After last year’s presidential elections, I wrote about the objective difficulties a society faces when it leaves the phase of revolutionary development and enters a period of constructive transformations. The February 1917 revolution in Russia, which failed to accomplish this, boiled over into the October Bolshevik coup, then the Civil War, and later the eventual extermination of the kulaks as a social class, as well as the technical and creative intelligentsia. Although this may not be an appropriate analogy, we should pay heed to recent statements made by one of the ideologues of the Orange Revolution, now the ex-deputy prime minister, who said that ahead of us is the “tornado of the second phase of the revolution.” This is especially dangerous for the economy, a sphere in which the former government’s efforts were dominated, until the very last day, by a revolutionary approach. We witnessed the government restore the all too painfully familiar, failed Bolshevik ideology of “politics above the economy.” This unfortunate ideology replaced the logic of economic rationalism on the macroeconomic level.
THREATS OF STAGNATION
Everything started quite logically: the government had to make good on the promises it made to the people on Independence Square. This explains the real steps toward neo-Bolshevism: the revival of state paternalism and, as its indispensable precondition, the expropriation of production facilities along with the systemic (at all functional levels) redistribution of property. “What yields profit must belong to the people” — this well-known slogan of those who once stormed the bastions of the bourgeoisie became part of the public rhetoric of government officials. If you add to this parliament’s nearly unanimous approval of arguably the most contradictory budget since independence, all of this leaves no doubt that a revolutionary ideology systemically infected the economic policy. At that time I called it the “childhood disease of leftism in the sphere of economic policy.” Over time, however, the fallacy of this definition became obvious. The disease in question was far from being a childhood disease: it was starting to display chronic symptoms.
Clearly, the fledgling Ukrainian economy, which hasn’t developed sufficient immunity, could only respond painfully to these phenomena. With GDP growth slowed down by 3.6 times in eight months alone, much like investment growth (down by 3.8 times), while incomes in the public sector increased by 26.8 percent, any politically unbiased person would have to question the state of health of this situation. The policy of advance increases in real wages had been tried before. But whereas in the past few years the growth dynamics of the population’s incomes outpaced GDP growth by only 1.5-2 times, this year the figure is 7.2 (GDP growth of 3.7 percent versus a 26.8 percent increase in personal incomes). You would be hard put to find similar cases elsewhere in the world. Vladimir Putin promised to raise wages in the public sector by 150% over three years, while the Ukrainian government raised them by 157% in one year. The 2005 budget provides for such an increase in public sector wages. The logic of neo- Bolshevik psychology was becoming established on this basis.
The consequences are obvious. First, the level of government consumption has started to rise. Whereas in 2004 revenues from the consolidated budget accounted for 26.3 percent of the GDP, in the first half of this year this figure was 33.7 percent, or nearly 50 percent with deductions to the Pension Fund. Nobody seemed concerned that such a high level of governmentalization of finances significantly reduced the potential for accumulation, thereby narrowing the prospects for much-needed economic growth. At the same time, it provides fertile soil for the further bureaucratization of society, spread of corruption, and movement in the opposite direction, away from a civil society. Why have these textbook truths been ignored?
We have grown accustomed to using yearly statistical comparisons. In the West the economic situation is assessed primarily by quarterly indicators. Consider the data for the last three moths: in June industrial output declined by 0.9 percent since June 2004, and in July 2005 by 2.4 percent from July 2004; in August it rose an insignificant 0.9 percent. Economists are also well aware that the economic situation can be measured most reliably by the dynamics of trade turnover and the specific volume of wholesale trade turnover. These parameters are hardly ever mentioned in Ukraine. Meanwhile, they point to a similar trend: in the first eight months of 2005 trade turnover declined by 2.6 percent and wholesale trade turnover, by 7.3 percent.
If you add to this the 8.1 percent drop in construction volume and arguably the most dangerous symptom of import growth exceeding export growth by more than three times (the past six years saw the opposite trend), you will clearly see an overall picture of dangerous economic stagnation. The Ukrainian economy is clearly sliding into the destructive phase of this stagnation. Leading foreign experts are constantly saying this. I do not believe that the Ukrainian president does not realize this, which is why I am certain that this factor was also present in his decision to fire the government.
What ideological precepts should underlie the new economic policy? What form can the Ukrainian NEP take? These questions are extremely relevant. We must not step on the same old rake again. The new government team must necessarily be a team of likeminded individuals, and this should be the main consideration. We must realize the significance of these emphases: the transition economy, like no other, contains the possibilities of ambiguous paradigms; in many respects even substantially contradictory ones. Of course, we all want the government to be staffed by professionals. However, they have to be professionals with adequate ideological positions. We must realize that this far from unimportant circumstance was among the factors that unbalanced the Tymoshenko government. This flaw has to be prevented in the future.
SOCIAL PRIORITIES
The first issues to be addressed are those relating to social policy principles and ways to develop a social state in Ukraine. As I mentioned earlier, the biggest contradictions of the previous period were hidden in the government’s attempts to replace a policy of unflinching pragmatism, which is the only possible successful policy in a transition society, with one that would establish a social state in the here and now. This explains the emphasis that was placed on implementing a model of a social-market economy. That such a position is appealing to the public is understandable. However, the latter is a phenomenon typical of a mature, competitive economic system with at least $18,000-20,000 per capita GDP (this figure, according to the purchasing power parity evaluation, stands at a mere $6,600 in Ukraine). Hence the main accents: we need to ensure high economic growth (at least 6-7 percent per year), complete the formation of market economy and competition mechanisms, and ingrain in society what Max Weber calls the “spirit of capitalism.” That outstanding scholar linked this notion with the “accumulation of capital through the ascetic compulsion to safe” and “an economically rational lifestyle.”
I once wrote about the policy of delayed liberalism. The leftist parliament blocked any steps in this direction. Now is the time to step up liberal reforms. This is the basis not only of real progress in the economy, but also the logical foundation for the European integration policy, the task of building Europe at home. It appears that the political duo of Viktor Yushchenko and Yuriy Yekhanurov (given parliament’s support) can become a powerful factor in fundamentally changing economic policy in this direction. A logical starting point for this change of direction should be a shift of accents vis-a-vis social policy: abandoning the state welfare model — a socially responsible state (so far we do not have the objective preconditions to implement one) — in favor of establishing a society of equal opportunities, which is a basic liberal axiom. In the practical sense this means completing market transformations in the social sphere as soon as possible, reinforcing the market type of workforce reproduction, and on this basis expanding a class of economically active and financially independent people who are free of the welfare mentality, aware of their personal responsibility for their own lives, and are capable of serving as the locomotive of economic progress. This is the only way to ensure reliable social stability and trust in the government and the state.
It is important to understand that there is no instant solution to poverty, which the Ukrainian president identified as the country’s biggest problem. Nobel Prize winner Friedrich Hayek points to the dangers of a policy of forcefully overcoming poverty through the artificial redistribution of national income, which was the apparent objective of the previous government. Hayek emphasizes that poverty can be overcome not through a policy of redistribution but through one that enhances economic competitiveness and national wealth, thereby strengthening the positions of the middle class. The problem of reducing unemployment, which is 9.1 percent in Ukraine (2004), is more ambiguous. Ukraine’s rate of unemployment is two times lower than in Poland and some other Central European nations. Here we face the dilemma of balancing the level of employment in manufacturing with the level of remuneration, as well as the problem of raising skills and productivity and introducing incentives. The Soviet economy could not resolve this dilemma. The nation’s leaders are now pursuing a dangerous policy of reversal in this respect also.
The new government will never be able to take any real steps toward achieving immediate social policy goals unless it realizes that the social aspect of a market economy has nothing in common with the revival of a dangerous paternalistic mentality. Social justice, which we must guarantee our citizens, has to be viewed within a different context. Such justice envisions the equality of opportunities at the outset, but it does not mean the equality of end results. Instead of eliminating it, we must support the principle of competitiveness not just in the sphere of economic relations but in the sphere of social relations. Competitiveness is an integral element of freedom, something for which the people gathered on Independence Square during the Orange Revolution. It enables society to determine who is more efficient at fulfilling a certain task. Finally, it forces individuals to mobilize their forces, skills, and creative energy to the maximum in order to be among the first. Curbs on competitiveness are a direct restriction of the personal freedom and free development of the individual. As for the state’s charity — social welfare — only disabled individuals unable to earn subsistence wages on their own should be the recipients of such charity. The middle class and the wealthy must be automatically deprived of welfare support. The principle of maximum responsibility of people, and society in general, must be applied.
STRENGTHENING THE POSITIONS OF PRIVATE OWNERSHIP
Another fundamental element that is organically linked with this liberal turnaround should be a revival of trust in the institution of private ownership, rightfully considered the cornerstone of modern civilization, personal freedom, and democratic development. It seemed as though this position was well understood by our leaders, most of whom came to power through the gates of business with its blessing. However, a most unlikely thing happened: behind the veil of revolutionary rhetoric the country’s leaders unleashed extensive (now largely uncontrollable) offensives not only against individual owners but essentially against the institution of private ownership as a whole. We have witnessed the restoration of elements of administered pricing, instances of gross manipulations of tax legislation, currency exchange rates, and corporate rights, the state’s systematic violations of agreements concluded with businesses, unjustifiable re-establishment of state ownership, along with attempts to governmentalize the sphere of finance and circulation, and much more.
We must not turn a blind eye to this. We must appreciate not only the economic consequences of these unfolding processes but also the political ones, the undermining of the basic fundamentals of private enterprise and the consolidation of national capital, its competitive positions, and society’s respect and trust in it. Besides the people who were linked in any way to the old government, all those who have something to do with capital, “all those who managed to line their pockets, build luxurious estates, and are driving foreign-made cars,” have also been branded enemies of the people.
Especially dangerous is the unfolding psychological war against big capital and efforts to artificially put it at odds with small and medium business by identifying it with an economy dominated by oligarchs. Even in the present case the structure of the Ukrainian economy has been ignored: a high proportion of base industries, specific features of the industrial stage of its development, for which a large corporation by international standards was always and still is the main source of accumulation of capital, technical and technological modernization. During the 1960s-1980s South Korea implemented an official state policy of “growing large corporations” that were the beneficiaries of “active protection from external competition and reinforcement of their competitiveness.” This approach was typical of all the Southeast Asian nations, and Japan, that had carried out an “economic miracle” during this period. India and “communist” China are following the same principle today.
It is imperative to remember that the largest national capital, which has already formed in the complex and contradictory period of initial accumulation, is changing its face. It seeks international recognition, and this requires bringing order to economic life, self-legitimization, leaving the shadow economy, pursuing active cooperation with medium and small businesses, paying adequate taxes, and implementing real market reforms. Big capital is shouldering a large proportion of social problems; it is arguably the subject most interested in society’s political stability and democratization; it acts as a consistent source of liberal ideology, publicly displays its support for the new government, and expects the government to make good on its promises of constructive cooperation.
In this situation it is essential to surround big capital with a highly favorable psychological climate. This requires the government to be highly specific. The following example is very illustrative. The period of the 1980s, when the Americans were implementing the economic policy called Reaganomics, was exceptionally favorable for private enterprise. One of the positive results of this policy was the nearly twofold increase in the number of millionaires to one million. How did the public react to this? The answer to this interesting question reveals the social psychology of American society, to whose standards we aspire. The American sociologist Jerry Kloby cites data from opinion polls, according to which 62 percent of Americans positively evaluated this climb up the social ladder. We can only hope that both Ukrainian politicians and the man in the street will no longer frown upon the fact that some members of the Ukrainian business elite are now on the list of Europe’s biggest capital owners, but will also consider it an achievement and a sign that we are progressing toward an economy with real competitive market conditions.
According to one guiding principle of economic theory, all market participants — individuals, companies, or states — act rationally in their undertakings. In essence, the entire system of economic relations, their internal logic and predictability, are founded on this very principle. By giving priority to the logic of “revolutionary expediency,” the Ukrainian government was moving in the opposite direction, thereby giving rise to a whole slew of systemic complications that are becoming more and more pronounced. I trust that the Yekhanurov government will do everything necessary to turn the country’s economic policy back on its natural course in order to make it rational again. Society is counting on this.
