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17 Apr 2013

Minsk needs money to support its paternalistic policy

Belarus economy

In 2012, the Belarusian economic model has reached peak of its current capability. Now the only way to keep the economic growth without structural reforms and avoid collapse in  the end of the year, such as currency crises as in 2009 or 2011, is attracting new borrowings  from abroad. This has already been said openly by senior Belarusian officials. But lately, in Minsk did not succeed in the relationship with the creditors, not only in the West but also in the structures of the EuroAsian Economic Community  (EAEC). What is the essence of the dispute and whether the parties will be able to agree?

In early April, the council of Anti Crisis Fund (ACF) of the EAEC delayed fifth tranche of the stabilization loan to Belarus $440 million. On March 25 the Head of Mission of the International Monetary Fund in Belarus David Hofman said that results of talks with Minsk on a new IMF program remain unchanged. And while experts point to the possible political motives of creditors, at the moment it seems that such obstacles are not really relevant.

As for the case of the IMF  political component might occur only at the stage of decision of the Board of Directors on the allocation of money. But in order to exert political influence on Minsk, the leaders of the West, firts have to agree with the IMF program for Belarus - as a subject for bargaining: "Follow supposedly our demands, and we will allocate money for the program".

Bearing it in mind the Economy Minister Nikolai Snapkou, who said recently that the government had prepared a new concept of economic policy for presentation at the session of the IMF and the World Bank, which will be held April 19-21 in Washington. But, according to the former chairman of the National Bank of Belarus Stanislav Bogdankevich, the Belarusian delegation is unlikely to come to a common ground with foreign economic officials.

According to him, the current government is fundamentally incapable of those steps, which  are required from them by both the IMF and the ACF bodies. "To manage the economy there must come people who have realized that the key is qualitative rather than quantitative results , profit, and not volume, and so on. This does not exist now ", - explained Bogdanovich his skepticism commenting to BelaPAN.

But this is not the case. There is enough people in  Belarusian government who understand the need for reform. The same Minister of Economy Snapkou has been repeatedly criticized by Alexander Lukashenko for "favoring  liberal market theories and arguments." During the period of the IMF program the IMF experts also noted understanding by the government, then headed by Sergei Sidorsky and National Bank (led by Peter Prokopovich). Reports of post-program monitoring said that the proposed conceptual reform  had been "chopped" exclusively at the top level.

But is Alexander Lukashenko simply not able to understand the basic theory of economic efficiency?

In fact, the current president, of course, perfectly understands the economic viability and guided by it in his decisions. The reason that economists talk to him in different languages just because this vision is fundamentally different to his political objectives.

If the IMF is talking about what is good for Belarus, Lukashenko is set to only what is good to Belarus led by Lukashenko. And this concept of economic measures subordinates his main political objective - to maintain and increase the "ration" of presidential primary electorate, which includes the poorest and least skilled population. If the reforms will lead to a drop in income and unemployment in these social strata, the electoral loss of the current government will not compensate for any economic gains.

So, this is just typical electoral paradox - the current president will lose part of their electorate, and those who  because of the reforms will be better, will  still do not support him.

The key difference between the two approaches lies in relation to the labor market. Economists calculations are based on the following logic of employer: if I give this man work - will increase of my income be more than his salary? In Belarus,  the top man think differently: to feed this man, how much work must be loaded on him? In other words, the second model, even unprofitable production makes sense if the workers in it can earn at least part of the salary paid to them and get the rest from revenues from commodity exports. This partially explains that paradox which always shocks foreign visitors - how people can not only survive but look reasonable good having only $300 per month. The explanation is that they have been spending their resource only up to $200.

Of course, the market system is more effective both economically and  socially, as it creates a more profitable jobs. But in order to reap the benefits of a mobile labor market, one needs to change the passive economic behavior and it is not always easy. And when this psychological change is passed, then it is much less reason to maintain the current paternalistic system.

Therefore, if the calculations of economists point of reference is the efficiency of production, but for the president the maximum acceleration of gross production and then the subsequent saleof it at dumping prices is the only politically rational way.

The same applies to economically unjustified increase of salaries. IMF officials believe that this is counter-productive policy of Minsk, as it leads to long-term imbalances in the economy. But for the official Minsk is what is the goal, and the economic stability of its interests only to the upcoming presidential election.

Returning to the current relations with the international lenders, the prospects are as follows.

In the negotiations with the IMF Minsk will try to find a compromise, reducing some figures to bring them to more realistic level. But much closer positions on the matter the parties will be able to reach only if in there will be another big devaluation of Belarusian ruble, which will provide the basis for the resumption of sustained growth. Therefore, this source of funding Minsk, it seems, regards as the post-crisis reserves.

As for the ACF, so far its claim to the Belarusian authorities is similar to IMF’s, but experts rightly point: the political agreement in Minsk with the Russian leadership is likely to cause Eurasian structure to close eyes on the many points of contention.

But as for the main  bulk of borrowings  in the 2013 Minsk will probably have to look for in the private sector of Russia, and that it is what the Kremlin  is pushing it to.

Stas Ivashkevich


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