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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

ECONOMY FOR THE WEEK 

10 April, 1999 - 00:00

Ambitions Abandoned

Koreans were asked to take care of Ukraine's auto industry

If one were to look for a consciously organized industrial policy in Ukraine,
the post-Soviet state with the largest "sector" government, one would not
find anything more ambitious than the automotive industry development program.
However, a consolidated progress report for the year, along with details
relating to the business dispute at its number one enterprise, which peaked
last week, makes one wonder whether any business accomplishment is possible
in today's Ukraine with its bureaucratic over-regulation. The Ukrainian
experience offers a resounding no.

Meanwhile, foreign practice knows countless examples of government manipulation
of national economies producing excellent results. In every such case developed
countries would work out their options for overcoming crises in some sector
or another, but in such cases there have always been several basic factors
operating. First, strictly targeted programs; second, programs extending
over several years; and third, state regulation has never acted in lieu
of the market but rather complimented it. Last but not least, separate
enterprises have always been treated on an individual basis, rather than
whole industries or sectors. Outwardly, the Ukrainian program meets the
principal requirements of a solid industrial policy, yet the car project's
negative image is evidence that something went wrong somewhere.

Suppose we try to analyze what went wrong and where, but first we will
take Japan as an example of how things can be done right.

In the first years after World War II the automotive industry had no
priority in Japan, as the government concentrated on and used most of its
resources to revive the steel, coal, and agrochemical sectors. To an extent
this approach was facilitated by the US occupation headquarters, pushing
through the idea of leaving auto-making to foreigners. However, patriotic
Japanese soon discarded that idea, and even during the war in 1944 the
Ministry of Foreign Trade and Industry came up with a five-year automotive
industry development plan as part of a nationwide economic recovery program.
After some holding back, causing mass bankruptcies and unemployment, genuine
powerful government support was given the automotive industry in the 1950s.
The Ministry's stated policy envisioned modernization of auto plants and
the large-scale introduction of progressive foreign technologies, with
the Ministry acting as a coordinator responsible for all technical arrangements.
Under the business rationalization law, auto-making companies began to
receive government subsidies covering up to 50% of all modernization and
equipment expenses. The Japanese Development Bank not only provided credit
for purchases and R&D projects, but also assisted with foreign loans.
The 1957 special tax law gave considerable breaks to car-makers.

The Japanese government also took care of rival manufacturers. Almost
half of the so-called foreign exchange limits (i.e., foreign currency provided
by the government) was received by the automobile industry to purchase
equipment. In addition to import restrictions and foreign exchange limits
(valid until 1970), the government built other import barriers. Thus, neither
Japanese citizens nor foreigners could bring to Japan more than one foreign-made
car every two years and could sell it only two years later. Japanese subjects
were forbidden to pay for foreign cars in foreign currency. Direct restrictions
on car imports, along with a 40% import tax, existed until 1965. To curtail
foreign investment in the industry, a special law was enacted, barring
foreign capital from the sales sector. Investment in production was encouraged
only when meant to stimulate domestic output. Repatriation of revenues
was not guaranteed. In 1956, manufacturers of automobile parts joined the
automotive industry program and the government support plan remained in
effect for a decade.

Government control, of course, extended to manufacturers. Presidents
of corporations had to file reports on production according to business
plan (for they received subsidies against such plans). Perforce they would
assume new commitments, and the remarkable thing was that the whole thing
was profitable.

Even a superficial comparison with the Ukrainian program would not be
in the latter's favor. The thing is not even that the Ukrainian side offered
the industry too little in term of protectionism. The problem is that this
protectionism fits neither Ukrainian nor world economic realities. The
Ukrainian government (unlike its Japanese counterpart) actually refused
to determine any strategic targets for the problem. Instead, it was busy
coping with current problems, such as budget subsidy reductions, paying
AvtoZAZ back wages and business debts, and preventing mass unemployment
(which, along with other expenses involved in closing down enterprises
may amount to some Hr 4.7 billion). Hence, the lion's share of

strategic planning was left to the Korean partner, which bungled it.

The Korean business model (like the Japanese) is based on a solid alliance
between the state and capital. In late 1997 it received a heavy blow from
the financial crisis and cracked. Moreover, some estimates point to its
being the main cause of the crisis, so the IMF's financial aid, warranted
by the reorganization of the chaebol, the Korean version of what we know
as financial-industrial groups in Ukraine, only served to enhance its impact.
Of course, weakening the chaebol played into rivals' hands in the US, Europe,
and Japan (businessmen in these countries have reason enough to take a
dim view of these Korean concerns). And the chaebol crossed the
paths of such world-renowned companies as Fiat, General Motors, and Renault
in Poland; Volkswagen in the Czech Republic and Slovakia, and Mercedes-Benz
had a hard time stopping Daewoo expansion on the Austrian market. In the
end, Opel/GM, VW, Fiat, and M-B joined into an informal alliance against
their Asian adversary.

In all likelihood, the Ukrainian problem is not the highest on the Korean
concern's list of priorities. Apart from reorganizing parent enterprises
and optimizing their expenditures, Daewoo has to make cardinal changes
in its business tactic. McKisey consultant Martin Bailey believes that
the sorest spot for the Korean is low return on capital in the real sector,
mostly because of inadequate management. Very likely this sore spot also
became the sorest in Ukraine, so if the Ukrainian government resolves to
play mine sweeper all the way (and if a sapper chooses the wrong partner
it will be his last mistake), it will have to abandon many of its ambitions
and accept almost every requirement put forth by the Koreans. Otherwise
it will have to develop its own automotive revival strategy and this would
be a completely different story.

By Iryna KLYMENKO, The Day

 

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