Opting for Outdated Technologies?

There are conflicting assessments of the current economic situation. Some authors are bubbling with optimism, taking into account high economic growth rates. Others, pointing at the obvious contradictions of development and drawing the experience of Central European and Baltic countries, conclude that the progress is unstable and short-lived. In our opinion, whether there is or not growth is not a question to discuss. What is really important is to identify the nature of this growth, see how strong its foundations are, and what is to be done to ensure stable economic and social development.

Historical experience shows that statistical growth of labor efficiency: in mechanical engineering, can be accompanied with a high or even increased materials-to-output ratio. Unfortunately, this phenomenon is typical of today’s Ukraine. In is common knowledge that Ukraine consumes almost twice as much gas as France does, while the latter’s industrial output is almost five times as large as that of Ukraine. This raises the question of whether an economy like this is efficient.

High growth rates in mechanical engineering (over 15% last year) is in general a very crucial factor that determines an economy’s technological level. Yet, the current rates should not be overestimated. While mechanical engineering accounted for more than two-thirds of the total industrial output before the crisis, now its share is only 11.4%. Therefore, this sector is unable to fundamentally influence the Ukrainian economy’s technological level. Moreover, the science and technology level of mechanical engineering does not allow us to claim that it could have a dramatic impact on the economy. For example, numerically controlled machine tools and high — and very-high-precision machines accounted for 4.8% and 6.6%, respectively, of Ukraine’s total output of machine tools in 2002. Therefore, this structure of machine tool manufacturing is unable to boost the retooling of the nation’s industry.

Analysts usually attach great importance to such a factor as significant growth of investment demand which they claim helps update fixed assets. Indeed, investments is an indispensable condition for innovations. Regrettably, the common perception, in both theory and practice, is that investments automatically trigger innovative processes. Analyses show that investments and innovations are really interconnected and interactive, but effect will be achieved only if the structure of investments not only corresponds to that of the economy but also ensures the development of higher technologies. This is why the intentions to implement an “investment-related model” in this country largely remain at the level of chit-chat. The more so that this kind of development can, as will be shown below, even worsen the economic structure.

Taking a civilized approach, modern economic science presumes that technological, i.e., manufacturing, process is the decisive factor in economic and societal development. Investments should promote these processes. In reality, our structure of investments is fundamentally distorted, which shows that they are not effective enough to meet our economic needs. According to the Ukrainian Institute of Economic Forecasts, enterprises of the third, by no means the most up-to-date, technological level (building materials industry; ferrous metallurgy; shipbuilding; metalworking, woodworking, light, and pulp-and-paper industries) account for 58% of our total output, with their share in investments being 75%. Conversely, enterprises of the fourth, more advanced, technological level produce 38% of output, with the investment share being 20% (Statistical Yearbook of Ukraine, 2000). This forms an ever worsening economic structure which facilitates the development of low-technology businesses and slows down that of hi- tech ones. The situation looks still gloomier if we take the total investments’ share used for updating industrial equipment and technologies: third-level businesses account for 83% of the investments and fourth-level ones for a mere 10%.

Both the science and the practice of the developed countries shows that an effective structure of investments should promote fast development of highest-technology businesses and industries. Of course, technological growth of third-level businesses could also contribute to this. For instance, when being reconstructed in a big way, they could channel a part of investments into higher-level businesses, i.e., turn the quantitative growth to qualitative.

What particularly causes a distorted structure of investment is low cost-effectiveness and profitability of businesses, a characteristic feature of the Ukrainian economy. The higher the profit, the more possibilities entrepreneurs and the state have to convert the main part of the former into investments and, hence, into new industrial capital. Industrial cost-effectiveness and profits continued to decline even after a dramatic fall in 2000. While the cost-effectiveness of industrial enterprises, i.e., the profit/GDP ratio, was 9.1% in 1999, it was 4.8% in 2000, 3.7% in 2001, and 2.6% in 2002. So the enterprises’ own capital, which was used, in the shape of investments, to increase the fixed assets, tended to decrease. Reducing investment in turn triggers negative processes in innovative activity. The share of innovative businesses also tends to shrink. While the industrial enterprises that implemented new technological processes accounted for 27% in 1999 and even 27.9% in 2000, their share dropped to 23.5% in 2002. In particular, the share of businesses implementing low-waste, resource- saving and waste-free technologies fell from 11.8% in 1999 to 10% in 2002. Also declining is the number of businesses that have diversified their output, including that of consumer goods. On the other hand, the percentage of enterprises that had undergone overall mechanization and automation rose from 12.1% in 1999 to 13.9% in 2002. But, unfortunately, the share of innovative businesses has dropped in mechanical engineering, a sector that is supposed to be the source of updated machinery and technologies and the leader of innovations.

What aggravates the situation is disproportionate accumulation and consumption. This is especially clear in comparison with some of the developed countries. The experience of Southeast Asian countries shows that the gross accumulation of fixed assets should account for over 30% or even 35% of GDP. In Ukraine, though, this indicator (in % of GDP) showed the following trend: 19.6 in 1998, 19.3 in 1999, 19.7 in 2000, 19.7 in 2001, and 20.2 in 2002. This negligible growth cannot change the impression that this country is not only short of accumulated capital but is also marking time. Moreover, public consumption is still on quite a large scale. While in the developed countries, which show a high accumulation rate, public consumption usually declines and does not exceed 20-25% of GDP, in this country the revenues of the state budget, the Pension Fund, and public social insurance funds made up 38.8% of GDP in 2002. In its turn, large-scale public consumption inevitably entails a reduction of public investments. While the developed countries keep public investments at 3%, we have to reduce them to 1% of GDP. Quite clearly, this disproportion means that a part of the accumulated capital is being eaten away, which fundamentally impairs the possibilities of economic growth.

An optimum ratio between output, accumulation and consumption is not a purely academic task. Fulfilling this task will bring about radical changes in the life and work of the entire nation. It is very important that government and economic executives as well as industrial managers should, instead of becoming self-comforting and groundless optimists, concentrate their activities on bringing about a genuine, qualitatively new and effective, innovative type of development.