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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

Financial collapse can be averted only by bridging the macro-micro management GAP

13 November, 2012 - 00:00

Presidential economic adviser Anatoly Halchynsky in his article “New Accents in Macroeconomic Policy,” carried by The Day June 4, 1998 (June 9 in English), admits that the low-inflation-production-growth vehicle did not work. And this vehicle was what the government staked all its hopes on this year. It was indiscriminately borrowed from Western experience. Indeed, low inflation makes it possible to predict economic processes as well as to plan investment and output. However, in the absence of investment resources and effective demand, even zero inflation will not lead to economic growth. Especially when money turnover is paralyzed.

The executive branch stubbornly kept to its course. People naively believed that the economy would start growing, although it remained and is still depressed. In 1995-98, industrial output dynamics (the first four months, as shown in Table 1) registered little change. The change for the better, much advertised at the start of this year, never occurred. There was a brief upsurge in February, but in April the curve dropped even lower. It is a case study in depression. True, GDP and certain other indices showed a slight increase over 5 months, compared to previous year, but progress here is too slow.

TABLE 1

Industrial Output Increment Compared to the Previous Month (%)

As for the attainments in halting inflation, they mostly exist in reports submitted to the IMF and foreign buyers of Ukrainian domestic government bonds. For the populace and domestic enterprises inflation is still going full blast, and not only in the form of increasing prices, but also as soaring debts. Considering back wages and pensions, this gross inflation rate remains high (Table 2).

TABLE 2

Official and Actual Inflation
(considering back wages and pensions, % per annum)

The lower official index does not make things easier on the people. The same applies to enterprises and many other indices. Tensions are mounting and the country is facing financial collapse with most destructive consequences.

Some see the way out in financial reform. Necessary as it is, it will not solve the main problems of production, employment, people’s purchasing power, and tax revenue. In the nearest future the government will have to assume even bigger foreign debts on crushing terms. Considering how effectively loan capital is being used – hence the budget redemption and debt-service capacities – Ukraine’s domestic and foreign debts are critically high.

In the macroeconomic perspective, production requires a credit influx and better paying capacity of the populace – in other words, at least back wages and social payments must be redeemed. The money supply must be increased, particularly by injections in the “points of growth.” This may require a cautious emission and gradual devaluation of the hryvnia, along with a series of measures aimed at securing the economic effectiveness of this strategy.

It is important to remember, however, that the economy’s active non-inflationary receipt of such additionally printed money largely depends on institutional aspects at the macro- and microeconomic levels. The latter implies that decisions be made from the standpoint of far-reaching economic expediency, rather than transitory benefit. The system of state administration must be changed forthwith, making it more mobile, capable of quickly responding to contingencies, while simplifying decision-making procedures.

At the microlevel, the ineffectiveness of domestic investment is corroborated by the negative experience of a number of enterprises receiving foreign loans and failing to put them to any good use, with the state budget having to scrape up the funds to repay them. In a word, the Makiyivka Iron & Steel Integrated Works, Myrhorodkharchoprom (Myrhorod Food Industries), Ukrahropromservice (Ukrainian Agro-Industrial Service), Kryvorizhstal (Kryvy Rih Steel), AvtoZAZ, etc., turned out unprepared to effectively use such loan capital.

Enterprises must be prepared to use investment effectively through restructuring (adjustment). This is not a new problem, but it has often been reduced to a simple decomposition which only served to weaken output. Dicom’s experience with industrial enterprises shows a different orientation. The group of enterprises working with Dicom united into a corporation, Ukrprom, aimed at the quickest possible integration into the market economy. To do so, functions were delimited between the production and so-called market administration. The latter is responsible for procuring production orders.

Another important trend is the emphasis on renovation in the strongest, most market-secure production sectors. Thus, the joint stock company Silur (also cooperating with Dicom) was detached as an independent enterprise specializing in metal cord. Its stocks are quoted high and can yield enough to renovate other production lines. This trend is also expected to liven up the stock market, without which the economy will not be revived.

Alongside renovation, national economic policy should place major emphasis on privatization. Enterprises must be prepared for it at least cosmetically. In this manner we will have adequate initial goods to offer at privatization auctions and the bids will be higher accordingly.

Microlevel adjustments calls for adequate changes in the system of state administration which remains exceptionally awkward, failing to respond to feedback signals. Generally speaking, we must bridge the gap between the macro- and microlevel economic management before the economy collapses.

As for where investment will come from, it is another story that would take too much room in this issue. Ukraine is suffocating without productive capital. But unless we can prepare our enterprises for its effective usage, any loans will be Trojan horses. Such capital is available, both within and without. It is waiting for us to make the right decision (which is also a topic worth a separate article). For the time being it is clear that financial reform alone will not help much. Economic degradation is a process which has gone far enough. It demands an active economic policy. The current wait-and-see tactic (inflation will lower, sooner or later and investments will come pouring in, and there is IMF that will lend us a hand) must be discarded, the sooner the better.

 

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