We view Ukraine’s perspective in terms of at least 6 to 7% permanent economic growth contingent on the creation by the state of the appropriate economic environment. Not merely tax breaks for the targeted sectors, strategic as they may be, but economic incentives for all constitute the bottom line of Ukraine’s new economic policy.
Some experts were too quick to dub the current year as one of an economic miracle, reflecting their wishful thinking. True, the reported 10.8% GDP growth for the first eight months and 16.9% growth in the economy lead the European continent. Equally important is that this upward economic climb has been going on for over two years now, accompanied by stable prices and growing personal incomes.
Given all this, we should not ignore the starting point, the abyss hit by Ukraine’s economy in the aftermath of the 1990-1999 crisis when GDP fell by 59.2%, industrial production by 48.9%, and agricultural production by 51.5%. In this context, the Ukrainian economy should better be viewed as one starting to turn the corner, not one that has already turned it. We have no right to encourage dangerous illusions that all the problems related to the economic crisis have been successfully dealt with. There is a theory which holds that Ukraine will take six to seven years to overcome the crisis, provided its GDP grows by 10% annually.
But not only this is the issue. We need to be concerned about the presence of real potential for economic growth. Unfortunately, in my view, it is not that large, with many factors responsible for the economic growth in the second half of 1999 becoming exhausted. These factors included, among others, the deep hryvnia devaluation in 1997-1998, favorable world market conditions in 2000 showing 4% economic growth, and free production assets, idle during the slump and readily available once the economy started to get back on its feet. Other windfalls should be mentioned here also: cheap labor force, delayed wages, tax arrears, huge corporate debts all became a kind of a credit resource for our struggling industry. Understandably, these factors can no longer be viewed as basic ones even now, let alone the future.
The same could be said with respect to the mechanisms of economic policy in 1999-2000. Here I have in mind the mechanisms whose task was to give the economy its initial boost. In order to attain this, we used fiscal incentives for the steel, light industrial, food, agricultural technology, shipbuilding, aviation, tanks, and the housing construction industries. It is important that the fiscal mechanisms for production were coupled with a substantial decrease of the budget deficit, from 6.7% in 1997 to 1.5% in 1999. I will repeat: it was a very wise, well-considered, and, above all, effective policy. It was implemented by the appropriate decrees of our president, providing incentives for economic growth. But these incentives have also become exhausted and we should not and can no longer rely on them.
We view Ukraine’s prospects in terms of at least a 6 to 7% stable economic growth, contingent on the creation by the state of an appropriate economic environment. This means not merely tax breaks for targeted sectors, strategic as they may be (although some exceptions cannot be ruled out), but economic incentives for all. This is the bottom line for a new economic policy at the present stage of Ukraine’s development. The implementation of this new economic policy, however, was rife with some serious problems which should be openly addressed. The fact is that we have been too quick to discard the fiscal mechanisms used in 1999-2000 to stimulate production, providing no alternative to them to secure further economic growth. Let me illustrate. The recent “State Program of Ukraine’s Economic and Social Development for 2002” drawn up in line with President Kuchma’s address says in detail what must be done. While, in my judgment, this document should primarily focus on how to attain stable growth and qualitative change in the economy and, accordingly, the social sphere.
In this respect, I am convinced that the present policy of the National Bank is the only significant factor stimulating positive dynamics, for a stable national currency (a mere 3.7% inflation rate for nine months) always leads to stability in the economy. The ongoing restraining of the dollar exchange rate and inflation undertaken by the NBU has in fact eroded for the Ukrainians the attractiveness of keeping their savings in foreign currency, for the first time since the country became independent ten years ago. Those who kept their savings in American dollars have actually lost part of them. There is an increasing interest in depositing savings in banks, something leading to the emergence of a major source for economic growth. I regard this factor as a positive one and, given the appropriate policy by the NBU, it will continue to be effective.
However, there are quite a number of controversial aspects of our new economic policy, with some bottlenecks visible with a naked eye. For the sake of justice, it should be mentioned that the problems are related not only to the government, but also to the traditional system of economic management and the state’s economic policy. The major players here are not only the government, but also Verkhovna Rada, the judiciary, and local government. To clarify, I would like to state with some reservations that the shaping of a new economic policy has been accompanied by a crisis, paradoxical as it may sound in the context of a growing economy. But, viewed from the long-term perspective, the problem is definitely a very serious one due to the lack of mechanisms the government can use to ensure permanent growth and new qualitative indicators for our development.
First, the unfolding crisis of our new economic policy stems from the failure to create conditions to strengthen the corporate cash flow and raise the competitiveness of our goods by substantially cutting the tax burden. Second, the same arguments could be used to describe the efforts undertaken to stimulate our domestic market, with the new policy posing more questions than providing solutions. Third, amid worsening world market conditions, the government has failed to take steps aimed at improving the foreign trade environment for domestic producers, with Ukraine’s entry into the World Trade Organization, the creation of free economic zones, and granting free economy country status to Ukraine left up in the air. Plus there are worsened trade conditions with Russia, numerous anti-dumping investigations, charges of money laundering, etc. All this cannot but tell on the economy. Fourth, despite numerous declarations, there has not been any visible headway in creating a more favorable environment for Ukrainians running small and medium sized businesses. The government has come up with no new initiatives on how to protect private property, fight monopolies, create effective institutions to protect creditors and investors, and ensure the implementation of contracts. Fifth, given the acute shortfall of investment, we continue to use up our receipts from the privatization, with the government’s declared new initiatives for the 2002 budget looking more like the manipulations of officials than radical changes in the state’s investment policy, something the government has completely failed to formulate. Sixth, we have to give up on subsidizing residential housing construction, a sector with the highest multiplier effect to generate consumer demand and high on the economic policy agenda in most Western countries.
The list of economic problems accompanying growth and for which we have failed to propose implementation mechanisms can be continued. They are large in number, but every new government merely declares plans to solve them, but does nothing. The major ones, unsolved for many years, include the creation of a stock market, strengthening the bank system, creation of investment institutions, development of mortgage, leasing, etc.
The budget deficit is also on the list of problems. The issue is not so much that there is a new method for making calculations excluding, quite sensibly, receipts from privatization. If past budget deficit statistics are calculated under the new method, the following picture will emerge: 6.7% deficit in 1997, 2.67% in 1998, 2.13% in 1999, 1.26% in 2000, 1.5% in 2001, and a projected 1.7% in 2002. The 1.7% deficit might seem small at first glance, but it amounts to 4.3 billion hryvnias. All this money has to be taken from industry. The government proposes to cover the budget deficit with money received from the sale of state property. This same money, incidentally, is the basis for budget growth, giving rise to strong suspicions of cooking the books. I touch on this issue in such detail, because the multitude of problems outlined above give reason to doubt the government’s ability to ensure stable economic growth as envisioned in the president’s address. The economy is not a place where miracles happen. In the wake of a grave slump, the weakened economy will not be able to secure stable and permanent growth on its own.
Nor, as has been amply evidenced by the past two years, will the economy, once left on its own, be able to improve its qualitative indicators. Economic growth and qualitative change are two processes that are different in nature. In the course of our economic growth we have not been able to come any closer to the innovation model. There are no mechanisms whatsoever aimed at, on the one hand, stopping the projected large-scale technical obsolescence and wearing out of basic production assets expected to gather momentum in the next 3-4 years, and, on the other, at stimulating the domestic production of imported goods, energy conservation, and the implementation of environmental safety standards by industry.
There are many shortcomings in implementing structural change, notably, in the social sector. There are absolutely no reasons to believe that the gap between the existing incomes of Ukrainians is beginning to narrow. We do not know how to go about strengthening the position of the middle class, the backbone of democracy and political stability in society. Many of the problems faced by our farming sector (even against the backdrop of its phenomenal 27.7% growth for the first eight months) are far from being solved. In fact, as emphasized by the current developments, there is real danger in the lack of legislation on land and property titles, mortgage, restoring land fertility, depreciation of production assets, the social sphere, etc.
Let me stress again that the declared 6-7% GDP growth in the immediate future is a target which the economy will not be able to meet without state support. This calls for an appropriate economic policy, something which the government has not yet drafted. Mere declarations will be of little help. Concrete measures are required on the way to real progress by means of step-by-step solutions of those major problems outlined here. Interestingly, only seven countries showed GDP growth of over 6% between 1985 and 1995. These are Indonesia (6%), Chile (6.1), Botswana (6.1), Singapore (6.2). South Korea (7.7), China (8.3), and Thailand (8.4). Our goal is to ensure a place for Ukraine among this group of nations. This cannot be done by itself; it calls for a balanced, effective economic policy and the coordinated effort of all branches of government, the people, and society.
