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Report No: ACS13961 . Republic of Belarus Public Disclosure Authorized Regional Development Policy Notes The Spatial Dimension of Structural Change . June 22, 2015 Public Disclosure Authorized . GMFDR EUROPE AND CENTRAL ASIA . Public Disclosure Authorized . Document of the World Bank Public Disclosure Authorized Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202- 522-2422, e-mail [email protected]. 2 BELARUS –GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of June 22, 2015) Currency Unit = Belarusian Ruble (BYR) US$1.00 = 15,293 BYR ABBREVIATIONS AND ACRONYMS Belstat National Statistical Committee GRP Gross Regional Product BSSR Belarusian Soviet Socialist Republic IFC International Finance Corporation BYR Belarusian Ruble MSEs Micro and small enterprises CIS Commonwealth of Independent States MSMEs Micro, small, and medium enterprises FEZ Free Economic Zone SOEs State-owned Enterprises ECA Europe and Central Asia WDR World Development Report EU European Union VAT Value-added tax GDP Gross Domestic Product UNDP United Nations Development Program Vice President: Laura Tuck Country Director: Qimiao Fan MFM GP Director: Marcelo Giugale Director: Satu K. Kahkonen Sector Manager: Ivailo Izvorski Program Leader: Lalita Moorty Task Team Leader: Kiryl Haiduk 3 Acknowledgements This Note was prepared by a team led by Kiryl Haiduk, and consisting of Alexander Chubrik (Research Center of the Institute for Privatization and Management, Director), Maria Shappo (Research Center of the Institute for Privatization and Management, Economist), and Uladzimir Valetka (Center for Social and Economic Research, Research Fellow). The team is grateful for comments and advice from Sebastian Eckardt (Senior Economist, GMFDR), Yutaka Yoshino (Senior Economist, GMFDR), Maryna Sidarenka (Research Analyst, GMFDR). The team is grateful for overall guidance provided by Ivailo Izvorski (Practice Manager, GMFDR), Qimiao Fan (Country Director, ECCU2), and Young Chul Kim (Country Manager, ECCBY). Excellent and timely assistance was provided by Mismake D. Galatis (Program Assistant, GMFDR), Nancy Sabina Davies-Cole (Program Assistant, GMFDR), and Alina Gres (Program Assistant, ECCBY) The team gratefully acknowledges the excellent collaboration of the Belarusian authorities, development partners, as well as the support and guidance of peer reviewers: Ulrich Bartsch (Lead Economist, GMFDR) and Karlis Smiths (Senior Economist, GMFDR). 4 Table of Contents Executive Summary .............................................................................................................................. 7 Introduction: Framework and Context........................................................................................ 10 Chapter 1. Economic Characteristics of the Belarus Regions .............................................. 13 A. GRP Dynamics and Structure ..................................................................................... 13 B. Inherited Density and the Associated Economic Vulnerabilities ............................ 17 C. Managing Industrial Legacies .................................................................................... 21 D. Conclusions and Policy Implications ......................................................................... 22 Chapter 2. Spatial Drivers of Private Sector Growth .............................................................. 25 A. Basic Characteristics of the MSME Sector ................................................................. 25 B. Legislative Background for Regional MSME Growth ............................................... 28 C. Factors Affecting Spatial Development of the Private Sector ................................. 32 D. Conclusions and Policy Implications ......................................................................... 37 Chapter 3. Jobs and Geography ...................................................................................................... 39 A. Regional Labor Markets and Productivity ................................................................ 39 B. “Intrusive Rentiers” versus Private Firms ................................................................ 44 C. Conclusions and Policy Implications ......................................................................... 48 References ............................................................................................................................................. 50 5 List of Boxes Box 1: The Territorial and Administrative Structure of Belarus 9 Box 1.1: A Mono-Towns Problem and Enterprise Restructuring. The Case of 19 “Neman Glassworks” Box 2.1. Liberalization of the Business Environment in Belarus: Significant Steps 30 List of Figures Figure 1.1. Ratio of Oblasts’ Per Capita GRP to Minsk Per Capita GRP 2009 and 13 2013 (percent) Figure 1.2. Oblast Density Indicators 2013 ($ thousand) 14 Figure 1.3. GRP Dynamics and Contributions of Oblasts to GDP 2009–13 (percent) 14 Figure 1.4. Average Sector Shares in GRP 2009–13 (percent) 15 Figure 1.5. Change in Employment Levels 1990–2012 (percent) 15 Figure 1.6. Population Employed in Production and Services 2013 (percent) 16 Figure 1.7. Shares of Selected Subsectors in Oblast Manufacturing 2012 (percent) 16 Figure 1.8. Concentration of Industrial Production, Rayon Level 2013 (percent) 17 Figure 1.9: Shares in Total Output and Exports, Rayons and their City Centers 18 (1975 classification) 2013 (percent) Figure 1.10. Average Rayon Share of Loss-making Enterprises 2005–13 (top 20 number of rayons) (percent) Figure 1.11. Employment, Stockpiling, and Loss-making 2005–13 (percent) 20 Figure 2.1. Share of Non-state Companies in MSMEs 2009–13 (percent) 26 Figure 2.2. Sectoral Distribution of MSMEs 2013 (percent) 27 Figure 2.3. Share of Loss-making MSMEs in Total MSMEs by Property Type 2013 27 (percent) Figure 2.4. Annual growth Rates of MSMEs 2010–13 (percent) 28 Figure 2.5. Dynamics of Employment at MSMEs and Non-MSMEs 2005–13 34 (thousand people) Figure 2.6. Fixed Effects Distribution by Rayons 2008–13 36 Figure 3.1. Density and Labor Productivity 2010–13 42 Figure 3.2. Coefficients of Variation of Wages, Major Types of Economic Activities 43 across Rayons 2010–13 (percent) Figure 3.3. Coefficient of Variation: Social Outcomes, Productivity, and MSE Entry 44 2008–13 (percent) List of Maps Map 1. Belarus Oblasts 9 Map 2. Belarus Rayons 9 Map 2.1.Concentration of MSMEs in Belarus 2013 31 Map 2.2. Classification of BSSR Rayons 32 Map 2.3. Regional Differences: Developed vs. Depressed Rayons 35 Map 3.1. Population and Employment Densities 2013 (per square kilometer) 41 Map 3.2. Within-wage Differentiation Rates, 2010 and 2013 42 Map 3.3. Between-Wage Differentiation Rates 2010 and 2013 43 Map 3.4. Ratio of Immigrants to Emigrants 2013 (percent) 45 Map 3.5. MSE Entry Rate 2013 (percent) 48 List of Tables Table 3.1. Sectoral Employment 2013 (percent of total) 40 Table 3.2. Employed and Working-age Populations 2000–13 46 6 Executive Summary As Belarus’s economy expands, economic production will likely become more concentrated spatially, but policies can help sustain living standards more uniformly throughout the country. Belarus can achieve significant productivity gains from allowing firms to aggregate more spatially and by reallocating labor and capital from less productive to more productive sectors and companies. But spatially blind institutions and policies can still ensure a more uniform level of living standards through broadly uniform quality of education, health, municipal services, and access to jobs across the country. Policy decisions on regional economic development are based on an understanding of the factors that currently shape the economic density and distances in the Belarus economy at the level of oblasts and rayons. Initial decisions about location and density matter because once firms and workers make decisions about where to locate, they can be difficult to reverse. The 2009 Word Development Report (WDR) of the World Bank formulates a workable method for capturing the intersection of