A BRIEF ANALYSIS OF ECONOMIC AND SOCIAL PROBLEMS IN BELARUS

1. Introduction (Belarus and Europe)
2. An overview of the economic situation
1. General trends
2. The features of dynamics in economy
3. The goals and priorities of the government
4. The defects of the structure as the cause of the crisis

• Evaluation of the social dynamics (the roots of the poverty and its impacts)

1. The general planning principles
2. The social impact of leveling the exchange rate
3. The poverty and its consequences

Minsk

August 18, 2002

1. Introduction (Belarus and Europe)

The autumn 1996 political crisis is the turning point of the modern Belarusian history, which led to concentration of all legal, executive and judicial power in the hands of just one individual, Alexander Lukashenko, President of the Republic of Belarus.

The reaction of European leaders of those days to the event of direct interference of Russia in to the internal affairs of a sovereign Belarus can be compared only with the Munich collusion preceding World War II.

At present our country still possesses quite a considerable potential in the sphere of human recourses, research, industrial production, agriculture and armed forces. Due to this, ignoring its national interests both by Russia and the West is objectively forcing Belarus to align with the third power and turns it into a hotbed, which jeopardizes the peace and stability in the region.

After Baltic states' joining the family of European countries, Belarus, which following WW II took the geopolitical place of East Prussia, will become a key to the solution to all the crossborder problems of the region. This includes ecological ones, as its territory is the catchment area of the rivers, which supply water to 50 million of people, and as its territory is contaminated with the radioactive fallout; economic ones, as it is the highway of the AsiaEurope transport corridor; social ones, as the route of drugs supply and refugee migration from Asia goes through it territory; financial, as it is one of the laundry points; political, because this is the zone of strategic military interests of Russia.

Under these conditions to ensure the sustainable development of our country is a priority. It is not realistic to assume that this can be accomplished without establishing all the components of a civil society.

Here it is necessary to take into account that due the historical reasons, the present power in Belarus is recognized by the predominant number of Belarusian population as legal, capable, successful and prospective, regardless of the way it was established. The Belarusian community is consolidated and stable.

Thus, the cooperation with Belarus has to be built on recognition of the legitimacy of the present institutes of power with awareness of the major problems and contradictions of the community, and, definitely, with taking into account the remote perspective of Belarus' joining the united Europe.

2. A Brief Overview of The Economic Situation

1. General Trends

We are going to analyze the dynamics of the economic development of the country during the period January 1, 1997 to July 1, 2002. During this period Belarusian economy has been developing under the impact of administrative control. Through this the country's leaders have been trying to utilize the resource reserves as much as possible. Their adherence to this particular way can be attributed to its success in 19971998, when the rates of growth of the GDP and industrial production exceeded 10%.

There was no adequate reaction to the Russian crises of 1998 in Belarus. This resulted in the increase of the instability of the financial systems of the enterprises, industries and the country in general. The rate of increase of the defaults in payments and the scope of the mutual indebtedness, price disproportions, practical bankruptcy of the agrarian sector were growing less and less sensitive to stimulation by the administrative methods and crediting by means of issue of money.

There was a start of deceleration of the GDP growth rate. There was evidence of the negative shifts in the process of its formation and use. The investments were decreasing. The reduction of the investments into the active part of the fixed industrial assets caused the decrease of the competitiveness of the industry at the foreign markets, and later inside the country.

The latter caused worsening of the structure of the foreign trade turnover. The export demonstrated growth of the share of raw materials. The effectiveness of use of imported fuel and energy kept falling. The foreign trade balance remained negative, and the real balance sheet deficit kept growing (we have to take account the peculiarities of Belarusian statistics).

The need of restructuring keeps growing more and more urgent and gains more and more understanding among mangers at different levels.

2. A Profile of Dynamics in the Economy

In 2001 the GDP growth made 4.1 per cent in comparison with the preceding year. In 2000, this increase was 5.8 per cent.

The investments into the fixed assets, nevertheless, continue decreasing. In 1999 they were 92% of the level of 1998, in 2000 102% of the 1999 level, and in 2001 — 94 % of the level of 2000.

In 2001, the foreign trade of Belarus was 96.8% of the level of 1997, and there was a considerable reduction of the negative balance (from 1,387.6 mill. USD to 620.6 mill. USD) as a result of the reduction of imports. At the same time, the rates of growth of the volume of exports were higher than the rates of growth of the prices for the export goods, and the prices for Russian goods, due to the increase of the prices for oil, kept steadily growing. The share of Russia steadily constituted makes more than a half of the foreign trade turnover (15,477/9,190 mill. USD in 2001).

The consolidated 2001 Budget was kept with a deficit of 1.3% of GDP, while in 1997 it was 2.2% of GPD.

The changes were caused by the increase of the rate of collected taxes and other duties to the State Budget. At the same time, the real income of economic entities (adjusted for the consumer goods prices index) was reduced by 30.4% as compared with 2000.

The profitability of sales of goods in the economy in general was 10.1 in 1997, and 8.2 in 2001. The share of loss making enterprises was 34.2% in 2001, while in 2000 it was 22.3%, and in 1997 — 12.3%.

One can notice the outpacing growth of outstanding accounts payable as compared with the accounts receivable. Thus, in 1997 this ratio was 1.1 (33,590 / 31,238), while in 2001 it became (2,043.0/1,657.7). At the same time, while in 1997 the outstanding accounts payable made 36.4% of the total volume of the accounts payable, in 2001 it grew up to 40.4%. On January 1, 2002 the ratio of the monetary funds of enterprises to the outstanding accounts payable in industry were 14%, in agriculture 2,4%.

The policy of increasing the real monetary incomes of the population leads, in fact, to weakening of the financial sustainability in the households sector too. Thus, in 1999 this increase reflected the overall condition of the economy in general and exceeded the level of 1998 by 0.2%. The following years, it became a rule to overdo the previous years by 1820%.

However, the fluctuations of the booked incomes of individuals do not proportionally affect the retail sales turnover. The ratio of the population's savings in banks to the retail sales turnover was 4.5% (7,657/169,300) in 1997, and 10.6% (823.8/7,797.3) in 2001.

So, in 2001 the real money incomes of the population increased by 25% as compared with 2000, and the retail sales turnover in comparable prices showed the upsurge of 17%, while the bank saving doubled under the condition of 46% growth of consumer good prices.

This is an indication of an inflow of nonmoney (agricultural produce, harvesting wild growing plants, hunting and fishing) and shadow incomes of households on the one hand, and of the arrears of consumer goods production on the other.

3. The Goals And Priorities of the Government

1. Declared ones

Under the conditions of the unsustainable financial system, the governments, which kept continuously replacing the other ones, nevertheless used to stick to the three priorities: increase of the export potential, augmentation of food production, and implementation of the housing construction program, the two latter being resolved through open or hidden crediting of the corresponding branches.

The pursuit of these goals, according to the official conception, has to maintain:

the diversified structure of the economy with the pro forma equality of the state and private sectors;

the leading role of the government in regulating and reforming the economy;

the social orientation, a system of protection of socially vulnerable groups of the population.

The main means of formation of the positive economic dynamics during the analyzed period were as follows:

1. the increase of the effective demand and expanding the capacity of the domestic and foreign markets for sale of Belarusian products;
2. the activating investment and innovation activity, renewal of the industrial production;
3. the increase of the effectiveness of the government's control over the social and economic processes;
4. taking advantage of the favorable geopolitical position of the country and the advantages of the international division of labor;
5. the development of the integration with Russia.

As these methods of economy regulations did not change, all the government de facto applied administrative methods and manipulated the money stock.

The analysis of the statistics demonstrates the special role, which was played in the national economy of 19972002 by the three factors underlying the economic dynamics: crediting through issue of money, directive management, and the policy targeted at integration with Russia.

2.3.2. The Analysis of the Situation And the Main Data

2.3.2.1. In 19972002 the real sector greatly depended on external factors. During the first half of 1999, the consequences of the 1998 Russian crisis were quite feasible.

The worsening of the financial problems caused the reduction of the investments to fixed assets.

Table 1

Investments to Fixed Assets

(preceding year is 100:)

The share of lossmaking enterprises is steadily growing.

Table 2

The share of lossmaking enterprises and organizations, %

The growth of the defaults in payment was stable also. The data are given above.

Belarusian enterprises have debts mainly for energy and fuel, most often to Russian suppliers (about 60% of the total debt). In spite of the real decrease of the foreign accounts payable, it remains almost three times higher than the foreign accounts receivable.

The profitability of the production is decreasing. The data are given above.

The agriculture is in crisis.

Table 3

Long Term Bank Loans to the Collective Farms

(real prices of the corresponding period, mill. rubles)

It is not capable to pay back its liabilities to the banks and suppliers even is they sold all their harvest and fixed assets (besides the land, which remains the property of the state).

The production of grains is not stable and shows a steady downtrend resulting from lower yields. The deindustrialization of the potato production ( the collective farms produce only 8% of the total yield) is also fraught with negative consequences in the medium term.

The number and the productivity of live stock is decreasing. For instance, on January 1, 2002 cattle made 58% compared with January 1, 1991, and the average yield of milk per cow dropped to 2,154 l (78 kg reduction in comparison with 1999).

grains potatoes

Figure 1. Gross production of grains, legumes, and potatoes in Belarus

2.3.2.2. The credit and monetary policy. During the whole period under evaluation, the inflation rate remained high. The attempts of the National Bank to conduct a strict monetary policy have been unsuccessful.

Table 4

The consumer goods index

(preceding years are 100:)

For example, in 2000 the price parameter of the inflation was estimated on the basis of the planned issue of money in the amount of 76 B rubles, but the factual amount was 175,0 B rubles during that year. The crediting through the issue of money caused the increase of the amount of rubles by 7.3% a month in average. The share of the ruble in the total money stock was reduced by15.0 p.p. and constituted 41.3%. The reason for this is the increase of hard currency deposits from 689.7 to 802.8 mill. USD and the devaluation of ruble from 320 to 1,180 rubles per dollar (by 3.7 times).

Since February 2000 the real level of the refinancing rate has remained positive with a general downward trend. This has caused increase of the period ruble deposits by 3.1 times up to 23.3% of the total ruble money stock as on January 1, 2001.

The growth of the real incomes of the population, which outpaces supply of consumer goods, has resulted in the increase of the individuals' period ruble deposits by 5.2 times, what made 11.8% of the ruble money stock as on January 1, 2001. However, the decrease of the interest rates on ruble deposits can again reduce the attractiveness of ruble as a means of savings.

During 2000, the average devaluation rate of the official exchange rate of Belarusian ruble was 11.5% per month. The devaluation the official exchange rate, which went faster than the inflation, allowed to bridge the gap between the exchange rates (60 times reduction) and to attain the uniform exchange rate in all the segments of the market.

Table 5

The consumer goods price index and the official exchange rate UDS/BRB in 2001

(December 2000 is 100%, 1,180 BRB per 1 USD)

At the same time, the notice has to be given to the growing gap between the rate of growth of the consumer goods price index and the pace of growth of the exchange rate of U.S. dollar.

2.3.2.3. Social life. In 2001, the average money income was 1,215.5, while the minimum budget in December 2001 was about 64,000 rubles. Incomes per member of the family of almost ѕ of the population were below the minimum budget, and for more than one third they were below the cost of living. More than 60% of the total income of the population was spent on food.

In 1997 the share of households that are non sufficiently provided for was 26.4% out of the total number, in 1998 — 27.8%, 1999 — 40.4%. By 2002 the poverty level has not decreased. There are groups of families, whose resources per member of the family do not cover even officially set minimum food standard.

By the end of 2001 the number of unemployed was 109.3 thou. of people (2.4% of the economically capable population) compared with 95.4 on the same date of 1999. It is not known whether the unemployment data are being recorded in line with the methodology of ILO.

Thus, the increase of the gross production indexes is provided at the expense of the decrease of the end consumption by considerable groups of households, through the growth of the accounts payable of enterprises, and decreasing investments into reequipment of the production.

4. Defects of Structure As the Source of the Crisis

The comparison of the official statistics does not reveal the full picture of the economic and social trends in Belarus, as the defects of structure originate from factors beyond the economy.

1. The crediting through issue of money insures high rates of growth and speeds up the inflation. For Belarus typical are seasonal fluctuations of the effective demand: reduction by April, growth by October, and the range of the fluctuations increases annually. This tendency results from the crediting the agriculture and construction through issue of money. The preservation of the collective farm system, unavoidable in centralized administrative system reinforces the seasonal character of the fluctuations.

2. The control over the economy allows to manipulate the material and human resources regardless of the form of ownership. Employment and utilization of capacity are determined not only by the economically grounded need of growth, but also by updown directions regarding the increase of production not associated with the demand. The real rates of growth outpaced the ones of the production only in October 1999.

There is no stable dependence between the stocks and the demand. Only since April 1999 the increase of demand has become in proportion to the reduction of the stock of finished goods. The stock of finished goods also demonstrates seasonal changes resulting from the artificial effective demand — they get smaller in October and increase by April. The fluctuation band keeps growing.

2.4.3. “Nonregulated&rdqu o; prices. However, the recurrent issue of money causes serious demand fluctuations and requires regulation of prices through a wide range of means of administrative compulsion. It is exactly here, where Belarusian economy shows most apparent and feasible breaks down.

2.4.4. Russia is the factor, which absorbs the resources and the stimuli for restructuring. It is noticeable that the integration agreements with Russia, except the last one, were signed in April. These were the time when the payments for the energy were made in the form of barter deals, through clearing settlements by means of goods.

This type of deals, which allow to get rid of the excessive production stocks, allow to postpone restructuring of the economy and distort the normal reaction of the market. At the same time, Russian investments to Belarus are related mainly to the transportation sector, and, partially, to processing mineral deposits. During the period under investigation they made up about 10 per cent of the total investments, and were the only steadily growing sector.

The development of the national economy strongly depends on the situation at the markets of Russia, the main economic partner of our country. For example, the results of 1999 indicated a 10.3% growth of industry in our country, but the volume of trade with Russia dropped by 30% in comparison with 1998, although the volume of supply of goods to Russia grew.

Unfavorable economic trends force the Government to apply stricter administrative control, but the effect of it is getting less and less feasible.

2.4.5. The perspective of overcoming the crisis

There are a number of reasons why the achievements of the extensive growth of the economy, the stronghold of the Government, and the means it has been using throughout 19972002 have become ineffective:

1. the enterprises fail to accumulate resources for technical reequipment of production facilities;
2. the misbalance of prices corrupts the relationship between the branches and segments of the economy;
3. in addition to the dependence on Russia in energy, the dependence in grains is growing coupled with forcing home made goods out of Belarusian market (the reason is that domestic goods are loosing their advantage of costcompetitive price);
4. hightech branches and enterprises become rigidly dependent on functioning of Russian military industrial complex.

This is why any government in the nearest future will attempt to pursue a strict credit and monetary policy, reject the total price control, reform agriculture and create a favorable climate for knowhow and investments.

3. Evaluation of the social dynamics (the roots of the poverty and its impacts)

1. The general planning principles

When planning future activities in Belarus, it is necessary to take into account a number of factors, which influence the development of the social assistance in general, regardless of its character, forms and way of funding:

the economic trends and resulting from them the peculiarities of the budgeting ( the analysis of the dynamics of outpacing indicators of economic development reveals the possibility of stagnation in the short run, and, possibly, in the medium run; at present state budget deficit is 48 B BRB or 1.2% of the GDP, and the amount of unpaid taxed is twice as high);

the democratic trends (at present the most numeral age group (born between 19451955) has reached the retirement age. This group makes the core of the workforce in industry and agriculture. The death rate exceeds the birth rate. There are no positive trends as far as the health indicators of the population are concerned;

the political trends (depending on the character of the relationship with Russia the process of legal and institutional changes, which affect the sphere of our interest, may vary in terms of its pace and, possibly, the direction).

Planning activities in our country require taking into account the scientific and administrative foundation of the forthcoming transformation. To be successful, it is necessary:

• to create a normal system for modeling and optimization of social expenses;
• to go through all the necessary administrative and coordination procedures, which are a prerequisite of a pure experiment;
• to establish a system for coordination of the actions of the main ministries, which determine the tactics of the government in the social sphere — social security, labor, finance and economy.

And, finally, the effectiveness and the attitude of the community to the activities, which are supported by foreign organizations, are not welcome by every social group and strata of the population. There have been cases of opposing the activity of foreign organizations, and they tend to grow towards the propagandistic actions.

This means to say, that at the given stage it is important to promote our actions and to work towards formation of a positive image.

2. About the Social Impact of Leveling the Exchange Rate

In the opinion of the Government, the most important positive social and economic results of the uniform exchange rate were:

• the credits to agricultural enterprises now are issued by commercial banks;
• housing now is credited from the Budget;
• accounting presents more precise data;
• the inflation has been 81.2 p.p. down in comparison with 1999.

The slowdown of the economic activity rates and the growth in number of lossmaking enterprises, which are observed in the period under investigation, are attributed to lack of liquidity, resulting from the tightening the crediting and monetary policy, and shrinking of CIS markets for exporters.

As a result, the dependence of Belarus on the external markets and price control, including cross subsides, are quoted as the deepest causes for the negative consequences of the leveling of the exchange rate.

Here, the three decisive factors for exporters are:

• the real rate of the compulsory sale of hard currency earnings;
• the energy consumption of the production;
• the direction of the export.

However, it has to be mentioned that the wellbeing of the leading exporters determine the wellbeing of half of urban families in the country.

In this respect price control is regarded by the Government as a most decisive factor. But there is no clear distinction between the possibilities of the institutions, which control the prices, and the economic effectiveness of their actions.

Here we have to mention that the rate of price rise in Belarus significantly exceeds the one in any of the neighboring countries.

This makes the devaluation affect the population regardless of the success of control over the prices for so called “socially important goods”.

The matter is that with the current structure of the modal family budget most of the households become vulnerable to the fluctuations of the import share, as every family spends about 60% of its budget on food.

It is not hardly be considered correct that the Government regards the agricultural production beyond the collective and state farms as a means of additional protection of the population against fluctuations of prices and exchange rates.

Officially, nongovernment producers of agricultural goods use 16% of agricultural land and output 40% of the gross agricultural product.

This volume of output cannot be beyond the impact of the economic conditions.

There is no official forecast for the impact of the exchange rate leveling in connection with the mere raising of the average salary up to 100 USD will not ensure the compensation by the population even of one forth of the communal services costs. And the growth of the tariffs, which outpaces the inflation rates, results only in the increase of the default payments and debts.

The change of the first tariff rate of the standard wages, justified by the social commitments of the government, protected the average wage against the inflation. However, what is more important in our opinion, is that it led to elimination of the gap in remuneration between different categories of workforce.

Through this barrier for the increase of labor productivity was created, and in future we cannot expect a feasible reduction of poverty.

1. The Poverty And Its Consequences

Poverty is one of the painful problems of the transformation in Belarus. The official methods for its estimation are not perfect yet, and the concepts applied are vague. The standard estimation of poverty, which is based on the fluctuating standards for “the rational consumption norms” is not adequate when it comes to terms of addressed social security.

We consider the adequate criteria for poverty estimation to be the share of expenditures on primary goods in the total household income.

1. these expenditures are relatively stable, as they are determined by the basic physiological needs and cult traditions of the population;
2. The share of these expenditures grows if the total household incomes decline, and the population lose the capacity to acquire durable goods and services.
3. When the household consumption tends to minimum, these expenditures become more preferable than savings.

The watershed between lowincome households and the rest is at least 80% share of expenditures on primary goods in the total income. Adjusted through the use of indirect criteria (subjective perception of poverty, the level of income and deprivations, the amount of accumulated property and savings) the share of lowincome households, which are not capable to overcome their poverty without outside assistance, makes 20% out of the total number of households.

Lowincome households fall into two groups depending on their inclination to savings and survival strategy.

The first one do not save money and other valuables, practice the passive survival strategy based on reduction of consumption and naturalization of their household, and consider positive future changes hardly possible. For of brevity further on we shall refer to this group as “pessimists”.

The second one make savings of money and other valuables, resort to the active survival strategy based on search for additional income and relate positive future changes to their own activity.

The survival prospects for a household and the duration of its stay in the category of lowincome is determined by three groups of circumstances:

1. sociodemographic: the size of the family, the proportion of members capable of work, the proportion of men in the family, the proportion of children in the family, the level of education of the members capable of work, the social position of the members of the family;
2. geographic: the distance to the state boarder, the distance to big cities, the distance to the centers of agricultural enterprises.
3. Socioeconomic:

Those, which determine the success of the active survival strategy:

Remuneration from the main employment, the effectiveness of use of the available plots of land, the recurrence of additional incomes, the work of one of the family members abroad, the activity in preservation of food for winter (mushrooms, berries, etc.), the involvement in buyandsell and flee market trade, the concealment of income from taxation, savings in hard currency, availability and use of relationships;

Those, which determine the success of the passive survival strategy:

The amount of the pensions (stipends, allowances) and so on, the amount and the liquidity of the accumulated property, the assistance of relatives, the longer use of the property items, the skills in self service and selftreatment.

Under the conditions of unfavorable economic situation, the active survival strategy proves not sufficiently effective.

The passive survival strategy against the background of high inflation expectations leads to losing resource management skills: 82.3% of the households in this group are not capable to make significant purchases in the nearest future.

The dynamics of the reasons that drive households into poverty depends on the following main factors: inflation, weather conditions, demographic situation. Additional factors are as follows: the price fork between industrial and agricultural goods, fiscal policy, the level of unemployment.

The negative impact of the main factors affects the number of lowincome households in different ways. Thus, under the impact of inflation following August 1998 the number of the poor augmented by one forth. The weather conditions in 1999 also caused the increase in the number of the poor.

The analysis of the structure of lowincome households and the factors, which determine their survival, allow to suggest that

1. the number of lowincome households will keep growing;
2. the households of older age groups, women, individuals with low level of education and rural population have less chances to overcome their poverty, and for them the passive survival strategy is more probable;
3. the households of young people will survive through the active legal and underground (even criminal) activity;
4. the difference in the sets of sources of extra income groups with different education levels will increase;
5. tightening of labor and tax legislation will force household of people, who are employed in budget funded spheres, to look for shadow incomes;
6. the drift of the expenditure structure of lowincome households towards primary goods will aggravate the problems of culture, health service and education;
7. the lack of savings of lowincome households classed as “pessimists” will suppress their initiative and cause rejection of any economic and social changes, because any risk in the situation of their expenditure structure jeopardizes their health.

The factors, which are favorable for survival of lowincome households in the nearest future are:

1. decrease of inflation;
2. growth of the effectiveness of agricultural production;
3. improvement of the fiscal policy;
4. organization of address social assistance;
5. creation of jobs, which correspond to the capabilities of the poor.

4. Conclusion

The above information concerning the economic and social trends in Belarus allows to compare the realistic social structure and dynamics with the structure and activities of NGOs and outline the possible ways for cooperation.

The information was prepared by

Analytical Group and Lawyers Club of UWB

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