After nearly a quarter of a century of development cooperation with Belarus, the World Bank’s active project portfolio has reached $1 billion. The organisation is now engaged in projects in just about all major development areas and maintains a strong policy dialogue on the country’s structural reforms’ agenda.
Young Chul Kim, the World Bank’s country manager for Belarus, told Emerging Europe about the opportunities for sustained growth that exist in Belarus and the changes the country is making in order to attract more foreign investment, and discussed the advantages that the country has to boast about.
–The World Bank has been working in Belarus for the last 24 years. What projects have you been engaged in over that time?
– Over the years, we have financed the country’s development project portfolio to the tune of over $1.5 billion. Initially, having focused our cooperation mostly on infrastructure services; now, we are working in all the key developmental areas. In particular, we have significantly expanded the size and the scope of the programme, since rolling out our Country Partnership Strategy (CPS) for Belarus, in June 2013. We are now implementing projects in road transport, energy, water and sanitation, solid waste management, forestry, education, and public financial management.
Three years ago, our active project portfolio was worth about $375 million. Now, it is worth $998 million and will soon reach $1.2 billion, when two new projects for the private sector and health sector development are added this year.
This expansion is notable not only in the sense that the amount of financing is increasing but also, and more importantly, because we have been able to build a strong mutual trust with Belarusians. Projects in education and health care represent the first time that Belarus is borrowing from foreign partners for social sector development. In health, the forthcoming project will bring e-health solutions, specialised training labs for general physicians and the refurbishment of a neo-natal care unit. <…>
– What are the main challenges for Belarus? (in the roadmap for reform that the WB designed for the country last year – note)
– I would say macro stability is the most important challenge. The argument there is: if I am an investor who is interested in bringing my capital to Belarus, I shouldn’t need to worry about how much that money will be worth in say six months. In an unstable economy, the invested capital can be subject to devaluation, depreciation and inflation etc. As we know, a stable economic environment is needed to foster investment. During the past 18 months, there has been a consistent and prudent macroeconomic policy in place, so the first condition for long-term investment has been met.
Another challenge is for state-owned enterprises (SOEs) to become more efficient and competitive. If they make progress in reducing cost and raising productivity, there will be more investors interested in entering into joint-ventures with them. Then, the SOEs will rely less on state subsidies because they generate more profits on their own. This in turn means that financial resources in the economy can flow more towards the private sector. However, making SOEs more efficient and competitive requires streamlining their product range and opening new markets which naturally takes time and money.
In a planned economy, the state gives state-owned companies quantitative production targets and budgetary funds with which to reach those targets, so there is no real incentive to improve the quality of their products. In addition, there are implicit and explicit price ceilings, vis-à-vis consumer goods and component suppliers, which are often very inflexible. This meant that you can’t adjust your prices based on economic principles. The market is left with unmet demand at the price ceiling rather than clearing at the equilibrium price where supply and demand curves meet. So if you operate under a price ceiling, you have to overproduce because the market would ask for more quantities when prices are lower than the equilibrium. As a producer, you either need to acquire more budgetary funds to produce them or you have to lower the quality, in order to meet those quantities.
– That sounds unsustainable, doesn’t it?
– Yes, this is what may have happened in Belarus in the past and why price deregulation is so important for firms’ competitiveness. The country has also been very much dependent on exports to Russia which, in retrospect, may have reduced the need for product upgrading in Belarus. <…>
– How can Belarus do that, now?
– Well, first of all, you cannot do it all at once, across the board, because it costs a lot to upgrade; you need to be selective. There is little room within the budget to support product upgrading after meeting the country’s social spending. You also have to find a transformation strategy which maximises the viability of the existing production system. Otherwise, you can end up de-industrialising the economy.
It is a delicate and difficult task to preserve Belarus’ significant industrial capacity, without keeping inefficient companies afloat in order to provide employment. It is even more difficult during a recession to achieve product upgrading, discovery of new markets, and transformation to higher value production. We will have to find a strategy to bring external or foreign savings to Belarus preferably in the form of investment rather than loans, and to find ways for foreign investors to put up their money, work with Belarusian producers to upgrade products and open new markets, and make decent profits together.
Some monumental change is already happening in Belarus, first in the business culture – a move from a philosophy based on quantity toward one focusing on quality, from a system relying on subsidies and state loans to one driven by own-generated profits, toward a business mind set which optimises the level of inventories and minimizes how much operating capital you have to carry.
All of these represent a very determined strategy for change, not just a routine modernisation. Now Belarus needs to further develop the logic of change and sell it to potential investors, I would argue, far better than its neighbours. There have recently been many encouraging signs of a systematic effort being made by Government and industries alike in order to overcome the structural constraints. The policy on phasing out directed lending is one of such signs.
– Belarus isn’t in the top ten investment destinations for foreign companies, is it? What can be done to attract foreign investors?
– Well, part of this is comes from the stigma of its being labelled as a centrally planned economy, heavily controlled by the State. The market tends to see things wholesale based on news headlines — that nothing operates on market principles and that there is excessive regulation. That may have been true in the past, to some extent, but there are also quite a few misperceptions. The part of the investor perception that is not true or exaggerated is the stigma.
– So when we look at the current image of Belarus as an investment destination, how much do you think is reality and how much are misconceptions or so-called stigma, if you will?
– I think the stigma has had a significant impact on foreign investment. It is not easy to get potential investors who have never set foot in the country to change their minds about the news that they assumed were true. Belarus has to make an extra effort to change perceptions and actively reach out to the investor community in order to overcome the stigma. <…>
– When we look at the Doing Business report, Belarus ranks 44th. It seems that on the one hand there has been a lot of improvement in the business climate, but on the other hand, we see countries which have climbed up the ladder where businesses don’t see much improvement in their day to day operations. In an interview two years ago, former Minister of Economy, Nikolai Snopkov, said we would see Belarus leap in the ranking.
– Ten years ago, Belarus ranked 106th out of 155 countries in the DB ranking. Now it ranks 44th out of 189 countries. So in ten years, the country moved from the bottom third group to the top quarter group which is remarkable. The rapid climb in the ranking was possible, to some extent, because the government focused on reforms that would have larger effect on the ranking. There have also been changes in the DB methodology which have helped Belarus. However, it is difficult to explain a consistent climb in the ranking without policy changes that are good for business.
I was not here ten years ago, but I will bet my house that the investment climate in Belarus is better now than it was a decade ago and will get better still.
I think it is important for the government now to ask a different question: if we have climbed up in the ranking so much, why haven’t we seen a stronger inflow of investment? In addition to all that has been done over the years to achieve the current position, what should the government do in order to translate the Doing Business indicators into actual investment?
Clearly, I think Belarus should ask which of the 43 countries ranking higher on Doing Business have also been able to attract investors. What have they done in addition to improving their Doing Business performance? Moving beyond the mechanical introspection on how it does on various country rankings, Belarus needs to study countries which have attracted large amounts of investments and recreate the conditions they offered to investors.
– What would be the profile of a European company that could benefit from investing in Belarus?
– I think companies whose traditional business lines face increasingly stiff competition from Asian producers should look at Belarus which has a good skills base and offers relatively low factor cost. The Carl Zeiss Group entered into a joint venture with BelOMA to produce high precision camera lens and microscopic equipment. Moscow Aeroexpress line is being upgraded with trains made in Belarus. There is interest from global medical equipment companies to produce X-rays, CT scanners, components for MRI scanners in Belarus.
However, I need to also mention that some of these products are already produced in Belarus and exported globally!
To me, I think a win-win solution can be found for many European producers if they would just come to Belarus and look around. One can definitely create higher value at lower cost in Belarus, and that is where the investment opportunities are.
– We were talking about the negative image of Belarus; we need to add there are many people who make generalisations and sometimes make comments even though they have never been here.
– Well, before I came to Belarus, I also came across a lot of articles which were negative about the country. Over time, I found that some of the same old articles from the past were being recycled by the media. New stories were being re-written on the basis of old pieces. So it is difficult to get outsiders to take a fresh look at the country – we called it the stigma earlier. It is like phantom pain of a severed limb.
Belarus has many scars from the past. If we look at the Chernobyl catastrophe, the country is still suffering. Chernobyl was actually a nuclear power facility in Ukraine not in Belarus but it was Belarus that got bombarded with nuclear fallout. Did anyone compensate Belarus for the damage? Since its independence, Belarus has spent $22.5 billion in direct costs to take care of its Chernobyl victims. If Belarus had a spare $22.5 billion today, it would be able to pay for a good chunk of the cost of transforming itself into a high-income economy.
However, since the reality dictates otherwise, Belarusians will do their part to attract investors who are willing to take the first step. I am sure Belarus will soon establish itself as a hospitable and friendly investment destination. I just bet my house on it, didn’t I?
Find the full version of the interview here.