The misperception of the Belarusian social economic model and its political management is quite wide spread both in the east and West. Lukashenko is claimed to get the best of the two worlds: socialism and capitalism. On the one hand he prevented formation of overpowering local oligarchs or robber barons as it were. He did not let “public assets” to be unfairly distributed among representatives of nomenclature and the underworld. On the other hand he managed to build an effective social security system. Of course it does not have resources like those of Germany or France. But still many people believe that this is an adequate response to systemic challenges of a transitional state. These are dangerous myths that are based either on lack of information and deep analysis or on official statistics and reports that resemble rather propaganda tools than objective evaluation of the system. So let’s see how fair, secure, stable, feasible and economically effective is the Belarusian model.  

Fairness and justice

If a collective farm or a state company have been making losses for the last 2 – 5 years is it fair to give them unconditionally energy resources, fertilizers, means of production  and financial support alongside with tax breaks? The present system punishes those who work productively, pay taxes and want to modernize and to grow. It means that jobs in perspective sectors and enterprises are cut because the government wants to conserve the old structure of investment and production. There are two big industrial plans in Minsk. One of them regularly paid taxes (truck plan MAZ) while the other did not and said that we were too big to go bankrupt. As a result the tractor plant got another batch of subsidies, cheap loans and tax breaks (though its general director was sent to prison) while the truck plan got into serious financial troubles and can hardly survive without cash injections from Russian companies that in effect control it. The message that managers of state companies got is “stop paying taxes, pretend to be poor, do not show initiative and the government will help you. You will get along somehow a month, a year. Who cares about the long run”? Directors of many privatized companies appealed to the government to nationalize them as it would mean cheaper money, guaranteed sales and many opportunities to get tax breaks. So if you are a big, state (preferably city-company that employs up to 25% of the population of the city) and you work in industry, agriculture and construction you work in the environment of very liberal legislation with tax burden from 5 – 10% down to negative (it means that the state pays you to produce goods or services (in Belarusian case we these goods are tractors, TV sets, fridges and others). Fairness of such system is highly doubtful. Moreover it begets corruption, nepotism and graft. In the recent opinion poll 75% of companies (all kinds of legal entities were asked) said that they had to give bribes in order to survive.

There is another aspect of fairness that is connected with income distribution. Let’s take pensioners. Those whose income during the working career was about $100 – 150 (the rouble equivalent) get the same pension as those who had salaries 2 times lower. Those who worked 40 years and contributed to the state pension fund get the same amount of money as those who worked for 20 years. There is another dimension of this problem. The average pension in January 2003 amounted to only $46. About 75% of pensioners’ income is lower than the subsistence level. Blocking economic reforms the Belarusian government pursues the policy that is deeply unfair to old people.

Another area where injustice of the system is obvious is unemployment policy. The unemployment benefit is meager $8 a month. Only 57000 people get it while the official number of unemployed is about 130’000. According to surveys of Belarusian state enterprises the “redundant” work force amount to about 35 – 40% of labor. So unemployment could reach the level of 17 – 20% even before the systemic reforms are launched. The government forces state enterprises to keep them employed and does not allow any restructuring that would involve job reduction. At the same time no conditions for creating new jobs by small business have been created. Market entry is very expensive and prevents ordinary people from starting their own business. Blocking competition bureaucrats and big businesses pursue unfair policy and gather momentum for deep painful economic recession.

Security and stability

In one of the latest opinion poll 68% of the population described their state of mind as “anxious, angry and worried”. People do not feel secure about their jobs, income, their old age and prospects for their kids. Young people with few chances of career making leave the country both for the West and for Russia. People of non-orthodox religions who thought that the Constitution guarantees freedom of religion were upset after the law on religion was passed. They can no longer feel secure about their ability to express their religious beliefs. The government fails to ensure physical security for people. Parks, streets and roads in small towns are poorly lit. Street crime is becoming a major threat for local communities. Police employ about 125000 people but crime rate went up about 45% in 2002. Making downtown Minsk (the capital of Belarus) a “Potyomkin village” does make thousands of Belarusian cities and towns safer.

Sustainable development of the society is impossible without security of investment and protection of property rights. Lack of these factors explains why Belarus remains the country with the least volume of foreign direct investment. The rule of “golden share” (the right of the government to take control over any enterprise with even the minimal share of state property), the right of state bodies to confiscate property of legal physical entities without a decision of the court, wide spread state control over contract terms between commercial organizations (foreign and private ones as well) makes the notion of private property meaningless. The investment climate in Belarus is one of the worst in the region. Belarus ranks 26^th out of 27 countries in European Bank for Reconstruction and Development index that shows how advances the country is in reforms. Belarus ranks 148^th out of 156 countries in Index of Economic Freedom. It also has one of the worst results in Freedom House ranking that combines both political and economic freedoms and reforms. Thus Belarusian authorities have failed to ensure stable investment friendly environment in which people and businesses can work creatively and plan for the future.  Another important aspect of social stability is ability to save and keep savings protected from inflation. After hyperinflation of the first half of the 90-ies that wiped out savings of the generations the government keeps ensuring high GDP growth by fuelling inflation. In 2002 Belarus had the highest inflation in the regions – 134,8%. The population is the biggest investor in the country. People keep about $750 in rouble and hard currency deposits but interest rates became negative in December threatening savings once again. If you take into account that the banking system is dominated by state banks and that bad debts amount to 25 – 30% of all credits. The National bank depends much upon decisions of the government and still supports various corporate programs. Its irresponsible policy lead to 400 times increase of consumer prices in 1995 – 2002.

Feasibility and economic effectiveness

For the last year profitability of industry which is the biggest sector of  Belarusian economy (27,7% of GDP) fell by 7,1% and real income of all industrial enterprises plummeted by 18,8%. Profitability of petrochemical, meat and dairy sectors was negative. Only 16% of enterprises have profitability over 20%. For the past year outstanding debts increased by 44% and equaled about 48% of GDP. The state which owns about 80% of all assets in the country can not manage them effectively. Nor it wants to let private capital participate in the economy on a broader scale.

The tax management is getting weaker too. No wonder as there are 38 taxes and fees in Belarus and each layers of state power (government, region, district) has the right either to increase tax burden or to decrease it for chosen entities. They do it quite arbitrarily and favor the companies that they consider the most important. The state revenues from all sources including social security fund and other off-budget funds amount to about 50% of GDP. Funds of 18 state bodies where revenues from their commercial activities are directed (Ministry of Interior, Ministry of Defense, KGB, Ministry for Emergency situations etc.) are not shown in the state budget. It is controlled neither by the parliament nor by any other control body except for Administration of president. With such centralization of control over state assets and budget money budgetary arrears increased by 63% during 2002. Its volume almost equals to officially declared budget deficit. This number (1,5% of GDP) can also be misleading. If you include money that are spent by enterprises to support social infrastructure (it is the responsibility of local budgets), “voluntary” contributions of companies for “national construction” sites (hockey palaces, football and tennis palaces, a library), bad debts of state banks it would make the budget deficit soar to 10 – 15% of GDP. If you take into account that the government is planning to increase salaries for over 1 mln. state employees (excluding workers of state enterprises) from $110 to at least $130 and an average pension from $46 to $70 without a comprehensive plan to increase competitiveness of the national economy then you will have even doubts about feasibility of Belarusian public finance and its economic policy. If we add to this balance funds for at least 300’000 unemployed it becomes clear that Belarus is heading towards a systemic economic crisis.

Some proponents of the government policy claim that independent economists predicted doom and gloom of the Belarusian model long time ago. The nature of the Belarusian crisis is different than that of many other countries where it associated with collapsing industry, galloping prices and total disarray of public finance. The first major source of support of the Belarusian system is Russia. Energy subsidies amount to about $1,5 bln. Russian still accepts barter as a form of payment for energy supplies and granted the government a few loans to support the Belarusian currency and the budget. By pumping cheap resources into Belarus many Russian companies want to take control over the most lucrative pieces of the Belarusian economy through debt-equity swap operations. Another source of relative social stability in Belarus is gray economy. According to estimates of Belarusian economists it amounts to about 80% of GDP. It creates real competition in many consumer goods market and serves as a source of income for many households (about 200’000). You should also keep in mind that Belarus was one of the best developed soviet republics. So it takes some time for Lukashenko and his team of “social engineers” to deplete all accumulated resources. With Russian support gradually waning, rapid loss of value of state assets and diminishing ability of the Belarusian enterprises to compete for old and new markets Belarus will face tough economic and social choices. And we believe it will happen sooner rather than later.