Or on Reform and the Virtual Economy

OBVIOUS BUT UNLIKELY

About reform we hear much and see little. Reform is not a full market and poor people. That stage might be a step toward reform but in essence is not reform. The goal of reform is to make the market’s cornucopia of goods and services accessible to people. Honestly, the Ukrainian market is saturated. Suffice it to look at the voluptuous array of goods in the deserted local supermarkets. And on the Ukrainian market it is difficult to find the person for whom all this instinctively (and rightly) works, the buyer. Today the Ukrainian market caters primarily to the so-called new Ukrainians and is not at all the basis of the much vaunted socially-oriented market economy, for this goal requires that the basic mass of people be sufficiently affluent that buying a computer or mobile telephone does not become a personal crisis. Reform is changing the system, getting rid of all that which has outlived its usefulness. No doctor can treat the dead. Only the living can be saved.

In this context I would like to turn to “What Criteria Should Be Used in Assessing Reform” (The Day, March 21, 2000) by Les Kachkovsky, an extraordinarily ambitious author, in which he attempted to analyze the course of economic and administrative reform in Ukraine. The very theme is extremely relevant, for who does not now feel that the social strain in Ukraine is now reaching its apogee? In this context the recent occupation by students of the KPU Central Committee, miners’ strikes, and virtual refusal of the IMF to work with Ukraine further only add to the pressure on a society demoralized by little (and late) pay, unemployment, and taxes. Certainly, only calm, systematic, and prudent steps by the Parliament, Cabinet, and President can sort things out. Reform is obviously needed. This has long been known. But I agree with Dmytro Korchynsky, who writes in Komsomolskaya pravda v Ukraine, that just mechanistically cutting the bureaucracy will not accomplish anything. It will only add to the pain of citizens who will have to stand in longer lines to get the pieces of paper they need from the bureaucrats. A situation has to be created such that in general they do not need so many magic pieces of paper and take whole spheres of activity out from under state control. Cutting the bureaucracy is obviously needed, but an even higher priority is to modify the behavior of the bureaucrats themselves.

Bureaucrats are by no means prone to occupational suicide. They never will be. One estimate has it that 11% of the Ukrainian labor force makes its living in one way or another from licenses, that is, from pieces of paper. What sense does it make to run from office to office in order to and pay hundreds of dollars to register a company when in Washington, DC, you can do it for $20? This is a direct road to offshore zones, to capital flight abroad. Certainly, the state needs money, and the only way to get it is taxes and fees, but the state’s not paying its bills is the worst way to economize. When a bureaucrat does not get paid on time, he is in fact forced into bribery. No penalty you can think of will stop him.

The corruption of, say, certain employees of the State Auto Inspection is no secret to anybody. In the US you can drive a car over a thousand miles and be certain that nobody will stop you without good reason. The speed limits are adapted to the roads such that most people would never think of breaking them. This does not mean the roads are not monitored. They are, by all possible technological methods. But in the US I was able to renew my driver’s license in less then a minute. The mechanism, including the computer data and getting my picture taken worked to the second with only one person.

Explaining the removal of its tobacco production from Lviv to Kremenchuk, the manager of one firm explained in the press that most of his time had been taken up by various inspections. And this is tremendous loss of human resources and human intellect. Consider yet another more example. One journalist spent half a day trying to get through on the phone to the editor of one newspaper, where he had published an article. “I don’t want to have to run to the tax inspectorate,” he said.

It is excruciatingly difficult to determine which regulatory functions should be left to the bureaucrats and which should be eliminated. This is where Western experts can help. There is, for example, a council of German economists attached to the President of Ukraine. From their press interviews it is absolutely clear that they have a precise understanding of the Ukrainian economy. Obviously, their recommendations have simply been ignored. Nobody listens to them, but maybe the time has come to start listening. One friend of mine put together a serious project such that some of the biggest agribusiness firms on earth were ready to invest up to $50 million in Ukraine. After losing about $7 million, they realized that the situation was hopeless, that in Ukraine every good project gets snared in the web of bureaucracy, and they left this market. Such examples are countless. Ukrainians have to understand that good business makes money for everybody involved.

An investor is not a donor; he wants to make money and not render humanitarian aid, which goes God knows where. Today on Wall Street you can hear countless horror stories about trying to do business in Ukraine, and if you suggest a project here about the best reply you can expect is “Thanks, but no thanks.” This is because Ukraine’s lack of rules of the game for honest business and “take the money and run” attitude render normal business relationships impossible. The reputation of a state that defends both its own and foreign owners is difficult to earn but very easy to lose, perhaps forever.

“Reform does not seem to be going anywhere,” writes Mr. Kachkovsky, and “one can hardly expect the ‘new Ukrainians’... to become aware the need to legitimize their wealth,” because they see themselves as citizens of a wider society. But then, so do Americans, Japanese and Germans. It is just that technical progress there does not prevent them from honestly accumulating capital and growing their businesses. Obviously, the problem is not that Ukrainians are “sly” and do not want to be governed by law in their practical affairs. Perhaps the problem is in the laws themselves, which are changed constantly, and the average Ukrainian finds completely unfathomable the rules of the game the state lays down for him.

Mr. Kachkovsky draws an analogy with the American Indians during the period of European colonization. He states that the tragedy of the Indians, who had supposedly lost their own capacity for further development, lay in their collision with “higher” European civilization. He thinks the source of today’s ills should be sought in this, that Ukraine was unprepared for the opening of new theaters of information, being joined to the world economy, and in fact annexed by a new civilization. I think he makes two fundamental mistakes.

In the first place, Ukraine never was a lower civilization, even in relation to the West. After all, did the Ukrainian mentality prevent Ukrainians in Canada from becoming one of that country’s most successful and influential groups? Ukraine’s economy included building rockets, military hardware, and metallurgy. In the cultural sphere, Ukraine has a higher literacy rate than the USA. For all the ideological and cultural encumbrances of the totalitarian past, one cannot ignore Ukraine’s highly developed music and theater, not to mention architecture or its library system (one of the world’s best, now degrading before our eyes). Nor can one say that instruction in the hard sciences at Kyiv Polytechnic was on a lower level than at MIT or Caltech. And on the basis of personal experience I can affirm that Harvard students have nothing on those at the Kiev-Mohyla Academy.

Secondly, the collision of “higher” and “lower” civilizations does not always mean that the former eats the latter. The most effective alternative is for them to interact and flow into each other. New opportunities for active cross fertilization are opening up, making it possible for the economy to grow hundreds of times over. Recall the economic analysis of Russian economist Kondratiev or how Japan and South Korea have developed.

POOR BUFFALO

I recall how my teachers told me not to answer every obvious crackpot hypothesis, but there are some things to which one simply has to react. What Mr. Kachkovsky writes in his article concerning the Indians is an intellectual justification of genocide, no more and no less. Poor, poor Indians! If they hadn’t been killed off they’d still be chasing buffalo (incidentally, the Indians used every part of the buffalo, and, unlike the White Man, did not kill them for sport). Poor, poor buffalo, which, also incidentally, did not live in the Eastern Woodlands where Mr. Kachkovsky’s Iroquois did. And the Indians were wild and barefoot, with spears and rocks in hand ready to hurl them at every paleface in quest of scalps. And forget about literate culture, honor, conscience, and the Commandment, “Thou shalt not kill” at the core of all the worlds great religious traditions. We can see where that road leads since God made Adam and Eve. One might as well argue that if there had been no Stalin, the Ukrainians would still be on the farm, guzzling moonshine, eating fatback, and dancing their traditional hopak. Kill off the Ukrainians to save them! Kill the Vietnamese, Chechens, and Hutsi to save them! As one American general said during the Vietnam War, “We had to destroy the village in order to save it.” Is this the logic of a humanist? Manmade famine? “History is harsh,” writes my opponent. This seems to me the psychology of Postsovdepia such that a million lives here or there — what’s the difference? The outside world has learned the value of every human life, or at least is starting to. Sixteen million Indians, destroyed cultures, temples, and a way of life is a cross we Americans have to bear. The legacy of history as a rule is mixed with blood and tragedies. But along with this one by one are kindled the higher human spirit, that of self- sacrifice, the spirit of Prometheus, Socrates, and Shevchenko. Where would we be without them? We all have a pretty good idea. And in order not to sow dragon’s teeth one has to answer such intellectual “quests.”

I doubt that the author who writes about Indians has ever seen a living Native American in the flesh, but my Internet readers can without any problem visit their hundreds of web sites and personally acquaint themselves with the countless attainments of a proud people with much to be proud of. Take, for example, the Cherokees. They adapted to the new historical and economic circumstances perfectly well, created their own syllabary (a sort of alphabet), in which they published books and newspapers. The tragedy of the Indians was caused not because they did not want to adapt to new circumstances but in the barbarous, violent behavior of Whites who wanted what the Indians had. “Higher” civilization did not come into it. I find the very logic of Mr. Kachkovsky’s article offensive. In the final analysis the victory rests with Shakespeare, Thoreau, Gandhi, Martin Luther King, Lesia Ukrayinka, and Nietzsche’s Zarathustra, while the hitlers and stalins of the world have lost. And they always will. This is why the author of such a theory of defending one nation from another, people from people, sheep from sheep will also inevitably lose. That’s all, let’s return to our own sheep. We have other fish to fry.

AND NOW WHAT?

Back to the crisis of our times. We need to reform, writes Mr. Kachkovsky, and are not reforming. I once again underline my agreement. And I am ready to vote with both hands that we need to make every effort to raise the nation’s intellectual potential, because the nation’s deintellectualization can only lead to its degradation, including that of its economy. It is one thing to cut the bureaucracy and quite another to cut science, education, health, and environmental protection. I repeat, it is, to put it mildly, a less than bright way to economize by not paying the people who work in such institutions is leading to the self-destruction of the very institutions that safeguard the intellectual level of the nation. But what does he propose? Think. I am convinced it is about time to do something. To do it through party, cultural-educational structures, art centers, and enlightenment societies. People have already thought and come to conclusions. Almost all the basic answers to the most fundamental questions have been found.

For four and a half years I was director of the US government hybrid Commission on the Ukraine Famine. Then suddenly I was unemployed. We do not really need to talk about how good the elderly have it on their pensions. People want self-realization. They want to be needed. And here even the best unemployment compensation does not help. It is only a step toward individual degradation and ruination. It is a road going nowhere. On the other hand, it is no great fun to work in an enterprise that makes things nobody needs or in a mine where instead of coal they haul up empty loads. Listening to canned speeches by canned People’s Deputies is no great frolic either. Reform is needed in all sectors of activity and all spheres of life. As I know Ukrainians, they are not people prone to go to the barricades for the sake of mythical ideas. The village will not strike, because the harvest will be lost. Businessmen will not strike, because their businesses will fail. The people’s common sense demands and will always demand constant movement. The state is people. They give the state a great deal and demand from it protection, welfare, and a decent life. The state is supposed to see to it that the onopiyenkos are behind bar and the teachers are in their places fine and forever. As well as their being suitably paid by the state, and that means by the people, by us all. We simply have to make it possible to work and earn. Then we can render unto Caesar what is Caesar’s, i.e., to the state.

What, then, is reform? Today the word basically means rescuing a system from its shortcomings by perfecting it without deep systemic changes. The question then arises of whether this is possible.

The symptoms of Ukraine’s current crisis are obvious: idle enterprises, shadow economy, official corruption at all levels, poor people, and fleeing investors. If we untie this knot, we can overcome the crisis. We can save this country. And if not, then Ukrainian boys will also be going to fight in Chechnya and Ukrainian belles to the white slave markets of Europe, Asia, and Africa. If not something worse, because one need not create a world where honest people can find work only in the rackets.

I suspect that in 1991 we all made an unconscious mistake, confusing the emergence of the newly independent states with new independent states. What really happened in the former USSR was that a number of preexisting states, including the Ukrainian Soviet Socialist Republic, became independent. They changed their flags, ideologies, rhetoric, and even names. But power basically remained with the same people in the same structures doing the same things basically the same way. The situation had its own inertia but evolved, and thus we have what we have.

Why did enterprises start to decline? Suffice it to recall how they were built. The breakage of economic links with Russia obviously did not help, but I suspect the real economic cause goes far deeper. It lies in a world where for seventy years the state programmed all prices and thus nobody knew what anything really cost (manipulating prices was at one time a state sport). There were artificially low — actually chaotic — prices. It did not matter what anything cost, because it the human and material resources involved in making something cost as much as the state said it did, no more and no less. This de facto transformed production into an exercise in engineering. Only output was important. There was an attitude that Sovdepia had resources and people to spare. “Wide is My Motherland” goes the song.

Such a system was never efficient in terms of the utilization of resources. One recent American estimate had it that in Soviet times labor productivity never exceeded 30% of America’s. This was enough for the military- industrial complex, feeding the people, and providing a few consumer goods in short supply. It even sufficed for nuclear bombs and superpower status.

Naturally, when the old regime fell apart and opened the doors to the world economy, it became obvious that many enterprises were simply not competitive. When prices were freed, it turned out that many enterprises were making products that cost more than the inputs needed to make them. This is the essence of what some Western economists have dubbed the virtual economy, enterprises that pretend to be adding value but are actually destroying it.

In the USSR corruption was built into the system. The command economy often had nothing to command. For example, my father in law ran a collective farm in Galicia and got an order to sow and harvest 500 centners of sugar beets from land where such a crop simply will not grow. His solution was simple: get drunk with the district committee in his native Volyn, where sugar beets grow just fine and he has a bunch of relatives, bring a truckload of buckwheat, pick up the beets, give them to the state, and he was even able to get the title of Hero of Socialist Labor for one of his woman workers.

It was the same with enterprises. Since the director had more or less the same sort of demands and could not rely on getting the required inputs on time, he had to hire a tovkach (fixer may be the best English equivalent), whose job was to get whatever was necessary by hook or by crook: bribing the district inspector, the plenipotentiary, or the bureaucrat, and the needed train would go instead of to Magadan, Dnipropetrovsk. Sovdepia was a land where trains regularly disappeared God knows where, and nobody in the West has yet figured out how they kept from running into each other.

It is true that Ukraine has had a hard time adapting to the world economy, the more so becoming one of its major players, and not only because of its being “uncivilized.” It is simply that the vampire of Sovdepia is still sucking its blood. It is difficult to see in the state something other than an enemy, difficult to believe in a state that has always fooled people. This makes it hard for both the state and its citizens to stop dividing up the world into “us” and “them.” Everybody chooses and finds his/her own path in life. The capitalist mode of life, I regret to say, is for individuals only. Every man for himself.

Corruption to some extent will be with us always, just like crime and tax evasion. The question is its scope and why it is so universal here and now.

Corruption is connected with the shadow economy. And what is it as a mass phenomenon? It is simply a symptom that the agents of economic activity cannot tolerate the demands of the state (taxes, excessive regulation, etc.) and flee the state, because you simply cannot do 100% legal business. Without a reduction of such demands, no talk about the “deshadowization” of the economy will go anywhere. No amnesty of shadow capital will help. Nobody will go up to a bureaucrat and shout, “I stole it; here, you take it.” Under such conditions all the projects of “new sources of revenue for the state budget” are going nowhere. Nobody will pay them, and the economy will simply be pushed further into the shadows.

The impoverishment of the population continues because the economy does not work, especially in those sectors most developed in the West, small and medium business, the very sectors accorded the least attention in the former USSR. These businesses are most vulnerable to excessive demands by the state. Because of this, enterprises which are in principle nonviable can exist only at state expense, that is, through hidden subsidies or creating nightmares for their competitors (countless inspections, frozen bank accounts, etc.). In this way the state becomes an active player in the shadow sector, through the protection of less efficient traditional enterprises from more efficient competitors. Recently Iryna Klymenko cited one Western consulting firm that called this “unequal competition.” From this flows low and late pay.

Obviously, putting the economy on its feet is not enough. If we want democratic self-government of the Western type, we have to make the political process transparent to the “real conflicts” (Mykola Tomenko) of Ukrainian politics, and we need to protect the Ukrainian culture, language, and all that gives Ukraine its special genius in the discourse of world civilization. I believe that every people in the world has its specific talent and mission. This goes equally for the native peoples of America and the Ukrainians. But supporting culture also costs money. And real money for this is possible only when people can make it, because the state does not suck everything it can like the spider from a fly.

People’s Deputy Oleksandr Turchynov, whose scholarly monograph on the shadow economy was the first fundamental inquiry into this phenomenon, explains in PiK (March 10-16) that neither the politicians with their ability to make millions from the current situation nor the oligarchs with their billions are interested in deshadowization. “They are all used to the current system. It has its advantages for those who work with it.” How, then, can we think about reform, if it conflicts with the interests of those in power? Reform will be possible only when the basic mass of people begin to understand what is happening, the need for thorough systemic change, and start to do something about it. And the way ordinary people can change things is to get organized. In the West we call this civil society.