Abstract
This Selected Issues paper reviews the external competitiveness of the Belarusian economy, particularly in 2000–01. The analysis starts with an overview of developments in Belarus’ external current account. The paper then examines various competitiveness indicators, most importantly changes in external and internal real exchange rates, as well as labor cost measures. It reviews trade data by sectors to explain recent export performance. The paper also provides an overview of current wage policy and its macroeconomic effects.
III. Wage Policy1
A. Introduction
1. Belarus is in the early stages of transition, characterized by still high (albeit declining) inflation, rigid labor markets, the virtual absence of open unemployment, and predominant state ownership. It also has one of the largest governments and budgetary wage bills in the CIS. In this environment, prudent wage policy is particularly important because it affects competitiveness, financial discipline, as well as the government’s ability to impose hard budget constraints on state enterprises and contain the fiscal deficit.2
2. In recent years, real wages in Belarus have increased significantly, despite a substantial slowdown in growth. As discussed in the previous chapter, wage increases have contributed to a loss of competitiveness vis-à-vis Belarus’s major trading partners, notably Russia (Table 1 and Figures 1 and 2). Wage policy, especially in 2001, also has contributed to the worsening fiscal situation, declining enterprise profitability, and growing arrears.
Belarus: Wages, Prices, and Output 1997-2001
The 2001 data refer to January-September.
Belarus: Wages, Prices, and Output 1997-2001
| 1997 | 1998 | 1999 | 2000 | Oct. 2001 | |
|---|---|---|---|---|---|
| (annual percentage changes unless otherwise indicated) | |||||
| Wages 1/ | |||||
| Real average monthly wage (1996=100) | 114 | 138 | 144 | 163 | 207 |
| Average monthly wage (in U.S. dollars) | 64 | 50 | 33 | 57 | 86 |
| Consumer Prices | |||||
| Average | 64 | 73 | 294 | 169 | 68 |
| End-of-period | 63 | 182 | 251 | 108 | 33 |
| Output | |||||
| Gross domestic product (in millions of U.S. dollars) | 14,006 | 15,116 | 12,099 | 12,742 | 8,737 |
| Real GDP | 11.4 | 8.4 | 3.4 | 5.9 | 3.0 |
| Industrial production | 18.8 | 12.4 | 10.3 | 7.8 | 4.4 |
The 2001 data refer to January-September.
Belarus: Wages, Prices, and Output 1997-2001
| 1997 | 1998 | 1999 | 2000 | Oct. 2001 | |
|---|---|---|---|---|---|
| (annual percentage changes unless otherwise indicated) | |||||
| Wages 1/ | |||||
| Real average monthly wage (1996=100) | 114 | 138 | 144 | 163 | 207 |
| Average monthly wage (in U.S. dollars) | 64 | 50 | 33 | 57 | 86 |
| Consumer Prices | |||||
| Average | 64 | 73 | 294 | 169 | 68 |
| End-of-period | 63 | 182 | 251 | 108 | 33 |
| Output | |||||
| Gross domestic product (in millions of U.S. dollars) | 14,006 | 15,116 | 12,099 | 12,742 | 8,737 |
| Real GDP | 11.4 | 8.4 | 3.4 | 5.9 | 3.0 |
| Industrial production | 18.8 | 12.4 | 10.3 | 7.8 | 4.4 |
The 2001 data refer to January-September.
Belarus: The Growth of Real Wages, Labor Productivity, and GDP, 1996-2001
Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A003
Belarus and Russia: Real Average Monthly Wage, 1996-2001
(Index, 1996=100)
Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A003
Source: Belarusian authorities and Fund staff estimates.3. This chapter provides an overview of current wage policy and its macroeconomic effects (Section B), and discusses wage indexation (Section C). Section D offers some concluding remarks.
B. Wage Policy and Recent Wage Developments
Wage policy
4. Wage policy in Belarus determines the levels, changes, and the structure of wages in a large part of the budgetary sector. In the social and cultural sphere of the budgetary sector,3 wages are determined by a complex wage grid with different coefficients for agency and seniority. This grid determines the structure of wages of some 1 million government employees, of which about 700,000 work for central and local governments. It consists of 28 categories, with each category defined as a multiple of the first-grade wage, ranging from 1 to 8.39. Changes in the first-grade wage are determined by discretionary considerations and by indexation and automatically affect other grade levels. Recently, discretionary wage adjustments have dominated the rise in wages, especially during the 2001 election year. As of July 1, 2001, the first grade wage was set at Rb1 14,500 (about $10). On December 1, it was raised to Rbl 19,500 (about $13) (Table 2).4 Since March 1, 2001, the structure of wages and wage adjustments in the remaining ministries and agencies—“power ministries” and state administration—has been determined separately from the budgetary sector wage grid, effectively delinking changes in these wages from changes in the first-grade wage and the minimum wage.
Belarus: Minimum Wage and First-Grade Wage (monthly), 2000-2001
Converted at the same period exchange rate.
Belarus: Minimum Wage and First-Grade Wage (monthly), 2000-2001
| 2001 | 2001 | |||||
|---|---|---|---|---|---|---|
| May 1 | October 1 | March 1 | July 1 | December 1 | ||
| Minimum wage | ||||||
| in rubels | 2,600 | 3,600 | 5,700 | 7,500 | 10,000 | |
| in dollars 1/ | 2.7 | 3.5 | 4.6 | 5.4 | 6.5 | |
| First grade wage | ||||||
| in rubels | 5,200 | 7,200 | 11,500 | 14,500 | 19,500 | |
| in dollars 1/ | 5.4 | 7.0 | 9.3 | 10.5 | 12.7 | |
Converted at the same period exchange rate.
Belarus: Minimum Wage and First-Grade Wage (monthly), 2000-2001
| 2001 | 2001 | |||||
|---|---|---|---|---|---|---|
| May 1 | October 1 | March 1 | July 1 | December 1 | ||
| Minimum wage | ||||||
| in rubels | 2,600 | 3,600 | 5,700 | 7,500 | 10,000 | |
| in dollars 1/ | 2.7 | 3.5 | 4.6 | 5.4 | 6.5 | |
| First grade wage | ||||||
| in rubels | 5,200 | 7,200 | 11,500 | 14,500 | 19,500 | |
| in dollars 1/ | 5.4 | 7.0 | 9.3 | 10.5 | 12.7 | |
Converted at the same period exchange rate.
5. The structure of public sector wages is rigid, distorting work incentives and reducing motivation in the civil service. This rigidity leads to wage compression under conditions of high inflation because indexation is lower at higher grade levels. In addition, discretionary wage increases tend to decline with grade levels. The wage compression, in turn, adversely affects incentives for work, especially at the upper echelons of the public sector. This problem was mitigated when the power ministries and state administration were delinked from the public sector wage grid in March 2001, but it still affects the rest of the public sector.
6. In addition, public employees receive various fringe benefits that compromise the role of the basic wage as well as fiscal transparency. For example, in the mid-levels of the wage grid (grades 15-17), total monthly cash fringe benefits exceed the basic wage by 65-75 percent. Fringe benefits maybe universal (such as years-of-service allowance and performance bonuses), or specific to certain categories of workers (such as special bonuses for teachers) as shown in Figure 3. In this environment, the basic wage structure does not provide accurate information on the extent of full employee compensation. It also creates adverse incentives for additional and/or higher fringe benefits to compensate for the inadequate basic wage.
Belarus: The Structure of Fringe Benefits, March 2001
Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A003
Source: Belarusian authorities.7. Wage policy in 2001 was driven largely by the President’s pledge to raise monthly wages to $100. In the event, wages were increased significantly, in four steps. On March 1, wages in the “social and cultural sphere” of the budgetary sector were increased by an average of 36 percent. On May 1, wages for power ministries and state administration employees were raised by an average of 20-23 percent. The “social and cultural sphere” wages were again raised by between 20-30 percent on July 1 and by about 30 percent on December 1. The main mechanism for wage increases in the social and cultural sphere was the change in the minimum wage and the first-grade wage, which triggered automatic adjustments in the remainder of the wage grid. During January-November 2001, the minimum wage and the first-grade wage almost tripled compared with the levels prevailing at the end of 2000 (Table 2).
Macroeconomic effects of recent wage increases
8. The sharp increase in real wages has not been accompanied by similar gains in productivity. In recent years, labor productivity has lagged significantly real wage growth, especially in 2001, when labor productivity declined slightly, while the growth of real wages accelerated. These wage increases weakened the financial position of enterprises, as reflected in rising barter, piling inventories, shrinking profitability, and a growing number of loss-making enterprises. Higher wages also contributed to jeopardize the external competitiveness of Belarusian goods.5
9. In the budgetary sector, wage policy has complicated fiscal adjustment and contributed to a rise in the fiscal deficit, at a time when tight fiscal policy is needed to further reduce inflation. In 2001, the wage bill is expected to reach about 9 percent of GDP, compared with 6 percent of GDP the year before; this is one of the largest government wage bills in the CIS. To offset rising wage expenditures, the government has cut nonwage expenditures, especially capital expenditures, but not enough to prevent an increase in the budget deficit (Figures 4 and 5). Moreover, the measured deficit does not capture fully the deteriorating fiscal situation due to a rise in budgetary arrears, especially at the local government level.6
Belarus: Wage Bill, Non-Wage Expenditures, and Fiscal Deficit, 1999-2001
(As a percentage of GDP)
Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A003
Belarus: Wage Bill in Belarus and Selected CIS Countries, 2001
(As a percentage of GDP)
Citation: IMF Staff Country Reports 2002, 022; 10.5089/9781451805062.002.A003
Source: Country authorities and Fund staff estimates.Note: Estimates are based on the latest available data for 2001, mostly for the period January-September.10. The “nongovernment” sector, consisting largely of state enterprises, generally follows wage increases set by the budgetary sector. The budgetary wage grid is not compulsory in the enterprise sector. It is only a loose guide for enterprises’ wage setting decisions. In practice, however, enterprises tend to raise wages at the same time as the budgetary sector. Also, there seems to be some indication that “nongovernment” enterprises tend to raise wages when measured output levels justify the raise even if inventories pile up. However, since enterprises in practice cannot lay off workers, the recent wage increases have been “eating up” enterprises’ profits and capital.
11. In principle, the increase in the wage bill in the budgetary sector and in the economy as a whole could have been offset by a reduction in implicit subsidies to households, which were estimated at 6-7 percent of GDP in 2000.7 However, this has not happened in Belarus to any significant extent: real wages have been growing rapidly, while subsidies have declined only gradually and from very high levels. While large subsidies to enterprises through preferential exchange rates under the multiple currency system were eliminated with exchange rate unification in September 2000, the reduction of consumer subsidies and the associated price liberalization has been slow.
12. The sharp increase in wages in 2001 has put pressure on enterprises, banks, and the foreign exchange market. Wage policy has led to rising inter-enterprise arrears, stepped up interventions of the National Bank of Belarus (NBB) in the foreign exchange market, and increased bank borrowing by enterprises to finance higher wages. This has been happening against the backdrop of increasing external competition and tighter liquidity conditions, making it difficult for enterprises to absorb higher wages, especially since some prices are still controlled. Since the NBB has not fully accommodated these wage pressures and import prices have turned out to be lower than anticipated, the impact on measured inflation has been limited, but inflationary pressures have started to emerge. Without a change in wage policy, these pressures are likely to intensify and could potentially lead to a combination of new arrears, monetization, inflation, and a change in exchange rate depreciation.
C. Wage Indexation
13. The current wage setting and wage adjustment in Belarus include: (1) discretionary, ad hoc wage increases; and (2) an automatic component based on a formula for wage adjustment. The ad hoc adjustment of wages is implemented in periodic, discretionary wage increases for specific or all categories of workers in the budgetary sector. In practice, the system has resulted in substantial real wage increases, independent of the automatic adjustment formula. As discussed above, the discretionary component of wage policy with large wage increases has tended to undermine the government’s broader fiscal policy and macroeconomic adjustment efforts. Making wage policy consistent with these efforts will, therefore, require a scaling down of the discretionary wage increases in the future and/or a greater reliance on a more realistic, automatic wage adjustment than has been the case so far.
14. The automatic adjustment, codified in the Law on Indexation (1991) is designed to provide limited wage indexation (50 percent) to past inflation, only when monthly inflation exceeds the threshold level of 5 percent.8 It provides no protection to wage earners when monthly inflation falls below this threshold. Since January 2001, with monthly inflation rates below this level, the indexation mechanism has been inoperative in practice.
15. Despite these drawbacks, suitably adjusted automatic, rules-based wage adjustments may be advantageous when compared with very large discretionary wage increases. For this reason, it is useful to examine the automatic formula, evaluate its potential effects, and consider possible modifications. However, any such modifications leading to a greater reliance on automatic wage adjustments would have to be accompanied by an appropriate reduction in (and possibly a complete elimination of) discretionary wage increases.
16. The indexation formula in Belarus has three main problems: high threshold, low indexation coefficient, and backward-looking basis. This results in a low degree of compensation for high inflation and in pressures to raise wages in a discretionary manner, while introducing inertia in the inflation process.9 These drawbacks could be resolved with appropriate modifications aimed at providing a realistic compensation to wage earners while basing indexation on projected inflation. Such a system would be more predictable and transparent, and less prone to periodic political pressures for large, unsustainable wage increases. Specifically, if the formula is to be made operative at currently prevailing rates of inflation of about 2-3 percent per month, the threshold parameter before triggering indexation would need to be reduced and the indexation coefficient suitably increased.
D. Concluding Remarks
17. The authorities have taken steps to reform the wage setting mechanism in the budgetary sector, including by delinking part of the budgetary sector from the wage grid. However, the practice of large, ad hoc wage increases (especially setting an arbitrary dollar wage target) and the automatic indexation formula require reform. The challenge for the authorities is to devise a less discretionary, more transparent, and sustainable wage policy, which would be consistent with efforts to promote macroeconomic stabilization and structural reform.
18. Against that background, it is possible to draw the following tentative conclusions. First, the Belarusian wage setting mechanism is essentially discretionary, since large, ad hoc wage increases are the most important part of the wage adjustment process. Recently, these increases have put considerable pressure on the budget and the foreign exchange market, complicated the conduct of monetary policy, and threatened to unwind the hard-won gains in macroeconomic stability. Second, the automatic indexation formula, while having a backward-looking basis and, therefore, potentially contributing to inflation inertia, has been much less important in influencing wage adjustments. Third, given the magnitude of recent wage hikes and their adverse effects, a shift to a much more modest and infrequent wage adjustments in line with productivity growth and/or a more rules-based, automatic wage adjustment formula that is suitably modified may provide alternatives to the present system. Developing flexible labor markets and allowing market discipline to play a role in wage determination would help alleviate this problem.
References
Bogetić, željko and Louise Fox (1993). “Incomes Policy During Stabilization: Lessons from Bulgaria and Romania,” Comparative Economic Studies, No. 1, Spring 1993, 39–58.
Bosworth, Barry (1991). “Incomes Policies in Socialist Economies,” chapter 9 in Simon Commander (editor), Managing Inflation in Socialist Economies in Transition, Economic Development Institute of the World Bank, Washington D.C.
Coricelli, Fabrizio and Timothy D. Lane (1993). “Wage Controls During the Transition,” The World Bank Research Observer, Vol. 8, No. 1 (July), 195–210.
Layard, Richard (1991). “Wage Bargaining, Incomes Policy, and Inflation,” chapter 10 in Simon Commander (editor), Managing Inflation in Socialist Economies in Transition, Economic Development Institute of the World Bank, Washington D.C.
Prepared by željko Bogetić.
Bosworth (1991), Coricelli and Lane (1993), Layard (1991), and Bogeti and Fox (1993) provide detailed analyses of wage policy issues during transition.
The “social and cultural sphere” encompasses budget sector workers, excluding so-called power ministries (defense, security, police and associated organizations such as border guards) and the state administration.
There are two main reference wages in Belarus: the minimum wage and the first-grade wage. The minimum wage is used for calculating various social assistance payments and pensions. The first-grade wage determines the grade levels and structure of the public sector wage grid. Even though these are, in principle, separate instruments of wage policy, they have typically been adjusted in parallel. Since January 2000, the ratio between the first-grade wage and the minimum wage has remained roughly constant, around 2:1.
See Chapter II.
The Consolidated fiscal deficit on a cash basis, shown in Figure 4, encompasses the republican budget, budgetary funds and local government funds, and the Social Protection Fund.
See Chapter IV.
According to the 1991 Law on indexation, 50 percent of the subsistence income is indexed to inflation if monthly inflation exceeds 5 percent. Wages, scholarships and grants, benefits, and other social payments are indexed in this way, while old-age pensions are indexed indirectly via their link to wages. Similarly, social pensions are indexed indirectly via their link to subsistence income. Specifically, the basis for wage indexation is the subsistence income defined by the government; hence “wage indexation” refers to the indexation of this subsistence level of income. As of July 2001, the subsistence income was Rb1 55,300 per person per quarter, 3.5 and 7 times the first-grade wage and minimum wage, respectively.
The formula ties present wage levels to past inflation, thereby increasing inertia and raising the costs of disinflation. Generally, forward-looking indexation based on projected inflation is preferable to reduce inflation in the presence of significant inertia and, possibly, one-time increases in prices due to liberalization. Bulgaria, Czechoslovakia, and Hungary used forward-looking indexation in their stabilization programs in the early 1990s. Poland, by contrast, used indexation based on current inflation.
