Tag: Belarus

Dreaming of Entrepreneurship or Requiem for a Dream – What Kind of Future Do Parents Envision for Their Children in Belarus?

Posted on November 4, 2024 | Policy Brief

A person performing high-altitude cleaning on a roller coaster structure, symbolizing bravery and entrepreneurship spirit in Belarus, with future generations and children in mind.

Even under current conditions in Belarus, society remains focused on freedom and fostering entrepreneurship. The perception of business as a means of minimizing interaction with the state still exists. This policy brief discusses parents’ perceptions of entrepreneurship as a possible area of self-realization for their children in Belarus, to analyze the role of the family in the formation and reproduction of entrepreneurial capital for future generations. The policy brief is based on a representative survey of individuals aged 18 to 64 who reside in Belarus, conducted from June to August 2024. The findings suggest Belarusian parents are largely positive toward entrepreneurship as a future avenue for their children, despite the continuing deterioration of conditions for the business sector.

The perception of private business and entrepreneurship in Belarus has undergone significant transformation over the course of the country’s modern history. Emerging from the Soviet era, which was distinctly anti-entrepreneurial, both the business sector and the Belarusian society have evolved. In a context where mass privatization did not take place, society – initially skeptical of entrepreneurs, often viewing them as dishonest “speculators” – gradually came to recognize that entrepreneurs are generally hardworking individuals who not only generate income for themselves but also create opportunities for others.

Despite the Belarusian authorities’ conservative and often restrictive approach toward business and entrepreneurship, pro-entrepreneurial values have taken root in Belarusian society. This has contributed to the development of a relatively dynamic and productive private sector, increasingly seen as a desirable environment for employment and growth. From 2012 through 2020, the share of the private sector in employment increased by 7.7 percentage points, in export sales of goods and services by 23.9, and in GDP by 14.6 percentage points, respectively (Daneyko et al., 2020).

Over time, businesses in Belarus have thrived, largely due to entrepreneurial skills, investment in human capital, and adaptability to external conditions, rather than reliance on state support or natural resources.

These dynamics further accelerated when Belarusian authorities realized that relying on and investing in state-owned enterprises (SOEs) was not generating the desired economic growth and employment, and a gradual liberalization of business conditions was introduced (Daneyko et al., 2020). This liberalization allowed the government to delay urgent structural reforms needed in the SOE sector, focusing instead on reducing excess employment, which was absorbed by the growing private sector (Chubrik, 2021; BEROC, 2023).

However, following the 2020 presidential elections and subsequent mass protests, the contribution of the private sector to the economy began to be downplayed in official rhetoric. Entrepreneurs were increasingly portrayed as dishonest individuals, profiting from unjustified price increases and lacking loyalty to the state. In response, the government intensified control over entrepreneurial activities, adopting several significant legislative changes aimed at regulating prices and individual entrepreneurs’ activities.

Moreover, the comprehensive sanctions imposed on Belarus in recent years have made the overall business environment more opaque and challenging. These conditions have enhanced the risk of legal violations during business operations, which in turn increases the personal risks for business owners and managers, potentially threatening their personal freedom.

In this hostile environment, families have become the decisive factor influencing one’s decisions about creating businesses and providing emotional, financial, and instrumental support.

Family as a Driver of Entrepreneurial Careers

There is significant evidence that family upbringing plays a crucial role in fostering entrepreneurial qualities and skills in children, which in turn positively influences their interest in starting their own businesses (Chauhan et al., 2024; Osorio et al., 2017). Parents’ knowledge, accumulated experience, and willingness to provide emotional and practical support further encourage entrepreneurial aspirations in children. A family’s support in developing relevant values and qualities also reflects how attractive entrepreneurship is in the eyes of parents.

Families also serve as role models, transmitting best practices and influencing children’s educational and career choices (Edelman et al., 2016). This support can help young people overcome common barriers to entry into entrepreneurship, such as lack of experience, resources, or social capital, increasing the prospect of starting their own.

The role of family support is particularly important in environments with insufficient structural or financial backing for entrepreneurship, as is the case in Belarus (Maleki et al., 2023; Guerrero & Marozau, 2023). In such contexts, the family’s role in fostering entrepreneurial ambition becomes a key factor in enabling the next generation of entrepreneurs to succeed.

Attitudes Towards Entrepreneurs

The perception of business in Belarus is reflected in the general attitude toward entrepreneurs and their role in the economy and society. Parents are the main influencers and role models shaping children’s entrepreneurial attitudes like risk-taking, problem-solving, and independence (Georgescu & Herman, 2020).

In a recent survey of 2,000 Belarusian respondents aged 18 to 64, including 826 parents of children under 18, participants were asked to select the statement that best describes their attitude towards Belarusian entrepreneurs. The findings suggest that individuals with children under 18 tend to have a more positive view of business and are more likely to choose favorable statements about entrepreneurs (see Figure 1).

Figure 1. Attitudes towards entrepreneurs

Graph showing attitudes towards Belarusian entrepreneurs by age and parental status, highlighting views on entrepreneurship.

Source: Calculations based on survey data. Note: The graph displays the answers to the question “Which statement best describes your attitude towards Belarusian entrepreneurs?” and is displayed as percent of respondents in the corresponding group.

Almost half of the respondents who have children under 18 (49.9 percent) describe their attitude towards entrepreneurs as the most positive option choice as they “earn their living through honest labor, generate employment opportunities, and stimulate economic development”. This share is significantly higher than among respondents without children (37.8 percent). A very positive attitude toward Belarusian entrepreneurship is also characteristic of young cohorts of respondents aged 18–24 (47.7 percent) and 25–34 (49.5 percent). This resonates well with the distribution found in a previous study by the IPM Research Center and BEROC (2019) and indicates that recent changes in the official rhetoric and entrepreneurship-related legislation have not yet damaged the public image of Belarusian entrepreneurs and businessmen.

Preferred Careers for Children

In the survey, Belarusian parents were asked to select areas of employment (choosing no more than three options) in which they would like to see their sons and daughters. The vast majority (69.2 percent) chose the option “to run their own business, to be entrepreneurs/freelancers” as the desired future for their children. Among other popular areas of activity were entrepreneurships’ antipoles; work within law enforcement agencies (22.9 percent) and civil service (16.1 percent). Interestingly, the choice of a future related to entrepreneurship for a child does not significantly differ by the child’s gender (see Figure 2).

Figure 2. Preferred careers for children, by gender

Source: Calculations based on survey data. Note: The graph displays the answers to the question “What would you like your child to do in the future?” and is displayed as percent of respondents in the corresponding group.As one might expect, parents-entrepreneurs more often associate their children’s future with entrepreneurship (80.9 percent) compared to non-entrepreneurial respondents (65.7 percent) (see Figure 3). Similarly, female entrepreneur respondents more often than others prefer their daughters to engage in business in the future (80.9 percent). This level of approval of an entrepreneurial future for daughters may be related to an understanding of the self-realization opportunities that business provides for women, compared to other employment options. Working “for themselves” allows women to avoid barriers and limitations encountered when working for an employer and it may also be associated with schedule flexibility and an ability to improve work-life balance.

Figure 3. Preferred careers for children, by parents’ occupational background

Survey results showing Belarusian parents' preferences for their children's future careers, highlighting entrepreneurship.

Source: Calculations based on survey data. Note: The graph displays the answers to the question “What would you like your child to do in the future?” and is displayed as percent of respondents in the corresponding group.

Attitudes Towards Entrepreneurship

The attitude towards entrepreneurship was captured by asking parents to choose what they would tell their children if they expressed the intention to become entrepreneurs. Based on interviews and a pilot survey, multiple statements that carried positive, neutral, and negative connotations were presented in the questionnaire (see Figure 4).

Parents interested in their children becoming entrepreneurs in the future tend to foster a positive view of entrepreneurship through encouraging messages about business. From the results, parents tell their children that business is “dream, wealth, and freedom”, with more than half of the respondents who wish for their children to have an “entrepreneurial destiny” choosing this triad to convey that business is a positive path.

Among those who do not see their children in entrepreneurship, these categories also dominate in justifying the attractiveness of business. However, those parents are more cautious and tend to warn their children about the associated risks of uncertainty and instability.

Figure 4. Attitudes towards entrepreneurship

Survey results on entrepreneurship in Belarus: perspectives of parents on their children's future in business.

Source: Calculations based on the survey data. Note: The graph displays the answers to the question “Which statements best describe what you would tell a child if he/she expressed a willingness to become an entrepreneur?” and is displayed as percent of respondents in the respective group. Respondents were asked to select all applicable response options.

Overall, the selection of positive associations by most parents indicates a high level of support for children’s interest in entrepreneurship within families. By choosing the triad “dream, wealth and freedom”, parents emphasize priorities related to the formation of free individuals and see potential in their children for engaging in business in the future, despite the existence of, and appeal from, other career choices. Employment (regardless of ownership structure) is much less frequently considered as an appealing prospect for children’s future. The likely rationale is the dependent position of employees within the current sociopolitical context, which partially undermines the benefits of private-sector employment. Therefore, many respondents may perceive employment as “captivity” – in contrast to the freedom associated with entrepreneurship. Thus, the current generation of parents largely want their children to have minimal interactions with the state.

Conclusions

Despite the current challenging conditions for business in Belarus, many parents still see entrepreneurship as a pathway to independence and freedom for their children. The role of the family in nurturing entrepreneurial potential should not be underestimated in this context. The fact that many parents see entrepreneurship as a means of self-realization for their children indicates a sustained positive perception of business within the population, despite the recent years negative portrayal of entrepreneurs in official media outlets.

For many, business is associated with the positive triad of “dream, wealth, and freedom”. This is particularly true for the current generation of parents, whose worldviews were shaped during the relatively open periods of the late 1990s and early 2000s. For them, entrepreneurship represents a means for their children to achieve personal freedom and self-realization without having to leave the country.

However, there is a notable contrast between these aspirations and the reality of doing business in Belarus today – a divergence that could prove pivotal for the future of private business in the country. Entrepreneurship in Belarus has the potential to either become a chance for future generations to help develop the nation (“dreaming of entrepreneurship”) or, if suppressed further, a missed opportunity (“requiem for a dream”).

There is no guarantee that future generations of Belarusians will share the same positive attitude toward entrepreneurship and pro-democratic values as their parents, if they lack real opportunities to start and run businesses or public success stories. The “fork” in the future of entrepreneurship in Belarus has another critical dimension: if parents no longer see opportunities for self-realization within the country, they may consider leaving it. Following the 2020 political crisis, Belarus has seen significant emigration driven by the risks of domestic criminal prosecution and the search for safety abroad.

The main implications for the decision-makers concerned with a future stable, predictable and democratic Belarus, could thus be the following:

  1. Supporting entrepreneurship as a driver of democratic values: In a non-democratic environment, entrepreneurs are known to act as carriers and multipliers of pro-democratic values such as freedom, personal responsibility, and self-determination. (Audretsch & Moog, 2022; Marozau, 2023). The (still) positive attitudes to entrepreneurship, intergenerational transmission of entrepreneurial values, and overall survival of the Belarusian private should be perceived, and treated, as a foundation for counteracting (some of the) ongoing negative institutional developments.
  2. Transmitting pro-entrepreneurial values to future generations: With the same idea in mind, it is important to support families transmitting pro-entrepreneurial values to future generations by complementing their efforts through, e.g., education. This can be realized by offering additional training programs for children and adolescents, such as financial literacy schools, business clubs, and leadership schools.
  3. Advancing the role of female entrepreneurship: The increasing participation of women in entrepreneurship presents an opportunity to transfer values, particularly to daughters, and thereby preserving entrepreneurial capital and overcoming gender inequality issues in Belarus.

Acknowledgment

The study underlying this policy brief was made possible by the generous support of the American people through the United States Agency for International Development (USAID). BEROC acknowledges support by Pyxera Global whose financial and technical assistance for INNOVATE is part of a USAID-funded activity to support the innovative-based economy and private sector growth in Belarus.

The contents of this brief are the sole responsibility of BEROC and do not necessarily reflect the views of USAID or the United States government.

References

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.

Belarus’s Progressing Economic Dependence on Russia and Its Implications

Posted on October 21, 2024 | Policy Brief

Image showing the border between Belarus and Russia, symbolizing Belarus' economic dependence on Russia.

This policy brief examines the complexities surrounding Belarus’s economy as it deepens its economic dependence on Russia. Recent growth, driven by increased domestic demand and a resurgence in exports to Russia, has surpassed expectations. This trajectory is largely due to Belarus’s mounting dependence on Russia across trade, energy, finance, logistics, and other domains, a dependency that poses significant long-term risks and uncertainties. The Belarusian regime has begun to see this relationship not only as a lifeline but also as a potential source of economic enhancement. However, this approach may blur the lines between sustainable growth and short-term gains, fostering uncertainties about the true nature of this economic uptick. Hence, questions on whether this growth is viable or merely cyclical persist. The uncertainty and progressing dependence on Russia, in turn, imply numerous challenges for the political domain.

New Issues on the Belarusian Economic Agenda

The Belarusian economy continues to surprise, displaying output growth substantially higher than previous forecasts (see e.g. BEROC, 2024). In 2024, the economy is projected to grow by around 4.0 percent. The growth is being driven by domestic demand, fueled by rising real wages and labor shortages. However, an underlying factor is the recent resurgence of exports to Russia. The unexpectedly high growth has allowed for the Belarusian economy to surpass pre-war output levels, at the moment defying earlier predictions of stagnation or decline.

Although the growth period has now extended beyond what could be considered a mere “recovery”, the overall picture – as suggested in Kruk (2024) – still appears relevant. Despite the upturn, the economy remains significantly behind the counterfactual ‘no sanctions, no war’ scenario (see Figure 1).

Figure 1. The Dynamics of Output (seasonally adjusted, index, 2018=100): Actual vs. Counterfactual

Line graph comparing the actual economic output of Belarus with a counterfactual scenario, illustrating the impact of war and sanctions on the country's economic dependence.

Source: Own estimations based on Belstat data. Note: The counterfactual scenario assumes that the Belarusian economy continued to grow uniformly from Q2 2021 to the present, at a sluggish growth rate of 1 percent per annum (a conservative estimate of the potential growth rate before the sanctions were implemented (Kruk & Lvovskiy, 2022)).

Moreover, all the risks to long-term growth associated with total dependence on Russia, potential contagion effects from Russia, etc. are still relevant (KAS, 2024; Bornukova, 2023).

At the same time, a prolonged period of growth gives grounds to think about recent trends also from the perspective of ongoing structural changes in the Belarusian economy. Can these changes, besides implying numerous risks, enhance Belarus’s growth potential and degree of sustainability? If so, to what extent, for how long, and under which conditions? With these questions in mind, it is important to gain a better understanding of what aspects of the Belarusian economy are being transformed due to the increased coupling with Russia and which effects, besides increased dependency and corresponding risks, this coupling generates. Are there any growth-enhancing effects? If so, how sustainable are they?

Belarus’s Growing Economic Dependence on Russia

Belarus’s economic dependence on Russia is reaching unprecedented levels, spanning various critical sectors, with new dimensions of reliance emerging in recent years. This dependence is deeply embedded in the trade, energy, financial, and technological sectors of the Belarusian economy, and recent geopolitical shifts have further intensified these connections.

One of the most evident signs of Belarus’s economic reliance on Russia is reflected in its foreign trade. Russian imports make up around 55-60 percent of all imports to Belarus, with a staggering 80 percent consisting of intermediate goods crucial for industrial production. Energy products, including crude oil and natural gas, form the largest part of these imports, with almost all of Belarus’s energy needs being met by Russia. Exports have also become increasingly concentrated to the Russian market. In 2022-2023 there were several periods when about 70 percent of Belarusian exports were directed to Russia, an increase from about 35-40 percent prior to 2022. This surge was driven by new opportunities for Belarusian firms on the Russian market following Western companies withdrawals. Although competition in the Russian market has since intensified, Russia still accounts for around 60-65 percent of Belarus’s total exports (see Figure 2).

Figure 2. The Evolution of Physical Volume of Exports (2018=100) and the Share of Exports to Russia (in percent)

Graph showing Belarus's exports to Russia and other countries, illustrating the country's growing economic dependence on Russia with a significant increase in the share of exports to Russia post-2022.

Source: Own estimations based on data from the National Bank of Belarus.

A major new development since 2022 is Belarus’s reliance on Russia for transportation and logistics. Sanctions and the war in Ukraine have forced Belarus to abandon its traditional export routes through European ports, leaving Russian seaports as the only viable option for further exports. In 2023, Belarus secured around 14 million tons of port capacity in Russia, primarily for potash fertilizers and oil products exports. Although it is still below the needed volumes, this logistics dependency significantly exacerbates Belarus’s external trade dependency. Taking into account direct exports and imports to and from Russia, as well as mechanisms of logistics and transport control, Russia essentially “controls” up to 90 percent of Belarusian exports and about 80 percent of its imports.

Energy dependency is another critical factor to consider. Belarus imports over 80 percent of its energy resources from Russia, making it vulnerable to any shifts in Russian energy policy. In fact, Russian energy subsidies have played a crucial role in keeping Belarusian industries competitive. In 2022, when global energy prices spiked, the low and fixed price that Belarus paid for Russian gas and the steep discount on oil supplies translated into record-high energy subsidies. These amounted to billions of US dollars and shielded Belarus from the economic fallout other countries experienced due to rising energy prices. Although the value of these subsidies has somewhat decreased in 2023-2024, they remain significant and vital for Belarus.

Belarus’s fiscal situation has also become increasingly tied to Russia. After years of running budget deficits, Belarus achieved a budget surplus in 2023, largely due to Russian financial assistance. For instance, the budgetary item ‘gratuitous revenues’, which mainly includes reverse excise tax and other transfers from Russia, reached a historical high in 2023, securing revenues of around 3.0 percent of GDP. Without this external support, Belarus would likely face a severe fiscal deficit, forcing cuts in social spending and other areas. The scale of Russian financial aid has become a key factor in maintaining budgetary stability, imposing a serious risk for Belarus. Were Russia to restrict such financing, Belarus would almost instantly lose its fiscal stability.

In the monetary sphere, Belarus’s dependence on Russia manifests through the informal peg of the Belarusian ruble to the Russian ruble. Given the deep trade ties and shared currency use in bilateral transactions, Belarusian monetary policy is effectively constrained by Russian economic conditions. The Belarusian National Bank has little room for maneuver, as any nominal devaluation or appreciation of the ruble tends to self-correct through inflation or price adjustments tied to Russian trade. This linkage limits Belarus’s monetary sovereignty and aligns its inflation trajectory closely with Russia’s.

Belarus’s debt structure underscores this dependency further. Of the country’s roughly 17.0 billion US dollars in external debt, about 65 percent is owed directly to Russia or Russia-controlled entities like the Eurasian Fund for Stabilization and Development. In 2022-2023, Russia granted Belarus a six-year deferment on debt repayments, providing crucial breathing room for the regime. This deferment, along with Belarus’s limited access to other international financial sources due to sanctions, has cemented Russia’s role as the primary creditor and financial lifeline for Belarus.

New dimensions of dependence have also emerged within infrastructure, technology, and cyberspace. As Belarus is cut off from Western technologies and financial systems, it increasingly relies on Russian alternatives. Belarus has adopted Russian software for critical functions such as tax administration, giving Moscow access to sensitive financial data. Similarly, with several Belarusian banks disconnected from SWIFT, the country has integrated into Russia’s financial messaging system, further entrenching its reliance on Russian infrastructure. Belarusian companies, particularly in sectors like accounting and logistics, have also shifted to using Russian business software, while consumers increasingly rely on Russian digital platforms for social networks, payments, and entertainment.

An Attempt to Spur Growth Through Coupling with Russia

From the perspective of macroeconomic stability and the traditional view on strengthening growth potential, Belarus’s progressing dependence on Russia is obviously an evil (Kruk, 2023; Kruk, 2024). However, the Belarusian regime sees it as a necessary trade-off, or a “lesser evil”. In 2021-2023, the coupling was done in exchange for economic survival. Firstly, production coupling allowed to counterweight the losses in output associated with sanctions (as niches were freed up in the Russian market) (Kruk & Lvovskiy, 2022). Secondly, the coupling was driven by pressure from Russia and a desire from Belarusian authorities to rapidly obtain some compensations if accepting Russia’s demands. For example, in 2022-2023, Belarusian enterprises were granted a credit line of 105 billion rubles within so-called import-substitution projects.

However, in 2024, coupling with Russia is beginning to look more like a purposeful strategy by the Belarusian economic authorities rather than just a survival strategy. The regime seems willing to sacrifice sustainability considerations in favor of strengthening the growth potential by ‘directive production coupling’, i.e. artificially shaping value-added chains between producers in Belarus (mainly state-owned enterprises) and Russia. For instance, the regime accepted the co-called Union programs for 2024-2026 (Turarbekova, 2024), which encompass numerous activities by the governments of Belarus and Russia aimed at securing ‘production coupling’ in sectors such as machine building, agricultural and automotive engineering, aviation industry, and elevator manufacturing. In some cases, the Belarusian party solely initiates such kind of sectoral activities. It seems that the authorities either accepted the dependency due to the lack of outside options, or they became more optimistic regarding the possibility to spur economic growth through coupling with Russia based on the experiences from the last couple of years. And to some extent, this logic might hold true.

As in the previous two years, the coupling with Russia may, in the short to medium term, more than compensate for certain institutional weaknesses and vulnerabilities in the Belarusian economy. The positive effects may even extend beyond mere cyclical impacts and, under certain conditions, contribute to a semblance of stability for a period of time. For example, economic growth in Belarus could reach some degree of stability under the following conditions:

  • (a) if the war in Ukraine becomes protracted and military demand from Russia remains steady;
  • (b) if the Russian economy continues to grow (albeit modestly) in an environment with limited competition in Russian commodity markets;
  • (c) if specific tools and forms of support for the Belarusian economy remain in place.

Growth driven by a combination of these preconditions could be sufficiently stable as long as they persist. However, the existence of such a status quo is not inherently sustainable and could vanish at any moment. Each of these preconditions is highly unreliable and comes with its own set of determining factors. Thus, one cannot count on the preservation of the entire “package” of preconditions in the long term.

Conclusions

Belarus and its economic prospects are currently in a highly complex situation. The Belarusian economy has been steadily increasing its degree of coupling with Russia, with the ties strengthening both in the range of economic sectors involved and the depth of their integration.

From a long-term growth perspective, the unprecedented level of dependence on Russia is undoubtedly detrimental. In this regard, Kruk’s (2024) conclusion about the economic and political deadlocks remains entirely relevant.

However, as the past two years have shown, this situation can achieve a certain semblance of stability in the medium term. The Belarusian regime is increasingly viewing its coupling with Russia not only as a mechanism for economic survival but also as a means to enhance economic potential. In this way, the growing dependence on Russia, which brings substantial macroeconomic risks, is seen as an unavoidable cost entailed to the only available mechanism to sustain economic growth in Belarus.

How then, should we interpret the related fluctuations in Belarus’s economy? As an increase in economic potential (equilibrium growth rate) or as cyclical acceleration? Traditional economic logic encounters a contradiction here, as the line between equilibrium growth and cyclical fluctuations becomes blurred. An increase in economic potential should inherently be sustainable, whereas cyclical acceleration is inherently transient. Yet, how should we treat a mechanism that might be somewhat sustainable under certain conditions?

This contradiction creates numerous uncertainties, both strictly within the economic domain and beyond it. Economically, it diminishes the effectiveness of conventional macro forecasting tools, making them more dependent on ad-hoc assumptions. For example, if there is indeed an increase in potential, then macroeconomic projections generated without accounting for this channel (e.g. BEROC, 2024) would likely underestimate output growth while overestimating the risks of overheating and destabilization. Conversely, if the model assumes higher equilibrium growth but it proves unsustainable, the forecast could significantly overestimate growth while underestimating macroeconomic imbalances. In other words, the seemingly favorable situation could ultimately be a harbinger of a macroeconomic storm.

These uncertainties are even more pronounced in the political domain. Up to what threshold can an increasing economic dependency on Russia yield macroeconomic gains for the regime? What political consequences can arise if the strategy of coupling with Russia for growth enhancement fails? Can the progressing dependency on Russia undermine the regime politically? If political barriers for democratization are eliminated, what should and can be done to get rid of the dependence on Russia? Are the estimations and prescriptions in Hartwell et al. (2022) – which considers the perspectives of economic reconstruction for a democratic Belarus and the costs of eliminating the dependency on Russia in pre-war reality – still relevant today?

Answering such questions meaningfully using formal research tools ex-ante is nearly impossible. The dependence of macroeconomic sustainability on non-economic factors and motivations leaves little room for an accurate ex-ante diagnosis of the current state of affairs. Only ex-post will we likely be able to reliably assess which diagnosis is closer to the truth. This, in turn, means that we must accept an additional degree of uncertainty in today’s forecasts and projections. Similar challenges are faced by decision-makers in Belarus. As a result, the likelihood of incorrect economic and political decisions due to misdiagnosing the current situation is relatively high, even in the (more optimistic) scenario where the authorities recognize and account for these uncertainties. Such decisions, if made, could not only be costly but might even trigger rapid and drastic economic and political changes.

References

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.

An Environmental Perspective on Belarus’s Sustainable Development

Posted on October 7, 2024 | Policy Brief

Traffic under smog in Belarus reflecting environmental pollution and decline

In the last two decades, Belarus has performed better than other CIS countries in sustainable development. However, Belarus has in recent years seen a decline in its global environmental rankings, particularly in the areas of climate action and environment. In 2023, the country’s standing worsened in the Sustainable Development Index, Climate Change Performance Index, and Environmental Performance Index compared to previous years and rankings. This policy brief analyzes Belarus’s performance across these indices and explores the potential causes of recent negative trends and the environmental decline in Belarus. It underscores the crucial role of political and civil engagement in ensuring long-term sustainability of environmental reforms in Belarus.

In recent years, political and economic turbulence has overtaken the public debate about the state of things in Belarus, while environmental issues have taken a back seat. However, tackling climate change is important in any political context, and in this policy brief, we delve into recent developments in Belarus along the environmental front.

Belarus has traditionally done relatively well in regard to sustainable development. For example, in the last two decades, it has consistently outperformed other CIS countries, as measured by the Sustainable Development Goals (SDG) Index, and has been on par with the Eastern European EU Member States (see Figure 1).

However, in the last few years, Belarus’s progress in this dimension has stagnated, and even partially reversed. This brief focuses on one of the drivers of this stagnation – recent developments in the environmental sphere. The brief shows that Belarus worsened its position in three major global indices measuring environmental performance and discusses which components of environmental performance have lagged the most. It proceeds to analyze the underlying causes for this stagnation. The brief concludes by discussing necessary policy measures to improve Belarus’s environmental sustainability.

Figure 1. SDG Index scores for selected countries, 2000-2023

Source: SDG Transformation Center.

Belarus in Global Environmental Rankings

Global environmental rankings are an essential tool for encouraging global efforts to tackle ecological challenges and promote sustainable development. The rankings aim to evaluate a country’s environmental policies and practices and provide a relative assessment of its sustainability efforts, pollution control, and conservation practices. We analyze the performance of Belarus with the help of three well-known indexes: the Sustainable Development Goals Index (SDG Index), the Climate Change Performance Index (CCPI), and the Environmental Performance Index (EPI).

The Sustainable Development Goals Index

The SDG Index measures the progress of countries towards accomplishing the 17 SDGs. Its score can be interpreted as a percentage of SDG achievement (Sachs et al., 2023). It is based on 97 indicators that are grouped by SDGs. The indicators are normalized on a 0-100 scale, and the scores are calculated as averaging across respective indicators. The SDG Index includes the total score and scores for individual goals (Sachs et al., 2023).

The SDG Index scores for Belarus improved significantly between 2000 and 2020, increasing by 8.31 points (see Figure 1). However, since 2020, the score has stagnated and even declined slightly. In 2020, Belarus ranked 23rd out of more than 160 countries. In 2023, it dropped to 30th place, the lowest since 2001.

To a large part, the decline in Belarus’s SDG Index score is driven by a drop in the index for the 16th SDG ”Peace, justice and strong institutions”.  However, Belarus has also faced stagnation in the SDGs that are explicitly related to the environment – such as the index for SDG 7: “Affordable and Clean Energy”, SDG12: ”Responsible Consumption and Production” and SDG13: “Climate Action” (see Figure 2).

Figure 2. Selected SDG Index components for Belarus, 2020-23

Source: SDG Transformation Center.

These developments reflect Belarus’s key challenges, including its excessive reliance on fossil fuels and insufficient focus on renewable energy; inefficient management of waste and emissions, including plastic and food waste; low priority of climate change issues in the country’s economic and social policies, high carbon intensity in the economy and low ambition when it comes to emission reductions. The Belarusian Civil Society Report on the Sustainable Development Goals’ implementation (2022) also refers to similar challenges.

As the SDG Index covers a broad range of sustainability aspects, it may be less precise when it comes to the specificities of developments in the environmental domain. To get a better grasp of these developments, it is useful to consider more refined indices addressing specifically environmental performance and climate change adaptation.

The Climate Change Performance Index

The CCPI is a tool to monitor the climate protection efforts of 63 countries and the EU, which together make up more than 90 percent of global greenhouse gas (GHG) emissions. This index was developed by Germanwatch in collaboration with the NewClimate Institute and the Climate Action Network. Published annually since 2005, the Climate Change Performance Index tracks countries’ efforts to combat climate change. As an independent monitoring tool, it aims to enhance transparency in international climate politics and to enable comparison of climate protection efforts and progress made by individual countries. The CCPI tracks climate protection performances in four areas: GHG emissions (40 percent of the overall score), renewable energy (20 percent), energy use (20 percent) and climate policy (20 percent) (Burck et al., 2024). The CCPI ranks countries’ efforts as very high, high, medium, low, and very low, with the actual scores normalized between 0 and 100.

The CCPI for Belarus has exhibited an uneven development. In most of the considered years, Belarus’s efforts to prevent climate change were ranked as low, except for 2010-2012 and 2018-2019 when they were characterized as medium or moderate. The lowest scores were recorded in 2017 and from 2020 to 2024, highlighting that climate protection has been less prioritized in Belarus in recent years compared to earlier periods.

The relative CCPI ranking for Belarus is similar to the SDG Index (Figure 1). In 2024, Belarus performed worse than the average for Eastern European countries that are part of the EU – their average CCPI score was 55.43. Still, Belarus performed better than some members of this group (Poland (44.4), Czechia (45.41) and Hungary (45.93)). At the same time, Belarus displayed the best results among CIS countries, as Russia scored 31.00, Kazakhstan 38.52 and Uzbekistan 46.68 in 2024, respectively.

While Belarus slightly improved its score in 2024, relative to 2023, it actually moved down the country ranking in all areas considered by the CCPI. The country still received a medium rating in the areas of GHG emissions and energy use. However, the 2024 efforts with respect to renewable energy and climate policy were once again rated as very low, resulting in a relatively low overall ranking in 2024. CCPI experts point to low diversification of imported energy resources, high reliance on fossil fuels, and delayed climate action as key underlying issues.

Figure 3. CCPI Scores for Belarus, 2008-2024

Source: Based on data from Climate Change Performance Index reports 2008-2024.

The Environmental Performance Index

The Environmental Performance Index ranks the performance of countries on environmental health, ecosystem vitality, and their efforts to prevent climate change (Block et al., 2024). It allows tracking of countries’ progress towards established environmental policy targets. The EPI was developed by Yale University in collaboration with Columbia University and is supported by the World Economic Forum and the European Commission. The EPI framework has been repeatedly changed over the years to incorporate more detailed accounting and further indicators. Thus, it is not possible to directly compare EPI levels for different years.

Instead, we look at the evolution of the EPI ranking for Belarus: in 2016 the country ranked 35th among 180 countries, in 2020 it ranked 49th, and in 2022 its position dropped to 55th place.

In 2022, the EPI score for Belarus amounted to 48.5, surpassing all other CIS countries, for which the average score was 39.79. However, Eastern-European EU members all outperformed Belarus, with an average score of 57.92.

It is worth pointing out how differently Belarus performs with respect to the three policy objectives of the EPI. The first component concerns environmental health – it reflects how well a country mitigates environmental risks that directly affect the health and safety of its population and includes issues such as air quality, sanitation and drinking water, heavy metals, and waste management. Belarus’s 2022 score for environmental health was 51.1 earning them a 52nd place. The second component of EPI is Ecosystem vitality – reflecting the performance in the domains of biodiversity and habitat, ecosystem services, fisheries, forests, climate change mitigation, agriculture, and water resources. Belarus’s ecosystem vitality performance was in 2022 substantially better with a score of 55.4, earning Belarus a 41st place. However, the last component of EPI – climate change mitigation efforts, were evaluated as insufficient for Belarus. The country scored only 39.6 in this regard, equivalent to a 94th place.

Reasons for Belarus’s Decline in Environmental Rankings

The recent stagnation and negative trend observed for Belarus across these global environmental rankings warrant an inquiry into the causes of such developments. Plausibly, these are a combination of insufficient effort to address preexisting environmental challenges and consequences from more recent economic and institutional shocks.

Preexisting Environmental Challenges

One of the main examples of preexisting economic challenges is the continued dominance on imported fossil fuels in the energy sector, low diversification of energy suppliers, and only a marginal share of renewables. According to the National Statistical Committee of the Republic of Belarus, the country belongs to the top-20 most energy-dependent countries in the world. In 2020 the share of energy imports to gross consumption made up 83.7 percent, with around 85 percent of these resources imported from a single supplier: Russia (Internation Energy Agency, 2021). The share of primary energy production from renewable energy sources in the gross energy resources consumption continues to be low (7.8 percent in 2020 vs. 5.6 percent in 2015).

Another challenge has to do with the implementation and enforcement of environmental legislation. Belarus has recently developed and extended its legal framework in environmental sustainability. For instance The National strategy of sustainable development for the Republic of Belarus till 2035, was approved in 2020 and the National action plan for the development of a “green” economy in the Republic of Belarus for 2021-2025 was approved in 2021. The first document outlines the general plan for sustainable development in Belarus; the latter sets 11 priorities for the green economy in the country, including the promotion of green financing and creation of smart and energy-efficient cities, climate change mitigation and adaptation to climate change, education and social engagement.

However, the legislation falls short when it comes to practical implementation of the declared goals and mechanisms. For example, virtually no public financing has been allocated for these purposes and other sources of financing are not specified. Also, the National action plan contains only a general reference to the possibility of attracting extrabudgetary funds, foreign financial resources, or other sources.

Economic and Political Shocks

Recent political and economic crises have also had a negative impact on the environmental sustainability in Belarus.

One can begin by considering the substantial, though potentially unintended, adverse effects of sanctions – imposed in response to the widely contested validity of the 2020 elections and Belarus’s involvement in Russia’s war on Ukraine. While it wasn’t their main objective, the sanctions led to the suspension of green projects and initiatives, supported by international organizations such as the World Bank and other UN programs, the EU and the European Bank for Reconstruction and Development, IMF etc., as well as international investments into Belarus. Funding was suspended for several energy efficiency projects and other green initiatives in Belarus, and for projects promoting sustainable environmental practices, energy efficiency, and clean water access – aimed at reducing Belarus’s carbon footprint and enhancing renewable energy capacity.

The political crisis also led to Belarus’s withdrawal from the Aarhus Convention in 2022. The UNECE Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters of 1998 outlines every person’s right to a healthy and sustainable environment which includes access to justice, participation, and information. The Aarhus Convention guarantees legal protection to people exercising these rights. Belarus’s withdrawal from the Aarhus Convention has increased the likelihood of being prosecuted for environmental activism, thereby undermining civil society’s involvement in environmental decisions and practices. For example, the Belarusian Civil Society Report on Sustainable development goals implementation (2022) mentions the dangers of publicity and resulting loss of funding for local initiatives concerning sustainable consumption practices.

Another adverse consequence of the political crisis was the massive explicit liquidation of ecological NGOs in the country, accompanied by self-liquidations. This negatively impacted civil society engagement into ecological matters in Belarus.

Conclusion: Addressing Belarus’s Environmental Decline

In recent years, Belarus has worsened its position in three major global environmental rankings, the SDG index, the CCPI and the EPI.

In this policy brief, we have outlined these declines and highlighted how they are linked to a combination of preexisting dependencies and recent economic and political developments.

The continued reliance on fossil fuel imports, insufficient renewable energy integration, and problems with enforceability and implementation of green agendas have collectively contributed to these developments. Additionally, the suspension of international projects and investment in the environmental sphere as a result of sanctions, Belarus’s withdrawal from the Aarhus Convention and the massive, forced liquidation or self-liquidation of ecological NGOs has further aggravated the situation.

To enhance its sustainable development, Belarus should focus on boosting renewable energy use and diversify its energy supply. This includes enforcing stricter environmental laws and reconnecting with global environmental agreements (such as the Aarhus Convention). Additionally, Belarus should incentivize research in green technologies and encourage government and private sector collaboration on environmental initiatives. Well-funded, comprehensive climate action plans with clear targets for emission reductions and renewable energy adoption must be developed and implemented. It’s also vital for Belarus to acknowledge and collaborate with environmental NGOs and actively involve the community in addressing the environmental decline through sustainability decisions and initiatives.

References

  • Belarusian Civil Society Report on Sustainable Development Goals Implementation: Trends since 2016. Vilnius: 2022 — 112 pages. https://library.fes.de/pdf-files/bueros/belarus/19382.pdf
  • Block, S., Emerson, J. W., Esty, D. C., de Sherbinin, A., Wendling, Z. A. (2024). 2024 Environmental Performance Index. New Haven, CT: Yale Center for Environmental Law & Policy
  • Burck, J., Uhlich, T., Bals, C., Höhne, N., Nascimento, L., Kumar, C.H., Bosse, J., Riebandt, M., Pradipta, G. (2023). ‘Monitoring Climate Mitigation Efforts of 63 Countries plus the EU – covering more than 90% of the Global Greenhouse Gas Emissions. Bonn: Germanwatch
  • International Energy Agency. (2021). Belarus Energy Profile. Retrieved from:  https://iea.blob.core.windows.net/assets/a9233b70-ee3e-4a0c-8cde-7a174760b3e2/BelarusEnergyProfile.pdf
  • Sachs, J.D., Lafortune, G., Fuller, G., Drumm, E. (2023). Implementing the SDG Stimulus. Sustainable Development Report 2023. Paris: SDSN, Dublin: Dublin University Press, 2023. 10.25546/102924.

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.

About BEROC

BEROC promotes a market economy in Belarus through research, education, and public dialogue. It conducts academic and policy research, organizes educational programs, and fosters collaboration between Belarusian and international economists. BEROC is part of a research network including SITE (Stockholm), BICEPS (Riga), CEFIR (Moscow), CenEA (Szczecin) and KSE/KEI (Kiev).

To read more policy briefs published by BEROC, visit the Institute’s page on the FREE Network’s website.

Gender Gap in Life Expectancy and Its Socio-Economic Implications

Posted on October 1, 2024 | FROGEE Brief, Policy Brief

Silhouetted crowd of people walking in a public square, symbolizing societal impacts of the gender gap in life expectancy.

Today women live longer than men virtually in every country of the world. Although scientists still struggle to fully explain this disparity, the most prominent sources of this gender inequality are biological and behavioral. From an evolutionary point of view, female longevity was more advantageous for offspring survival. This resulted in a higher frequency of non-fatal diseases among women and in a later onset of fatal conditions. The observed high variation in the longevity gap across countries, however, points towards an important role of social and behavioral arguments. These include higher consumption of alcohol, tobacco, and fats among men as well as a generally riskier behavior. The gender gap in life expectancy often reaches 6-12 percent of the average human lifespan and has remained stubbornly stable in many countries. Lower life expectancy among men is an important social concern on its own and has significant consequences for the well-being of their surviving partners and the economy as a whole. It is an important, yet under-discussed type of gender inequality.

Country Reports

Belarus Country Report FROGEE POLICY BRIEF
Georgia Country Report FROGEE POLICY BRIEF
Latvia Country Report FROGEE POLICY BRIEF
Poland Country Report FROGEE POLICY BRIEF

Gender Gap in Life Expectancy and Its Socio-Economic Implications

Today, women on average live longer than men across the globe. Despite the universality of this basic qualitative fact, the gender gap in life expectancy (GGLE) varies a lot across countries (as well as over time) and scientists have only a limited understanding of the causes of this variation (Rochelle et al., 2015). Regardless of the reasons for this discrepancy, it has sizable economic and financial implications. Abnormal male mortality makes a dent in the labour force in nations where GGLE happens to be the highest, while at the same time, large GGLE might contribute to a divergence in male and female discount factors with implications for employment and pension savings. Large discrepancies in life expectancy translate into a higher incidence of widowhood and a longer time in which women live as widows. The gender gap in life expectancy is one of the less frequently discussed dimensions of gender inequality, and while it clearly has negative implications for men, lower male longevity has also substantial negative consequences for women and society as a whole.

Figure A. Gender gap in life expectancy across selected countries

Source: World Bank.

The earliest available reliable data on the relative longevity of men and women shows that the gender gap in life expectancy is not a new phenomenon. In the middle of the 19th century, women in Scandinavian countries outlived men by 3-5 years (Rochelle et al., 2015), and Bavarian nuns enjoyed an additional 1.1 years of life, relative to the monks (Luy, 2003). At the beginning of the 20th century, relative higher female longevity became universal as women started to live longer than men in almost every country (Barford et al., 2006). GGLE appears to be a complex phenomenon with no single factor able to fully explain it. Scientists from various fields such as anthropology, evolutionary biology, genetics, medical science, and economics have made numerous attempts to study the mechanisms behind this gender disparity. Their discoveries typically fall into one of two groups: biological and behavioural. Noteworthy, GGLE seems to be fairly unrelated to the basic economic fundamentals such as GDP per capita which in turn has a strong association with the level of healthcare, overall life expectancy, and human development index (Rochelle et al., 2015). Figure B presents the (lack of) association between GDP per capita and GGLE in a cross-section of countries. The data shows large heterogeneity, especially at low-income levels, and virtually no association from middle-level GDP per capita onwards.

Figure B. Association between gender gap in life expectancy and GDP per capita

Source: World Bank.

Biological Factors

The main intuition behind female superior longevity provided by evolutionary biologists is based on the idea that the offspring’s survival rates disproportionally benefited from the presence of their mothers and grandmothers. The female hormone estrogen is known to lower the risks of cardiovascular disease. Women also have a better immune system which helps them avoid a number of life-threatening diseases, while also making them more likely to suffer from (non-fatal) autoimmune diseases (Schünemann et al., 2017). The basic genetic advantage of females comes from the mere fact of them having two X chromosomes and thus avoiding a number of diseases stemming from Y chromosome defects (Holden, 1987; Austad, 2006; Oksuzyan et al., 2008).

Despite a number of biological factors contributing to female longevity, it is well known that, on average, women have poorer health than men at the same age. This counterintuitive phenomenon is called the morbidity-mortality paradox (Kulminski et al., 2008). Figure C shows the estimated cumulative health deficits for both genders and their average life expectancies in the Canadian population, based on a study by Schünemann et al. (2017). It shows that at any age, women tend to have poorer health yet lower mortality rates than men. This paradox can be explained by two factors: women tend to suffer more from non-fatal diseases, and the onset of fatal diseases occurs later in life for women compared to men.

Figure C. Health deficits and life expectancy for Canadian men and women

Source: Schünemann et al. (2017). Note: Men: solid line; Women: dashed line; Circles: life expectancy at age 20.

Behavioural Factors

Given the large variation in GGLE, biological factors clearly cannot be the only driving force. Worldwide, men are three times more likely to die from road traffic injuries and two times more likely to drown than women (WHO, 2002). According to the World Health Organization (WHO), the average ratio of male-to-female completed suicides among the 183 surveyed countries is 3.78 (WHO, 2024). Schünemann et al. (2017) find that differences in behaviour can explain 3.2 out of 4.6 years of GGLE observed on average in developed countries. Statistics clearly show that men engage in unhealthy behaviours such as smoking and alcohol consumption much more often than women (Rochelle et al., 2015). Men are also more likely to be obese. Alcohol consumption plays a special role among behavioural contributors to the GGLE. A study based on data from 30 European countries found that alcohol consumption accounted for 10 to 20 percent of GGLE in Western Europe and for 20 to 30 percent in Eastern Europe (McCartney et al., 2011). Another group of authors has focused their research on Central and Eastern European countries between 1965 and 2012. They have estimated that throughout that time period between 15 and 19 percent of the GGLE can be attributed to alcohol (Trias-Llimós & Janssen, 2018). On the other hand, tobacco is estimated to be responsible for up to 30 percent and 20 percent of the gender gap in mortality in Eastern Europe and the rest of Europe, respectively (McCartney et al., 2011).

Another factor potentially decreasing male longevity is participation in risk-taking activities stemming from extreme events such as wars and military activities, high-risk jobs, and seemingly unnecessary health-hazardous actions. However, to the best of our knowledge, there is no rigorous research quantifying the contribution of these factors to the reduced male longevity. It is also plausible that the relative importance of these factors varies substantially by country and historical period.

Gender inequality and social gender norms also negatively affect men. Although women suffer from depression more frequently than men (Albert, 2015; Kuehner, 2017), it is men who commit most suicides. One study finds that men with lower masculinity (measured with a range of questions on social norms and gender role orientation) are less likely to suffer from coronary heart disease (Hunt et al., 2007). Finally, evidence shows that men are less likely to utilize medical care when facing the same health conditions as women and that they are also less likely to conduct regular medical check-ups (Trias-Llimós & Janssen, 2018).

It is possible to hypothesize that behavioural factors of premature male deaths may also be seen as biological ones with, for example, risky behaviour being somehow coded in male DNA. But this hypothesis may have only very limited truth to it as we observe how male longevity and GGLE vary between countries and even within countries over relatively short periods of time.

Economic Implications

Premature male mortality decreases the total labour force of one of the world leaders in GGLE, Belarus, by at least 4 percent (author’s own calculation, based on WHO data). Similar numbers for other developed nations range from 1 to 3 percent. Premature mortality, on average, costs European countries 1.2 percent of GDP, with 70 percent of these losses attributable to male excess mortality. If male premature mortality could be avoided, Sweden would gain 0.3 percent of GDP, Poland would gain 1.7 percent of GDP, while Latvia and Lithuania – countries with the highest GGLE in the EU – would each gain around 2.3 percent of GDP (Łyszczarz, 2019). Large disparities in the expected longevity also mean that women should anticipate longer post-retirement lives. Combined with the gender employment and pay gap, this implies that either women need to devote a larger percentage of their earnings to retirement savings or retirement systems need to include provisions to secure material support for surviving spouses. Since in most of the retirement systems the value of pensions is calculated using average, not gender-specific, life expectancy, the ensuing differences may result in a perception that men are not getting their fair share from accumulated contributions.

Policy Recommendations

To successfully limit the extent of the GGLE and to effectively address its consequences, more research is needed in the area of differential gender mortality. In the medical research dimension, it is noteworthy that, historically, women have been under-represented in recruitment into clinical trials, reporting of gender-disaggregated data in research has been low, and a larger amount of research funding has been allocated to “male diseases” (Holdcroft, 2007; Mirin, 2021). At the same time, the missing link research-wise is the peculiar discrepancy between a likely better understanding of male body and health and the poorer utilization of this knowledge.

The existing literature suggests several possible interventions that may substantially reduce premature male mortality. Among the top preventable behavioural factors are smoking and excessive alcohol consumption. Many studies point out substantial country differences in the contribution of these two factors to GGLE (McCartney, 2011), which might indicate that gender differences in alcohol and nicotine abuse may be amplified by the prevailing gender roles in a given society (Wilsnack et al., 2000). Since the other key factors impairing male longevity are stress and risky behaviour, it seems that a broader societal change away from the traditional gender norms is needed. As country differences in GGLE suggest, higher male mortality is mainly driven by behaviours often influenced by societies and policies. This gives hope that higher male mortality could be reduced as we move towards greater gender equality, and give more support to risk-reducing policies.

While the fundamental biological differences contributing to the GGLE cannot be changed, special attention should be devoted to improving healthcare utilization among men and to increasingly including the effects of sex and gender in medical research on health and disease (Holdcoft, 2007; Mirin, 2021; McGregor et al., 2016, Regitz-Zagrosek & Seeland, 2012).

References

About FROGEE Policy Briefs

FROGEE Policy Briefs is a special series aimed at providing overviews and the popularization of economic research related to gender equality issues. Debates around policies related to gender equality are often highly politicized. We believe that using arguments derived from the most up to date research-based knowledge would help us build a more fruitful discussion of policy proposals and in the end achieve better outcomes.

The aim of the briefs is to improve the understanding of research-based arguments and their implications, by covering the key theories and the most important findings in areas of special interest to the current debate. The briefs start with short general overviews of a given theme, which are followed by a presentation of country-specific contexts, specific policy challenges, implemented reforms and a discussion of other policy options.

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.

Active Labor Market Policy in the Baltic-Black Sea Region

Posted on June 3, 2024 | Policy Brief

Image that shows an overhead view of a large, open pedestrian area with people walking and standing around representing active labour market policy.

This brief outlines the characteristics of active labor market policy (ALMP) in four countries in the Baltic-Black Sea region: Belarus, Lithuania, Poland, and Ukraine. An analysis of the financing expenditure structure within this framework reveals significant differences between the countries, even for Poland and Lithuania, where the policies are to be set within a common EU framework. Countries also differed in terms of their ALMP reaction to the economic challenges brought about by the Covid-19 pandemic, as Poland and Lithuania increased their ALMP spending, while Ukraine, and, especially, Belarus, lagged behind. Despite these differences, all four countries are likely to benefit from a range of common recommendations regarding the improvement of ALMP. These include implementing evidence-informed policymaking and conducting counterfactual impact evaluations, facilitated by social partnership. Establishing quantitative benchmarks for active labor market policy expenditures and labor force coverage by active labor market measures is also advised.

Introduction

This policy brief builds on a study aimed at conducting a comparative analysis of labor market regulation policies in Belarus, Ukraine, Lithuania, and Poland. In comparing the structure of labor market policy expenditures, the aim was to identify common features between Poland and Lithuania, both of which are part of the EU and employ advanced labor market regulation approaches. We also assessed Ukraine’s policies, currently being reformed to align with EU standards, contrasting them with Belarus, where economic reforms are hindered by the post-Soviet authoritarian regime.

The analysis of the labor market policies for the considered countries is based on an evaluation of the structure of pertinent measures between 2017 and 2020 (Mazol, 2022). We used the 2015 OECD systematization of measures of active labor market policy, as presented in the first column of Table 1.

Our study reveals substantial differences in active labor market policies within the four considered countries. Still, motivated by OECD’s approach to ALMP, we provide a range of common policy recommendations that are relevant for each country included in the study. Arguably, aligning with the OECD approach would have more value for current EU and OECD members, Poland and Lithuania, and the aspiring member, Ukraine. However, these recommendations also hold value when considering a reformation of the Belarusian labor market policy.

ALMP Expenditures in Belarus, Lithuania, Poland and Ukraine

Labor market policy comprises of active and passive components. Active labor market policy involves funding employment services and providing various forms of assistance to both unemployed individuals and employers. Its primary objective is to enhance qualifications and intensify job search efforts to improve the employment prospects of the unemployed (Bredgaard, 2015). Passive labor market policy (PLMP) encompasses measures to support the incomes of involuntarily unemployed individuals, and financing for early retirement.

Poland and Lithuania are both EU and OECD members, so one would expect their labor market policies to be driven by the EU framework, and, thus, mostly aligned. However, our analysis showed that the structure of their expenditures on active labor market policies in 2017-2019 differed (Mazol, 2022). In Lithuania, the majority of the funding was allocated to employment incentives for recruitment, job maintenance, and job sharing. From 2017 to 2019, the share for these measures was between 18 and 28 percent of all expenditures for state labor market regulation. In Poland, the majority of funding was allocated to measures supporting protected employment and rehabilitation. The spending on these measures fluctuated between 23 and 34 percent of all expenditures for state labor market regulation between 2017 and 2019.

The response to the labor market challenges during the Covid-19 pandemic in Poland and Lithuania resulted in a notable surge in state labor market policy spendings in 2020, amounting to 1.78 percent of GDP and 2.83 percent of GDP, respectively. Both countries sharply increased the total spending on employment incentives (see Table 1 which summarizes the expenditure allocation for 2020). Poland experienced a nine-fold increase in costs for financing these measures (29.4 percent of total expenditures on state labor market regulation). Meanwhile, in Lithuania, financing for employment incentives increased more than tenfold, amounting to 42.5 percent of all expenditures for state labor market regulation. In both countries it became the largest active labor market policy spending area.

Table 1. Financing of state labor market measures in Baltic-Black Sea region countries in 2020 (in millions of Euro).

Source: DGESAI, 2023. Author’s estimations based on World Bank data (World Bank, 2023), National Bank of Belarus data, National Bank of Ukraine data.

In Ukraine, the primary focus for active labor market policy expenditures was, from 2017 to 2020, directed towards public employment services, comprising 18 to 24 percent of total labor market policy expenditures. Notably, despite the Covid-19 pandemic, there were no significant changes in either the structure or the volume of active labor market policy expenditures in Ukraine in 2020. Despite Ukraine’s active efforts to align its economic and social policies with EU standards, the government has underinvested in labor market policy, with expenditures accounting for only 0.33-0.37 percent of GDP between 2017 and 2020. This is significantly below the levels observed in Lithuania and Poland.

In Belarus, labor market policy financing is one of the last priorities for the government. In 2020, financing accounted for about 0.02 percent of GDP, amounts clearly insufficient for having a significant impact on the labor market. Moreover, Belarus stood out as the sole country in the reviewed group to have reduced its funding for labor market policies, including both active and income support measures, during the Covid-19 pandemic. The majority of the financing for labor market policy has been directed towards protected and supported employment and rehabilitation, including job creation initiatives for former prisoners, the youth and individuals with disabilities.

ALMP Improvement Recommendations

As illustrated above, the countries under review do not have a common approach to active labor market policy spendings. Further, countries like Poland and Lithuania took a more flexible stance on addressing labor market challenges caused by the Covid-19 pandemic, by implementing additional financial support for active labor market policies. However, Ukraine and Belarus did not adjust their expenditure structures accordingly. Part of these cross-country differences can be attributed to differing legal framework: Poland and Lithuania are OECD and EU member states, and, thus, subject to corresponding regulations. Ukraine is in turn motivated by the prospects of EU accession, while Belarus currently has no such prosperities to take into account.

Another important source of deviation arises from the differences in current labor market and economic conditions in the respective countries, and the governments’ need to accommodate these. While such a market-specific approach is well-justified, aligning expenditure structures with current labor market conditions necessitates obtaining updated and reliable information about the labor market situation and the effectiveness of specific labor market measures or programs. An effective labor market policy thus requires establishing a reliable system for assessing the efficiency of government measures, i.e., deploying evidence-informed policy making (OECD, 2022).

To achieve this, it is crucial to establish a robust system for monitoring and evaluating the implementation of specific measures. This involves leveraging data from various centralized sources, enhancing IT infrastructure to support data management, and utilizing modern methodologies such as counterfactual impact evaluations (OECD, 2022).

Moreover, an effective labor market regulation policy necessitates the ability to swiftly adapt existing active measures and service delivery methods in response to changes in the labor market. This might entail rapid adjustments in the legal framework, underscoring the importance of close cooperation and coordination among key stakeholders, and a well-functioning administrative structure (Lauringson and Lüske, 2021).

To accomplish this objective, it is vital to foster close collaboration between the government and institutions closely intertwined with the labor market, capable of providing essential information to labor market regulators. One of the most useful tools in this regard appears to be so-called social partnerships – a form of a dialogue between employers, employees, trade unions and public authorities, involving active information exchange and interaction (OECD, 2022).

A reliable system to assess labor market policy and in particular to facilitate their targeting, is an essential component of this approach.

Ukraine and Belarus are underfunding their labor market policies, both in comparison to the levels observed in Poland and Lithuania, and in absolute terms. It is therefore advisable to establish quantitative benchmark indicators to act as guidance for these countries, in order to ensure that any labor market policy implemented is adequately funded. Here, a reasonable approach is to align the costs of implementing labor market measures with the average annual levels for OECD countries (which are 0.5 percent of GDP for active measures and 1.63 percent for total labor market policy expenditures (OECD, 2024). Furthermore, it’s essential to ensure a high level of labor force participation in active labor market regulation measures. A target standard could be set, based on the average annual coverage from active labor market measures, at 5.8 percent of the national economy labor force, as observed in OECD countries (OECD, 2024).

Conclusion

The countries under review demonstrate varying structures of active labor market expenditures. Prior to the Covid-19 pandemic, employment incentives received the most financing in Lithuania. In Poland the largest share of expenditures was instead directed to measures to support protected employment and rehabilitation. In Ukraine, the main expenditures were directed towards financing employment services and unemployment benefits while Belarus primarily allocated funds to protected and supported employment and rehabilitation. Notably, Lithuania and Poland responded to the economic challenges following Covid-19 by significantly increasing spending on employment incentives, while Ukraine and Belarus did not undertake such measures.

Part of the diverging patterns may be attributable to the countries varying legal framework and differences in the countries respective labor market and economic conditions.

While some of the differences in labor market policies are thus justified, ensuring funding at the OECD level for labor market measures, alongside adequate tools for monitoring and evaluating labor market policies, are likely to benefit all four Baltic-Black Sea countries.

References

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.

Monetary Policy in Belarus Since Mid-2020: From Rules to Discretion

Posted on February 12, 2024 | Policy Brief

20240211 Monetary Policy in Belarus Image 00

The most important “safeguard” against negative consequences from government’s economic policy mistakes is an independent monetary policy aimed at maintaining inflation near a pre-announced target and smoothing out short-term fluctuations. In Belarus, various monetary policy regimes have been employed and, for most of history, the ability of the National Bank of Belarus to set goals and deploy monetary policy instruments without government intervention has been limited. As a result, monetary policy in Belarus tend to exacerbate negative shocks to the Belarusian economy rather than play a stabilizing role. Since mid-2020, the National Bank has de facto lost operational and institutional independence, and monetary policy has become discretionary – focused on stimulating economic activity. As of 2024 this discretionary and expansionary monetary policy has increasingly come into conflict with the need to ensure macroeconomic stability.

Monetary Policy Design in Belarus: Developments in the Last Decade

Since 2015, the National Bank of Belarus (henceforth the National Bank) has declared its monetary policy regime to be monetary targeting. The primary goal of such policy is price stability, while the intermediate target is broad money supply growth. However, research results show that monetary targeting was employed only until mid-2016. From mid-2016 to mid-2020, the National Bank implicitly employed flexible inflation targeting (Kharitonchik, 2023b).

In mid-2020 the National Bank de facto lost its operational independence as the bank was no longer in control of the rules concerning monetary policy (Kharitonchik, 2023a). In 2022-2024, among other things, targets were set for inflation, the growth of the ruble monetary base, broad money supply, the banks’ claims on the economy, and the refinancing rate level. Thus, the National Bank seeks to simultaneously control both the volume of money in the economy and the prices. This is, in practice, expressed in the implementation of discretionary and situational monetary policy.

Under pressure from the government, the National Bank’s monetary policy has since mid-2020 focused on stimulating economic activity, with a high degree of tolerance to inflationary risks. After the US, EU, UK, and several other countries imposed strict sanctions on Belarus in the beginning of 2022, the government’s pressure on the National bank to support economic activity increased even further.

Since October 2022, the only inflation regulator has been strict price controls, exercised by the government in the form of a system of price regulations for approximately 85 percent of the items in the consumer basket. According to the system, manufacturers are obliged to coordinate wholesale prices with government authorities and retailers were in Q4 2022 forced to adjust prices. The system has been modified several times, but as of 2024, it continues to operate in an extremely rigorous version.

Besides the erosion of operational independence, the recent years have been characterized by a marked decline in the institutional framework for executing monetary policy. Aspirations to enhance transparency and accountability of the National Bank to the public seem to be history, at least for the time being. The frequency of the bank’s communication has decreased significantly and its content, as well as the bank’s published data and analytical materials have deteriorated. There are no longer any National Bank briefings on the outcomes of its board meetings, nor are there clear explanations of the decisions made or meetings with the expert community.

The National Bank also introduces uncertainty and undermines confidence in its policies with its strange approach to setting and announcing inflation targets. The increased inflation target, from the previous 5, to 7-8 percent for 2023 is unexplained, the explicit inflation target for 2024 was not presented until the end of August 2023, and the medium-term inflation target is nonexistent. Under such conditions, investment planning and forecasting becomes challenging, necessitating substantial efforts to rebuild trust in monetary authorities for the future.

Figure 1. Inflation and inflation targets in Belarus, 2015–2023.

Source: Author’s estimates based on data from Belstat and the National Bank of Belarus.

Between 2020 and 2023, the National Bank was unable to effectively implement monetary policy in a coordinated manner, falling short in achieving de jure primary and intermediate targets. Thus, inflation in 2020–2022 was significantly higher than targeted levels, while the money supply growth was close to the lower bound of its target range (see Figure 1 and 2).

Figure 2. Broad money growth and its target in Belarus, 2015–2023.

Source: Author’s estimates based on data from the National Bank of Belarus.

In 2023, the inflation was below its target due to total price controls, while money supply growth was twice its target (see Figure 2). Such targeted monetary policy dynamics indicate the instability of the economy’s demand for money and the money multiplier, the instability and poor predictability of money velocity in the face of shocks to the Belarusian economy, as well as the lack (or inability) of a strict commitment by the National Bank to achieve the primary goal of monetary policy.

Monetary Conditions Between 2020 and 2023

Monetary conditions are calculated as a weighted combination of deviations of real interest rates on assets in Belarusian rubles and the real effective exchange rate of the Belarusian ruble from their equilibrium levels. As detailed in Figure 3, the monetary conditions for 2020–2023 are considered stimulative for economic activity and pro-inflationary.

Figure 3. Monetary conditions in Belarus,2015–2023.

Source: Author’s estimates based on QPM BEROC (Kharitonchik, 2023b).
Note: Monetary conditions are estimated as a combination of deviations of real interest rates on the Belarusian ruble assets and of the real effective Belarusian ruble exchange rate from their equilibrium (or inflation-neutral) levels (assessed within the model). Positive monetary condition values indicate their restraining-economic-activity and disinflationary stance, and negative monetary condition values indicate their stimulating and pro-inflationary stance.

In 2020, the soft monetary conditions (the combined effect of interest rates and the exchange rate on the economy) were determined by the behavior of the exchange rate. The Belarusian ruble weakened significantly and became undervalued in 2020 due to a sharp increase in demand for foreign currency at the onset of the Covid-19 pandemic in Belarus and following the presidential elections in August 2020.

As a result of the National Bank’s discretionary monetary policy, interest rates’ volatility significantly increased. A deterioration of the liquidity situation in the banking system and increased risks to the economy during the acute phase of the socio-political crisis in 2020 resulted in interest rates restraining economic activity in September-December 2020.

In 2021, there was a notable improvement in the economic situation in Belarus compared to the crisis experienced in 2020. External demand for Belarusian goods and services rose, and export prices increased significantly which contributed to an increase in foreign currency earnings. As a result, the undervaluation of the Belarusian ruble neutralized during 2021, the banking system moved to a liquidity surplus, and interest rates decreased noticeably, creating soft monetary conditions (see Figure 3).

In 2022–2023, monetary conditions became even softer against the backdrop of increasing priority for the National Bank to support economic activity over inflation containment. The Belarusian ruble again became undervalued which increased foreign trade and allowed for the banking system’s liquidity surplus to expand significantly (see Figure 4).

The realization of a substantial liquidity surplus in 2022 resulted from the National Bank’s active emission policy, likely associated with considerable government pressure. The National Bank injected at least 1.7 billion Belarusian rubles (0.9 percent of GDP) into the financial system through lending to non-deposit financial organizations in 2022, and more than 1.9 billion Belarusian rubles (1 percent of GDP) in 2022 and 1.1 billion Belarusian rubles (0.5 percent of GDP) in 2023, through the purchase of government bonds on the secondary market.

Figure 4. Banking system liquidity in Belarus, 2017–2023.

Source: Author’s estimates based on data from Belstat and the National Bank of Belarus.

Under a colossal and stable liquidity surplus – not withdrawn by the National Bank – interest rates in the money and credit-deposit markets, in 2022-2023, repeatedly reached historically low levels in nominal terms, and in real terms remained  significantly below their equilibrium levels (see Figure 3).

The Monetary Conditions’ Impact on Economic Activity and Inflation in Belarus, 2022–2024

Under loose monetary conditions there was a significant strengthening of the credit impulse (share of new loans in GDP) from Q3 2022 and onwards (BEROC, 2023). In this environment of increased credit activity, the money supply grew at a rapid pace in the second half of 2022–2023 (see Figure 2). The money supply growth significantly exceeded an inflation-neutral pace and by the end of 2023, the volume of real money supply exceeded the inflation-neutral level by almost 10 percent.

Expansionary monetary policy was one of the drivers of the rapid economic recovery in the second half of 2022–2023. The negative output gap, which widened in Q2 2022, following increased sanctions against Belarus, was offset in Q1 2023. Moreover, in Q2–Q4 2023, GDP surpassed its equilibrium level (see Figure 5).

Figure 5. Output gap decomposition in Belarus, 2015–2023.

Source: Author’s estimates based on QPM BEROC (Kharitonchik, 2023b).
Note: The output gap is the deviation of real GDP from its potential (or equilibrium) level, where potential is understood as such a volume of GDP that does not exert any additional pro-inflationary or disinflationary pressure.

By 2024, the Belarusian economy reached a state of moderate overheating (see Figure 5). Currently, loose monetary policy fuels demand but the ability to adjust supply to increased demand levels is limited under sanctions and labor shortages. This mismatch between supply and demand would normally lead to a significant acceleration of inflation. However, due to the strict price controls, this is yet to realize. In fact, inflation reached a historically low value of 2.0 percent Year over Year (YoY), in September 2023. Nonetheless, inflation in Belarus began to accelerate in Q4 in 2023 and amounted to 5.8 percent YoY at the end of the year. In an environment of excess demand and a shortage of workers, firms’ costs rise and translate into higher selling prices, albeit on a limited scale and with a time lag due to the price controls (see Figure 6).

Figure 6. CPI inflation in Belarus, 2015–2023.

Source: Author’s estimates based on data from Belstat. Calculations based on QPM BEROC (Kharitonchik, 2023b).

A prolonged combination of total price controls and loose monetary policy leads to an inflationary overhang – the potential for delayed accelerated price growth. Inflation overhang is a highly undesirable phenomenon since it increases the risk of a price surge in the future and the need for a sharp and aggressive tightening of monetary policy. The inflationary overhang in Belarus is estimated at 5–9 percent (for the end of 2023).  This means that there is a risk of a sharp increase in prices by 5-9 percent if price controls are removed or significantly relaxed.

Conclusion

Since mid-2020, the National Bank has de facto lost its operational independence, and monetary policy has become discretionary, focused on stimulating economic activity. By the beginning of 2024, this discretionary and overly loose monetary policy has increasing come into conflict with the task of ensuring macroeconomic stability.

The Belarusian economy enters 2024 in a state of low economic growth potential (about 1 percent per year) and an imbalance of supply and demand, which creates threats of intensified inflation and a decline in foreign trade.

Attempts by the authorities to artificially maintain high rates of GDP growth and low inflation through excessively stimulating economic policies and archaic price controls may lead to an economic overheating by the end of 2024 similar to the situations leading up to the currency crises in 2009, 2011 and 2015. Under such developments, the fragility of the economy and the likelihood of an economic crisis in Belarus will increase.

To prevent such negative development, it is critical to gradually normalize the monetary policy design in coordination with fiscal policy. Key recommendations from experts for a strengthening of the stabilizing role of monetary policy include ensuring the National Bank’s independence, eliminating discretionary and subjective policymaking, and outlining a clear hierarchy of monetary policy goals (Kruk, 2023).

Simulation results indicate that the use of flexible inflation targeting is the most preferable monetary policy strategy for Belarus under existing sanctions and internal and external capital control measures (as discussed in Kharitonchik, 2023a).

Lastly, as monetary policy is about managing expectations for which trust (i.e. credibility) plays a key role, restoring the public’s trust in the National Bank is essential. To achieve this, the National Bank needs to reestablish communication with the public and resume the publication of analytical and statistical reports, at a minimum matching the extent seen in early 2021.

References

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.

Cognitive Dissonance on Belarus: Recovery and Adaptation or Stalemate?

Posted on January 8, 2024 | Policy Brief

20240107 Cognitive Dissonance on Belarus Image 02

A closer look at the Belarusian economy over the recent year, produces two initially competing narratives. The first one emphasizes that tough sanctions have led to a deadlock for the Belarusian economy. The second one stresses that output losses have turned out to be much lower than expected, and that the economy has displayed a rather high degree of adaptability – securing an early and rapid recovery. This policy brief shows that these narratives are not mutually exclusive but rather elements of the same bigger picture. A short-term focus gives the impression that the current stance is ‘more good than bad’. This reflects the fact that output has recovered and almost reached historically high levels, made possible due to a combination of exports protection mechanisms and compensatory effects on output. However, this does not eliminate the disappointing medium- and long-term prospects for the country. On the flip side of the immediate survival of the Belarusian economy is the country’s economic and political stalemate. This includes the lack of opportunities for future sustainable growth and Belarus’ enormous and continuously growing dependence on Russia. Within this stalemate, stagnation is the best plausible scenario. At the same time, much worse scenarios, both economically and politically, are also highly likely. Ultimately, breaking the deadlock is the only way to a better future for Belarus.

The Belarusian Economy and the Changing Narratives

About 1.5 years ago, Western countries introduced tough sanctions against Belarus, punishing the Lukashenka regime for its role in Russia’s invasion of Ukraine. This gave rise to a huge uncertainty regarding Belarus’ economic prospects. A FREE policy brief published about a year ago (Kruk & Lvovskiy, 2022) presented a model-based estimate of a potential rock-bottom for the Belarusian economy in the new environment, which amounted to 20 percent of output losses. The authors however argued that actual output losses might be significantly lower given Russia’s support and policy responses, which were unaccounted for in the model. At the same time, downside risks and a lack of output consistency seem to have become permanent traits of the Belarusian economy.

Expectations of a large and prolonged recession in Belarus prevailed into mid-2023. International institutions (IMF, World Bank) and rating agencies (S&P, Fitch Ratings) mainly expected a recession in Belarus up to 10 percent 2022-2023.  The reality has however turned out to be quite different with the recession being relatively contained and short-lived. The output losses between the peak (Q2-2021) trough Q3-2022 amounted to 6.8 percent. In Q4-2022 a recovery began, and in Q3-2023 the economy had almost fully recovered, reaching nearly the same levels as in Q2-2021 (see Figure 1). Further, in terms of average real wages and household consumption, the situation appears to be even more positive. The real average wage reached its pre-war level in Q1-2023 and has since displayed record high levels, and household consumption follow a similar trend (see Figure 1).

These dynamics have given rise to a new narrative. As of lately, the Belarusian economic situation is at times treated as ‘more good than bad’. Further, most international financial institutions currently forecast a continued weak recovery growth in the coming years (EBRD, 2023; IMF, 2023; Izvorski et al., 2023).

Figure 1. Real GDP, Average Real Wages, and Real Household Consumption (index, seasonally adjusted, 2018=100).

Source: Author’s estimations based on Belstat data.

Factors Behind the Recent Recovery Growth

The underlying reasons for the recovery growth can be divided into two groups: (i) export protection mechanisms under sanctions and (ii) positive shocks and compensatory effects on output.

Export protection mechanisms under sanctions are twofold. Firstly, the Belarusian regime turned out to be somewhat successful in adjusting to the new sanctions-environment. This partly due to a somewhat geographical U-turn of Belarusian exports, underpinned by new logistics and payment schemes. The best example of this turn is the re-orientation of oil product exports from the EU and Ukraine to Russia (Kharitonchik, 2023). Moreover, some exports to traditional markets, which were challenged by logistics and payment barriers rather than sanctions, were secured by crossing these barriers. The best such example is the recovery of potash fertilizer exports to China, Brazil and India. Since early 2023 these displayed a rapid recovery due to Belarus finding logistic solutions through Russian sea ports instead of EU ports, and by using railway transportation.

Secondly, the practices of sanctions evasion may also have played a significant role. The scope of sanctions evasion is however difficult to assess due to its secretive nature. Moreover, the difference between avoiding and evading sanctions is not always clear.

Export protection mechanisms allowed Belarus to cushion actual export losses, making them transitory (see Figure 2). Actual losses in exports were close to the rock-bottom scenario estimates for only a couple of months. Instead of an expected level shift in exports by roughly 40 percent (from the pre-war level), exports displayed a recovery trajectory. Hence, what was modelled as a permanent shock in Kruk & Lvovskiy (2022), turned out to be transitory.

Figure 2. Physical Volume of Exports (index, seasonally adjusted, 2018=100).

Source: Author’s estimations based on Belstat data.

One important aspect to mention is that part of this recovery is due to oil-product exports taking place already in 2022 (Kharitonchik, 2023). In Kruk & Panasevich (2023) the authors show that the oil-refinery industry is of extreme importance for the entire Belarusian economy. Due to inter-industrial linkages, the oil-refinery industry indirectly accounts for about 11 percent of Belarus’ output, despite its modest direct contribution to the GDP (slightly more than 1 percent). Hence, due to protecting these exports (and the corresponding production of oil products), a large amount of output losses was avoided. A similar situation unfolded also for potash fertilizer exports and the chemical industry producing them (although inter-industrial linkages and effects on output are much weaker for that industry).

Besides export protection mechanisms, the recovery of exports and output stem largely from various positive and compensatory effects on output Some of them arose from Belarus’ and Russia’s respective regimes responses to sanctions, and from Russia’s readiness to support Belarus. Others are classical external positive shocks (to no degree related to sanctions) while some are a combination of both. They include: (i) increasing energy (gas) subsidies from Russia, (ii) a prolonged period of extra-high price competitiveness, especially in the Russian market, (iii) expanded access to the Russian market, (iv) other forms of Russian support (debt restructuring, budget transfers, new loans), (v) favorable trade conditions and export prices (apart from on the Russian market), (vi) a (macro)economic environment that allow for more  room for domestic economic policy interventions.

Taken together, these positive output drivers largely contributed to curbing the recession in 2022 and to the output recovery in 2023. A straightforward decomposition of the actual output growth path is unfeasible (due to the close interconnection of export protection mechanisms and output drivers, and the lack of available statistics). However, approximating the actual path in a model environment results in the following: between Q2-2021 and Q3-2022, about 12 percent of losses due to sanctions (taking into account the export protection mechanisms) and a deprivation of the Ukrainian market, and 5.2 percent of gains due to output shocks, resulted in actual output losses of 6.8 percent. Later in 2023, due to increasing effects from the export protection mechanisms, the sanctions-related output losses shrank to about 6.6 percent, while output shocks expanded output by roughly the same level. This allowed output losses to be zeroed out, i.e. the level of output in Q3-2023 was almost identical to Q3-2021.

An Economic Stalemate

Is the ‘more good than bad’ economic situation sustainable? Does the recent recovery mean that Belarus has overcome the major challenges to the economy? The short answer is no. Even with short-term thinking, there are still numerous downside risks. Sanctions still form a permanently challenging environment for the Belarusian economy, putting exports and output in jeopardy. The export protection mechanisms are not persistent, and they largely depend on Russia’s political will to support them. Moreover, the updated logistics and payment chains may also be vulnerable and sensitive to changes in the sanctions’ environment, and short-term trends in external prices. The aforementioned positive output effects are short-term by their nature and there are indications of them starting to fade already in 2023 (BEROC, 2023). Hence, even short-term projections for 2024 are challenging: the output growth is expected to weaken significantly or even fade away, while inflation spikes and financial destabilization risks are high (BEROC, 2023). Therefore, a return to a stagnant economic environment appears to be the most plausible short-term outlook.

The medium-term outlook seems even worse. According to Kruk (2023), the Belarusian macroeconomic balance (a) is very fragile, (b) is subject to numerous and huge downside risks, and (c) cannot be secured by macroeconomic policies because of the structural weaknesses in their design and the lack of room for maneuver. This means that even the existing weak long-term growth potential cannot be realized in the medium term, while the likelihood of recessions, inflation spikes and financial destabilization is high.

Re-shifting focus to a long-term and international perspective makes the viewpoint ‘more good than bad’ appear inconsistent. First, the long-term growth potential for Belarus, which was very weak even before the sanctions, keeps on worsening. This as adverse supply shocks and a deterioration of the productivity determinants continue eroding it (Kruk & Lvovskiy, 2022). Estimations of the growth potential (that rely on historical time series) are mainly within the range of 0-1 percent per annum. However, even such disappointing estimates might be optimistic bearing in mind the current political and sanctions-related risks and uncertainty (absent in the historical data). This makes stagnation the best possible long-term outlook, although it cannot be guaranteed.

Second, despite the milder recession and rapid recovery, the well-being gap between Belarus and its EU neighbors keeps on expanding (see Figure 3).

Figure 3. Well-being in Belarus vs the average among its EU neighbors (Latvia, Lithuania, Poland), 1990-2022, in percent.

Note: The GDP per capita PPP in 2017 constant international dollars is considered as well-being. The average well-being for EU Neighbors is the simple average in GDP in Latvia, Lithuania, and Poland.
Source: Author’s estimations based on World Bank data.

The average well-being in Belarus (measured in GDP per capita in constant international dollars) vs. that among its EU neighbors reached an (almost) historically low level in 2022. After attaining a level of well-being of roughly 75 percent of the average in Latvia, Lithuania, and Poland in the early 2010s, the well-being in Belarus has fall to about 52.5 percent, almost as low as in the mid-1990s. Given the economic stagnation as the most likely outlook, this means that the country will, in relative terms, keep on getting poorer in comparison to its EU neighbors.

A Political Stalemate

The hypothetical way out of the economic stalemate is more or less obvious. For instance, there is somewhat of a consensus among Belarusian economists about strengthening the long-term growth and securing macroeconomic stability (see Daneyko & Kruk, 2021; Kruk, 2023, for an overview of a collective view from a group of Belarusian economists). This vision, however, clashes with the views of the Lukashenka regime, which has inhibited its implementation throughout decades. Hence, democratic transition, or at least deprival of power of the Lukashenka regime has long appeared to be a highly likely precondition for moving away from the stalemate.

This, however, has changed in the last couple of years. The Belarusian economy’s dependence on Russia has moved from large to absolute. Prior to 2022, Russia was an important market for Belarusian exports (about 40 percent), the single energy supplier, and de facto the lender of last resort. To date, Russia’s role has expanded dramatically. The share of exports to Russia has increased up to about 65 percent. Moreover, the majority of the remaining 35 percent is exported with the assistance of or through Russia, using Russian infrastructure. Therefore, it would be fair to argue that Russia in some form “controls” roughly 90 percent of Belarusian exports. Further, being Belarus’ sole energy supplier, Russia has increased its significance for Belarus through expanded energy subsidies. The size of the energy subsidies reached a historical high in 2022, and the mechanism of the energy subsidies has become a cornerstone for macroeconomic stability in Belarus. Furthermore, Russia has turned out to be the only effective creditor for Belarus. Overall, Russia has accumulated a significant number of tools to undermine Belarus at any given moment.

A democratic transition or at least deprival of power of the Lukashenka regime might therefore not be sufficient preconditions for breaking the economic deadlock. Even if domestic political will to do so should emerge, the risk that Russia will successfully suppress it using the above outlined economic tools is very high. Hence, apart from a democratic transition, the way out of the economic stalemate requires a way out of the political stalemate. This seems to only be possible through either a politically weakened Russia, and/or an external political force, allied to the Belarusian democratic forces, and strong enough to suppress Russia.

Conclusions

Recently, the narrative on the Belarusian economy has changed. The prevailing expectations of a large and prolonged recession has been substituted by expectations of a gradual recovery. The narrative ‘the jig is up’ has somehow been crowded out by the ‘more good than bad’ viewpoint on the Belarusian economy. However, these narratives are not mutually exclusive. Behind the current ‘more good than bad’ viewpoint on the Belarusian economy, a severe economic and political deadlock prevails. Moreover, future economic and political deadlocks are the actual price being paid for the recent survival and recovery of the Belarusian economy.

From a positive perspective, the economic and political deadlock means that the country is likely to, at least, be bogged down in stagnation. Belarus’ total dependency on Russia makes the country hostage to Russia’s political preferences and country-specific risks. Should Russia decide to exert further economic and/or political influence over Belarus, it is likely to succeed. Consequently, any economic downturn faced by Russia would automatically impact Belarus.

From a normative perspective, breaking the economic and political deadlock might be the only solution, and for this, the order might matter. Prior to 2020 there was a widespread opinion that breaking the economic deadlock must be prioritized, and that it could – in turn – break the political deadlock. As of now, the tables have turned. The current order postulates the political deadlock comes first, as it seems to be the only way of breaking the economic stalemate. However, breaking the political deadlock appears to require external political will.

With these conclusions in mind, the recent Belarusian democratic forces’ manifest regarding Belarus’ EU membership aspiration, deserves attention (BDF, 2023). At first, such aspiration might appear schizophrenic given the actual political situation inside of the country. However, taking a Belarusian EU membership serious (within the EU and among Belarusians) might be the answer to Belarus’ political and economic deadlock. From this perspective, the task for the Belarusian society is thus to convince EU counterparts that this is not madness, but rather a feasible solution. It is rather evident why this solution is both desirable and feasible for the Belarusian society. The main question to be answered is therefore whether, and why it would be desirable and feasible for the EU.

References

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.

Belarusian Business in Turbulent Times

Posted on October 23, 2023 | Policy Brief

20231023 Belarusian Business Challenges

In the past three years, the Belarusian private sector appears to have been caught between a hammer and an anvil, experiencing domestic repressions and de-liberalization as well as collateral damage from sanctions and a deterioration of the country’s image. This policy brief discusses the challenges that Belarusian businesses have been facing since the onset of the Covid-19 pandemic and argues that the private sector may be the last hope for sovereignty and transformation of the country.

The years that have passed since the onset of the Covid-19 pandemic and the subsequent economic shocks have significantly altered the entrepreneurial landscape in Belarus. This period has seen the emergence of private businesses’ social and political activation during the pandemic, as well as during the 2020 election campaign and post-election protests (Bornukova & Friedrich, 2021). Businesses have also had to adapt to reactionary government policies, cope with sanctions against Belarus and deal with issues related to the Russian invasion of Ukraine. In the face of these challenges, the reactions and responses from small and medium-sized businesses signals that the private sector still has the potential to remain a driving force for socio-economic development in Belarus – despite the current political forces in power.

Private Sector Development; Liberalization and Regulation

The liberalization of the business environment, which lasted more than a decade and ended in 2020, allowed the private sector (enterprises without any state ownership share) to become the most dynamic part of the economy (see Figure 1).

From 2012 through 2020, the share of the private sector in employment increased by 7.7 percentage points. Similarly, the contribution from the private sector to the export of goods and services, as well as to GDP, exceeded the contribution from state-owned commercial enterprises. Moreover, even in the absence of significant privatization and restructuring of state-owned enterprises, the private sector took over the “social” function as an “employer of last resort”, absorbing workers released from the public sector (including from fully and partly state-owned enterprises) (IPM Research Center, 2020).

In addition, the development of the private sector increased the diversification of Belarus’ foreign trade. Private companies in the IT sector, advanced instrument manufacturing, electronics, and other high-value-added industries shifted their focus to developed countries’ markets, which reduced the dependency on Russian resources and markets. This increased Belarus’ economic sovereignty and its resilience to political tensions and other external shocks. The year 2020 however marked the end of the liberalization of entrepreneurial activities, as private businesses and private capital started to be seen as a threat to the political system (Bornukova & Friedrich, 2021).

Figure 1. Contributions from the Belarusian private sector to main economic indicators.

Source: Own elaboration based on Chubrik (2021) and IPM Research Center (2020).

Although there are no uncontestable figures describing business’ attitudes and activities during the political crisis in 2020, several non-academic projects documented that 58 percent of people protesting the fraud elections in 2020 worked within the private business sector (Devby.io, 2020). Dozens of businesses also openly supported the anti-regime strikes (The Village Belarus, 2020). As a consequence, legislation and law enforcement have since been steadily tightened, the tax burden has increased, and the possibility for using simplified taxation and accounting systems by small-scale businesses, in particular for sole proprietors, have been substantially reduced.

Against this backdrop, the government has also suppressed the publication of detailed statistical data including those on entrepreneurial activity. Since 2020, the Belarusian Research and Outreach Center (BEROC)’s quarterly enterprise surveys have become the main source of information and analysis on the business development situation.

In general, BEROC’s surveys demonstrate that, despite a reduced safety cushion and the lack of substantial state support during the pandemic, Belarusian businesses had, by the end of 2021,  adapted to the shocks from the post-election crisis and harsh de-liberalization, by realizing  their ability to cope, and finding creative solutions in the turbulent environment (Marozau, Akulava and Panasevich, 2021). Before Russia’s aggression against Ukraine, Belarusian entrepreneurs’ optimism about overcoming external barriers – i.e., factors that are out of a firm’s control such as macroeconomic instability, etc. – was the highest since 2015. However, increased uncertainty forced Belarusian businesses to focus primarily on maintaining the achieved scale of activity, halting investments (Kastrychnicki Economic Forum (KEF) & BEROC, 2022).

Optimism In Challenging Times

In general, the institutional environment for doing business in Belarus has deteriorated in recent years, both due to actions such as changes in tax legislation, price regulation and pressure on disloyal businesses, and due to negligence from the state, such as lack of significant support measures for private business, an outflow of businesses due to sanctions and an increasingly negative image of the country (KEF & BEROC, 2022). The Business Confidence Index (BCI, ranging from 0 – “extremely negative” to 100 – “extremely positive”), developed by BEROC and the Kastrychnicki Economic Forum based on OECD methodology, documented that at the end of 2020, the confidence level of business representatives regarding future developments was in the negative zone – arguably due to the political unrest and the Covid-19 pandemic. As firms accepted a new normality and adjusted their businesses, the BCI steadily grew before comfortably settling in the neutral zone at the end of 2021 (see Figure 2).

In March-April 2022, however, macroeconomic instability, disruption of supply chains, and shortages of raw materials and/or components following the Russian war on Ukraine became serious external barriers for Belarusian businesses. This lowered the BCI and businesses’ perception of their economic situation.

Quite surprisingly, the risks of doing business in Belarus in the second half of 2022, until early 2023, were estimated to be lower than in 2021 (see Figure 3). This may be explained by the fact that (for companies remaining in Belarus) many of the potential risks (inflation, exchange rate instability, sanctions, counter-sanctions, disruption of supply chains, tightening of price regulation, etc.) had already realized (BEROC, 2023).

Figure 2. Business Confidence Index and GDP growth rate, October 2020-March 2023.

Source: KEF & BEROC (2023) and the National Statistical Committee of the Republic of Belarus.

Figure 3. Risk perception by Belarusian Businesses.

Source: BEROC (2023).
Note: Risks were scored on a five-point scale, 1-5, where 1 denotes “very low” and 5 “very high”. Dotted lines denote the 95 percent confidence intervals.

The New Reality

The reaction from most Belarusian businesses to both pandemic- and war-related challenges has manifested in their search for new business models, an introduction of new products/services, and the entry into new export markets. Despite a bundle of powerful shocks to the economy stemming from the Russian war on Ukraine and related sanctions, some factors have dampened the anticipated drop in the economy: in particular, the increase in Russian support, export re-orientation to Russia and developing markets, alongside monetary stimuli, and interference with the activity of state-owned enterprises as well as artificial price controls (Kruk & Lvovskiy, 2022). As a result, the standard of living has remained at pre-war levels: in January-April 2023, real household disposable income and real salary grew by 1.6 percent and 3.8 percent respectively. With sanctions on Belarus being comparatively softer than those on Russian businesses, Belarusian businesses may have gained a comparative advantage and additional opportunities in both the domestic and Russian markets (BEROC, 2022). This caused optimism among entrepreneurs and in March 2023 – for the first time in the considered period – the composite BCI turned out to substantially exceed the neutral zone (see Figure 2). These positive spillovers are however likely to be bound in time – they will end both if the state of the Russian economy worsens (as this would reduce Russian support and decrease export revenues for Belarusian firms), and in the unlikely scenario that Russia’s current isolation is reduced. Whether Belarusian businesses will withstand the current protracted crisis depends on the ability of state authorities (current or new) to restore a constructive dialogue with the business community, return to the rule of law and create a business environment conducive to entrepreneurship.

According to business, the key factor needed to expand business activity is a reduction of external barriers (such as disruptions to supply chains, shortages of raw materials and/or components), rather than government support (e.g., financial, informational, etc.) (KEF & BEROC, 2022). Thus, “We do not need state support, but need the state not to worsen legal conditions for doing business” has become a motto of Belarusian entrepreneurs. Even in the context of war and political instability in the region, it allows looking at the prospects of the private sector in Belarus with some positive expectations.

At the same time, factors such as political repressions, sanctions against Belarus, problems with logistics, and the refusal of business partners to work with Belarusian companies due to the Russian aggression towards Ukraine have forced many Belarusian businesses, especially in high-tech sectors, to relocate. While the scale and direction of Belarusian business emigration is still difficult to assess (Krasko & Daneyko, 2022), these processes devastate entrepreneurship capital in Belarus and jeopardize the prospect of entire sectors such as the IT sector. In addition, the popular opinion about the lack of business opportunities implies that, unless conditions improve in terms of state policy and public confidence in the future, the socio-economic effects (employment, value added, tax revenue, innovations) from entrepreneurial activity in Belarus will diminish (GEM-Belarus 2021/2022). With operations severely affected by external barriers and restrictive legislation, halted investments and limited, if any, commercial contacts with Western countries and individual businesses, Belarusian private enterprises can hardly be seen as a source of stability for the current regime.

Conclusion

To promote an increased role of the private sector in the Belarusian economy, and to ensure high-quality and sustainable growth of the same, two prerequisites are critically necessary.

Firstly, a resolution of the political crisis and a restoration of authorities’ and state institutions’ legitimacy will significantly increase the populations’ confidence in state policy on business and economics. The principle of rule of law must be recognized and public and private actors must be treated equally in all spheres. It is also necessary to ensure the stability of tax legislation and economic law and the mitigation of excessive state control of business activities. All the above would lower external barriers and create stimuli for long-term business investments that, in turn, would facilitate economic transformation.

Although the sanctions’ packages imposed on Belarus by most developed countries due to domestic repressions, and complicity in the aggression against Ukraine, were directed towards the public sector, the private business suffered substantial macroeconomic and reputational consequences in their wake. The refusal of many foreign partners (suppliers, customers, banks, transport companies etc.) to work with Belarusian businesses – regardless of their affiliation with the state and attitude towards Lukashenko’s regime as well as towards the war on Ukraine – also substantially undermine businesses’ potential and Western soft power in Belarus. Such refusal is often driven by the argument that, by paying taxes, private businesses in Belarus support the current regime, when they should instead undermine the regime by halting operations (and thus tax revenues). At the same time, with the complete liquidation of civil society organizations and the termination of international projects and initiatives, the Belarusian private business may serve as the last resort in the hope of achieving independent, decentralized, and autonomous decision-making – all cornerstones of modern democracy (Audretsch & Moog, 2022).

From this perspective, the preservation of the private sector in Belarus may be of decisive importance in the future political processes, necessary to take into account by policymakers and business elites alike in developed countries.

In addition, relocated Belarusian businesses can play an important role in transforming the country by developing social ties between entrepreneurs and civil society, by providing support when solving problems related to doing business outside of Belarus and by investing in the Belarusian economy in the future. In this regard, establishing non-partisan Belarusian business associations abroad creates preconditions for consolidation of the most active part of the Belarusian community and its involvement in the envisaged economic transformation of the country.

References

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. 

Georgian Economy and One Year of Russia’s War in Ukraine: Trends and Risks

Posted on March 13, 2023 | News

20230228 Georgian economy and one year of Russia Image 01

Russia’s invasion of Ukraine profoundly impacted the global economy, immediately sending shockwaves across the globe. The attack of a country that was once a major energy supplier to Europe on the country which was one of the top food exporters in the world, sent food and fuel prices spiralling, causing major energy shortages and the prospect of protracted recession in the United States and the European Union.

The unprovoked and brutal aggression resulted in nearly universal condemnation and widespread sanctions placed on Russia by the United States, the EU, and other Western allies. Financial sanctions were perhaps the most unexpected and significant with the potential for immediate impact on Russia’s neighbours, including those that did not formally join the sanctions regime. In addition to sanctions, the major consequence of the war was mass migration waves, particularly from Ukraine, but also from Russia and Belarus to neighbouring countries.

At the start of the war, it was expected that the Georgian economy would be severely and negatively impacted for the following reasons:

  • First, as a former Soviet republic, Georgia historically maintained close economic trade ties with both Russia and Ukraine. The ties with Russia have weakened considerably in the wake of the 2008 Russo-Georgian war but remained significant. Russia was the primary market for imports of staple foods into Georgia, such as wheat flour, maize, buckwheat, edible oils, etc. Russia and Ukraine were both important export markets for Georgia. Russia was absorbing about 60 percent of Georgian wine exports and 47 percent of mineral water exports, while Ukraine was one of the leading importers of alcohol and spirits from Georgia (46 percent of Georgia’s exports). Tourism and remittances are other areas where Georgia is significantly tied to Russia and somewhat weaker to Ukraine. Before the pandemic, in 2019 Russia accounted for 24 percent of all tourism revenues, while Ukraine for 6 percent. Remittances from Russia accounted for 16.5 percent of total incoming transfers in 2021.
  • Second, while the Georgian government chose to largely keep a neutral stance on the war (announcing at one point that they would not join or impose sanctions against Russia), the main financial and trade international sanctions were still in effect in Georgia due to international obligations and close business ties with the West. These factors were reinforced by strong support for Ukraine among the Georgian population, where the memory of the Russian invasion of Georgia in 2008 remains uppermost.
  • In addition, Georgia is a net energy importer, and while the dependence on energy imports from Russia is not significant, the rising prices would have affected Georgia profoundly.

Original publication: This policy paper was originally published in the ISET Policy Institute Policy Briefs section by Yaroslava Babych, Lead Economist of ISET Policy Institute. To read the full policy paper, please visit the website of ISET-PI. 

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.

What Drives Belarus to Be One of the Most Optimistic Nations in Europe?

Posted on March 6, 2023 | Policy Brief

20230306 What Drives Belarus Image 01

War in Ukraine, imposed sanctions on Belarus and the worst yearly GDP drop since the 1990s. Despite these challenges, Belarusian households were the third most optimistic in Europe in late 2022, following Lithuania and Montenegro. The Belarusian Consumer Confidence Index, calculated on the basis of four household surveys conducted in Belarus by BEROC’s Belarus Monitoring Project in 2021 and 2022, shows surprising resilience among Belarusians – especially in Q3 and Q4, 2022.  This brief shortly describes the components of the index and their evolution and discusses what factors might have been driving this high index. The brief argues the found optimism among Belarusians could have been driven by a state-owned media influence and by the Belarusian economy performing better than expected.

Optimism Without Grounds?

In 2022, Belarus experienced a 4.7 percent yearly GDP drop, the worst since the 1990s. The main reasons behind the decline is the Russian war on Ukraine and Belarus’ involvement in it, and, consequently, the severe sanctions imposed on Belarus and its main trade and economic partner: Russia. A surge of exports to Russia to counter the sanctions helped prevent the severity of the drop, although it still remains large. Forecasts for 2023 are also not encouraging. The World Bank expects the Belarusian economy to shrink by 2.3 percent. The European Bank for Reconstruction and Development’s forecast is -1 percent, the International Monetary Fund (IMF)’s is +0.2 percent, and the Eurasian Development Bank’s +0.3 percent, whereas the announced official target is +3.8 percent. In total, the GDP decrease could be as large as -6.9 percent in the two coming years, following the World Bank’s worst prognosis. The question is; Is this a lot?

The last GDP decline occurred in 2020 and amounted to a moderate -0.7 percent, despite the apex of Covid-19 related shutdowns, the decrease in the world economy, and the political crisis following the rigged elections in August. The most recent severe GDP drop happened between 2015 and 2016 with a decline of 3.8 percent in 2015 and 2.5 percent in 2016.

Figure 1. A comparison of GDP changes and the CCI values in Belarus in 2021 and 2022.

Note: Based on Eurostat methodology. Source: Belstat, BEROC.

Surprisingly, the lower the GDP, the higher the consumer confidence, as measured by the Consumer Confidence Index (CCI). For example, the CCI was -18.7 percent in Q4 2021, while the GDP increased by 2.3 percent in 2021. On the contrary, the CCI in Q4 2022 was -15.0 percent, while the GDP dropped by massive -4.7 percent (see Figure 1).

The experience from numerous financial crises in the 2010s may play an important role here by moving the expectation baseline and conclusively undermining confidence in the country’s economic institutions. However, even if this is the case, it would not explain the dynamics of consumer confidence in Belarus in relation to the country’s economic performance. In this brief we dig deeper into the determinants of this seemingly ungrounded consumer optimism.

The Consumer Confidence Index

The Consumer Confidence Index (CCI) used for this brief is based on four household surveys conducted in Belarus by the Belarusian Economic and Outreach Center (BEROC)’s Belarus Monitoring Project. The online surveys were conducted in December 2021, and in April, August and November in 2022. The surveys are representative for the urban population aged 18-64 (approximately 5 million people). They have also been weighted by region, sex and age.

The index is designed to measure consumer confidence from -100 percent to + 100 percent (0 being neutral). Consumer confidence is defined as the degree of optimism regarding the state of the economy which consumers express through their saving and spending patterns.

A few approaches for calculating the index can be used. One of them is the Eurostat methodology, which includes answers to four questions about households previous and expected financial position, the expected economic situation in the country, as well as the propensity to buy durable goods. Another approach is the Rosstat methodology, which, in addition to the Eurostat approach, includes one extra question on the previous economic situation in the country. We considered both methodologies to allow for a comparison of Belarus to countries in Europe as well as to Russia.

Belarus Compared to Russia

The CCI value, applying the Rosstat methodology, was -19.4 percent in Belarus in November 2022 (a 3.6 percentage point growth as compared to August 2022), while the index value in Russia was -22.7 percent (a 0.3 percentage point growth).

It is worth mentioning that there was a sharp drop in Q2 2022 in both countries. However, the index values recovered in Q3 2022 to Q4 2021 values, i.e., to the index values prior to the introduction of large-scale economic sanctions and prior to the war.

The pattern is somewhat similar to that during Covid-19-related restrictions, displaying a sharp drop and then a strong recovery. The magnitude of the drop was however much higher in 2020: 20.3 percent in 2020 compared to 10.3 percent in 2022 for Russia. No data is available for Belarus prior to Q4 2021 but the trajectory was likely similar. Apparently, households in neither country appear be desperate (see Graph 1).

Graph 1. The CCI in Belarus and Russia.

Note: Q1 2022 data not available for Belarus. Source: BEROC, Rosstat.

Belarus Compared to Europe

The Belarusian CCI, when excluding the component of the past state of the economy (i.e. applying the Eurostat methodology), was -15.0 percent in November 2022. This was 3.4 percentage points higher than the value in December 2021 and the third highest value in Europe, following Lithuania (-9.2 percent) and Montenegro (-8.6 percent). Moreover, the index was the highest observed for the entire period of observations by BEROC (from December 2021), as depicted in Graph 2.

Graph 2. The CCI in Belarus and the EU.

Source: BEROC, Eurostat.

The index values of the European Union and the Eurozone have not changed significantly from Q2 2022 and currently stand at -26.3 and -24.9 percent, respectively. Naturally, some countries have faced slight reductions, while others have seen slight increases, for instance, the indices for Italy, Croatia and Cyprus had all increased by more than 4 percentage points in Q4, 2022.

As evident from Graph 2, Belarus has since Q4 2021, moved from a below average position to become a leader in optimism on the European continent.

The Past and the Future

Throughout all four surveys, evaluations of the current state of the country and of personal wellbeing contrasted the projections for the future (see Graph 3). The projections for the future are much more positive, which is evident if we compare question 4 and 2 to question 3 and 1. At the same time, the share of negative answers is higher than the share of positive answers for all questions, and the term “optimism” should therefore be taken as the lack of strong negative views on the past and future.

A higher share of “difficult to say or do not know” answers is unsurprisingly found for questions regarding the future.

Graph 3. The composition of the CCI in Belarus for Q4 2022.

Note: All answers to the questions are distributed along a Likert scale from “will improve (has improved)” or “very good” to “will decline (has declined)” or “very bad”. For question 1 (Q1) and question 2 (Q2), the answer options range from “has improved” and “has declined”; and for question 5 (Q5), the answer options range from ”very good” to “very bad”. Source: BEROC.

The largest negative contribution to the index was the question on the current assessment of the country’s economic situation in relation to the previous year (question 1). The share of negative answers was 72 percent in December 2021, and it decreased only to 63 percent in November 2022, even though the economic performance prior to those periods was a 2.3 percent GDP growth and 4.7 percent GDP decline, respectively. Apparently, the worse the economy performed, the better was the perception of the past.

This is however not the case regarding the state of the household’s financial position. The share of negative answers was 48 and 47 percent, and the share of positive answers was 13 and 14 percent in December 2021 and November 2022, respectively.

The answers concerning the future standing of the economy and one’s personal financial position follow the same logic, with large disparities between the evaluation of the country’s economy – which one is negative about – and personal finances – where respondents are more optimistic.

What could influence the changes? We hypothesize that there are at least four possible explanations for the improvement in the CCI from Q1 to Q4, 2022:

a) a stabilization of the situation on the foreign exchange market
b) a slowing GDP decline, reaching a “local minimum”
c) an influence from Belarusian and Russian state-owned mass media outlets
d) failed negative expectations in previous periods

As discussed in a previous FREE Network Policy Brief by Luzgina (2022), the Belarusian currency market has stabilized since April, 2022. The Belarusian exchange rate is somewhat of a “Holy Grail” and a crucial factor for Belarusians after numerous financial crises in 2010s, so its stabilization could act as a positive signal for households. Indeed, when asking respondents about the factors influencing their income, the share of those who attributed this to the exchange rate had in August 2022 decreased by 25 percentage points, as compared to April the same year (from 45 to 20 percent, respectively).

The GDP decline slowed in the second half of 2022, from -4.9 percent in August to -4,7 percent in November. An additional positive development for Belarusians was that the inflation declined in November.

Media consumption is another essential factor in understanding consumer confidence. State-owned and independent media consumers showed significant differences in their assessments of the economy. Only 22 percent of state-owned media consumers rated the economy as “bad” or “very bad” compared to 68 percent of independent media consumers.

In April 2022, the World Bank estimated a possible Belarusian GDP change at -6.5 percent, the IMF
-6.4 percent and S&P -15 percent. The CCI in April was also at the lowest throughout BEROC’s observations at -23.0 percent. Despite these extremely negative forecasts for Belarus’ GDP, the actual outcomes were less catastrophic than expected. This might have improved respondents’ assessment of the future economic situation.

Conclusion

Data from the online household surveys show that imposed sanctions, the Russian war on Ukraine, and a declining economic growth in 2022 have not yet significantly affected the sentiments of Belarusians on a large scale. Rather, Belarusians’ expectations have improved despite serious current and future challenges to the Belarusian economy. In fact, Belarus is among the most optimistic nations in Europe, according to the surveys.

This is arguably due to a financial stabilization and an economic performance above expected, as well as exposure to state-owned media.

With this in mind, we may see an increase in households’ consumption in the following months, which will contribute to a slowdown in the GDP decline or even a slight economic recovery in 2023 – pending no new shocks occur.

References

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.