Today the notion of reform calls forth a mixed reaction from most of the Ukrainian populace in a variety of ways. For nine years of our independent history it has been corroded by numerous assurances from various cabinets.
Expectations of reform arrived in 2000. Viktor Yushchenko’s cabinet promised to restore respect for a notion that had already come under suspicion. Its action plan had the meaningful title, Reforms for the Sake of Well-Being, no doubt sounding better than all the previous ones, being a program with supposedly clearly defined guidelines.
I remember laudatory speeches from the Verkhovna Rada podium, describing the program as “realistic” and “innovative.” The verbiage turned out to be all good intentions and declarations. The programs was innovative only if one considers that ideas, not programs, can innovate.
Apart from all that verbiage, however nicely put, we expected real effective steps to improve the economic situation in Ukraine that had caused inadequate decisions to be made.
A year has passed. The cabinet is reporting to parliament on its progress. Is it really progress and how can it make the man in the street feel better?
In 2000, Ukraine’s industries turned out UAH 144.4 billion worth of products (a 12.9% increment compared to 1999). Was this positive or not? The cabinet feels sure that it is. But if one considers the inflation rate the result becomes dramatically different: not a 12.9% rise but 10.4% drop. After all, how can one even discuss growth and invigoration with the fuel sector dropping its output by 4.1% and the construction industry by 0.4%? And the growth registered in other industries is no thanks to the government’s effort.
The cabinet is happy to proclaim an increment in people’s real incomes. Is it really so? Official statistics point to an average per capita income of 234 hryvnias in 2000, 29% more than in 1999. Consider simple arithmetic. Inflation showed the same increment. In other words, nothing changed one way or the other. The average industrial producer’s costs increased by 20.8% (vs. 15.7% in 1999). What does this mean? Again no positive change. In fact, the situation got worse. When will we stop telling and hearing lies? I understand that breaking the habit is difficult. It is ingrained in us at what might be best described as the genetic level, a typically Soviet-perverted mental trait dating from the time when lying at every bureaucratic level was a matter of course, ministers telling lies to factory managers, the latter lying to foremen, and vice versa. In our case, falsehood comes from the sincere wish to see the world through rose-colored glasses. This is characteristic of all our cabinets, the current one being no exception.
The cabinet has failed to solve the main problem of laying the foundations for subsequent continuous economic growth.
It was standard procedure for Soviet statistics to make all comparisons with the year 1913. They had special methods. What do we do now? We compare everything with 1991, in terms of vital statistics and costs. An enterprise is considered as having put out 100 conventional machine tools in 1991, 50 in 1992, 30 in 1993, 20 in 1994, 15 in 1995, one in 1996, and none in 1996-99. And then two machine tools in 2000, bringing joy to all those on high. This is evidence of real headway with statistics pointing to a 200% increment.
We will soon celebrate the tenth anniversary of Ukrainian independence. Over the years its economic policy has sustained considerable transformations, yet the economic climate has not shown any discernible changes. The pattern of reform adopted (if any) has placed this country in a critical situation.
Transformations in the economic system, developing an effective infrastructure and conditions favorable to a market economy have been agonizingly slow, subject to starts, stops, and worst of all without any effective coordination from the state. Whatever progress made here has nothing to do with the state; in fact, every step forward has been made despite the state’s actions. Whatever has been said about Ukraine setting a market course remains just that, words. Consider what this author regards as the main causes of the current depressing situation:
institution of world market costs without making any progressive pay changes, official management being unprepared to operate under new economic conditions, soaring energy supply costs, andabuses committed while trying to carry out the industrial and agricultural reforms.
Expert economists are all too well aware of the main reason: inflation is causing all our troubles now. And the practice continues. The current government in order to show its alleged spectacular performance and prove that the commitment to repay all back wages and pensions has been honored, once again used the tried and true tactic of cranking up the banknote presses to the tune of UAH 1.4 billion.
In addition, Ukraine badly needs a national industrial policy geared to provide for a differentiated approach to various businesses enterprises, institutions, and organizations. At present, almost all of the larger enterprises are bankrupt and most are not to blame; the reason for their peril is the absence of financial aid from the state. Of course, the point is not handing out budget money freely. Money not lawfully earned tends to disappear faster than it appears. Here the relevant administrative tactical and strategic decisions should be reconsidered and placed within an adequate legal network.
Those running enterprises demand an effective legal framework in order to enable them to supply consumer interests. The time of “planned stability” is past. Only enterprises capable of generating real, hard-won assets can survive in today’s market economy situation.
Privatization and auctions, the way they have been practiced in Ukraine, are nothing other than changing the signs over the door. There is no solid legislation, no legal principles. Moreover, we constantly stumble over problems that we ourselves have created. Sometimes we try to figure out the reasons: ignorance, incompetence, indifference, venality...
Even as Russia raised prices and wages, we left all that unchanged in Ukraine. Why? Could our domestic experts not forecast the consequences? Or could the government have failed to heed them? The result is that a great many tangible assets have been exported from and sold for token money outside Ukraine. Meaning that somebody somewhere must have needed all this.
Prior to 1993, our enterprises were still alive and kicking, making products that were in stable market demand in the CIS, former socialist countries, and elsewhere in the West. People bought those products in order to survive; shuttle merchants delivered them to Poland, Bulgaria, Yugoslavia, Romania, Turkey, and Russia, returning with greenbacks. Not the best option, of course, but all those enterprises did manage to stay in business with at least some money (practically enough to revive output and pay wages); on the other hand, we had all that “primary capital accumulation,” a course followed by Poland and Romania. Yesterday’s “Polack speculators” then dominated Ukraine’s markets, setting up their own companies; moreover, they were prepared to invest in the Ukrainian economy. In fact, they have been doing just that.
Meanwhile, the Ukrainian government did its best to place all kinds of obstacles in the way of all those peddlers, resulting in a dramatic declining output and soaring unemployment, complimented by enterprises going into the red, people losing their savings and buying power, simply because it was impossible to avoid doing so legally.
With time, makeshift businesses were replaced by shuttle merchants investing in Poland, Turkey, China, and God only knows where else. In a word, we had a negative currency turnover in Ukraine, soaring export of hard cash to be precise, as the Ukrainian national currency was being sold for dollars and third-rate merchandise purchased in the countries mentioned and then sold in Ukraine, so that our national currency was again translated into dollars. Obviously, somebody somewhere needed all this.
When they boosted the foreign car import tax and lowered it three months later, it was equally apparent that someone must have lobbied the bill through Verkhovna Rada to stuff his/her/their pockets. In any [civilized] country import and export duties are instituted to protect the domestic manufacturer. (actually, this is called protectionism, and most leading countries are trying to reduce it. — Ed.) In other words, if enough quality goods are produced in Ukraine, the import tax on analogous goods should be increased. Otherwise this tax must be reduced to a minimum or even to nil, so as to replenish the domestic market. Here, as usual, everything was done the other way around. We levied an excise tax on our tobacco products, wines, and spirits such that the imports became three times cheaper. This is ludicrous!
The export duty for exporters should be zero. In a normal economy, exports are encouraged financially. Ukraine’s ranking officials do the opposite. Is it not paradoxical that the Ukrainian licensed shopping centers have a scarce assortment of consumer and industrial goods and those available are high-priced, while there are plenty to be found on all those street markets, sporting good quality and selling for 30% less? The state budget gets nothing from this black market, so it shifts the tax burden to state-run, municipally owned, joint stock companies, and other law-abiding commercial entities. Certain sources point to some 50% of the industrial-trade potential remaining in the shadow economy. Considering this, the tax burden becomes unbearable for the law-abiding producer, suffocating and driving him into the shadows.
Ukrainians in enterprise are capable of replenishing the market with whatever goods, but they will not cope with the task unless assisted by the state in terms of balanced tax, customs, and fiscal policies. I will not let the reader in on a big secret if I state that 70% of Ukraine’s so-called imports comes from our own legal, half-legal, and illicit factories. The fact remains that these goods show design and quality superior to foreign truly imported counterparts. Thus we must provide the conditions for these goods to become legitimate.
We need laws having a lasting effect; we must design our taxes and duties so that they stimulate rather then suffocate enterprise. To do so, we need a professional parliament. We have gone in the wrong direction so far, and no one knows how long it will take to get back onto the right path, one that has been followed by the civilized countries for so many years. The obvious question is, Who needs this deformed reform? Who is developing, planning, implementing, and regulating it?
In fact, crippled economic reform is peculiar to Ukraine, resulting in industrial output reductions, institution of special energy-saving procedures, 2-3-day work weeks, and indefinite leaves of absence. These are not incidental but regular phenomena. Apart from objective reasons (like severed economic ties, lack of turnover assets, loss of consumers, along with low technological and work discipline), almost all enterprises feel they are no longer needed; the state began by reorganizing them as joint stock companies and then threw them to the wolves. What the powers that be have done to the industries is a crime against the Ukrainian nation as a whole.
All we hear are declarations of reforms made from high podiums. In all honesty, reform as such has not even begun. The reason is banal: too many dilettantes at the economic helm, among them characters that are still using their posts for personal enrichment. In addition, political considerations have invariably dominated the economic and business ones, a situation that has never resulted in effective decision-making.
The basic cause of the fall in production output decline is the citizenry’s and enterprises’ inability to buy domestic products in full amount. This results in less products being produced at every subsequent stage and even fewer being bought (by way of advance payments, nonpayment, along with wage delays and arrears). Our unfinished construction sites are on a scope almost matching that of GDP.
Yet there are no objective reasons for such a dramatic decline in the Ukrainian economy and living standards. In other words, there are actually no factors outside the people’s will; they are all caused by the performance of the government machine, the official decision-makers.
Who is to blame?
The following are the objective reasons for the current production decline:
the wages, salaries, and other incomes of the Ukrainian population are less than the domestic or imported products available; the resultant decline in the population’s buying capacity; the fiscal orientation of the tax policy, meaning that each employee receives 49% of production costs referred to payroll; Ukrainian products sell at prices most people simply cannot afford, substantially exceeding world market costs due to: heavy taxes; state support of monopolies allowing unjustifiably high municipal costs (electricity, gas, cold and hot water, communications); underutilization of production capacity, resulting in their products remaining shelved because of prices that are unaffordable; low production efficiency explained by inadequate taxation and customs practices; absence of technological and labor discipline; meaning manpower costs noticeably lagging behind world standards and the insolvency of enterprises caused by their lack of turnover costs.
The way out of the industrial crisis is in purposeful restructuring, meaning the creation of new independent businesses capable of attracting investors, transforming huge unprofitable and budget-straining enterprises into a variety of small and medium businesses capable of supplying market demand.
The economic reform is most closely connected with the regulation of prices, production and other costs, as well as tax rates in keeping with the market economy standard; also, an effective monetary and stabilizing strategy. This calls for the development of incentives and sanctions for the management, primarily with regard to state-owned enterprises (after relabeling certain state enterprises as public joint stock companies, with their essence remaining the same) or those with an over 25% government interest.
Price stability depends on competition in the market for goods and services. There are practically no such markets in Ukraine. Instead, we have 90% monopoly on our market, meaning that no price or interest rate mechanisms can be truly effective. Under the circumstances, we must place an even greater emphasis on antimonopoly laws.
Our numerous cabinets along with two previous and current Verkhovna Rada have demonstrated their utter incompetence in going through the motions of building a strong national economy and paving the way for the nation’s spiritual revival. Ukraine’s man in the street is primarily concerned about his personal and family’s survival, about what he will have to pay to sustain his children and aging parents. Most citizens are unaware of the current problems; they have lost confidence in the possibility of ever solving them. Hence the predominant mood is one of hopeless despair.
Also, this society must have an overall national idea, one capable of uniting its eastern, western, northern, and southern regions. The well-being of all Ukrainians could be this idea.
Can we rely on Verkhovna Rada now?
All those political battles in the parliament’s gallery centered on the cassette scandal make one think there is no use expecting anything good from this parliament. Can we trust the current cabinet? How often can they shuffle the same deck considering that every card in the deck has long been marked? There is one hope left. Our president has ample authority, but he is not using his legitimate powers to the full.
Do we have adequate reason to accuse the legislature of having no reform program or strategy, of deliberately procrastinating the development and passage of bills and long- term rules of the game? We most certainly do.
Do we have adequate reason to accuse the executive of lacking strategic plans for economic reform, of being reluctant and incompetent to carry out the reform, evading political responsibility, failing to make decisions, showing total passivity? We most certainly do.
All those action plans we have been offered by the highest echelons must be reflected in action plans binding at every bureaucratic level. They must! An action plan must be long- term, embracing the current decade and several more. The government must be held answerable for its implementation, regardless of who may be at the head of the cabinet.
