The Leaders and Laggers in the Slavic Triangle:

Comparative Economic Performance of

Belarus, Russia and Ukraine

Vladimir Popov (vpopov@nes.ru)

Russia was leading in economic liberalization, while Belarus was lagging

Private sector share in GDP, %

0

10

20

30

40

50

60

70

80

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Russian FederationUkraineBelarus

But economic performance was more impressive in Belarus, although Russia has oil and gas

Fig. 2. GDP change in FSU economies, 1989 = 100%

25

35

45

55

65

75

85

95

105

115

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Central Europe

Uzbekistan

Belarus

Kazakhstan

Estonia

Turkmenistan

Azerbaijan

Latvia

Lithuania

Tajikistan

Russia

Kyrgyzstan

Armenia

Ukraine

Georgia

Moldova

By 2004 Belarus was among 5 FSU economies that exceeded the pre-recession 1989 level of output

GDP in 2004 as a % of 1989

PolandSlovenia

Slovakia

UzbekistanCzech Republic

TurkmenistanEstonia

BelarusKazakhstan

RomaniaArmenia

Croatia Latvia

BulgariaLithuania

RussiaKyrgyzstan

AzerbaijanTajikistan

UkraineGeorgia

Moldova

Hungary

40 60 80 100 120 140 160 180

In 1989-2005, growth rates in Belarus were higher than in Russia and Ukraine for 10 years out of 16

GDP growth rates, %

-25

-20

-15

-10

-5

0

5

10

15

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

BelarusRussian FederationUkraine

In 1990 PPP GDP per capita in Belarus was half of that in Russia and 60% of the level of Ukraine.

In 2004 it was higher than in Ukraine and reached 70% of the Russian level

PPP GDP per capita, current international dollars

3000

4000

5000

6000

7000

8000

9000

10000

11000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Russian FederationBelarusUkraine

Life expectancy in Belarus was generally higher than in Ukraine and Russia

Life expectancy at birth, years (1995-2002 - WDI, 2003 - HDR)

64

65

66

67

68

69

70

71

72

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

BelarusUkraineRussian Federation

Human Development Index (GDP per capita, life expectancy, education) was lower in Belarus than in Russia and Ukraine in 1990, but now is higher than in Ukraine and is nearly as

high as in Russia Human Development Index for China, Belarus, Russia and Ukraine

0,65

0,67

0,69

0,71

0,73

0,75

0,77

0,79

0,81

1990 1992 1994 1996 1998 2000 2002 2004

Russia BelarusUkraineChinaCuba

There is only one former Soviet republic with which Russia has today a negative

migration balance (more people leave for B republic than come from B republic to

Russia)

• Yes, it is B e la r u s

It was argued that Belorussian economy is not restructuring, but investment is higher in Belarus

than in Russia and Ukraine Investment as a % of GDP

14

19

24

29

34

39

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

BelarusUkraineRussian Federation

It was argued that investment are supported by government subsidies and are used to finance inefficient projects, but energy

intensity of GDP fell faster than in Russia and Ukraine

Energy use per PPP GDP (kg of oil equivalent per constant 2000 PPP $)

0,45

0,5

0,55

0,6

0,65

0,7

0,75

0,8

0,85

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

UkraineRussian FederationBelarus

Belarus is biting the bullet - electric energy tariffs grow fast

Electricity tariffs, US cents per 1 kWh

0,3

0,8

1,3

1,8

2,3

2,8

3,3

3,8

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

BelarusRussian FederationUkraine

ODA to Belarus was high, but now is low

Aid per capita (current US$)

0

5

10

15

20

25

30

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

UkraineRussian FederationBelarus

However, investment climate is good - FDI inflows are higher than in Ukraine and Russia

Cumulative FDI inflows in 1989-2004 per capita, US$

0

50

100

150

200

250

Belarus Ukraine Russian Federation

Why differences in performance?Answers are available from vpopov@nes.ru on request

Shock Therapy versus Gradualism Reconsidered: Lessons from Transition Economies after 15 Years of Reforms. TIGER Working paper No. 82, 2005

Shock Therapy versus Gradualism: The End of the Debate (Explaining the Magnitude of the Transformational Recession). – Comparative Economic Studies, Vol. 42, Spring, 2000, No. 1, pp. 1-57.

Reform Strategies and Economic Performance of Russia’s Regions. – World Development, Vol. 29, No 5, 2001, pp. 865-86.

Democracy and Growth Reconsidered: Why Economic Performance of New Democracies Is Not Encouraging, co-authored with V. Polterovich)

Impact of initial conditions, institutions, liberalization:1989-96

Table 1. Regression of change in GDP in 1989-96 on initial conditions, policy factors, and rule of lawand democracy indices, robust estimatesDependent variable = log (1996 GDP as a % of 1989 GDP)For China - all indicators are for the period of 1979-86 or similarEquations, Number ofObservations / Variables

1,N=28

2,N=28

3,N=28

4,N=28

5,N=28

6,N=28

7,N=28

Constant 5.3*** 5.4*** 5.2*** 5.4*** 5.4*** 5.5*** 5.7***Distortions, % of GDPa -.005** -.005** -.003 -.006** -.007*** -.007*** -.007***1987 PPP GDP per capita, % of theUS level

-.009** -.006* -.007** -.007** -.009*** -.008***

-.008***

War dummyb -.19c -.36*** -.37*** -.45***Decline in government revenues asa % of GDP from 1989-91 to 1993-96

-.011*** -.011***

-.011***

Liberalization index .05 -.02 .03Log (Inflation, % a year, 1990-95,geometric average)

-.16*** -.20*** -.18*** -.17*** -.13*** -.13*** -.14***

Rule of law index, average for1989-97, %

.008***

Democracy index, average for1990-98, %

-.005***

-.003**

Ratio of the rule of law todemocracy index

.07*** .07*** .06*** .05*** .05***

Adjusted R2, % 82 83 83 85 91 91 90

*, **, *** - Significant at 1, 5 and 10% level respectively.aCumulative measure of distortions as a % of GDP equal to the sum of defense expenditure (minus 3%regarded as the 'normal' level), deviations in industrial structure and trade openness from the 'normal' level,the share of heavily distorted trade (among the FSU republics) and lightly distorted trade (with socialistcountries) taken with a 33% weight – see (Popov, 2000) for details.bEquals 1 for Armenia, Azerbaijan, Croatia, Georgia, Macedonia, and Tajikistan and 0 for all othercountries.c Significant at 13% level.

Best performance: low distortions, strong institutionsWorst performance: high distortions, weak institutions

INITIAL CONDITIONS (DISTORTIONS) AND INSTITUTIONS –CLASSIFICATION OF COUNTRIES

DISTORTIONSINSTITUTIONAL CAPACITY

LOW HIGH

HIGH CHINA,VIETNAM

EASTERNEUROPE

LOW ALBANIA,MONGOLIA

FSU

Belarus had very distorted economy before transition, but managed to avoid the collapse of

the institutional capacity of the state

INITIAL CONDITIONS (DISTORTIONS) AND INSTITUTIONS –CLASSIFICATION OF COUNTRIES

DISTORTIONSINSTITUTIONAL CAPACITY

LOW HIGH

HIGH CHINA,VIETNAM

BELARUS

LOW RUSSIA UKRAINE

Government revenues and expenditure declined in virtually all transition economies

Рис. 4. Доходы консолидированных бюджетов в % к ВВП

10

15

20

25

30

35

40

45

50

55

1989 1990 1991 1992 1993 1994 1995 1996

ЦентральнаяЕвропа

Юго-ВосточнаяЕвропаПрибалтика

Россия

СредняяАзия

Закавказье

Китай

Expenditure for “ordinary government” did not decline in Central Europe and in China...

Fig. 3. Government expenditure, % of GDP

0

10

20

30

40

50

60

1985 1989 1995 1978 1985 1994 1989 1996

Debt serviceDefenceSubsidiesInvestment"Ordinary government"

POLAND CHINA USSR/ RUSSIA

...And in Belarus General (consolidated) government revenues (% of GDP)

30

35

40

45

50

55

60

65

70

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

BelarusRussian FederationUkraine

Government purchases of goods and services (i.e. government expenditure minus transfers)

were relatively high in Belarus

General government final consumption expenditure without defense expenditure (% of GDP)

0

5

10

15

20

25

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

BelarusUkraineRussian Federation

For instance, government expenditure on education Public spending on education, total (% of GDP)

0

1

2

3

4

5

6

7

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

BelarusUkraineRussian Federation

Conclusions

• The impact of the speed of liberalization at the initial stage of transition, i.e. during the transformational recession, appears to be negative, if any.

• The reason for the negative impact is most probably associated with limited ability of the economy to adjust to new price ratios

Conclusions• Differences in performance during transition

depend strongly on the initial conditions:

• The higher the distortions (militarization, over-industrialization, "under-openness" of the economy and the share of perverted trade flows), the worse is the performance

• The higher was GDP per capita before transition, the greater were distortions embodied in fixed capital stock, the more difficult it was to overcome these distortions to achieve growth

Conclusions

Fig. 5. Hypothetical trajectories of output (Year "0" = 100%) assuming gradual and instant liberalization

80%85%90%95%

100%105%110%115%120%125%

0 1 2 3 4 5 6 7 8 9 10

Years

Out

put,

Year

"0"

= 1

00%

Reduction ofoutput in aNC sector at10% annually

Reduction ofoutput in aNC sector at30% annually

Reduction ofoutput in aNC sector at100%annually

Assumptions: size of non-competitive sector (NC) in the initial year = 20% of total output; net investment (s) = 10% of total output;

marginal capital productivity, output increase per unit of net investment (a) = 1/3.

Conclusions• At the recovery stage liberalization starts to affect

growth positively, whereas the impact of pre-transition distortions disappears. Institutional capacity and macroeconomic policy continue to be important prerequisites for successful performance.

• Liberalization at the recovery stage influences performance positively because it creates market stimuli without causing rapid collapse of output of inefficient industries, which cannot be compensated fully by the rise of efficient industries due to investment constraints.

Thank you

• Details are available from:

vpopov@nes.ru