Experts point out that the Ukrainian economy is in for yet another stormy season. The presidential election will start in less than two months. Economic growth is suspended, while the amount of investments and credits does not satisfy the appetites — all this happening while the rest of the world is expecting an economic revival next year. What steps Ukraine should take to have a firm foundation for economic growth in 2010? What steps shouldn’t be taken to avoid aggravating the situation? Below is an interview with Oleksandr PASKHAVER, president of the Economic Development Center.
We hear about forecasts about economic growth all over the world in 2010. What is your view of the tendencies in Ukraine?
“Our state is institutionally ineffective and poorly governed, and there are reforms that remain to be completed. We have fewer reserves to meet the challenges thrown on our way by the world financial crisis, so every problem is met here as though something that has come out of the blue. Proof of this is the situation with the preparations for Euro 2012, the ongoing financial crisis, and the flu epidemic. Most economic problems result from a lack of strategic work in this country. All governments constantly forget that rash decisions can’t solve systemic problems. By continuing to make such rash decisions they only increase expenditures, making such problems even harder to resolve. On the other hand, Ukraine does not fundamentally differ from the rest of the world and will find its way out of the crisis together with other countries, albeit lagging behind somewhat.
“The Ukrainian economy has been the hardest by the world financial crisis. It is also true, however, that Ukraine started the revival process ahead of America and Europe. Despite some experts’ negative forecasts, there hasn’t been a single systemic breakdown during the year of the crisis — not in the banking sector; nothing drastic has happened to Naftohaz Ukrainy or any municipal networks. Such drastic occurrences were avoided thanks to the government’s quick and efficient resuscitating measures that were taken proceeding from the central budget’s actual capacities. This is a positive aspect.
“Let us now analyze the current status of [Ukraine’s] economy. The banking and financial sectors are still convalescing, but a similar trend is observed elsewhere in the world. The real sector of the economy has been making headway since March 2009. This reviving growth will be quick and inexpensive for a while, considering that the businesses cut sharp on their expenses and maintained their production capacity. However, the economic well-being in 2010 will depend on investments, credits, and consumer demand. At present, economic growth is hanging in midair because it has no solid footing (investments, credits, and consumer demand aren’t showing any significant growth).”
What should we expect if the IMF refuses to give Ukraine another tranche?
“Ukraine must receive another IMF tranche; otherwise the economic situation will get worse because Ukraine is still weak. If the IMF provides this tranche, this money should be used to boost Ukraine’s consumer demand. To get well, we must stimulate domestic production. It’s the only way our economy will start earning real money. However, the priorities of this growth should be determined by consumers, rather than bureaucrats. We can rely on the experience of advanced countries in stimulating our consumer demand. In the United States, the federal government financially supports a citizen who decides to buy a new car; an American citizen buying a home (for the first time) receives $8,000 from the federal budget.”
How will our president’s signing of the law to raise social standards influence Ukraine’s economic growth?
“Higher social standards are a political project. It lacks economic motivation and will only do damage to Ukraine. Personal incomes have to be increased, of course, but only when the existing economy has the resources to make this possible. What will happen next? Another political show Ukrainians have watched a hundred times: the government will make every effort to avoid implementing this law, while the opposition will be insisting on its implementation, using it as a tool to reach their campaign objectives. Such shows will continue forever unless our politicians realize that the economy and all of this country are facing reforms that have to be completed. Ukraine badly needs the pension, education, and health care reforms. Along with other social issues, they would provide budget funds for upgrading the economy. In the conditions of a market economy the budget is simply unable to sustain half of the population.
“Today’s economy is in a vicious circle formed by short-term problems, while everyone seems oblivious to the long-term ones. They keep asking me, ‘How will Ukraine pay for [Russia’s] gas supplies? Where will Ukraine find the money to cover the budget deficit?’ As a rule, all such problems are long-term ones. In the short-term perspective, these are not economic problems, so they are being solved as purely political matters. There is no point in considering them in this perspective.”
What GDP percentage is believed to be optimal for financing social spending?
“I’m not sure about the percentage, but I can say that about one-third of [Ukraine’s] GDP stays in the central budget. This is very high centralization for a country with the incomes level that we have. A considerable part of the budget funds are being used toward apparent and concealed social expenditures. We’re supporting agriculture, the mining industry, and natural monopolists by using a system of low tariffs. This is social, rather than economic, support. We must change our inadequate social policy, the sooner the better; otherwise it will continue keeping our economy down.”
Will Ukraine manage without loans in 2010?
“Ukraine will have to take out loans in 2010. Cheap money won’t hurt us, considering that Ukraine is passing through the initial post-crisis phase of economic growth. I can’t see any reasons against borrowing money for the sake of our economic progress. Another thing is that this should imply a long-term clear-cut policy for securing the most effective way of using such loans.”
What do you think has caused the large scale of hostile takeovers in Ukraine? What will happen if this process continues and becomes more established?
“One shouldn’t look for reasons behind hostile takeovers in Ukrainian mentality. Hostile takeovers stem from inadequate governance. They are one of the vices that flourish in this kind of situation. This phenomenon can be overcome only by completing reforms, which means improving our legislation — today they are passing laws with the expectation that no one will be observing them.”
