A Weak State Casts An Unruly Shadow
Today’s shadow economy not merely dominates but also offers stiff resistance to the state and so far gets the upper hand in their confrontation. This writer does not believe the claims that the shadow economy gives hundreds of people jobs. It really creates jobs for a hundred or so moonlighters but simultaneously robs two hundred or so miners or energy workers of their wages due to pay arrears or criminalized barter. The vast smuggling of oil products, alcohol, and cigarettes into Ukraine not only steals many billions of dollars from the state treasury but also makes it unprofitable to produce these items in Ukraine and brings dozens of plants to a standstill (oil refineries along with liquor and tobacco plants), depriving thousands of their workers of wages. Nor is it worth hoping that the shadow economy will come out into light of day, because the non-criminal part of the shadow economy, which is forced there in order to evade onerous taxes, accounts for only 10-15% of the total. These will come into the sunlight should taxes be cut. And the rest?
In terms of the amount of natural gas (as well as other kinds of energy resources) consumed, Ukraine is among the top five developed countries, but, in terms of the amount of the per capita GDP, Ukraine trails the top hundred (see the table with 1999 data).
Poland, which consumes seven times less gas than Ukraine does, has a GDP seven times as much! The explanation that our industry consumes four to five times as much power will satisfy nobody who can count. For 2.6:0.07 (figures from column six of the table) = 37, not 4 or 5. Our economy simply cannot be 37 times as gas intensive as Poland’s (and 87 times as that of Germany). Our public utilities sector, accounting for a mere 5-10% of Ukraine’s very modest GDP, cannot possibly consume almost as much gas (9 billion cu. m.) as does far more highly developed Poland (11 billion cubic meters). Add to this 50 million tons of industrial coal and 10-15 million tons of fuel oil burnt every year.
Let us continue counting. Suppose the whole Ukrainian economy is four to five times more power- intensive than that of Poland, then Ukraine must need four to five more gas than Poland does, that is, 11 x 4.5 = 49.5 billion cu. m. a year. We do have this much gas, to be precise, 18 (extracted in Ukraine) + 32 (for Russian transit) = 50 billion cu. m. a year. This means we did and do not have to buy even one cubic meter of gas from Russia or Turkmenistan. In all probability, the “extra” 30 billion cu. m. of gas (worth $1.5 billion yearly), being purchased with such a strain, directly or indirectly cater to the shadow sector. There seems to be a very simple solution: to install gas and heat meters at all enterprises and boiler rooms (an IMF loan would do very well here). I am ready to argue that nobody will ever manage to install gas and heat meters at all Ukrainian enterprises and boiler rooms in a civilized way and force the consumers to enter the meter readings in financial documents.
It is the same story with electricity: for example, in 1998 Ukraine as a whole lost 30 billion kWh of electrical power (not to mention the unrecorded figures), with the population of Ukraine having consumed just 23 billion kWh! If you add here the unrecorded figures, this will come to about 50 billion kWh or, in other words, bye-bye, $1,000,000,000! Energy people call this “commercial loss.”
This kind of a shadow economy is not just bad or prone to crisis, it is murderous for Ukraine. Let us drop this euphemistic word, shadow. This is the economy of being out of control and theft on a massive scale. It cannot be the result of somebody’s drawbacks or mistakes, for a “national economy” like this can only then exist for nine years when it is profitable for quite a wide circle of very powerful individuals (businessmen, bureaucrats, and lawmakers) and structures. And they will never of their own will allow anybody to change it. How can you otherwise explain why during the same nine years such entirely different countries but as backward nine years ago as Ukraine — China and Poland, Argentina and Slovenia, India and Rossia, Estonia and Romania — have taken such a great leap forward? Or how can you explain why the problems of gas, coal, and electricity in this country have become entangled in a Gordian knot, while the problem of, say, pastry has been successfully solved? My answer is that gas, coal, and electrical power constitute a sphere of high-placed vested interests, while the latter are in no way interested in the baking business (but if they suddenly develop this interest, Ukraine will immediately have a pastry crisis).
This kind of “shadow economy” has scared off all Western investors (which means lost profits of tens of billions of dollars), making it possible for profitable Ukrainian enterprises to be privatized almost free of charge against various certificates, investment liabilities, and other scraps of paper, and be ruined, with the profits sailing away to offshore havens.
When the dissidents of the 1960s, my spiritual colleagues, predicted the end and inevitable collapse of the USSR, they were ridiculed (and, to be on the safe side, put in prison). Today, I want to say (many will laugh now also) that one must put an end to this mayhem of economic crime and corruption in the shortest possible time. Otherwise, Ukraine will face a national catastrophe. Neither the super efforts of any super cabinet, nor a 5% GDP growth will help, for this shadow economy will swallow everything up.
Let me quote Mr. Owen, an assistant to Albert Gore: “The scale and duration of Ukraine’s economic slump are unprecedented among the transition economy countries.” So shall we continue in free fall another ten years and wait for the “shadow operators” to get reeducated and get some sun? I do not want to speak about some strong hand. I want to speak about a strong state capable of taking quick, tough, and adequate measures.
