“Homework” for officials

It is hard to underestimate the role of domestic small business, which in record terms united and came to the Maidan to defend their vision of the Tax Code. One can argue about how successful they were, but one positive thing is clear — entrepreneurs have began to assume their proper social and political role. In other words, Ukrainian small entrepreneurs entered upon the path of liberalism. All the world’s developed economies have trodden down this path. But what hurdles does domestic business face? Which legislative initiatives will help small and medium businesses overcome those barriers on the way toward a liberal economy? The Day asked these questions and more to the head of the Parliamentary Committee for Industrial and Regulatory Policy and Entrepreneurship Natalia KOROLEVSKA.

You attended the Davos Forum, where big business traditionally looks for potential investors. What conclusions should Ukraine come to?

“One of the forum’s main messages is that the economic system of the 20th century cannot handle the risks of the 21st century. Its management mechanisms are outdated, since they simply transfer the risks from one part of society on another (usually the most sensitive ones. During the forum they also said that one should prevent the transformation of economic crisis into a social one. Traditional management decisions and tendencies presuppose solving many economic issues at the expense of the future generations. These tendencies, in particular, are topical for Ukraine as well: they want to shift the risks connected with inflation processes, unemployment and poverty to the poorest layers of the population. Such tendencies should be prevented, and the entire civilized world agreed with this at the forum.

“The forum also confirmed that Ukraine remains attractive for investors from European and many other countries of the world. During the Ukrainian lunch in Davos investors pointed out new competitive advantages of our country. In particular, establishing the freest economy in Europe can become the major competitive advantage of Ukraine in the future. That is investors believe that it is possible to create more attractive conditions for doing business in Ukraine than in European countries, which have to observe certain obligations within the EU. But corruption, the absence of guarantees for the property rights, and immense bureaucracy are the main obstacles on the way to free economy.

“At present mostly speculative investments come to us, while Ukraine needs ‘hard’ investments which can create new production [facilities] and modernize the available ones. Such investors look at Ukraine with interest but don’t hurry to invest money. They ceased to believe in promises and wait for us to do our homework, which Ukraine unfortunately doesn’t do. The post-crisis generation of investors is rather cynical and cautious, and doesn’t make emotional decisions on investments in growing markets, as it was before the crisis. Investors expect clear proposals and guarantees from Ukraine. Of course, everyone knows about our main problem, the ubiquitous corruption.”

Which steps should be taken to make investors believe in Ukraine?

“Economic freedom is necessary for legal business to be profitable here. Today we have high taxes, huge corruption, an extremely complicated licensing system, and the procedure of opening and closing businesses is too expensive even for rich citizens. It is necessary to change all this as soon as possible relying on the experience of leading countries in terms of economic liberalization.

“For example, the US is now lowering taxes, liquidating privileges for big American companies and freezing federal expenses for five years. In addition, the government needs to take heed of one of the statements made at the Davos forum, which says that Europe needs an aggressive transcontinental impetus for entrepreneurial initiative. In the future Europe is going to bet on economically active people, business diversification and maximum development of small and medium businesses. And Ukraine still didn’t get this because it wants the state to have leverage over businesses. At present, only the development of big business is stimulated.

“In addition, Ukraine must create a stimulus-reaction for legalizing business, since 50 percent of economy is gray. The remaining 50 percent of legal enterprises will not be able to provide complete social guarantees for the population. No economy could.”

What about the procedure of re-registering physical entities of entrepreneurs who work based on the simplified taxation system?

“Re-registration started in January, so there are no statistics. However, according to entrepreneurs, it is known that in some regions this process was blocked by tax bodies because the Tax Code doesn’t contain a mechanism for the functioning of the simplified system. Today everyone waits for new conditions and rules of the game.”

If the parliament doesn’t support the version of the bill on the simplified system suggested by business, what reaction should be expected?

“I think this reaction will be very negative.”

“Tax Maidan” again?

“I wish the Maidan didn’t become an instrument for blackmailing the government based on the principle ‘either our way, or no way.’ First, there should be dialog, arguments and a search for compromise. Ukraine must elaborate a new economic development model, which would correspond to the reality of the 21st century. If 78 percent live below the poverty line (according to UN methodology), over 45 percent are not confident in their permanent job, and at this the birth rate in the country decreases: the economy has huge problems that require extraordinary measures.”

We need a “smart” economy model that can address all the problems in one go. Does it exist?

“Unfortunately, there is no magic wand in this case. But the country and the budget should refuse as soon as possible from being dependent on metallurgy and chemical industry. One cannot develop the economy and build a social model relying mainly on two fields which, actually, depend on the state of foreign markets. The crisis proved the absurdity of this development model. The era of the domination of metallurgy and chemical industry in Ukraine should be over. The future is in innovations, the agrarian sector, small and medium businesses. Ukrainians are traditionally venturesome people. But at present, the share of small and medium businesses constitutes only 16 percent of the GDP, while it should constitute 60 percent of the GDP.

“On the whole, as of the end of last year the number of physical entities of entrepreneurs working based on the simplified taxation system constituted 3.116 million people. During the year 161,000 shut down. A detailed analysis shows that out of three entrepreneurs who opened last year, two shut down. Business doesn’t trust the government. The reason for this situation is that the government doesn’t understand the role of small and medium businesses in the economy.”

Why do you think that in almost 20 years of independence small and medium businesses never became stronger, despite ardent promises of prime ministers from different political forces to assist in its development?

“Some lacked political will, others knowledge, and sometimes law enforcement bodies prevail, that cannibalize the entrepreneurs. The government still doesn’t understand that it is precisely small and medium businesses that should form the lion’s share of the budget revenue. In Europe the state maximally simplifies all procedures and rules for doing business. Yet we still didn’t reduce the number of controlling bodies (as promised last year) because the ministries blocked this issue. All these controlling bodies, hundreds of certificates issued by ministries and sub-departments are like ‘leeches’ which bite into the economy and paralyze the work on improving the quality of people’s lives.”

In the past at least the State Committee for Entrepreneurship helped to repulse these “leeches” and defend the interests of business. What is the present situation: is this body liquidated and what will come instead?

“The State Committee for Entrepreneurship is in the process of liquidation. It is transformed into a separate department in the Ministry of Economy. This status completely levels its initial mission. The department will not be able to veto even disadvantageous regulations, being a part of the body issuing them. Therefore I am against the liquidation of the State Committee for Entrepreneurship and addressed the president of Ukraine with the respective proposition.

“In my opinion, an independent body with a separate state statute should be set up instead, it should have more power to veto and regulate all acts affecting business vivacity. At present the committee examines the experience of many countries, in particular, Poland, and is preparing a bill on establishing the Entrepreneurship Agency.”

Which additional documents have been prepared in support of small and medium businesses?

“The major document is the ‘constitution’ of the small business — the bill on the status of small and medium businesses, which will determine the status and the role of economically active citizens in the development of the economy and will guarantee their rights.

“We also plan further deregulation. We should maximally decrease the number of activities subject to state control and licensing. One more important law is about markets, which will help keep them out of shadow.”

After Ukraine’s president signed the Tax Code, you spoke about amending the document. Is there a list of tax amendments?

“There are three important moments. First, amendments to the suggested mechanism of automatic VAT return. What is offered now is a big deceit, since according to the criteria elaborated by the government, only several Ukrainian and European transnational companies will get the automatic return. The situation will get worse for the rest. Business and investors disagree with this version. Second, decreasing the powers of controlling bodies, which currently abuse them. And third, a simplified taxation system, because from April 2011 (according to the Code) legal entities will not be able to refer their expenses for the work with physical entities of entrepreneurs working based on the simplified taxation system to their gross expenses. Presently, about 300,000 of small and medium physical entities of entrepreneurs work based on this principle. If this norm is not revised, entrepreneurs will go bankrupt and will become jobless.”

Perhaps the pace of economic transformations in Ukraine is low because business still didn’t fully realize their role in this process?

“In each country business corresponds to what the state allows it to be. Today businessmen waste about 70 percent of their time on controllers and officials. Because of this lack of time business still didn’t completely assess its mission and role in the formation of a new economic model for the state. However, the consolidation around this issue already began in the economic milieu.

“Let’s remember business in the early 2000s: it could be characterized as kneeling. But after being tested by the crisis and after feeling economic freedom the face of Ukrainian entrepreneurship changed. Business already cannot and doesn’t want to kneel before the state. The recent events with the Tax Code prove this. Ukrainian business is ready to participate in building a new economy. In the entire country informal circles and social movements are formed where business thinks progressively and in stately manner, which our officials could learn from them.

“What is the difference between business and officials today? Entrepreneurs used to make money, not steal it. And officials will never understand businessmen because they never had so much freedom or so much responsibility. The future of Ukraine is in an economically active civic society.”

Finally, let’s shift from economy to politics. Where do you see yourself in the future: in the opposition, in the Cabinet of Ministers, or as the leader of your own political project?

“In the near future I see myself in the committee for industrial policy. I will do everything I can to consolidate people of action, patriots of the Ukrainian economy who invest money and effort in the development of our country; those who create jobs, pay taxes and take an active part in the development of Ukraine of the 21st century. I will support such a social initiative by all means.”