cul-2
ECONOMY FOR THE WEEK
"Made in" Somewhere Else
About a year ago, last April to be precise, the Ukrainian government embarked
on a program supposed to "reorganize" light industry. This reorganization
provided for "serious efforts" along several lines, namely: building up
technical barriers in the way of imports, enacting several laws for the
national producer's benefit, and securing direct credit support on the
domestic market.
As is always the case with Ukraine, some of this was done and the rest
got lost in the bureaucratic maze. Thus, all those earning their living
as petty shuttle merchants were now faced with formidable barriers, yet
importing clothes and footwear collapsed for an altogether different reason:
hryvnia devaluation making usual consumer goods a luxury item. In addition,
the populace's buying capacity had dropped by some 20%. And the official
good intentions aimed at combating foreign dumping schemes also proved
ineffective because legal imports, as usual, were the exception and not
the rule. As for credit, the banks did not care much about Cabinet instructions,
for they worked by market, not bureaucratic rules, having updated business
risk standards from the previous year. Moreover, no one actually expected
them to grant loans on political rather than business grounds; they did
not have to pacify another crowd of helmet-banging miners (and the only
real guarantee one could speak about was a government-guaranteed US loan
to textile manufacturers).
President Kuchma met with the cream of the industry last week and learned
from the bureaucrats at the helm that light industry once again needed
government financial injections to keep the zombie moving. He promised
them (he always does) and said he would surely do his best to get the fixed
tax into practice (sounds quite impressive; following in the same vein,
all of us could find ourselves living by that principle, supposed to be
the remedy for all our financial ills). He further promised to help implement
other custom checkpoint "technical barriers." In a word, the government
promises protectionism and output growth to reach Hr 16 billion, of which
Hr 3 billion is sure to reach the state budget. Except that last year's
official statistics pointed to a mere 7% growth in the Ukrainian light
industry. Not so great, after all.
January-February output decline amounted to 2.1% compared to the same
period of last year, the State Statistics Committee reports. In February,
compared to January, production declined 1.8%, with the chemical, construction,
and machine-building industries topping the list at 16.7%, 11%, and 8%
respectively. Against this background light industry looked good: a mere
1.9% lost. But a closer look at what lay behind this figure would make
a regular business analyst gasp, reaching a trembling hand for a bottle
of heart drops. And there is a fair chance that the Ukrainian government
does not even suspect the real losses sustained by the light industry.
We all seem used to the idea that our sewing, textile, and footwear
manufacturers should work abiding by the "tollhouse" principle. This means
that all these industries, having been denied the "benefits" of socialism
- e.g., heavy, mostly ungrounded government subsidies - ended up hoping
for contracts between their and foreign companies, however insignificant
compared to their former Soviet glory. Their Western counterparts would
be willing to order a certain assortment and more often than not pay in
kind. Some estimates point to 20-40% profit thus lost.
But then the problems the industries experienced were quite common in
all post-Soviet countries. Something could be expected to have been done
about them after so many years. Not in Ukraine. After 1992's sharp decline
in current assets the government thought of no better remedy than massive
printed money injections; the banks were ordered to issue nonrefundable
loans. And the fiscal system could not but make its bureaucratic contribution:
overstated rates and overregulation on the one hand, and risk-free, highly
effective, quick-spreading tax evasion on the other. Under the circumstances
any legitimate manufacture of light industrial goods was plain stupid.
Hence the tollhouse technique as one of the two forms in which Ukrainian
light industry could exist.
It should be pointed out that "light industry number two" has been carefully
left unmentioned in Ukraine. It has never been officially accounted for,
yet it has been in existence all these years and anyone more or less knowledgeable
of local light industry business intricacies (or who has visited the local
open-air dry-goods market at least once) can attest to the fact. We all
remember Bulgaria and China with their illicit CD markets. By the same
token Ukraine is known for its pirated textiles (and the same could have
been true of many other sectors, except for purely technical considerations).
The Ukrainian reader might well wonder about the make of his shirt,
jacket, or some other article of clothing bought recently. If he paid a
high price, it came from Turkey or China. If the price was affordable under
post-Soviet standards (and moreover if the quality lived up to what met
the eye), it was probably Ukrainian. Unofficial sources point to Kharkiv
as the illicit textile capital (before the Russian financial crisis). Official
statistics assert that the city has no garment industry, except perhaps
a couple of small businesses. Russia's statistics are very different: importing
heavily from Italy and elsewhere (Kharkiv included, of course), its average
annual 1991-97 imports total 1.5-2 million products, in other words, about
85% of Ukraine's illicit imports.
In fact, Ukraine's light industry's getting heavily involved in the
production of phony Western garments became possible precisely due to the
government's industrial policy. On the one hand, the state was all set
on instituting all kinds of import restrictions, thus forcing production
being moved further inside the country; on the other, the ranking bureaucrats
left all promising entrepreneurs with absolutely no chance of survival,
should they abide by the stupid laws. Here one should be referred to the
notion of expenses being sustained by large enterprises, something uncharacteristic
of a normal market economy pattern (e.g., unprofitable excessive social
facilities, obsolete equipment, inadequate premises, unnecessary manpower),
and of course clumsy management by holdovers. In a word, legal output loses
much compared to illicit marketing in terms of price and on all fronts.
The Ukrainian reader might, of course, counter that our President promised
a fixed tax and simplified accounting and reporting procedures. So what?
There is an age-old adage: countries that get hooked on protectionism more
often than not tend to underestimate all those time-tested bureaucratic
distortions. In Ukraine, the situation is aggravated by such protectionism
measures being implemented to camouflage official resistance to market
reform, rather than to help implement it (and camouflaging meant lobby
profiteering, of course). With regard to Ukrainian light industry, such
protectionism was another proof that the state cares nothing about the
local consumer's pocketbook.
In terms of foreign experience, only a handful of countries have succeeded
in using government protectionism to secure firm positions on the world
market. More often than not such attempts ended in companies going bankrupt,
causing numerous other interested parties to suffer, mainly because consumers
had to content themselves with purchasing inferior quality goods, paying
inflated prices. The Ukrainian government, assuming that it really wanted
to improve the situation, should have paid more attention to relevant international
practice, realizing that output as such has never been made top priority
in any successful country, particularly when the key manufacturing sectors
are under government control. On the contrary, government priorities should
be primarily supporting law and order, that is, securing equal opportunities
for the entire economy and not only certain entities.
The criteria for determining the spheres of government intervention
are very simple. In those areas where the market system does not work,
the state's task is to make up for its shortcomings. Instead we have (by
the government's design) come to a system of illegal survival mixing elements
of both the market and state regulation. Is this what we struggled for?
By Iryna KLYMENKO, The Day






