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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

“New Accents” Will Not Save Ukraine Only a macroeconomic policy new in principle

13 November, 2012 - 00:00

The article by presidential aide and Professor Anatoly Halchynsky “New Accents of Macroeconomic Policy” (The Day No.18, June 9) announces new accents of macroeconomic policy, which, he asserts, would call forth economic growth within the confines of the present course of reforms.

According to Halchynsky, the scheme “low inflation — production growth did not work but caused a further manufacturing decline (3.2%) in 1997 primarily due to a lack of deep reforms in the financial sphere. The author thinks the actions which have suggested by the President are needed.

The purpose of my article is to prove that the steps suggested are essential but not sufficient for Ukraine to overcome its crisis.

Halchynsky’s new accents in macroeconomic policy are only tactical steps, which have nothing to do with a strategy of economic development. Some of them cannot be launched within the current reform policy. According to economic theory, with monetarist (the author means tight money - Eds.) policies inflation declines but is accompanied by a fall in production. Which means a monetarist economic policy cannot secure economic growth; it cannot even secure economic stabilization.

The information supplied by Halchynsky’s article shows that after successfully carrying out the shock therapy program developed by IMF and World Bank experts, Ukraine wound up on the verge of national catastrophe.

Society began to degenerate so much that the power elite stopped reacting and taking into account economic theory. The mass media report only on monetary values.

Our main weak point is that neither the Presidential Administration nor government understand that Ukraine is suffering not financial crisis but a crisis of the system of administration.

We have rich soil, natural resources, industry, skilled workers, an educational system, and science, but all that has been paralyzed due to the system of leadership. This systemic crisis has led to the fact that Ukraine has almost completely (92%) lost its domestic market. The paradox is the Ministry of Foreign Economic Ties and Trade does not protect the Ukrainian market, producer, and help Ukrainian producers to penetrate foreign markets; it is actually helping foreign firms to unilaterally swallow up the Ukrainian market.

The slight manufacturing increase is taking place due to attracted foreign loans with normal interest rates (not over 12%). Simultaneously, the profits from manufacturing go abroad instead of coming back as new loans to boost our manufacturing.

According to the Institute of Economics in the Ukrainian National Academy of Sciences, Ukraine’s cash outflow is three times as much as all the loans, investments and humanitarian aid it receives, which means our banking system finances the West but not Ukraine. This is why it is essential to radically change the Ukrainian banking system along German lines.

This change has also flowed from the fact that the present banking system fosters the development of the shadow economy, organized economic crime, and corruption, which means that without radical changes in the banking system we will not be able to solve a single problem listed by Halchynsky: we will not be able to attain economic growth or broaden the tax base, thus reducing tax pressure and giving a boost to the manufacturing process.

The most important step should be rejecting the policy of liberalization in foreign economic relations and developing our own strategy of protectionism.

But all these measures will lead to nothing until the purchasing power of the Ukrainian population increases. According to my calculations, astute government intervention in the economy, changes in the banking system, and intelligent protectionism would make it possible to double or even triple wages and salaries.

I can summarize all this in one phrase: Ukraine should reject monetarist economic policy as a basis and, like developed countries, start using a number of economic theories together: the Ukrainian innovation theory of Mykhailo Tuhan-Baranovsky, Keynes, monetarism, and other rational suggestions.

Clumsy and inappropriately timed state borrowing, conducted by the Ministry of Finance on the bond market, which was meant to soften the financial crisis, actually exacerbated it instead and resulted in a reduction in long-term loans from commercial banks.

Current macroeconomic policy ignores some of the recommendations of economic theory. The money mass has to be adequate for the development of manufacturing and making payments. In the USA the money mass fluctuated between 40% and 100%. Today we have 14%, which results in the fastest turnover rate in Europe, payments crisis, barter operations in large number, and thus the ruin of domestic manufacturing. People in the country are also growing poorer. If we freeze wages, then we should freeze prices also, considering the Israeli, Argentinean, and a number of other countries’ experience. But what we are doing is to freeze wages and liberalize prices. Under protectionist policies a targeted emission of money for new technologies and manufacture would not cause inflation. The growth of debt would lead to a rise in tax rates, which means taxes can be cut only if we reject the present forms of cooperation with international financial organizations, because fulfilling their conditions leads to Ukraine’s financial entrapment. The overall budget deficit is equal to the primary deficit plus interest. President Kuchma demands Parliament cut the budget deficit in 1999 to 1-1.5%, when foreign debt interest will constitute 1.5% of GDP, excluding outlays (payoff) on the bond market. This presidential suggestion, made on the IMF’s recommendation, obviously has no economic basis.

In other words, Ukraine can be saved and national catastrophe adverted not by making new accents in the present reform policy, but in changing the policy itself: converting from the classical capitalist model (free market) to the model used by developed countries, a mixed economy.

 

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