BEROC (Belarusian Economic Research and Outreach Center),
In mid-2019 Belarus has entered a new stage of its development. In respect to the economy, one can argue that the period of recovery with somehow heightened growth has ended, while a subsequent stage is likely to be associated with a weaker growth. But this is not the only challenge. Economic threats tend to inter-relate with social and political ones, which together may result in a systemic threat to the country. So, standing against them is the most crucial question on the agenda.
During the period of 2017-1H 2019 Belarus displayed somehow heightened GDP growth: 2.8% on annual average basis vs. the estimate of the equilibrium medium-term growth of around 2% per annum. Growth in this period was a recovery one (after the recession in 2015-2016): the incentives of ‘postponed’ production and consumption were behind the behaviour of firms and households. In mid-2019 the pre-recession level of output and incomes has been restored and such kind of incentives tend to decay. Hence, a ‘recovery growth mark-up’ is likely to disappear, which means that the actual growth rate will tend towards its estimate of equilibrium, i.e. 2%.
From a short-term perspective and ‘local’ view, this does not seem to change the environment considerably. According to such view, given the commitment of the authorities to monetary and financial stability (since 2015 it seems to be rather firm) the decay of the ‘recovery growth mark-up’ does not mean anything except weaker growth of incomes. Moreover, one can argue that during the period of the recovery growth the country has reinforced its resilience to external shocks. For instance, debt burden (both private and public) reduced, while the level of international reserves increased. Baseline projections based on this view mainly postulate further domination of low growth/stagnation environment, but without severe shocks and systemic threats.
However, from a longer-term perspective and a ‘big picture’ view, one can detect such kind of threats. First, meagre growth is likely to renew/strengthen squeezing of relative level of well-being in Belarus from international perspective. For instance, a relative level of well-being vs. CEE countries (the ratio between PPP-based GDP per capita in Belarus and the mean of the one in 11 CEE countries) began to decline gradually in 2012 (after 20 years of growth) and afterwards displayed a severe drop in 2014-2016. Hence, between 2012 and 2016 the level of well-being in Belarus reduced from about 77% down to about 65% of the average one in the CEE countries. The period of recovery growth in 2017-1H 2019 allowed freezing it nearby that level. A renewal of relative well-being downgrading is likely to result in increasing labour migration, as in recent years the latter has become extremely sensitive to the former. This constitutes an important challenge in economic, social and political dimensions. In the economic one, this would lead to further deterioration of growth perspectives because of labour and human capital outflow. Socially and politically, this trend is likely to challenge the consistency of the entire economic model.
Second, the risk of financial turmoil can again appear on the agenda. The main achievement of the period of recovery growth – strengthening financial stability – in a great extent fell back upon the growth of output. Just it was the core factor behind the reduction of debt burden and some improvements in the financial performance of firms. Poor growth environment is likely to reverse these trends, as despite some reinforcement of financial stability in recent years systemically it is still fragile.
Third, poor growth can challenge the commitment of the authorities to sound economic policies. Such committments were introduced in 2015 given the environment of financial turmoil. A new policy mix has mitigated financial distortions, but has denuded poor growth potential. In case the ‘costs’ of poor growth mentioned above are treated as unacceptable by the authorities, and taking in mind some ‘margin of safety’ at disposal (higher international reserves, lower inflation expectations), they can begin a new round of voluntary expansionary policy.
So, unfavorable perspectives and policy dilemmas with hardly acceptable options are dominating today on the national agenda. This makes the country very attackable from outside and Russia seems not to lose this opportunity for promoting its interests. A so-called ‘integration promotion program’ is likely to be the instrument for weakening Belarusian sovereignty. What are the options for standing against? The authorities fall back upon ‘diplomatic maneuvers’. However, as shown above a ‘systemic fragility’ mainly stems from fundamental economic weaknesses. So, without readiness of the authorities to institutional reforms in the economy, the stance of ‘systemic fragility’ is likely to maintain. The latter can generate different development scenarios, even those that seem improbable today.
Expert article 2573