It seems that during the past years of crude experimentation with reforming
Ukraine's economy just about everything has been said about emission. One
could hardly expect to find a single newspaper reader or television viewer
in Ukraine without his/her own view on the matter. Remarkably, these views
show a broad range of concepts, from sheer denial of emission as such to
impassioned reflections on its "inadequacy."
President Kuchma once again broached the subject of emission late last
week. A few days later, Valery Alioshyn, Verkhovna Rada Finance and Banking
Commission chairman, warned that there would be "further debates on emission
in Ukraine during confirmation of the budget." The reader might wonder:
Why do the debates continue? Is economic theory full of so many discrepancies?
How about learning the 1992-93 lesson of activating the printing machines?
Trite as they seem, these questions cannot be answered that easily. Moreover,
no one can be sure about these answers being satisfactory to whomever poses
them. However, this author will venture a few explanations.
THE ABCS OF EMISSION
John Maynard Keynes, author of an advanced theory to go down in history
as Keynesianism, holding that the level of national income and employment
both depend on consumption and investment spending, as compared to monetarism
that has come to be frowned upon in Ukraine, wrote that Vladimir Lenin
regarded undermining the monetary system as the best way to destroy capitalism.
He was absolutely right, Keynes said. There is no surer way to destroy
a given system than by undermining its monetary foundations. It is a process
triggering off all the destructive forces secreted in the economy laws,
a disease progressing in a manner no doctor can diagnose.
Keynes spoke of hyperinflation, no doubt, but all those secreted forces
provoking it are actually not all that enigmatic. Economics can offer straight
and precise answers to the question how and why such currency circulation
can be destroyed, using the following equation: M (money mass) multiplied
by V (velocity of circulation) equals P (price level) multiplied by Y (GDP
volume): MxV = PxY. Ukrainian politicians dwelling on emission more often
than not refer to the M value, meaning an addition to the monetary mass
using the money printing presses, increasing their velocity (in the postcrisis
period this index jumped from 7.9 to 10.3 times). On certain less frequent
occasions they imply other operations (more on this further on). And they
hope that in the second part of the equation the GDP value will show an
increment and that the prices will register "insignificant growth." Wishful
thinking, of course. In the post-Soviet Ukrainian realities the M value
has always been on an upward curve, as has the P one, but never GDP. Remarkably,
this phenomenon contradicts the classical theory, despite the fact that
structural, fiscal (taxation), and budget processes prove the crucial factor
in raising Y output. The fact remains that capitalist production usually
responds to increased monetary supply by not only inflation but also increased
output. And Keynesianism provides for just such approach; among other things,
it helps determine the maximum value of monetary supply using government
investment programs, which is supposed to finally result in an impetus
to national economic growth.
Another interesting peculiarity of Ukrainian economics is that, in view
of the fact that the connection between emission and GDP growth has been
hushed up recently, shifting the subject to what is best described as "measures
to prevent further inflationary jumps," the only logical question is, Why
bother resorting to such an emission in the first place? Those at the helm
say that we need it so we can raise the monetarization index. Is this not
the ends justifying the means? Or are we just being lied to again?
UNTRADITIONAL APPROACH TO EMISSION
The economic crisis affecting Russia and Ukraine and the obvious nonconformity
of their economies to market standards can make anyone question the validity
of modern economic and social theories being used as recipes to remedy
the situation in these countries. In fact, those in power need these theories
the way we used to be provided imported goods under the Soviets: to have
something to liven up the table with when receiving foreign guests. The
numerous political economic doctrines mushrooming over the past several
years leave little doubt that printing money within the boundaries of the
thoroughly corrupt Commonwealth of Independent States would not serve the
targets which, when set by any civilized Western economy, help translate
into life Keynes's formula. The following are their basic arguments.
Post-Soviet economic management can be regarded as market-oriented only
in the narrow space of legal relationships with world markets, while inside
any given former Soviet republic (and in a number of international aspects)
this management can be called a market one only in terms of the administrative
market. It is possible that the need to use a showcase to attract foreign
visitors could allow this money printing process to be predictable and
controllable to some extent. Otherwise no revenues from this process would
make the game worthwhile. In other words, emission is not a matter of theory
in Ukraine. Here is why.
Corrupt bureaucracy, theft and embezzlement by businessmen and private
citizens, barter deals, and laundered money are by no means phenomena to
be regarded as chance occurrences accompanying the assertion of democracy
and the market economy; these are systemic characteristics peculiar to
the Russian administrative market and to that of Ukraine (which is very
similar to that of its big brother). In both cases the so-called financial
markets use money squeezed out by the newly rich from enterprises they
control along with various risky foreign loans. Here the debt market is
the real sector of the economy. The state services this market, accumulating
debts, reallocating the liabilities, trying to control their sale. In this
type of economy, debts emerge as financial and administrative assets that
are freely traded by market operators, finally to produce the bills to
be footed by the state. The latter shows its debts and cries on the international
financial community's shoulder, begging for loans to pay off its liabilities.
Such debts reflect barter deals made among producers. Commodity credits
being traded by enterprises and organizations are accounted as cross liabilities
which the state can redeem when given a chance. Such liabilities as can
be converted into cash constitute the basis of dirty money. Many of the
payments made among Russian business entities are carried out using precisely
this dirty money in terms of foreign exchange transactions. The debt market,
just like that of loans in a natural market economy, produces an interdependence
of economic and social entities, securing their economic predictability.
The amount of debt thus accumulated determines the debtor's administrative
and political status; the higher the debt, the better the status. Foreign
borrowing and portfolio investments have turned into the legitimate source
sustaining the financial market. Illicit exports and imports of goods and
cash do the same with regard to the black market.
In a word, this country discovered itself and the surrounding world
as a source of enrichment; its residents are inventing the most subtle
ways to build their fortunes, ranging from sham exports and imports to
pretending to be below the poverty line and whining for a "supplementary
monetary emission." The choice of such ways and means depends on one's
position on the political ladder. Well, this is just an assumption, but
it is an established fact that when and wherever a Ukrainian bureaucrat
can get hold of money, this money is sure to be officially allocated in
return for envelopes containing other money. This is why emission is now
invariably associated with corruption.
POINT OF VIEW
Valery LYTVYTSKY, Presidential Aide on the Economy:
Monetary mass is a value dependent on two variables: (a) the monetary
basis which is expanded by emission and (b) the ratio of monetary turnover
- in other words, the degree to which we can trust our national currency.
If this trust is good, people do not try to get rid of what they have,
hurrying to foreign currency exchange booths or spending it to buy goods.
Given certain conditions, the banks, acting via the monetary multiplier,
saturate the economy with money. The level of such saturation is also known
as the monetarization coefficient. It points to the extent to which the
GDP is covered by money. Our task is to increase this monetary mass, with
the emphasis not on the first constituent variable, and not so much on
the first one (because the risks involved are too high; any emission may
cause an increase in the inflation rate and a large emission will cause
hyperinflation). At the same time we are not in a position to avoid working
with this first variable, not now. For as long as we are faced with a budget
deficit, we will have to live with the risk of inflation; we will have
inflation, regardless of how much we cover this deficit, whether by a direct
National Bank emission (with NBU directly crediting the budget deficit)
or by doing so indirectly, purchasing securities. In the latter case the
inflationary effect would be less, but it would be there still. On the
other hand, we cannot underestimate inflation and its hazardous effect,
but nor should we blame inflation for all our troubles. Thus, our task
is to increase the monetary mass without unacceptable inflationary consequences
by focusing not on monetary emission but on structural, tax, and budget
reform, on all that which can serve to restore people's confidence in the
hryvnia and simultaneously help raise the monetarization coefficient.
Emission as such does not influence the hryvnia exchange rate or the consumer
market. Hence, if the state chooses this way to increase the monetary mass
(due to a variety of circumstances), then the state must see to it that
the so-called depreciation effects are provided for. If this emission is
used to finance the existing budget deficit, basically caused by consumption,
the price effect will be negative. If we mean to use emission resources
for the benefit of certain entities [projects] we must exert serious efforts
to make any loans granted us yield tangible results. This is an extremely
complex task. Thus no one can be sure of avoiding negative consequences.
In other words, we must not go off the deep end. There is yet another aspect.
Parallel to working on projects of such a controlled emission, every effort
must be made to develop vehicles capable of combating corruption.







