Correcting mistakes

The national economy is in bad need of change. This is not a new slogan, but all Ukrainian politicians and powers-that-be tend to take it up, thus emphasizing their keen desire to save the country and its economy. Yet when those who say they wish to do so come to power, very few of them tend to make such decisions, after duly analyzing the mistakes of their predecessors. This is the reason why, according to experts of many international financial organizations, reforms in Ukraine are confined to words alone. So what mistakes should be taken into account for the national economy to benefit from reforms? The Day discussed this with Oleksandr PASKHAVER, president of the Economic Development Center.

The World Bank recently published a comprehensive appraisal of the Ukraine’s economic development, which considers economic shortsightedness as the greatest evil. What chief lessons do you think Ukraine should learn from the past seven years that have seen the Orange Revolution, a never-ending change of governments and promises of a better life?

“The ‘orange’ ideals are freedom and national identity. They are obviously positive for me. Yet the inability of the people who came to power to work as a team shattered these ideals. This is not their only defect, but it proved sufficient to paralyze government.

“In my view, the ‘orange’ go-vernment failed to conceive a badly-needed major systemic project for this country. Let me remind you that before 2000 Ukraine’s President Leonid Kuchma carried out reforms aimed at forming the governmental machine of a new state. To begin with, there was a sketch. Then, as long as experience was being gained, this sketch was to turn into a set of mature state mechanisms. But this did not happen. The politicians ‘slowed down’: neither Kuchma in his second term nor Yushchenko cared about major reforms.”

Do you see any constructive changes in the current government’s actions?

“They are representatives of big capital. Naturally, they are resolute, energetic, and experienced in carrying out major economic projects. They know how to quickly correct their mistakes if nothing else stands behind the latter. What surprises me pleasantly is the fast learning and appropriate usage of liberal vocabulary. High-profile liberal reform projects have been announced. A word is not a thought or, the more so, an action, but if used for a long time, it can have a certain effect on the thoughts of those who say it.

“In my opinion, this country is in for troubles at the intersection of the declared reform plans and the plans of power-wielders to satisfy their own interests. Obviously, we will also see and feel an energy, resourcefulness, and resolution in the latter case.

“But it is extremely dangerous and difficult to remove a traditional aspiration of post-Soviet bureaucracy to build the economy as a system of monopoly businesses and reap the benefits. This suppression of competition paralyzes the energy of capital, and its ability to be reproduced. Mid-sized business is particularly vulnerable to this. The new Tax Code story showed not so much a negative as an indifferent attitude to the problems of small business. The latter is not so easy to deal with, it is difficult to manage it with administrative methods, and it does not fit in with big economic pro-jects. But it is common knowledge that a strong and sustainable deve-lopment of small businesses always boosts medium and big investments and is the basis of the middle class. Of course, nefarious simplified ta-xation schemes must be thwarted — but without resorting to such a strong remedy for headache as the guillotine.

“The story of small business taxation has revealed an essential fault of the new government, the lack of experience in governing the country as a complex social system, a living body. They resort to economic, rather than social, management, whereas any nationwide economic project is filled, first of all, with social content. When an economic criterion is used in the theory of economic decisions to choose the best option, this always suggests explicit economic parameters, within the framework of which the choice is made. All the more so, this concerns geopolitical and social matters. Substituting the economic calculation (which is more lucrative) for a political choice based on strategic goals of development is a very, and at times even tragically, dangerous thing to do. The same problem is also discernible in the government’s plans of reforms. They are clearly aware of the inevitability of liberal reforms in the fields of budgeting, taxation, and regulation. Plans have been made public, active preparation is being made.

“However, it is the bureaucratic structures that were instructed to draw up and carry out liberal anti-bureaucratic reforms. In my view, this is doomed to failure.”

What do you think of the national economy now that two years have passed since the world crisis began? Did it manage to come back to the pre-crisis levels?

“Ukraine managed to avoid devastating collapses during the crisis. This is the merit of the Tymoshenko government. But prevented damage never attracts public attention.

“Now about riding out the crisis. Before it began, Ukraine was at about 75 percent of its 1990 GDP, and now it is at 65 percent. We are the only European post-Soviet country which has not reached the 1990 GDP level, even though we have not fought in any wars. Other countries surpassed their Soviet-era levels of economic development back in 2002-06 and went further ahead. The Ukrainian economy is now beginning to grow slowly. If no extraordinary measures are to be taken, we will only reach the 2008 pre-crisis level in 2012-13. In my view, the root cause of Ukraine’s economic failures in the period of independence, including the unprecedented drop during the 2008-09 crisis, is lack of reforms and the national economic organization based on corruption and monopolies.”

What factors do you think will play the decisive role in the full “resetting” of the economy in 2011?

“The trouble is that Ukraine is restoring a raw materials-based, ineffective, and wasteful economy. In other words, the crisis has not changed the face of the national economy, although in other countries this crisis strengthened economies. Ukraine is, unfortunately, reproducing an old ineffective economy full of corruption and monopolies. Why did it happen? One of the causes is a lack of stimuli to implement innovations and mo-dernize the economy. It is a real vicious circle: for the state to pay more attention to this, it must carry out reforms aimed at relieving the budget of the alien functions of social paternalism (increasingly subsidizing the Pension Fund, offering social security to a vaguely-defined group of people, supporting low prices, and mindlessly maintaining a wasteful public-health system).

“Freeing up the budget would essentially encourage the national producer to invest in cheaper business transactions, with equal access of all active economic entities to these investments. But, instead, tax exemptions are being planned for shipbuilding, aerospace, and light industries, as well as the hotel business. If we leave aside lobbying the interests of specific businesses, we should say that the tradition of preferences for certain industries stems from a Soviet strategy of accelerated militarization to the detriment of the harmonious development of the entire national economic complex. This strategy was based on the idea of the country’s self-sufficiency in a hostile world. But now this idea has lost its meaning. Incidentally, even at that time, the government encouraged the development of new, rather than old and depressed, sectors.”

In other words, you do not believe that Ukraine will be among the world’s 20 most developed countries in 10 years?

“Ukraine cannot enter the economic Top 20 in such a short period of time. What is the G20 today? It is a per capita GDP of about 40,000 dollars [the actual level is closer to 20-25 thousand, depending on method of calculation used; the lowest GDP per capita in the G20 is India’s 1,031 dollars, which is almost three times lower than Ukraine’s; the confusion stems from the fact that the G20 is the group of the world’s 20 biggest economies, irrespective of level of economic development. – Ed.]. In Ukraine, with due account of comparative prices, this index is about 6,000 dollars [the value corrected for price purchasing parity is around 6,600, the actual, nominal value is around 2,800 dollars. – Ed.]. So, for us to catch up with them, this index must be multiplied six to seven times. In other words, for Ukraine to be one of the world’s 20 most developed countries in 10 years, we need over 50 percent annual economic growth [in fact 20 percent growth is enough to multiply the size of the economy six-fold in a decade – Ed.]. This is an absolutely unrealistic figure.”

Can you forecast the consequences of the active expansion of Russian capital in various sectors of the national economy now that the Ukrainian leadership is pursuing a course towards closer cooperation with Russia?

“The essential difference between Russian and, say, Swiss or Belgian capital, is that its actions are closely tied with an expansionist governmental strategy.”

Does this mean that we are in for a Belarusian scenario? After selling half of its strategic businesses in exchange for cheap gas to Russian investors, Belarus faced the necessity of paying for the “blue fuel” at European prices in 2011?

“This is not to be ruled out. Yet, as the current government openly represents big capital, we do have chances to retain economic independence. In my view, the interests of big capital will hinder the rapprochement with Russia. And we will perhaps see the ensuing conflicts in the nearest future.”

Who do you think Ukraine is closer to — Russia or Europe?

“I would not say we have passed the point of no return in our Europe-bound movement. We have not yet passed this European exam. All we have to do for integration with Russia is give up our assets. Europe is making too many demands. It demands that we have handkerchiefs, speak politely, and always wear clean shirts. There is a long way to go, and nobody promises a victorious finale.”