Official Economic Policy Pushes People into Shadow Sector

In Ukraine, even the President does not seem to believe in either. Not so long ago, he said that if he were the manager of an enterprise he would not pay taxes. Yet this did not stop him from declaring at a meeting with Kirovohrad oblast executives on February 10 that the situation in the country could be improved only in the presence of a rigid vertical chain of command and responsibility "from top to bottom."

Yet is this vertical chain ("from top to bottom") prepared to assume responsibility for the fact that under the circumstances a decent person simply cannot survive, and that Ukraine has actually turned into a country of lawbreakers, with millions of citizens being forced to earn their living illicitly?

Economists believe that countless Ukrainians are somehow or other involved in or with "unlawful" business. Ukrainian expert estimates, polls, and monitoring domestic enterprises show that 50% of the economy exists in the shadows and is tax-free.

A sharp increase in the illicit sector over the past several years is attributed by Volodymyr Lanovy, President of the Market Reform Center, to the absence of tax adjustment in the face of production decline. "This is evidence of the persevering totalitarian system and its chauvinistic attitude toward private business and the people's enterprising spirit," he says.

"A newly created enterprise finds it extremely difficult to receive a license. And even after living through the ordeal there is 98 kopiykas worth of taxes per hryvnia earned. Do you call this normal?" Yuri Kudinov, manager of a private firm in Kharkiv, asks indignantly, adding that working under such conditions makes one resort to "double bookkeeping," in other words keeping most of the revenues hidden from the tax inspectors..

German economist Ulrich Thiessen is convinced that today's shadow economy surpasses the gross domestic product. In his opinion, many businesses refuse to operate legally due to an "extremely complicated" business environment.

"The government facilitates the development of the shadow economy. Its attitude toward enterprises is controversial; on the one hand, it demands tax payments and levies fines; on the other, it forgives their debts. In other words, it shows an example of how useless it is playing by the rules in Ukraine and that those who do so are simply idiots," says Herr Thiessen.