After breakup of the Euro-Asian system of centralized planning and decision making 27 new independent states were formed. The Republic of Belarus inherited from the Soviet Union relatively developed production, transportation, telecommunication and education infrastructure. Many industrial enterprises (tractor plant, truck plant, meat processing plants, TV and refrigerator plants etc.) were built to target the Soviet Union market or the whole socialist world. According to Soviet quality standards many Belarusian goods were quite competitive on that market provided there was no market price at all. Distribution of goods and capital was done along the lines of Communist party decisions rather than consumer and entrepreneur preferences. Information distortions for effective market-based production and investment were so big that the only rationality that existed was the rationality of arbitrary decisions of few authorized institutions (for example Gosplan, Gossnab branch ministries). At the same time rational expectations were quite easy to form as the framework of the centralized decision making process operated under quite rigid rules. The system was close to implementing the hypothetical maxim of economics – “all other factors being equal”.  

Economic foundations and reality ignored

Belarus had no experience in working as an independent country. It had no institutions to carry out independent monetary, fiscal and administrative policies. More important its economy has never functioned as a closed market. Declaration of the end of socialism per se did not bring any meaningful changes in the economic system. In order to understand the peculiarity of the Belarusian model the following factors should be taken into account: 1) Belarus did not have the natural production structure, i.e. the structure of production as a result of independent choices of consumers, entrepreneurs and capital owners. That is why all attempts to fine tune the economy in transition, to nominate “national champions”, to administratively stimulate export and pursue active industrial policy were inconsistent with economic science and should be considered as means and tools to squeeze rent from the system rather than exercising a “scientific patter of optimal resource distribution”. 2) Belarus did not have the natural price structure. i.e. free price system originated from choices of owners, entrepreneurs and consumers that illustrated preferences of economic entities, their propensity to save and consume. Thus attempts to establish “fair” prices for certain goods lead to blocking of the market information system and to many more investment mistakes. In fact Belarusian system integrated the major drawback of the Soviet system: inability to make economic calculation and inability to ensure personal responsibility for investment mistakes. 3) Belarus did not have the natural employment structure. That is many jobs were created by administrative and political orders of policy makers in Moscow or Minsk rather than by private sector. Consequently many so called company-cities (one plant is a source of 25% and more of jobs in a city) faced serious problems as the market they sold to no longer existed. 4) There was evident crisis of trust to the institutions of the state. They were associated with repression, persecution rather than were viewed as partners of citizens. That was an important factor to take into account while drafting economic legislation. Too complicated a law with many loopholes, benefits, vague propositions based on the notions of fairness and equality and protection of the poorest consumers is sure to benefit various rent-seekers and created further distortions in the economic system. That is one of the reasons why copying any western piece of legislation by a post-socialist begot unintended consequences that had to be tackled with more tax-payers money. 5) There was no tradition to pay taxes. Belarusian citizens could hardly be called law-abiding. The clash between such informal institutions and very complicated legislation lead to huge distortions in the official economy and formation of dynamic gray sector. 6) Another peculiarity of systemic transition in Belarus was that the legislative framework was very weak. On the first stage it was shaped by the last communist government and the parliament and on the second stage – by the authoritarian president Alexander Lukashenko. Low quality legal base failed to create a reliable system of property protection and to ensure smooth change of property owners. In fact the concept of property rights (what L. von Mises called the dynamic property rights vs. static) was alien to Belarusian law-makers. 7) Belarus did not have strategic reliable tax payers that produce competitive goods both for the domestic and world markets. Thus the government worked under severe budget constraints and failed to reform the social security system that was commonly abused by high and middle income groups. Copying a Western welfare model and its basic patterns of income redistribution in the legislative havoc generates serious distortions. They in turn reduce popular support for democracy, market economy and private property as state controlled media contrast “orderly socially secure socialist system” with “disorganized, chaotic and the rich men-oriented market”. 8) Belarus did not have authoritative responsible trade unions. These workers’ organizations were transformed into pseudo-state structures. On the one hand they resisted carrying out systemic reforms. On the other hand they were used as a means to pursue the government economic policy. Belarusian trade unions could not play the role of the Polish “Solidarity”. 9) Belarus did not have the independent and well-qualified judiciary. Judges were not ready to solve disputes among legal and physical entities. Old corporate structures that united lawyers, attorneys, notaries and other professions that produce legal services were used to reinstall oligopoly on this sector of the market. At the same time the country lacked teachers and trainers to teach new generation of producers of legal services. As the principle of division of power was breached courts and state prosecution system was used to legalize various discriminatory practices and even to discriminate against competitors. 10) Belarus did not have internationally recognized accounting practices and norms of financial and corporate transparency. Instead of accepting EU, BIS, IMF and World Bank recommended norms Belarus experimented with national accounting practices that among with other factors effectively blocked foreign investment. 11) Belarus did not have market for information and independent mass media. Thus powerful tools of control over activities of the government were blocked. Monopoly of the state over electronic mass media and over the newspaper distribution system, numerous discriminatory practices against private media disabled institutions that are widely used in the West to control activities of the both state structures and corporations. 12). Belarus did not have highly qualified personnel to fill out necessary vacancies in state bodies. Due to low wage high skilled people preferred either private marker offers or immigration. Job offers from state bodies were filled out with people with firm socialist management background. Ten years after gaining independence Belarus is still run by the people who held various positions in the communist party, trade union or socialist administrative system. Hence attempts to ensure so called “soft landing” policies of gradual step by step systemic reforms lead to reshuffling the same persons, to changing labels and keeping the substance of economic regulation.

Consequences of planning in information vacuum: main parameters of the system

Belarusian policy makers made major methodological mistakes by accepting mainstream western tools of economic analysis. Relying on aggregates that were calculated by collecting distorted data, applying demand-stimulating and full employment schemes (both by using monetary and fiscal means) in the emerging economy lead to highly ineffective resource allocation. Policy makers acted as if there was market environment around that provided all economic players with adequate information. In reality the government made it impossible to form the environment in which most of economic entities could form rational expectations and reduce investment risks. Neither Belarusian economic scientists nor policy makers grasped the meaning of the category “complete ignorance” (at the moment of action an economic entity does not know about the existence of certain factors that may deem his action irrational in the future). Attempts to reach equilibrium, to ensure optimal allocation of resources and full employment (from the point of view of key decision makers) lead to activation of monetary and fiscal means and the whole array of administrative measures. As a result Belarus is one of the worst performers among Central European countries. It is lagging behind in terms of stabilization, liberalization and institutional reforms. It has one of the worst records of property rights violation and confiscation, foreign investment attraction and market access regulation. Bad theories justified Soviet style politicians to pursue a dangerous combination of Marxist-Keynesian policies. Because of a decade of serious mistakes in choosing strategy and tactics of economic reforms Belarus is now an unstable monopolized economic system with the high level of investment and property risks. It has the worst inflation index for 1994-2000 in the world – about 550% a year. Through the system of authorized banks the National Bank continues to finance unprofitable projects of state enterprises and collective farms (kolhozes). Total banking system resources constitute just 2,3 billion Usd. Commercial banks still have to (under administrative pressure) finance different off-budget project: sowing, harvesting, construction, etc. Property rights are commonly violated. Over the last two years real debts of enterprises grew twofold every year. Wear and tear of the production facilities constitutes 70-80%. Irrespective of annual subsidies of about 500 million Usd, agriculture generates losses.   The tax system is extremely complex of 39 republican, oblast and district taxes. It has numerous privileges, preferences, special conditions, which result in corruption and fraud. After paying all taxes, an enterprise gets four kopecks of net income for 1 ruble of earnings, i.e. 4% net income. The wide-range price regulation continues. There are about 280 normative acts that regulate price formation for different goods and services. 99% of the enterprises inspected by the Committee for State Control have violations of tax or price legislation. The existing state purchasing system (state institutions order producers to sell to the state wholesalers and retailers a crtain amount of goods at fixed prices) makes industrial and agricultural enterprises sell their goods and services 20-70% lower than cost price. So the incentive of state companies is to reduce the state order (zakaz) as the loans to ensure production do no cover losses from this highly unfavorable trade. Discrimination of the private sector and foreign investors was legalized. There is a system of off-court property confiscation. The “golden share” mechanism can be used for control over any enterprise irrespectively of the form of ownership, or country of origin. It was introduced by Decree of the President ¹ 591 of November 14, 1997. The decree aimed at guaranteeing state security, observance of economic state interests, moral protection, health of population, and observance of constitutional rights of Belarusian citizens. The “Golden share” is introduced for the term determined by the authorities. The representatives of the state in the companies that have the golden share have the power of veto the following decisions: –stock company reorganization; –liquidation of a company, appointment of liquidation commission, establishment of intermediate and final balances; –change of authorized fund and use of net profit of company; –deals which are in the competence of board of directors and general stockholders’ meetings; –appointment the head of company and his dismissal.   So the government has the instrument with which it can establish control over any company it wished so. In total, this form of control over enterprise activities was used in more than 25 cases. This is one of the major breaches of private property rights in Belarus. Apart from that systematic re-registration campaigns, practice of the enterprise liquidation by decision of registering organ scare off foreign and domestics investors. There are many cases of confiscation of goods on the territory of Belarus. Because of the high insecurity of property in Belarus there are cases when Russian insurance companies refuse to insure goods on its territory. Foreign investors have to pay higher production costs.   Different branch concerns unite enterprises depriving them of corporate independence. Among the monopolists there are over 2000 enterprises which allow the authorities to control the pricing and production policy of enterprises. Degree of dependence on the Russian market is inadmissible. About 60% of the goods turnover is with Russia. 100 per cent of imported gas and oil, 70% of imported power resources come from Russia. One cannot judge as professional the management of the state property and finances. According to the implementation of the budget 2000 data revenues from the state shares and privatization (about 80% of assets still belong to the state) constitute annually just 3-5 million USD. The market cost of enterprises drops because of equipment wear and tear, loss of markets and qualified manpower. Due to huge price, production structure and labor market distortions, lack of the capital market any estimate of the price of state property is approximate and arbitrary. Resources are distributed through long chains of intermediaries in ministries and concerns which leads to their considerable rise in price. For example, the price of Russian natural gas for Belarus is about 30 USD per 1m³ and for enterprises it already costs 68-75 USD. About 180 aggregated types of activities are subject to licensing (this list grows every year by 13 positions on average. It gives about 1500 licensed types of activities). To prove that the retail sale transaction took place a company has to produce 15 separate documents. Resolution ¹456 of 21.08.1995 on activities subject to licensing changed 65 times, increasing the number of such activities. For example, to sell tractors one needs a license. Sewing sweaters and socks and scarves require three separate licenses.   The major beneficiaries of the Belarusian economic policy of 1995 - 2001 are the same persons and entities. In 2000 for a state enterprise it was still more important to have a “strategic” or “socially important” status and expect cheap resources and protection from competitors, than to ignore the administrative resource and attempt to achieve market competitiveness of the company. The status of a private enterprise automatically means the raise of cost of transaction and costs of resources. The situation is paradoxical: private and foreign enterprises show much better results, pay more taxes to the budget, have much higher cost efficiency, do not ask for subsidies, - but all the budgetary support goes to the state production sector.   Article 13 of the Constitution of the Republic of Belarus states that “the state gives everyone equal rights for the economic and other activities with exception of illegal, and guarantees equal defense and equal conditions for the development of all forms of ownership”. This norm is violated practically in all spheres of economic activities. Subsidies and grants given on the discriminative basis, crediting of state enterprises at extremely low interest rate thanks to the National Bank emissions, budgetary resources and off-budget funds, allocation of the most profitable export and import resources, interference into the price regulation process with the exclusive right for some companies to form prices freely, making a special production, sales and payments regime (charge-off policy, hard currency or Belarusian rubles payments, advance payment or commission, rent for the state or commercial rates, introduction/elimination price limits, etc.) are the most widely used tools of the market monopolization. The poll of economic entities at the beginning of 2001 showed that 87% of the respondents face the facts of violation of the equal opportunities and free competition rights.

Peculiarities of the Real Economy Sector Development 

Irrespectively of declared priorities, the industry remains one of the inefficient sectors of Belarusian economy. Even within the sector itself there is an extremely inefficient redistribution of resources. The important factor for determination of the industry potential is the structure of expenses. Over the last 10 years the share of material expenses grew to almost 80%. The share of expenses for wages and salaries dropped from 11.2% to 9%. There was a sharp fall of depreciation charges, the share of which dropped in 10 years from 9.4% to 1.4%. In the electric power industry the share of material expenses reaches 85%, in the fuel industry it exceeded this figure. None of the industrial branches makes depreciation payments exceeding 2.5% of the total volume of expenses. This means that the industry wastes fixed assets, does not make even minimum necessary investments in science and is firmly plunging into the system crisis. The paradox of the Belarusian model is that the government announced 4.1% GDP growth in 2001 and the drop of investment by 6.1% at the same time. The magic of accounting and administrative redistribution practices makes the Belarusian bubble look stable but if you scratch the service you see that enterprise debts grew almost threefold in 2001, so did stock of goods.   Such behavior of enterprises can be explained by the following factors: 1) lack of motivation for directors to make the long-term strategic planning with complete uncertainty in ownership rights, 2) high inflation that “eats up” current assets, 3) low financial discipline: no motives to economize and minimize expenses if the industry, as one of the priorities, gets various financial and administrative help, 4) lack of economic freedom and responsibility in corporate decisions on production, financing and sale of goods, 5) inflexible structure of industry management hostile towards the rational economic policy of the companies. For an ordinary investor or a Western analyst it is difficult to understand the condition of an average Belarusian industrial enterprise. In this country balance sheets of enterprises are classified, i.e. one cannot analyze the risks and benefits of a project. On the other hand, the government itself reacts late on the emergence of crisis phenomena at a certain enterprise. In a civilized economy the balance sheets openness is a necessary condition of the stable development of enterprises, high trust credit of shareholders, creditors and investors. As a result of the wide-range state assistance to enterprises, the taxpayers pay extra for every produced TV-set, tractor, refrigerator or a microchip. Over a half of industrial enterprises would not be able to work in conditions set for small and medium businesses:  no tax holidays, no writing off of debts and fines, no state guarantees on credits, with payment for premises that are ten times higher than those for the state enterprises, with limits on cost efficiency, sales margins and prices for the production factors, independent supply of the raw materials and independent market research.   Belarusian market is a paradox. Because of discrimination of the private business sector, joint stock corporations with or without state share and private enterprises initiate their nationalization. There is a clear explanation of such tendency. In conditions of severe discrimination of private enterprises the place within the state concern means a number of benefits for a company: access to cheap materials, privileged credit, monopoly access to a certain market segment; privileges for the rent, taxes, financial resources; reduced administrative costs (fire inspection, sanitary inspection, since local organs are more loyal to state enterprises); possibility of regular participation in exhibitions, more chances for the managerial staff, etc. So the major obstacle of economic development of Belarus is its trade and industry sector, based on the presence of state monopolists, that are in reality vertically integrated companies. The state anti-monopoly organ does not consider the market share of concerns but the smaller shares of smaller enterprises that are its members.  

A typical example of a complex state assistance to a single enterprise is the Presidential Decree ¹ 255 of 11.05.2000 “On some measures on further stabilization of financial and economic situation of industrial amalgamations “Vityaz” and “Horizont””. No wonder these enterprises could raise the volumes of production: they do not work in conditions created for the private sector. For the “Vityaz” enterprise the state will discharge “the debt for the natural gas, used by the enterprise in 1992-1996 in the period from January 2001 till December 2005”. The Ministry of Finance will pay the debts of the “Horizont” enterprise that it made in 1994-1995 for the 16 mln DM credit. The return of credits to commercial banks of 5 million USD and 6 million USD respectively for these enterprises was postponed. And there are dozens of such examples.

Discriminative practices in agriculture 

Belarus is the only post-Soviet country where the collective and state farm system is preserved, and the socialist planning and regulation system of agricultural production was restored. Agricultural enterprises receive annually about 500 million USD from different sources, which constitutes about 1/4 of the republican budget expenses. Administrative price formation led to actual bankruptcy of agriculture. After prices rose more than 6 times in 2000, the cost efficiency of dairy products was about 3%. Investments into new technologies, equipment and social projects are out of question. The situation with state finances and consumers would have been better if there were no such help to agriculture. The new program of social and economic development of Belarus for 2001-2005 preserves the crisis of these sector and blocks change mechanisms. The typical normative act that regulates the agricultural activities is the Presidential Decree ¹ 114 “On measures of improvement the financial situation in agricultural enterprises”. The Decree gives “postponement till January 1, 2005 to collective and state farms, other agricultural organizations and organizations serving agriculture, private farms… of the debts payment on credits (except for excise payments), other payments into the state budget… that were made by January 1, 2000…” The state also benevolently remits the fine and “postpones debt repayment on the 1999 credits without changing the interest rate on them”. It should be noted that such policy benefits not the profit generating enterprises but those that are chosen by a civil officer for some poorly defined reason. The “manual” management of resource and financial capital flows continues, and small taxpayers and state employees pay for the special status of some collective and state farms.   The off-market status of the state in economic processes is a Decision of the Council of Ministers of Belarus ¹ 1410 of 11.09.2000 “On issuing credits for financing acquisition of grain of the 2000 harvest”. The Government “asks” the National Bank to issue in September-October 2000 till 1.09.2001 credits of 6 million USD for the 15% interest and 2.5 billion rubles for the have the official National Bank interest. Then goes the number of standard measures: Ministry of Finance compensates losses of the banks, the government gives guarantees. If the borrowers do not return money – the government pays. About 10 such decisions are signed every year. The regime does not even try to get out of the crisis through the development of private farming, introduction of lands into economic turnover, through legal introduction of private property rights by way of development of mechanism of sale (distribution) of lands to the people who live in rural areas.

Discriminatory practices in foreign trade

Belarus has one of the most complex systems of the tariff and non-tariff trade regulation. Being a small open economy, Belarus largely limits competitiveness of its enterprises. The average level of import customs fee is about 14%, which is almost 4 times more than in OECD countries. The Presidential Decree ¹ 7 “On improvement of the order of conducting and controlling foreign trade operations” is typical from the point of view of deprivation of enterprises of independence in choosing production, trade and payment regime. The Decree envisages “inflow of monetary means from export not later than 90 days from the moment the goods shipment”. If export is to European countries then the term is 60 days. Irrespectively of the fact that the payment was made or not, an enterprise must pay all income taxes. As in many legislative acts, there are exceptions from this rule. The terms can be prolonged in agreement with the Ministry of Foreign Affairs, Council of Ministers and the State Control Committee. Every discriminative act has exceptions that give civil officers the right to decide the procedure for  foreign trade operations.   The currency and foreign trade legislation is the most frequently changing and cumbersome. In December 2001 Head of the Belarusian Customs Office A. Shpilevski said that in order to abide to law in international trade the company or rather the accountant and the director should know the contents of 10000 documents. Having restricted the access of “non-critical” importers to the currency market, the government hoped to stabilize the exchange rate for a long time, which would lead to stable prices. The implementation of this idea resulted in multiple exchange rates, intensification of the inflation process and other negative consequences on a macro and micro levels. It brought about numerous restrictions preventing access of businesses to the market and made legitimate purchase and sale of the foreign exchange impossible. Gradually the Belarusian ruble disappeared from the foreign trade turnover, and so does the official over-the-counter market, replaced by the “black” one. Officials used normative acts to respond to each “scheme” contrived to bypass tight legislation, making it illegal. Such an orientation and the tendency of the legislative development significantly damaged appeal of legitimate export. 1999 gave a start to liberalization of foreign trade regulation. In the fall of 2000 practically all restrictions on the use of the ruble in foreign trade accounts were lifted and currency market considerably deregulated. It allowed Belarus to joint IMF Article 8. However positive policies of the National Bank are not coordinated with fiscal and institutional policies of the government. It leads to formation of considerable discrepancies among economic sub-sectors.

Trade relatoins with Russia

Belarus trade turnover constitutes about 120% of GDP, but its trade policy is not multi-vector, which puts the real sector of economy into a very difficult position. Determination of maximum prices, especially for food products at the end of the 90-s led to a huge price disparity between domestic and foreign markets. The President and the Government adopted a number of regulatory acts that limit the export of goods. The Decree ¹ 15 “On urgent measures of the consumer market defense” of September 4, 1998 initiated the ban on export of consumer goods from Belarus, which led to the practice unlawful, off-court confiscation of property. There were cases of confiscation of state enterprises’ vehicles as well as cars belonging to Russian and European citizens.   Widely advertised Customs Union of Belarus and Russia never corresponded to the documents it was formally based on. Moreover, we never even had a classical free trade zone with our eastern neighbor. As well as the Commonwealth of Independent States, it turned into a discussion club that is used by the lobbyist structures for preservation of the rent economy relations. By the beginning of 2001 according to the Chairperson of the State Customs Committee, Belarus and Russia did not agree on tax fees for 2840 positions. And this happens five years after the Customs Union has been created. These differences illustrate lack of consensus on strategy and tactics in building Russian-Belarusian relations. The then prime-minister V. Yermoshin noted in April 2001 that Belarusian industrial enterprises pay for the natural gas 3.5-4.3 times more than in neighboring Russian regions and for the electric energy 5.5-6 times higher. This reflects one more problem of Belarusian-Russian relations: lack of equal economic conditions for Belarusian and Russian enterprises at their markets. The tools of non-tariff regulation, VAT payment regime, trade with the third countries are not coordinated. The growth of barter to 30-35% of the trade turnover became the answer of the industry and trade sector to the price and currency limits. The norm of the compulsory sale of 30% of hard currency profits at a National Bank rate while the market rate was up to three times higher became another foreign trade tax. The work of enterprises in such conditions in 1996-2000 led to the dissolving of current assets, appearance of parallel system of payments between enterprises, corruption in the system of allocation of the right to work with mutual clearings for the electric power, natural gas and oil products. Presence of five or more different prices for one and the same product of Belarusian enterprises led to very negative impact for themselves because manufacturers had to compete with intermediaries.  

Successful development of entrepreneurship requires a clear-cut and transparent normative and legal base. The “rules of the game” in Belarus do not meet basic requirements to create favorable economic environment. The adopted Civil, Investment and Labor Codes alongside with the Tax Code that will be passed in the first half of 2002 are characterized by ·        non-conformity with the norms of international law; ·       

contradictions between various normative acts; ·       

instability and chaotic character of the legislative base, possibility to introduce retroactive acts; ·       

ambiguity of some provisions of normative acts.   The Constitution and the Civil Code are constantly corrected and “improved” through decrees, Edicts and governmental telegrams. Acts, which are not regulated by the Constitution but have the power of a normative act, are put into force. The great quantity of the legislative acts and lack of consideration and system induce a vicious circle of never-ending alterations and amendments. The dynamics of the rise in the number of normative acts can be observed in the following examples. As mentioned in one of the previous chapters, the Council of Ministers of the Republic of Belarus adopted 507 acts in 1991, 1787 in 1997, 2031 in 1998, and 2084 in 1999. In 2000 and 2001 the number of legal acts exceeded 3000 in each year. Since 1997 there has been a significant upsurge in the president’s participation in the regulation of activity of business entities. In 1993 only 3 Presidential decrees were adopted, none dealing with entrepreneurship. In 1997 23 decrees were adopted, in 1998 24 decrees, in 1999 43 decrees, particularly aimed to regulate free enterprise. There were issued 527 Edicts in 1995 and 789 in 1999. The quality and the quantity of introduced amendments can be observed in the following examples. Dated August 4, 1997, Decree of Belarusian President ¹ 14, “On Certain Measures of Economic Relations Regulation,” was amended practically every month during 1999. Edict ¹ 52, dated February 8, 1995 “On the order of Regulation of Export-Import and Currency Transactions and Graver Responsibility for Law Infringements in Foreign Trade” was  amended six times, by the beginning of 2000 when Edict # 7of Belarusian President “On Improvement of Procedure of Conduct and Control of Foreign Trade Operations” came into force and revoked Edict ¹ 52. After April 1999 Belarus had four “Provisions on Price and Tariff Forming” (¹ 43 of April 22, 1999), the latest one went four times through amendments in the year 2000 alone.

In the end of 2001 the World Bank and the IFC in Minsk conducted a survey of 625 businesses in six regions of Belarus and the City of Minsk, including 107 individual entrepreneurs. The sample taken is representative of the overall economic situation in Belarus. Its results prove that Belarus regulatory system is one of the most repressive among Central European countries. In order to meet all regulatory requirements, the management of the surveyed enterprises spent an average of 18.3% of their time. As far as the registration is concerned it took businesses that had to register, re-register or change their registration documents during the last three years 58.5 days to fulfill these statutory procedures. The average registration costs amounted to $169.  Of these, official payments and fees accounted for  $146. Registration procedures are the most burdensome for small businesses that employ from up to 50 employees. Currently 165 kinds of business activities are subject to licensing by 50 state agencies. An average business in Belarus has 5.5 licenses.  An average license is valid for 4.5 years.  It takes on average 30 days and costs $120 to receive one license. 54.3% of all polled businesses have purchased equipment over the last three years.  Of these, 67.8% had a certificate confirming the equipment’s compliance with  Belarusian standards. In most cases (78.9%) these certificates were supplied along with the equipment, whereas 16.7% had to certify the equipment themselves.  This procedure took an average of 32 days and $183 for one certificate. Also, 8.5% enterprises have been obliged to obtain additional equipment permits and spent  22 days and $60 on complying with this requirement. Interesting data was received in reference to trade regulation. It took an average surveyed enterprise 13 days and $90 to comply with all the bureaucratic procedures related to import transactions with Russia. Of these, 54.2% of respondents were obliged to receive a certificate confirming the compliance of imported goods with Belarusian standards that required an average of 14 days and $44.6. It took the polled businesses an average of 7 days and $45 to obtain preliminary import permits, and 3.2 days and $86 to fulfill all customs requirements. An average enterprise executes 30 import transactions with Russia annually. As for import from countries other than Russia a total of 8.5% of respondents have been involved in import transactions with countries other than Russia in the last three years. Of these, 50% were obliged to obtain certificates confirming the compliance of imports with the Belarusian standards, spending an average of 14 days and $60. It took the polled businesses an average of 8.5 days and $73 to receive preliminary import permits, and an average of 4 days and $149 to meet all customs requirements. An average polled economic entity spent 14 days and $117 to fulfill all applicable state requirements. On average the surveyed enterprises executed 46 import transactions with these countries annually. A total of 22% companies have exported to Russia over the last three years.  Bureaucratic procedures connected with export transactions to Russia took an average of 6 days and $82 to fulfill.   An average enterprise spent 12 days and $54 on receiving export permits, and an average of 4 days and $61 on meeting all customs requirements. An average exporter executed 85 transactions annually. A mere of 5.6% companies have exported to countries other than Russia over the last three years, with an average of 41 transactions per annum. It took an average surveyed enterprise 7 days and $136 to comply with all the bureaucratic procedures related to these export transactions.  An average enterprise spent 7.5 days and $78 on receiving export permits, and an average of 2 days and $104 to meet all customs requirements.   Certification procedures are the most cumbersome in the region. Of all polled businesses, 35% certified their goods and services.  The share of enterprises that were obliged to take out certificates was higher among state enterprises (42%) and companies with foreign participation (44%).  On average, economic entities are obliged to go through certification procedures for 17 times annually. Enterprises whose production lines are subject to certification (30% of businesses obliged to go through certification) do so four times a year.  Businesses that have to certify separate batches of goods (77% of businesses obliged to get a certification) are subject to this procedure for 18 times annually. The time and resources spent by surveyed enterprises on one certification averaged 35 days and $200 for certification of a production line and 21 days and $153 for individual batches of goods. Another item of regulation is hygienic registration of products. Of all poll participants, 27% are subject to hygienic registration. 18% have to go through both certification and hygienic registration.  On average, the polled companies have to undergo hygienic registration 4 times a year.  It takes an average of 15 days and $65 for an enterprise to receive one hygienic permit.   An average Belarusian enterprises paid host to 9.7 inspections last year. Inspectors spent an average of 68 days on a single enterprise. A mere 8.5% of the surveyed companies reported no inspections at all. Average inspection costs equaled $880 per enterprise. They consist of fines levied on enterprises that averaged $892 per enterprise, confiscations at $1,183, “voluntary contributions” at $157 and bribes at $134. An average economic entity pays a total of 10 taxes.  Individual entrepreneurs have an average of 3.6 taxes, whereas legal entities average out at 12 taxes.  Legal entities have to fill in an average of 141 forms annually. To ensure the timely payment of all taxes, 78.7% of the respondents maintain a staff of 3 in-house accountants. The majority (52.9%) of Belarusian businesses are subject to price controls to a varying degree. Prices of 76.8% of products are regulated. Most often the state resorts to profitability caps, price ceilings and fixed prices to enforce pricing controls. The survey demonstrated that prices are primarily controlled by structural subdivisions of the Ministry of Economy, and City and Regional Governments as well as the State Control Committee and the Tax Inspectorate. Almost 60% of respondents state that they have optimal staffing levels. The largest percentage of enterprises claiming staff overhang is among state companies (35.5%). Most businesses retain excess staff largely due to the pressure from the state. Although freedom of contract is built into the Civil Code of the Republic of Belarus, 28.9% of those polled pointed out that the state oversees the conclusion and execution of their contracts. Tight state supervision of commercial contacts precluded 11.5% of the respondents from meeting their contractual obligations and entailed average losses of $6.800. Nearly a third of those polled (29%) believe that it is more difficult to execute contracts with companies located in other regions. Nearly 17% of the polled enterprises have social objects on their balance sheets. The majority of the surveyed companies with social objects on the balance sheets (65.5%) are state-owned companies. The polled businesses spend an average of 11% of profits on the upkeep of these objects.  

Climate of investment disincentives  

Among 156 countries Belarus takes the 135^th place in the world by the investment climate attractiveness. For 2002 of Belarus holds 148^th place in the world by the index of economic freedom designed by Heritage Foundation (Russia holds 131^st position while the most dynamic reformer Estonia is fourth). Belarus’ position steadily got worse in all major indices of institutional change, liberalization and stabilization. These indices prove the fact of the very reactionary and aggressive administrative and legal environment for the development of private companies and private initiative. In one of his speeches A. Lukashenko compared privatization with elimination of the state property. Such emotional approach dominated in institutional changes over the last seven years. According to the Ministry of State Property, 2706 enterprises cost about 5 trillion and 500 billion BYB or about 5.5 billion USD. If all these state enterprises had been sold for just 550 million USD, at 10 times less than their balance cost, and the money had been put into the lowest-risk USA state bonds for 5% annual interest, the budget would have received 25 million USD annually or 5 times more. It is very easy to calculate opportunity costs of this type of property management. According to the former minister of privatization V. Novak, 1.9 million square meters of premises are free or are used inefficiently. At the lowest rent rate the state loses almost 23 million USD a year. If we take into consideration other factors, social and economic costs of blocked privatization and the lost profits amounts to hundreds of millions of dollars.

Conditional right for entrepreneurship

The state deprives its citizens of the right for mistakes in business: paragraph 7 of the Regulations on Registration states that “if after the end of the second and every following fiscal year the value of net assets of a commercial enterprise drops below the statutory capital, then it has… to register the reduction of its statutory capital. If the value of the above assets is less … than the minimum size of the statutory capital then such a commercial enterprise is subject to liquidation.” The Presidential Decree #22 “On … some issues of the state registration of some legal entities” and the above mentioned Regulations prove that the property rights are not yet guaranteed in Belarus. The attitude towards enterprises that are going to be engaged in activities with high business risks did not change as well. If they “violated tax legislation within a year prior to submission of registration documents”, then “registration organs have the right to create a legal entity … that envisages a subsidiary responsibility of its founders”. There are no businesses without the risk. As future will always be uncertain, the risk interpreted by a bureaucrat will always reflect his own point of view. Belarusian citizens unlike citizens of countries with market economies are deprived of the right to realize the limited liability principle while registering companies.   The Decree #22 left valid the norm of having a single legal entity at a single premise. With the state monopoly on office space, the issue of finding a legal address turns into a real threat of closing the business. Registering organ has the right to refuse registration if it turns out that the property owner “violated the order of currency transactions, illegally opened bank accounts outside Belarus, gave bribes or committed crimes in the sphere of entrepreneurial activities, has debts in paying wages, budget duties or is an owner (partner) of the legal entity that has such debts.” Such norms violate the property rights of a citizen.   The freedom of entry to the market is as important as the freedom of exit from it. The Decree #22 did not change the procedure of enterprise liquidation and it may last for years. There are cases when people cannot close their companies since 1996. And not only founders suffer, who can go away, into hiding, etc. Shareholders cannot be engaged in business activities because the enterprise in which they took part is in the process of liquidation. The Decree did not change the rules, according to which the enterprise can be liquidated by a registration organ, which violates generally accepted rules of regulating relations between the state, business and society. The executive committees still remain the organs of judicial power. They must observe how enterprises work, and in case of necessity create liquidation commissions, and conduct a number of complex managerial, economic activities. The executive committees lack both experienced people and money for this task. There still remains such a reason for liquidation as failure to conduct entrepreneurial activities envisaged by the statute for 6 months in a row and failure to send a note on the reasons of failure to conduct these activities, to the registration and taxation organ. There are plans to modify presidential decrees on incorporation but any draft paper has been published in 2001 yet.  

Destruction of the Social Security System

The social security system, based on universal social transfers, subsidies for goods and services, setting of the maximum-price indices for consumer goods, quoting, introduction of obligatory norms for the retail trade for the range of goods, different categories of privileges, is not able to solve the issue of redistribution of goods in favor of the most indigent people. The interventionism system using monetary and fiscal mechanisms leads to social stratification, growing of the difference between the rich and the poor, diminishing of the social guarantees for pensioners, teachers, doctors, large families, children and youth. In fact, the principle of the free education and medical services is not being carried out. Numerous privileges are purely formal.   The mechanisms of the target help to the most indigent are not developed, there are no official criteria of poverty. According to the trade unions information, 40 to 60% of country’s citizens are beyond the poverty level. The state social protection is envisaged for 34 wide categories of people, support is provided in 29 different forms (distribution of food, medical help, informational and financial support, etc.). According to the Belarusian Ministry of Labor data there are about 300 kinds of benefit for different categories of population. Half of the population – about 5 million people - enjoy them, though many have only nominal benefits. The largest share in the structure of expenses for social needs is pensions (about 59%), allowances to families with children (11%), provision of social security (9%), housing subsidies (7%), payment of sick leaves (6%), transport subsidies (4%). Over 50% of families are poor, 34% of families receive social support. 71% of the families with three and more children receive support, 93% of full families with children are low-income. The income of adults is inadequately low for financial provision for their children, and the birth-rate dropped sharply.   The average old-age pension is about 30 - 35 USD. The total number of pensioners is about 2.63 million or a quarter of the total population. During the last 10 years the labor force dropped to 4.4 million, or by 18%, and the number of pensioners grew by 13%. According to the existing consumption norms, pensions of 35% of pensioners cannot provide for the full value nourishment.   With the existing financial, savings and accumulation system, only 3% of families can buy or built their own apartment or house without the help of the state. An average Belarusian citizen, paying off a third of his salary, will be able to cover the costs of his apartment in about 90 years. Today about 600 thousand families are on the list of those in need of lodgings. 60% of consumer expenditures of an average household is on food. Families spend 7.3% on clothes, 4.3% - on foot wear, 1.1% - on culture, entertainment and sport. The population spends twice as much on alcohol and cigarettes as on lodgings and residential services. The Decree ¹ 285 of 19.05.99 envisages that the population should pay maximum of 50% of the lodging services. In 2000 the situation worsened. Although in 2000 the electric energy prices grew 10 times, heat and rent – 7 times, the share of these household expenses grew very little – from 2% in 1999 to 3% in 2000. The total price regulation with the aim of social protection of population turned out to be completely inefficient.   The natural increase in population became negative in 1993. The life expectancy dropped 3 years in the last three years. And the number of suicides grew twice from 1990. This is one of the worst indices in Europe. The number of registered illnesses grew almost 1.5 times, nervous and mental illnesses – 2 times. Over 5 years the number of tuberculosis cases grew 46%, syphilis – 500%, alcoholic psychosis – 180%. Only 15% of secondary schools graduates can be considered healthy, 45-47% of children suffer from functional pathology, 40% - from chronic diseases. An average Belarusian drinks over 11 liters of vodka per year, i.e. the threshold of genetic degeneration of the nation has been passed.   1.84 million of people live on the Chernobyl-damaged territories. Almost half a million of them are children and teenagers. In Ukraine and Russia people are moved prom the regions with the radiation level of 15-40 curie. In Belarus 140 thousand people live in such regions. In Gomel oblast the number of genetic deviations since 1986 grew 8 times. 42% of children born on contaminated territories have deviations in psychomotoric development from 3 to 6 years. The index of primary disability grew 50%. 70-90% of the radiation intake is though locally produced food products. At the same time the government constantly subsidizes collective and state farms producing contaminated food. The volume of means earmarked for overcoming of effects of Chernobyl disaster is annually decreasing.   Hopelessness, legal chaos, lack of perspectives on the labor market, lack of self-employment possibilities stimulate violence. From 1990 to 2000 the number of registered crime grew 1.7 times, the number of drug-connected crimes – 7 times. In 1990 there were a little above 15.5 thousand of prisoners, today – over 50 thousand. In 1990 35% of marriages broke, in 2000 – almost 70%. The number of children born out of marriage grew from 8.5% to 16.2%. From 1995 the number of children without parental care grew 1.8 times. 420 thousand people in Belarus are invalids.  

What Belarus Needs 

Purely administrative measures of managing economic and social processes in a post-socialist state lead to a sharp decrease in the living standards, growth of inner destabilization risks and decrease of the country’s economic potential. It was proved once again that good intentions based only on the political will cannot lead to the growth of the country’s welfare if the authorities are economically illiterate. The world experience, including the experience in the post-soviet regions, proves that system reforms both in economic development and social justice are the most effective if they are in accordance with the classical triad: privatization – liberalization – macro-stabilization. Actions of the Belarusian regime contradict this approach and are directed at the suppression of private property, and strangling of economic freedom.   To get out of economic, political and constitutional crisis Belarus has to follow a social and economic model which:  

will provide the fastest restructuring of industry and create the information environment for the market definition of proportions of consumption, savings and investments as well as of spheres, mechanisms and instruments of economic activities;

will legally provide for equal economic conditions for domestic and foreign entities;

will shift to the market system of the national currency regulation and the monetary policy for its stabilization most quickly (inflation targeting or introduction of euro/or dollar a parallel currencies);

will use world standards of presentation and analysis of statistic information and accounting system

will provide for the creation of economic environment that will help the development of small and medium-size businesses;

will initiate reforms of the state management system, will clearly differentiate the rights and powers of the center and regions

will simplify and make transparent the taxation system. A group of Belarusian economists worked out a new tax system based on just 6 taxes instead of 39 (retail sales and service tax, personal income tax, social security tax, real estate tax, excise tax and import tariff)) and a new concept of the budget policy based on balanced budget and centralization of all sources of government finance (off-budget funds, presidential funds, branch concern funds etc.)

will be guided by the independent court system on economic, criminal and administrative issues

will liberalize prices for all forms of the capital, remove limits on interest rates, receipts, rents, and allowances

will allow to minimize social impact of the transition period for the poor and least sheltered, will  targeted the least society protected members of the society with the state assistance

will gradually transit towards the system of individual pension and medical accounts

will create conditions for the development of the third sector (NGO) also as a contractor for the state while fulfilling many social functions

will allow for a volunteer mobile army, the size and character of which corresponds to the character of existing domestic and foreign threats.   With such an approach Belarus will get a chance to become competitive in the regional, as well as in the global system of division of labor. 12 years of systemic transformations in Central and Eastern Europe behind it has a unique opportunity to take into account mistakes that were made and positive solutions that were applied. Having in mind many success stories of post-socialist states Belarus should choose the economic policy that are similar to those in Estonia rather to Poland or Hungary in the beginning of the 90-ies. The country can not afford copying a classical welfare model of a Western country. It does not have required institutions and most importantly necessary information from the market to do it either. Instead of concentrating efforts on patterns of redistribution the government should pursue policies that ensured creation of the US economic miracle in the 19th and the beginning of the 20^th, Japanese and German models after the war which were targeted on wealth creation, property right protection and contract enforcement. It does not mean that welfare programs should be slashed. Facing the dilemma between corporate welfare and address assistance to the most needed it is economically rational and politically feasible to choose the latter provided we want to ensure long-term economic growth and wealth creation. Laisser faire approach to economic policy, Austrian economic school approach has never been in Belarus and in Central European countries. It is one of the reasons why Belarus is on the brink of wide recession and Central Europe tackles with recurring crises.