3.Low labor productivity

Salary growth over the long term in Belarus exceeds labor productivity growth multiple times over. For example, from 2000 to 2014, real wages grew 4.8 times, while productivity only grew 2.2 times. From 2010 to 2014, real wages grew 45%; productivity was held to only 14% growth.

Admittedly, labor productivity at Belarusian state-owned firms is lower than at their private and foreign competitors. In 2013, revenue per employee at the joint venture MAN factory was 360,000 dollars compared to 64,300 dollars at the Minsk Automobile Plant (6 times higher); at John Deer it was 11 times higher compared to the Minsk Tractor Works; at foreign owned Olivaria Brewery it was 190,700 dollars compared to 85,000 dollars at state-owned Krinitsa (half as much); at private Santa Bremor it was 115,900 dollars compared to 83,700 dollars at state-owned Belryba. It is worth noting that the difference in productivity goes beyond technology, a metric according to which state enterprises are comparable to their competitors after modernization; different management systems—manual versus corporate, for instance—explain the difference.

Belarus can therefore get away from the "middle-income trap" by utilizing systemic and operational measures.


liberalizing immigration policy, and reducing prison sentences (for example, for non-violent crimes).

### **3.3 The "social burden trap"**

Belarusian state capitalism has always had the support and understanding of the people as a form of socialism, or a welfare state. Since the 1990s, especially when contrasted to the social turbulence experienced in neighboring countries, Belarusian society held onto a degree of nostalgia for the relatively successful social and economic development Belarus had grown accustomed to as part of the Soviet Union.

And nowadays the government and its limited resources are torn between satisfying the country's growing social needs and solving its economic problems. It generally chooses to prioritize the former at the cost of economic growth. That high level of social spending coupled with the "debt trap" and "middle-income trap" is calling into question whether the social welfare system will be financed in the future by the government, the people, or other sources of income. At the same time, a population that has grown accustomed to today's level of income and social benefits as subsidized by the government expects more of the same.

It is important to also note that the purchasing power of wages in Belarus is higher than its face value in dollars. That can be explained by the partial subsidies the government provides for consumer prices, utilities, and social services. While nominal wages in Belarus are lower, for example, than in Russia and Kazakhstan, in terms of purchasing power parity they have been higher in recent years than in Kazakhstan.

The growth in and level of salaries in Belarus should be juxtaposed with the approaches taken by other countries, for example, to financing utilities or a number of other social expenses aimed at boosting the national economy's competitiveness.

### *3.3.1 Utilities*

The government provides a utility subsidy of nearly 70%, and there are plenty of counter-arguments to the impending elimination of cross subsidies.

First, and given the state monopoly in this area leaving consumers bereft of choices when it comes to which utilities they use and pay for, the key issue is to control expenses and therefore rates.

Second, raising rates would increase the percentage of private expenses taken up by utilities. In the first quarter of 2015, utilities accounted for 6.9% of household expenses in Belarus. By way of comparison, in 2012 that number was 6.8% in Russia and 9.9% on average in Europe, with the lowest being 3.5% in Finland and the highest being 14% in Slovakia [22]. In other words, completely eliminating cross subsidies in Belarus would be justified given were it to occur in the context of an increase in private earnings.

Third, utility rates are included in the consumer price index, so raising them would have a trickle-down effect that pushes inflation higher across the entire economy. Doing so therefore needs to be gradual in an effort to avoid an inflationary shock.

#### *3.3.2 Social support*

Social expenditures on, for example, supporting families are higher in Belarus than in other countries. For instance, paid maternity leave in Belarus is 3 years, while in Russia, it is 1.5 years and in Kazakhstan, it is 1 year. The one-time grant given at childbirth is 961 USD in Belarus for the first child and 1345 USD for all following children. In Russia, it is 261 USD; in Poland, it is 266 USD; and in Lithuania, it is 469 USD. In Kazakhstan, parents are paid 319 USD for each of

**73**

*State Capitalism in Belarus: Behind Economic Anemia DOI: http://dx.doi.org/10.5772/intechopen.93606*

Kazakhstan, Poland, or Lithuania.

finance the state's social infrastructure.

at discounted rates, for instance).

continue stable economic development.

*3.4.1 The petrochemical sector*

**3.4 The "resource curse trap"**

their first three children, receiving 53.2 USD for all subsequent children. In 2015, Belarus introduced family capital in the amount of 10,000 USD made available after the birth of third and following children. In Russia, maternity capital comes to 8160 USD, while there is no state-sponsored maternity capital system in

There is no need to limit the search for ways social spending can be financed to some sort of split between the government and consumers—business could also prove to be an important source. However, social spending is usually seen in the business world as a burden imposed by the government in the form of a minimum wage, educational standards, medical standards, and more. In the 1990s and 2000s, the business model in vogue was to minimize social expenditures by manufacturing in countries with the lowest social requirements and standards:

In Belarus, one strategy for privately owned construction companies is to build kindergartens into their new apartment complexes and hand them over to the local authorities, thereby adding to the incentive to buy their apartments. The cost of building the kindergartens is even built into the price of the apartments. Another example is when companies build roads to their shopping centers, business centers, and entertainment complexes. All of that goes back to a business model focused on stimulating demand for goods and services rather than charity paid by business to

Ultimately, one way out of the "social burden trap" (besides wholesale welfare reform) is a public-private partnership that is both mutually beneficial and voluntary, a qualification without which it would drag business into an unprofitable social sphere and come to nothing. Most practical would be the creation of a fund supported by private, state, and international capital that could be used to finance the public-private partnership's social projects (by offering targeted business loans

This trap occurs when the economy, and in particular exports, is based on preferential access to raw materials, forcing it into dependence on external factors (global prices, foreign trading partners, and competitors) and industries not based on raw materials into the background. Favorable conditions see exports and the economy grow, digging themselves deeper and deeper into the hole in the process, while economic downturns lead to falling exports, economic growth, and living standards. Free or preferential access to raw materials also saps the state's need for tax revenue and strong institutions. When the economy takes a turn for the worse and the prices for raw materials drop, institutions and tax revenue are not there to

This pitfall is a real and present danger for the Belarusian economy due to the

The petrochemical industry exploited a period of low crude oil prices and high prices on finished products to boost its share of the country's GDP. In 2009, oil refining and chemical production created 4.7% of GDP; in 2019, they created around 7%. Raw materials also became more of the country's focus when it came to exports. For example, the share of oil, petroleum products, and potash fertilizers in Belarusian exports went from 35% in 2010 to 38% in 2014. And even within that number oil and petroleum

products went from 26 to 30%, while potash fertilizers dropped from 9 to 8%.

petrochemical sector's outsized presence and the Russian factor.

China, Vietnam, Bangladesh, and other Asian countries, for instance.

*Public Sector Crisis Management*

for non-violent crimes).

**3.3 The "social burden trap"**

liberalizing immigration policy, and reducing prison sentences (for example,

Belarusian state capitalism has always had the support and understanding of the people as a form of socialism, or a welfare state. Since the 1990s, especially when contrasted to the social turbulence experienced in neighboring countries, Belarusian society held onto a degree of nostalgia for the relatively successful social and economic development Belarus had grown accustomed to as part of the Soviet Union. And nowadays the government and its limited resources are torn between satisfying the country's growing social needs and solving its economic problems. It generally chooses to prioritize the former at the cost of economic growth. That high level of social spending coupled with the "debt trap" and "middle-income trap" is calling into question whether the social welfare system will be financed in the future by the government, the people, or other sources of income. At the same time, a population that has grown accustomed to today's level of income and social

It is important to also note that the purchasing power of wages in Belarus is higher than its face value in dollars. That can be explained by the partial subsidies the government provides for consumer prices, utilities, and social services. While nominal wages in Belarus are lower, for example, than in Russia and Kazakhstan, in terms of purchasing power parity they have been higher in recent years than in Kazakhstan. The growth in and level of salaries in Belarus should be juxtaposed with the approaches taken by other countries, for example, to financing utilities or a number of other social expenses aimed at boosting the national economy's competitiveness.

The government provides a utility subsidy of nearly 70%, and there are plenty of

First, and given the state monopoly in this area leaving consumers bereft of choices when it comes to which utilities they use and pay for, the key issue is to

Second, raising rates would increase the percentage of private expenses taken up by utilities. In the first quarter of 2015, utilities accounted for 6.9% of household expenses in Belarus. By way of comparison, in 2012 that number was 6.8% in Russia and 9.9% on average in Europe, with the lowest being 3.5% in Finland and the highest being 14% in Slovakia [22]. In other words, completely eliminating cross subsidies in Belarus would be justified given were it to occur in the context of an

Third, utility rates are included in the consumer price index, so raising them would

Social expenditures on, for example, supporting families are higher in Belarus than in other countries. For instance, paid maternity leave in Belarus is 3 years, while in Russia, it is 1.5 years and in Kazakhstan, it is 1 year. The one-time grant given at childbirth is 961 USD in Belarus for the first child and 1345 USD for all following children. In Russia, it is 261 USD; in Poland, it is 266 USD; and in Lithuania, it is 469 USD. In Kazakhstan, parents are paid 319 USD for each of

have a trickle-down effect that pushes inflation higher across the entire economy. Doing so therefore needs to be gradual in an effort to avoid an inflationary shock.

benefits as subsidized by the government expects more of the same.

counter-arguments to the impending elimination of cross subsidies.

**72**

*3.3.1 Utilities*

control expenses and therefore rates.

increase in private earnings.

*3.3.2 Social support*

their first three children, receiving 53.2 USD for all subsequent children. In 2015, Belarus introduced family capital in the amount of 10,000 USD made available after the birth of third and following children. In Russia, maternity capital comes to 8160 USD, while there is no state-sponsored maternity capital system in Kazakhstan, Poland, or Lithuania.

There is no need to limit the search for ways social spending can be financed to some sort of split between the government and consumers—business could also prove to be an important source. However, social spending is usually seen in the business world as a burden imposed by the government in the form of a minimum wage, educational standards, medical standards, and more. In the 1990s and 2000s, the business model in vogue was to minimize social expenditures by manufacturing in countries with the lowest social requirements and standards: China, Vietnam, Bangladesh, and other Asian countries, for instance.

In Belarus, one strategy for privately owned construction companies is to build kindergartens into their new apartment complexes and hand them over to the local authorities, thereby adding to the incentive to buy their apartments. The cost of building the kindergartens is even built into the price of the apartments. Another example is when companies build roads to their shopping centers, business centers, and entertainment complexes. All of that goes back to a business model focused on stimulating demand for goods and services rather than charity paid by business to finance the state's social infrastructure.

Ultimately, one way out of the "social burden trap" (besides wholesale welfare reform) is a public-private partnership that is both mutually beneficial and voluntary, a qualification without which it would drag business into an unprofitable social sphere and come to nothing. Most practical would be the creation of a fund supported by private, state, and international capital that could be used to finance the public-private partnership's social projects (by offering targeted business loans at discounted rates, for instance).

#### **3.4 The "resource curse trap"**

This trap occurs when the economy, and in particular exports, is based on preferential access to raw materials, forcing it into dependence on external factors (global prices, foreign trading partners, and competitors) and industries not based on raw materials into the background. Favorable conditions see exports and the economy grow, digging themselves deeper and deeper into the hole in the process, while economic downturns lead to falling exports, economic growth, and living standards. Free or preferential access to raw materials also saps the state's need for tax revenue and strong institutions. When the economy takes a turn for the worse and the prices for raw materials drop, institutions and tax revenue are not there to continue stable economic development.

This pitfall is a real and present danger for the Belarusian economy due to the petrochemical sector's outsized presence and the Russian factor.

#### *3.4.1 The petrochemical sector*

The petrochemical industry exploited a period of low crude oil prices and high prices on finished products to boost its share of the country's GDP. In 2009, oil refining and chemical production created 4.7% of GDP; in 2019, they created around 7%. Raw materials also became more of the country's focus when it came to exports. For example, the share of oil, petroleum products, and potash fertilizers in Belarusian exports went from 35% in 2010 to 38% in 2014. And even within that number oil and petroleum products went from 26 to 30%, while potash fertilizers dropped from 9 to 8%.

Falling global potassium prices in 2013–2014 and oil prices in 2014–2015 (a trend that will most likely be deep and protracted) coupled with a lesser fall in prices for petroleum products necessitates a new economic structure for Belarus. A fast bounce-back of global oil prices and a return to the old national economic structure are an unlikelihood not borne out by knowledge of history. The average historical oil price (in terms of the dollar's value in 2000) from 1880 to 2004 was 19.61 USD per barrel [23]. The historic highs enjoyed by the global economy have been a recent phenomenon: in 2010–2014, Brent crude averaged 102 dollars per barrel, creating an unsustainable bubble in the economies of a number of countries. The dramatic drop in oil prices has also had an impact on both production quantities and the financial wellbeing of oil refineries that are Belarus' largest exports and taxpayers and in the middle of modernization. In 2013, the share of exports taken up by goods and services provided by Mozyr Oil Refinery and Naftan was 16%.

On the other hand, the impact dropping crude oil prices have had on the Belarusian oil refinery sector should not be overstated. Prices on crude are correlated with prices on oil refinery goods, so the net profit brought in by oil refineries should remain more or less the same. Efficiency, rather than price changes, is a much heftier driver of profits, and decreased export customs duties have been the biggest difference the oil price drop has had on the Belarusian refining sector.

#### *3.4.2 The Russian factor*

Russia's oil-based economic structure, the formation of the Eurasian Economic Space, and the orientation of 43% as of 2019 Belarusian exports toward the Russian market make the Russian factor a critical piece of the puzzle. In 2019, oil was responsible for 48% of import from Russia to Belarus, adding gas pushes that number to 68%, and adding metals means that the overall share of raw materials came to 78%.

Given the Russian ruble's floating rate, the global collapses of oil prices in 2014–2015, and early 2020 were mirrored almost exactly by the exchange rate. The Russian ruble has been de facto pegged to the price of oil. Certainly, the plummeting price of oil has not been the only factor exerting downward pressure on the Russian ruble. Countries like Angola, Algeria, Kuwait, Iran, Iraq, and Nigeria, all with a higher oil exports to GDP ratio than Russia, saw their currencies devalue less dramatically than the Russian ruble in 2014–2015.

The weakening Russian ruble has a corresponding effect on the competitiveness of Belarusian exports to Russia. Not only that, but given the floating Belarusian ruble rate, the fact that the Russian ruble is in the Belarusian currency basket, and the close economic relationship between Belarus and Russia, changing global oil prices affect the value of the Belarusian ruble as well via currency and trade channels.

All in all, the Belarusian economy's post-Soviet structure, its overbearing focus on the raw materials of the petrochemical and potassium sector, and its close ties to the raw materials-based Russian economy creates the framework for a fall into the "resource curse trap." Norway is a textbook example of how to get out of that trap, as the oil and gas sector there is responsible for more than 50% of the country's export revenue. Even so, it has maintained stable economic growth—while raw materials and the role they play in exports is an important factor in the country's economic growth, they are not the determining factor. The main difference is that institutions were built in Norway before raw materials were developed on an industrial scale (before the 1970s), making it immune to external shocks today. The way out of the resource curse pitfall, ultimately, means going back to the necessity of institutional reform.

**75**

competition.

*State Capitalism in Belarus: Behind Economic Anemia DOI: http://dx.doi.org/10.5772/intechopen.93606*

growth thanks to the net-export effect [25].

foreign markets without increasing capacity.

The "conflict neighbors trap" term was coined by Paul Collier to describe how countries surrounded by neighbors in conflict fall into the long-term trap of inhibited economic growth [24]. His study showed that, on average, countries benefit from the economic growth of their neighbors: each point of growth adds 0.4% to the GDP of neighboring countries, though for African countries that number is 0.2% and for non-African countries it is 0.7%. Political crisis in a country also results in economic losses both for it and for its neighbors totaling an average of 100 billion dollars. The origin of political conflict was also proven to be slow economic growth or contraction in many instances. For example, 5 years of non-existent economic growth leads to political crisis and civil war in 14% of cases. Each point of growth or contraction improves or lowers the odds of a political crisis occurring. If an economy contracts by 3%, for instance, the likelihood of a crisis happening rises to more than 16%. It was also shown that the longer an economy contracts, the longer it takes to dig itself out of the resulting political crisis. A crisis that culminates in civil war lasts an average of around 5 years, and countries that go through a civil war have a 50% chance of experiencing another one within the next decade. Economies suffering from civil war contract by an average of 2.3% per year, pulling their neighbors down with them. The results of Collier's study have an analogy in the Russian-Ukrainian conflict, the civil war in Ukraine, the 2014–2015 recession, the 2016–2019 slow recovery in Russia, and their impact on the Belarusian economy. Given the territorial losses suffered by Ukraine as well as the human cost of the conflict, a fast resolution to the bilateral conflict looks anything but likely. Taking into the account the consequences of 2020's coronavirus, it is hard to make predictions when Russia will return to growth. While prognoses differ, they share a similar trend: for each point Russian GDP contracts, estimates concur that Belarusian GDP will lose 0.6% of

Before moving on it is important to note that Russia and Ukraine are not simply neighbors of Belarus; they are its primary trade and investment partners. And they stay like this through the years, despite their economic recessions or recoveries. In 2019, the share of Belarusian exports of goods to Russian market of total was 43%, and to Ukrainian market—11%. The share of import from Russian of total in Belarus was 62%, and from Ukraine—5%. The share of foreign direct investments

There are two ways out of this trap for the Belarusian economy: reorientation

While this may be a tempting solution, from January to March 2015 the share of Belarusian sales in the domestic retail market came to 68.9%. For foodstuffs, that number was higher, at 81.6%, and for non-foodstuffs, it was 50.9%. The domestic market is simply not capable of completely replacing the volume of sales lost in

Generally speaking, a reorientation toward domestic markets is generally part of a temporary import substitution strategy geared toward protecting from external

The main argument in favor of import substitution is the need to temporarily shelter high-potential industries or companies from competition. However, in that case the sheltered industry has to use that opportunity to outpace the development of its foreign competitors (by cutting production costs faster, for example), coming out the other side having made up most of the ground separating

1.Reorienting the economy from foreign markets to the domestic market

from Russia of total to Belarus was 69%, and from Ukraine—1%.

toward the domestic market or diversifying into other foreign markets.

**3.5 The "conflict neighbors trap"**
