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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

Is Official Policy

2 February, 1999 - 00:00

 A Concentrated Expression of the Shadow Economy?

By Iryna KLYMENKO,The Day
What associations arise when you hear the words, shadow economy? Obviously
different things for different people, depending primarily on how one exists
within its context.

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.

 

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