# **2. Belarusian “welfare state”: Overall principles**

# **2.1. Poverty, growth incidence, and trends in inequality**

In its recent history, Belarus demonstrated an impressive reduction in poverty. The poverty headcount based on the official poverty line<sup>1</sup> fell from 46% in 1999 to 4.8% in 2014; it has stayed well below 10% of population since 2007 (see Figure 1). Poverty measured with the international poverty line of USD 4 PPP was below 1% since 2011, and since 2013 it is close to 0. Economic growth (quite impressive between 2000–2010, when Belarus was among top-25 fastest growing countries in the world) was the key factor behind poverty reduction – the correlation between real GDP and the national poverty headcount is -0.91. The outliers are explained by extremely fast growth of housing and utility tariffs (2002) and a hyperinflation episode (2011).

However, Belarusian economic growth was not sustainable. It was driven by fast capital accumulation financed initially from the budget and later via directed lending at preferential interest rates. As a result, returns on investment fell, as well as total factor productivity (Kruk and Bornukova, 2014; 2015). On the demand side, GDP growth was driven by domestic demand; fast growth of investment and household consumption led to growing external imbalances that were financed via growing government borrowing. Altogether, the unsustainability of these factors caused the economic recession, which started in Belarus at the end of 2014, and growth prospects look gloomy: recent IMF and World Bank outlooks forecast very modest growth,<sup>2</sup> while statistical filters give real GDP long term trend growth rate below zero (Chubrik and Shymanovich, 2016).

The recent GDP decline was associated with a slight increase in poverty. The poverty rate according to the national definition grew from 4.8% in 2014 to 5.7% in 2016. Moreover, the national definition of poverty does not properly take into account the significant increases in utility tariffs, which have been taking place since 2014. Regional inequality has also been increasing, with the population outside the capital, and in particular in small cities and in rural areas lagging behind the large urban centers in terms of wages and other types of income (Chubrik, 2016b; Mazol, 2016).

**Figure 1. Poverty and economic growth, 2000–2015**

<!-- Start of picture text --> 95 44<br>90 40<br>85 36<br>80 32<br>75 28<br>70 24<br>65 20<br>60 16<br>55 12<br>50 8<br>45 4<br>40 0<br>2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br>Real GDP, BYN bn (2015=100)<br>Poverty headcount, national poverty line, % of population (RHS)<br>Poverty headcount, $4 PPP, % of population (RHS)<br><!-- End of picture text --> _Source_ : Belstat, World Bank POVCAL (USD 4 PPP headcount).

Such a strong correlation between poverty and economic growth should mean that Belarusian economic growth on average had a pro-poor nature. Indeed, in general, the higher the initial income, the lower the rate at which it grew between 2000 and 2015. Income of the poorest decile grew by 0.65 percentage points a year faster than income of the richest decile (see Figure 2a). However, over time the real income growth rate was falling, following the real GDP growth rate, and profiles of the incidence curves changed as well. The rich benefited the most between 2005 and 2010, while the poorest – between 2010 and 2015, and the lower middle class – between 2000 and 2005 (Figure 2b). In the end, Belarus succeeded in delivering benefits of economic growth to all household groups, including

> 1 Absolute poverty line (“minimum subsistence basket”, or “subsistence minimum”) is calories-based poverty line; before 3Q2014, it included administratively defined set of food and non-food goods and basic services, since 3Q2014 it is calculated as the value of administratively defined food basket times 1.77.

> 2 See IMF WEO database, April 2017 (https://www.imf.org/external/pubs/ft/weo/2017/01/weodata/index.aspx), and World Bank’s - - - Belarus Economic Update, May 2017 (http://pubdocs.worldbank.org/en/819391494832531504/Eng <u>EcUpdate May14 17.pdf).</u>

5