1

Trade and Growth

Belarus: Window of Opportunity to Enhance Competitiveness and Sustain Economic Growth

A Country Economic Memorandum for the Republic of BelarusJune 29, 2005

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Outline

• Summary of Trade Performance

• Weaknesses in current trade patterns

• Trade with Russia

• Trade and investment regime

• WTO accession issues

• Policy recommendations

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Summary of Trade Performance

All data for 2003 in US$ million unless otherwise stated Belarus Ukraine Russia Poland Lithuania Germany EU-15

Export of goods per capita, US$ 1022.7 490.9 947.7 1597.2 2217.2 9122.8 7622.0

Export of goods, ratio to GDP, percent 56.7 47.9 31.4 29.1 42.0 31.4 27.6

Import of goods per capita, US$ 1150.2 480.2 530.4 1747.1 2710.6 7285.7 5794.3

Import of goods, ratio to GDP, percent 63.8 46.9 17.5 31.8 51.4 25.1 21.0

Trade balance, ratio to GDP, percent -7.1 1.05 13.8 -2.7 -9.4 6.3 6.6

Openness, percent 120.5 94.8 48.9 61.0 93.5 56.4 48.6

Export of goods growth, percent, average for 1996-2003 8.2 6.2 6.1 12.0 12.2 5.4 4.3

Import of goods growth, percent, average for 1996-2003 7.3 2.3 1.6 9.7 11.7 4.1 1.1

Share of manufacturing (groups 5-8 excluding 68, using the SITC revision 3) exports in export of goods, percent* 61.8 67.3 21.2 81.2 62.9 84.0 80.6

Share of CIS in export of goods, percent 54.6 27.5 14.1 6.7 17.0 2.5 1.8

Net FDI per capita, cumulative for 1996-2003, US$ 193.6 117.0 18.0 1181.9 1015.6 -290.2 -1852.6

Net FDI, ratio to GDP, percent, average for 1996-2003 1.8 1.8 0.1 3.4 3.9 -0.001 -1.1

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Strong export growth

Rates of export growth (times)

2.4

2.1

1.7

2.7

1.91.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2004/1996 2004/2000

Total Non-CIS CIS

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Strong Export Growth but

• Mostly driven by growth in exports of few commodities (refinery products, first of all);--2004/2000: growth of exports of refinery products to non-CIS by 3.3 times, to EU-15 – by 18.5 times!

--growing importance of price factor (underestimation of TOT gains);

• Slow pace of trade restructuring and diversification in terms of export markets

• Limited dynamism of export structure and worrisome trends in factor intensity of exports

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Role of Price and non-Price Factors

Factors of imports growth

-25

-15

-5

5

15

25

35

45

1997 1998 1999 2000 2001 2002 2003 2004

Non-price factor

Price factor

Factors of exports growth

-20

-10

0

10

20

30

40

50

1997 1998 1999 2000 2001 2002 2003 2004

Non-price factorPrice factor

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Commodity structure of exports

• Relatively stable

• Changes mostly due to change in the share of mineral products (2004: 1/3 of total exports and over 50% of exports to non-CIS)

• Major export categories the same as before independence: no visible diversification

• Tendency towards greater concentration

• The share of capital- and skilled-labor intensive goods in exports has been falling

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Factor intensity of exports

Belarus: Factor Intensity of exports in 1998 and 2003

30.5

33.9

28.929.0

16.7

19.4

23.8

17.7

0

5

10

15

20

25

30

35

40

1998 2003

Skilled Labor

Capital Intensive

Unskilled Labor

Natural Resource

Factor Intensity of exports of selected countries, 2003

23.8

77.1

36.5 40.1

21.5

28.9

11.6

19.5 18.2

24

30.5

10.1

38

13.230.7

16.76

28.5 23.8

1.2

0%

20%

40%

60%

80%

100%

Belarus RussianFederation

Ukraine Lithuania Poland

UnskilledLabor

Skilled Labor

CapitalIntensive

NaturalResource

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High Export Concentration

• Markets: CIS accounts for over 50 % of total exports (compared with 26% Ukraine; 17% Lithuania; 7% Poland);

• Products: indices of concentration (growing concentration on non-CIS markets);

• Exporters: small number of exporters responsible for lion share of exports.

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Export Concentration: products

0.27 0.26

0.11

0.05

0.54 0.55

0.26

0.19

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Belarus Lithuania Ukraine Poland

HI DX

Belarus

0.500.46 0.46

0.71 0.71 0.72

0.14 0.14 0.14

0.390.42

0.45

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2001 2002 2003

DX_CIS DX_ROW HI_CIS HI_ROW

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Export Concentration: exporters

Share of 5, 10 and 20 largest exporters in export to different markets, %

19.623.4

18.3

42.734.9

26.6 24.8

57.657.1

46.1 44.4

80.7

0

10

20

30

40

50

60

70

80

90

Total export CIS Russia non-CIS

5 10 20

14

Slow export diversification on EU-15 market

Export specialization (ESI>2)

0

2

4

6

8

10

12

14

1998 2000 2001 2002 2003

World CIS EU-15

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Risks associated with high concentration

• Greater vulnerability to TOT movements

• Vulnerability to changes on major market

• Growing dependence from exports of low value added goods reduces opportunity for creation of more high-paid jobs, productivity increases and, thus, increases in living standards

Results of empirical work:

Export concentration hampers

economic growth

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Opportunities

• Trade complementarity--relatively high TC_15 index

• Intra-industry trade

--positive link between IIT and growth (productivity gains, diversification)

--linked to FDI

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Trade complementarity

25

30

35

40

45

50

55

1998 1999 2000 2001 2002 2003

TC_EU15

TC_CIS

TC _Russia

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Export-FDI interlink: global view

NetherlandsOman

Panama

Ireland

Slovak RepublicBelarus

Kuwait

BrazilLebanon

Thailand

Sweden

R2 = 0.24

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14

FDI/GDP ratio av.1995-2002

Export/GDP ratio av. 1995-2002

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Low level of IIT with non-CIS

Belarus

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004

Total trade CIS ROW o/w: EU15

47.4

38.4

57.5

50.153.9

16.7

24.3

35.6

58.2

16.6

22.5

54.6

0

10

20

30

40

50

60

70

Belarus ** Ukraine* Poland*

Total trade CIS ROW o/w: EU15

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Trade with Russia

• Extremely important: was, is and will remain the major market

• Impact on growth was larger during the 1st period• Advantages of special relations were used strategically• Comparative advantages on Russian market are

different from that on the ROW: difficulties in reorientation

• Some worrisome signs of falling competitiveness (declining share of Belarusian goods in Russian visual consumption)

• CU provided with benefits but there some burning issues. Asymmetry of CU could not last long.

• Adjustment costs to more market-based relations are big

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Trade and investment regime

• Tariff regime is rather liberal (max weighted average tariff fell from 12.6% in 1998 to 11.2% in 2003; min – from 11.1% to 9.8%)

• Non-tariff regime is rather restrictive, especially discretionary administrative measures (IMF trade restrictiveness index for NTBs= 3, i.e. max)

• Investment Code is rather good but investment image is poor

• Informal and regulatory NTBs and high costs of doing business undermine the benefits of liberal tariff regime and good Investment Code

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WTO accession issues

• In the process for more than a decade• Considerable progress during last year

--introduction of large amount of legislation

--progress on sectoral fronts (agriculture, standards, intellectual property rights)

• But there is still a long way to go--no single bilateral agreement is signed yet

--no serious discussion yet about business environment, subsidies, NTBs.

--3-5 years behind Russia and Ukraine

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Recommendations

• Securing longer-term benefits of cooperation with Russia • Advancing trade diversification primarily towards the EU

market: FDI attraction is crucial! • Advancing global and regional integration• Reforming policies (subsidization and import restrictions)

that may hamper trade integration• Accelerating WTO-compliant regulatory reforms, incl.

standards and customs administration• Investing heavily in the country investment imageIn short: Capitalizing on benefits of favorable external

environment and special relations with Russia to advance trade restructuring and integration into the world economy