**2. State capitalism in Belarus: overview of indicators and instruments**

The Republic of Belarus features an unstable hybrid economy. On the one hand, the country features state ownership of large swaths of property, administrative (manual) control over state-owned enterprises and state-owned banks, directed lending, consolidated budgetary resources, and wide social security. On the other, it has its entrepreneurs, small and medium businesses, private and foreign businesses, an international banking sector, a free-floating exchange rate, market prices, elements of a public-private partnership, a functioning Hi-Tech Park, an industrial park "Great Stone," free economic zones, and other aspects of a market economy.

The hybrid regime of the Belarusian economy sometimes reminds of other countries: modern Russia [1], other post-Soviet countries [2], and China at one point in its development [3]. The resemblance is especially clear when talking about the active role played by the government in a market economy, something generally referred to as state capitalism [4]. State capitalism is understood here to be an economy in which the state plays the main role as entrepreneur, employer, owner of the means of production, and profit allocator.

Belarus' state capitalism can be described through six indicators how the state intervenes in the economy, and how the capital is distributed.


Developed countries saw that same number range from 33 to 55% from 2000 to 2019. Interestingly, from 1870 to 1910 in developed countries, it was as low as 7–8% and was sufficient for governments to pay for security, legal systems, foreign services, and everything else the public needed [7]. The growth in tax revenue experienced by those countries since then has primarily served to cover spending on social programs and infrastructure. For the same reason, Belarus has a fairly high tax burden, with around 12% of GDP going to social security.

3.Money supply to GDP: In Belarus, the ratio of money supply (aggregator M2) to GDP is quite low around 16% in 2019, especially if it is compared with Chinese indicator of more than 200%, or Russian—around 60%. This ratio has been increasing in Belarus annually with the speed of 13% in 2016 to 18% in

**65**

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

and economic growth.

GDP; in 2019–20, it is 57%.

from 71.7% in 2017.

prises and state-owned banks.

**2.1 State-owned enterprises in Belarus**

agriculture, and running social projects, sports, and more.

Ministries responsible for a particular state enterprise.

2019, but still lower than in 1996–2015 with the spread from 20 to 60% increase in different years, which boost double-digit inflation, rapid devaluation,

4.Banking assets to GDP: Banks are usually the significant elements of state capitalism in different countries. For example, the share of banking assets to GDP

However, the banking system in Belarus does not satisfy the country's economic needs, meaning that is suffers from chronic undercapitalization. In 2013, the Belarusian banking system commanded assets equaling a bit more than 60% of

5.Financial market to GDP: Due to the lack of privatization and relatively small number of private enterprises in Belarus, national financial market is rather underdeveloped. In 2019, the capitalization of Belarusian financial market to GDP was 22.6%,

By the comparison of state capitalism in China, this indicator was more than 100% to GDP there in 2019, and stock market capitalization was 46.5% falling

6.Foreign direct investments to GDP: As the important source to finance balance of payments and economic growth, foreign direct investments inflow in Belarus were at the average annual level around 2.3% to GDP in 2016–2019. This ratio is similar to Chinese one in recent years, but not in the

According to the estimation of Economy Research Institute of the Ministry of Economy of Belarus in 2015, USD 9.3–9.6 billion of foreign direct investments are to be mobilized in 2016–2020 on a net basis to attain the GDP growth of 10–15% over the 5 years (2–3% per year). In fact, USD 5.2 billion of foreign direct investments were attracted in 2016–2019, and GDP growth was on the average level of 1.1% per year. The main two instruments of state capitalism in Belarus are state-owned enter-

From the Soviet times, it is believed in Belarus that economy could be run as if it were a single state-owned corporation and thus managed more efficiently. The government participates in the day-to-day management of individual state-owned companies by setting goals, approving business plans, helping organize sales, unloading warehouses, continually monitoring operations, attracting financing for

State and local authorities often serve as anti-crisis managers, actively intervening and periodically offering support to state-owned firms. For example, in 2015, the government and the National Bank (central bank of Belarus) took control of the business plans for 106 of them with the heaviest external debt burdens. Anticrisis management encompasses the use of a number of financial tools: tax breaks, short-term loans, debt restructuring, loan servicing, and more. The problem is that a conflict of interests necessarily arises between the Ministry of Finance and the

The government not only provides financial support but also requests additional financial payments besides taxes from the profitable state-owned enterprises. In

in Russia is around 90%; in China, it is almost 300% [8].

including stock market to GDP was only 0.6%.

2000–2010 when it overcame 4%.

*Public Sector Crisis Management*

can only be overcome by recognizing the inevitability of transformation; it is self-

This chapter includes several parts. The next one provides overview of state capitalism in Belarus, its indicators, and instruments. Another one describes pitfalls faced by state capitalism in Belarus and the reasons behind its economic anemia. The last one shows how Belarusian state capitalism is supported by the public during economic growth, and how public values are transformed during economic anemia.

**2. State capitalism in Belarus: overview of indicators and instruments**

The Republic of Belarus features an unstable hybrid economy. On the one hand, the country features state ownership of large swaths of property, administrative (manual) control over state-owned enterprises and state-owned banks, directed lending, consolidated budgetary resources, and wide social security. On the other, it has its entrepreneurs, small and medium businesses, private and foreign businesses, an international banking sector, a free-floating exchange rate, market prices, elements of a public-private partnership, a functioning Hi-Tech Park, an industrial park "Great Stone," free economic zones, and other aspects of a market economy. The hybrid regime of the Belarusian economy sometimes reminds of other countries: modern Russia [1], other post-Soviet countries [2], and China at one point in its development [3]. The resemblance is especially clear when talking about the active role played by the government in a market economy, something generally referred to as state capitalism [4]. State capitalism is understood here to be an economy in which the state plays the main role as entrepreneur, employer, owner of

Belarus' state capitalism can be described through six indicators how the state

1.Public expenditures to GDP: This indicator shows how consolidated budgetary funds are in an economy. In Belarus in 2010–2019, they were at an average around 30% of GDP, though adding in social security pushes that number to an internationally recognized 40% of GDP. Budget is the main tool and indicator of state capitalism in Belarus. It redistributes much higher share of capital in economy by way of comparison with other countries: Central and Eastern Europe registered at 34%; and Brazil, India, Korea, Malaysia, Singapore, and

2.Tax burden: Belarus enjoys a lighter tax burden than many developed countries. In 2019 tax revenue, including social spending, came to 37% of GDP. Tax burden, without social spending, was 25% in 2019 and stayed flat since 2016 [6]. Developed countries saw that same number range from 33 to 55% from 2000 to 2019. Interestingly, from 1870 to 1910 in developed countries, it was as low as 7–8% and was sufficient for governments to pay for security, legal systems, foreign services, and everything else the public needed [7]. The growth in tax revenue experienced by those countries since then has primarily served to cover spending on social programs and infrastructure. For the same reason, Belarus has a fairly high

awakening that will illuminate the path forward for reforms.

the means of production, and profit allocator.

South Africa at an average of 22% [5].

intervenes in the economy, and how the capital is distributed.

tax burden, with around 12% of GDP going to social security.

3.Money supply to GDP: In Belarus, the ratio of money supply (aggregator M2) to GDP is quite low around 16% in 2019, especially if it is compared with Chinese indicator of more than 200%, or Russian—around 60%. This ratio has been increasing in Belarus annually with the speed of 13% in 2016 to 18% in

**64**

2019, but still lower than in 1996–2015 with the spread from 20 to 60% increase in different years, which boost double-digit inflation, rapid devaluation, and economic growth.

4.Banking assets to GDP: Banks are usually the significant elements of state capitalism in different countries. For example, the share of banking assets to GDP in Russia is around 90%; in China, it is almost 300% [8].

However, the banking system in Belarus does not satisfy the country's economic needs, meaning that is suffers from chronic undercapitalization. In 2013, the Belarusian banking system commanded assets equaling a bit more than 60% of GDP; in 2019–20, it is 57%.

5.Financial market to GDP: Due to the lack of privatization and relatively small number of private enterprises in Belarus, national financial market is rather underdeveloped. In 2019, the capitalization of Belarusian financial market to GDP was 22.6%, including stock market to GDP was only 0.6%.

By the comparison of state capitalism in China, this indicator was more than 100% to GDP there in 2019, and stock market capitalization was 46.5% falling from 71.7% in 2017.

6.Foreign direct investments to GDP: As the important source to finance balance of payments and economic growth, foreign direct investments inflow in Belarus were at the average annual level around 2.3% to GDP in 2016–2019. This ratio is similar to Chinese one in recent years, but not in the 2000–2010 when it overcame 4%.

According to the estimation of Economy Research Institute of the Ministry of Economy of Belarus in 2015, USD 9.3–9.6 billion of foreign direct investments are to be mobilized in 2016–2020 on a net basis to attain the GDP growth of 10–15% over the 5 years (2–3% per year). In fact, USD 5.2 billion of foreign direct investments were attracted in 2016–2019, and GDP growth was on the average level of 1.1% per year.

The main two instruments of state capitalism in Belarus are state-owned enterprises and state-owned banks.

### **2.1 State-owned enterprises in Belarus**

From the Soviet times, it is believed in Belarus that economy could be run as if it were a single state-owned corporation and thus managed more efficiently. The government participates in the day-to-day management of individual state-owned companies by setting goals, approving business plans, helping organize sales, unloading warehouses, continually monitoring operations, attracting financing for agriculture, and running social projects, sports, and more.

State and local authorities often serve as anti-crisis managers, actively intervening and periodically offering support to state-owned firms. For example, in 2015, the government and the National Bank (central bank of Belarus) took control of the business plans for 106 of them with the heaviest external debt burdens. Anticrisis management encompasses the use of a number of financial tools: tax breaks, short-term loans, debt restructuring, loan servicing, and more. The problem is that a conflict of interests necessarily arises between the Ministry of Finance and the Ministries responsible for a particular state enterprise.

The government not only provides financial support but also requests additional financial payments besides taxes from the profitable state-owned enterprises. In

2005, Belarus has founded a targeted national development fund. It accumulates capital from revenue appropriated from highly profitable state-owned enterprises based on their yearly results. The list of firms and the amount appropriated are set each year. In 2020, 40 state-owned enterprises redirected part of their earnings to the fund, and the primary contribution, which was made by the Belarusian Potash Company, made it based on raw materials. However, the fact that contributions are made by state-owned enterprises unrelated to raw materials weakens their incentive to boost productivity. The fund also receives foreign-denominated contributions earned by selling state-owned shares to foreign investors.

The focus of the Belarusian government on the state-owned enterprises put the doubts on the efficiency of such management system as this sector covers only half of national GDP. The similar share of state-owned enterprises around 50% to GDP is in Russian state capitalism. In China, state-owned companies take up only around 30% of GDP [9]. Another way of looking at this issue is to evaluate the other contributions of state-owned enterprise in Belarus: to foreign exchange earnings (about 30% in 2019), industry production (73.3%), retail turnover (16.2%), and revenue (58%) [10].

The close relationship between public and private business in Belarus makes it difficult to objectively determine the role played by the public side of that partnership independent of its private counterpart. State-owned enterprises support an entire ecosystem comprised of hundreds of smaller state-owned, private, and foreign suppliers, contractors, and intermediaries. In keeping with international terminology, companies critical to the economy vis-à-vis manufacturing, taxes, exports, and employment are designated "national champions." However, the fact that they are occasionally forced to lay off employees, reduce production, and rely on tax breaks to maintain competitiveness means that the list of Belarusian national champions sometimes changes.

The role of state-owned enterprises in job creation deserves a separate look due to its economic and social importance for Belarus. State-owned companies made up 43.4% of employment in Belarus as of January 1, 2020, 39% of employment in Russia, and 19% of employment in China. The high percentage of employment generated by state-owned companies in Belarus is in large measure due to how connected they are to individual cities, something left over from the Soviet Union. From a social point of view that makes them essential and from an economic point of view, it keeps labor resources sticky and puts a damper on overall labor productivity across wide swaths of territory. High employment at state enterprises in Belarus can be seen as providing social security in the form of guaranteed jobs (lifetime employment). However, companies incapable of holding up on their own under intense competition cannot provide that security to their employees. Counting on the government to continually prop them up can distort public finances and lead to problems for other public services, also preventing manpower from migrating to industries characterized by higher added value and stronger economic growth.

#### **2.2 State-owned banks in Belarus**

The lion's share of the Belarusian banking system is occupied by two stateowned banks: Belarusbank and Belagroprombank. They participate in state programs and offer state support, commanding a monopoly of the banking system vis-à-vis assets (62.2% between them as of April 1, 2020) and capital (60.4%) [11].

The low profitability that comes with state programs and support ranks stateowned banks among the country's worst large banks in terms of asset profitability and capital. As of January 1, 2020 the profitability of assets after taxes of state-owned banks in Belarus was 1.3%. The same indicator of the banks with foreign capital in Belarus was 2.3%, and the banks with private national capital—3.9%. In general, it is necessary to mention that banks with foreign capital play important role in economic

**67**

priority goals.

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

growth of Belarus as they fuel the money in the fast-growing private and international companies in the country. As of January 1, 2020 the foreign-capital banks' assets was 34.6% to Belarus' GDP, and their capital was 34.9% to GDP. It is different from other state capitalism models. In China, these indicators are not higher than 2%. Administrative meddling in the day-to-day operations of state banks by oversight boards often leads to directed lending that does not take the bank's reserves into consideration, creating liquidity issues. Directed lending also relieves banks of responsibility for channeling funds to underperforming projects. When the general economic situation worsens or revenue dries up, companies no longer have the ability to service the loans held by banks. The continually changing outlook also ensures a constant stream of bank customers switching their accounts to and from rubles as well as into and out of the banking system, draining bank reserves. All those factors intensify the systemic risks faced by banks, and a state infusion of capital or moving toxic assets to the Development Bank or public debt when directed lending

is relaxed serves as only a temporary reprieve for the banking system.

and continue lending directly to government programs.

owned banks in banking system assets and capital.

tion at 8.3%, labor at −5.3%, and productivity at −1.4% [13].

In 2011, the Development Bank of Belarus was founded as a non-banking institution designed to improve the economic performance of government investment programs. From December 2011 to June 2013, Belarusbank and Belagroprombank handed over some of their state program assets to the newly founded institution, altogether totaling more than 12 trillion rubles. They did hold onto some old loans

As of 2019 an old mechanism for funding state programs in Belarus was still in place, though it keeps the Development Bank from being able to perform its primary function. If that mechanism changes or a competitive, a result-based approach is taken to distributing funds, the Development Bank can transition to the traditional format employed by development banks in other countries (for example, in Germany, China, and Russia). The Belarusian Development Bank could then focus on providing export finance, financing major infrastructure projects, supporting small and medium business, and others of the country's

Thus, state capitalism in Belarus characterized by high level of public expenditures to GDP, medium tax burden, decreased monetization of GDP, undercapitalized banking system, underdeveloped financial market, and low inflow of foreign direct investments. Its main tools are state-owned enterprises and state-owned banks. However, state capitalism in Belarus is a hybrid regime, as it covers only half of national GDP. It is proved by such metrics like share of state-owned enterprises to GDP, the share of employment at state-owned enterprises, and the share of state-

The evaluation of state capitalism efficiency in Belarus based on economic growth provides contradictive results (**Table 1**). There was stable economic growth in Belarus above global average in 1996–2010. The main economic drivers were on the one hand consumption and investment, and on the other hand manufacturing and agriculture. The high inflation in that period signaled about misbalancing in monetary and external spheres. The current account deficit and rise of gross external debt proved that. The IMF holds factors of production responsible for 70% (of which capital created 55% and labor 45%) of growth in output, while productivity came in at around 23% [12]. Other calculations estimate the average contribution of capital to growth from 2006 to 2012 to be 98.3%, accompanied by capacity utiliza-

In the last decade, economic growth was trapped in the long-term anemia around 1% average per year. The role of manufacturing and agriculture in pushing the economic growth decreased with the rise of service sectors. The improvements in financial stability and external balances have happened in recent years.

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

*Public Sector Crisis Management*

2005, Belarus has founded a targeted national development fund. It accumulates capital from revenue appropriated from highly profitable state-owned enterprises based on their yearly results. The list of firms and the amount appropriated are set each year. In 2020, 40 state-owned enterprises redirected part of their earnings to the fund, and the primary contribution, which was made by the Belarusian Potash Company, made it based on raw materials. However, the fact that contributions are made by state-owned enterprises unrelated to raw materials weakens their incentive to boost productivity. The fund also receives foreign-denominated contributions

The focus of the Belarusian government on the state-owned enterprises put the doubts on the efficiency of such management system as this sector covers only half of national GDP. The similar share of state-owned enterprises around 50% to GDP is in Russian state capitalism. In China, state-owned companies take up only around 30% of GDP [9]. Another way of looking at this issue is to evaluate the other contributions of state-owned enterprise in Belarus: to foreign exchange earnings (about 30% in 2019), industry production (73.3%), retail turnover (16.2%), and revenue (58%) [10]. The close relationship between public and private business in Belarus makes it difficult to objectively determine the role played by the public side of that partnership independent of its private counterpart. State-owned enterprises support an entire ecosystem comprised of hundreds of smaller state-owned, private, and foreign suppliers, contractors, and intermediaries. In keeping with international terminology, companies critical to the economy vis-à-vis manufacturing, taxes, exports, and employment are designated "national champions." However, the fact that they are occasionally forced to lay off employees, reduce production, and rely on tax breaks to maintain competitive-

ness means that the list of Belarusian national champions sometimes changes.

ized by higher added value and stronger economic growth.

**2.2 State-owned banks in Belarus**

The role of state-owned enterprises in job creation deserves a separate look due to its economic and social importance for Belarus. State-owned companies made up 43.4% of employment in Belarus as of January 1, 2020, 39% of employment in Russia, and 19% of employment in China. The high percentage of employment generated by state-owned companies in Belarus is in large measure due to how connected they are to individual cities, something left over from the Soviet Union. From a social point of view that makes them essential and from an economic point of view, it keeps labor resources sticky and puts a damper on overall labor productivity across wide swaths of territory. High employment at state enterprises in Belarus can be seen as providing social security in the form of guaranteed jobs (lifetime employment). However, companies incapable of holding up on their own under intense competition cannot provide that security to their employees. Counting on the government to continually prop them up can distort public finances and lead to problems for other public services, also preventing manpower from migrating to industries character-

The lion's share of the Belarusian banking system is occupied by two stateowned banks: Belarusbank and Belagroprombank. They participate in state programs and offer state support, commanding a monopoly of the banking system vis-à-vis assets (62.2% between them as of April 1, 2020) and capital (60.4%) [11]. The low profitability that comes with state programs and support ranks stateowned banks among the country's worst large banks in terms of asset profitability and capital. As of January 1, 2020 the profitability of assets after taxes of state-owned banks in Belarus was 1.3%. The same indicator of the banks with foreign capital in Belarus was 2.3%, and the banks with private national capital—3.9%. In general, it is necessary to mention that banks with foreign capital play important role in economic

earned by selling state-owned shares to foreign investors.

**66**

growth of Belarus as they fuel the money in the fast-growing private and international companies in the country. As of January 1, 2020 the foreign-capital banks' assets was 34.6% to Belarus' GDP, and their capital was 34.9% to GDP. It is different from other state capitalism models. In China, these indicators are not higher than 2%.

Administrative meddling in the day-to-day operations of state banks by oversight boards often leads to directed lending that does not take the bank's reserves into consideration, creating liquidity issues. Directed lending also relieves banks of responsibility for channeling funds to underperforming projects. When the general economic situation worsens or revenue dries up, companies no longer have the ability to service the loans held by banks. The continually changing outlook also ensures a constant stream of bank customers switching their accounts to and from rubles as well as into and out of the banking system, draining bank reserves. All those factors intensify the systemic risks faced by banks, and a state infusion of capital or moving toxic assets to the Development Bank or public debt when directed lending is relaxed serves as only a temporary reprieve for the banking system.

In 2011, the Development Bank of Belarus was founded as a non-banking institution designed to improve the economic performance of government investment programs. From December 2011 to June 2013, Belarusbank and Belagroprombank handed over some of their state program assets to the newly founded institution, altogether totaling more than 12 trillion rubles. They did hold onto some old loans and continue lending directly to government programs.

As of 2019 an old mechanism for funding state programs in Belarus was still in place, though it keeps the Development Bank from being able to perform its primary function. If that mechanism changes or a competitive, a result-based approach is taken to distributing funds, the Development Bank can transition to the traditional format employed by development banks in other countries (for example, in Germany, China, and Russia). The Belarusian Development Bank could then focus on providing export finance, financing major infrastructure projects, supporting small and medium business, and others of the country's priority goals.

Thus, state capitalism in Belarus characterized by high level of public expenditures to GDP, medium tax burden, decreased monetization of GDP, undercapitalized banking system, underdeveloped financial market, and low inflow of foreign direct investments. Its main tools are state-owned enterprises and state-owned banks. However, state capitalism in Belarus is a hybrid regime, as it covers only half of national GDP. It is proved by such metrics like share of state-owned enterprises to GDP, the share of employment at state-owned enterprises, and the share of stateowned banks in banking system assets and capital.

The evaluation of state capitalism efficiency in Belarus based on economic growth provides contradictive results (**Table 1**). There was stable economic growth in Belarus above global average in 1996–2010. The main economic drivers were on the one hand consumption and investment, and on the other hand manufacturing and agriculture. The high inflation in that period signaled about misbalancing in monetary and external spheres. The current account deficit and rise of gross external debt proved that. The IMF holds factors of production responsible for 70% (of which capital created 55% and labor 45%) of growth in output, while productivity came in at around 23% [12]. Other calculations estimate the average contribution of capital to growth from 2006 to 2012 to be 98.3%, accompanied by capacity utilization at 8.3%, labor at −5.3%, and productivity at −1.4% [13].

In the last decade, economic growth was trapped in the long-term anemia around 1% average per year. The role of manufacturing and agriculture in pushing the economic growth decreased with the rise of service sectors. The improvements in financial stability and external balances have happened in recent years.


#### **Table 1.**

*Average annual macroeconomic statistics for Belarus, % [10, 11].*

They provided proper environment to increase the quality of capital in Belarusian economy, but not its necessary quantity. The economic anemia can be explained by taking a closer look at the traps facing Belarusian state capitalism.
