At a recent government session, Ukrainian Prime Minister Valery Pustovoitenko put ministers under the fire of critics for failures that have taken the country to the edge of financial and economic crisis. In his speech, Pustovoitenko referred to the astonishing research data provided by the German consulting group attached to the Council of Ministers. After that deeply emotional session, The Day failed to familiarize itself with this document. According to the explanations we have received, the research was conducted “for government use” only. At the same time, more and more details surfaced during further discussion. And finally it was announced that inflation could rise to 35-40% unless budget expenditures are not steeply reduced. Naturally, we wanted to know if the German consulting group is connected to working out such a scheme. Therefore the first question to the Ph.D. in economics Ulrich Tissen was about inflation.
What do you think is most likely to happen in Ukraine. In other words, will inflation rise or will they decrease budget expenditures?
In all countries stable currency and low inflation are considered to be the main indices of a properly developing economy. That is why they should keep such reference points, because without any doubt, they are very important. Moreover, inflation is always asocial: usually those who keep their money in bank accounts or receive fixed wages or pensions, suffer from inflation much more than the affluent. I hope that they will manage to keep the currency stable and inflation low. As to reducing state expenditures, we think that social security funds should not be cut. However, the more they suspend making unpopular decisions, the more they will have to cut budget expenditures. The state budget deficit and external debt are growing very fast. The state is now borrowing money at very high interest and this cannot last forever.
What may happen if Ukraine fails to attract an IMF loan?
This is a very important question, because the appraisal of Ukrainian policy depends on this. In other words, interest rates depend on what Western experts think of Ukrainian policy.
Is this the only consequence?
It’s the main one, because all other budget expenditures depend on covering the interest rates - the higher the rate is, the less money government will have later. In short, the more money they will have to pay for the loan, the less they can spend for other purposes.
How do you evaluate the tax policy in Ukraine?
You should note that the state income share of GDP is relatively high in Ukraine, compared to other transition economies and constitutes a little less than 30%. If you add the pension fund, Chornobyl fund and other so-called social security funds, this index rises as high as 40%. But I suggest considering the state budget, excluding the social funds, because they cannot be cut. This way the Ukrainian budget, estimated to make 30% of the GDP is larger than Germany (23%), the USA (20%), Kazakhstan, and Russia (under 20%). Ukraine might find it hard to maintain such a high level of budget income. However, despite its relatively large income, Ukraine has also the largest budget. For instance, state and local budget deficits came to 5.6% of the GDP last year. The deficit is currently covered by extremely expensive loans, the interest rates of which have not decreased since the financial crisis last November. The financial crisis in Asia provoked interest rate increases in the countries with transition and developing economies. But the high interest rates cannot be explained only by the Asian crisis. The Ukrainian example shows how the absence of structural reforms can also lead to the high interest rates. In Russia, Brazil, and other countries, interest rates went back down after the November jump. They remained so high only in Ukraine (about 50% annually). I repeat, only in Ukraine. This is very indicative because this is how high Western experts estimate the risks of investing money in Ukraine. This situation cannot remain unchanged for long. Even if the state issues securities to cover the budget deficit, they will be basically purchased by the National Bank. Sooner or later NBU will issue too much money causing an inflationary upsurge.
We think Ukraine could withstand a large budget deficit if it were used to finance structural reforms. Money should be invested not only in infrastructure. It can be social aid aimed at cutting various state subsidies. For instance, in the energy and coal sectors as well as in every sector directly financed by the state.
Please explain what structural reform is? It’s on everyone’s lips in Ukraine, but they understand it differently.
First, the state has to guarantee fulfillment of its contracts. This includes also protecting creditors’ rights. Actually, only the state is able to introduce legislative norms to regulate the bankruptcy process as the final level of responsibility. The economic aim of bankruptcy is not creation of unemployment, but preventing it by means of constant structural changes: the property of the bankrupt enterprise is given to another enterprise, which is able to use it better and make the business profitable.
Second, it is essential to pass laws instituting private property rights in land and capital. Without this it isn’t possible to improve management, to decrease loan risks and interest rates.
Third, they need to eliminate state price regulation, including the system of state reserves. Then, the state should stop its administrative regulation of foreign economic activity. Above all, this should be done in the agricultural complex. By the way, the points I mentioned played the key role at attracting the loan from the IMF ($2.5-2.7 billion). Note, these requirements are not important for IMF or Western observers. They are important for Ukraine. The country will be able to overcome its economic crisis only through economic growth.
Now everything depends on the readiness of the government to take unpopular measures and steps (bankruptcy, deregulation, business activities, and raising utility rates for natural gas, water, and heat). And this will be very difficult in view of the coming presidential elections.
When did your group first advise more actively use of bankruptcy as an element of structural reform?
Already in late 1994 we proposed closing certain large enterprises with the most substantial losses. This would have served as a signal to others that in Ukraine from now on enterprises have to take responsible for their property and get serious about their financial obligations. In Germany, for instance, up to 25,000 enterprises go bankrupt annually.
Perhaps in Ukraine it will be easier to carry out the necessary reforms if we take into consideration that 100 years ago the Ukrainian economy was successful and 900 years ago Kyiv was the center of a highly developed civilization.






