Empty Title

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