Apropos unappetizing aspects of Ukraine’s WTO membership
In a new wave of debate on the consequences of Ukraine’s WTO membership of late the emphasis has been traditionally on how this membership will affect the Ukrainian economy. Analyses, however, are reduced to the expected consumer advantages, picturing an unprecedented assortment of superior quality and inexpensive goods emerging on the Ukrainian markets due to international competition.
However, the situation is not as it meets the eye. The said advantages primarily depend on the prospects of the consumers’ buying power — in other words, their incomes. This approach allows us to see the direct dependence of the WTO effect on changes in the overall economic situation. The latter will be affected via two main channels. First, it is safe to predict a decrease in the level of domestic market tariff protection, as basic rates will be tied in the course of bilateral talks with Ukraine’s trade partners. While tariffs will generally be reduced somewhat, the decrease in tariff protection will be significant in a number of commodity groups. This, in turn, will intensify competition in the pertinent industries. Meat, meat byproducts, sugar, food, pulp and paper, footwear, furniture, and other rates will see an accelerated decrease. Second, the regulatory environment will change in keeping with WTO requirements. In particular, sectoral tax concessions and credit subsidies will be annulled, the system of state procurements will be altered, and so on. As a result, the tax burden on a number of industries will substantially increase and there will be additional sales problems.
These factors will add considerably to the competitive requirements on Ukrainian enterprises. Those failing to observe them will find themselves in adverse economic conditions and some will even have to close. Of course, there will be many such enterprises. Assuming even that it will be possible to revive some mismanaged businesses (through bankruptcy proceedings), medium-term prospects indicate a decrease in the employment rate and in the per capita gross income, which will be socially paenful. The situation will be aggravated by the multisectoral structure of a number of Ukrainian regions adding to the interregional disproportion and giving an impetus to economic decline in depressive areas. The latter may have a cumulative negative social effect, imposing an extra burden on the local and central budgets responsible for the social maintenance of those territories.
To counteract these negative social effects, Ukraine will have to provide additional job placements and require higher labor productivity from competitive enterprises. This, in turn, will call for actual structural adjustments in the economy and investment-oriented growth, something that actually has nothing to do with WTO and which Ukraine’s membership will by no means bring closer. Even competitive companies, sensing an increase in the competition, will have to rationalize their expenditures. In view of today’s considerable nidden unemployment, it is easy to predict that such rationalization will entail redundancy manpower reductions, freezing or even lowering net remunerations.
Ukraine’s WTO membership will have interesting consequences also in the shadow sector of the economy. Measures being taken to prepare Ukraine for WTO have a tangible positive potential (thus, combating contraband will make it possible to raise the actual level of consumer market tariff protection even as the nominal value of declining imports). However, in the social context, especially until shadow transactions are crowded out by the growing legitimate economy, such measures will mean income losses for persons operating in the shadow (various estimates point to three million Ukrainians involved in or with the shadow economy). Such losses may have a noticeable effect on the buying power of numerically significant groups of the population at the level of actual gross consumer demand. Therefore, the much-advertised consumer advantage [of Ukraine’s WTO membership] will show its reverse side, namely, unemployment growth and a slower per capita income growth.
In other words, an increase in the assortment of superior quality and inexpensive goods remains to be seen. Considerable transaction costs on the domestic market, Ukraine’s international image lacking in attractiveness, tangible transportation costs (especially with regard to food deliveries), etc., will complicate commodity imports. And so domestic products becoming more expensive after nullifying [tax] concessions and enhancing fiscal control may get noticeably ahead of the competition growth due to imports where conditions will be liberalized. As a result, domestic market prices will go up while the population’s buying power will go down accordingly, provoking inflation.
However, it is hard to deny the obvious fact that Ukraine’s WTO membership is an objective necessity on its road to integration into the world economic community. Yet this does not mean that one should ignore another fact; in the course of this process Ukraine might have to pay a dear social price for all that time wasted going through the motions of economic reform and accumulating tangible structural distinctions from not only leading world economies, but also those of its closest neighbors. Ukraine needs a purposeful economic policy allowing for the peculiarities of its transition economy and being capable of adjusting itself to the WTO membership requirements, so as to make the best possible use of its positive potential, while reducing to a minimum the negative economic and social consequences. This policy must envisage an upgrading of the domestic market protection system and supporting domestic businesses in keeping with WTO requirements. To do so, Ukraine has to master the whole assortment of WTO protective measures and bureaucratic casuistry. Otherwise all advantages of Ukraine’s simplified access to markets in other countries will be reduced to nothing.
It is important to support export-oriented businesses and upgrade the structure of exports. The experience of Central and Eastern European countries shows that WTO membership did not become a factor increasing their exports and improving their balance of payments. On the contrary, intensified imports added a noticeable amount of red ink to the foreign trade balance. Therefore, target-oriented measures must be taken to stimulate such export businesses, raising their technical level, and stimulating their competitiveness. The more so that Ukrainian exports are in the lead in the GDP structure. While upgrading their structure, it is necessary to increase the specific weight of high VAT level products. The regional leveling-out policy deserves special notice, particularly with an eye to special economic zones and priority development territories.
Nor should one overlook the need to take direct measures to make up for the negative social effects. Social policy should focus on preparations for a tangible increase in the unemployment rate, so as to provide employment for people losing their jobs owing to redundancy. During this period the job market should be shaped with an eye to future demand. In particular, a system of social works financed by local budgets and aimed at developing local social amenities and production infrastructures will have to be developed. An increase in the mobility of manpower may become a necessity (a painful one, owing to the specifics of our national mentality). In fact, people have long been leaving depressed areas, but the process must be civilized. Small business and individual entrepreneurship are meant to be the main social way out of the situation.
Perhaps the above measures will fail to make up for all the negative social consequences of Ukraine’s WTO membership, but they will at least allow us to maintain social optimism, which is badly needed in order to make effective use of the opportunities resulting from this membership.
