To Study, Study and Again Study Capitalism*

My new article on market reforms and privatization in Belarus, for Naša Niva:



To Study, Study and Again Study Capitalism*



For several weeks, before and after the Belarusian Investment and Economic Forum, the media was being bombarded by news on developments around the privatization of Belarusian state property and plans for further liberal reforms in the economy of the country. Belarusian authorities finally outlined plans to make order in the Augean stables of the national tax system - the world's worst according to international rankings. Movement in the right direction is good, but its shortcomings must be corrected.

How to attract adventurers

The Belarusian economy is perceived as a high risk investment target. To improve the image of Belarus, more than just one year is needed. Old scandals (unsuccessful investors to Belarus in the 1990s, like "Baltika" or "Ford") are much better remembered than new success stories. No protection of investments, biased courts and the overall exotic totalitarian image of Belarus - the government has a huge scope of work to do. Positive changes must happen and be recognized by the international community.

Only adventurer-type investors would be ready to invest in Belarus now. For ignoring the risky image of Belarus they want high returns on their investments. Prospects of such returns are vague: Belarus doesn't have natural resources that attract investors to Russia or Kazakhstan It is hardly possible to transform Belarus from the "Assembly Shop of the USSR", as it was called in Soviet times due to Belarusian heavy industry supplying the rest of the USSR, to "a Small Assembly Shop Near the EU" because Belarus is not even a member of the WTO. Today, when Finnish wood processors sometimes find it easier to handle Russian wood in China, Belarus is not physically able to compete with Asian countries as an eventual location for foreign production facilities.

"To be proud of one's export potential is past century," a senior foreign delegates of the Belarusian Investment Forum said in a private conversation. Investors are more interested in domestic market and the effective domestic demand, on which Belarus is not very attractive, he added.

The government could sell state-owned companies, which it can't manage anyway, for a lower price, but today the Western investors have enough cheap objects at home. This makes them less interested in Belarusian enterprises. There are many assets for sale in Belarus, but many of them lack a realistic valuation, the forum participant complained.

Bluff as style

Arrogance and inflated self-importance are usual for the foreign relations of the Belarusian government under Lukashenka. Their speeches sound like foreign capital just can't wait to rush into the country. This is where the high prices for state companies, which still require a lot of work to be done prior to a sale, come from.

So, it was strange to hear Prime Minister Siarhiej Sidorski presenting the Belarusian centralized economy as a successful model compared to the crisis-causing free market capitalism. Just as free market has very little to do with the causes of the current economic crisis, even the Belarusian Investment and Economic Forum, where Mr. Sidorski has held this speech, seems specifically to have been organized because the old approaches to the Belarusian economy had stopped working. There is a need for Belarus to catch up two decades of market reforms. In 2010 Belarusian accounting standards will be brought closer to IFRS, the licensing system will be radically simplified et cetera. Just why couldn't it all have been done in the previous years?

Already too late, or not yet?

The Belarusian government only learns to act in the circumstances of a modern economy. There has been a comic phrase occasionally said by Chairman of the State Property Committee some time ago, according to which the government of Belarus had then finally realized, what the difference between transforming of a unitary enterprise to a joint-stock company and privatization was. However, some publications in the media or the sudden appearance of the still unitary Beltelecom on the privatization list for 2009 indicate that there is still large space for the elimination of illiteracy.

Belarusian officials have found out about such a thing as a listing on a stock exchange and carefully repeat words about preparations for IPOs of companies of the Belneftekhim holding. It brings optimism to hear such things from previously conservative officials. Professionalism of the key people in the government and their ability to learn - that is what gives hope to investors.

The reforms are advancing very rapidly and even demonstrate short-term benefits of an authoritarian regime, that is not burdened by a discussion of new legislation with the parliamentary opposition. The latter is what has been drowning reforms in neighboring Ukraine over the past years. The problem is that the effect of reforms and good international ratings can be expected only in not less than five years. Much earlier will we know whether the government of Belarus is not already too late with its today's reformist enthusiasm. Those who come too late will be punished by life, Mikhail Gorbachev used to say.


// Naša Niva, translated by myself and Google Translate

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* "To study, study and study communism again" - a quote attributed to Vladimir Lenin
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Forbidden to forbid: Georgia as Field for a Macroeconomic Experiment

The idea to protect economic freedoms on a constitutional level has for the first time been thoroughly formulated in the post-Soviet region by the Belarusian economist Jaraslau Ramanchuk. In 2007 he presented the project of an Economic Constitution of Belarus[1]. This document was supposed to supplement the country's Constitution in terms of economic policy and to guarantee economic freedom for the citizens and limitations for government intervention in the economy on the constitutional level. This may look as an interesting, but utopian intellectual project for Belarus, but in Georgia it will soon be reality.

A liberal economic regime guaranteed by Constitution

Georgian President Mikheil Saakashvili proposes to protect and expand the country's liberal economic regime on the constitutional level. According to the Act on Economic Freedom and the relevant amendments to the Constitution, a draft of which he introduced to the Parliament on October 6. If passed, the new legislative acts will set limits on the size of government expenditures and public debt, prohibit the imposition of additional licensing and other restrictions on economic activity of private entities.

Besides that, it will be forbidden for the Georgian state to own shares in banks and put restrictions on convertation of the national currency or movements of capital. Any tax increase will have to be approved on a national referendum [2].

Given that the pro-presidential party has a constitutional majority in the parliament, the Act and the amendments to the Constitution are likely to be passed.


Georgia's success under Saakashvili

Just like any politician, Mikheil Saakashvili can be criticized for many things: for an authoritarian domestic policy, maybe for lack of flexibility and diplomatism in foreign policy (although it is difficult to imagine what a president of Georgia could make in order to avoid the war with Russia in August 2008). Even this initiative and the way it has been announced has a fleur of PR and populism on it. But what no one is able to question is the scale of socio-economic progress achieved by Georgia under Saakashvili.

According to most international rankings, Georgia has one of the most attractive environment for business and for investors in the region (and even in the world). Having almost no natural resources or major industries from the Soviet era, in 2004-2008 the country showed an average annual GDP growth of 9.3% which is comparable to the rate for Belarus (10% in 2008, 8.2% in 2007, 9.9% in 2006) with its preferential prices for Russian raw materials, Soviet industrial legacy and manipulation with statistics.

The flow of foreign investment in Georgia has not stopped even after August 2008 (although it dropped to USD 226.1 million in the first half of 2009 to USD 1.143 billion for the same period of 2008). Economic losses of Russia from the war in the form of capitalization of Russian companies fall (a few tens of billions of dollars), the withdrawal of capital from the country (up to USD 20 billion) and the drop in Central Bank reserves (USD 16 billion) were much greater than the loss of Georgia, so the question of who has really lost that war is not a rhetorical one.

Now Saakashvili together with Kakha Bendukidze, the father of the Georgian economic reforms and co-author of the Act on Economic Freedom, have led the country to a major turning point, when the economic transformation is about to get a real deeply institutionalized character.


The essence of the planned economic transformation

The new reform will not simply allow Georgia to get immunity from leftist populist politicians, because forced redistribution of wealth will be more difficult. Mikheil Saakashvili has a chance to remain in history not as a man who lost the war in South Ossetia or returned control over Ajaria, a different separatist region. Saakashvili and Bendukidze are starting an interesting large-scale experiment, perhaps unprecedented in the economic history. For the first time a country of several millions people will try to move to quite a revolutionary socio-economic system, which differs significantly from the generally accepted model of a Keynesian economy.

It is difficult to blame the current global economic crisis on the free market as long as the modern state holds the key control over the economy through manipulation with interest rates, currency or the amount of money in circulation, or even more through direct participation in economic life. Bendukidze and Saakashvili decided to give up some of these institutional postulates that seem to be axioms for ordinary people but which were not common practice even 100 or 150 years ago. If the experiment is successful, the Georgian experience might have a truly global significance, the example of Georgia could become an important step towards a new economic model.


Obstacles and successes: Georgia and other countries

The main thing that can prevent the success of the newest Georgian reforms are the well-known external circumstances and the well-known danger of war that hangs over the country. Those who wish the Georgian experiment to succeed may only hope for peace in the region. It is noteworthy that this reforms just makes Georgia very interested in peace with its neighbors: in fact, it is much more effective for Georgia (taking into account Russia's military presence, actually much more easy as well) to attract the Abkhaz and South Ossetians with social and economic progress than to return control over these regions by military power.

Circumstances have helped Georgia to carry out radical economic reforms: destroyed by war and corruption, the political leaders simply had no option but to make the economy regenerate itself by implementing radical liberal reforms. Reforms bring their results, and Georgia now looks very well compared to other post-Soviet Caucasian countries - Azerbaijan, where the economy is only driven by oil exports, and Armenia, corrupt and surrounded by enemies.

A low starting position, when there is nothing to lose, plus a strong-willed and well-educated authoritarian president turned out to be the ideal conditions for effective economic reforms. Belarus can only envy and closely monitor the Georgian economic experiment: the time will come to learn from the Georgian reforms, and it may come sooner than it seems.


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[1] for more details about the Economic Constitution of Belarus see here (in Belarusian)

[2] for details see here (in English) and here (in Russian)


// Novaja Europa
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The world should have one global currency

A multi-currency system presents the governments a large field for export-import manipulation using the exchange rates: put your currency's exchange rate down and your imports will go up for some time not because your goods got better or cheaper or something - but for purely manipulative reasons. A whole system of risk management is in place in banks and foreign trade companies to respond to an artificial and unnatural risk as the one related to exchange rate fluctuations. A whole industry of forex traders is there to gain profit from not producing something, but simply from speculating on these governmental speculations. (I hate to sound like a primitive marxist physiocrat, but here it's the case when their argumentation sounds reasonable).

A globalized world should indeed have one single currency. Many libertarians, including the Belarusian economist Jaraslau Ramanchuk, propose a return to the gold standard. Even though at the university we were taught that abandon of the gold standard was quite an obvious thing to do (gold isn't liquid enough), afterall one can see the abandonment of the gold standard in 1970s as being politically motivated and driven by the US.

Still, more likely is it that the world will melt into one currency zone following the example of the EU. Regional currencies at first, to merge into one global currency zone after that. But this is something of a science-fiction scenario that could get real in a hundred or two hundred years. A big question is at all whether there would be enough motivation at all to abandon the multi-currency system and all its positive sides (possibility to generate profits from exchange rate fluctuations, possibility to diversify investments etc).
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Russian ruble lost 41% of its value against US dollar in 6 months

Bloggers write that today it's 6 months since the Russian ruble exchange rate starting falling against the US dollar. In June 2007 one dollar was worth 23.12 rubles and now it's 32.57 rubles.

During the same time the oil price went down from above 145 $/bbk to 45 $/bbl.

As sad as it is for Russian economy. The miracle couldn't have last too long without serious diversification of the economy.
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Russian Finance Minister Kudrin: 2009 Worst Year Since World War 2

Happy new year 2009: Finance minister Kudrin promises us a deficit of the Russian state budget as huge as RUR 1.5 - 2 trillion (USD 51bn - 69bn).

"2009 will be the hardest year for Russian and global economy. It will be the worst year since the end of World War 2", Mr. Kudrin said.

// http://www.vz.ru/news/2008/12/27/242613.html


Inflation will rise but the government still does not plan cuts in financing the construction of Sochi 2014 Olympic infrastructure.
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Russians protest against the government rising automobile import duties

Russian car-owners protest against the government's plan to seriously rise import duties for automobiles starting 1 January 2009. Mass protests started in the Far Eastern regions where the majority drives Japanese cars.

People say the rising of import duties was lobbied by Russian car makers (AvtoVAZ and GAZ and probably foreign players who have production facilities in Russia: Chrysler, Ford, Renault, Nissan, Peugeot-Citroen, GM, Toyota, Volkswagen).

I just found an other reason not to buy myself a car in the coming spring :,)

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