Transcript Belarus: Window of Opportunity to Enhance Competitiveness and

Belarus: Window of
Opportunity to Enhance
Competitiveness and
Sustain Economic Growth
A Country Economic Memorandum for the Republic of Belarus
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Major questions
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Whether Growth? If Yes,
What are the drivers? How they have
being changing over time?
Is it sustainable? What are the major
risks?
What could be done about them
under the existing political
constrains?
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Outline
1.
2.
3.
4.
Main Message
Analysis of Growth Patterns
Main Policy Weaknesses and Risks
Policy Recommendations
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Main Message
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Recent performance was strong and based
on a certain set of competitive advantages
The effect of these advantages has been
eroded
Earlier growth drivers weakened, while no
replacement has emerged
We expect a slowdown in growth if there is
no policy reform
Moreover, the economy is highly
vulnerable to external shocks
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GDP Growth and Poverty
Outcomes are impressive
Steady Growth Has Driven Poverty Reduction
(GDP growth index and poverty headcount rates)
60.
220
50
46.7
Poverty headcount ratio
40
177.3 180
41.9
159.2
38.6
32.1
30
33
124.1
135.8
142.2
128.4
28.9
114.5
149.3
140
GDP growth
30.5
27.1
102.8
100
GDP growth Index, 1995=100
Poverty headcount ratio, %
20
17.8
60
10.
20
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
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Two growth phases
Phase I: 1996-2000
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The expansionist monetary policy that helped to keep the real value of the
Belarusian rubel low
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The policy of multiple exchange rates that was used as an instrument of
hidden targeted support for some exporters and as a tool of taxation for
others
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The strict policy of wage and price controls that helped to keep production
costs low and support cost advantages of traditional exports
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The encouragement of barter transactions with Russia, which in
combination with multiple exchange rates generated a considerable
resource transfer to Belarusian exporters
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The active political re-integration with Russia, which resulted in improved
market access, ensured preservation of preferable gas import prices, as well
as tolerance of energy arrears; it also helped to improve capacity utilization
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in oil refineries and secure a debt write-off in 1996
Cost advantage against Russia
90
80
70
60
Belarus/Russia
wage ratio
50
40
Belarus/Russia
CPI ratio
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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Two growth phases
Phase II: 2001 - onwards
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Improved macro policies: unified exchange rate, stricter
monetary policy, considerable fiscal and quasi-fiscal
adjustment, and lower inflation
Energy and utility policy that aimed at attaining full cost
recovery in tariffs and strict payment discipline
New wage and income policies that stimulated domestic
demand
Phasing out barter, which inter alia helped somewhat
accelerate export diversification out of the Russian market
Maintaining its political and administrative effort aimed at
the preservation of the Belarusian traditional niche at the
Russian market
Improved external environment (oil prices, Russia, etc.)
Much healthier growth: more investments and restructuring
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Growth Drivers
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Cost/wage advantage
Expanding share of
Russian market, gains
from re-integration
Wage/income growth
High oil prices and
strong global growth
Restructuring due to
competitive pressures
Improved capacity
utilization
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Eroding due to the
wage/tax policy
Share of exports to
Russia is too high
Limits to future growth
due to competitiveness
concerns
Cannot remain high
forever
The extent of
restructuring is limited
Insufficient investments
in new capacity
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Where will new growth be coming
from? …Unclear
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Earlier growth drivers (cost/wage
advantage vs Russia, Russian post
1998 recovery, expansion in
domestic demand, oil processing
exports to Europe) will not be able to
play the same role in the future
We do not see a big new thing to
push growth up
Slow down in growth is quite likely
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Signs of Strain
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Trends in industrial productivity and
competitiveness: growing costs, low profits,
depressed investments in manufacturing
Low dynamism of export patterns:
concentration, no new products,
dependence on Russia
Lagging enterprise restructuring: new firms
are few and weak
Agriculture: heavy subsidization
Energy: slow reforms will hamper
investments and upgrade
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Growth in ULC Indicates
Erosion in Competitiveness
Developments in unit labour costs by industry
Relative to total industry, 1997=1
1.2
Belarus
1.0
Russia
0.8
0.6
0.4
0.2
0.0
1995
1996
1997
1998
1999
2000
2001
2002
2003
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Growth is unbalanced
80
72.6
70
60
44.3
50
40
balance of
answers
24.0
30
16.6
20
10
0
Average wage
Labor
productivity
Fixed capital
investments
Gross profit
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Export Concentration: products
Belarus
0.8
0.71
0.71
0.6
0.54
0.55
0.72
0.5
0.7
HI
0.6
0.50
0.46
0.5
0.42
0.39
0.4
0.46
0.45
0.4
0.3
0.27
0.26
0.26
0.3
0.2
0.14
0.14
0.14
EDI
0.19
0.2
0.11
0.1
0.1
0.05
0.0
2001
DX_CIS
2002
DX_ROW
2003
HI_CIS
HI_ROW
0.0
Belarus
Lithuania
Ukraine
Poland
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Export Concentration: exporters
Share of 5, 10 and 20 largest exporters
in export to different markets, %
90
80.7
80
5
10
20
70
57.6
57.1
60
46.1
50
42.7
34.9
40
30
44.4
19.6
23.4
26.6
24.8
18.3
20
10
0
Total export
CIS
Russia
non-CIS
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Depressed FDI level imposes
constrains on future exports growth
Export/GDP ratio av.
1995-2002
0.8
Ireland
0.7
0.6
0.5
Slovak Republic
Oman Belarus
Thailand
0.4
R2 = 0.24
Kuwait
Sweden
0.3
0.2
Panama
0.1
Brazil
0.0
0.00
Lebanon
0.02
0.04
0.06
0.08
0.10
0.12
0.14
FDI/GDP ratio av.1995-2002
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Business Registration is too
Slow (days)
80
Days Needed for Registration
70
60
50
40
30
20
10
0
Belarus
Poland
Russia
Ukraine
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Weak Investment Performance
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Investment structure is biased
against manufacturing
The bulk of industrial firms (97%):
< than 4% of GDP in 1999-2003
Why?
- low profitability
- mostly state owned economy
- excessive government interventions
in credit allocation
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Incidence of State Support, % of GDP
12
10
8
Total flows
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Resource transfer
4
2
0
1999*
2000
2001
2002
2003
2004
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Growing Competitive Pressures
% of firms calling competition from import not
important
100%
80%
Poland
60%
Ukraine
Russia
Belarus
40%
20%
0%
1999
2002
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Slow enterprise restructuring
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Growth has a limited foundation in
improvements of economic fundamentals
(ownership, new entry, new markets, new
skills)
Private sector is weak: no difference in
performance between SOEs and private
firms
Slow and limited restructuring (unbundling,
divestiture, foreign ownership, etc.) – less
than in Russia 10 years ago
Acceleration in restructuring is a must to
sustain competitiveness. Reforms will be
necessary
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Energy sector
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Major success stories: energy efficiency, financial
discipline, tariff policy adjustment
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Significant medium-term challenges:
A. Reducing risks associated with the excessive energy dependence on
Russia
B. Strengthening the creditworthiness of sector companies
C. Maximizing benefits associated with energy transit
D. Setting a modern regulatory framework
E. Securing adequate financing for the sector
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Agriculture
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Strong growth driven by exchange rate
adjustments, a doubling of state support, and
improvements in “internal terms of trade.”
Scope of state support is unsustainable, 3-4% GDP
Food processing is chronically inefficient
Directions for reforms: (i) price liberalization and
the removal of input subsidies; (ii) more effective
targeting of support and enforcing a hard budget
constraint, (iii) more decisive farm restructuring,
and (iv) a more aggressive FDI policy in the
processing sector.
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Major Macroeconomic Risks
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Low international reserves
High dependence on a single and unstable
export market (Russia)
High concentration of the economy
Large size of the government
Vulnerabilities in the banking sector
The pension system is unsustainable
Costs of adjustment to future higher
prices of Russian energy
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Economic Policies:
not conductive to growth in competitiveness
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High cost economy: taxes, interest rates, price
controls, costs of administrative interventions
Business environment is difficult for new entry:
marginal growth from the new private sector,
depressed FDI – diminished opportunities for
productivity growth and export expansion
Expensive subsidization: undermines competition
Trade regime: high incidence of NTBs discourages
trade and will be a major barrier for global and
regional integration
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Recommendations:
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Strengthening market discipline for
traditional enterprises:
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downsize and restructure existing system of state support
advance trade liberalization to expand international competition
accelerate exit of non-viable firms
harden budget constrains (esp. in the agro-food sector)
ensure financial sustainability and efficiency of the energy sector
Encourage growth by reducing operating
costs:
- reduce tax burden and reform tax structure
- liberalize employment and wage policies
- advance price liberalization
- reduction regulatory costs of doing business
- limit discretionary administrative interference
- accelerate reform of standards system
- consolidate recent progress towards a stable macroeconomic
environment
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Urgent steps to improve investment
image
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FDI level: integral measure of reform progress
Measure of progress towards export
diversification, enterprise restructuring
New Policy Initiatives:
- Expansion of FEZs (Chinese experience)
- Several visable privatizations (e.g. banks)
- a targeted effort to attract FDI into ffod
processing
- Setting up an investment promotion agency
- De-regulation: trade restrictions, golden share,
registration procedures
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In the longer-term…
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The comprehensive reform to sustain growth
will be needed sooner or later
Advance liberalization, privatization and depolitization of the economy
Political will be required
Currently, it is a perfect timing to accelerate
structural reforms
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Window of opportunity
Favorable conditions for acceleration of
structural reforms:
 growing economy
 positive trends in perceptions of both
enterprise and households
 favorable global developments
 low debt
 strong administrative capacity of the state
Belarus is well equipped to mitigate
potential costs of reforms
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