Belarus's journey into, and initial response to, the financial crisis was markedly different from its neighbors, but its overall attempts to repair its economy is an area where it converges with its western counterparts. The path Belarus took in seeking a way out of the financial crisis puts it in demonstrated contradiction to the Marxist literature advising on paths out of the financial crisis.
By
"Post 2015
election result, as per the IMF forecast, Belarus’ GDP is expected to decline
by 2.2% in 2016. The forecast for 2015 has been revised downwards – GDP is
expected to shrink by 3.6% instead of 2.2% according to April forecast. The
deterioration is due to the slower pace of economic recovery in the developing
countries with a view to preserving the current level of oil prices. In the
near future investment in fixed assets will curb, household incomes will continue
to fall, competition for jobs will increase, and inflation somewhat decline due
to lower consumer demand. The current account deficit of 4.3% of GDP requires a
search for external funding sources to service the public debt, since Belarus
does not have sufficient domestic resources to service her debt." - Belarus in Focus
Belarus
initially weathered the global financial crisis better than its neighbors and
trading partners. The state's grip on industry and the strongly centralized
powers allowed the administration to directly steer the country away from the
crisis as it swept through Europe, the United States, and Russia. State
ownership of many industries allowed the leadership in Minsk to control the
behavior of large economic actors aimed to increase domestic demand in the face
of decreasing exports (Kruk, 2013). The tactics worked initially and
superficially. Belarus was one of only two Eastern European countries to see a
positive albeit small growth in Gross Domestic Product (GDP) in 2009 and it was
able to keep its currency peg of 3000 Belarusian rubles to the U.S. dollar. The
following year, its GDP increased by 7.7 percent, despite its exports to the
Euro Zone dropping by almost 45 percent in 2009 and largely stagnating in 2010
(European Commission, 2013).
Image Attribute: www.financialobserver.eu
Eventually, stimulating
domestic demand was not enough to offset the dip in trade by its main trading
partners Russia, Ukraine, and the European Union (primarily Germany and the
Netherlands) (United Nations Statistics Division, 2013), many of which
depreciated their currency to stay competitive. By June of 2009, the countries
at the heart of the financial crisis began to migrate towards the perceived
security of the U.S. dollar. The Russian Ruble began to depreciate against the
dollar, as did the Ukrainian Hryvnia. The Euro followed suit at the end of the
year. Belarus initially tried to hold fast to its currency peg. Exports
suffered as the real price for Belarus's goods increased with respect to its
trading partners. Its foreign currency reserves dwindled as it became less
globally competitive. Increasingly, Belarus was unable to make up for dips in
export.
By 2011,
Belarus's ability to command its way out of the financial crisis was dwindling.
It was facing a balance-ofpayment crisis, with shrinking foreign currency and
gold reserves. It depreciated its currency and by end of year, the ruble had
dropped to almost a third of its value with 8500 Belarusian rubles to the
dollar. Consumer prices grew by 107 percent (Bornukova, 2012), driven mainly by
a sudden increase in the prices of imported goods.
Image Attribute: Welcome
To Hyperinflation Hell: Following Currency Devaluation, Belarus Economy
Implodes, Sets Blueprint For Developed World Future by Tyler Durden on
05/25/2011 / Source: Zerohedge.com
The price fluctuations more
greatly affected the higher income earners purchasing imported goods, as many
essential domestically-produced goods and services were subject to price
controls. While the prices of many goods increased, long-standing price
controls meant that much of the population was somewhat shielded from the
entire effect of the rise in inflation. Domestically-produced items not subject
to price controls, for example meat and poultry, saw a rise in price almost in
percentage parity to the exchange rate depreciation (Bornukova, 2012).
More harmful to
the average population, and especially to pensioners, was the drop in real
income and the depreciation of their Belarusian ruble-based savings. The
average real income of a Belarusian decreased by fifteen percent in 2011
compared to the year before. Pensioners saw their stipends fall in real terms
by 29 percent. The percentage of the population that fell below the poverty
line more than doubled from the beginning to the end of 2011 (Bornukova, 2012).
It could have been argued that the fall in real income for pensioners would be
the greatest threat to the Belarusian system. It is the pensioners who by
majority believe that the demise of the Soviet Union was a mistake and support
the resistance to westernize (White, 2010). It follows that a failure in the
current system could have hurt that support. Lukashenko attempted to placate
the pensioner population by increasing pensions ahead of the 2010 presidential
election, furthering the financial crisis but maintaining support for the
current system.
The Only Available Way-Out –
The International Lenders of Last Resort:
Belarus's
journey into, and initial response to, the financial crisis was markedly
different from its neighbors, but its overall attempts to repair its economy is
an area where it converges with its western counterparts. The path Belarus took
in seeking a way out of the financial crisis puts it in demonstrated
contradiction to the Marxist literature advising on paths out of the financial
crisis. Belarus paid lip service to Lenders of Last Resort (LOLRs), agreeing to
concessions that would take the economy on a more wholly market-based path. The
international LOLRs made conditions for the loans, bringing Belarus more
greatly in line with the western policies that Marxist literature blamed for
the crisis.
Image Attribute: The Plaque of IMF Office in Minsk, Belarus
Prior to its
2011 crisis, Belarus sought and accepted a 2.5 billion dollar loan from the
International Monetary Fund (IMF) in 2009 to bolster their gold and foreign
currency reserves and to support the fixed exchange rate. In return, Belarus
agreed to undergo a fifteen-month economic reform program. As Belarus began to
feel the full effects of the financial crisis in 2011, the IMF later increased
the loan amount to 3.5 billion, and Belarus agreed to implement structural
reforms aimed at improving macroeconomic policy in the real economy. Belarus
later accepted a 3 billion dollar loan from the Russian-led Eurasian Economic
Community's Anti-crisis Fund. The Community's loan came with conditions,
including the sale of 7.5 billion dollars in state-owned assets (many of which
Russia had interest in purchasing) and increased bank lending to the economy
(“Belarus Ratifies Treaty,” 2009).
The LOLR
solidified its role as a crucial lifeboat for many countries during times of
financial crises during the late nineteenth and early twentieth century, when
many countries experienced runs on banks simultaneously with currency crises
(Goodhart & Illing, 2002). Originally, it was a country's central bank that
played the role of LOLR to cushion liquidity shocks. As globalization connected
economies, financial crises were increasingly an international problem for
stats rather than a domestic issue. Capital flows began regularly crossing
borders, and thus, a financial crisis in one country could affect the situation
in another. The risks associated with such interconnectivity were identified as
the “international financial contagion risks” and the response to these risks
was to internationalize the role of LOLR (Huang & Goodhart, 2000).
In the 1990s,
the literature began to examine the increasing role of an international LOLR,
that is, it began to ask about the appropriateness of a multinational
organization or institution acting as LOLR to an entire country's banking
system. This debate was framed by an acceptance in the 1990s of the greater
efficiency on the macro level appreciated by countries that were open to
international capital flows (China and India's growing economies during this
period aside) (Fischer, 2002). To accept the principle that international
capital flows increased overall wellbeing, it was also necessary to accept that
financial crises must be kept at a minimum, thus bringing to the forefront the
crucial role of the international LOLR.
The IMF, has
become principal international LOLR, although its founders deliberately wrote
its Articles of Agreement to avoid the IMF taking on this role. However,
Boughton and Lombardi (2009) and Calomiris (1998) argue that the IMF has been
going in the direction of becoming principal international LOLR since the end
of Bretton Woods in the 1970s. Russia led the way towards a Eurasian
international LOLR when it created the Anti-crisis Fund for the Eurasian
Economic Community (EEC) in 2009. Its primary goal is to assist EEC members
(Russia, Belarus, Kazakhstan, Kyrgyz Republic, and Tajikistan) hardest hit by
the financial crisis (EurAsEc Anti-Crisis Fund, 2013). As with the IMF, the
monies in the EEC's Anti-crisis fund are available with conditions for its recipients.
Intervention by
a LOLR invites criticism; it’s very existence possibly contributing to a
suspension of market discipline by taking away the risk of failure. This stands
in contrast to the original Bangehot LOLR principle to “lend freely, at a high rate,
against good collateral,” Any LOLR must have “technical autonomy and effective
sanctioning power” (Giannini, 1999, 2). Giannini (1999, 1) argued that the only
way to minimize the moral hazard associated with an LOLR was to rely on the
“broader legal and institutional setupdon regulation in the broadest sense of
the word.” However, in light of international organizations legitimacy coming
from a critical mass of members and the buy-in of those, international LOLRs
depend on the cooperation of state-level leaders to maintain its ability to
lend funds with conditions attached. Often international LOLRs make loans
without such collateral prerequisites as their state-level counterparts, but
instead make conditions for the loans that countries adhere to when accepting
the bailout funds.
When Belarus
accepted IMF assistance, it also accepted IMF's conditions for greater
privatization, its critiques, and its guidance. The IMF's goal for Belarus
includes tightening of monetary, budget, and tax policies. Belarus furthermore
agreed to reforms in its exchange rate policy (Lis & Koliadina, 2012).
Belarus's acceptance of assistance from the EEC Anti-crisis Fund meant it
agreed to sell some of its state-owned industries to Russia and further
privatize other industries, as well as agreeing to reform monetary, budget and
tax policies, with some emphasis on easing tariffs between Belarus and other
EEC members.
That a
post-Soviet state would promise reform when offered a lifeline by a LOLR is not
a new concept. PopEleches (2008) argued that regardless of a state's
ideological differences with market capitalism, in Eastern Europe, states that
were experiencing hard currency crises were more likely to seek and accept
assistance from the IMF during the 1990s. His analysis found that Eastern
European states with reformist-minded governments were statically equally as
likely as states whose governments resisted reforms to make necessary
concessions needed to enter IMF programs. In Belarus, in 2010, the prospect of
an upcoming election paired with a hard currency shortage saw the government
ready to set aside their partisan differences with the IMF and agree to
implement the requisite privatization programs for IMF assistance. In fact, it
had begun to look to privatization to solve its hard currency problem before
seeking IMF assistance as a way out of its financial crisis. In times of strong
inflation (over 140 percent), former communist states in Eastern Europe are far
more likely to initiate IMF-style reforms.
Although some
Marxist literature heralded the remarks by Buiter (2008) that private finance,
with its risks and bubbles, should give way to the public sector to regulate
and control, Belarus, already with a strong grip on its financial system, was
promising to open itself up to the global financial system and decrease its
strong tradition of state ownership. It promised to deviate from its own
mechanism of production, ownership, and lending (championed by Davies (2011) as
a way out of the crisis) and go towards the uncertainties of the global
financial market that Davies (2011) said was the wrong path from the crisis.
It should not be
argued, however, that Belarus sprung into reform upon agreement to the terms of
the international LOLRs (IMF, 2013). In a 2012 report, the IMF noted that
Belarus has made little progress in its market reforms and has reversed some of
the price liberalizations put into place in 2009-2010. The IMF criticized
Belarus for continuing to focus on output (rather than profit), at the expense
of efficiency, as well as its distortions of market indicators as a result of
government-controlled investment, the dominance of state-run banks, and an
inflexible labor market (Lis & Koliadina, 2012). In addition, Belarus's
last tranche of the EECs Anti-crisis Fund was delayed in late 2013, as it had
not yet met the reforms and privatizations necessary for continued support of
the EEC (“Decision on Sixth Tranche,” 2013). Furthermore, while a country can
attempt to control its banking sectors, it has a more difficult time
controlling its population's trust, and many of Belarus' citizens prefer
foreign currency. Although Belarus agreed to market-focused reform, its lag in
their implementation has been cause for further issues (rather than their
salvation), including slow growth, trade imbalances, and pressure on banks that
are experiencing shortages in ruble funding (IMF, 2014).
The connection
to the Marxist literature can be seen in the steadfast nature of the
international LOLR. Ultimately, the international LOLRs, although dependent on
quotas given by the very countries hit hardest by the financial crisis, did not
buckle or weaken in the face of global financial crisis. Marxism's appeal never
made it past the literature and occasional public demonstrations to applied policy
because there has, heretofore, been no need for such grand structural and
institutional reform anywhere in the western world. When Belarus faced its own
financial crisis, it first turned wholly towards LOLRs and promised reforms
that would increase its dependence on the global market. When it largely
ignored its promises, its problems persisted. In the current interdependent
world, the literature on Marx's solutions no longer provides answers, or even
viable suggestions.
Conclusion:
When Belarus's
leadership notoriously skeptical of Western reforms and outside intervention by
even its allies are willing to promise market-based reforms in times of
financial crisis to qualify for much-needed liquidity, it should be little
wonder that the Marxist advice espoused in the thick of the financial crisis
has been largely ignored by policymakers. When Belarus ignored its promises and
sunk further from recovery, it lends credence that reform away from
market-based capitalism is not effective in the globalized economy. By
examining the case of Belarus, it is possible to see how international LOLRs
not only maintain current systems' status quo, but can also compel a state to
desire greater integration to the global market. Belarus' continued struggles
as a result of ignoring the reforms show further that closing oneself off from
the global market and attempting does not provide relief. The existing
Marxist-leaning literature, by ignoring the situation in Belarus, fails to see
the game-changing impact that, among other factors, strong LOLRs have in
maintaining current market-based practices. Predictions of protests-cum-reform,
a change to the global order, and a movement away from market-based,
profit-seeking practices will continue to come up short as long as there are
viable mechanisms including international LOLRs to keep the current systems
afloat.
About The Author:
Heather Bell and Robin Bell, Worcester Business School, University of Worcester, Worcester, United Kingdom
Publication Details:
Journal of Eurasian Studies, Volume 6, Issue
2, July 2015, Pages 153–160, doi:10.1016/j.euras.2015.03.007,
Open Access funded by Hanyang University Under a Creative Commons license. Downlod the Paper - LINK
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