary.org/view/?ref=119_119680-di6h3qgi4x&title=Covid-19_SME_Policy_Responses. Access date: May 19, 2020.
- OECD. (2009). “The Impact of the Global Crisis on SME and Entrepreneurship Financing and Policy Responses.” OECD – Centre for Entrepreneurship, SMEs and Local Development, Paris.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Money as an Economic Category and Its Relationship With Crypto Assets
This brief discusses money in its general definition and describes new types of money arising in the modern era of digitalization, such as electronic money, cryptocurrencies, Central Bank Digital Currencies (CBDC), etc. It provides an overview of some of the legislative approaches trying to deal with new types of money and outlines the benefits and shortcomings arising from allowing for financial operations with digital currency. It also stresses the necessity of a new integrated approach in national and international regulation of cryptocurrencies.
Introduction
Cryptocurrencies have existed for more than 10 years. During this period the interest towards this type of digital money has seen its ups and downs. However, by now, they have become part of modern financial markets. Today, more and more central banks consider the possibility of introducing national digital cash and try to create easy-to-understand and clear regulation for new payment methods. We can observe the rapid transformation of the traditional monetary system. At the same time, there is no clear understanding of how the new monetary system should look like. An essential step towards this understanding is developing a clearer systematization and definition of money, financial funds, cryptocurrencies, fiat money in the traditional and the modern sense. Explaining these concepts is necessary to facilitate effective regulation, the development and supervision of financial markets. Indeed, during rapid financial markets transformation, well-developed regulation is necessary to avoid excessive financial risks and speed up financial sector development.
The Place of Money in the Modern Financial System
Financial resources play an extremely important role in the economy: Monetary systems are like the blood circulation for the body. While there is a common understanding of what money is in the traditional sense, this concept does not take into account the recent development of the financial sector, the penetration of IT technologies, the entry of new non-financial institutions into the financial sector as well as the creation of new products at the intersection of finance and IT. As argued above, a clear and encompassing definition of money, reflecting these developments, is necessary for regulatory purposes both at the national and international level.
Typically, money is defined through its functions, such as a measure of value, means of circulation, means of payment and savings. For example, the Large Economic Dictionary suggests that “Money is the universal equivalent, a special product, used to form expressions of the value of all other goods. Money functions as a medium of exchange and of payments, as a measurement of value, wealth accumulation and world money” (Borisov, 2003). As can be seen, one of the most important characteristics of money is its universality. Money can be exchanged against different goods and services almost without any limitations. At the same time, Tarasov mentioned that money is “legal payment funds, usually consisting of banknotes and coins that are constantly circulating as a medium of exchange in accordance with government rule” (Tarasov, 2012). There are other definitions of money, but they usually describe traditional money.
Along with traditional fiat money, there are other payment methods and electronic money is the most common of them. According to the Belarusian legislation, electronic money is “units of value stored in electronic form, issued in exchange against cash and monetary funds and accepted as a means of payment […]”
Electronic money cannot be described as traditional cash or money on bank accounts. It is not included in the money supply and can be issued only by commercial banks. At the same time, electronic money can perform the same functions as traditional fiat money. Whether or not electronic money can be considered full-fledged money is essentially a legal issue.
Another very important question is dedicated to cryptocurrencies. Cryptocurrencies are usually issued based on blockchain technology (distributed ledger) and can be created (“mined”) by anybody. Hence, electronic money is representative of traditional money, but cryptocurrencies are not.
Taking into account the penetration of information technologies into finance as well as the appearance of electronic money and cryptocurrencies, we can define money as the universal equivalent (measure) of value constituting a legal means of circulation, payment and savings on certain territories within a particular jurisdiction, with a legal status guaranteed by the government (Luzgina, 2018). In this definition, the emphasis is placed on the legitimacy of money because in some countries, operations with digital currencies can be legally interpreted as operations with securities, equity etc., rather than money in the legal sense.
Belarus was one of the first countries that legalized operations with crypto assets. But this does not mean that cryptocurrencies have become the equivalent of national or foreign currencies. According to the Belarusian legislation, people can mine cryptocurrencies, exchange them against Belarusian rubles, foreign currencies, buy, sell and exchange against other tokens (Decree #8, 2018). There is no official permission to use crypto money as a measure of value, means of circulation or payment method. In other words, people cannot use bitcoins for purchasing goods and services. At the same time, cryptocurrencies can be used as traditional financial assets.
It is necessary to emphasize here that the digitalization of the financial sector is an ongoing process. It is very hard to be the leader in the sphere. Despite Belarus being an early mover in the legalization of crypto assets and notwithstanding the existence of a strong IT sector and attractive crypto assets regulation, Belarus is only the 59th among 65 countries in the Fintech Index 2020. Based on the experience of other countries, sustained progress in this area can be achieved by government support, the existence of a well-developed ecosystem and access to financing (Global FinTech Index 2020).
Belarus is not the only country in the world that has limitations on cryptocurrencies’ circulation as fiat money; restrictions differ depending on the jurisdiction. Many central banks consider cryptocurrencies as disruptive technologies with high risks. Regulatory bodies usually cannot control operations with crypto money. That is why cryptocurrencies can be attractive for payments in the grey economy. Moreover, exchange rate fluctuations of cryptocurrencies are very unpredictable. Owners of cryptocurrencies can become very rich as well as very poor within a short period of time.
Central banks can implement limitations to avoid or decrease risks. For example, operations with cryptocurrencies are prohibited in Bangladesh and strongly restricted in India. There are central banks (including the central banks of Malaysia and Austria) that take a neutral position with regards to crypto operations but inform the society about possible risks, including risks of high fluctuations (Luzgina, 2018). At the same time, Japan permits the circulation of cryptocurrencies as a means of payment within its current regulation. That is, the Japanese authorities legalized these digital assets and, supposedly, can keep risks under control.
It is important to understand that these, and other, differences in the approach to crypto assets regulation create barriers for international payments and investment transactions. At the same time, a unification of regulation would contribute to transparency and mitigate the risk of cybercrimes.
Central Bank Digital Currencies: Main Aspects
There is an intense political and academic debate about the future of crypto markets. At the same time, more and more countries begin to think about the introduction of Central Bank Digital Currency (CBDC). Countries like Ukraine, China, Sweden, Canada, Thailand and some others have announced their plans of issuing CBDC. CBDC can be compared with digital cash; it can reduce operational costs and make all money transactions more transparent. But there are some uncertainties: The technology is new and may cause confusion and even disapproval among the population who prefers to use only cash.
One of the most interesting examples of the introduction of CBDC is the case of Uruguay. In 2017-2018, this country realized a pilot project of CBDC (the e-peso). A limited amount of digital currency was issued and only 10,000 citizens joined the project. There was a limited list of stores and businesses that were allowed to work with digital currency and all transactions on the base of mobile phones were done only between registered users. This project has demonstrated several advantages of e-peso circulation. First, the system could work without Internet and provided anonymity but at the same time controllability of all operations. Second, security was the main concern: The person could get access to his/her digital resources even if he/she forgot the password of the digital wallet or lost the mobile phone, but non-authorized access was effectively avoided. Finally, the last but not the least advantage of the system was the exclusion of double charge or falsification during payment transactions. The project lasted half a year and finished successfully. However, transition to the digital currency did not follow.
As of now, many countries only consider or are going to realize pilot studies in this area. The only country that is going to implement CBDC in the foreseeable future is China. The cautious position of many central banks is understandable because CBDC is an analogue of digital cash. The population distrusts such forms of money. Another challenge is that senior citizens often prefer cash for payments and other financial transactions.
Tokens vs. Cryptocurrencies
Bitcoin and other cryptocurrencies present only one kind of digital tokens. According to the Belarussian legislation, a token is an entry in the register of transaction blocks (blockchain), or another distributed information system certified that the owner of a digital sign (token) has rights to civil law objects and (or) presents cryptocurrency. All cryptocurrencies are tokens but not all tokens can be defined as cryptocurrencies. Tokens are issued for multiple purposes. Governments in many countries try to identify all types of operations with tokens for the creation of clear regulation. For example, the Central Bank of Lithuania highlights the differences between issuing tokens in the framework of ICO (Initial Coin Offering) and STO (Security Token Offering). According to the Lithuanian regulation, ICO usually provides for presenting discount programs or using tokens as payment instruments. At the same time, STO includes the issuance of tokens that have features of bonds or other traditional financial instruments and is subject to regulation. In other countries, central banks do not highlight STO and operations regulation with tokens depends on the characteristics and specifics of each project.
Many countries have developed unique principles and rules of tokens regulation. But there are no unified approaches at the international level which makes it difficult for conscientious market participants to work with financial crypto assets over different jurisdictions. Moreover, there are uncertainties and risks that have to be investigated more in detail. Authorities in many countries are afraid of cybercrimes and increasing money laundering operations.
At the same time, many advantages are apparent. For example, in Belarus, crypto platforms get more popular, because they offer attractive financial instruments for the population and companies. On such platforms, companies can attract necessary resources and citizens invest in financial tools with regulated risks.
Figure 1 – Structure of digital, electronic money, tokens and financial means (Luzgina, 2018)
Comment: Fiat electronic money is an electronic analogue of fiat currency. In this case, if we put 100 euros in an electronic wallet, we should see 100 electronic euros after the transaction. At the same time, non-fiat electronic money differs from fiat currency. For example, we can exchange Belarusian ruble against electronic money – V-coin, which is issued by Belgazprombank in cooperation with the mobile operator – A1.
The above discussion results in a number of policy-relevant implications:
- The legal definition of money, financial funds and electronic money should be updated taking into account innovative forms of financial instruments development and the appearance of new financial market participants.
- Old rules and regulatory approaches hinder market development and unregulated space can create additional risks and uncertainties.
- The transition from cash to CBDC is possible but has limitations.
- A unified regulation for cryptocurrencies and other tokens should be developed at the international level for decreasing risks and further developing financial markets.
Conclusion
Financial market transformation is happening very rapidly. The penetration of information technologies in the financial sector created a huge number of new innovative products and simplified financial operations. All these changes have affected the payment system. The creation of electronic and digital currencies makes it necessary to reconsider the future of the traditional monetary system. But even the current regulation has to become more flexible and take into account the rapid growth of new types of financial market participants and products. The development of financial technologies creates additional risks, such as money laundering, money theft or uncontrolled financial operations which go beyond the borders drawn by national jurisdictions very often. Many central banks treat payments with cryptocurrencies and ICO with caution. At the same time, the process cannot be stopped because alternative methods of financial transactions are often more attractive compared with traditional financial services. But the low level of financial and digital literacy among the population combined with outdated legislation can slow down innovative processes in the financial sphere and augment the risks.
References
- “Money: meaning and functions of money – discussed!” (2007). Economics Discussion. Accessed September 12, 2017.
- Tarasov V.I. (2012), “Money, credit, banks”, Minsk: BSU. p. 375.
- “On Digital Economy Development”. Decree No.8 dated December 21, 2017.
- Luzgina A. “Money and monetary funds as economic categories and their relationship with cryptocurrencies”, Bank Bulleting Journal, October 2018. pp.26-35.
- “Japan to provide G20 with the solution for Crypto Regulation”, News Bitcoin.com. Accessed February 28, 2020.
- Central Banks worldwide testing their digital currencies“, News Bitcoin.com. Accessed February 20, 2020.
- Banco Central del Uruguay, 2018. “Uruguayan e-Peso on the context on financial inclusion“, Accessed January 15, 2020.
- “Bank of Lithuania Issues Guidelines for Regulating STO”, (2019). Crowdfund Insider, Accessed February 10, 2020.
- Borisov A.B, (2003). Large Economic Dictionary. Knizhni Mir. p. 895.
- “The Global FinTech Index 2020”, (2019). Accessed March 10, 2020.
- Ting Peng “Turning a crisis into an opportunity, China gets one step closer to CBDC”. Accessed March 25, 2020.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
COVID-19 | The Case of Belarus
Belarus is a country with about 9.5 million citizens. The area is 207 thousand sqkm which gives a population density of 45.9 persons/sqkm. The capital is Minsk with around 2 million inhabitants, other major cities are Gomel (0.53mn), Mogilev (0.38mn), Vitebsk (0.38mn), Grodno (0.37mn), Brest (0.35mn). Belarus is a member of the Eurasian Economic Union and is part of the Union State of Russia and Belarus. The national currency is the Belarusian Ruble (BYN).
Different responses to the crisis across countries depend partly on the organization of political authority, as reflected in the level of regional decentralization of decision making in key areas of authority, and the strength and independence of public agencies. In the case of Belarus, the power is highly centralized and most decisions are made either by central government or personally by the president.
It is widely considered that the government in Belarus has a small degree of independence from the president. The authority in charge of dealing with pandemics is the Ministry of Health.
Health Indicators
Belarus had its first officially registered case of Covid-19 on February 27 and the first death on March 31. At first, the increase of the newly registered cases was slower than in most other countries, but in the beginning of April, Belarus started to catch up, reaching 351 officially registered total cases by April 3. As of April 3, officials in Belarus have performed 32000 cases and tried to trace and isolate all the close contacts in the early phase of Covid-19 spread.
Belarus has a relatively high numbers of doctors and hospital beds per capita. There are 4 doctors, 12 nurses and 8 hospital beds per 1000 citizens and 2.3 intensive care units per 10,000 citizens. Government officials claim that there are 22 lung ventilators per 100 thousand persons and that this number can be increased to 38 if necessary.
Financial Indicators
Belarus currently does not have a properly functioning stock exchange, so it is hard to provide any strong evidence on the changes in corporate valuations. The Belarusian ruble started to depreciate in late February of 2020. Figure 1 depicts the recent developments in the exchange rate with respect to US dollar. Since the beginning of 2020, the US dollar went from 2.1 BYN to 2.57 BYN.
Figure 1: USD to BYN exchange rate.
Source: National Bank of Belarus.
The developments that can be seen on Figure 1 are largely due to the depreciation of the Russian Ruble which in turn was caused by decrease in oil prices as the OPEC+ agreement have failed in early March of 2020.
Government Health Policies
The government’s strategy so far was to identify and trace all the Covid-19 cases by performing a large number of tests (32,000 as of April 3) and isolating the first-degree contacts of infected persons. Public events with international participation were forbidden, however this does not apply to other public events and gatherings including football games and music concerts. As of April 4, government officials are still planning to hold the WW2 victory parade on May 9. Borders and airports are not closed, but persons arriving from abroad are advised to self-isolate for 14 days. There is no state-wide closure of schools and universities. The only closed teaching institutions are those which had students with officially confirmed Covid-19.
There is no state-wide quarantine as government officials deem it unnecessary and President Lukashenka calls the situation “Covid hysteria”. Among the measures taken up to date is financial regulatory easing ordered by the National Bank of Belarus. The government also issued a decree that consumer prices should not increase by more than 0.5% per month. In addition to that, the government plans to spend 110 million BYN (42.5 million USD) on economic support measures.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
Can Loose Macroeconomic Policies Secure a ‘Growth Injection’ for Belarus?
After a relatively long period of macroeconomic stabilization, Belarus faces the threat of a purposeful deviation from it. However, today there is no room for a ‘growth injection’ by means of monetary policy. Moreover, Belarus still suffers from a problem of unanchored inflation expectations. This prevents monetary policy from being effective and powerful. So, unless inflation expectations have been anchored, any discussion about reshaping monetary policy and making it ‘pro-growth’ is meaningless.
Policy Mix and Macroeconomic Landscape in Belarus
Since 2015, Belarus has considerably improved the quality of its macroeconomic policies. The country has fallen back upon a floating exchange rate, and feasible monetary and fiscal rules. This change followed a long history of voluntary expansionary policy mixes associated with numerous episodes of huge inflation, currency crises, etc.
Due to the new policy mix, the country has been displaying a movement towards macro stability in recent years. For instance, the external position is close to being balanced, the fiscal position has even become positive, while the inflation rate is at historical lows around 5%. For Belarus, these achievements are important, taking in mind a ‘fresh memory’ of price and financial instability. Hence, until recently there were no doubts in the feasibility of the commitments of Belarusian authorities to sound macroeconomic policies.
However, despite a relatively strong macroeconomic performance, the threat of a purposeful and at least temporary deviation from policy commitments seems to strengthen. What is important is that this time, popular simple explanations – e.g. political voluntarism (Belarus will have presidential elections in 2020), a naïve perception of economic policy mechanisms by authorities, etc. – are not sufficient for understanding the phenomenon. Rounds of loosening economic policies tend to be justified as ‘lesser evils’. Exploring some rationality in such a justification requires more insight into the Belarusian macroeconomic landscape.
In recent years, the lack of productivity and output growth has become more evident: in 2015-2019 the average output growth rate has been around 0. The root of the problem is the deficit in productivity and growth (Kruk & Bornukova, 2014; Kruk, 2019), while the rules-based policy mix just uncovered it.
However, this direction of causation tends to be challenged by some policy-makers. In an ’archaic’ manner, the policy mix is accused of blocking any pro-output policy discretion, even if there is a justification for it. For instance, an ‘extra’ need for a ‘growth injection’ may be justified by social challenges. Poor growth in Belarus results in a rather sensitive squeezing of relative levels of well-being in comparison to neighboring countries. Between 2012 and 2019, the well-being shrank from around 78% of the average level in 11 CEE countries down to about 63%. This intensified the labour outflow significantly, including for those employed in socially important industries, say, in healthcare. So, according to this view, the ‘growth injection’ is a lesser evil rather than systemic social threat.
A more advanced ‘accusation’ of the new policy mix assumes that it either causes a too restrictive stance of monetary policy with respect to output or that it ignores complicated transmission channels. For instance, one may argue that too much emphasis on price and financial stability can actually result in undermining them, given the huge debt burden of Belarusian firms. The quality of a considerable portion of the debts in Belarus tends to be sensitive to output growth rates. Hence, according to this argumentation, the monetary policy rule should be ‘more pro-growth’, reflecting the debt-growth-financial stability linkage inside it.
‘Translating’ this policy agenda to a research agenda results in two questions. First, is there room for a more expansionary monetary policy? Second, do financial instability risks require making the monetary policy rule ‘more pro-growth’?
The Monetary Policy Stance: Causality and Causes
Monetary policy, as a rule, aims to be counter-cyclical, i.e. generate expansionary incentives during cyclical downturns, and vice versa. In this respect, its stance should be matched to the estimate of the output gap. From this view, given dominating estimates of a near-zero output gap for 2019 in Belarus (National bank, 2019; Kruk, 2019), today’s monetary policy should be roughly neutral. However, analyzing monetary policy stance together with the estimates of the output gap is not a univocal option, especially given doubts about the consistency of any estimate of the output gap (Coibion et al., 2017).
From this point of view, a direct measurement of the monetary policy stance – matching ex-post real interest rate vs. an ex-ante one – is a worthwhile alternative. If the ex-post real interest exceeds the ex-ante rate, it means that the interest rate policy by a central bank is restrictive, while an opposite situation witnesses its expansionary stance (e.g. Gottschalk, 2001). A methodology for identifying inflation expectations by Kruk (2016) allows detecting restrictive and expansionary stances as well. Moreover, doing it in this way allows simultaneously tracing the stance of actual and expected inflation, and study its possible impact on monetary policy (Figure 1).
Figure 1. Monetary Policy Stance, Actual Inflation and Inflation Expectations in Belarus
Note: Positive sign means restrictive stance of monetary policy, while negative sign means expansionary stance.
Source: Own elaboration according to methodology in Kruk (2016) and based on data from the National Bank of Belarus.
First, this diagnostic shows that the stance of the monetary policy today is roughly neutral, which conforms to the diagnosis based on matching with the output gap. In this respect, it means that there is no room for monetary policy softening today.
However, eventually the situation may change and a need for an expansionary monetary policy may indeed arise. Can the National Bank of Belarus unconditionally satisfy such demand? Second, and the more important conclusion, is that the National Bank cannot. Figure 1 also demonstrates that the monetary policy stance in Belarus is very sensitive to the stance of inflation expectations. From this view, the restrictive monetary policy, say in 2015-2016 and 2018, reflected shocks in inflation expectations. The National Bank had to take a mark-up in the expected inflation in respect to the actual one into account and to transform it to the mark-up of the interest rate. If the National Bank ignores such shocks and nevertheless softens monetary policy, it will undermine price stability due to a powerful transmission effect from expected inflation to the actual one. Moreover, a reverse linkage from actual inflation to the expected one is likely to result in a prolonged inflationary period, causing a so-called ‘abnormal’ stance of the monetary environment (Kruk, 2016).
So, a generalized policy diagnosis for today looks as follows. Monetary policy has reached a roughly neutral level due to a considerable reduction in inflation expectations. The latter, in turn, happened due to a prolonged period of a restrictive policy stance (in 2015-2016), which suppressed actual inflation by means of sacrificing output in a sense (the period of cyclical downturn could have been shorter without such limitations in monetary policy).
Unanchored Expectations Bar a More ‘Pro-Growth’ Policy
A deeper cause of the limited room for monetary policies is unanchored inflation expectations. Statistical properties of the inflation expectations series (Kruk, 2019 and 2016), as well as the polls of households and firms by the National Bank, suggest that despite the reduction of the level of inflation expectations, the issue of it being unanchored is still on the agenda. In this respect, expected inflation in Belarus tends to be sensitive to numerous kinds of actual and information shocks, e.g. domestic and global output dynamics, interest rate levels and spreads, exchange rates, financial stability issues, etc. Hence, unless expectations have been anchored, the monetary policy would still suffer from a lack of power. This means that anchoring inflation expectations is the core precondition for normalizing the monetary environment and the power of any monetary policy.
For the monetary rule, this means that it cannot become more ‘pro-growth’, keeping in mind the risks to financial stability. Otherwise, it can spur price destabilization, which may also trigger financial instability. Hence, the logic of a ‘lesser evil’ does not work. Indeed, there are risks to financial stability stemming from poor growth. But combating them through a more ‘pro-growth’ policy will cause price instability and financial instability stemming from that. But what is more important, the logic of a ‘lesser evil’ itself is doubtful with respect to monetary policy. Recognizing the linkage between monetary policy and financial stability does not mean that risks to the latter should be directly traced by the former. Financial stability issues can and should primarily be tackled through macroprudential tools.
Conclusions
After a relatively long period of macroeconomic stabilization, Belarus faces some risk with respect to it. However, today’s monetary policy stance is roughly neutral in Belarus. Hence, a ‘growth injection’ may result in inflation resurgence. Moreover, even today’s near-neutral monetary policy stance is a considerable achievement, as the country still experiences the challenge of unanchored inflation expectations. This issue is a deep underlying problem, which keeps the monetary policy from being more effective and powerful. So, unless inflation expectations have been anchored, any discussion about reshaping it and making it ‘pro-growth’ is meaningless.
As for today’s justifications for monetary policy softening – poor growth and financial instability risks – they hardly relate with the monetary policy agenda. The challenge of poor growth requires thinking in terms of productivity issues, while financial stability risks in terms of macroprudential tools first.
References
- Coibion, O., Gorodnichenko, Y, Ulate, M. (2017). The Cyclical Sensitivity in Estimates of Potential Output, National Bureau of Economic Research, Working Paper No. 23580.
- Gottschalk, J. (2001). Monetary Conditions in the Euro Area: Useful Indicators of Aggregate Demand Conditions? Kiel Institute for the World Economy Working Paper No. 1037.
- Kruk, D. (2019). Belarusian Economy in Mid-2019: the Results of the Recovery Growth Period, BEROC Policy Paper No. 69.
- Kruk, D. (2016). SVAR Approach for Extracting Inflation Expectations Given Severe Monetary Shocks: Evidence from Belarus BEROC Working Paper No. 39.
- Kruk, D., Bornukova, K. (2014). Belarusian Economic Growth Decomposition, BEROC Working Paper No. 24.
- National Bank of the Republic Belarus (2019). Information on the Dynamics of Consumer Prices and Tariffs and Factors of Changes Therein, 2019Q3.
The Long Shadow of Transition: The State of Democracy in Eastern Europe
In many parts of Eastern Europe, the transition towards stronger political institutions and democratic deepening has been slow and uneven. Weak political checks and balances, corruption and authoritarianism have threatened democracy, economic and social development and adversely impacted peace and stability in Europe at large. This policy brief summarizes the insights from Development Day 2019, a full-day conference organized by SITE at the Stockholm School of Economics on November 12th. The presentations were centred around the current political and business climate in the Eastern European region, throwing light on new developments in the past few years, strides towards and away from democracy, and the challenges as well as possible policy solutions emanating from those.
The State of Democracy in the Region
From a regional perspective, Eastern Europe has seen mixed democratic success over the years with hybrid systems that combine some elements of democracy and autocracy. Based on the V-Dem liberal democracy index, ten transition countries that have joined the EU saw rapid early progress after transition. In comparison, the democratic development in twelve nations of the FSU still outside of the EU has been largely stagnant.
In recent years, however, democracy in some of those EU countries, such as Bulgaria, the Czech Republic, Hungary, Poland and Romania have been in decline. Poland, one of the region’s top performers in terms of GDP growth and life expectancy, has experienced a sharp decline in democracy since 2015. Backlashes have often occurred after elections in which corruption and economic mismanagement have led to the downfall of incumbent governments and a general distrust of the political system. Together with low voter turnout, this created fertile ground for more autocratic forces to gain power helped by demand for strong leadership.
An example from Ukraine illustrated the role of media, both traditional and social, for policy-making. In some countries of the region, traditional media is strictly state-controlled with obvious concerns for democracy. This is less the case in Ukraine, where also social media plays an important role in forming political opinions. The concern is that, as elsewhere, opinions that gain traction on social media may not be impartial or well informed, affecting public perception about policy-making. A recent case showing the popular reaction to an attack on the former governor of the Central Bank suggests that those implementing important reforms may not get due credit when biased and partial information dominates the political discourse on social media.
Another case is the South Caucasian region: Armenia, Georgia and Azerbaijan. The political situation there has been characterized as a “government by day, government by night” dichotomy, implying that the real political power largely lies outside the official political institutions. In Georgia, the situation can be described as a competition between autocracy and democracy, with a feudalistic system in which powerful groups replace one another across time. As a result, trust in political institutions is low, as well as citizens’ political participation.
In the case of Azerbaijan, there is an elected presidency, but in reality, power has been passed on hereditarily, becoming a de facto patrimonial system. Lastly, in Armenia, the new government possesses democratic credentials, but the tensions with neighbouring Azerbaijan and Turkey have given increasing power to the military and important economic powers. Overall, democratisation in these countries has been hindered by a trend for powerful politicians to form parties around themselves and to retain power after the end of their mandates. Also, the historical focus on nation-building in these countries has led to a marked exclusion of minorities and a conflict of national identities.
The last country case in this part of the conference focused on the current political situation in Russia and on the likely outcomes after 2024. The social framework in Russia appears constellated by fears – a fear of a world war, of regime tightening and mass repressions, and of lawlessness – all of them on the rise. Similarly, the economy is suffering, in particular from low business activity, somewhat offset by a boost in social payments. Nonetheless, it was argued that it is not economic concerns, but rather political frustration, that has recently led citizens to take to the street. Despite this, survey data shows that trust in Putin is still over 60%, and that most people would vote for him again. However, survey data also points out that the most likely determinant of this trust is the lack of another reference figure, and that citizens are not averse to the idea of political change in itself. Lastly, Putin will most likely retain some political power after 2024, transiting “from father to grandfather of the nation”.
Voices from the civil society in the region also emphasized the importance of a free media and an active civil society to prevent the backsliding of democracy. With examples from Georgia and Ukraine, it was argued that maintaining the independence of the judiciary, as well as the public prosecutor’s office, can go a long way in building credibility both among citizens and the international community. The European Union can leverage the high trust and hopeful attitudes it benefits from in the region to push crucial reforms more strongly. For example, more than 70% of Georgians would vote for joining the EU if a referendum was held on the topic and the European Union is widely regarded as Georgia’s most important foreign supporter.
Weak Institutions and Business Development
The quality of political and legal institutions strongly affects the business environment, in particular with regards to the protection of property rights, rule of law, regulation and corruption. Research from the European Bank for Reconstruction and Development (EBRD) highlights that the governance gap between Eastern Europe and Central Asia and most advanced economies is still large, even though progress in this area has actually been faster than for other emerging economies since the mid-‘90s. This is measured through enterprise surveys as well as individual surveys. In Albania, for instance, a perception of lower corruption was linked to a decrease in the intention to emigrate equivalent to earning 400$ more per month. Another point concerned the complexity of measuring the business environment and the benefits of firm-level surveys asking firms directly about their own actual experience of regular enforcement. For example, in countries such as Poland, Latvia and Romania the actual experience of business regulation measured via the EBRD’s Business Environment Enterprise Performance Survey, is far worse than one would expect from the World Bank’s well known Doing Business rating.
From the perspective of Swedish firms, trade between Sweden and the region has remained rather flat in the past years, as the complexity and risks of these markets especially discourage SMEs. Business Sweden explained that Swedish firms considering an expansion in these markets are concerned with issues of exchange rate stability, and the institutional-driven presence of unfair competition and of excessive bureaucracy. Moreover, inadequate infrastructure and the presence of bribery and corruption make everyday business operations risky and costly. It was generally emphasized that countries have to create a safe investment environment by reducing corruption, establishing a clear and well enacted regulatory environment, having dependable courts and strengthening domestic resource mobilization. Swedish aid can play a part, but there is a need to develop new ways of delivering aid to make it more effective.
An interesting example is Belarus, that has seen more economic and political stability than most neighbours, but at the same time a lack of both economic and political reforms towards market economy and democracy. Gradually the preference towards private ownership, as opposed to public, has increased in recent years and the country has seen a rising share of the private sector, even without specific privatization reforms. Nonetheless, international businesses are still reluctant to invest due to high taxes, a lack of access to finance as well as to a qualified workforce, but most importantly due to the weak legal system. An exception has been China, and Belarus has looked at the One Belt One Road Initiative as a promising bridge to the EU. Scandals connected with the two main Chinese-invested projects have damped the enthusiasm recently, though.
The economic and political risks of extensively relying on badly diversified energy sources, as is the case with natural gas imports from Russia in many transition states were also discussed. It was shown how some countries such as Ukraine, Poland and Lithuania have improved their energy security by either benefitting from reverse-flow technology and the EU’s bargaining power or building their own LNG terminals to diversify supply sources. However, either of these, as well as other energy security improving solutions are likely to come with an economic cost, though, that not all countries in the region can afford.
A Government Perspective
The main focus of this section was the Swedish government’s new inspiring foreign policy initiative, “Drive for Democracy”. Drawing from a definition of democracy by Kerstin Hesselgren, an early Swedish female parliamentarian, democracy enables countries to realize and utilize the forces of the individual and draw them into a life-giving, value-creating society. It was emphasized that the values of democracy are objectives by themselves (e.g. freedom of expression, respect for human rights) but also that democracy has important positive effects in other areas of human welfare. The Swedish government views democracy as the best foundation for a sustainable society, equality of opportunity and absence of gender or racial bias.
The “Drive for Democracy” specifically identifies Eastern Europe as one of the main frontiers between democracy and autocracy, and the Swedish government promotes human rights and stability through various bilateral programmes through the Swedish International Development Cooperation Agency, Sida, and multilateral initiatives within the EU, such as the Eastern Partnership. It was also emphasized that democracy is a continuous process that can always be improved, as indeed experienced by Sweden. Political rights were granted to women only in 1919 followed by convicts and prisoners in 1933 and to the Roma people only in 1950. Political and democratic rights are thus never once and for all given, and it is crucial that the dividends from democracy are carried forward to the younger generation.
Conclusion
In sum, the day illustrated clearly how democracy engages all segments of society, from the business sector to civil society, and the potential for but also challenges involved for democratic deepening in Eastern Europe. To get more information about the presentations during the day, please visit our website.
Participants at the Conference
- PER OLSSON FRIDH, State Secretary, Ministry for Foreign Affairs.
- ALEXANDER PLEKHANOV, Director for Transition Impact and Global Economics at EBRD.
- TORBJÖRN BECKER, Director, SITE.
- CHLOÉ LE COQ, Associate Professor, SITE and Professor of Economics, University of Paris II Panthéon-Assas.
- THOMAS DE WAAL, Senior Fellow at Carnegie Endowment for International Peace.
- NATALIIA SHAPOVAL, Vice President for Policy Research at Kyiv School of Economics.
- ILONA SOLOGUB, Scientific Editor at VoxUkraine and Director for Policy Research at Kyiv School of Economics.
- KETEVAN VASHAKIDZE, President at Europe Foundation, Georgia.
- MARIA BISTER, Senior Policy Specialist, Sida.
- HENRIK NORBERG, Deputy Director, Ministry for Foreign Affairs.
- YLVA BERG, CEO and President, Business Sweden.
- LARS ANELL, Ambassador and formerly Volvo’s Senior Vice President.
- ERIK BERGLÖF, Professor in Practice and Director of the Institute of Global Affairs, London School of Economics and Political Science.
- KATERYNA BORNUKOVA, Academic Director, BEROC, Minsk.
- ANDREI KOLESNIKOV, Senior Fellow, Carnegie Moscow Center.
Liberal Democracy in Transition – The First 30 Years
This year marks 30 years since the first post-communist election in Poland and the fall of the Berlin Wall. Key events that started a dramatic transition process from totalitarian regimes towards liberal democracy in many countries. This brief presents stylized facts from this process together with some thoughts on how to get this process back on a positive track. In general, the transition countries that joined the EU are still far ahead of the other transition countries in terms of democratic development.
The recent decline in democratic indicators in some EU countries should be taken seriously as they involve reducing freedom of expression and removing constraints on the executive, but should also be discussed in light of the significant progress transition countries entering the EU have shown during the first 30 years of transition. The brief shows that changes in a democracy can happen fast and most often happen around elections, so getting voters engaged in the democratic process is crucially important. This requires politicians that engage the electorate and have an interest in preserving democratic institutions. An important question in the region is what the EU can do to promote this, given its overloaded political agenda. Perhaps it is time for a Greta for democracy to wake up the young and shake up the old.
This brief provides an overview of political developments in transition countries since the first post-communist elections in Poland and the fall of the Berlin Wall 30 years ago. It focuses on establishing stylized facts based on quantitative indices of democracy for a large set of transition countries rather than providing in-depth studies of a small number of countries. The aim of the brief is thus to find common patterns across countries that can inform today’s policy discussion on democracy in the region and inspire future studies of the forces driving democracy in individual transition countries.
The first issue to address is what data to use to establish stylized facts of democratic development in the region. By now, there are several interesting indicators that describe various aspects of democratic development, which are produced by different organizations, academic institutions and private data providers. In this brief, three commonly used and well-respected data providers will be compared in the initial section before we zoom in on more specific factors that make up one of these indices.
The big picture
The three indicators that we look at first are: political rights produced by Freedom House; polity 2 produced by the Polity IV project; and the liberal democracy index produced by the V-Dem project. Figures 1-3 show the unweighted average of these indicators for two groups of countries. The EU10 are the transition countries that became EU members in 2004 and 2007 and include Bulgaria, the Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Romania, Slovakia, and Slovenia. The second group, FSU12, are the 12 countries that came out of the Soviet Union minus the three Baltic countries in the EU10 group, so the FSU12 group consists of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
Figure 1. Freedom House
Source: Freedom House and author’s calculations
Note: Scale inverted, 1 is best and 7 worst score
Figure 2. Polity IV project
Source: Polity IV project and author’s calculations
Note: Scale from -10 (fully autocratic) to 10 (fully democratic)
Figure 3. V-Dem
Source: V-Dem project and author’s calculations
Note: Scale from 0 to 1 where higher is more democratic
All three indicators convey the message that the democratic transformation in the EU10 group was very rapid in the early years of transition and the indicators have remained at high levels since the mid-90s only to show some decline in the most recent years for two of the three indicators. The FSU12 set of countries have made much less progress in terms of democratic development and remain far behind the EU10 countries in this regard. Overall, there is little evidence at the aggregate level that the democratic gap between the EU10 and FSU12 groups is closing. While the average EU10 country is more or less a full-fledged democracy, the average FSU12 country is at the lower end of the spectrum for all three democracy measures.
The average indicators in Figures 1-3 obviously hide some interesting developments in individual countries and in the following analysis, we will take a closer look at the liberal democracy index at the country level. We will then investigate what sub-indices contribute to changes in the aggregate index in the countries that have experienced significant declines in their liberal democracy scores.
For the first part of the analysis, it is useful to break down the democratic development in two phases. The first phase is from the onset of transition (1989, 1991 or 1993 depending on the specific country) to the time of the global financial crisis in 2009 and the second phase is from 2009 to 2018 (the last data point).
Figure 4. Liberal democracy, the first phase
Source: V-Dem project and author’s calculations
Figures 4 and 5 compare how the liberal democracy indicator changes from the first year of the period (measured on the horizontal axis) to the last year of the period (on the vertical axis). The smaller blue dots are the individual countries that make up the EU10 group while the red dots are the FSU12 countries. The 45-degree line indicates when there is no change between start and end years, while observations that lie below (above) the line indicate a deterioration (improvement) of the liberal democracy index in a specific country.
In the first phase of transition (Figure 4), all of the EU10 countries increased their liberal democracy scores and the average increase for the group was almost 0.5, going from 0.26 to 0.74. This was a result of many of the countries in the group making significant improvements without any countries deteriorating. The FSU12 group had a very different development with the average not changing at all since the few countries that improved (Georgia and Ukraine) were counterbalanced by a significant decline in Belarus and a more modest decline in Armenia.
Figure 5. Liberal democracy, the second phase
Source: V-Dem project and author’s calculations
The very rapid improvement in the liberal democracy index in the EU10 countries in the first phase of transition came to a halt and also reversed in several countries in the second phase of transition. Of course, as they had improved so much in the first period, there was less room for further positive developments, but the rapid decline in some of the countries was still negative news. However, it does point towards that reform momentum was very strong in the EU accession process, but once a country had entered the union, the pressure for liberal democratic reforms has faded.
Overall, the EU10 average fell by 0.1 from 2009 to 2018. This was a result of declining scores in several countries. The particularly large declines in this period have been seen in Hungary (-0.28), Poland (-0.27), Bulgaria (-0.14), the Czech Republic (-0.14), and Romania (-0.12). Again, the average FSU12 score did not change much, although Ukraine (-0.2) put its early success in reverse and lost as much in this period as it had gained earlier.
Country developments
Since much of the current discussion centers on how democracy is being under attack, the figures name the countries that have seen significant declines in the liberal democracy score in the first or second phase of transition. Figures 6 and 7 show the time-series of the liberal democracy index in the countries with significant drops at some stage of the transition process.
Figure 6. FSU12 decliners
Source: V-Dem project and author’s calculations
In many countries, the drop comes suddenly and sharply, with the first and most prominent example being Belarus. There, it only took three years to go from one of the highest ranked FSU12 countries to fall to one of the lowest liberal democracy scores. In Poland, Romania, Bulgaria and Armenia, the process was also very rapid and significant changes happened in 2-3 years.
Figure 7. EU10 decliners
Source: V-Dem project and author’s calculations
In the Czech Republic and Hungary, the period of decline was much longer and in the case of Hungary, the drop was the most significant in the EU10 group. Ukraine stands out as more of an exception with a roller-coaster development in its liberal democracy score that first took it up the list and then back down to where it started. For those familiar with politics in these countries, it is easy to identify the elections and change in government that have occurred at the times the index has started to fall in all of these countries. In other words, the democratic declines have not started with coups but followed election outcomes where in most cases the incumbent leaders have been replaced by a new person or party.
How democracy came under attack
We will now take a closer look at what has been behind the instances of decline in the aggregate index by investigating how the sub-indices have developed in these countries. The sub-indices that build up the liberal democracy index are: freedom of expression and alternative sources of information; freedom of association; share of population with suffrage; clean elections; elected officials; equality before the law and individual liberty; judicial constraints on the executive; and legislative constraints on the executive (the structure is a bit more complex with mid-level indices, see V-Dem 2019a).
Table 1 shows how these indicators have changed in the time period the liberal democracy indicator has fallen significantly (with shorter versions of the longer names listed above but in the same order). The heat map of decline indicated by the different colours is constructed such that positive changes are marked with green, smaller declines are without colour, declines greater that 0.1 but smaller than 0.2 are in yellow and larger declines in red. Note that the liberal democracy index is not an average of the sub-indices but based on a more sophisticated aggregation technique (see V-Dem 2019b). Therefore, the Czech Republic and Bulgaria can have a greater fall in top-level liberal democracy index that what is indicated by the sub-indices.
Table 1. Changes in liberal democracy indicators at times of democratic decline
Source: V-Dem project and author’s calculations
For the countries with the largest changes in the liberal democracy index, it is clear that both freedom of expression and alternative sources of information have come under attack together with reduced judicial and legislative constraints on the executive. Among the EU10 countries, Hungary and Poland stand out in terms of reducing freedom of expression, while Romania has seen most of the decline coming from reducing constraints on the executive. Not surprisingly, Belarus stands out in terms of the overall decline in liberal democracy coming from reducing both freedom of expression and constraints on the executive in the most significant way.
On a more general level, the attack on democracy does differ between the countries, but in the cases where serious declines can be seen, the attack has been particularly focused on information aspects and constraints on the executive. At the same time, all countries let all people vote (suffrage always at 1) and let the one with the most votes get the job (elected officials).
Policy conclusions
This brief has provided some stylized facts on the first 30 years of liberal democracy in transition and some details on how democracy has come under attack in individual countries. It leaves open many questions that require further studies and some of these are indeed ongoing in this project and will be presented in future briefs and policy papers here.
Some observations have already been made here that can inform policy discussions on liberal democratic developments in the region. The first is that changes can happen very rapidly, both in terms of improvements but also in terms of dismantling important democratic institutions, including those that provide constraints on the executive or media that provides unbiased coverage before and after elections. What is also noteworthy is that these changes have almost always happened after an election where a new person or party has come to power, so the democratic system is used to introduce less democracy in this sense.
It is also interesting that in all of the countries, the most easily observed indicators of democracy such as suffrage and having the chief executive or legislature being appointed by elections are given the highest possible scores. In other words, even the most autocratic regime wants to look like a democracy; but as the old saying goes, “it is not who votes that is important, it is who counts”.
The regime changes at election times that have led to declining liberal democracy scores have also in many cases come as a result of the incumbents not doing a great job or voters not turning up to vote. It was enough for Lukashenko in Belarus to promise to deal with corruption and rampant inflation that was a result of the old guard’s mismanagement to turn Belarus into an autocracy. In Hungary, the change of regime came after the Socialist leader was caught on tape saying he had been lying to voters. While in Romania, only 39% voted in the 2016 election. And in Bulgaria, around half of the voters stayed at home in the presidential election the same year.
In sum, both incompetent and corrupt past leaders and disengaged or disillusioned voters are part of the decline in a liberal democracy that we have seen in recent years. It is clearly time for policy makers that are interested in preserving liberal democracy in the region and elsewhere to think hard about how democracy can be saved from illiberal democrats. Part of the answer clearly will have to do with how voters can be engaged in the democratic process and take part in elections. It also involves defending free independent media and the thinkers and doers that contribute to the liberal democracy that we cherish. The question is if the young generation will find a Greta for democracy that can kick-start a new transition to liberal democracy in the region and around the world.
For those readers that want to participate more actively in this discussion and have a chance to be in Stockholm on November 12, SITE is organizing a conference on this theme which is open to the public. For more information on the conference, please visit SITE’s website (see here).
References
- Freedom house data downloaded on Oct 4, 2019, from https://freedomhouse.org/content/freedom-world-data-and-resources
- Freedom house methodological note available at https://freedomhouse.org/report/methodology-freedom-world-2018
- Polity IV project data downloaded on Oct 4, 2019, from http://www.systemicpeace.org/inscrdata.html
- Polity IV project manual available at http://www.systemicpeace.org/inscr/p4manualv2018.pdf
- V-Dem project data downloaded on Sept 24, 2019, from https://www.v-dem.net/en/data/data-version-9/
- Coppedge, Michael, John Gerring, Carl Henrik Knutsen, Staffan I. Lindberg, Jan Teorell, David Altman, Michael Bernhard, M. Steven Fish, Adam Glynn, Allen Hicken, Anna Lührmann, Kyle L. Marquardt, Kelly McMann, Pamela Paxton, Daniel Pemstein, Brigitte Seim, Rachel Sigman, Svend-Erik Skaaning, Jeffrey Staton, Steven Wilson, Agnes Cornell, Lisa Gastaldi, Haakon Gjerløw, Nina Ilchenko, Joshua Krusell, Laura Maxwell, Valeriya Mechkova, Juraj Medzihorsky, Josefine Pernes, Johannes von Römer, Natalia Stepanova, Aksel Sundström, Eitan Tzelgov, Yi-ting Wang, Tore Wig, and Daniel Ziblatt. 2019a. “V-Dem [Country-Year/Country-Date] Dataset v9”, Varieties of Democracy (V-Dem)
- Pemstein, Daniel, Kyle L. Marquardt, Eitan Tzelgov, Yi-ting Wang, Juraj Medzihorsky, Joshua Krusell, Farhad Miri, and Johannes von Römer. 2019b. “The V-Dem Measurement Model: Latent Variable Analysis for Cross-National and Cross-Temporal Expert-Coded Data”, V-Dem Working Paper No. 21. 4th edition. University of Gothenburg: Varieties of Democracy Institute.
The Gender Wage Gap in Belarus: State vs. Private Sector
This brief is based on research that studies gender difference in wages in Belarus using survey data from 2017. According to the results, the unconditional gender wage differential equals 22.6%. The size of the wage gap is higher in the state sector than in the private sector. Additionally, it increases in the state sector throughout the wage distribution and accelerates at the top percentiles, indicating the presence of a strong glass ceiling effect.
Introduction
The causes and consequences of the gender wage gap in the labor market, that is the difference between the wages earned by women and men, continue to attract increasing attention in empirical studies worldwide.
Belarus’ labor market is not an exception and faces the problem of wage inequality like other neighboring and transition countries. According to the National Statistical Committee of the Republic of Belarus (Belstat), the average gender wage gap in terms of monthly wages was 19% in 2000, it increased up to 23.8% in 2015, and reached 25.4% in 2017.
In this regard, this brief updates the estimates of the gender wage gap in Belarus. And it summarizes the results of the study on what the role of the state and private sectors are in the distribution of gender wage differences in Belarus (Akulava and Mazol, 2018).
Data and methodology
The data used in the research is from the Generations and Gender Survey (GGS) conducted in Belarus in 2017. This survey is a nationally representative dataset that is based on interviews of about 10,000 permanent residents of Belarus, aged 18–79, covering the whole country disaggregated by regions. The GGS contains information on a range of individual (age, gender, marital status, educational attainment, employment status, hours worked, wages earned etc.) and household-level characteristics (household size and composition, land holding, location, asset ownership etc.).
The analysis is based on the typical Mincer model of earnings that estimates individual wage income as a function of various influencing factors using the OLS approach (Mincer, 1974). Specifically, the Mincerian wage equation is defined where the log of the hourly wage rate is regressed on a set of male and female workers’ personal and job characteristics (educational level, working experience, occupational type, organization type, family characteristics, and region).
Next, we use the Oaxaca-Blinder (OB) methodology (Oaxaca, 1973; Blinder, 1973) to identify and quantify the contribution of personal characteristics and the unexplained component (which is referred to as differences in returns) to the wage difference between males and females.
Finally, we apply the Machado-Mata (MM) technique (Machado and Mata, 2005) to look into the nature of the wage gap at various points of the income distribution and also to test the difference for individuals employed in the state or private sectors. For the Machado-Mata procedure, we estimate our specifications at the 10th, 25th, median, 75th and 90th percentiles of the wage distribution.
Results
The analysis shows that women’s wages are lower than men’s wages all over the wage distribution. The average raw gender wage gap equals 22.6% and it increased substantially compared with 9.0% in 1996 and 17.8% in 2006, the numbers obtained in the study conducted by Pastore and Verashchagina (2011).
Figure 1. Gender differential by quantile of the wage distribution
Source: Authors’ estimates based on GGS.
The level of female earnings is lower than the male regardless of the occupational type, educational background, work experience and organizational type. Moreover, the underpayment of women is lower for low earning workers, but increases up to the end of the wage distribution (see Figure 1).
The OB decomposition shows that female educational attainment and job-related experience help to decrease the level of the wage gap slightly (see Table 1).
Table 1. Oaxaca-Blinder decomposition results
Source: Authors’ estimates based on GGS.
However, the occupational choice is leading to an expansion of the difference in earnings. However, its effect is also small, indicating that occupational segregation plays a minor role in explaining the gender wage gap. The major share of the gender wage gap is formed by the unexplained part, which is likely to be attributed to discrimination.
Next, the level of remuneration is higher among private companies. However, contrary to other countries in transition, the average gender wage gap in Belarus in the private sector is lower than in the public sector.
Moreover, the MM decomposition estimates presented in Table 2 demonstrate that the gender wage gap in the state sector shows evidence of the glass ceiling effect (the size of the total wage gap expands at the top of the wage distribution), while no evidence of either glass ceiling or sticky floor (the size of the total wage gap increases at the bottom of the wage distribution) in the private sector.
The negative coefficient near the characteristics part in the private sector shows that female endowments outweighs their male counterparts. Thus, controlling for personal characteristics, if the labor market rewards males and females equally, the wages of females in the private sector should be substantially higher (see Table 2).
Table 2. Machado-Mata decomposition of the observed gender wage gap by organization type
Source: Authors’ estimates based on GGS.
Finally, the results also suggest that female workers are better off being in the private sector at the lowest and the highest percentiles (i.e. the size of the gender wage gap is lower there compared to the 25th and 50th percentile).
A possible explanation for all the above is that institutional differences seem to play a crucial role here. First, Belarusian private firms work under stronger regulation than in other transition economies which makes it harder for them to set low wages. Second, they also operate under stronger competition (compared to state companies), which force them to identify individual productivity more correctly, narrowing the gender difference in pay. In contrast, the paternalistic attitude to women left as a legacy from the Soviet Union further increases the gender wage gap in the public sector.
Conclusion
In this brief, we present new evidence on the existence of a gender wage gap in the Belarusian labor market and analyze the differences in its distribution between the state and private sectors.
Our results show that the unconditional gender wage gap in terms of hourly wages equals 22.6%. Thus, jointly with a previous study (see Pastore and Verashchagina, 2011) and recent official indicators, all these indicate that the pace towards gender equality in Belarus seems to be sluggish. For the moment, all institutional changes accomplished by the Belarusian government to reduce gender discrimination are not enough and require additional efforts to cope with that problem.
However, the gender wage gap is shown to be much wider in the public sector than in the private sector. At the same time the private sector appears to be more attractive than the public sector in the country in terms of the level of remuneration. Therefore, additional structural shifts of the economy accompanied by the growth of competition are needed to induce a further reduction of the gender wage gap.
References
- Akulava, M. and A. Mazol. (2018). What Forms Gender Wage Gap in Belarus? BEROC Working Paper Series, WP no. 55.
- Blinder, A. (1973). Wage Discrimination: Reduced Form and Structural Estimates. Journal of Human Resources, 8, 436-455.
- Machado, J., and J. Mata. (2005). Counterfactual Decomposition of Changes in Wage Distributions Using Quantile Regression. Journal of Applied Econometrics, 20(4), 445‑465.
- Mincer, J. (1974). Schooling, Experience, and Earnings. New York: Columbia University.
- Oaxaca, R. (1973). Male-Female Wage Differentials in Urban Labor Markets. International Economic Review, 14(3), 693-709.
- Pastore, F., and A. Verashchagina. (2011). When Does Transition Increase the Gender Wage Gap? An application to Belarus. The Economics of Transition, 19(2), 333-369.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.