Tag: crises
Will Entrepreneurs Be Able to Reactivate the Belarusian Economy?
Based on data from two recent waves of the Global Entrepreneurship Monitor (GEM), we demonstrate that the Coronacrisis gave birth to many new necessity-driven entrepreneurs who will likely alleviate the current challenges of unemployment and income losses in the short- and medium-term. The readiness and willingness of Belarusians to become entrepreneurs in a harsh business environment could be considered a good sign for the economy and society. However, such businesses may fail to deliver a positive long-term impact on the economy, while the detrimental consequences of the war in Ukraine undermine the potential and sustainability of growth-driving businesses with international and innovative orientation.
Crises and Entrepreneurial Activity in Belarus
During the past 15 years, the Belarusian economy and, in particular, Belarusian entrepreneurs have experienced several crises of different scopes, nature, and origins (in 2009, 2011, 2015-2016, 2020). During these periods, Belarusian private enterprises responded faster to both negative and positive trends in the economy compared to state-owned firms. This has for instance manifested itself in private sector firms being swifter in decreasing or increasing the size of the work force in recessions or recoveries (IMF, 2019). Stagnating demand also led to deteriorating business opportunities that in turn incited a decrease in the number of both nascent and matured entrepreneurs. In line with Cowling et al. (2015), these circumstances suggest the presence of a procyclical trend in the entrepreneurship development in the country. In the same vein, the period of economic growth brought new entrepreneurs to the market to pursue business opportunities.
However, results from two waves of the Global Entrepreneurship Monitor (GEM), conducted in May-June 2019 and June-July 2021 demonstrate that notwithstanding the Coronacrisis, political unrest, and worsening business climate, the Belarusian economy experienced an influx of entrepreneurs (not necessarily officially registered as a firm or sole proprietor). These findings contribute to the discussion on the motivation, potential, and effectiveness of this wave of entrepreneurs for the economy.
Belarusian Context for Entrepreneurs in 2019-2021
After the 2015-2016 economic crisis, 2019 represented the third consecutive year of moderate economic growth in Belarus. The gradual liberalization of the economic activity, as well as the give-and-take relationship with Eastern-European neighbors and the West, fueled the enthusiasm of Belarusian entrepreneurs, especially in the medium- and high-tech sectors. The year 2019 was supposed to be highly conducive to entrepreneurship. These conditions were captured by the GEM Belarus 2019/2020 (2020).
However, as in most other countries, small businesses were more affected by the pandemic than large enterprises in Belarus. Moreover, many of them were left to fend for themselves in dealing with COVID-related challenges, as only a small portion of enterprises benefitted from state support measures (Marozau et al., 2021). The recovery period was abrupted by the political crisis that broke out after the presidential elections in August 2020. This political unrest resulted in increased pressure on the private sector and NGOs as well as tensions with EU countries and Ukraine. Many famous entrepreneurs were forced to immigrate and re-locate their businesses. Consequently, GEM Belarus 2021/2022 (2022) captured a new reality of the Belarusian entrepreneurial ecosystem.
How the Entrepreneurship Indicators Changed
According to the GEM 2021/22 survey, Belarus experienced an increase in the percentage of the adult population (18-64 years old) involved in all stages of the entrepreneurial process (Figure 1). Nevertheless, the level of the total early-stage entrepreneurial activity (which includes nascent entrepreneurs – up to 3 months old businesses and baby businesses – 4–42 months old) is still lower than one might predict based on the country’s level of economic development (Figure 2).
These positive changes are paradoxical because, according to the survey, Belarusians were not enthusiastic about the opportunities to start a business – respondents reported a high level of fear of business failure, and that the entrepreneurial framework conditions had deteriorated.
Figure 1. Percentage of the adult population involved in the entrepreneurial process
Source: GEM Belarus 2019/2020 & 2021/2022
Figure 2. Early-stage entrepreneurship rates and GDP per capita.
Source: GEM 2021/22 Global Report (Hill et al., 2022)
Moreover, the GEM survey reveals that the profile of early-stage entrepreneurs changed between 2019 and 2021 – the educational level of early-stage entrepreneurs increased, while their income level followed a negative trend. A plausible explanation for these changes could be that a relatively well-educated part of the population, employed in the sectors that were harshly hit by the pandemic (HoReCa, Sport & Leisure, etc), decided to start a business out of necessity due to wage shrinkages or layoffs. Therefore, neither a low level of opportunity perception nor an aggravating business climate kept them from starting an enterprise.
Support for this argument can be found if we examine the reasons why Belarusians started businesses in 2021 (Figure 3). The shares of both nascent entrepreneurs and owners of baby businesses that report ‘earning a living because jobs are scarce’ increased by about 20 percentage points. This phenomenon, when a depressive market reduces employment opportunities and forces individuals into becoming entrepreneurs, is regarded as necessity-driven entrepreneurship (Gonzalez-Peña et al., 2018).
Figure 3. Reasons to start a business
Source: GEM Belarus 2019/2020 & 2021/2022. Note: Respondents could strongly agree, somewhat agree, neither agree nor disagree, somewhat disagree, or strongly disagree with statements reflecting the reasons they were trying to start a business. Figure 3 provides the cumulative share of those who strongly agree and somewhat agree.
Keeping in mind that the unit of analysis in the GEM is on the individual and not the enterprise level, we can suggest a cautious hypothesis that the trend in entrepreneurship development in Belarus has changed from being pro-cyclical to countercyclical in the short term.
It is already obvious that the negative impact of the pandemic and political unrest on Belarusian businesses cannot be compared with the devastating effects of the Russian invasion of Ukraine. In this context, the countercyclical trend or, in other words, the readiness and willingness of Belarusians to become entrepreneurs against all odds, could be considered a good sign for the economy and society. However, such necessity-driven entrepreneurs are more focused on achieving a sufficient standard of living than on expansion and innovation. It is known that the growth and innovative orientations of businesses (product and process innovation, activity in technologically intensive sectors) are important predictors of technological change and total factor productivity (Erken et al, 2018). From this perspective, according to the GEM 2021/2022, Belarus is still doing relatively well in terms of impactful early-stage entrepreneurship (international and innovative orientation, growth expectations, and technological intensity). However, businesses with these characteristics are usually led by opportunity-driven entrepreneurs and are more sensitive to changes in the external environment. Therefore, the detrimental consequences of the Russian aggression against Ukraine (difficulties with payments and logistics, export/import restrictions, and tarnished reputation of Belarus) have already undermined the potential and sustainability of most such businesses and jeopardized the socioeconomic development of the country.
So, the answer to the question of whether Belarusian entrepreneurs will be able to reactivate the economy is rather ‘no’. Based on GEM 2021/2022 data, we argue that the augmented entrepreneurial activity rate will plausibly alleviate the problems of unemployment and income losses in the short- and medium-term, but may not have a strong and long-lasting effect on the economy as a whole.
Conclusion
The 2021 wave of the GEM survey has documented an increase in the share of the population involved in the different stages of the entrepreneurial process in Belarus. This, however, appears to be the outcome of the pandemic-related economic crisis, which manifests itself in income losses and layoffs. As a result, the crisis produced new necessity-driven entrepreneurs with vague prospects.
In this regard, policymakers should realize that stimulating self-employment and small-scale entrepreneurship may indeed be a temporary solution to unemployment issues. If this is the aim, the toolkit to support such businesses is well elaborated and accessible to the government (it includes educational & consulting services, easy access to finance, etc.).
As for impactful entrepreneurship, hardly anything can be done by the current government to retain innovative and international business in Belarus against the backdrop of the consequences and global reactions to the war in Ukraine.
References
- Cowling, M., Liu, W., Ledger, A., & Zhang, N. (2015). “What really happens to small and medium sized enterprises in a global economic recession? UK evidence on sales and job dynamics”, International Small Business Journal, 33(5), 488-513.
- Erken, H., Donselaar, P., & Thurik, R. (2018). “Total factor productivity and the role of entrepreneurship”. The Journal of Technology Transfer, 43(6), 1493-1521.
- GEM Belarus 2019/2020, (2020). “Global Entrepreneurship Monitor Report GEM Belarus 2019/2020”.
- GEM Belarus 2021/2022. (2022). “Global Entrepreneurship Monitor Report GEM Belarus 2021/2022”.
- González-Pernía, J. L., Guerrero, M., Jung, A., & Pena-Legazkue, I. (2018). “Economic recession shake-out and entrepreneurship: Evidence from Spain”. BRQ Business Research Quarterly, 21(3), 153-167
- Hill, S., Ionescu-Somers, A., Coduras, A., Guerrero, M., Roomi, M. A., Bosma, N., … & Shay, J. (2022). “Global Entrepreneurship Monitor 2021/2022 Global Report: Opportunity Amid Disruption”.
- IMF. (2019). “Reassessing the Role of State-Owned Enterprises in Central, Eastern, and Southeastern Europe”, 19/11.
- Marozau, R., Akulava, M., & Panasevich, V. (2021). “Did the Government Help Belarusian SMEs to Survive in 2020?” FREE Network Policy Brief Series.
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.
Political Responsibility for Economic Crises
This brief summarizes the results of research on the political costs of large-scale economic crises. In a large historic sample of countries, we study the impact of different types of crises, such as sovereign and domestic defaults, banking crises and economic recessions, on political turnover of top politicians: heads of the state and central bank governors. According to the findings, only default on domestic debt increases the probability of politicians’ turnover but not the default on external debt. As argued, this is due to the fact that the latter is not directly felt by the voters. In addition, we find that although currency crises increase chances of head of central bank turnover, it does not affect tenures of heads of state. Presumably, this is the case since currency crises are in the eyes of the public the responsibility of CB governors. These findings are relevant for both developed and transition economies, but are especially important for the latter as political turmoil and economic recessions are more prevalent in developing nations.
Overview and Key Findings
Large-scale economic crises are associated not only with the economic downturns, but also with political turnover. When the national economy is in a critical state, a default declaration often turns the economy back to growth as it is typically viewed as an act of acknowledging a problem and showing readiness for changes. However, politicians responsible for the economy and leaders of the states are often reluctant to declare default and try to postpone it, which worsens the situation. One of the reasons behind such unwillingness to act is a fear of a political turnover following the open acknowledgement of a problem.
This brief summarizes the findings Lvovskiy and Shakhnov (2018). We investigate the statistical evidence of political costs related to different types of economic crises.
We find that the effects of a crisis depend on the crisis type and on whether it was in the area of responsibility of a given politician. For example, external sovereign defaults have no effect on political turnover, which we interpret as external sovereign default having a small impact on the general public. On the contrary, domestic sovereign defaults have a large impact on the country population and often lead to the replacement of the top executive. In turn, banking crises are followed by the downfall of the government at the level of chief executive as well as the governor of the central bank.
While there is large literature on career concerns of politicians and political turnover, the majority of papers either focus on the regular changes through elections in democratic regimes (Treisman, 2015) or study a particular non-democratic country, like China (Li and Zhou, 2005). However, throughout history, crises have often happened in transition, non-democratic or not fully democratic countries. Furthermore, even in democratic countries many changes of government have been irregular. Since a delay in default declaration usually harms economies it is important to understand the mechanisms behind it in different institutional settings. Our paper contributes to this understanding by analyzing the impact of economic crises on political survival in a wide set of countries and regimes. Better understanding of the political costs that the top executives face while making such decisions is crucial for the prediction of these decisions as well as for international default negotiations and consultations.
Below we describe our finding in some more detail.
Statistical Analysis and Results
Our analysis consists of two main parts. We start with the political turnover for heads of state, who are in charge of the performance of the whole economy, which we measure by the GDP growth. Then, we look at central bank (CB) governors, who are in charge of the monetary policy, price stability, stability of the financial sector and banking supervision.
Table 1. Head of state changes
Table 1 presents the estimated linear probability regression models for the head of state turnover. As expected, elections have a strong impact on the probability of the turnover of the head of state. Further, as Column 1 in Table 1 shows default on external debt has no significant impact on the head of state tenure while default on domestic debt increases the yearly chances of being displaced by 34 %. This supports the idea that voters care more about their own savings than about the general situation with the state’s budget. When we look at the effect of past crises (the predictor variable in this case is whether a crisis took place last year), Column 2 coefficients for both external and domestic defaults appear to no longer be statistically significant. Instead, banking crises become significant. This situation could be due to the fact that one of the common consequences of domestic defaults is an ongoing distortion of savings which often leads to deposit runoffs, so the effect of the previous year’s domestic default now acts through a banking crisis.
Table 2. Central bank governor changes
Table 2 presents similar results but this time the left hand side variable is CB governor turnover. Similarly to the case with the head of state turnover, only default on domestic debt has a significant effect on the CB’s governor tenure and not the one on external debt. The main differences with Table 1 are that elections do not statistically predict turnover of CB heads while currency crises do. The former result is expected since in most countries there are no direct elections of central bank governors and central banks often have some degree of independence from the government. The latter result, that currency crises have a significant impact on CB governors’ tenures, implies that since currency control is one of the roles of a CB, its head is held accountable for currency crises and not the head of a state.
Conclusion
We examine the political cost of different types of economic crises, and find non-uniform effects of different types of crises on the political survival of various key officials. Domestic defaults, and recent banking crises are shown to be costly both for heads of states and central bank governors, while currency crises only have an impact on the political survival of the latter.
Interestingly and importantly, we find no evidence of the impact of (external) sovereign default on political turnover of the head of state or central bank governors. In other words, contrary to Yeyati and Panizza’s (2011) suggestion, it seems that there is no immediate political cost at the top associated with (external) sovereign default. One possible explanation is that the public does not punish a politician for defaults because by defaulting, the politician makes the optimal decision. In a modern world, many developing nations experience rapid growth of their sovereign debt. The presented evidence brings partial optimism that even if economic mistakes have already been made, top politicians would understand that acknowledging a problem and making steps toward its solution may not always be as costly for them as has previously been thought.
References
- Li, Hongbin; Li-An Zhou, 2005. “Political turnover and economic performance: the incentive role of personnel control in China,” Journal of Public Economics, 89 (9), 1743 – 1762.
- Lvovskiy, Lev; Shakhnov, Kirill, “Political Responsibility for Different Crises”, BEROC working paper #50, 2018
- Treisman, Daniel “Income, Democracy, and Leader Turnover”, American Journal of Political Science, 2015, 59 (4), 927–942.
- Yeyati, Eduardo Levy and Ugo Panizza, “The elusive costs of sovereign defaults,” Journal of Development Economics, January 2011, 94 (1), 95–105.