If ordinary Ukrainians were asked what they could remember most vividly about all those reforms underway for the past decade, 99.9% would point to (a) price jumps, varying in frequency in different years, and (b) privatization. Hard as they might, they would remember nothing about any other methods of reforming the Ukrainian economy. Indeed, if one analyzes the 11-year-long road from “developed socialism” to — well, that remains to be seen, then what our ranking bureaucrats describe as “unpopular measures” — i.e., another price and tariff increase — appears to be almost the hub of the Ukrainian reforms. Interestingly, prices also tend to rise in Europe, where we seem headed with such determination, but this increase is more often than not in terms of several percent (for them a 10% increase would be an emergency situation). Raising the prices of a commodity there takes a lot of paperwork to justify it; increasing the cost of socially important utilities is preceded by a nationwide discussion (as was the case with electricity costs being increased in Germany by 0.5 phennig — ha-ha! — in late 2000). In Ukraine, all this is done on a far larger scope. If we raise costs we do so 1.5-2 times. Or more. Someone will object that the Ukrainian and Western economies are so different they can hardly be compared. They can be compared but the results are practically incomparable. In fact, there is an even greater difference between people running economies in the West and their Ukrainian counterparts. In the business parlance these people are known as managers. I daresay that all our economic ills result from the Ukrainian economic process being legally regulated and managed by old-style bureaucrats whose mentality and modus operandi formed under “developed socialism,” based on knowledge and concepts received and instilled at that period. Precisely this administrative stratum, known as the partkhozaktiv [Moscow bureaucratic coinage, meaning faithful party-appointed administrators] at a time when sausages sold at 2 rubles 20 kopecks per kilo — suppose we call these people Soviet managers — has led our movement toward a market economy, with the false dogmas of socialist political economy firmly implanted in their minds and a vague idea about the market economy.
The Soviet managers started by trying to enter the market through the back door. The economic theory, relying on world experience, defines a strict sequence of transition to a market economy: five stages. I will spare the reader going into details, except that the liberalization of prices is the final stage, preceded, among other things, by the wage-and-salary and monetary reforms. So what did we do? Right, liberalized the prices. Then we carried out the monetary reform, but did nothing by way of the wage reform, even though the president signed a reform concept more than two years ago. The Soviet managers had no idea that the balance of prices and wages, being a regulator of market supply and demand, is the basis of a market economy — unlike the Soviet economy where more than 80% of commodities and services were never sold but allocated.
We were so busy liberalizing the prices, without adequately reforming the wages, we upset that balance. It got so that, in 1992-94, real individual incomes were going down three times faster than was the GDP. The former was attributed to the latter, either deliberately or owing to economic incompetence, mistaking the consequence for the cause. Individual income and GDP decline charts of that period, juxtaposed on the time base, show that income restriction happened first. After that purchase requirement went down sharply, causing output shrinkage. Some of the Soviet managers are now concerned over the GDP rate slowing down, referring to various reasons. Comrades, just draw up the said charts and you will see what is the actual cause of the present economic situation. Moreover, the GDP increment registered over the past several years is largely due to the advanced rate of individual real incomes, as disproportions in the income-GDP dynamics, emerging just as we embarked on the road to a market economy, eventually evened out.
Another sore point of the Ukrainian economy, courtesy of our incompetent managers, is the maladjustment of [retail] prices and individual incomes, aggravated by inner disparities of the costs of certain goods and services — as evidenced by the situation with public conveyances. Eastern European experience shows that this sphere can function adequately at not less than $0.35 (UAH 1.85) worth of one way fare. I am not sure that, by instituting this fare, we will solve all public transportation problems. The point is whether a man in the street will be able to afford it, being paid an average of less than $70 a month (in Eastern Europe, the amount is 5-10 times larger).
Our Soviet managers are fond of referring to costs “over there,” seemingly oblivious of what kind of wages and salaries people are paid there, or that the balance of prices and wages is among the pillars supporting their economies and keeping them stable. All those economic cycles are caused precisely by that supply-and-demand balance being now and then upset. Keeping this balance is not easy. The countries with advanced market economies pay serious attention to price and wage-and-salary control. The Soviet managers have no understanding of the problem, otherwise they would have combined the pricing reform with that of wages and salaries, rather than draw it out ad infinitum. Some claim that the preconditions are still not there. They never will be unless our seemingly Ukrainian, but essentially Soviet, managers stop mistaking the consequence for the cause.
A Soviet manager will give you plenty of objective (from his point of view, of course) reasons for raising prices: mounting fuel and energy, grain, and other costs. It is also true, however, that world energy costs have shown fluctuations over the past couple of years, affecting domestic prices. Yet when domestic gasoline costs go down, for example, nothing happens in public transportation. Another example: wheat costs go up twofold and the price of bread goes up two or more times immediately. Then the wheat costs lower as many times whereas the price of bread goes down by only 5-10%. This does not stand to logic from the market economy point of view. Well, the Soviet managers abide by their own logic incomprehensible to us simple mortals. Indeed, trying to understand them often proves futile. Suppose you check the estimates to see how well the current prices are motivated. In 2000, when the Kyiv City Hall resolved to increase the fares to 50 kopiykas, this author, attending a meeting between one of the deputies to the mayor with city trade union leaders, asked him to show the estimate of the fare’s prime cost (I did it specially, having with me official reports of the ministry of economy, reading that the maximum prime cost did not exceed 30 kopiykas — or precisely the previous fare). The bureaucrat refused and accused the ministry of economy of taking a biased stand, insisting they ignored all those passengers entitled to cut-rate fares or free travel, as well as those refusing to pay. Meaning that all such losses had also to be included in the prime cost. Some logic!
Or take electricity. The cost of one nuclear-generated kWh does not exceed $0.08 (about 6 kopiykas) at the most. At present, the Ukrainian population pays 15.6 kopiykas. We are told that electricity transportation is very expensive, that there are big energy losses, also theft, and there is the value added tax. Losses caused by mismanagement are a typical phenomenon characteristic of the Soviet manager’s style and quality of performance, even though quite a few of them are known to have built fortunes even during Soviet times (one is reminded of the proverbial loss of weight through drying and spillage). As for constant theft, it leaves one wondering. Everybody knows about it and nobody is doing anything about. So maybe it’s all links of one chain? Maybe the thieves and those meant to catch them are involved? Also, this could be stopped immediately, by an enactment forbidding to include losses resulting from mismanagement and theft in the final cost of the product. As long as the consumer (meaning all of us ordinary people) has to pay for this, there will be no stimulus.
Kyiv raised the heating prices again recently. Plenty of reasons, but all in words, without motivated estimates. Personally, I am baffled. According to the existing regulations, two times more gas is consumed to heat a square meter of living space in Ukraine than in Poland whose climate is no better than ours. Also, has anyone tried to learn exactly how much gas it takes to keep one’s flat warm? Naively, I tried to find in my own residential area about five years ago, so I could compare it to what we had to pay for. Naturally, I was refused information and someone told me good-naturedly to forget it if I wanted to live long and healthy. Just like that.
For a Soviet manager, price control is a grave offense against the market economy. True, meaning only price increase. Have you noticed that, once the prices of certain products start going down, affected by market factors, however underdeveloped, the government comes out with a price floor enactment? Restricting price drops is a welcome practice, easily explained by caring for the domestic manufacturer. But no price increase restrictions! And no one cares for the consumer, even though both the manufacturer and consumer are equal market entities, so that reducing the market presence (in the broadest sense) of either also destabilizes the economy. So the EU countries control the prices of a number of commodities (mainly through antimonopoly legislation), so what? Giving agricultural producers state subsidies is standard practice there. Great! It is a matter of honor for every Soviet manager, raised on the past lofty traditions, to get the better of the thriving West, even if in such little things.
Subsidies? There is no money for that. Hasn’t been for a long time. Under the Soviets, low prices and costs were kept using the so-called public consumption funds, raised by allocating up to 80% GDP through the state budget. Now that hardly 22-26% GDP can find its way to the state budget, the said funds have long sunk into oblivion, so the taxpayer has to sustain the “privileged” [i.e., those entitled to cut-rate services, free travel, and other benefits for reasons of age, health, etc.]. Good to be generous at someone else’s expense, isn’t it?
Talking of public consumption funds. First, they were actually done away with by those very Soviet managers. Second, there is a little nasty question: Where have all those GDP appropriations for the said funds have gone? Logically, after discarding them the money thus released ought to have been channeled into the wage-and-salary reform. True, some reform was carried out, in a very special way. Longing for a communist future never to come, the Soviet manager decided to introduce elements of a communist society into the market economy. I have in mind “free work,” with people working under employment contracts having to wait for months, if not years, to be paid.
This brings me to yet another Soviet manager’s trait. Feathering his nest comes first and caring for the national economy and people’s well-being comes last. Can you think of a civilized country where the manager of a state enterprise will buy components from an intermediate seller at prices 1.5 times the world market’s? Naturally, not just any intermediate seller but the one with the manager’s wife or son, or relative.
Like no one else, the Soviet managers inherently practice an eclectic approach to the market theory. Never bothering to study the latter at any length, borrowing some concepts and clauses instead, they set about introducing them into the Ukrainian economy, ignoring the economic context. The value added tax saga is a good example. All over the world it is instituted to keep consumption within reasonable limits. In the early 1990s, the Soviet managers, after hastily restyling themselves as market economy activists and having heard something about VAT, bestowed it on the Ukrainian citizenry. Simply because the tax would come from that citizenry’s pockets. I wonder who saw it in his dream that our citizens were given to overconsumption. The result was further personal income decline, inadequate GDP reductions, and plummeting output. All this courtesy of the Soviet managers. After that VAT-related events took a totally incomprehensible course. There is probably no other Ukrainian law that has undergone as many changes as the one on the value added tax. Result? It got almost absurd when the VAT budget earnings proved almost equal to the tax amounts returned by the budget. Except that the tax was paid by citizens — i.e., consumers — and that it was then returned to manufacturers. Once again, no logic whatsoever. But who needs logic when there is profit to be made? Paraphrasing Ostap Bender, there is a thousand and one legal ways to pumping cash, and VAT is one such way in our conditions.
A dozen other example of Ukrainian market mismanagement could be cited, but I hope that the reader already has a good idea about one of the main reasons for all our troubles. Raised under the so-called socialist economy, the Soviet managers tried to create a market environment, relying on their old knowledge, dogmas, and misleading concepts complimented by some of the market economy principles they heard about but never comprehended. The result is there for all to see. Whereas it could be understood at an early stage of state construction (after all, there was no qualified administrative personnel to choose from), the presence of Soviet managers running the Ukrainian economy in the eleventh year of independence defies understanding. The cadre replacement process is regrettably slow and painful; in most cases we see only old cadre reshuffling or even less competent appointment, although the economic managerial sphere requires fresh blood even more than the political one; we need people not burdened with socialist economic postulates, people versed in the market laws and concepts and prepared to implement them. Otherwise we will have to spend a long time in conditions of a surrogate market, a monstrous symbiosis of “developed socialism” and underdeveloped capitalism.
