President Lukashenka only talks about market economy without embarking on economic reforms
Lukashenka is holding out for the existing economic model, which enables to maintain social stability at an acceptable level. The head of state is afraid of reducing the state’s role in the economy, seeing it as a threat to the stability of his rule. Nevertheless, some in the president’s inner circle, especially in the government, expect partial reforms of the most problematic economic sectors.
Last week, President Lukashenka held a meeting on topical issues of Belarus’ development.
Lukashenka sees no need in changing approaches to managing the economy; he counts on external funding to avoid major reforms and on administrative measures to retain control over economic processes. If crisis in the economy builds up, the president may resume usual micromanagement practices.
The president is attempting to mobilize state managers and bureaucrats. Despite the failure of a large-scale industrial modernization programme in 2012-2015, the President has once again requested woodworking industry to provide modernization performance reports by the next meeting. In the past, there were numerous meetings and working field trips to control the modernisation progress, however, in most cases, to no avail.
In addition, the president has replaced previously used term ‘modernization’ with a more popular now ‘structural reform’, which he uses in a peculiar way: “The strategy was that we needed structural reforms in our economy (and this [modernisation] was a structural reform), so that a share of manufactured products sold on domestic and foreign markets was made with our own raw materials in order to avoid dependence on raw materials from other countries, as is the case in other economic sectors”.
The president has proposed to strengthen control over pricing policy and step-up the state’s role in redistributing profits from the most profitable sectors to the loss-making enterprises, which partially help the authorities to solve the unemployment issue. It is worth noting that previously Lukashenka had promised to put a leash on prices, so as he had no funds to raise wages.
Despite high levels of hidden unemployment, the government keeps silence about this matter in an attempt to preserve the existing structure of the economy, in which public sector and large state owned enterprises predominate. In addition, amid rising unemployment and falling wages in Belarus, labour migration, especially to Russia, enables to relieve social tension.
Meanwhile, what the president says is at odds with the government’s plans for 2016, which envisage some market reforms in the economic policy. Nevertheless, President Lukashenka said he did not intend to make fundamental changes in the government, which should imply continuity of the economic policy for the next presidential term, “the future government for next five years and all governmental agencies have been formed before the presidential election”.
Analysts say that the likelihood and depth of economic reforms largely depends on Belarus’ ability to attract foreign loans. If Lukashenka were able to raise sufficient funds, the changes would be purely cosmetic and if not – they might be more substantial.
Overall, if Belarus obtains foreign loans, the Belarusian authorities will combine market rhetoric with micromanagement of the economy, especially if economic imbalances occur.
The rapid increase in wages has led to a decline in the ratio between labour productivity and real wages to one. Previously, the rule was that enterprises, in which the state owned more than 50% of shares in the founding capital, were not allowed increasing salaries if this ratio was equal to or less than one. The authorities are unlikely to be able to meet the wage growth requirement without long-term consequences for the economy. Hence, the government is likely to contain wage growth for the sake of economic growth.
According to Belstat, In January – August 2017, GDP growth was 1.6%. The economic revival has led to an increase in wages. In August, the average monthly wage was BYN 844.4 or USD 435, i.e. grew by 6.6% since early 2017, adjusted for inflation. This has reduced the ratio between labour productivity and real wages from 1.03 in January 2017 to 1 in the first seven months of 2017. This parameter should not be less than 1, otherwise, the economy starts accumulating imbalances.
The need for faster growth in labour productivity over wage growth was stated in Decree No 744 of July 31st, 2014. The decree enabled wages growth at state organizations and organizations with more than 50% of state-owned shares only if the ratio between growth in labour productivity and wages was higher than 1. Taking into account the state's share in the economy, this rule has had impact on most of the country's key enterprises. In 2013 -2014 wages grew rapidly, which resulted in devaluation in 2014-2015.
Faster wage growth as compared with growth in labour productivity carries a number of risks. Enterprises increase cost of wages, which subsequently leads to a decrease in the competitiveness of products on the domestic and foreign markets. In construction, wholesale, retail trade, and some other industries the growth rate of prime cost in 2017 outpaces the dynamics of revenue growth. This is likely to lead to a decrease in profits and a decrease in investments for further development. Amid wage growth, the population is likely to increase import consumption and reduce currency sales, which would reduce the National Bank's ability to repay foreign and domestic liabilities.
The Belarusian government is facing a dilemma – either to comply with the president’s requirement of a BYN 1000 monthly wage, which could lead to new economic imbalances and could further affect the national currency value, or to suspend the wage growth in order to retain the achieved economic results. That said, the first option bears a greater number of negative consequences for the nomenclature.
Overall, the rapid growth in wages no longer corresponds the pace of economic development. The government is likely to retain the economic growth and retrain further growth in wages. Staff reshuffles are unlikely to follow the failure to meet the wage growth requirement.