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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

The Country Should Know Its Inflation Heroes

24 November, 1998 - 00:00

After familiarizing himself with the 1999 draft budget, former
Polish Minister of Finance, Prof. Jerzy Osiatinski passed a harsh sentence
on it.


"There is no point in saying that the Ministry of Finance and the government
should review the macroeconomic indices in the 1999 budget, taking into
account world financial tremors. Before review is made, a political decision
should be worked out on exactly how Ukraine will combat the economic crisis
and there should be the political will to move on. Only after passing this
fundamental decision, review of the macroeconomic indices can begin." And
how do things stand in terms of this "will" in the top echelons? The best
indicator of this came last Tuesday.

According to Chairman of the Parliamentary Finance and Banking Committee
Alioshyn, the current budget draft is the result of the heated discussions
between the government and the National Bank on the key question for the
economy - inflation (and emission). Perhaps the 7.8% inflation figure used
in the budget, is the NBU's "political" point of reference, not the government's,
which put its faith in printing-press money up to the very last day. Meanwhile,
formally everything tries to makes it look like the government wants to
curb any emission. Even the emotional remark by the NBU head that the lawmakers
should accept the political responsibility for a future emission deflects
guilt from the government, not to mention the NBU.

Is it really like this? According to the record, yes. But the logic
of the government decisions indicate otherwise. There is every reason to
state that a powerful pro-inflation lobby has taken shape both in the government
and Parliament, members of which are likely to find inflation in their
own monetary interests and will try to recreate their personal fortune,
shaken by the ruble and hryvnia devaluation, through adoption of an inflationary
budget.

We know that economic happiness never comes free of charge, and the
price paid by one social group or another depends much on the scenario
of how the economy develops. Some win from hyperinflation, while other
people benefit from stabilization. It suits some to give advantages to
export-oriented sectors: others want protectionism and elimination of competition
from foreign products. These interests conflict, and very rarely can the
best way of overcoming the crisis be found by means of parliamentary debates.

The raw material and energy consuming sectors along with a weak banking
system constitute 50% of the Ukrainian economy. It is plagued by payment
arrears, and exports are virtually without exception those of raw materials.
All this provides an almost 100% guarantee that additional money will call
forth price rises. Clearly, this will not happen immediately. Who wins
and who loses in this scenario? First of all, the banks and middlemen win.
It has been proven more than once, by modern history also, that financial,
and commercial-intermediary activity is the first beneficiary of inflation.
It is worth recalling that Ukraine's banking sector owes its flourishing
to the inflation of 1992-1994.

Under contemporary conditions representatives of the raw materials and
agricultural sectors join the inflation lobby. First, devaluation has not
fully justified the hopes for increasing the effectiveness of metal and
chemical exports. Secondly, exporters depend much on imported equipment;
thus, they could not escape losses from devaluation. Thirdly, this business
is closely connected to banking, and this significantly influences its
leaders' position. Fourth, what seems to be most important in the current
situation, budget austerity, as well as currency controls, would impact
on exporting sectors, because the major part of their hard currency revenues
wind up abroad. Of course, the emission mechanism weakens pressure on this
sector, because it gives the government another, less conflict-ridden way
to finance the budget.

The enterprises - both exporting and those making domestically competitive
products which have managed to survive the competition - will lose from
high inflation. The absence of financial and monetary stability ruins the
basis of their functioning, prevents them from making investment decisions,
and keeps them from developing. The large urban industrial centers will
suffer much from the inflation. Money devaluation will cut urban food supplies
because agricultural regions begin limiting food deliveries. Food imports
will also be cut. Provinces somehow associated with agriculture will adapt
to the food problems better.

The situation is different under budget and monetary austerity, which
speeds the structural reconstruction of the nation's economy, bankruptcy
and, ownership changes for unprofitable economic agents, be they producing
enterprises or financial structures. Such a policy envisions maintaining
the country's ties with foreign product and capital markets, spurring competition
and limiting state interference in the economy. Naturally, this course
suits the big cities and effective enterprises. Banks and ineffective enterprises
face the task of reorganization, often a very painful one. Unemployment
is likely to grow, which will affect provinces where there are fewer job
opportunities more than the big cities. However, both these options have
one thing in common, and it is not a pleasant one. In both cases the state's
social obligations will decline. With an austere financial policy this
takes place directly through cutting budget expenditures to the level of
budget revenues. Inflation brings the same results by depreciating budget
expenditures. Both options are painful, but the second is also unfair,
because it is the effective enterprises and the poorest people who suffer
first from rising prices.

 

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