Belarus has recently had to endure an unprecedented financial crisis and a total reset of an economic cycle, based on the illusions of prosperity. In 2011, the devaluation-inflation spiral lowered the income of the Belarusian society twice, paralysed small and medium-sized entrepreneurs, and greatly shook the electorate’s faith in the current economic model of state.
After reaching a relative state of stabilization in the foreign exchange market, ordinary citizens as well as experts focused on the Belarusian banking system – the system which most probably will cause new shocks in Belarus, forcing the country to face another crisis in the nearest future. In this context, the recent collapse of the banking sector all over the world makes Belarusian policy makers thinks hard about the future. Let’s take a look at the shortcomings of the Belarusian economic model, while analyzing one of former success stories of Europe – Ireland.
The sinking island
Ireland’s dynamic development of the infrastructure, friendly environment for international business and high position in the world rankings attracted investors from around the world. The island was seen as a solid and reliable country. Many Europeans kept their money in Irish banks and the international business invested money in the local economy of the island. However, this state has fallen a victim of structural and debt imbalances on a scale perhaps even more than the United States of America.
Such different countries as Belarus and Ireland are similar in one aspect. The ruling elite of both the “Land under White Wings” and in “Green Island” succumbed to the temptation of holding their power by building a false vision of prosperity, financed from foreign sources. Since 2003, commercial banks had actively helped to increase Irish voters’ welfare. With the tacit approval of Dublin, they dished out cheap credit money and caused the Irish society to become the world’s champion in using bank loans. In the situation of mass loan insanity, bank managers earned fortunes: along with the increasing number of clients and the volume of credit assets, the revenue and market capitalization of banks grew as well. Bank shareholders were generously rewarding fast decisions and stupidity of their managers with unprecedented remuneration. Irish bankers hand in hand with politicians carelessly ignored credit risks and strategic threats related to the dominant position of the foreign capital. This led to the failure of the Celtic miracle. Even high inputs, which Ireland allocated for research and science – and which are still mentioned as an example of effective spending of European subsidies – as it turned out, produced cash for mainly foreign companies rather than domestic business. An export-oriented modern IT sector could create a counterweight to the dominant international corporations, but it did not. Even the computer industry, which until recently was considered the engine of the modern Irish economy, was a big disappointment, as the most successful companies in this field were absorbed by transnational giants.
The situation of the Irish economy rises a lot of questions about the strength and reliability of economic growth based on foreign investments. That means the Belarusian policy makers must keep in mind that accelerated development of commercial banks along with a weak financial supervision and aggressive investment practices – combined with the constant stimulation of demand and high dependence on external credit financing in the period of instability – will force a country into insolvency. As a result of the liquidity crisis (which is, above all, a crisis of confidence), a real estate sector that grew during good speculative situation would burst like a soap bubble. Then, the capital flees, which leads a banking failure. And after that, the reputation of the country and a favourable investment climate are both destroyed Indeed, the Irish crisis reached the entire economy. Financial sector losses resulted in over-indebtedness of the state and taxpayers – a vicious circle of debt.
A scenario for future leaders of Belarus
Thus, before undertaking the privatization of state-owned banks, the future government of Belarus should develop clear and effective mechanisms of supervision and regulation of the financial sector in order to risky practices of banks did not become a source of systemic risk to the entire economy. Secondly, the future of the Belarusian government should not tolerate the growth of the banking sector to uncontrollable sizes, especially in the context of limited fiscal space to act as lender of last resort. Thirdly, the Belarusian authorities should be more wary of offers of joining a monetary union and do not welcome foreign currency loans for citizens. At the same time, they need to care about the Belarusian cash position and watch the inflation – in other words, to encourage Belarusians to hold their financial assets in local currency. Fourth, the financial control should promptly restrict the aspirations of firms, households and banks to the accumulation of excessive debt. Fifth, the Belarusian authorities should consider foreign investments bad friends: while you’re on the rise, they are with you, but in case ofproblems – you are left alone.
We are observing an exciting shift in the parity between politics and economics. The classical formula of domination has been changing and the very concept of power has been rethought, since the instrument of coercion is not the threat of economic expansion, but rather ignoring the country by investors or sudden outflow of foreign investments. Therefore, in the context of global competition, foreign direct investments should be seen more as speculative loans to be used for the development of modern technologies and Belarusian domestic businesses. International capital is about the augmentation of international capital. Only the Belarusian authorities and Belarusian business can think about Belarusian national interests.
Translated by MA