ECONOMY FOR THE WEEK 

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