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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

Kuchma’s Reforms Steer Clear of the Financial Market

13 November, 2012 - 00:00

It has long been observed that, with the political regime getting shakier and faced with problems it cannot solve, greater emphasis is placed on the propaganda machine to convince the man in the street that all the top bureaucrats are absolutely indispensable.

Starting last fall, the Ukrainian public has been constantly threatened with impending financial crisis. The official public relations network has succeeded in convincing most Ukrainian citizens that individual incompetent government clerks, the leftist Parliament, and even “external enemies” were to blame. Meanwhile, even a superficial analysis of the Cabinet’s and President’s performance reveals their being directly responsible for the failure of economic reforms.

German consultants working under contract with the Cabinet composed a memorandum in early April which reads that Ukraine is gripped by a deep financial crisis, specifying that the reasons should not be referred to what was happening in Asia or to previous years’ political stabilization measures, but to the actual stoppage of structural reforms and the attendant domestic and foreign investors’ distrust of the promised national currency’s stability and favorable economic policy. As a result, this crisis can no longer be overcome using financial and technical means only.

Naturally, both the Premier and Chief Executive were shocked to read this. The German experts had actually questioned the existing regime’s ability to prevent Ukraine’s bankruptcy. The national budget was in a vicious circle of high deficit, increasing foreign debt service burden, and steadily reducing choice of government priority disbursements. Regrettably, all of Ukraine’s creditors are well aware that such a situation cannot last long, and they want exorbitant loan interest, something Ukraine simply cannot afford. In other words, once these creditors get really worried, Ukraine will go bankrupt, period.

Under the circumstances, the most disheartening fact is not the creditors’ suspiciousness but the fact that Ukraine has been “hooked” by credits the way a junkie gets on the needle. Somehow the problem of paying and servicing domestic and foreign debts has turned into a focal political economic issue. The reader will wonder, of course, who is behind this devilish scheme. The program, On the Road of Radical Economic Reforms, adopted in 1994, habitually associated with post-Soviet transformations in this country, has no clauses envisioning such a result. And nor would one find anything pointing to the current situation in a single Cabinet program or Verkhovna Rada resolution. The obvious assumption is that someone is carrying out a political-economic course totally different from that set by the President. But is this really so?

Ex-Minister of the Economy Viktor Suslov told The Day that the country started moving toward debtor’s prison in 1997 when the Cabinet increased the country’s indebtedness three times over. This, in turn, was the only possible response to the IMF’s and World Bank’s refusal of long-term credits. Let us recall that this negative response came after the drawn-out budget enactment and incompetently prepared “tax revolution.”

Mr. Suslov’s version could be accepted if the financial crisis was really the result of incompetent tax policy. Unfortunately, the situation is much more aggravated than meets the eye, and the debt nose-dive should be tracked to 1994 when the President came out with his radical economic reform course and when the Cabinet signed the memorandum with IMF. In fact, Mr. Kuchma appeared with an oral version of the memorandum which, as a kind of credit agreement, provided for liberal market reforms. The donor’s concept was that consistent reforms would help economic growth and eventually repay the debts. The Ukrainian authorities seem to have had something different in mind, barely finding it in themselves to carry out even half-way reforms.

Experts agree that the main reason behind all the impractical economic revival projects being constantly proclaimed starting in 1992 is that the reforms tried in the industrial and agrarian sectors have always run against those in the financial domain. While fiscal and foreign economic changes were expressly market-oriented, production was geared to restrict, rather than adjust to the market. In other words, the President has always actually steered clear of the financial market, inasmuch as transformations there did not affect the key interests of the industrial-financial groups which brought Mr. Kuchma his presidency.

How can one seriously regard an economic policy based on over-regulation, the government’s constant interference in all business entities’ endeavors, as a market-oriented one? Using the motto of the state’s regulatory role, the President actually incited bureaucrats to indulge in “business” at all levels and without any scruples, organizing petrochemical and fertilizer supplies to the countryside, arranging the barter deals now dominating all Ukrainian industries, trade in grain, sugar, and gas, forcing enterprises to settle their debts among themselves, etc. An impartial observer would hardly call this government market-reform-oriented and its Chief Executive a reform-inspiring politician.

Ukraine’s economic situation is going from bad to worse. This spring the President had to remind himself of his previous promises of structural reforms. A series of presidential edicts were enacted in late April and early May. Whether or not these documents will be effective is now anyone’s guess. Public response shows that the President has absolutely no support in society. Businessmen complain of the tax collectors’ arbitrariness, adding that the tax burden is getting heavier. The party in power and its minions in the business sphere are busy defending their privileges and securing further subsidies. Agribusiness is on the verge of total collapse (meaning that all those used to pumping funds from it will also suffer). The populace can hardly be expected to support the current regime, expecting another round of electricity bill and consumer price increases (including tobacco, vodka, and gasoline costs). Even worse, not a single presidential edict so much as hints at any of those structural reforms originally accepted as the only condition of overcoming this financial crisis.

In a word, Ukraine is not South Korea and the Ukrainian populace will not part with their jewelry (if any) to help the state pay its foreign debt. Not because Ukrainians are less patriotic than Koreans, but because the President is afraid to allow anyone to dispose of what he sincerely believes to be his own hard-earned assets.

Photo by Valery Miloserdov, The Day:

Kuchma’s reforms: If you want to survive, learn how to swim

 

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