Ukrainian political community lacks an investment, not a consumer development model

For the past four years the Ukrainian economy has shown a steadily high growth rate. In 2000-02, the GDP rose by 20.9%, and 7.2% in the first ten months of this year. Industrial output has shown an even higher rate: 38.4% and 15.7%, respectively. According to all 2000-03 economic indices, Ukraine is among the countries leading the world. EBRD estimates point to 3.3% average annual GDP growth in the Central European and Baltic States that previously were in the lead.

What is the nature of this phenomenon? Is it safe to assume that a purely reproductive process is the main factor of the Ukrainian economic growth, or that an investment model is being asserted, capable of securing not only a steady (lasting) growth, but also, eventually, a structural-innovation renewal of the economy? With a great deal of caution, I would suggest that the Ukrainian economy is entering a new qualitative phase (especially this year), one of investment rejuvenation and growth. This assumption is rejected by a number of experts, so I will try to substantiate it.

GENERAL ESTIMATES

First, one must clarify the specifics of the 1991-99 economic crisis, one of transformation, in conjunction with the dismantling of the destructive command-administrative system and laying market foundations. One could call into question certain its systemic completeness or certain qualities, but it is apparent that the crisis as such was a tool or progress, not degradation, a means of radical innovation and rejuvenation of the previous system of economic relations, and that the whole complex of economic contacts is being revived. Such is the function of any crisis, including one of transformation.

This pattern is evidenced by all states with transition economies, and Ukraine could be no exception. I am an economist, so I rely mainly on statistics. Statistically, qualitative changes in the Ukrainian economy include labor productivity, especially in industry. According to the State Statistics Committee, the productivity ratio was 107.1% in 1997; 103.9% in 1998; 109.6% in 1999; 113.2% in 2000; 114.2% in 2001, and 107.0% in 2002. Under the Soviets, labor productivity was proclaimed the key factor in the victory of the new social order, yet it could not show such rates. Further estimates show that in 1995-2001, Ukraine’s labor productivity and industrial output rose by 74.5%, more than three times such Soviet indices in 1985 90 (21%). Also, the currentlabor productivity ratio in Ukrainian industry is higher than that of 1990 (before the crisis) by almost one-third.

In view of this, one can hardly deny the obvious: Ukraine has traveled a major part of the road leading to the systemic modernization of its economy that commenced at the outset of the economic reform. Economic growth in 2000-03 is, on the one hand, the natural result of this modernization, and, on the other, a catalyst deepening it. For this reason, any attempts to reduce the process to purely reproductive characteristics are serious methodological miscalculations.

In this context, it seems worthwhile to point out the incorrectness of comparisons between the existing level of production and that of the pre-crisis period of 1990-91. As part of the Soviet Union, Ukraine did not have an economy as a systemic whole. Instead, it had production facilities as components of the so-called single economic complex; 82.1% of their output were sold via the trade network between republics. In other words, Ukraine was left with a mere 17.9% of that output to meet its own domestic market demand. Thus the structural modernization of the Ukrainian economy also contained the said aspect, namely, its being asserted as a systemic whole, as the economy of a sovereign country. Personally, I consider this process, perhaps the most complet one, as being of overriding significance.

Extensive factors — economic growth by putting free production capacities to use, taking advantage of the consequences of the hryvnia’s dramatic devaluation in 1997-98, paying wage and pension arrears, etc. — served as a catalyst at the start of economic growth. However, such factors practically exhausted themselves in the three previous years.

The current year is a different story. It does not take an expert to see this growth acquiring a new quality, mainly due to the beginning of an intensive rejuvenation of the main production assets. Evidence of this is the significantly increasing investment demand. While in the first ten months of 2002 investments in fixed capital grew by 6.2%, during the same period this year it was 32.5%. Output in the machine-building industry, it being the principal investment venue, rose from 11.3%, in 2002, to 33.6% in ten months of 2003. In addition, in the first half of 2003, machine-building imports increased by 39.6%, while in the same period last year the rise was a mere 6.4%. These products’ share in the overall imports went up 23.7%, compared to 17.6% in 2000.

Let me emphasize once again the regularity of the transformational crisis forming a tangible enough growth potential, and that this is evidenced by the experience of all the countries with transition economies. Ukraine is no exception from the rule. There is, however, another pattern, namely, the energy of growth generated by the transformation process and requiring an adequate policy response from government. Otherwise, the period of high economic growth rates (6-7%) may follow the same course as in most Central European and Baltic countries, meaning that it will be of short duration. This is fraught with danger for countries with transition economies, as they have to work more intensively to catch up.

The countries that will join the EU next year are beginning to understand this, but they are not likely to make up for what has been lost. I do not see the economic prerequisites to help Poland or Hungary, for instance, to advance its economy as an EU member at a rate 2-2.5 times that of the Union’s veteran members. This is yet another principal admonition that addresses Ukraine’s integration policy, which should take into account not only the advantages, but also shortcomings of those Central European and Baltic countries, where the period of high growth turned out to be dramatically brief.

REINDUSTRIALIZATION

Another principal admonition is that we must not harbor any illusions about the possibility of any postindustrial transformation of the Ukrainian economy at its current stage of development. This is sheer romanticism. In reality, there the issue of conformity between the investment model being asserted and the reindustrialization of Ukraine’s production potential, something the Soviet economy stopped short of. This phase cannot be circumvented. Moreover, the postindustrial stage requires at least 2-3 times higher per capita GDP indices. Significant industrial modernization reserves are the basis of a powerful growth potential being maintained by the Ukrainian economy, and this is currently being implemented. The machine-building growth of almost 70% in 2000-03, considering that two-thirds of its products are supplied to the domestic market, proves this.

In our case, it is the potential of not only the internal rejuvenation of active production capacities, but also, and most importantly, of satisfying foreign market needs. The postindustrial states do not have this segment in their economies, for they have actually liquidated it. Their specialty is postindustrial production. However, countries in the periphery (over four-fifths of the world’s population), particularly the CIS states, above all need industrial postmodern products. The Ukrainian machine-building complex can operate so as to fill this niche as much as possible. Ukraine’s WTO membership could expand this possibility.

Russia could claim a similar role, but it is forming an altogether different growth model. Russian investments are accumulated in the fuel and energy sector. Its machine- building industry shows a 2-2.5 lower growth rate than does Ukraine’s. It is no coincidence that the machine-building share in the Ukrainian exports to Russia increases with each year and is currently at 35%. Similar trends are true with regard to other CIS countries. Ukraine is gradually becoming a machine-building center in the region. This trend must be stimulated by an appropriate national policy.

This does not mean that less attention should be paid to the high- tech sectors. Ukraine’s economic policy should rest on a dual basis: support of industrial modernization plus active governmental stimulus of our high-tech potential, the latter likewise relying on sufficient domestic research strata and accumulated knowledge. On the whole, however, one ought to proceed from the fact that the problem of asserting the postindustrial principles of the economic process is a long-term task for Ukraine. Once again, Ukraine’s potential must be assessed realistically. At present, an economic and development strategy is being worked out to embrace a period of 2004-15, as instructed by the president. The authors of this fundamental document proceed from the assumption that the said period should become a stage in the preparation of institutional, organizational, and material-technological preconditions of completing the industrial phase of Ukrainian economic progress and commencing its systemic transformation into structures of the postindustrial process.

CONTRADICTIONS OF ECONOMIC POLICIES

I emphasize this point primarily because it is necessary to make corrections in the existing model of economic policy. This policy remains inertial, not aimed at securing qualitatively new tasks of economic growth. A situation is taking shape such that the principle of the adequacy of goals and mechanisms in economic policy is being violated. This is dangerous. We need not wait for further recommendations from Western experts, just as we need not copy the economic political principles adhered to by postindustrial states. We have completely different objectives: we must complete the industrial cycle and simultaneously work to achieve higher growth. Southeast Asian experience is closer to us, although here, too, we cannot discuss complete similarity, because we have a fundamentally different initial basis.

Nevertheless, it is possible to ponder certain most principal positions in economic policy that have a common basis with certain countries and are still to be implemented in Ukraine. The first is a considerably higher level of fixed capital gross accumulation. In Ukraine, in 2000-02, it ranged from 19.3% to 20.3% of GDP, while in most Southeast Asian countries, it was over 30%, at times reaching 35%.

Another principal position is noteworthy, namely the state consumption index, which is considerably lower there than in Ukraine. In 1999, the Ukrainian state budget, pension, and state social insurance fund receipts accounted for 34.6% of GDP; in 2002, it was 38.8%, and in the first half of 2003, 43.5%. Such state consumption can be afforded only by the developed countries. Countries working in the accelerated mode and maintaining the annual growth rate steady at 6- 7% (precisely our objective) cannot allow state consumption to exceed 20-25%. They do not spend their accumulated resources “on luxury foods” (as we do), but invest them in the economy.

One other basic distinction concerns state investment. Countries with advanced economies consider 3% GDP an optimum index. In Ukraine, it is reduced to the lowest possible minimum: less than 1% GDP. Even privatization proceeds are funneled into the expansion of consumption.

The abovementioned three basic positions alone (there are more) confirm the inference that the current economic policy is not adequate to the assertion of an investment development model in Ukraine, to secure on that basis a steadily high growth rate in the long run. One has to conclude also that the current government lacks precisely that level of macroeconomic perception of Ukraine’s future economic problems. Everybody is engrossed in the election campaign.

Likewise, the so-called liberal opposition lacks understanding of the state’s problems. Viktor Yushchenko and Viktor Pynzenyk, once outspoken exponents of major cuts in state consumption, spoke for a significant increase when debating the 2004 budget bill in the parliament. Listening to them, this author once again saw just how vulnerable the Ukrainian political community was, owing to the absence of influential right-liberal forces capable of promoting an investment, not consumption model of development. Considering that this country is actually drawn into a two-year parliamentary- presidential election campaign, and that leftist pie-in-the-sky verbiage will remain the key political dominant under the circumstances, it becomes clear that the prospects of further prolonging the much-needed economic growth trajectory at the level of 6-7% GDP already appear optimistic.