1. 1 Trade and Growth Belarus: Window of Opportunity to Enhance Competitiveness and Sustain Economic Growth A Country Economic Memorandum for the Republic of Belarus June 29, 2005

2. 2 Outline Summary of Trade Performance Weaknesses in current trade patterns Trade with Russia Trade and investment regime WTO accession issues Policy recommendations

3. 3 Summary of Trade Performance All data for 2003 in US$ million unless otherwise statedBelarusUkraineRussiaPolandLithuaniaGermanyEU-15 Export of goods per capita, US$1022.7490.9947.71597.22217.29122.87622.0 Export of goods, ratio to GDP, percent56.747.931.429.142.031.427.6 Import of goods per capita, US$1150.2480.2530.41747.12710.67285.75794.3 Import of goods, ratio to GDP, percent63.846.917.531.851.425.121.0 Trade balance, ratio to GDP, percent-7.11.0513.8-2.7-9.46.36.6 Openness, percent120.594.848.961.093.556.448.6 Export of goods growth, percent, average for 1996- 20038.26.26.112.012.25.44.3 Import of goods growth, percent, average for 1996- 2003 7.32.31.69.711.74.11.1 Share of manufacturing (groups 5-8 excluding 68, using the SITC revision 3) exports in export of goods, percent*61.867.321.281.262.984.080.6 Share of CIS in export of goods, percent54.627.514.16.717.02.51.8 Net FDI per capita, cumulative for 1996-2003, US$193.6117.018.01181.91015.6-290.2-1852.6 Net FDI, ratio to GDP, percent, average for 1996- 20031.8 0.13.43.9-0.001-1.1

4. 4 Strong export growth

5. 5 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

6. 6 Role of Price and non-Price Factors

7. 7 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

8. 8 Exports by end-use categories

9. 9 Factor intensity of exports

10. 10 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.

11. 11 Export concentration: markets

12. 12 Export Concentration: products

13. 13 Export Concentration: exporters

14. 14 Slow export diversification on EU-15 market

15. 15 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

16. 16 Opportunities Trade complementarity --relatively high TC_15 index Intra-industry trade --positive link between IIT and growth (productivity gains, diversification) --linked to FDI

17. 17 Trade complementarity

18. 18 Export-FDI interlink: global view

19. 19 Low level of IIT with non-CIS

20. 20 Trade with Russia Extremely important: was, is and will remain the major market Impact on growth was larger during the 1 st 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

21. 21 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

22. 22 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

23. 23 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 image In short: Capitalizing on benefits of favorable external environment and special relations with Russia to advance trade restructuring and integration into the world economy