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OPINION July 29, 2019

“Reforms Are like Going to the Dentist: The Longer You Wait, the Harder It Will Be. But You’ll Have to Go After All”

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Alex Kremer. Photo by Dmitry Brushko, TUT.BY.

Alex Kremer, World Bank Country Manager for Belarus, told TUT.BY in an interview what would be in the structural reforms Roadmap, which is being prepared with the Government, what the problematic public sector costs to the economy and whether Belarusians would have to suffer, as in the reforms of the 1990s.

 

Urgent need for reforms

— International institutions have traditionally been harsh critics of the Belarusian authorities and the Belarusian economic model, but in recent years the situation has changed — the rhetoric has become noticeably softer. Almost nothing remains of the Washington consensus. For example, no one insists on privatization. Is it because Belarus has advanced in reforming the economy? Or you’ve changed your approaches?

— We have always believed and are still convinced that the economic future of Belarus depends on whether structural economic reforms will be carried out. If you think our voice isn’t as sharp as it used to be, I’ll take that as a compliment. Still, our message remains unchanged: today, structural reforms are even more important than in the past. The economic model, that the Belarus chose around 2003, is currently under severe stress.

Belarus has consumed more than it has produced for a long time and thereby making significant progress in terms of improving the living standards of people. Actually, there are not so many ways to close this gap. The country is like a family. If you consume more than you earn, this is due to the depletion of your own savings and reserves, external borrowing or help from other countries. The ability to use all these options has recently been declining. Also, the state of balance leaves much to be desired: household savings are dwindling, and it is more difficult for the country to borrow from its traditional lenders.

Therefore, the country has to live within its means: it cannot afford the previous level of state support for agricultural enterprises or subsidizing heating services for the population.

The need for structural transformations became much more acute in 2017, when foreign debt reached 130% of exports, compared to 2003, when it was only 30%. So, we certainly don’t have less reasons for concern.

— Looks like Belarus slowly, yet inevitably is approaching structural transformation of the economy. Is the Roadmap that the World Bank is helping the Belarusian Government to develop ready? Can you already reveal the details of what’s in it?

— The Roadmap is a process of in-depth technical discussions and consultations between the World Bank and the authorities in 2016–2017, and then in 2018–2019. The Roadmap includes five chapters. The first and most important one is the real economy. We focus on the situation with state-owned production enterprises and competition policy.

State-owned enterprises use national capital less effectively than private ones. They create a debt burden that increases the need for borrowing, including foreign borrowing. State-owned enterprises account for a large amount of non-performing loans and distressed assets.

According to the IMF, in 2015 the size of budget support for state-owned enterprises reached 9.5% of GDP. Now this figure is about 3.5%. Indeed, it has decreased, but this is still a lot. Additionally, there is already accumulated volume of debt obligations of state-owned enterprises to both national and foreign creditors.

Economic growth is impossible without the effective use of capital. If a substantial part of national savings is spent inefficiently and unproductively, if the public sector does not operate in line with market rules, does not obey market discipline, this limits growth and reduces the possibility of improving the lives of the people. If Belarus continues to borrow outside the country in order to support its state-owned enterprises, its position will remain very fragile.

— Is privatization inevitable?

— Now the World Bank does not insist on large-scale privatization. Some businesses will work better if they become private. Others may well remain state-owned, but they need to be restructured and made subject to market discipline. Some businesses will have to be closed down.

Another chapter of the Roadmap is social protection. Belarus needs a broad and effective unemployment protection program. Keeping public enterprises afloat is not the only way to ensure an acceptable standard of living for households.

Expenditures on unemployment benefits in Belarus amount to 0.006% of GDP. The cost of targeted social assistance is 0.02% of GDP. According to our estimates, the cost of social assistance can be increased fivefold. And this will be the right and effective approach to protect the poor, vulnerable groups of the population. It is much more effective than artificially keeping employment at state-owned enterprises. In fact, even after a fivefold increase, these expenses for targeted assistance will be 95 times lower than the amount the state spent to help state-owned enterprises in 2015.

— But if we compare it with the current expenditure on the public sector, the difference will be less.

— Yes, “only” 35 times. And that’s still a lot.

By the way, another factor associated with state-owned enterprises is the debt burden that has already been accumulated. These are loans of state-owned enterprises in Belarusian banks, mainly in foreign currency.

One of the issues of the Roadmap is how the National Bank and the Government can ensure the stability of the banking sector until this debt burden is settled. The National Bank has been quite actively working to implement the recommendations of the World Bank and the IMF to ensure the stability of the banking sector over the past three years.

The fourth topic is heating tariffs. A study of household expenditure patterns shows that the most vulnerable poor people can be protected through housing and utility subsidies. It would be more efficient than subsidizing heat tariffs.

Now the population pays about 20% of the cost of heating, the rest is covered by cross-subsidization, business, enterprises, which certainly affects their solvency, or by Government subsidies. This once again brings us to the issue of borrowing from abroad.

The proposed housing subsidy will also be targeted and intended for those who need such support. Presently in Belarus, the greatest benefits from subsidies are enjoyed by the owners of bigger apartments. Most likely, such people do not need subsidies at all. The key principle of the housing subsidy: it should be social and aimed at protecting those in need.

The final theme of the Roadmap is public spending. This is the topic where the most advanced dialogue is taking place, and I am very happy about that. For example, a system of per capita financing is being introduced in education. It will indeed allow schools to better manage their finances and direct funds to where they are most needed.

In the health sector, the Ministry of Health, together with the Ministry of Finance, is currently testing a result-based financing system. That is, the money will be allocated to medical institutions for the procedures they actually carry out, rather than the total amount. This will allow the heads of medical institutions to better control their resources and direct them to where they are most needed.

I take off my hat and say words of gratitude to the Belarusian Government: the heads of line ministries and the Ministry of Finance. In my career, I haven’t seen the case when the line ministries and the Ministry of Finance so quickly made a good team and implemented such a program.

— Something is already being implemented, but we haven’t seen the final document. Will it be published?

— We recommend — the Government decides. However, we are currently at the stage when the World Bank is ready to pass its recommendations to the Government. Then it’s up to them.

— The main recommendation is about the speed and comprehensiveness of reforms – is it still in force? Perhaps, here, too, the approaches have changed and become closer to the Belarusian ones: to move on in an evolutionary, rather than revolutionary way? For example, to engage in education and health care, while leaving state property alone?

— The issue of restructuring state-owned enterprises is the key and most urgent for the economy of Belarus. But this does not mean that other important and necessary reforms cannot go in parallel.

Of course, we would like to see faster progress in the restructuring of the public sector, but we must respect and acknowledge positive steps that have already been taken. For example, these are measures to ensure stability of the banking sector.

Crisis of the 1990s won’t recur

— The attitude of the population of Belarus to reforms is changing noticeably, but they are still perceived as an inevitable evil that will hurt the majority of the country’s citizens. Or have you already come up with “pain relief” — measures that can significantly mitigate the negative consequences for vulnerable groups of citizens? And what, in your experience, is the most acute period — how long ordinary Belarusians have to suffer?

— I’d be lying if I said it was painless. But the fact that the attitude has changed shows that people have a rather realistic perception of reforms, many understand that structural transformation is inevitable, though painful. Moreover, today Belarus has advantages over the countries of the former USSR, which undertook reforms in the 1990s. The transformation process will be less painful for Belarus, as half of the workers are already engaged in the private sector of the economy. Thus, public sector reform will have a less serious impact on the overall social situation than it would have been ten years ago.

Additionally, Belarus has developed strong trade relations with the European Union in the west and with Russia in the east, which is incomparable with the situation in the 1990s, when the countries were left alone with their difficulties. Finally, Belarus has budgetary resources to build a system of social protection and provide an acceptable standard of living for the most vulnerable segments of the population. Yet again this is a significant advantage compared to the 1990s.

It is difficult to predict how long it will last but I can say two things with absolute certainty. Firstly, it will definitely not be like the reforms of the 1990s. Secondly, it’s like going to the dentist – the longer you delay, the harder it will be. But one will still have to go.

— In recent years, a lot has been done in Belarus to increase the attractiveness of the country for private investors. But when dealing with businessmen and investors, it seems that much still remains to be done. This engulfs the protection of property rights and criminal prosecution for economic crimes. What would the World Bank advise Belarus in this regard?

— Both the World Bank and the International Finance Corporation are very actively generating recommendations related to the country’s business climate. Of all the concerns expressed by businesses, three points constantly emerge in meetings and surveys.

This is unequal attitude to public and private economic entities on the part of the state bodies and in courts. The first thing I did when I came in Belarus was to send questions to all foreign embassies here. It was important to understand what investors in these countries think about the business climate in Belarus. The issue of inequality of conditions for enterprises of different forms of ownership, public and private, was the number one problem.

The second problem is access to financial resources. Actually, this issue should be considered both from a macroeconomic and microeconomic perspective. If state-owned enterprises consume a significant part of the funds, there will be a shortage of funds for private borrowers. But here, for example, the World Bank offers its opportunities for micro, small and medium-sized enterprises together with the Development Bank. This is important for unlocking their potential.

The third problem is that technical skills and attitude of Belarusian specialists to work is very important and valuable for investors, but the education system produces personnel with outdated technical knowledge and does not prepare the graduates to be responsible for their career and life. Therefore, we are actively collaborating with the Ministry of Education, advising on higher education and helping to ensure compliance with the norms of the Bologna process.

Still, there are training-related problems. One very large Belarusian employer, who employs thousands of people, said: “Alex, I can easily hire mathematics graduates, train them and make them good programmers. But finding a person who I can put in front of a client — that’s the whole problem”.

— Is this a problem with soft skills? Is it the education system? Or maybe Belarusian mentality?

— Our mentality is what we learn in the family, school, or university. There is a very good saying: education is what’s left after you’ve forgotten everything you were taught in school.

— The World Bank traditionally pays significant attention to education. Allocating extra €90 million to continue modernizing schools has been recently approved. Nonetheless, it is quite difficult to evaluate the results of our education system. We are talking about the high quality of human capital, but, on the flip side, we did not participate in the ratings of the Programme for International Student Assessment (PISA) until 2018; our universities are not at the top of the world rankings. How does the World Bank assess the results, including intermediate ones, of cooperation with Belarus in this sphere?

— It is good that Belarus has joined PISA after all. We will help you to analyze the results of the first round and take part in the second round. Eventually, Belarus will be able to compare the achievements of its students with others. I also congratulate Belarus on joining the World Bank project on human capital development.

Within the framework of this project, it will be possible to compare the level of human capital of the average Belarusian with residents of other countries. We can also congratulate you on joining the Bologna process. Work is underway to unify and harmonize degrees and specializations with international ones. International comparability in education is a very important topic.

“We keep track of every single cent”

— You are talking about equal opportunities, but in Belarus people still prefer to follow the path of creating special conditions, legal regimes, or zones — like the HTP, the “Great Stone”, Orsha special economic zone. How does the World Bank evaluate this path and whether the Government finds appropriate growth points? And, generally speaking, to what extent this is the function of the authorities — to identify promising areas, invest in them, and give benefits?

— Apparently, these special zones are important points of growth for private business in the country. It is equally obvious that since investors and companies have an interest in working in the country under normal conditions, when the state considers a private enterprise as an equal and valuable player, why not extend this principle of equality to the entire economy?

Investors often ask us for advice: what would you recommend to our businesses that want to work in Belarus? My answer is this: if you can find an economic area, where the state encourages rather than hinders private business, and an industry where you will not overlap with the interests of state-owned enterprises, then Belarus is a great country where you can experience all the advantages of having a highly skilled workforce and excellent geographical location.

— The medium-term economic growth forecasts for Belarus from international organizations are rather bleak — below 2%. Can the Belarusian economy grow at a higher rate in the short and medium term? At what expense? Is it possible to achieve the goal of GDP growth to $100 billion by 2025?

— The next two or three years, the economic growth of Belarus, which will be 2% or another value, largely depends on how the negotiations with Russia will go for compensation of the tax maneuver. In the long run, the growth trajectory will depend on how well the country succeeds in improving the conditions for private business and whether the public sector slows down the efficiency of the economy. In the longer term, growth rates will depend on the level of skill development and education.

— What about $100 billion?

— If Belarus reaches $100 billion in 2025, I will be happy to come to you to celebrate this event.

— We have already mentioned that Belarus was spending more than it earned over the years. Along the same lines, our economic success over a fairly long period of time was due to Russian preferences and preferential prices for energy resources. Now the situation is reversed: the country will have to face the consequences of a financially unpleasant tax maneuver. Can Belarusian economy handle it? After all, the amount of losses — more than $10 billion — is very serious, even for a restructured economy.

— If there is no compensation, Belarus will have to tighten its belts. Further cuts in Government spending will be required, and subventions to state-owned enterprises will become a luxury that the country will find even harder to afford. This is why we are talking about the urgent need to restructure state-owned enterprises and strengthen the system of social protection for vulnerable segments of the population. Discussions with Moscow about relations with Minsk and internal discussion in Belarus of how subsidies are spent are two sides of the same coin.

— The World Bank is quite conservative in choosing areas of cooperation: forestry, education, as mentioned above, water supply, waste management. Are these long-term topics that require long-term funding, or is it because of their global importance and going beyond one country?

— We agreed with the Government of Belarus on the principles of our work when we approved the country partnership framework a year ago. All our investment projects and projects aimed at improving the quality of services should have an innovative component, leading to changes in approaches and policies in a particular sphere. If it were just a matter of investment, of course, there are areas where the return is greater.

Now, for the first time in our housing and utilities services projects, we will apply the approach of evaluating the efficiency of public utilities, and those who actually work effectively will receive funding from the World Bank. In particular, for the first time it is within the framework of the World Bank project that several rayons and municipalities will unite and create a single landfill for several rayons instead of the current small landfills in each rayon.

Another example – our energy efficiency project. In September it will be submitted to the Board of Directors for consideration, and after approval for the first time in Belarus, apartment owners will be able to team up for thermal rehabilitation, renovation, and energy efficiency improvement of their homes.

— Subsidies for this will be allocated by the World Bank?

— That’s right. The cost of renovation works will be divided between the owners of apartments in the building and the state. The share of the state will be financed by the World Bank and the European Investment Bank. So, the sectors are traditional, but as a result of the project with the World Bank, something should have been implemented that previously did not exist in Belarus.

— Our neighbors in Lithuania have such projects, so Belarusians have an idea of how it works. But we have a strong mistrust in this area: there is a lack of transparency in pricing. Who, for example, will control how much thermal modernization costs and who will calculate my share in the expenses?

— Overall coordination will be carried out by the housing and utilities services and oblast executive committees. Within the framework of the project with the World Bank, there will be an outreach campaign for the population, for apartment owners, so that everyone understands how much it costs and who pays for what. We keep track of every cent spent and every procurement. If something is fishy, the whole process will be stopped.

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