Shifting responsibility for social services as enterprises privatize in Belarus

In Belarus, divestiture of social assets, a misnomer for fringe benefits that comprise a part of wages, is needed to transform enterprises so they can function appropriately in a market economy. Maintaining supply of these services after enterprise divestiture is an important public policy problem in transition economies. These fringe benefits, issued mainly in the form of housing and kindergarten services, were cut by at least two-thirds as a proportion of employee remuneration between 1994 and 1995 because of the economic downturn. This report debates whether most of these fringe benefits should continue to be subsidized or receive preferential tax treatment. A strong case is made for some government funding of the public health and kindergarten services, and public utility and housing services divested by enterprises. The reasons for assigning services such as education and health to local governments is debated and financing arrangements such as revenue sharing are examined. Among the problems cited with the latter are interregional imbalances caused by unequal resources distribution, tax breaks given to agriculture which has reduced payments to rural local governments, the absence of close links between beneficiaries and payers justifying extrabudgetary funding, and inadequate subnational government taxation raising insignificant amounts of revenue. Where transfers to local governments are required, formula financing is suggested for unconditional grants to low-income local governments and conditional grants to support specific objectives.