What Kind of Society Do We Have?

The Orange Revolution has made Ukrainian society aware of a number of questions that until now were either ignored or shamefully left unanswered. Among these questions are traditional ones that the European nations have had to face up to since time immemorial, including how a democracy is to be protected against arbitrary governments; and new ones that aren’t likely to be answered in the foreseeable future. For example, try to answer the question, “What kind of society are we living in?” Should we define it as capitalist, socialist, or maybe use an altogether different modifier? We seem to have discarded socialism in its ugliest totalitarian manifestation thirteen years ago. Does this mean that we have embarked on capitalism? If we have, what makes politicians and analysts in the classical European and North American capitalist societies become so alarmed whenever they’re reminded of what’s been going on in the post-Soviet countries, including Ukraine? If what we have is capitalism, where is the well-being and adequate living standard germane to a consumer society? What about a high- output economy, equal opportunities for all, and sufficient market supply of domestically manufactured and imported goods, all of which is supposed to be the result of free competition and private initiative? Where are all the other benefits found in every civilized country that follows a market economy, like in Germany, France, even in Poland and Hungary, our closest neighbors?

“WHERE SHOULD A POOR PEASANT GO?”

This line is from Chapayev [a Soviet blockbuster]. An old peasant played by the Soviet movie star Boris Chirkov addresses Chapayev: “The Reds come and rob us blind, and then the White Guard comes and does the same. Where should a poor peasant go?” This seems to be an adequate expression of all the doubts and worries that are haunting the average Ukrainian after living through all those restructuring campaigns and reforms. First he got rid of communism with its bathtub-gin 0.5 liter vodka bottles sold for 3 rubles 62 kopecks, and “guaranteed sausage” with heavy cellulose admixtures; he was haunted by memories of the Holodomor, collectivization, and Gulag servitude. He then trustingly followed romantics who were professing the national idea, telling him about Mother Ukraine but proving unable to do anything practical about it. This disillusioned him and made him part ways with them; after that he nearly walked into the same trap where he would find himself with his good old communist buddies. He didn’t. Dressed in rags, undernourished, lacking basic civilized amenities, he refused to return to those “friends of the people.” Instead, he gritted his teeth and traveled outside Ukraine as a migrant laborer, looking for better paid jobs in Italy. Others in the same dire straits quit university chair jobs or abandoned their drawing boards in polytechnic institutes, and became local bazaar vendors or “shuttle merchants,” venturing bus/ train trips to other countries to buy cheap merchandise to try to sell it at a profit in Ukraine.

Today, our hero is being urged to reach new horizons under orange banners. However, these horizons look rather ambiguous. Two questions remain open. What kind of society are we living in? What kind of social ideals and relationships must we try to achieve? One answer to the first question may be formulated as follows: Most of our citizens aren’t satisfied with the main qualitative characteristics of our society at present, as evidenced by the protest actions that involved hundreds of thousands, even millions, of people.

What about all those social shortcomings that irritate our people so much? How are they to be defined and categorized, even if at this initial imperfect stage? Psychologists long ago discovered a remarkable phenomenon; to see an object or phenomenon, one must give it a name. During experiments people under hypnosis were instructed to forget certain words and they could no longer see the objects defined by those words.

The same is true of our society; it has been under a kind of hypnosis for a long while, unable to understand what has been happening. Now that this hypnosis is being neutralized, we are trying to see what has really happened to us. Further on, the reader is offered data in an attempt to identify certain features and phenomena inherent in Ukrainian society, but considered from a sociopsychological point of view.

Suppose we start by analyzing socioeconomic realities in terms of certainty and confidence.

Being sure or unsure, trusting or distrusting of someone or something- these rank with basic personal psychological conditions, meaning that in many ways they determine individual socioeconomic conduct.

Certainty and confidence are closely related notions; they are important in understanding a number of economic phenomena. Thus, a stock market value depends on the degree of trust placed in its property and other collateral. Distrust in a given political regime and doubt in the stability of private property status, despite all official assurances, serve to hinder the foreign inland investment process. Moreover, the local authorities’ unpredictable responses and lack of private ownership result in the lowering of this property value.

Considering the socioeconomic aspect of this certainty, the number of social realities meant to generate a productive kind of socioeconomic conduct, given sufficient certainty, should include certainty in terms of safe private ownership, being sure of adequate legal protection, a stable national currency, and predictable conduct on the part of the government. These four factors are extremely important in analyzing civic business and public activities.

Suppose we consider the first one, namely safe private ownership. Without it, property as a socioeconomic institution, as well as a component of a free market economy, cannot adequately operate for the benefit of the people and society. Let us analyze just how such private ownership can be secured in our conditions. According to economic theory, private ownership in a market economy is implemented via a legal framework recognized by such noted Western economists as Richard Crouse, Armen Alchian, and others in the early 1960s, namely:

— the right to own,

— the right to enjoy,

— the right to manage,

— the sovereign right,

— the right to be protected against expropriation,

— the right to own property ad infinitum.

It is not hard to see that at least two of the above-mentioned rights (e.g., the right to be protected against expropriations and the right to ownership ad infinitum) are not implemented in Ukraine; here, as in many other post-Soviet countries, one doesn’t have any guarantees for retaining private ownership in the truest sense of the word.

Subsequently, a great many entrepreneurs feel totally unsure about retaining their ownership. This uncertainty runs in our blood, dating from all those historical reassignments and expropriations of property in the course of revolutions, socialist experimentation, and imperial expansion in Ukraine. Nor do the current realities serve to bolster the businessman’s certainty of preserving and protecting his property. There has been a very heavy tax burden, with some taxes looking more like requisition tools, what with the lack of transparency in the tax legislation, which is exacerbated by numerous controversial business clauses.

LAW OR PROVOCATION?

We have to cope with more than twenty central and local taxes and duties. Yet the tax authorities apparently don’t consider this to be enough. We have several hundred (!) amendments, annexes, and explanatory notes concerning our tax laws, along with about a hundred such documents relating to the value added tax (as evidenced by this year’s interview with Oleksandr Bandurka, head of the Kharkiv regional tax administration).

Some twenty various controlling authorities have been created, as though to make the situation even more confusing, with the result that every domestic businessman is subjected to an even heavier tax burden; in addition to the Tax Inspectorate, we have the Pension Fund, the Derzhkomstat [State Statistics Committee], the Sanitary and Epidemic Service, fire departments, ecological and labor protection services — you name it. All these bureaucratic bodies must justify their existence, prove that this country really needs them, meaning budget appropriations. Here one may add what is known as informal payments, meaning bribes. And so hundreds and thousands of laws, bylaws, manuals, and memoranda are written and enacted to supply their greedy needs, with additional obstacles placed in the way of normal business. Every effort is being made along these lines, with tens and hundreds of thousands of bureaucrats on all levels keeping themselves busy, going through the motions of doing of what is commonly known as important affairs of state. Hundreds of thousands of entrepreneurs and tens of millions of taxpayers have to part with their money to sustain all these official parasites. The laws, bylaws, manuals, and memoranda remain so ambiguous as to contradict basic individual interests, and they run counter to one another. They are geared to provoke people to act counter to them and thus break the law; many norms of the economic/business and other laws are openly provocative.

This is how people, by violating such provocative norms, become dependant on bureaucrats who are empowered to arbitrarily apply penal sanctions against such formal transgressors — or to refrain from levying them. With this kind of purposefully engineered citizen-bureaucrat dependence, bureaucrats are free to trade in their official services, selling businessmen ways to bypass the law. A shadow bureaucrat services market emerges with its price and commodity lists dictated by bureaucrats in command of national resources. Such bureaucrats can convert their powers into hard cash and property. Under the circumstances, offering bribes not only violates the law, but is also how an individual can defend himself against his own government’s arbitrary rule; it is further the result of the government’s manipulation of its people. The state provokes its citizens to give bribes. Bureaucratic arbitrariness forces businesspeople to give bribes, and bureaucrats’ token salaries encourage them to accept such bribes. After all, official payroll statistics show that government officials are the least socially protected stratum, following pensioners, janitors, and cleaning women. So they are interested in developing a shadow economy because it is the only source of adequate living for them. Bureaucrats make off-the-record deals with bribe-givers, undertaking to lobby their business interests or protect them against fiscal authorities’ inspections that are fraught with risks of impoundment.

The Ukrainian customs authorities are another example of how bureaucrats construct further administrative obstacles, as they seek to make businessmen realize that they are at their beck and call. Consider customs clearance procedures. They are markedly unfavorable for anyone crossing the Ukrainian border. In addition to the shipment declaration, approximately twenty other documents must be filled in to clear the shipment. Such procedures are nonexistent in any other countries. As a result, transit carriers prefer to bypass Ukraine to avoid such devilish customs formalities. The Ukrainian budget has thus been losing at least UAH 600 million every month, with only 50% of the national transit capacities actually being utilized (these statistics courtesy of President Leonid Kuchma’s report of 2004). In other words, the cheap government is costing this society too much. This is how the system of corruption and deliberate bureaucratic barriers works; it is like corrosion, eating away at every element of the state structure, forcing normal individuals to forget about personal dignity and professional ethics.

TAX STEAMROLLER

Considering the refined ambiguity of the Ukrainian taxation system, the more important stimuli and mechanisms designed to boost its economic progress have turned out to be unpredictable. Economists point to the following shortcomings:

— absence of tax concessions in regard to output investment yields, meaning that there is actually no official encouragement for the output of goods and services;

— absence of company income tax concessions, regardless of whether a given company is only starting up in business (new companies in Egypt are tax-exempt for the first five years);

— absence of research and research-and-development incentives;

— absence of small business incentives, considering that this is practiced in most countries (particularly via cut tax rates);

— possibilities for dual taxation.

The tax burden is a steamroller that is destroying small and medium business offshoots. Here is a glaring example. The minimum tax-exempt sum in Ukraine is lamentable, among the lowest registered in the world.

THE SWEET CONCEPT OF ECONOMIC FREEDOM

In Ukraine, the individual tax- free-GDP minimum rate also ranks with the world’s lowest indices: 0.1 ($85/$80). It was last registered only in Mexico in 1998, but its per capita GDP is several times higher: $4,000 (courtesy of P.V. Melnyk, 2001). This statistic is evidence of a huge tax burden being levied on Ukrainian citizens. The low individual tax-free- GDP ratio indicates a low level of economic freedom and that Ukraine’s social progress is being suppressed.

What is preventing this country from making headway is the extremely low level of economic freedom engineered by the government; this index places Ukraine 107th on a world list (Cato Institute’s Economic Freedom of the World: 2004 Annual Report). By way of comparison, Sweden is third; the U.S., fifth; Germany, 22nd; Italy and Japan, 36th; China, 90th; and Russia, 114th. In countries with greater economic freedoms, per capita incomes are approximately ten times higher (averaging $26,100 in the top five and $2,800 in the bottom-line top five).

In 2004, the countries with genuine economic freedoms contributed $11,000 per employee investments; those with restricted freedoms, $847. This is explained by the fact that investment yields in economically free countries are seventy times higher than those in countries with restrictions.

In other words, we can see that civil liberties are not only a moral but also a powerful factor in economic development, which has been understated (to put it mildly) in Ukraine for so many years.

Also, if Ukraine wants to meet European standards of economic prosperity, we must break free of the vicious circle of domestic reciprocal fraud. Our state, by levying repressive and discriminatory laws, is trying to harm its own people. The latter respond by trying to bypass such laws. Ukrainians can only be persuaded to trust their government, believe in their happier future, and become inspired to work and show better quality output by being shown in return fair, transparent, even biblically simple relationships between people as citizens and the state machine.

Finally, let us sum up the principles and practical measures that should be implemented to help increase public confidence and support business in Ukraine:

— a rational approach to the legal business framework to bring it into conformity with the citizen’s lawful interests; norms should not incite any transgressions, but rather encourage law-abiding conduct proceeding from businesspeople’s inherent motivations;

— serious efforts must be made to ease businesspeople’s dependence on bureaucrats, including the removal of bureaucratic obstacles that stand in the way of normal business; business registration procedures must finally be simplified, while establishing a single business registration authority, with all business registration procedures to take several hours, rather than several weeks;

— business deregulation is necessary in order to enhance economic freedom, so as to ease the tax burden, lower the influence and degree of interference on the part of state regulatory authorities, etc.;

— government officials must be granted considerably higher salary increases in order to overcome bureaucratic corruption, so that they can receive wages and salaries matching those in the private sector, as in the case of bank executives; on the other hand, it is worth exercising rigid official control over their performance; budget appropriations as wages and salaries for these officials will cost Ukraine considerably less than what the central budget will lose because of corruption, irresponsibility, and shadow transactions;

— a system of guarantees must be secured for proprietors at all levels, so they can be reasonably confident that they will retain their property;

— reliable relationships with citizens, predictability, and being open to all public interest is a prerequisite to enhancing the Ukrainian government; every step taken by the authorities should inspire confidence in the general public rather than cause panic or incite protest actions, as has been the case lately.