Government sends “signals and pulses” to economy
The Ministry of the Economy has made public its strategic goals for 2003. They essentially boil down to five items each of which could be a piece of good news for the stagnating Ukrainian economy. Minister Valery Khoroshkovsky is sure that the attainment of the declared goals will boost the annual economic growth rate to seven to ten percent. He thinks that the projected four percent growth in GDP in 2003 is insufficient. This statement is probably wishful thinking. So what does the Ministry of the Economy want in 2003?
SMALL-SCALE BUSINESS
Minister Khoroshkovsky announced the government was going to simplify registration of enterprises in the nearest future, employing the one stop principle. In other words, the entrepreneur will hand documents to one agency which will take care of all the time-consuming formalities in the shortest possible time. The Minister of the Economy is sure this simplification process will be implemented without delay because, to do so, the Cabinet of Ministers does not have to turn to parliament. In all probability, the implementation document will take the shape of a Cabinet resolution. This decision is expected to breathe a new life into small-scale business now suffering from an unduly complicated registration procedures.
LEGALIZING THE SHADOW ECONOMY
Khoroshkovsky, who came to the government from business, is only too well aware of the extent and root causes of the shadow economy. The minister suggests, as a remedy, cutting taxes on the incomes of individuals. In his view, parliament should make this decision within the first six months of 2003 so that the law could take effect in 2004. The idea is to halve the tax, which will undoubtedly provide some food for thought for managers who prefer paying their employees in cash unrecorded in the accounting books. The already-approved reduction of the corporate profit tax from thirty to twenty five per cent will help the legal economy grow. In this case, allocating a third of the wages fund to the Pension Fund will remain the only tax- related item encouraging the shadow economy. Khoroshkovsky says that even now, many people’s deputies and even ministers have not yet understood that legalization and a twofold tax cut will allow the Pension Fund to get much more than it does now.
THE GROWTH OF DIRECT INVESTMENTS
The Ministry of the Economy plans to attract foreign capital by removing tax-related irregularities in the performance of various companies. Khoroshkovsky believes that if conditions are the same for all, they will be more transparent for Western investors who increasingly disapprove of business conditions here. It is well known that offshore companies have been lately one of the main sources of foreign investments in Ukraine. The economy minister does not think it is dangerous and suggests reassessing the role of offshore entities in the Ukrainian economy, “Some take a suspicious view of the offshore companies, which is not exactly fair. First of all, the inflow of offshore capital should be regarded as reinvestment of Ukrainian capital. Secondly, even big well-known foreign companies come to Ukraine via offshore firms. They thus take precautions against risks, for we are not understandable and transparent enough for them. There is nothing bad about such offshore companies. It does happen that, apart from well-known large companies, an unknown offshore business takes part in privatization. This is the problem to address.” Well, let us not fear offshore companies. Maybe Nauru, the Virgin Islands and Cyprus will soon be the only ones not to apply sanctions against Ukraine for lack of anti-money-laundering drive.
FREE TRADE AND WAGES
Ukraine plans to join the World Trade Organization next year. Why the economy ministry put this item on the list of its main 2003 goals is not quite clear. Besides, the experience of other countries recently admitted to the WTO shows that their economy took a slight downturn in the first months after trade barriers were removed, and only two to three years later they began to make full use of the benefits of free trade.
RAISING PUBLIC ADMINISTRATION STANDARDS
The Ministry of the Economy has devised an utterly simple formula for raising the standards of public administration: “increase the incomes of public servants.” But the current budgetary problems of Ukraine make it very difficult to achieve this goal.
Minister Khoroshkovsky admitted he hoped that signals and pulses would have a positive effect on the economy, stating “It is not so much economic changes themselves as signals about them that are important. If we presume that the new tax law will begin to work next year, this does not mean there will be no positive effect right now.” So we are going to exclusively rely in 2003 on the sensitivity of small business and foreign investors. Optimists can rely on the economy ministry’s promises. All we have to do is wait and see.
