The results of Ukraine’s economic progress in 2005, which ended in a scandalously low GDP growth of 2.4 percent, are being discussed by everyone but the lazy. The range of assessments is broad: the opposition is capitalizing on the dramatic decline of this growth, offering apocalyptic forecasts and expressing nostalgic moods for 2004 and its GDP growth of 12.1 percent. Government representatives prefer to focus on the successful parts of the microeconomic report, noting philosophically that, all things considered, 2005 should be regarded as one of the best periods in the history of Ukraine.
While allowing for the legitimacy of these different assessments and assumptions, it is necessary to point out that the bearers of these opinions ought to have come to terms with regard to one matter at least, namely, that the slowdown of the growth rate, against the backdrop of reaching historical maximums in per capita income and increased money supply (of course, actual growth not distorted by inflation) proves that the idea of stimulating economic growth by increasing the rate of domestic consumer demand has exhausted itself. A similar policy gave an impetus of sorts to growth in 1999-2001. However, without adopting strengthening measures to expand the growth effect targeting the consumer market and other sectors of the economy, this stimulus would have been quickly reduced to nil under the pressure of forced anti-inflation measures if not for the convenient emergence of favorable external markets that led to the confirmation of an export growth model in 2003-04. Unfortunately, the increase in exports created the illusion of contained effectiveness of aggressively increasing consumer demand, which the “new government” unthinkingly inherited from the “criminal regime.”
The events of 2005 forced everybody to sober up. The loss of the export growth factor instantly caused a decline in economic dynamics, which could not be saved even by the record-setting growth rate of the food industry, thanks to the joint efforts of domestic consumption and exports. (It is a good thing that in 2005 the Russian Federation was not even contemplating restrictions of Ukrainian meat and dairy imports.) It should be noted that the reduction of exports gave rise to other factors besides exogenous ones. An important role was played by the increase in domestic transport and energy tariffs, mounting fiscal overload, rising value of labor, revaluation of the hryvnia in the real dimension by 15 percent, and the overall disorganization of the economy. Therefore, the intensification of social paternalism actually “finished off” the export growth model that had been shaken under the pressure of external factors, while statements to the effect that the increase in per capita incomes could compensate for the unfavorable influence of the external situation are like a zoologist trying to feed a dog with its own tail.
Still, the situation is not as bad as it seems. In earlier years, despite the controversial nature of the development model, it was possible to accumulate preconditions for possible quantitative movements in this model. There are two.
The first is the dynamic per capita income growth. In 2005 the population of Ukraine received over 350 billion hryvnias in the form of salaries, pensions, and other official payments, which correspond to 89 percent of the GDP and are 2.3 times higher than the retail trade turnover. Considering that individual deposits rose by 76 percent (31.6 billion hryvnias), it is possible to conclude that people have started not only to spend more but save more. It is hard to imagine that any victorious political forces will risk direct reductions in incomes, even in the relatively quiet period after the elections. Therefore, we have a rather stable and powerful resource that, if properly applied, may become the basis of economic growth.
The task of economic policy is to reorient this resource from servicing current consumption (i.e., pressure on the consumer market) to financing long-term development goals. This task can be implemented through direct tools: by getting the population to purchase investment securities; expanding insurance networks capable of accumulating and redistributing monies for investment purposes; systems for long-term crediting of individual investments (for example, by enhancing residential energy saving, education, housing construction, all of which are highly relevant today); expanding the range of paid services; and raising the price of utilities to their real value while securing their effectiveness, quality, and so on. This task can also be implemented by indirect methods, such as stimulating the channeling of company revenues (including those that have been obtained thanks to active consumer demand) into development, investments, and innovations; stimulating state investments (by preserving a heavy tax load); expanding the financing of purchases by organizations in the budget-sustained social sphere to the domestic market, and adopting similar measures.
Second, I am talking about the fundamental increase in the money supply (by the end of the year the M3 aggregate amounted to 194.8 billion hryvnias, or almost 50 percent of the GDP) and bank assets (223 billion hryvnias, or approximately 56 percent of the GDP). The results of the years 2004-2005 showed that banks, contrary to the National Bank of Ukraine’s policy of monetary restraint, tend to actively develop crediting for the economy, including long-term. In 2005, long-term credits for the economy rose by 89 percent. The monetary-credit system is thus capable of ensuring the reorientation of the payment-finance flow discussed above. But this will require a transition to qualitatively different monetary regulation mechanisms, primarily to mostly non-monetary, anti-inflationary measures that would encourage long-term investment loans, ease the terms of granting government credits (guaranteed by the state), and alter the principles of currency regulation, which lately has taken on the lion’s share of monetary instruments.
The paradoxical nature of the situation resides in the fact that these preconditions are generally alien to the existing consumer development model, as they are capable of emerging as the primary factors that would destabilize this model. The traditionalist approach logically dictates the intensification of macroeconomic stabilizing measures that would allow, by standard measures, to “disperse” such destabilizing threats while pushing the economy into the swamp of stable stagnation. The constructive approach is based on converting such destabilizing factors into factors of development — to see in the accumulated prerequisites signs of the maturation of a new development model in the heart of the old one and in good time allow the latter to effectively rid itself of this burden.
However, the simplicity of this solution is only imaginary. In fact, the long delay in changing the model has conditioned the painfulness of this process. The burden must increase for ordinary consumers, who will have to pay more for paid services, insurance, and conformity to norms and standards. The dynamics of salary and pension increases will slow down, and a number of social programs may have to be frozen. In the course of financial recovery and consolidating resources for development goals depression may emerge in the employment sphere. The campaign against income from shadow sources, including on the everyday level, will intensify. Proposing such an action plan is fatal to any of the political parties during the pre-election period, and after the elections only a force that stands very firmly on political ground can do this. Unfortunately, political scientists of various political “confessions” are practically unanimous in their declarations that the future political coalition will turn out to be a motley crowd. Thus, there are significant grounds to assume that political speculations rooted in social populism will not stop on March 26, but will be actively applied not only by the legislators themselves, but also in the relations among the branches of government. This will not allow a constructive approach to the economy, which may once again find itself a hostage of politics. It wouldnot hurt if awareness of this were used as the basis of a consensus among the future victors in the political boxing ring.
