Is Official Policy

Some have to share revenues with the rackets (government or criminal) and curse the shadow economy as those who steal from them. Others are speechless because only the shadow economy saves them from being strangled by taxes. In a word, the notion is multifaceted, and so are attitudes toward it

On January 21, Volodymyr Lanovy's Market Reform Center and the Friedrich Ebert Foundation, being aware of the long pause and fading public interest in the issue, decided to resume the dialogue, but considered it best to limit the discussion to one aspect, formulated as "The Shadow Economy and Official Policy: a Controversial Relationship." Let us follow their findings and try to ascertain whether the seeds of official policy and fruit of the shadow economy are different notions. Is the connection all that controversial?

Perhaps because the audience lacked what the organizers considered their key "opponents" - producers, politicians, and shadow market operators - the discussion was uneventful. True, among the participants there was at least a minimal representation of Peoples Deputies and Oleksandra Kuzhel representing the executive, yet none of them were willing to identify themselves with the nominal power. On the contrary, they either took an opposing stand or preferred to keep silent. Thus, we will not interpret their statements as representing official views (which is actually untrue). In our case they all claimed the role of independent experts looking on and offering comments regarding what they called a faulty policy and economy.

WHAT IS IT AND HOW MUCH?

As expected, there were practically no discrepancies in their statements, except probably whether it was right to qualify the shadow economy as something distinct from the official one. Some of the experts, represented by professional economists Lanovy, Pynzenyk, Lysytsky, and Kuzhel, preferred to distinguish between the two. They actively structured and categorized, singling out causes and consequences, rendering recommendations etc. Volodymyr Lanovy came up with a list of what he viewed as the shadow economy components: tax evasion in the official sector, illicit sector (e.g., smuggling, etc.), corruption (influence peddling), unregistered (family) business - which did not seem to surprise many in the audience. Viktor Pynzenyk reminded those present of something everyone seemed to know already: immediate consequences of the causes stated earlier by Mr. Lanovy, such as the absence of market business rules, constant government meddling with the economy [overregulation], the existing ignominious taxation system, and absence of property liabilities as per financial commitments.

Viktor Lysytsky, obviously in keeping with the principle of noblesse oblige (being the macroeconomic advisor to the National Bank Governor) tried to estimate how much wealth was owned by God knows who, yet was claimed primarily by the state and concentrated in the shadow economy. Everyone realized that the latter could not be estimated using any conventional techniques, so Mr. Lysytsky suggested first that shadow revenues be measured proceeding from the annual growth of automobiles, 200,000-300,000 and the 26,000 increment registered officially. In his words, maintaining five million privately owned cars officially registered at the start of 1998 would take about 40% of all statistically registered incomes of the populace. Inference: the shadow GDP is by no means inferior to the official one.

Other experts preferred to stick to purely financial indices like accounts payable and receivable, hard cash turnover ratio, etc. "The rate at which these indices are increasing is mind-boggling!" Mr. Lysytsky believes the reason is to be found in "business conditions going from bad to worse."

WHAT IS TO BE DONE?

Economist expert conclusions were as follows. Naturally, the first step to overcome the shadow economy should be by making changes in official policy. In other words, without removing the causes (e.g., unbearable taxation burden, absolute dominance of the bureaucracy, and halfway reform) one will never reach the end desired.

But suppose we paraphrase the main question: Who is behind all these changes? Why does official policy, despite its constant fluctuations, invariably produce this shadow sector? Why the shadow economy, allegedly a noose slipped round the neck of one and all, proves to grow wider and stronger with each passing year? The economists present offered no answers, so the politicians undertook the task.

Vyacheslav Chornovil (Rukh) declared there are no official or shadow economies in Ukraine. Just one economy evolving in accordance with the laws enacted by the powers that be. Hence, there is no "controversial connection" between the national policy and existing economy. People's Deputy Mykhailo Syrota enlarged on Mr. Chornovil's version somewhat, saying that the shadow economy is nothing but a process of private primary capital accumulation. He saw nothing disastrous about Ukraine having to live through this period of economic development, for this is what he believes to be the lot of all countries. Moreover, he believes that after the presidential elections "all those 5-7 industrial-financial groups already formed will be interested in becoming legalized," and the Verkhovna Rada, in response to their inquiries, will pass economic bills adequate to the principles of a real market economy. On the whole, Mr. Syrota's stand caused almost no objections. The proposed causation will work, sooner or later anyway. There is one objectionable aspect, however: predicting how long it will take.

There is something unsavory about primary capital accumulation: it never seems to be enough, so there is no guarantee that the next stage of this economic development will be reached. One of the reasons is that some of the financial-industrial groups have no political parties of their own, just as some of the existing parties do not have their own financial industrial groups/

Recently in Zerkalo nedeli Anatoly Halchynsky (the person most directly involved in economic policy over the past few years) tried to follow the politicians' suit analyzing not a duplex but single, albeit "virtual," Ukrainian economy. He also concedes that this model is a consciously made choice, and he also offers prescriptions for recovery: "In my opinion, several solutions to the problems should be considered a possibility. First, all those pseudoowners should be legitimized, and that an interest in certain enterprises should be allowed to be acquired by them or by certain other private persons (structures), specifically that interest which is now formally under public ownership, so they could hold it in trust for a certain period officially, with the vehicles of its subsequent pecuniary - maybe even preferential - privatization by these persons... I believe that this task should be carried out as a number one priority by the newly formed Agency for Public Corporate Rights Management. It is also necessary to make every effort to toughen property liability proceedings with regard to all those nontraditional entities, while simplifying business recovery reorganization procedures and bankruptcy proceedings. And, of course, the main thing is to speak openly about all these problems and convince our Parliament and society that money privatization is the next, most essential phase in the overall privatization process."

In other words, the agenda for the coming period is ready and in some respects it tallies with Mykhailo Syrota's predictions. Yet there are all those craving the next redistribution and those who do not need economic transparency? We welcome your scenarios. The best will be proposed for implementation.