A WORLD BANK COUNTRY STUDY 1 8G,3 Public Disclosure Authorized Belarus A, 7i,-,., .1I,fai tk.s,t/sli(II, tlto' p/r.s'c R(,I}0/ Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized A WORLD BANK COUNTRY STUDY Belarus Prices,Markets, and EnterpriseReform The World Bank Washington,D.C. Copyright X 1997 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing July 1997 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and develop- ment communities. 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The World Bank encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data Belarus: prices, markets, and enterprise reform. p. cm. - (A World Bank country study) Includes bibliographical references. ISBN 0-8213-3976-1 1. Belarus-Economic conditions-1991- 2. Belarus-Economic conditions-1991- -Statistics. 3. Economic stabilization-Belarus. I. World Bank. II. Series. HC340.17.B475 1997 338.9478-dc2l 97-13283 CIP CONTENTS Acknowledgments ................................................ vii Abstract ................................................ viii Selected Indicators Table ................................................ ix List of Abbreviations ................................................ xi EXECUTIVESUMMARY ................................................ xiii 1. THE ECONOMICCRISIS - SOURCESAND SOLUTIONS............................ I A. Origins of the Economic Crisis .......... 2......................................2 Inflation,Credit, and Banking........................................................... 2 SectoralAllocation of Credit........................................................... 5 Growth and Expenditure........................................................... 9 ExternalTrade .......................................................... 15 ExchangeRate .......................................................... 16 EnterpriseProfitability .......................................................... 27 FiscalPolicies and Perfornance.......................................................... 30 B. Restoring Economic Stability and Growth................................................ 31 Stability.......................................................... 31 Growth and StructuralChange .......................................................... 31 C. Conclusions ................................................ 32 2. ESTABLISHINGA MARKET-FRIENDLYENVIRONMENT ........................ 33 A. Attracting Investment for Growth ................................................ 33 B. Establishing Market-Determined Prices ................................................ 35 Price Decontrols.......................................................... 35 Demonopolizationand Privatization.......................................................... 38 ExternalTrade Policy.......................................................... 39 FinancialDiscipline, Price Formation,and Bankruptcy.......................................................... 42 Prices, Subsidies,and SocialProtection .......................................................... 42 Monetaryand Credit Policies.......................................................... 43 C. Transparent, Equitable Legal Framework ..................... ........................... 45 Risksand Investment.......................................................... 45 Barriersto Entry and Exit.......................................................... 45 Contracts,Hard BudgetConstraints and Bankruptcy.......................................................... 46 ForeignTrade and Payments.......................................................... 47 Taxation.......................................................... 49 D. Supportive Environment ................................................ 54 Law and SocialOrder .......................................................... 54 Vital PublicGoods and Services.......................................................... 54 E. Conclusions ................................................ 55 Market-DeterminedPrices .......................................................... 55 Transparent,Equitable Legal Framework .......................................................... 55 SupportiveEnvironment .......................................................... 55 iii 3. ESTABLISHINGPROFIT-ORIENTED PRODUCERS .................................. 56 Background.56 A. State Enterprises:The Current Situation.57 Causesof Loss-Making.58 State EnterpriseResponse and Adjustment.59 RestructuringStrategy for the Future.61 B. The Privatization Process .62 PrivatizationPolicy Perspectives .63 Incentivesto Privatization.65 C. Private EnterpriseDevelopment .65 D. Fringe Benefitsand SocialAsset Divestiture.66 Need for Divestiture.66 Approachesto Divestiture.69 E. Summary.71 4. PROTECTINGTHE PEOPLE.72 A. MaximizingEmployment to MinimizePoverty .72 Small EnterpriseDevelopment .72 B. An Effectiveand Fiscally SustainableSocial SafetyNet is Needed.73 Developinga New SocialProtection Strategy .74 ImprovingLabor Market Flexibility.74 Establishinga Well TargetedSocial Safety Net .75 ReformingSocial Insurance .75 C. Conclusions.78 MaximizingEmployment to MinimizePoverty .78 FringeBenefit Restructuring .78 Programsto ReducePoverty During the Transition.78 SocialInsurance Programs .78 5. REFORMAGENDA AND MACROPROSPECTS .. 79 A. ReformAgenda .79 B. MacroeconomicProspects .79 PolicyReform Scenario .80 High Debt Scenario .81 LowGrowth Scenario.82 FinancingRequirements .84 C. Key Themes and Conclusions .86 Notes.87 References .93 iv STATISTICALAPPENDIX ...................................... 95 TECHNICALANNEXES ...................................... 161 A. Social Asset Divestiture by Enterprises (D. Sewell)........................................ 163 B. Agro-Industry Sector Review (S. Sen Gupta) ........................................ 193 C. The Sustainabilityof External Debt (S. Shatalov)........................................ 209 D. Macroeconomic Projection Framework (Y. Sobolev)........................................ 215 E. Purchasing Power Parities (J. Hansen) ........................................ 221 Map IBRD 28262R ........................................ 230 Text Figures 1.1 Cumulative Inflation in FSU Countries .2 1.2 Credit and Inflation .4 1.3 Money Supply Expansion and Inflation .4 1.4 Allocation of Credit by Sector .5 1.5 Availability of Real Credit .5 1.6 Annual Inflation and Per Capita Growth Rates, 127 Countries . 9 1.7 GDP Decline in FSU, 1989-1995.10 1.8 Trends in GDP Decline .10 1.9 GDP Growth/Decline in FSU, 1995 .1 1.10 Industrial Output .11 1.11 Time Profiles of Output Decline.12 1.12 Trends in Expenditure .13 1.13 Investment and Rates of Return in Soviet Industry .14 1.14 Real and Dollar Monthly Wage Rates .14 1.15 Imports and Exports to the World .15 1.16 Foreign Trade Balance .16 1.17 Trade Deficit with West and Real Exchange Rate .16 1.18 Real Exchange Rate Index.17 1.19 Wage Rates in Competitor Countries .19 1.20 Loss-Making Enterprises .27 2.1 Foreign Direct Investment per Person, 1993.33 2.2 FDI as Share of GDP in FSU, 1994.33 2.3 FDI Inflows and Liberalization Speed.34 2.4 Liberalization and FDI .34 2.5 Market Share of State in Retail Sales.38 2.6 Tax Revenues and Per Capita GDP, 1994 .50 3.1 Proportion of Firms Making Losses, First Quarter 1996.58 3.2 Balance Sheets of Selected SOEs.59 3.3 Employment by Property Ownership .62 3.4 Enterprise Privatization and Corporatization .63 v Text Tables 1.1 Annual Purchase of Agricultural Equipment ............................................. 12 1.2 Decline in Export Profitability During 1995............................................. 18 3.1 Production, Employment, and Investment in Industry .............................. 57 3.2 Unsold Stocks, April 1996 ............................................... 58 3.3 Loss-Making Enterprises by Subsector..............................................