Government suggests fixing limits of compromise with parliament and seeks taxpayers’ trust

HOW WILL WE LIVE?

Oleksandr SHLAPAK, Minister for the Economy and European Integration:

“There will be no results unless the public supports the steps and programs which we think should be taken and implemented before the end of this and throughout next year. We are going to conduct a public dialogue with our citizens to clarify our intentions. Today, the draft Action Conceptual Program, 2002 budget, and monetary policy basics are, I hope, awaiting a fruitful parliamentary discussion. Later in November the government will consider its action program and submit it for Verkhovna Rada approval. But this government’s first legislative initiative was a comprehensive program to eliminate poverty. It encompasses all this country’s problems in terms of figures. Working out all its program documents, the government sets a double goal: to do its utmost to sustain economic growth and the pace of economic reforms and at the same time to carry out all the reforms against the backdrop of a firm social policy. In brief, it intends to tap to the maximum the potential of every able-bodied person and simultaneously offer transparent and fair protection to the poorest strata.”

“Could you tell us about the government’s forecasts in respect to the main economic indicators that will directly affect the population’s living standards?”

“Have you noticed how quickly we get used to good things? We had had an eight- month 10.8% GDP growth, a good result indeed. Then, no sooner had it dropped to 9.3% in nine months that we almost began talking about stagnation. But the truth is that last year’s harvest was completed in August and September, while this year almost all the work was over a month earlier. This also enabled us to finish the autumn field work earlier than usual. So let’s not scare people by talking about the beginning of a downturn. Over the past nine months our industrial output has shown substantial growth of 16.6% instead of the projected 10%. Agricultural output has risen by 8.5% instead of 6%. Inflation has shown a rate of 3.7% instead of the expected 12.3%. In my opinion, the economy of Ukraine has displayed far more vigorous growth than we forecast. This happened for two major reasons: the government and the National Bank have achieved a stable macroeconomic situation and intervened as little as possible in economic activities. I believe this is the greatest reserve, which affords new opportunities for further growth. By the end of this year, GDP is supposed to grow by 7.3% (we foresaw well in advance some decline in business activity for this period) and industrial output by 10%. The national currency rate is 5.4 hryvnias to the dollar. Of course, these indicators were also influenced by the international events we all know and antidumping actions against Ukrainian producers. But consider next year’s macroeconomic indicators envisaged in the program of social and economic development: 6% GDP growth, UAH 5.6/$1 exchange rate, and 9.8% inflation (December against December). On the other hand, European Union and IMF experts forecast a general slowdown in the world economy. Accordingly, there are also reasons why we should be making a more cautious forecast for next year.”

EXPORTERS AND IMPORTERS

Valery HEYETS, Director, Institute of Economic Forecasting, Ukrainian National Academy of Sciences:

“I can say that we are also forecasting economic growth in this country. I can also accept the indicators the minister was talking about. But there also are other threats to economic growth in addition to what he said. We have noticed a quite rapid growth of imports in the past few months, which, naturally, causes us worry because this hampers the satisfaction of domestic demand by domestically produced goods and aggravates the problem of protecting and further expanding the domestic market. It also raises the problem of foreign exchange rate policy, but, as far as I know, the National Bank has announced for the first time that it is going to keep up a real, rather than nominal (as hitherto) rate. What causes most concern today is whether the projected further economic growth will be qualitative. It is no secret that the current growth has been achieved on an outdated technical basis inherited from the USSR, and the latest research says we are still investing in this outdated basis. This can lower the qualitative level of growth and thus lead to losses in terms of competitiveness. So the question is really to what extent we will be able, under these circumstances, to implement modern innovation projects which would help to basically restructure the economy. Next year will be special not so much in the rate of growth as in the circumstances conducive to further progress. There is some concern about this, for it is not yet known what kind of influence — retarding or stimulating — the world situation will exert on Ukraine.”

“When participating in economic debates, ordinary taxpayers, although pleased with GDP growth in our country, still say they don’t feel its impact. This supplies skeptics with fresh arguments. They ask if there will be any growth in the sectors responsible for the population’s living standards, they want to know why Ukraine has again adopted a deficit budget and whether it is fair. Or is it running a deficit exclusively on the IMF’s demand?”

Oleksandr SHLAPAK:

“No doubt, our government wants people to see a better life behind the figures we supply. Apparently, they do not yet have this kind of feeling. Still, I would like to illustrate that this year differs from last. In 2000 we observed a 29% nominal growth of people’s incomes. With inflation at 25.8%, nobody felt the increase of real incomes because they were just eaten up by inflation. But this year, with 3.7% inflation in nine months and increased average salaries for teachers, has seen a noteworthy growth of income at least in this group of the population. There was also some growth in other groups. This resulted in an overall 7% growth of real incomes this year. Not much, but what matters is that wages and salaries are now the main source of this. Of course, we cannot hope for any breathtaking great leaps forward. By the end of the year, the growth of real incomes will be around 6.5%. And there is sound logic behind this, not only our desire to make life so much easier. From now on, teachers are almost the main investors in our economy. For they cannot send their funds abroad. They spend them, promoting accelerated money circulation, or take them to a bank, thereby strengthening the economy’s credit resources. In the nine months of this year our commercial banks saw a 20% increment of resources obtained at the expense of public deposits.

“As to the current budget, it differs from last year’s in having been calculated in a different way. In all the previous budgets, privatization revenues were considered part of government revenues. This gave us a small surplus after nine months. But no one else in the world does this. The IMF has always insisted that we remove these funds from revenue calculations, so we could see what the economy is really earning and what the state is spending, because state property sometimes must not be sold. This is why we have honestly projected a 1.7% GDP deficit instead of drafting a deficit-free budget, while privatization incomes will be one of the sources (the other being domestic and foreign borrowing) in 2002 to cover and then finally eliminate this deficit.”

“Is the government going to put pressure on the National Bank or resist the desire to devalue the hryvnia in order to help exporters?”

Oleksandr SHLAPAK:

“Mr. Heyets wants to answer this one.”

Valery HEYETS:

“The National Bank’s promise to maintain a real, that is really and not only nominally stable, exchange rate will mean, in my opinion, that the rate will vary with inflation. This is very important. In this case the price-related competitiveness of our economy will make it possible to keep our export at the minimum level required and to partially deny importers access to our market. This is a must because the Ukrainian economy has only started to be restructured with no end in sight. And we have so far failed to establish big competitive sectors that could work on the basis of a new supplying of goods. All we can do not is to artificially support our exporters, which is also a must. As an independent expert, I now say what will not be easy for the government to announce openly. I stick to the following viewpoint: the funds which, instead of being immediately thrown onto the consumer market, have gone through mortgage loans and interest-rate subsidies, i.e., through the real sector of the economy, play a positive role and promote economic development. So I see no serious economic threats ahead even if inflation reaches 15%.”

HOW MUCH DOES A STABLE HRYVNIA COST?

Ella LIBANOVA, Doctor of Economics, Scientific Consultant to the President of Ukraine:

“We could only accept this rate of inflation if real incomes of not only the poorest strata of the population were adequately protected.”

Valery HEYETS:

“As of today, the population is already using a mechanism to protect itself from this level of inflation. Look at how this problem was solved in a year of high economic development rate. This mechanism worked, with arrears being cleared concurrently. Of course, precipitous devaluation is out of the question, but we must still create conditions for the economy to make progress and solve its current problems. In any case, this leaves restructuring the main long-term task. Combining strategic and tactical methods would be an adequate policy, which could lead to stable economic growth over quite a long period, and this is what the government program intends.”

“Are there any expert assessments of the price taxpayers pay for the policy of propping up the hryvnia?”

Valery HEYETS:

“I have long advocated reducing foreign financial aid, the main lever of maintaining the national currency rate in this country. I think the foreign financial injections have had a negative effect on the economy. By making use of foreign financial aid, we achieved a 30% exchange rate to purchasing power ratio in mid-1998, while it would be to our benefit to keep it at 20-22%. Today, in the absence of restructuring and a national currency support policy, we have made our goods uncompetitive in terms of price and have worsened conditions for our exporters.”

MIDDLE CLASS IS RUNNING AN AVERAGE HOSPITAL TEMPERATURE

Ella LIBANOVA:

“In my opinion, all the figures we have just heard should be treated with utmost caution — not because the government, the State Statistics Committee, or some ministry don’t know how to count but because we live too sizable a part of our life outside the official sphere. This applies to production, consumption, trade, and incomes. I am absolutely convinced that all the GDP growth indices are in fact higher than the ones mentioned today because, judging by some indirect indications, the shadow sector is developing even more dynamically than the official one. The trouble is that our middle class or middle- income group is being further eroded. When I was analyzing remuneration in the government program, I failed to discern any serious governmental policy aimed at genuine differentiation in wage and salary payments. It was said here today that wages have risen in real terms. Yes, average wages have gone up. But isn’t this like the average temperature in a hospital where there is a morgue and a patient running a temperature of forty degrees centigrade? At the same time, the approach whereby the government has been regulating this matter exclusively by means of the minimum wage has led to a situation that in such areas as health care, education, culture, and social security where the minimum wage is 80% of the average one. This is an absolutely abnormal situation. Besides, although it is clear that the government finds it difficult to regulate wages at private enterprises, I can still blame it for evading the regulation of wages in public-sector facilities as well as in the industrial enterprises with a major government stake. If the broad strata of the population do not see their pay grow, the increment of average remuneration (owing to pay hikes in small high-income groups) cannot lead to the result expected. Instead of forming a middle class (the only institution capable of shaping investment policy and the domestic consumer market on the basis of some patriotic guidelines), society experiences further polarization, quite an alarming sign. The rich get richer, and the poor get poorer. This is what raised the average indices. As to tax policy, I think it should be changed. And, coming back to the government program, I can say it only includes figures. What it lacks is a conceptual model of tax (by this I mean problems with parliament). What does the government want to achieve? Just to reduce taxes or to encourage investment and improve cost effectiveness? Programmatic documents should include precisely this, for this, in my opinion, is the main thing.”

Valery HEYETS:

“Tax policy is often quoted as an obstacle to economic growth. This also brings about criminal and shadow tendencies in the economy. It is doubtful that these problems will be solved quickly. After the government has taken its first steps, I think all other governmental bodies will act in the same direction. Yet, this is clearly not enough: what is needed is civil activity (as shown by the experience of combating this phenomenon in Sicily). But the state must demonstrate its role as an organizer and inspirer. As to tax problems, one of the governmental tasks is to analyze, economically and legally, the draft tax code now awaiting parliamentary consideration. The point is that this document requires coordination with all other the legal entities governing economic relations. Analysis shows this code attracts many other things that are the object of other legislative acts.”

“Is there, in general, such thing as the desire to pay taxes in our society?”

Oleksiy ONYSHCHENKO, Full Member, National Academy of Sciences, Doctor of Social Sciences, Culture Critic:

“A considerable part of our population wants to honestly fulfill their commitments to the state. And I think the adoption of the cabinet conceptual program, a truly important event, will further promote this. This shows, in particular, that the government apparatus is becoming more stabilized and professional, trying to implement a nationwide strategy rather than keep on making day-to-day decisions. The countries, which once made a breakthrough in tax collection and the economy managed to do so on the basis of a conceptual and fundamental approach. However, since Ministry of the Economy experts seem to have played first fiddle in drafting this program, social issues were played down, and the program clearly lacks a broad approach.”

Petro OVCHARENKO, State Secretary, Ministry of Labor and Social Policy:

“Social policies are, of course, based on a certain economic basis. We have already witnessed and participated in the drafting of various programs. But this one, in my opinion, is clear, transparent, and easy to grasp. And it is good that the program begins with purely practical social issues, with the problem we have begun to tackle only recently like eliminating poverty and reinforcing the social goals of reforms. Now we have scientifically validated methods to do so.”

“Your ministry can now be called an agency of social optimism...”

Valery HEYETS:

“As we have been asked today, we supply concrete examples, I want to give a general example to which most of today’s experts do not object. A new economic model and the actions of economic entities are now the decisive factors of our life. Even if the government fails to assist these entities, their activity can ensure 2-3% economic growth. If we reach these indices next year, this will mean the programs fizzle out and the government is inactive. But if the growth is 5-6% or more, then the credit must be given to the government and the programs it has implemented. If the growth is zero or less than 2-3%, this will mean the government has been creating obstacles. Precisely a year from now we will be able to appraise both the program and the government’s performance.”

Oleksandr SHLAPAK:

“I don’t quite agree with Ms. Libanova. Indeed, societal stratification is still rife. But we are trying to improve the situation of the poorest public sector employees. Let me tell you about my own relatives. While my mother had her pension delayed for a long time earlier, now she gets 23 or 24 hryvnias more. Of course, this isn’t much, but still it’s our result. My two student daughters are now paid a stipend twice as big as before. I could also give other examples of this kind about my friends and acquaintances. Now a few words about the Tax Code submitted to parliament as long as two years ago. It contains clear and comprehensive proposals about our further development. It is perhaps no good to shift the blame to somebody else, but the trouble is that we have not yet gotten down to solving this problem. Or take the previously mentioned formation and development of the middle class. It’s a question of tax rates. Our draft envisions drastic cuts in the profit tax and individual income tax. Parliament is also unable to pass a package of pension reform laws, while we plan to use these to cancel, at last, the fantastic (32%) rate of wage and salary taxation. These factors could jeopardize further growth. If we fail to do this, we will finally lose the competition with the Russians who have been making tremendous strides in tax reform.”

TAX LABYRINTH

“Is the government prepared to reduce taxes and encourage launching businesses and creating new jobs? How is it combating shadow income and money laundering? Who’s in charge of this? Could you give an unambiguous answer to the following: are we prepared to use new instruments to address social problems? Or we cannot yet afford it? What should be considered as the highest priority: to keep people from starving to death or create a new middle class which will lead Ukraine to prosperity?”

Oleksandr SHLAPAK:

“I think the government’s program does answer all these questions. Some people might not like these answers. I say again: we have spelled out a new vision of tax policy, but the specific documents intended to ease the tax burden have been gathering dust in the parliament for two years. What also illustrates our government’s new approach or, in your words, new instruments, are the following figures. I mean a GDP share subject to redistribution by the country’s budget, which can be regarded as tax burden. While we had 18.5% in 2000, we’ve had 18.4% this year and plan to reduce it to 17.7% next year. This means we will be drawing less money out of the economy as taxes in order to perform social functions mandated by the Constitution. Thus, even unable to reduce tax rates (due to the failure to adopt laws), we try to intervene less in the work of enterprises, allowing them to grow. But you are absolutely right that we cannot expect any further basic economic growth without fundamental changes in the tax rules. We want the necessary changes to be effected as soon as possible, even in spite of the coming elections. In the present conditions, we could earmark much more for innovative programs that have results. But what we have done is done the Ukrainian way. For we will be unable to fully carry out economic reforms and move on without the support of the broadest strata of the population.”

SHADOW ECONOMY

“Which of the two economies, official or shadow, prevails in this country?”

Oleksandr SHLAPAK:

“The official one. Yet, an estimated 60% of the state’s real economy is in the shadow. This means, figuratively speaking, a blocking, if not controlling, block of shares.”

“We’ve been witnessing so- called shadow privatization recently. Can we say under these conditions that privatization performs a function in promoting innovation? And, in general, does the government- approved privatization program work today?”

Oleksandr SHLAPAK:

“Despite obvious difficulties, the privatization program is still being carried out. Instead of the projected UAH 5.9 billion, we’ve got only 2 billion at best. And we don’t know if we will get more. It is important that today we actually sell every major facility according to an individual plan, deciding on a case by case basis how to pay wage arrears, fund the necessary innovation programs, and so on. On the other hand, we have failed to effect any successful large-scale sales. This is a problem of our overall economic situation. Investors still take a dim view of Ukraine and doubt the stability of our course. There is still no significant demand for the facilities being sold. I can only say what I feel as minister of the Economy: last year very few foreign investors visited the ministry, while this year the situation has changed: visitors come in droves. The point is not only in the number but also in the status of investors. Suffice it to hold out another year or so, and I am sure Ukraine will drastically improve its investment image. Verkhovna Rada must also pass badlyneeded amendments to the laws on legal execution, taxation, and bankruptcy, which will effectively stem the tide of shadow privatization. This problem arose because we set up several inadequately controlled property evaluation systems. Today the government has decided that any evaluation should be made according to SPF methods.”

“But who bought Rosava for four million? Nobody can answer this question. There is quite a long list of such questions. What our state lacks is not ideas but their quality. Today we have seen a public figure who advocates, of all things, quality. This is not a compliment. But still, are you prepared, as a minister, to stand by the government programs to the end?”

Oleksandr SHLAPAK:

“The situation in our society is that our people have gotten so used to the creation of programs since the times of five-year plans that they pay practically no attention to such processes. They think programs and real life have nothing in common and are absolutely different things. But we must cultivate a systemic approach toward officials and ordinary people. A debate on government programs should not turn into a trivial squabble. In any case, the government and, in particular, our ministry is professional enough to defend our positions.”

“Which conceptual provision will the government stand by under any circumstances?”

“I think we’ll stand by the social development indices. But we will also reject demands for increases of these indicators. We will stand by what is possible to do in reality. Otherwise we will become indebted to people. Of course, we will object to revising the macroeconomic model, although it might have to be modified. But the most important thing we achieved when working out the government’s program is a budget of development. Using the target program method, we put together four financial resource groups: expenditures for applied research and capital construction, innovation in developing investment, supporting high technology production facilities and priority programs by means of interest rate compensation. This is what the state is doing to replenish its capital. Earlier, these funds were usually distributed among ministries and departments, which would then hide the final result of expenditures. This was the subject of heated debates in parliamentary committees, but everybody agreed that this was an absolutely correct step. We will stand by this, too.”