Tag: Belarus
The Inevitable Social Security Reforms in Belarus
In 2016, Belarus will face the need to reform its social protection policy. The three main directions of reforms will be to departure from subsidized tariffs, to reform the pension system, and to increase unemployment benefits. Needless to say, some of these reforms will be highly unpopular. The government needs not only to cut expenditures, but also to think about new ways of providing targeted social support.
Faced with an anemic growth over the last 5 years and a GDP decline of 3.9 percent in 2015, Belarus has to rethink its economic policy. While the government is so far reluctant to undertake serious structural reforms, the decrease in budget revenues and lack of access to international financing leaves the authorities with few other options than to reform the social security system. This push might actually be a good thing, as social security in Belarus needs to depart from its current non-sustainable model of subsidies for everyone, to a model of focused means-tested social support.
Subsidized Tariffs
A lot of government-set tariffs in Belarus are currently subsidized. Utility service tariffs and transport fees are lower than the costs of providing these services. This is especially true for the heating tariffs, which currently cover 10-20 percent of total costs.
The subsidization policies are inefficient, as they benefit the rich (who consume more) rather than the poor in need of government support. Moreover, in the case of energy tariffs, cross-subsidization leads to higher energy costs for the firms, making them less competitive. Both prospective creditors, the IMF and the Eurasian Fund for Stabilization and Development, demand that the subsidies are gradually removed.
Zhang and Hankinson (2015) estimate the effects of an increase of the heating tariff on welfare. They find that the burden of higher tariffs will mostly fall on low-income groups. In particular, if the heating tariffs increase to 100 percent of the costs, households from the lowest income quintile will spend over 16 percent of their income on energy. Therefore, the authors conclude that the government should introduce a targeted social assistance together with the tariff increase.
While tariff increases were already introduced in the beginning of 2016, a targeted social assistance is still only a project.
Unemployment Benefits
Despite calling itself a social economy, Belarus has inexplicably low unemployment benefits (currently below 10EUR per month in Minsk). These low unemployment benefits contribute to a very low registered unemployment rate – 1 percent in November 2015. The more adequate measure of unemployment, based on labor force surveys, is classified in Belarus. However, large-scale job cuts in the biggest state-owned enterprises suggest that unemployment is a real threat.
Akulava (2015) argues, that given the current situation on the labor market, unemployment benefits should be increased to at least the minimal subsistence level. However, unemployment benefits per se will not solve all the problems in the labor market, and Belarus needs more active labor market policies facilitating the retraining and reallocation of workers.
The IMF has also emphasized the need to introduce proper unemployment insurance. The government has already pre-announced an introduction of increased unemployment benefits, but the details and dates are still unclear. There is a risk that, as many other policies in Belarus, the unemployment support will favor the state-controlled part of the economy and only offer increased support for those laid off from state-owned enterprises.
Pension Reform
The Belarusian pension system has not change much since the Soviet times: it is still a pay-as-you-go redistributive system, with a pension age among the lowest in Europe (55 for women and 60 for men). The Pension Fund first registered a deficit in 2013, and given the ageing population, deficits will only deepen in the future.
Due to relatively low fertility rates (1.6 per woman) and increasing life expectancy, the Belarusian population is quickly ageing: In 2015, there are 4 persons of retirement age per 10 persons of working age, but in 2035, this ratio will be 6 per 10.
Lisenkova and Bornukova (2015) build a demographically accurate overlapping generations model of Belarusian economy to estimate the stability of the pension system. They find that if the current parameters do not change, the deficit of the Pension Fund will explode up to 9% in 2050 (line 55/60 in Figure 1).
Figure 1. The Pension fund deficits under different scenarios, in % of GDP
Source: Lisenkova and Bornukova, 2015
The authors also estimate different reform scenarios. An increase in the contribution rate and a decrease in the replacement rate (ratio of average pension to the average wage) do not seem feasible, as the current contribution rate of 29 percent is already too high, and the replacement rate is near the minimum set by the National Development Strategy 2020. The most obvious reform is then to increase the pension age for women, who retire 5 years earlier than men, despite having 10 years longer life expectancy. However, as can be seen from line 60/60 in Figure 1, equating the pension ages for women and men will not be enough to curb the deficits. Another simulated reform is to gradually increase pension age to 65 years for everyone, after increasing it to 60 for women only. This reform would mean that the deficits would be kept below 1 percent of GDP (and even generate a small proficit by 2035, although in a very long perspective the deficit will increase to 2 percent again (line 65/65)). In the very long run, Belarus needs to build a fully funded pension system.
The need to increase the pension age is already on the public debate agenda, and the authorities recognize the need for reforms. Needless to say, however, this move will be very unpopular.
Conclusion
The current economic crisis gives an opportunity and incentive to make Belarusian social policy more efficient. This policy brief describes the three major fields of reform. Subsidized tariffs are unfair and inefficient, but before removing subsidies the government should create a targeted system of social assistance to those in need. Increasing unemployment (and demands from the creditors) may force the government to change its unemployment benefit policy. The pension system needs reforms, but these would be difficult to implement due to unpopularity.
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References
- Akulava, M. (2015), ‘Unemployment insurance as a tool of social protection’, BEROC policy paper series, PP no. 32 (in Russian)
- Lisenkova, K., and Bornukova K. (2015), ‘Effects of Population Ageing on the Pension System in Belarus’, BEROC working paper series, WP no. 28
- Zhang, F., and Hankinson, D. (2015), ‘Belarus Heat Tariff Reform and Social Impact Mitigation,’ World Bank Publications, The World Bank, number 22574
Local Self-Governance in the Republic of Belarus
Author: Aleh Mazol, BEROC.
This policy brief summarizes the results of our research on the development of local self-governance in the Republic of Belarus. The aim of this study was to analyze the existing system of local self-governance in the Republic of Belarus and to suggest directions for its improvement. The results show that the development of local self-governance should be directed to the reduction of concentration of the administrative-territorial division, real empowerment of local Councils of Deputies, improvement of the mechanism of alignment and balancing of local budgets, as well as the development of a financial base of local financial management and intergovernmental relations.
Expected Effects of Tobacco Taxation in Five Countries of the Former Soviet Union
Authors: Irina Denisova and Polina Kuznetsova, CEFIR.
In this policy brief, we discuss the results from a study of different dimensions of tobacco taxation policy in five former Soviet Union countries: Belarus, Kazakhstan, Kyrgyz Republic, Russia and Ukraine. We find that the increase in budget revenue from raising excises on filter cigarettes is high in all studied countries. Furthermore, due to a low elasticity of the demand for cigarettes, the increase in excise taxes needs to be substantial to lead to a noticeable improvement in public health.
The Role of Belarusian Private Sector
The development of a private sector and the expansion of its role in the economy is one of the key goals repeatedly announced by the Belarusian authorities. The reforms carried out in Belarus in 2006-2014 moved the country from 106th to 57th position in the World Bank Doing Business ranking. The official statement is that reforms boosted the rapid development of business initiatives and its impact on economic development. Unfortunately, there is no clear confirmation of this statement. The absence of a transparent and clear methodology in Belarusian statistics on how to evaluate the role of the private sector makes it difficult to evaluate the exact input of the Belarusian business in the economy and compare its role to other countries.
In the last 5 years, the Belarusian authorities have repeatedly highlighted the need to develop the private sector, perceiving it as the main source for sustainable economic growth and competitiveness of Belarus in the future.
However, it may be difficult to assess the real role of the private sector in the Belarusian economy. First, existing data do not allow a clear identification of the boundaries between the private and state-owned sectors in Belarus. Furthermore, there are certain methodological differences in identifying and evaluating the private sector between Belarusian official statistics, the World Bank approach and alternative methodologies. These methodological variations combined with data limitations result in significantly different estimates of the role of the private sector for the Belarusian economy. The problem concerns both the evaluation of the role of small and medium enterprises (SMEs) and the private sector in general.
Small and Medium Enterprises
One good example of the abovementioned data issue is the statistics for SMEs sector. Unlike the EU, Belarus does not include individual entrepreneurs to the micro organizations in the SME sector. This results in highly different estimates for the number of SMEs per 1000 inhabitants (Figure 1). If we follow the methodology of the National Statistical Committee of the Republic of Belarus (Belstat), the number is 9.7 firms per 1000 people. However, switching to the EU methodology (IFC report, 2013) raises the number significantly up to 35.9. Moreover, the inclusion of unregistered self-employed individuals involved in the shadow economy (which according to estimations of the authorities amount to at least 100,000 inhabitants) increases the number to 46.5 firms per 1000 people, which is above the level of many European countries.
Figure 1. SME density
Source: own estimations from Belstat data, Eurostat.
Private Sector
As for the private sector in general, the problem here is that the official statistics counts enterprises with mixed form of ownership and state presence to the private sector. This makes it difficult, if at all possible, to obtain the exact input of the private sector to the economy and see the dynamics of its change.
More specifically, there are three potential ways to assess the contribution of the private sector. Unfortunately none of them provides reliable estimates of the role of business. The first method is to use official data. The main problem here is that the private sector according to official statistics includes enterprises with state presence as well as large private companies that are under state control and not totally independent. Thus, the contribution of the private sector calculated based on these figures is likely overestimated.
The second method is to look at enterprises that do not report to the Belarusian ministries, following the methodology of the World Bank used in their evaluation of Belarus machinery industry (Cuaresma et al., 2012). Here, non-ministry reporting enterprises work as a proxy for a private firm, as in this case it doesn’t have to report directly to Belarusian ministries and is independent from the state.
The problem is that the majority of large private enterprises, even though there is no state share in them, are not in this list. In Belarus these enterprises often form a part of state concerns on the one hand and are independent on the other. The example here is JSC “Milavitsa”, one of the largest lingerie producers in EE, which is a part of the Bellegprom concern. Therefore, this methodology likely underestimates the role of the private sector.
The third way is to try to exclude state presence from the official data of the private sector. According to official statistics, the private sector includes several groups of enterprises, such as individual entrepreneurs, legal entities with/without state/foreign presence, etc. However, the absence of a clear distinction between these sub-groups allows for only rough estimates, through the extraction of the state presence.
As a result, all obtained numbers are qualitatively different from each other and there is no clear answer if any of them reflects the real picture.
For example, the contribution of the private sector in total employment according to the three different methods (Figure 2) provides the following results. Officially, in 2013 around 53% of the active labor force worked in the private sector. However, the exclusion of state presence in private property changes the results significantly and the share of the active labor force involved in the private sector drops to a level of 31%, while the non-ministry reporting enterprises employ around 18% of the active labor force.
Figure 2. Private sector in employment (%)
Source: own estimations from Belstat data.
The input of the private sector in the total production volume (Figure 3) is also very diverse depending on the method of evaluation. Official data show that the private sector is responsible for 80% of total production volume. However, the exclusion of state presence decreases the value to a level of just 26%, which is similar to the result demonstrated by the non-ministry reporting enterprises (25%).
Figure 3. Private sector in total production volume (%)
Source: own estimations from Belstat data.
At the same time, the absence of a clear definition of the private sector does not allow for obtaining reliable information about its effectiveness. If we take the rate of return on assets (ROA), again, there is a significant gap in the results of the different methods of estimation (Figure 4). ROA of the private sector according to official statistics is significantly lower than similar indicators based on the data obtained by the other two methods (in 2013: 1.17 vs. 2.4 and 1.3 respectively). Thus, the lower the “measured” state presence, the higher is the productivity of the private sector, especially in comparison with the effectiveness of the state sector (0.25).
Figure 4. Return on Assets (BYR/BYR)
Source: own estimations from Belstat data.
Conclusion
The above discussion has illustrated that diffuseness of data and the definition of the private sector is likely to create troubles for understanding the importance of the private sector in Belarus. This, in turn, may undermine the effectiveness of economic and political measures targeted towards this sector.
The implementation of a clear, unified and transparent methodology of how to estimate the role of business and what exactly can be treated as a private sector in statistics would allow for a better understanding of the obstacles and barriers that the private sector is dealing with, as well as to help developing effective measures of business support. Until then, the official statistics should not stick to just one definition of the private sector. Instead, it can use all three abovementioned gradations, as a better reflection of the realities of Belarusian business.
References
- Cuaresmo, J., Oberhofer, H., Vincelette, G. (2012).‘Firm Growth and Productivity in Belarus: New Empirical Evidence in the Machine Building Industry’, World Bank, Policy Research Working Paper No. 6005.
- ‘Business Environment in Belarus 2013.Survey of Commercial Enterprises and Individual Entrepreneurs’, IFC, Report.
Stimulating Growth in Belarus: Selecting the Right Priorities
Belarus is suffering from a substantial decline in economic growth potential. Both the government and academic researchers are discussing a number of options for stimulating the growth rate and enhancing its stability. The government tends to focus on equipment investments as the priority for growth stimulation. However, academic researchers have revealed huge unused potential for growth in institutional environment in Belarus. In this brief, we deal with the issue of selecting the right priorities in growth stimulation policies.
Nowadays emerging markets as a whole, and especially countries of Central and Eastern Europe (CEE) and the CIS region suffer from the problem of declining growth potential (IMF, 2013). Belarus is not an exception from this trend. However, the situation in Belarus is distinct from the regional patterns since the majority of factors behind the declining growth potential in Belarus differ from those in other CEE and CIS countries. While the IMF (2013) emphasizes constraints for capital accumulation as the core challenge for the CEE region, the major problem in Belaurs is the lack of productivity growth. Capital accumulation has in fact been huge and ineffective in Belarus in recent years (Kruk and Bornukova, 2014). Hence, a key issue for Belarus for restoring output growth, and enhancing its sustainability, is total factor productivity. Some degree of consensus about this priority exists both in the academic sphere and among economic policy makers. However, further questions about the sources of productivity growth generate ambiguous solutions, which result in different growth strategies.
Embodied Technical Progress versus Neutral Productivity Growth
Two years ago, the Belarusian government initiated a so-called modernization campaign. The idea of this campaign was to accomplish rapid re-equipment of large Belarusian firms, which was expected to increase their productivity. The government considers this channel to be self-sufficient, hence staking on it almost exclusively.
At the same time, a number of both academic (World Bank, 2012; Cuaresma et al., 2012; Kruk and Bornukova, 2014) and economic policy studies (IMF, 2012) emphasize the necessity of institutional changes for productivity growth. Gains in productivity herewith are expected due to improved incentives by firms and more efficient allocation and usage of factor inputs by firms.
From an academic perspective, the first approach may be interpreted as one based on technical progress embodied in capital (embodied technical progress, ETC). In other words, equipment investments are to provide productivity growth per se (De Long and Summers, 1991; Greenwood et al., 1997; Hernstein and Krusell, 1996). More recent studies provide evidence on the importance of this mechanism for a modern transition agenda (Skare and Sinkovic, 2013).
The second approach deals with so-called neutral productivity growth (NPG), i.e. productivity gains independent of the quantity of either capital or labor inputs. NPG can be divided into a number of channels: neutral technical change, technical efficiency (characterized by the distance between the actual position of the firms and the production frontier), scale economies, and allocative efficiency (Coelli et al., 2005).
Impact of NPG and ETC on Productivity: Complementary or Substitutive?
As a rule, growth models do not assume any trade-off between NPG and ETC. For instance, a firm that succeeds to implement a new technology (independent on capital of labor inputs) will generate higher productivity. This will attract additional inputs – capital and labor – given higher factor returns due to productivity gains. New capital (equipment), in turn, may generate additional gains in productivity. Hence, productivity growth may stem from both tracks complementing each other. In this sense, the issue of decomposing actual sources of productivity growth – capital or technology itself – becomes largely meaningless.
The idea of the Belarusian modernization – that ETC comes first and other things do not matter – substantially changes this growth pattern. Rapid technical re-equipment makes the lack of financial sources for investments roughly inevitable, as national savings can hardly be enough for a surge in investments. The government in Belarus partially solves this problem through centralized reallocation of financial resources. However, this reallocation negatively impacts allocative efficiency (Kruk, Haiduk, 2013). Further, it is likely to have a similar adverse effect on technical efficiency and scale economies. Hence, in Belarus the trade-off between ETC and NPG arises: artificially pushing ETC suppresses NPG.
Criterions for Assessing Effectiveness of NPG and ETC
A misbalance between the ETC and NPG resulting from an artificial ETC stimulation raises serious concerns about the desirability of this policy. However, the ‘modernization ideology’ uses a counter-argument: productivity gains from ETC may be sufficiently large to allow sacrificing potential gains from NPG growth.
From this perspective, we can compare both channels through the following criterions:
- How large is the productivity effect from both channels
In order to get a quantitative assessment, we employ the model by Greenwood et al. (1997) that dissect NPG and ETC for a balanced growth path (the equilibrium trajectory when capital and output grow with the same rates). We apply our estimates of the Belarusian growth parameters to the model. For assessing ETC growth rate, we employ an approach by Hernstein and Krusell (1996). The latter produces an assessment of an average ETC productivity growth in 2005-2012 from -1.55 up 6.40% (depending on the measures of correspondent prices). The mean of the corridor seems to be rather close to the one Hernstein and Krusell (1996) estimate for developed countries (3-4%). Hence, in the current exercise we use a value of 3.5% for the Belarusian ETC. In this manner, we get the estimates of output growth-rate returns on growth rate of NPG (1.69) and ETC (0.41). This means that a change in the growth rate of NPG by 1 percentage point results in 1.69 percentage point increase of output growth rate, while the latter will increase by only 0.41 in case of 1 percentage point increase of ETC. However, the range in which NPG and ETC may vary due to government policies is highly important as well.
- How large is the sensitivity of NPG and ETC to government stimulation?
Economic modelling assumes that, once an economy is on a balanced growth path (the stock of capital grows by the same growth rate as output), the ETC growth rate is exogenously determined by global technology gains. In this case, an attempt to push ETC by excessive capital accumulation will only generate a savings-investment misbalance. Hence, this kind of stimulus policy makes sense only if the economy has not yet entered the balanced growth trajectory. Whether this is the case for Belarus is still an open question, although findings in Kruk and Bornukova (2014) signal that this path has already been achieved.
Existing options for stimulating NPG seem to be much more numerous. First, technical efficiency and scale economies may progress substantially due to a changing environment, with more intense competition and tighter budget constraints. Such environment will force firms to increase their flexibility and adaptability, which will finally result in more technical efficiency and more proper scaling. Second, Belarus has accumulated great growth potential in the sphere of allocative efficiency. Due to long periods of inefficient capital accumulation, its proper reallocation can provide up to 10% growth of output (Kruk and Bornukova, 2014).
- What are the costs of growth stimulation?
In the case of NPG, there are actually no direct costs. Enhancing more flexibility and adaptability for firms, along with establishing tough budget constraints does not require new financial injections. These goals may be achieved through legislative activity, implementing new practices and standards into business activities.
As for ETC, a number of undesirable outcomes may be interpreted as costs. First, while stimulating productivity growth due to technology background, artificial ETC stimulation may further dampen allocative efficiency in Belarus. Second, an attempt to boost it requires sources for additional investments, which typically exceed available savings. Hence, the country is likely to face a deficit of savings-investments balance. The latter is to determine current account deficit, the necessity of external borrowings, and vulnerability of financial market.
Conclusion
In the last two years, Belarus has spent considerable effort towards modernization and re-equipment of large industrial enterprises. However, the most important outcome from the Belarusian experience – artificial stimulation of ETC – is likely not worth the effort as it might hinder allocative efficiency. Because of such practices, Belarus has faced an unfavorable trade-off between ETC and NPG.
However, this trade-off should not be treated as a predetermined one. It is possible and desirable to avoid it. In the long term, the growth should stem from both tracks – NPG and ETC. However, in a shorter perspective, more returns in terms of welfare may be obtained through a more efficient allocation of resources, improvements in the institutional environment, and more flexibility and adaptability by firms.
References
- Cuaresmo, J., Oberhofer, H., Vincelette, G. (2012). ‘Firm Growth and Productivity in Belarus: New Empirical Evidence from the Machine Building Industry’, World Bank, Policy Research Working Paper No. 6005.
- De Long, J., Summers, L. (1992). ‘Equipment Investment and Economic Growth’, Quarterly Journal of Economics, 106, 2, pp. 445-502.
- Greenwood, J., Hercowitz, Z., Krusell, P.(1997). ‘Long-Run Implications of Investment-Specific Technological Change.’ American Economic Review, 87, 3, pp. 342–362.
- Hornstein,A., Krusell, P. (1996). ‘Can Technology Improvements Cause Productivity Slowdowns?” In NBER Macroeconomics Annual 1996, eds. Julio J.Rotemberg and Ben S. Bernanke. Cambridge, MA: MIT Press.
- IMF (2013). ‘Central, Eastern and Southeastern Europe: Faster, Higher, Stronger – Raising the Growth Potential of CESEE’, Regional Economic Issues, October 2013.
- IMF (2012). ‘Republic of Belarus: Selected Issues’, IMF Country Report No.12/114.
- Kruk, D., Bornukova, K. (2014). ‘Belarusian Economic Growth Decomposition’, Belarusian Economic Research and Outreach Center, Working Paper No.24
- Skare, M., Sinkovic, D. (2013). ‘The Role of Equipment Investments in Economic Growth: Cointegration Analysis’, International Journal of Economic Policy in Emerging Economies, 6, 1, 2013.
- World Bank (2012). ‘Belarus Country Economic Memorandum: Economic Transformation for Growth’, Country Economic Memorandum, Report No. 66614.
Liquidity and Monetary Policy in Belarus
High inflation and devaluation expectations after the 2011 currency crisis force Belarusian monetary authorities to seek non-conventional policy measures. Instead of using the refinancing rate as an instrument on the money and credit markets, the National Bank of Belarus resorts to liquidity squeezes, which drive up the rouble interbank rates. The banks have to raise deposit and loan rates in response. As a result, households continue to keep savings in the national currency deposits, while firms struggle to keep up with the payments. This situation, however, will have to end soon.
Belarusian economy is characterized by state ownership domination and various (including political) constraints. This often makes it tempting for the Belarusian authorities to resort to untraditional policy measures, or use the conventional policies in unexpected ways. A good example is Belarusian monetary policy in 2012-2013. In 2011 Belarus experienced a severe currency crisis: the exchange rate of the Belarusian rouble (BYR) crumbled from 3011 BYR per USD in January 2011 to 8470 BYR in December 2011. Prices followed the currency and doubled: in 2011 the inflation rate was 108%. Due to high government influence on the labor market and competition from the Russian labor market, real incomes quickly recuperated (Bornukova, 2012). But the owners of the deposits in Belarusian roubles took a hit – their savings lost almost a half of real value. More and more people converted their deposits into USD or other foreign currency. Inflation and devaluation expectations were soaring (Kruk, 2012).
The National Bank of Belarus clearly realized that the proper response would be to increase the interest rates: this policy measure would partially compensate the losses of rouble deposit holders, make rouble deposits attractive again and curb the growth in lending, one of the major causes of the currency crisis.
However, there is a catch. Formally, the main monetary instrument of the National bank is the refinancing rate. Yet, despite the name, this is not the rate at which the National bank is refinancing the commercial banks. Officially, it is only a “basis for setting interest rates on the operations involving liquidity provision to banks”. The problem is that most of the floating rates, especially those on concessional loans, have the refinancing rate as its basis rate. Very high refinancing rate would hurt debt-financed organizations, in particular in agriculture and construction. And the National bank found a compromise: the refinancing rate would remain relatively low; but the National bank would regulate the money market through liquidity squeezes: it would offer liquidity to the commercial banks only at a much higher collateral loan and overnight rates. The lack of liquidity due to a squeeze would drive up the interest rates on the interbank market.
Figure 1: Main interest rates in Belarus in 2012-2014
Source: The National Bank of the Republic of Belarus.
Figure 1 shows the main interest rates in Belarus in 2012-2014. The refinancing rate was steadily decreasing throughout the whole period. The overnight rate (which moves together with the collateral loan rate), also set by the National bank, for some period was almost two times higher than the refinancing rate, reaching 70 percent at its peak. The overnight rates mostly exceeded the rate set in the interbank market. The interbank rate reflects the market price of liquidity. The National bank influences this rate by offering (or not) liquidity to the state-owned commercial banks.
The National bank has successfully used liquidity squeezes as an instrument of stabilization on the currency market. As Figure 2 shows, the two major spikes in the interbank rate coincided with the higher rates of currency devaluation. The first major devaluation episode began in the autumn of 2012. At that time the market reacted to the increased lending and the news about the ban on the exports of “solvents”, which meant Belarus would have to pay back to Russia the customs duties on oil. On the other hand, the periods of high liquidity and low interbank rates were usually followed by devaluation episodes.
Figure 2: Changes in the exchange rate and the interbank rate, 2012-2014
Source: The National Bank of the Republic of Belarus.
In the summer 2013 devaluation speeded up once again, fueled by the potassium scandal. The National bank responded with lower liquidity and higher rates, which reached peak values of 50% and higher in September 2013.
Of course, this policy had other effects besides calming the currency market. As Figure 3 demonstrates, deposit and credit rates mainly reacted to the changes in the interbank rate, with peaks in the autumn of 2012 and summer-autumn of 2013. Enormously high deposit rates (often higher than 40 percent) delivered a hefty real rate of return given inflation of 22 percent in 2012 and 16 percent in 2013. Rouble deposits were growing throughout the period. But someone had to pay those rates.
Figure 3. Short-run deposit and loan rates for firms and individuals
Source: The National Bank of the Republic of Belarus.
High real rates became a burden for firms and households. The commercial banks had to stop many of their long-term individual lending programs (mainly those financing housing purchases). Instead, the banks put their efforts into the development and promotion of short-term consumer credit, which was virtually non-existent just a couple of years before. Many firms switched to cheaper loans in U.S. dollar, but the National bank quickly shut down these practices by introducing restrictions on foreign currency loans. Credit growth slowed down, and did not decline only due to the government-sponsored lending programs and a boom in consumer credit.
High loan rates together with the growing wages and low sales suffocated the firms. Average profitability across the country is declining since summer 2012, reaching the record low profit margin and negative aggregate net profits in December 2013 (see Figure 4). The lack of liquidity lead to the crisis of payments: accounts receivable and accounts payable on the 1st of February 2014 were 24.7 and 31.6 percent higher than a year before.
Figure 4. Average profit margin in Belarus, 2012-2014
Source: The National Statistical Committee of the Republic of Belarus
Today Belarus experiences high pressure for devaluation. The international currency reserves are depleted; the current account balance is in the red for a long time. The exporting enterprises quickly lose competitiveness due to low productivity. For the first time since 2009 GDP growth is virtually non-existent (and even negative in the first months of 2014). Some of the main trading partners – Russia, Ukraine and Kazakhstan – have already devaluated their currencies and face uncertain prospects for growth. It looks like the successful practice of fighting devaluation with liquidity squeezes at the cost of the real economy will have to end soon.
References
- Kateryna Bornukova, 2012. “Devaluation of 2011 and real incomes in Belarus (in Russian),” BEROC Policy Paper Series 9, Belarusian Economic Research and Outreach Center (BEROC).
- Dzmitry Kruk, 2012. “Inflation Expectations and Probable Trap for Macro Stabilization”, FREE policy brief, http://freepolicybriefs.org/2012/02/27/inflation-expectations-and-probable-trap-for-macro-stabilization/
- National Bank of the republic of Belarus, Statistics. http://nbrb.by/engl/
- The National Statistical Committee of the Republic of Belarus. http://belstat.gov.by/homep/en/main.html
The Application of Composite Leading Indicators on the Single Economic Space Economies
This brief is based on a CEFIR research project aimed at the short-term forecasting of socio-economic development of the member-countries of the Single Economic Space (SES), conducted for the Eurasian Economic Commission in 2013. This project focused on compiling composite leading indicators that could allow policymakers to identify phases of a business cycle and to forecast its turning points. We suggest a methodology for the selection of components of the Composite Leading Indicators (CLIs) for industrial production, and apply this methodology to predict industrial production in SES member states. Our methodology performs well for Russia and Kazakhstan, and slightly less so for Belarus.
Tajikistan Joining the Customs Union of Russia, Belarus and Kazakhstan: Pros and Cons
Authors: I.A. Densiova, A.M. Malokostov, and N.A. Turdyeva, CEFIR
In this brief we summarize the results obtained in a CEFIR research project on the economic impact of Tajikistan joining the Customs Union of Russia, Belarus and Kazakhstan conducted for the Eurasian Development Bank in 2013 (EBD, 2013). We argue that integration has to be comprehensive to be mutually beneficial: indeed, trade effects are marginal, and the highest stakes are at migration regulation in the CU member-countries and the investment opportunities in Tajikistan.
Integration Formations in the Monetary Sphere: the Possibility and the Necessity for Monetary Integration in the Post-Soviet Region
This policy brief addresses the possibility of monetary integration in the post-Soviet region. It provides a short overview of the literature devoted to the formation and development of the monetary unions, and argues that, based on this literature and real-world experiences, monetary integration can be of substantial value for the CIS states. However, such monetary union is not feasible in the near future due to weak economic integration of the national economies of the CIS countries, significant difference in their development level, and imbalances in allocation of bargaining power between the states. This policy brief suggests that a first step towards monetary integration could be an adoption of a supranational unit of account on the territory of the Customs Union between Russia, Belarus and Kazakhstan.
The modern world has observed formation of a number of economic and monetary integration communities. Their performance varies greatly: some of them are developing successfully, others, on the contrary, are stagnating. Questions concerning the possibility of economic and monetary integration in the post-Soviet space are constantly addressed both by policymakers and by academic economists. Taking into account theoretical concepts and international experience, this brief addresses the possibility and desirability of the integration of the monetary sphere of the post-Soviet region. Based on Luzgina (2013a,b), this brief proposes a form of representation of monetary integration on the early stages of its development. In this case, an early form of monetary integration may be achieved via adoption of a single supranational unit of account on the territory of (a subset of) countries; the national currencies would continue to coexist with the new supranational currency. This approach to integration would allow preserving the independence of economic policy for the involved member states. At the same time, countries would benefit from a reduction in transaction costs and increasing convergence of national economies.
Background: Theoretical Concepts and World Experience of Monetary Integration
Ideally, the monetary union should have the form of an optimum currency area (OCA), a territory of one-currency domination with high level of integration and unification in different economic spheres. Modern economic science provides two main approaches considering the possibility of constructing an optimal currency zone on the territory of several states. The first suggests that optimality should be determined on the basis of implementing a specific group of criteria by countries. Among the main criteria, freedom of goods movement, labor and capital, openness and diversification of the economy, the synchronization inflation rates as well as integration in the financial sector can be mentioned. The second approach is based on a comparison of the benefits and costs in terms of the monetary union formation of the country with the highest economic potential. In practice, when studying the effectiveness of monetary integration, a synthesized approach is used. It includes evaluating by criteria, as well as taking into account costs and benefits that a country accrues in case of entering a particular monetary group. The main benefits of a monetary union include a reduction of transaction costs, trade relations enlargement, improving the discipline in the monetary sphere, and a reduction of the rate of international reserve sufficiency for every country-member. At the same time, there are some negative aspects of deep integration, such as loss of monetary policy independence, economic imbalances in case of weak convergence of national economies, loss of (part of) seigniorage income, and a possible negative public reaction to the adoption of a single currency.
When discussing the concept of monetary integration, it is important to understand the distinction between a monetary union and an optimum currency area. A monetary union is one of the most developed forms of a currency area, which implies a rigid anchor of national currencies to each other with a possible further transformation into the currency of the leading country, or to a single supranational currency (as in the case of the European Union). In this case, a monetary union can be formed of asymmetrical economies. Instead, the optimum currency area requires mandatory implementation of the main convergence criteria, and thereby, more symmetry/alignment among the members. Thus, a monetary union does not necessarily have to be an optimum currency area, while the optimum currency area has every opportunity to be transformed into a full-fledged monetary union [1].
Historically, there have been several examples of monetary union formations. The Italian monetary union (1862-1905), which was formed through the merger of disparate Italian lands, is among them. We can also identify the Scandinavian Monetary Union, which united Norway, Denmark and Sweden (1875-1917). The Austro-Hungarian monetary union existed in the period from 1867 to 1914. Currently, we observe formations of monetary unions in Africa, Latin America and the Arab states.
Despite the implementation of a number of integration projects within the various groups of countries over the past century, only the European states were able to achieve the highest form of monetary integration. It took them more than 50 years to do this, and the integration processes in the economic and monetary fields are continuing with new Member States joining the European Union. However, despite the detailed development plans for the implementation of a monetary union, the Eurozone countries face a number of difficulties and obstacles on the path of economic development. European monetary integration brings not only benefits, but also some costs. For example, the loss of independence of monetary policy creates obstacles in regulations of economic processes.
This discussion suggests that an assessment of the potential formation of a monetary union – that is, of desirability, feasibility and level of monetary integration within a particular group of countries – should be based on relating theoretical concepts and features of the countries in question, as well as a in-depth research of the experience of other currency unions.
Integration Processes in the Post-Soviet Space
At the territory of the former Soviet Union, integration projects have been implemented for more than 20 years. After the collapse of the Soviet Union, such integration formations as the Commonwealth of Independent States and the Eurasian Economic Community were created. Belarus, Kazakhstan and Russia have built a Customs Union (CU) and a Common Economic Space (CES). There is also a possibility of making a transition to the highest form of integration – a monetary union. However, this raises a number of questions: which CIS countries should join a monetary union, when should this be done, and what is the optimal form of monetary union for integrating countries.
Luzgina (2013b) shows that, within the framework of the CIS countries, that there are significant differences in many of the macroeconomic indicators. Countries differ in terms of GDP and the growth rates of investment and prices. For example, Belarus has the highest inflation in the post-Soviet region. The source of growth also differs: for example, a number of countries, such as Azerbaijan, Russia and Kazakhstan, owe a significant part of their economic growth to the availability of natural resources, but this is not universally true within the CIS. Dynamics of population income is also significantly different among the countries. Here, Russia occupies the leading position with its average wage at the beginning of 2012 reaching 780 USD. At the same time, in Tajikistan, the average wage amounts to only 110 USD.
Another concern is that the formation of an economic and monetary union implies free movement of labor and capital. However, at this stage of development, it can lead to some negative consequences. Free movement of labor could involve a massive flow of labor from depressed areas to regions where incomes are much higher. This may create pressure on health and social services in the latter regions. In turn, free movement of capital may cause speculative attacks on the financial markets. At the same time, the CIS countries, except Russia, Kazakhstan and Ukraine, do not have large gold reserves. Therefore, the free movement of capital flows without additional support may cause a crisis within the national financial systems. Out of all the gold reserves of the CIS countries, more than 85% of the total volume is owned by Russia. In the case of an abolition of restrictions on capital flows, countries that are exposed to speculative attacks are likely to ask Russia for help. Such a situation would require Russia to use its own financial resources, which would create an additional pressure on its international reserves.
Table 1. International reserves in the CIS countries, (million US dollars)|
Country |
2008 |
2010 |
2012 |
|
Azerbaijan |
6467,2 |
6409,1 |
11277,3 |
|
Armenia |
1406,8 |
1865,8 |
1799,4 |
|
Belarus |
3063,2 |
5025,4 |
8095 |
|
Kazakhstan |
19883,1 |
28264,7 |
28299,4 |
|
Kirgizstan |
1225,1 |
1720,4 |
2066,7 |
|
Moldova |
1672,4 |
1717,7 |
2515 |
|
Russia |
426278,8 |
479222,3 |
537816,4 |
|
Tajikistan |
163,5 |
403,1 |
630,7 |
|
Ukraine |
31543,3 |
34571,3 |
24552,8 |
Russia is leading among the CIS countries in terms of population and territory, with other countries lagging substantially behind. For example, Belarus owns less than 1% of the total territory of the CIS countries and less than 4% of the population.
Relying on the above quantitative indicators it is natural to expect that in case of a formation of a monetary union with a single emission center, the distribution of votes in the decision-making of the development and implementation of monetary policy is likely to be unequal. The leading role would likely belong to Russia, which has the largest economic potential. However, other countries in this case may be in a less advantageous position as Russia’s decisions may lead to undesirable consequences for the economies of other countries, given the lack of a sufficient degree of synchronization of national economic systems.
Thus, a weak degree of economic integration of the national economies of the CIS countries, different levels of development, as well as the superiority of the economic potential of Russia over the other states gives reason to argue for a non-feasibility of monetary integration within the CIS countries in the short term.
On the other hand, it may be reasonable to consider the possibility of integration in the monetary sphere on the basis of the most economically integrated countries, namely Russia, Belarus and Kazakhstan. These countries have created a Customs Union and are implementing a project of forming a Common Economic Space. There are plans of creating the Eurasian Economic Union. In addition, based on the experience of European countries, it might be easier to start the integration within a limited number of participants, which satisfy the required convergence criteria. Later, more countries may enter the monetary union.
Prospects for Monetary Integration of Belarus, Kazakhstan and Russia
Taking into account the experience of the European Union, we note the need for close trade and technological relations, as well as a market type of economy, and unification of the legislation in the economic sphere. Some of these elements of monetary integration are observed within the CU. After the collapse of the Soviet Union, economies of the former Soviet states switched to paths of market reforms. In addition, the CU countries have rather close trade relations; they have restored the old and created new means of communication. At the same time, there is a weak degree of diversification of exports and imports. A large part of export and import are represented by raw materials.
The second important point of the monetary integration is the comparability by size of the emerging economies. In the framework of the Customs Union, Russia is the only leader. Harmonization of relations between the alliance partners would be easier in the case of smaller countries coordinating their efforts, which would allow them to defend their interests along with the large member-states.
Finally, obligatory condition of monetary integration is the fulfillment of convergence indicators (certain values of macroeconomic indicators) by all association members. In Luzgina (2013b), we compare a range of such indicators, as based on the experience of the European Union. We use indicators such as the inflation rate, public debt, budget deficit, and the dynamics of exchange rates for comparison. The study reveals that the main differences lie in the monetary indicators, namely the rate of inflation and exchange rate. In addition, there are certain differences in the structure of the economy and the share of private ownership in GDP.
Figure 1. Exchange Rate (average for a year), as % of the previous year
Figure 2. Industrial Producer Price Index (average for a year), as % of the previous year
Source: Data of the Interstate Statistical Committee of the Commonwealth of the Independent State
The persistence of significant differences in the values of convergence indicators at the macro level makes a full-fledged monetary union highly unlikely in the short term, even within the framework of the three most economically integrated states. At the same time, it is appropriate to consider the option of monetary integration in its mild form, i.e. in the form of monetary integration on the basis of a single unit of account. A single unit of account is usually calculated on the basis of the basket of national currencies, and is mostly used for international payments and credits.
The attractiveness of monetary integration in the form of monetary union on the basis of a supranational unit of account is motivated; first of all, by the preservation of the economic sovereignty of all countries. Circulation of the unit of account would take place in parallel with national currencies. Member states would retain the possibility of implementation of independent monetary and fiscal policies. Furthermore, the unit of account may fulfill the role of a training tool. The supranational payment unit can be used on the national level. Using this unit of account, legal entities may carry out transactions and individuals may hold their savings. It can also be actively implemented in the inter-state calculations. A part of gold and forex reserves of member countries can be held in the supranational unit of account. Inter-state loans can be issued in this unit as well. This type of monetary union would reveal the feasibility of further deepening of integration in the monetary sphere and determine the timing of the formation of a full-fledged monetary union. In case of serious problems, the dismantling of the currency union will not cause major adverse changes in national economies, unlike in the case of a collapse of a monetary union with a single currency. In addition, the operation of a single unit of account allows for the anticipation of potential problems associated with the functioning of economies under a single monetary system, and a solution before the introduction of a supranational currency.
Last, but not least, this form of integration seems to be a relatively feasible option as the process of convergence on the territory of the CU countries in the monetary sphere has already begun. There is an increased use of national currencies in bilateral trade, harmonization of national legislation is taking place in the monetary sphere, and international agreements in the monetary sphere are ratified. These activities are gradually building a base for the realization of the monetary integration project of the union countries.
Conclusions
Economic and monetary integration allows the countries to get the maximum benefit from mutual cooperation. However, the deepening of the integration process is usually accompanied by certain difficulties. Convergence of economic systems requires transformation of economic institutions, changes in legislation and principles of management, all of which are costly to achieve. The better the preliminary harmonization is performed, the easier the process of adaptation of national economies to function within a particular economic and monetary union will be.
The post-Soviet countries are implementing several projects of economic integration. However, their economies have major differences according to a number of macroeconomic indicators. The greatest degree of convergence is reached only by three CIS states, namely Belarus, Russia and Kazakhstan. Rather high level of economic integration, as well as a continuation of the process of unification and harmonization of national economies allows us to study the feasibility of realizing the lightweight form of a monetary integration based on a single supranational unit of account on the territories of Belarus, Kazakhstan and Russia.
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References
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[1] Chapligin V.G. Theory and methodology of currency alliance formation/ V.G. Chapligin – St. Petersburg.: Publishing house SPbGUAF, 2003.- 193 p.
Decomposition of Economic Growth in Belarus
During the last decade Belarus was one of the leaders of growth in the CEE region. Kruk and Bornukova (2013) have analyzed the sources of growth and found that capital accumulation was the main contributor to growth. The contribution of total factor productivity (TFP) to growth was, on the contrary, quite modest. On the sectoral level, capital accumulation was not always accompanied by the increases in TFP. Hence, the new growth policy, modernization, with the bottom line “more capital” may not be the best option for enhancing productivity-based growth. The competitive advantages of Belarus lie in the resource-based and non-tradable sectors, while the majority of the manufacturing sectors are lagging behind in productivity. Belarus has symptoms of a Dutch disease without the trade surplus, and the devaluation of 2011 did not cure it.
During 2003-2012, Belarus had an average growth rate of 7.1%, and during the ‘fat years’, i.e. 2003-2008, it was even higher – 9.5%. Intuitively, this prominent growth is questionable, as it was achieved in the context of dominating state ownership, centralized allocation of resources, government’s control at the factor and goods markets, as well as poor infrastructural reforms (for instance, according to the indices of the EBRD). The Belarusian case challenges the mainstream paradigm of growth in transitional countries, which assumes that the progress in market reforms is the key factor for high and sustainable growth.
The simplest and most widespread explanation of the Belarusian phenomena is based on ‘non-standard’ gains in productivity. This approach assumes that productivity is the engine of growth (World Bank (2012); Demidenko and Kuznetsov (2012)). To a large extent, these gains in productivity are seen as “artificial”, resulting from Russian injections into the Belarusian economy: cheap gas, specific schemes of oil trade, and preferences in access to the Russian markets (Kruk (2010)). However, under this approach, decomposing the growth in productivity by ‘natural’ and ‘artificial’ parts is hardly possible, as the impact of these factors is already hidden in the available data.
The IMF (2010) gave a substantially different explanation of Belarusian growth. They claimed that the average growth of 8.3% over the period of 2001-2008 was mainly capital-based with a contribution of 4.8 percentage points, while the contribution of productivity growth was only 3.0 percentage points (the rest of growth was explained by labor and cyclical factors).
The main reason behind the substantial difference in the explanation of growth factors is the statistical data on capital used during the growth accounting exercise. Belarusian official statistics reports the data on capital stock based on a direct survey of capital assets according to both gross and net (wealth) capital concept. However, the growth rates of capital are reported only for the gross stock of capital. These growth rates are questionable as they demonstrate ‘unnatural stability’ – they fluctuate around 2% for the last 20 years, despite the fact that investments during this period has displayed huge and volatile growth. Statistical offices in other CIS countries have reported similar dynamics of the capital stock. Voskoboynikov (2012), and Bessonov and Voskoboynikov (2008) show that this trend is a consequence of the statistical methodology used in Russia (which the Belarusian methodology is very similar to). In particular, the trend is driven by biased capital investments deflators (which are overestimated) from the periods of high inflation (1990-s and early 2000-s).
If official data is used as the capital input for the growth accounting exercise, the contribution of TFP to growth will be overestimated. Hence, in the studies of the World Bank (2012) and Demidenko and Kuznetsov (2012), the leading role of TFP may be due to the use of the official data on the capital stock.
Motivated by this concern, we use two different methods to evaluate the value of capital inputs (see Kruk and Bornukova (2013) for more details). The first alternative to using the data from direct capital survey is to exploit a perpetual inventory method (PIM): the historical assessment of initial capital stock is further adjusted by the flow of investments and depreciation. However, if there is a bias in deflators within the sample, the series will also be distorted. This problem may be eliminated if the initial stock will be selected at the moment when there is no bias in investment deflator, in the period of moderate inflation. We call this approach PIM-backward.
The second approach to constructing capital series exploits the concept of productive capital and the data on the flow of capital. It assumes that the productive capacity of a capital good depends on its age. The productive stock of a capital good (i.e. the gross stock adjusted by the age-efficiency profile) generates a flow – capital services. The latter is the productive stock adjusted by the user cost of the individual capital good. For the total output of an industry (or economy) one should aggregate the inputs by different capital goods, which in contrast to the net (wealth) concept depends not only on the value of capital goods, but also on their user costs. This approach has solid theoretical foundations, which is the reason it is prioritized in productivity studies.
From the view of available data in the case of Belarus, this approach has a number of powerful advantages. First, we use individual deflators for individual capital goods, which are expected to be less biased than total deflators for the industry. Second, we use heterogeneous depreciation rates for each capital good in each industry based on actual data of ‘accounting depreciation’, while we would have to use homogenous assumptions for each industry in the case of net (wealth) concept. Third, we can exclude residential housing from our measure of capital input.
There are, however, also disadvantages. First, data of newly employed capital goods (in direct surveys of capital assets) and data on capital investments differ rather substantially. Traditionally, the data on capital investments is treated as more reliable, but based on the direct surveys of capital assets we have to use the series of newly employed capital goods as a flow variable when running PIM. Second, we use exogenous real interest rate for computing unit user costs, but the results are very sensitive to our assumptions on the real interest rates across industries. Third, the necessity to exclude residential housing from the data (because of ‘mixed historical prices’) may be interpreted as a loss of information. Given the strengths and weaknesses of the approach, we prioritize it on the industrial level, but prefer the PIM-backward approach for an aggregate economy analysis.
Based on the PIM-backward measure for the total economy (see Figure 1), we may argue that the contribution of TFP to growth was more modest during the last decade than what was reported in the majority of previous studies on Belarusian growth. This finding is of fundamental importance for the growth agenda: only productivity-based growth may be treated as sustainable, since capital growth will slow down as the capital approaches its stationary value. We argue that only the policy directed to promotion of productivity is vital for growth prospects.
Figure 1. Contribution of Production Factors and TFP to the Growth of Gross Value Added (PIM-Backward Approach) 
The dynamics of productivity divided according to industries (see Table 1) display that the leaders in productivity growth are either industries that produce non-tradable goods (communications, finance, construction) or those that have a chance of ‘artificial productivity gains’ (chemical and petrochemical manufacturing, and fuel).
Table 1. Initial Level and Growth Rates of Productivity in Major Industries 
However, the theory suggests that the leaders in productivity growth should be the industries producing tradable goods. . This contradiction may be interpreted in two ways. First, one may argue that a more competitive environment and larger share of private ownership (which are seen in the financial industry, trade and catering) are the core reasons for high productivity level and growth rates in ‘domestic industries’. Second, an attractive position of ‘domestic industries’ may reflect a high level of domestic prices rather than ‘natural’ productivity. The base year for our computations is 2009, in which both the real effective exchange rate of the national currency and income were relatively high. The devaluation of 2011 fixed the problem only temporarily, since the inflation in 2011-2013 quickly eroded the benefits of the devaluation. Therefore, the indicators, in terms of 2009 prices, may capture the changes in nominal values as the main component of the productivity gains, while from a longer-term perspective it would be seen as mainly price movements without substantial progress in productivity. In our view, the second explanation is the main reason for the non-standard disposition of productivity levels and growth rates among industries.
If that is the case, the bigger picture looks as follows. Industries producing tradable goods suffer from the lack of progress in productivity, i.e. lose their competitive advantage; enhancements in total productivity are mainly due to industries with ‘artificial productivity gains’. The latter allows domestic prices to grow, making a productivity illusion of domestic industries. All together these symptoms are quite similar to the Dutch disease.
One more finding from the productivity analysis at the national level is the lack of productivity gains from reallocation of resources from less productive industries to more productive ones. A scatter-plot between capital accumulation growth rates and TFP growth rates (see Figure 2) demonstrates no clear relationship between them.
Figure 2. Growth Rates of Capital Input vs. TFP Growth Rates in Manufacturing Branches, 2006-2010. 
Notes: The sizes of the circles correspond to industry shares in value added.
However, if there was a free allocation of resources, more productive industries would accumulate more capital. Moreover, the same indicators under the PIM-backward approach demonstrate clear negative relationship. A ‘soft’ interpretation of this phenomenon assumes that the lack of reallocation of capital restrains the development of total productivity. A ‘tighter’ interpretation assumes that at least in some industries there is a trade-off between capital accumulation and productivity gains. For instance, in Kruk and Haiduk (2013) it is shown that spurring capital accumulation through the practice of directed lending leads to losses in efficiency through a number of channels. Hence, the simplest way to increase aggregate productivity is to depart from the centralized allocation of capital and unblock capital inflows to more productive industries and vice versa.
Figure 3 documents the mobility of labor markets across the manufacturing industries in Belarus. While one can expect that labor flow into more productive industries, it is not completely true for the Belarusian manufacturing sector.
Figure 3: Labor growth and TFP growth in industries of Belarusian manufacturing, (capital services approach). 
Notes: The sizes of the circles correspond to industry shares in value added.
Two distinct trends emerge in the labor market. On the one hand, some industries exhibit textbook behavior: increases in TFP are associated with increases in the number of people employed. The best example here is the fuel industry, which experiences TFP increases due to preferential oil prices. However, there are industries that gain TFP and lose labor at the same time. The chemical industry, machinery manufacturing and woodworking are examples of this pattern. These industries have experienced rapid capital accumulation, which, coupled with high gains in TFP, should have contributed to the increases in labor productivity. Surprisingly, though, these industries did not attract more labor. A possible explanation for this counterintuitive pattern is the excessive employment at the beginning of the period in question. In this case, a decrease in the number of people employed may have contributed to the increases of TFP.
Indeed, Figure 4 confirms our hypothesis: labor was flowing from the industries with lower labor productivity to the industries with higher labor productivity in general. Industries in which TFP increased and which were accompanied by a labor decrease, featured low labor productivity in the beginning of the period in consideration, more precisely in 2005. Only the chemical industry exhibited the unexpected behavior: it lost labor despite high initial productivity. By getting rid of excessive employment they were contributing to an increase in TFP.
Figure 4: Labor shifts into the sectors with higher labor productivity. 
Notes: The sizes of the circles correspond to industry shares in value added.
How is Belarus doing relative to other countries? We have compared Belarusian TFP to the TFP of the leader of transition, the Czech Republic, and to the regional leader, Sweden. The Czech Republic is more developed than Belarus (in 2010 Czech GDP per capita (PPP-corrected) was 1.73 times higher than in Belarus), and, theoretically, it should be much more difficult and costly for it to continue approaching the technological frontier. However, our findings suggest that the Czech Republic is catching up with Sweden in terms of TFP, and doing it faster than Belarus (see Figure 5).
Figure 5: TFP of Belarus and the Czech Republic relative to TFP of Sweden, (PIM-backward approach).
Over the last 10 years, Belarus has closed only 5 percentage points of the gap with Sweden. The Czech Republic, where the contribution of TFP to growth was more substantial, has managed to close 8 percentage points of the gap.
In absolute numbers (in ‘international’ dollars of 2010), aggregate TFP in Belarus in 2010 was 2.92 versus 4.66 in the Czech Republic and 9.38 in Sweden (according to the PIM-backwards method). However, the aggregate picture does not reflect the situation in the sectors of the economy and industries of manufacturing.
Table 2: Comparative advantage of Belarusian industries: winners and losers (capital services approach) 
Table 2 documents the comparative advantages and disadvantages of the Belarusian economy in 2010 according to the capital services approach. Both the capital services approach and the PIM-backwards approach produce the same winners and losers list with the only difference being that the PIM-backwards method has the construction sector among winners. It is not surprising to see resource-based industries among the winners (mining and quarrying mainly reflects the extraction of potash, while the chemical industry benefits both from potash and from preferential process for Russian oil). Food manufacturing is among the winners mostly due to the price scissors in agriculture: food producers buy their inputs at very low prices. The non-tradable sectors are among winners, and the majority of the manufacturing sectors are among the losers. Again, this is similar to the symptoms of the Dutch disease. It is ironic that Belarus has symptoms of a Dutch disease without the trade surplus. Instead, the desire of the government to inflate wages combined with the preferences for Russia led to the development of the same diagnosis.
Belarusian economic growth is less TFP-led than is commonly believed. While the labor market proves to be relatively successful in its reallocation of employees and its contribution to aggregate increases in efficiency, the capital market is distorted by government interventions. Capital accumulation does not necessarily lead to increases in TFP, and the new modernization policy with the bottom line of “more capital” may not be the best option for enhancing growth. Our conclusion is that Belarus should find new sources for TFP-led growth.
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References
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