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1. Belarus: crisis
of market socialism
Republic of
Belarus is a neo-planned economy with high concentration of economic
decision-making at the very top of political power hierarchy. It has been
pursuing basic production and distribution patterns of both socialist theorists
and Keynesians. In order to grasp the essence of the Belarussian system of decision
making it is necessary to determine its main characteristics and parameters: 1)
who, in what branches and to what extent makes economic decisions, 2) how the
institute of private property works on markets of all forms of capital (money,
land, goods and services and labor), 3) motivation of main economic players
(capital owners, entrepreneurs and consumers), 4) observation of the principle
of equal opportunities and conditions for all economic subjects including the
state. 5) effectiveness of legal judicial system in protecting property rights.
Belarussian system of decision making is in many respects incompatible with the
Western model that is driven and shaped by globalization process. Instead of
enhancing growth it hampers it and increases transaction costs, reducing
competitiveness of domestic producers.
In
1998 Belarus
passed the climax of economic growth, investment and credit expansion within
the Keynesian model of business cycle. In 1999 there was virtually no growth
and decline of some important macroeconomic indicators. The policy of cheap
money, soft monetary policy, administrative definition of “points of growth”
and subsequent financial stimulation of enterprises, discrimination against
form of property, size and origin, trade status alongside with giving various
perks for state “leaders” (tax breaks, debt cancellation, subsidies, state
guarantees for foreign loans, restriction of competition by licensing markets
entry etc.) lead to temporary economic expansion. Within 1996 – 1998 president and
the government managed to apply fundamental Keynesian advice to the
cash-strapped, market infrastructure free post-socialist economy. The resources
for such growth were the following:
-
Russian direct and indirect
subsidies in the form of (a) energy resources debt cancellation, b) stimulation
of barter trade that enabled Belarussian state enterprise to sell illiquid low
quality goods in exchange for gas, oil and electric energy, c) making the best
use of unbalanced Belarussian – Russian customs Union to export to Russia high
tariff goods (over 300 positions still have different tariffs and duties), -
“legalized smuggling” d) using free economic zones in Belarus as budget “black
holes” to avoid paying duties in Russia;
-
monopolization of key
resource and raw material exporting industries: timber, flax, chemicals,
fertilizers and creating numerous administrative and economic incentives for
them;
-
redistribution of capital in
favor of industries and enterprises with growth potential (agriculture,
construction, machine building). As Belarus
used to be a kind of assembly line for the whole Soviet
Union many plants and factories do not work at their full
capacity. The government set production target indices at the 1991 level.
Commercial banks, Belarussian rouble holders, rouble depositors, enterprises
(working capital) off-government most favored entities list were net payers as
the whole Belarussian financial system has been working in the mode of negative
interest rate for the third year.
In
oligopolistic environment when the state as the owner holds control over 95% of
capital flows fluctuations of cycles of production and consumption are more
distinct. Artificial (government driven) merge of production cycles of
investment and consumer takes place. At rapid increase of government demand and
almost unrestricted capital supply for the chosen entities growth of aggregate
indices really took place. However macroeconomic tendencies in 1999 show that
the period of economic expansion is coming to a close. Belarus is entering
a new phase of its business cycle - recession and stagflation. The depth of the
dive will depend on demand for Belarussian goods in Russia
and its ability and willingness to pump cheap energy resources into Belarus. Russia’s
natural monopolies are clearly switching to monetary trade rejecting barter
schemes. Introduction of statistical declaration by the Belarussian government
on the one hand (February 1, 2000) and introduction of import tariffs for goods
from third countries by Russia
(April 10, 2000) in fact terminates the Customs Union between Russia and Belarus making old patterns of
trade obsolete. Among the most popular instruments of capital redistribution in
Belarus
are
-
licensing of most kinds of
economic activities (over 110 licenses), subsidies and cheap credit,
-
selective liberalization of
obligatory sale of hard currency revenues and access to purchase of hard
currency at very favorable rate (the official rate was 2-4 times lower than the
market rate in the period of 1998 - 1999);
-
quota distribution in the
most profitable spheres of business (export and import of natural and energy
resources)
-
legal definition of a
special production, sales and payment mode (amortization policy, rouble or hard
currency payments, down payment or commission, rent at state or commercial
prices, setting or repeal of price ceilings for various goods.
2. Main opponents of systemic market reforms in Belarus
Production
psychology and development patterns were dominant among economic theorists and
policy makers both in the government of Prime Minister Mr. Kebich and President
Lukashenko. Proponents of radical markets reforms were few and far between.
Directors of state enterprises, chairmen of state banks, heads of government
run concerns and ministries, academic economic elite pursued the policy of
"soft landing" i.e. gradual reforms. Key decision makers in choosing
the strategy of development were directors of enterprises that form natural
monopolies (energy sector, telecom, railroad, raw materials), flagships of
Soviet era (tractor, truck, engine, agricultural machine plants), military
complex plants closely integrated into the Russian defense industry and
powerful agricultural lobby heavily represented in all governments and parliaments
of the Republic since 1990. Members of the government and administrative nomenclature
on all levels of power were interested in keeping new people off the process of
formal and informal redistribution of state capital. They were supported by
economists from numerous state research institutes dominated by theories of
socialism and left keynesianism. Rent seeking took place in various forms
(export subsidies, exclusive contracts, davalcheskoye
syryo schemes, privatization of different objects at very low prices
etc.). In 1999 the authorities invented another typically Belarussian source of
rent, distribution of confiscated goods which amounted to about 5% of the
budget revenues. President Lukashenko practically copied the distribution
pattern of the Soviet Union and created
structures similar to State Planning Committee and State Supply Committee.
President Administration is the former and state concern "Belresursy"
is the latter. The government and the National bank are institutions to carry
out strategic decisions made by President and his Administration. They set parameters
of monetary, fiscal, industrial, trade, construction and agricultural policies.
President created parallel control and enforcement structures. Security Council
headed by V. Sheiman fulfills functions similar to KGB (competition between
these two powerful force structures takes place). Committee for State Control
(CSC) has been given broad powers. It copies the functions of Tax Inspection,
Committee for Economic Investigations and Corruption. In December 1998
Republican Headquarters at President of Belarus was created to respond to
various critical situation in the economy. This body consists of key figures of
President Administration, Security Council, the government (including Minister
of Interior), National bank and the CSC. It is a specific body that will be in
demand when economic and political crisis is deepening. In fact formation of
state management structures around President made traditional ones just pseudo
structures with very limited powers.
Belarussian
decision making process is directed not at meeting demands of the globalizing
economy but rather at curtailing direct effective links with foreign economic
actors. Centralization of decision making, monopolization of demand not only
for raw materials but for consumer goods and imposing arbitrary controls over
private actors clearly contradicts the major globalization pattern which
implies expanding economic freedom, privatization, removal of trade and
administrative barriers and letting capital owners and entrepreneurs decide for
themselves. Belarussian closed system also differs from the global one by the
attitude to losses. In spite of many normative acts the government
traditionally cancels debts of state enterprises at the beginning of each year.
3. Who makes economic decisions
Concentration
of economic decision making in one body in Belarus
exceeds the level of the Soviet Union. About
200 persons manage 80% of all capital while the rest 10 mln. people have
control over just 20%. 200 state decision makers is not a homogeneous class.
About 20 of them handle about 80% of the “state pie”. The official budget of
the Republic is just but one of four sources of financing of various projects
launched by the president and key decision makers. The second is President
Foundation. It is not specified in any open document where this foundation gets
money from and how it is spent. In 1999 President Lukashenko said that he did
not spend a penny of budget money to build hockey palaces but he earned hard
currency himself. He obviously meant revenues of this Foundation. The third
source is off-budget specialized foundations which include agriculture support
fund, housing support fund, pension fund, Chernobyl
fund. These funds do not act independently and pursue their own policies. They
fulfill direct orders from the government and president Administration and
finance programs that are not connected with their direct activities. The
fourth source is revenues of specially designated companies that have exclusive
rights to control the most profitable cash and export – import goods flows. The
government has expanded this source of finance by including “voluntary”
contributions of state and private companies to agricultural, housing programs.
The local and Republican authorities force economic entities to pay for energy
supply and to cover debts of collective and state farms. As a stick to ensure
obedience they practice license cancellation, closing credit lines, creating
administrative stumbling blocks that drive any company out of business.
The
public has just nominal control over the state budget. The other three sources
of finance are closed for public scrutiny. Persons appointed by President
manage all state property (over 80% of all property in the Republic). Belarus has not
formed a class of owners with nominal rights to handle their capital. One group
of managers (old soviet economic elite) was substituted by the other (so called
Shklov-based group). At the same time Lukashenko kept positions for those who
pledged loyalty and agreed to accept new rules of the game. The structure of
economic decision making in Belarus
has the following hierarchy:
1st layer.
President.
2nd layer.
President Administration, President Administrative Department. The first two
layers of economic power are enhanced by Security Council, KGB and the State
Control Body that form a powerful analytical and control structure, a kind of
information processing unit that is frequently used as a tool to stifle
competition and to redirect capital flows according to president
specifications.
4th layer.
Branch state concerns (Belprom, Bellegrpom, Belsevkhozpod, Belneftegaz,
Bellesbumprom, Belvtorchermet, Belneftekhim, Beltelecom, Belenergo etc.). Big
state industrial plants (with a number of employees over 6000 - 10000) that in
many cases are the only employers in the city or the region (Gomselmash,
Khimvolokno from Mogilyov and Grodno, Minsk Tractor, Truck, Engine plans, BELAZ
(Zhodino), Belarussian metallurgical works (“BMW”), AZOT (Grodno) etc.
5th layer.
State mixed form of property companies that were set to exclusively control
different export – import cash and goods and services flows (Torgexpo,
Belagrointorg, Belgosresursy, Belryba etc.). The Belarussian Orthodox Church
(or rather Russian) can also be included here as it is one of the major
structures to handle big flows of export-import goods. It is granted economic
privileges for ideological reasons.
6th layer.
Local power state officials that handle local budgets and tax revenues and have
control over the state border (especially those who have free economic zones on
their territories).
7th layer.
State and collective farms, numerous small and medium sized state industrial,
construction, transport companies that receive various perks from the
government that enable them to get rent at the expense of taxpayers.
8th layer.
Private small companies, across-the-border “shuttles” – chelnokis semi-legal traders of goods (import of various consumer
goods from Poland, Lithuania, China, Turkey, India and export of heavily
subsidized and high tariff goods from Belarus to Russia, Ukraine, Poland,
Lithuania (food products, gasoline, hard drinks, cigarettes). It
is difficult to place another very important element of the economic decision
making structure – criminal “gray” world. I believe that this pillar permeates
through all layers of power as the volume of the gray economy (broadly defined
as unregistered and criminal) amounts to about 85% of GDP. Globalization clearly
transfers economic power to private transnational companies, financial
institutions, hi-tech technologically advanced centers, powerful medial centers
from the government. Privatization of assets in advances economies (France, Italy,
Germany),
numerous international mergers and reduction of the share of the government in
GDP are evidence of this processes. Belarussian government pushes the country
into the opposite to the globalized economic world direction. Hence it has lost
much of its competitive potential and many traditional markets.
4. Motivation of main decision makers
Capital
owners as well as entrepreneurs seek to make profit by definition. If there are
impediments in this process they tend to transfer the capital into more
predictable and favorable economic environment. Impossibility of economic
calculation in Belarus
(information economic field is highly distorted by price policy of the
government) and lack of personal financial responsibility for investment
production and trade decisions does not create incentives for profit
maximization by operation cost reduction, technological, management and
marketing innovations. That is why only highly volatile speculative short-term
investments are attracted to Belarus.
Gazprom is a major investor and creditor as securing transit of gas to the West
is one of top priorities of this company. However in 1999 R. Vyakhirev, CEO of
the gas Russian monopoly, said that “by pursuing such economic policy the
Belarussian government will destroy the country and we are not going to sponsor
it”. Even state enterprises learnt that it is not worth showing high profits
due to confiscatory tax system (up to 80% of revenues is taxed away, for 1
rouble of take home salary the company pays 1,20 rouble in various taxes). The state
pushes economic entities to total consumption as it is ideologically beneficial
to raise demand and to ensure GDP growth. There is no concept of saving in the
country. Hard currency and to a lesser degree real estate, liquid goods are the
most popular saving instruments. In the beginning of 2000 the National Bank
issues 100 USD hard currency bonds for the population. So did Ministry of
Finance. People are reluctant to credit the government. The mere fact of
issuing such securities shows the depth of the financial crisis that the
Belarussian government put the country in. As
all economic entities of 7 top layers of decision making structure manage state
property they have a strong incentive
-
to redistribute state
capital to the personal benefit;
-
to minimize the risk of
being punished (criminally or financially) for personal profiteering;
-
to ignore getting maximum
value at using state (taxpayers) capital, that is why even full amortization of
tangible assets is of no concern (davalcheskoye
syryo schemes that are quite widespread is an evidence for it);
-
to reduce freedom of entry
to profit making spheres of goods and services production;
-
to discriminate against
those entities who are less effective in building a network of lobbyists at
every layer. It
is achieved by arranging a network of key players that penetrate top layers of
decision making structure, by active work among nomenclature, “red directors”,
Shklov power group, Russian importers of energy and raw materials that the
Belarussian government depends upon and of course among Security Council and
KGB top figures that control information flows.
5. Subsidarkhs: transformation trends
A
subsidarkh (subsidy + archy) is an economic entity that has almost exclusive
temporary access to certain capital and resource flows and does not bare
responsibility for investment production and distribution decisions. He is not
the legal owner of capital he manages and this factor determines his incentive
structure. As political and economic powers in Belarus are almost identical he
could belong to any of the top seven layers of the economic decision making
structure. He could be either a formal state employee, an elected member of the
parliament or an appointed director or a president of the state concern. He
accumulates his personal wealth abroad at his bank account or preferably uses
his personal network (friends, relatives, business partners). He is a
subsidarkh as long as he keeps his position in the economic/political power
hierarchy and can benefit from it.
3rd layer.
Council of Ministers, 27 ministries, 17 state committees and agencies. It would
be logical to include the parliament here but in Belarus it is appointed by
President and it is fully controlled by him. The National Assembly (lower
chamber of the parliament) and the Council of the Republic just approve
President economic decisions. Even state budget revision is done by president.
The National Bank de facto has turned into a president administration
department. Its Chairman signs many documents (together with Minister of
Finance) that formally sanction financial aid and subsidies to collective
farms, various industrial plants and social groups. In fact resources of the
National Bank became another source of financial (mostly inflationary) of the
executive power.
Difference between the
Russian oligarkh and the Belarussian subsidarkh
Russian oligarkh:
1)
Formal owner of capital and
assets with monthly defined by the company plus income from other sources
(shares, real estate, performance of the company)
2)
It discriminate competitors
not only by erection of legislative and administrative barriers but by economy
of scale and better marketing and production strategy;
3)
Limited but increasing
liability for economic results of his activities. Incentives for top managers
to perform better;
4)
Interest in reproduction of
investment capital that is employed in his business, attraction of foreign
investment and taking into consideration globalization tendencies and world
market prices;
5)
Limited structural
dependence on the ministry, independent supply of raw materials and spare parts;
6)
Higher degree of
independence from the political power. Nationalization of assets highly unlikely;
7)
Private marketing and sales
management,
Belarussian subsidarkh
1)
Appointed manager with a
fixed salary the size of which is strictly regulated by the government or the
branch concern;
2)
It discriminates competitors
primarily by blocking competitors access to cheap state resources including
hard currency and by getting tax and interest payment exemptions;
3)
No liability for economic
results of the company. Incentives for top managers to continue barter schemes
and seek rent rather than official economic results;
4)
Restrained interest in
investment in his own company as the state crowded out private investors. He
rather seeks to ensure continuous inflow of cheap credit and resources from the
government and the concern he is a part of. No regard to world prices within
the system of soft fiscal policy;
5)
Member of the branch
concern, centralized supply of raw materials and spare parts within the whole
branch of the industry;
6)
Full dependence on the
political power. No need to nationalize as the enterprises are state owned;
7)
State run obsolete marketing
schemes, addiction to domestic distribution of manufactured goods at fixed
prices rather than profit seeking behavior.
There
are four potential transformation trends for a Belarussian subsidarkh:
1) to
become an oligarkh (provided the government launches wide scale privatization
campaign),
2) to lose his position in the decision making structure and thus
3)
go to jail or
4) flee out of the country. The first scheme is unlikely as
President Lukashenko power is strong and quite homogeneous. It is
well-controlled and guarded. Formal privatization of the most profitable assets
has not been announced. Moreover a list of enterprises that shall remain state
property (presidential decree) includes almost all spheres that “feed” many
subsidarchs. Becoming an oligarkh would mean gaining much political weight.
President Lukashenko watches closely for this not to happen. His close allies
(all members of the Shklov group) control the legislative power, most of trade
and resource economic flows and information flows. They compete with each other
but the balance or rather agreement on distribution of rent seeking spheres is
kept yet. This “peaceful coexistence” could end if one of the three becomes
dissatisfied with his position or if president Lukashenko feels politically
endangered by one of the. Another important figure is Head of Administration of
President. He belongs to the old nomenclature and he is the closest in power to
the class of Belarussian oligarkhs. At the same time he is Chairman of
Headquarters. His connections with many influential Russian policy makers might
be a virtue or a vice depending on his personal ambitions and role in further
transformation of economic power structure.
The
second and the third variants are quite popular. Rotation of subsidarkhs is
common. Imprisonment of ex-minister of agriculture, ex-Chairman of the National
bank, General director of one the biggest exporter in the country – Belarussian
metallurgical works, director of once biggest collective farm, director of
“Konto Group”, one of the major companies that was involved in barter schemes
with Russia - these are just a few examples of how influential subsidarkhs at
the very top of the decision making structure were turned into criminals. In
July 1999, president passed Decree № 29 “On additional measures to improve
labor relations, strengthening of labor and executive discipline, prevention of
violations in labor relations”. According to it “violation of Constitution,
decisions of president, normative acts of the Council of Ministers and court
decisions at doing one’s work is considered rude violation of labor
obligations”. This document makes it much easier for the upper layers of power
to control the lower layers as directors of state enterprises and collective
farms are ordered on the one had to increase production and supply of goods for
the domestic market and on the other hand - to keep prices way below the cost
of production, to reduce the volume of barter exchange with no access to hard
currency at the official rate, to guarantee a certain assortment of goods at
inflationary confiscation of working capital, to pay wages in time while it is
impossible to make state companies to pay theirs, to renovate production base
while it is impossible to safe capital. The fourth trend is important enough as
it is the way or rather an escape for representatives of lower layers of
decision making structure. But a few oligarkhs of the Kebich era and some would
be oligarkhs of the Lukashenko era also escaped the country prior to being put
behind bars.
6. Impact of Globalization Processes
on Belarus
Impact
of external factors is very weakly translated into almost all layers of
Belarussian economic decision making structure. External foreign debt is about
1 bln. USD that amounts to 8% of the GDP. Shares of Belarus in the world trade turnover
is just 0,04%. Agreements with IMF were either ignored or taken as broad
guidelines that did not shape key aspects of monetary and fiscal policy.
International organizations - IMF, EBRD, WB, EU, WTO - are external factors
that have little influence on behavior of all major economic subjects.
Belarussian Russia-oriented foreign trade determines its high dependence on
energy and raw material resources as well as on markets for barter goods flows.
In the 90-ies the West sent to Belarussian political and economic elite quite
contradictory signals on effectiveness of the welfare state model. Double
standards of the West in economic policy, modern version of the policy
"beggar your neighbor" made first Prime Minister Kebich and then
President Lukashenko come out with unification with Russia rhetoric. Mercantilist
policies of major welfare states in the West were one of the important factors
that influenced Belarussian leadership. There is a considerable gap between
reality and the free trade models praised by many Western policy makers. Seeing
no perspectives in expanding cooperation with the West
Lukashenko turned to the East.
The main forces driving global integration are
technology, the growing faith in markets, and the growing connection between
poorer and richer nations. Spurred both by technology and the successive
reduction in various kinds of barriers, trade flows worldwide have increased
several percent a year faster than global output. But trade flows between Belarus and the
West has been decreasing. Pursuing economic policies based on distrust to
market forces, to benefits of international division of labor and free trade
Lukashenko can not possible match globalization processes with further state
centralization of economic decision making. It is believed that if and when
technology, communications, politics, and cultural convergence reduce the
national border effects international considerations could come to loom far
larger in national economic policy making than they do today. Belarus being a
technologically backward country and excluded from major international capital
flows thinks about integration in terms of further unification with Russia on
vague unspecified terms.
Academic and economic intellectual elite in Belarus could
not make a clear point that open markets, free trade and economic integration
are obviously beneficial. Fundamentally, the case for free trade is the case
for the market system. The benefits come in the form of greater realization of
the efficiencies available from specialization, from allowing resources to flow
to their most productive use, from comparative advantage, and from the spur of
competition. They show up in the form of higher living standards resulting from
higher wages and higher returns to capital and quite likely in the form of
higher rates of growth. However Lukashenko views globalization as a process of
ensuring access to free Russian resources and keeping political independence
within the declared model of market socialism. At the same time he ignores
evident benefits that many Central European countries are getting because of
their strategic choice of free market economy. Rent seeking at the domestic
market at the expense of Russia
contradicts standards of the global market. Integration trilemma – greater
integration into the world market and international economic structures, proper
public economic management, and national sovereignty - is solved by president
Lukashenko in the following way:
1) let the world buy Belarussian goods and
services at world prices for hard currency, let Belarus purchase imported goods
for Belarussian roubles; unconditional loans for the government and state
enterprises, most favorable trading status while keeping high barriers of entry
for the domestic market.
2) No transparency of public finance, common standards
of financial information dissemination, auditing and accounting standards,
requirements to loan practices and debt services.
3) National sovereignty is a
bargain “good” that could be exchanged for more power in a new modified version
of another Soviet Union. The leadership of the
republic does not have a concept of how to reconcile the idea of having Russian
rouble as the Belarussian national currency and keeping the right to pursue
independent monetary policy; how to form a free trade union and keep different
tariffs and duties for many goods and services. Lukashenko is reluctant to give
more power to any institution unless he is at the head of it. That is why Henry
Kaufman idea of a global financial regulator, Jeffrey Garten’s suggestion of a
global central bank, and George Soros’ global credit insurer are off the agenda
of Belarussian policy makers. Even Russian – Belarussian equivalents of these
structures are not given a through analysis and consideration. Neither
Belarussians nor Russians worked out sound effective systems for managing
public and private financial risks. In fact private financial risks in the
Belarussian subsidarkh model are insured by the state. One step further to
switching to Russian oligarch model when the state pays off for a few
privileged economic entities letting others down will definitely be the step
away from the international globalization and integration norms.
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