When I was heading out to interview Ivan Sakhan, Minister of Labor and Social Policies, I was sure he would be adamant in trying to prove that incomes are rising every day, if not every hour. However, Mr. Sakhan did not pull the wool over my eyes. He honestly agreed that all the government’s statistical reports that “the level of incomes has increased by so many percentage points” cannot raise the living standards of ordinary Ukrainians, even if one resorts to autosuggestion.
No one knows if Ivan Sakhan will stay on as minister after the new cabinet is formed. I only hope the new minister will try to implement the ideas that Mr. Sakhan willingly shared with The Day ’s readers.
“Mr. Sakhan, you have been minister of labor and social policies for six months now. What do you think is the main social problem?
“Our major problem is our low living standard. This problem should be viewed through the prism of all of its components: salary levels; employment; social support for pensioners, the poor, and large families; and effectiveness of the insurance system. But the economy and its ability to offer fair wages and salaries are what basically forms living standards.
“Statistics say that in the first quarter of this year taxable incomes increased by 33.1 percent and net incomes by 22.9 percent. Wages and salaries have also seen an essential — 35.3 percent — rise. Take- home pay has gone up by 22.6 percent. That’s a fast rate, isn’t it? But if you apply the European yardstick and compare these figures to what our people really need today, then of course the level of incomes, wages, and resultant pensions cannot satisfy Ukrainians. What we have to focus our attention on is overcoming poverty, raising living standards, and forming a strong middle class, which shows real incomes.”
“Wages are rising, as are prices. So to what extent is the claim that people’s incomes have increased by 22.9 percent correct?”
“When it is the question of take-home pay and net income rise, this figure is adjusted to the inflation rate. So this year there has really been a 22.9-percent rise in net incomes. For example, wages went up by 35.3 percent in the first quarter of 2006, but with due account of the inflation rate, it rose by mere 22.6 percent. Still, this is good progress.”
“Two weeks ago at a press conference the president officially announced that wage arrears have reached one billion hryvnias.”
“This is a problem, and a very pressing one. But don’t forget that before this period back wages amounted to almost eight billion hryvnias. Now, out of the UAH- 1 billion arrears, about 400 millionstem from functioning enterprises that for some reason failed to pay wages to their employees. The remaining half-billion consists of arrears of enterprises that are either standing idle or have gone bankrupt because they were uncompetitive on the labor market. All businesses of this kind are now being either financially revitalized or liquidated. The arrears of state-run businesses, totaling 260 million hryvnias, mostly affect farming and mechanical engineering facilities. The government has promised trade unions to clear the arrears primarily of state-run businesses, i.e., the places where we exercise actual control, and appoint and sign contracts with executives.”
“What about private-sector employees?”
“It is far more difficult to deal with the arrears of economic entities on which the state has no direct impact. At first glance, the current law allows putting things in order here, too. But in practice this is not so easy. As for timely payments of wages at private enterprises, this should be achieved by joint efforts undertaken with other social partners, primarily trade union organizations that represent the interests of workforce units. Unfortunately, trade unions often make serious demands to the authorities rather than to private employers and industrialists who have wage and salary arrears.”
“Is there any way to force nonpublic enterprises to pay their employees their wages on time?”
“There certainly are. The law envisages disciplinary and administrative responsibility of executives who violate the labor code. A clause in this law explicitly states that if a trade union passes a vote of non- confidence in a manager for failing to comply with the collective agreement, the owner of the enterprise must fire this manager. In other words, trade unions have the right to press hard for a manager’s dismissal. This applies to both state-run and private entities. Yet there have not been many instances of this in Ukraine. Apparently, the stumbling block is the union leader’s dependence on a certain employer.”
“What have you failed to do in the six months of occupying the ministerial office?”
“You haven’t even asked me about what I managed to do, but what I have failed to do!”
“But there were lots of plans. Have you really implemented them all?”
“There have been positive shifts in practically all social fields. I have already mentioned the steady growth of incomes, wages, pensions, and many fringe benefits. We managed to fundamentally reduce the Pension Fund’s dependence on the state budget — the former has made a major step toward self-financing. We have stabilized social insurance funds: there are no more failures in back payments to coal miners, and sick- leave and unemployment benefits are being paid on time.
We’ve been energetically addressing the problem of integrating the disabled into society through occupational rehabilitation. Thanks to our efforts, shops, drugstores, and administrative buildings in most industrial parks have at last been equipped with wheelchair ramps. For example, here in the Ministry of Labor and Social Policies a wheelchair-bound individual can easily come to see me. We practically started from scratch to tackle the problem of homelessness. There is a worldwide system of combating this evil, but we are only beginning to grasp and implement it in this country.
“As for unresolved problems, we have failed to raise living standards quickly, because despite obvious positive changes, most Ukrainians are still wary of loosening their purse strings. Naturally, there can be no miracles in the economy — flying carpets exist only in fairytales. In real life things are far more prosaic: hard work alone guarantees success.”
“So what kinds of changes are required?”
“We must see to it that the projected rise in incomes does not abate. At the same time, economists are cautioning us against focusing too much on fringe benefits, for this can adversely affect the country’s financial situation and trigger a new upsurge of inflation. Ensuring a balanced growth of incomes and maintaining a moderate rate of inflation is what the government should consider its top priority. One should make pension reform look more attractive. Unfortunately, in the last while pension reform has been losing its appeal as a project of nationwide importance. Oddly enough, the common perception is that this problem will be solved by itself.
The replacement of the social security system by social insurance, which has now been implemented, is just the first small step. Now we should add the accumulative part to generous pension allocations, which will allow raising pensions by 15-20 percent, and encourage nonpublic pension schemes. Therefore, the combination of these three levels of pension expenditures will allow future pensioners to have an income level that radically differs from the current generation’s. In my view, this scheme is good enough to make pension reform a matter of nationwide importance and a question for all branches of government.
“We have also failed to solve the problem of legalizing the economy. A considerable part of the population continues to be paid ‘under the table.’ This arrangement suits both employers and employees, but both are breaking the law. The former also risk losing their businesses. In a non-competitive environment there are honest employers who work for the older generation according to this pattern on behalf of themselves and their colleagues, who hand their employees pay packets under the table.”
“Unfortunately, what you are saying does not depend on the Ministry of Labor and Social Policies. It is the cabinet, and the president, who should launch a tax reform so that businessmen will find it unprofitable to work ‘in the shadows’.”
“But on the other hand, we should also be aware that even if we reduce taxes, we cannot be sure that we will get an adequate reaction, i.e., legalization of our businesses. It may well happen that we will cut Pension Fund allocations but businesses will remain in the shadows and there will be no money to pay pensions. Our Pension Fund pays out a monthly six billion hryvnias. I think we can do the following: reduce Pension Fund allocations on condition that there is an unshakable agreement between government and business. For example, we are cutting allocations by five percent this year, while business should ‘come out of the shadows’ and make available — through a greater number of taxpayers — the amount required for paying pensions.
“We can also borrow from the experience of our neighbors, the Poles. Incidentally, their pension fund contributions are as high as ours. So they redistributed all funds’ allocations equally between employees and employers. Thus, they halved employers’ contributions, doubled employee contributions, but raised the latter’s wages by the same amount. So employee contributions account for 50 percent of the Poles’ insurance system allocations. Thus, Poles have begun to participate directly in their own insurance without losing out on incomes. Meanwhile, in Ukraine it is the employer who makes 90 percent of the contributions. In developed countries, the employer usually makes 100-percent contributions only to the occupational disability insurance fund. We once proposed this well-tested scheme to the government.”
“And why did it not accept it?”
“The point is that this kind of decision can only be made if there is consensus in society, agreement between trade unions and employers, and of course the presence in parliament of political forces that would put the requirements of the state and society above their own political interests.”
“According to the State Committee of Statistics, every month the unemployment level is dropping by approximately 0.01 percent. What is standing in the way of creating the planned three-to-five jobs?”
“The unemployment level in Ukraine is now at about 7.2 percent, whereas a couple of years ago it was 10-12 percent. We often hear the figure of three percent, but you should remember that recorded unemployment is only an indication of those unemployed who have been registered at job centers. The increase in this figure reflects the efficiency of the employment service rather than the genuine number of unemployed people. Let us also not forget about illegal employment. Some businessmen are officially unemployed but they earn millions a year. Or take a market seller who is paid unemployment benefits. But this is a problem of the entire economy, not just the unemployment social security law.
“The president’s goal is to create five million jobs in the next five years. This program is being carried out. Over a million jobs were created last year. In 2005 the national employment level rose by one percent, with the number of employed increasing by 400,000. The government sometimes hears accusations that it is juggling figures — where is this million if the number of employed has risen by 400,000? But one often forgets that jobs can be created — and abolished. Some businesses have gone bankrupt over the past year, and their employees have filled the ranks of the jobless, while others have installed up-to-date equipment and dismissed some employees.
“It is absolutely normal to create and liquidate jobs in an economy. Our foremost task here is to make sure that the number of created jobs exceeds that of liquidated ones. It is also important to create highly-paid and well-protected jobs.”
