Classic monetarism has proven ineffective

Bohdan HUBSKY:

“While in the nineteenth century the economy of countries developed spontaneously rather than following a specific pattern, the modern processes of economic development have shaped certain requirements for twentieth-century development strategies. Pragmatic efforts to ward off devastating crises, such as the Great Depression of the twenties and the early thirties, led to the appearance of Keynesian theory and the economic model implemented by Franklin D. Roosevelt in the US. From then on, the world economy has developed in conformity with certain selected models.

“Today, this country also faces the necessity of choosing a model of development for the Ukrainian economy. For the transition period has to shape an acceptable market model. Without doubt, if Ukraine is to enter the path of economic growth, it must choose a model meeting the requirements of modern epoch. Which of the existing, well-known, already-implemented, or hypothetical models of development should we accept either as it is or alter to really attain the goal? It is beyond doubt and self-evident that the development model now being implemented in Ukraine needs to be corrected or perhaps even replaced. We have to choose a development model for the Ukrainian economy with due account of our national special features and contemporary assessment of geopolitical factors. Unless these problems are solved, we will not make any progress.

“Unfortunately, the economic transformation strategy we have pursued until now was unclear in many methodological aspects. What is needed is a social consensus of politicians, economists, entrepreneurs, and common citizens, for their interests were and still are too different. Market reforms started when a critical mass in society was prepared for radical transformations but not for the choice of the best model adequate to our national interests.

“But you will agree that our practice of reforms mostly suffers from the deficiency of our own experience of market transformations, which has induced us to borrow foreign models of economic development. Even if we attach the same label of ‘Western’ to the whole set of them, they are still varied and dissimilar. And I think we all agree that these models exist in pure form only on paper. This applies to the Keynesian, liberal, neoliberal, special Scandinavian, and Asian models alike. Of a specific nature are the developmental models of China and some Latin American countries. But there can be no all-purpose models.

“It has so happened that Western experts suggested, via international organizations, above all the IMF, that Ukraine implement in practice the economic reform model known as the Washington consensus. Unfortunately, the implementation of this model was characterized by a simplistic approach to the monetarist elements of economic reforms and the absence of critical assessment of the concrete results of their application in other countries.

“What gives me comfort is that negative experience is also experience. And I think there is no need today to persuade anybody that we should opt for a long-term (strategic) economic model with due account of the latest criteria of competitiveness. Perhaps this is debatable, but I adhere to the opinion that the negative consequences of our socioeconomic development resulted from the inconsistent policy of implementation rather than the purposeful nature of reforms. In other words, our failures were caused mostly by subjective factors. The latter are chiefly responsible for the fact that Ukraine has actually lost its strategic benchmarks due to its permanent state of transition, that the standard model of market-oriented transformation has failed is indisputable. But structural reforms have also ended in a fiasco because every declaration of intent (made by a new cabinet) was followed by a period of doing nothing. The potential for restructuring was realized neither during inflationary periods nor our rather long period of a relative financial stabilization.

“Perhaps I am repeating myself, but I must emphasize my own conclusion: we also feel today failures of the past years, when our leadership tried, unsuccessfully and amateurishly, to implement simplified models of a so-called open economy by placing only monetarist regulators within the paradigm of reforms. Unfortunately, the fact was ignored that the Ukrainian economy (like any other, incidentally) has its own national specifics. Nor were the goals and the specific nature of industrial policy taken into account. Everybody finally understood that this was an error. We must now decide which economic model we want, what price we will have to pay to implement it, and what results we will get. The state and society should understand: if we miss this chance, we will lose everything. Economics as a discipline must make a decisive contribution to the solution of this problem. The aim of our discussion is to identify the main steps in this direction.”

Anatoly HALCHYNSKY:

“Society, the political leadership, and all people of sound mind today see that the model of reforms that we have been applying has exhausted itself completely.

“The problem is whether there are social and political forces in this country on which the president could rely, forces capable of radically changing the course of reforms. If we don’t have such forces, we can’t even speak about changes in concepts or models: all that can be done in this case is giving a facelift, which is in fact being done. This can yield certain short- term positive results in the economic dynamics, but society will continue degrading to its very core.

“Now about the problem itself and the importance of choosing an adequate concept. I am convinced that such concepts can only be put forward by political forces capable of influencing the actual processes going on in the state. Let us be frank: there has often been a disparity between the statements we made and the guideline documents we adopted in 1994 to 1999. The decisions made are left hanging in the air without adequate political support.

“It seems to me the ongoing events in Ukraine reflect precisely these burning questions, this aspect. I want to support the idea the president expressed at a workshop that the main problems of today’s Ukraine in fact lie outside the economy. The point is in a knot of issues touching upon the nation’s intellectual potential without which society cannot develop and progress. In this case, I think we can point out the de facto degradation of our elite still in the process of formation. Society is developing sort of a philosophical vacuum, and this is a dangerous thing indeed.

“Now about structural transformation of the economy. The state of our economy is determined by its place in today’s globalized world and, accordingly, the division of labor aimed at strengthening the stratification status of the countries within the world community. We have our own place within the framework of this stratification, which also imposes a certain specialization on us. Exports account for over 56% of our GDP, which means that we are completely dependent on the foreign market situation. The world sees tough competition caused by the active process of energy, raw- material, and ecologically intensive industries being pushed to the periphery of high-tech economic systems. We must strive to be competitive at the level of industrial technologies. As to high technologies, our prospects are very bleak.

“Our much talked about institutional reforms cannot exist as a thing in itself and be the same for all eventualities. It is futile to adapt the legal basis to any, even the highest, standards. The same is true of Ukraine’s integration into the European theater. We understand only too well that what cast a shadow on our economy were the 1991-1992 laws copied from French, German, and others, which did not correspond to our actually existing economy. As a result, the laws seem to exist, but they don’t work. Institutional reforms are indeed one of the basics of economic progress. But they should conform to the conditions, i.e., they should be Ukrainian. I repeat: there can be no all-purpose institutional reforms against the same pattern.”

Valery HEYETS:

“The general topic of our debate is extremely pressing, and the list of problems it embraces is very broad. I will agree with Dr. Hubsky that our initial successes and failures in the transformation of our economy were indeed caused by our opting for the Washington consensus and monetarist approaches to economic reforms.

“Today, the overwhelming majority of experts admit that the Washington consensus concept was drawn up for Third World countries. It has now been admitted that the countries which followed alternative scenarios have achieved serious successes thanks to, above all, active intervention of state in this process.

“Incidentally, the advocates of the Washington consensus do not reject an active role for the state. But what matters here is that this role is typical of developed economic systems. The state can play this role only under conditions of a developed market environment or a market environment with lasting traditions. Hence the mechanistic extrapolation of the role of state with a well-developed institutional sector and a well- established market environment onto the conditions of a transition economy country, where this environment is absent and the institutional sector is in its infancy, is in my opinion a critical methodological flaw of the Washington consensus idea and of all the previous policies of transformation. This is why there is a quite serious gap between Ukraine and the outside world. We must bring into action the factors of long-term growth largely connected with society, not only with the economy. I think this includes the importance of choosing an adequate contemporary model of economic development.

“If we go by the indicators and estimates that characterize the Europeanization of development and our inherent economic model, we lag behind essentially by all these indicators, are on the lowest rung of transformation, and will have pass through more transitional forms. To our utmost regret, very little is now being said about the nature of these transitional forms. In fact, I think this was one of the reasons why administrative reform is far from completed. There is no complete understanding of the forms of transition that could make it possible to achieve the necessary mutual interaction.

“Structural transformations in Ukraine are lagging behind in two directions. The first concerns changes of ownership. It is clear that the new integral parts of the property not run by the state are in the making, but these changes seem quite menacing. It is abnormal when a subject of property, who owns 0.1% of the stock, gets 20% of the income from the property. We’ve formed an economic system in which institutional transformations do not provide for the constructive motivation for economic development. If we further follow this model of changing the forms of ownership, we will face a quite serious contradiction: the institution of private property will not spur interest in development; on the contrary, it will promote further the distribution and redistribution of property.

“We have lived through the initial stage of general distribution and the second one of privatization. The latter was partially done for money, but even the money earned was used to eat up fixed assets. We have now come to so- called fiscal privatization. If, God forbid, this is not accompanied by investment liabilities, it will again come to eating up our fixed assets. This should be avoided by all means. The next ten years will be a period of the mass retiring of worn out fixed assets. If we fail to activate investment support even under these conditions, the technologic collapse and disintegration of big industry will be inevitable.

“Meanwhile, we unfortunately continue with privatization, saying that money-based privatization will bring us the same success. It really can bring in budget revenues, it could also attract some investment liabilities. But the fact that the subjects of property have earned their income and taken it out of the country, instead of capitalizing it, will have a medium- term destructive effect on the economy. These tendencies are extremely undesirable for us.

“One more element is structural transformation of the economy. The economy remains deformed in the energy intensive and raw material processing industries, such as electricity, coal mining, and metallurgy. We must reorient ourselves toward profit of industrial origin rather than rentier profits on the basis of a rent gained from the exploitation of natural and mineral resources and usually smuggled out. This is a set of very serious problems that have to be solved urgently.”

Andriy HRYTSENKO:

“The contemporary world witnesses changes not only in the model but also in its very type of development. Today, we see transition to a different type which can be defined as sociocultural or cultural.

“Ours is a very poor country. Industrial assets are outdated, their quantity is declining, and there are no visible prospects of replacing or updating them. The sector structure has not just worsened in the last decade; it simply does not absolutely meet our national interests and vital requirements of the people. The whole banking system of Ukraine can basically be compared to a middle-sized bank in any European country. This circumstance cannot be changed in five or even ten years. We should be aware that, in terms of development level, Ukraine is incapable of becoming a European country with a European mentality in the coming decades. Then what is it capable of?

“The sociocultural type of development forms structures of, to a certain extent, an interpersonal, intercontinental, and interdisciplinary nature. A modern level of high technology exists in Ukraine and other countries. But, concurrently for a long time, there will also exist another level which has very little to do with the one now in the making. This is the level of simple reproduction through rather primitive technologies, which incorporates both low-skilled and high-skilled workers. There will also be differentiation here.

“In other words, we may soon face a situation such that Ukraine, instead of being a monolith gradually approaching the European countries and finally integrating with them in one way or another, will show different levels of development. And there will be no so- called average Ukrainian, because average is an abstract notion correct only when it can be applied to the majority. But there will be no such average majority as long as such differences remain.

“This means that the state should first of all take care of its high-tech level because it is here that the former can really influence the formation of growth points on the basis of high, especially information, technologies.

“The ongoing processes cannot but raise anxiety. We’ve talked a lot today about property. We have an absurd situation such that the foreign owner of a small part of the stock can draw almost the lion’s share of a property’s profits. Undoubtedly, the state should play here a different role. No matter how, with or without a model, as our society develops, the role of the state should rise.”

Dmytro LUKYANENKO:

“The modern market economy rests primarily on big business. In current conditions, our big business is oriented not toward the implementation of the competitive national economy model but toward the transit, import, or interconnected export and import, of foreign resources. In many respects, this business is not interested in economic prosperity or even economic stability of its own country because this business is based on price differences, the insolvency of enterprises, etc. This is precisely the way our top management earns huge sums, although the main problem lies elsewhere. This kind of business is essentially passive, corroding not only management but also business circles. Unfortunately, our medium and small business has also become school for the shadow economy.

“The discussion has pointed out certain macroindicators, for example, that the export quota is over 50%. As we know, this is assessed as a ratio between export and the GDP which has halved in the past eight years. But we use practically no absolute indicators, with almost all calculations being done in relative terms. For example, our research-and-development expenses, as a GDP percentage, almost correspond to similar indicators in the developed European countries. But these allocations are negligible in real terms. When some multinational companies spend on advertising more than our state does on research, can there possibly be any state-of-the- art technologies or civilized prospects? This is why the much- advertised models should operate with absolute figures, real resource indicators. It is shameful today to announce absolute figures, especially before a young audience, although the bulk of students favor market transformations.

“We see that young people support modern processes, but most of them have not yet got education, not gone to the labor market, not tasted the bitter bread of unemployment. And I don’t know what will be the behavior of those 15-20% who supported reforms but then had to apply to unemployment offices. It could form a highly-educated critical mass prone to protest.”

Yuri PAKHOMOV:

“First of all, I will note that I assessed the reform movement as erroneous and unsuccessful at the very outset. This assessment, regrettably, still holds true. It still seems to us, for some reason, that the West is cleverer than we are, even in this country. Of course, the intellectual potential is higher there than here, but there is a great difference between being clever at your own and at an alien home.

“The experience of vanguard countries, even those once semi-savage, shows that if the state really commits itself, enlisting the support of the best forces, to fulfill certain projects in its interests, it will do so more wisely than anything written in foreign recommendations. These conditions reveal national leaders who cannot be replaced by people like Jeffrey Sachs and other invited intellectuals. The example is not only Japan or China but also the once backward countries, such as Thailand, South Korea, Malaysia, etc. It would be good to recall today that the Japanese administration was once doing things at its own discretion and very wisely because it knew its own country, its national interests, and traditions much better than anybody else. Such tactics have been used not only by the economic giants but also by countries like Thailand. They managed to find their own people who were capable and knew how to do things successfully.

“We know worldwide, local, and intermediate models. Keynesianism has been leading among the former. Moreover, this model has never served one country to the detriment of another. This model gave way to monetarism. It is important for us to understand why monetarism, of all models, came to replace Keynes’ doctrine. Partly, it was because the latter had exhausted itself. But the main reason was that Western leaders made it clear that it was possible to live better at the expense of an external, rather than internal, effect. Incidentally, the US also applied double, even twice double, standards in this case: with respect to others (saying one thing, and doing and implying another) as well as to itself, when it showed difference between rhetoric and concrete actions. Liberal rhetoric is like bon ton for the West. If they break liberal canons, they still do so, if only furtively. Let us recall that when they incorporated the model of Reaganomics, they tried to introduce liberalism via monetarism. But as soon as they found they could undermine themselves with this model, they immediately scrapped it. They urgently formed the Reaganomics-2 model reinforced with Keynesian elements. So they synthesized both things for themselves but exported the purely monetarist models even if these were a clear misfit (as is the case with us).

“The model of economic development the IMF proposed has been rejected almost officially — not only all over the world but even in this country. But there has not been even one related comment from our reformers in power. This raises a natural question: why has the IMF model caught on so well in this country? I think the answer is, first, in the possibility of the instant enrichment of the strata in power and, second, the model’s simplicity. For all the circles in power have to do is pull the right monetary levers. Another, very serious, reason is our habit to deify any model or theory. It is we, not Poland, Hungary, or Rumania, that have dismantled the state. The whole world resorts to planning. Japan has been a country of the most rigid plan-related discipline for twenty years on end. But we are afraid even to say a word aloud about planned development. The question is not to get back to our former system, which has, of course, exhausted itself, but to employ methods being successfully used in other countries. I am convinced we can achieve success by synthesizing these models. Let us take, for example, the problem of increasing effective demand. This requires a monetary policy combining the idea of monetarism and that of post- and neo- Keynesianism. This kind of policy allows depressing one pedal and then, when the pressure is excessive and the situation needs easing, another. In other words, we should pursue an austere policy in some conditions in order to neutralize the metastases and then relax a little by using the elements of Keynesianism. If we have overdone this, which led to an excessive money emission and the danger of an uncontrollable inflation, let us take up monetarism again, and so on.

“For example, we have built up a post-reform backlog of payments and allowed the domination of barter and intermediaries. I am sure that in this situation one should make partial use of some elements of the mobilization model, which has nothing to do with Keynesianism, institutionalism, or monetarism. But it is very important to display here a sense of proportion so that resolute steps in this direction do not damage society as a whole.

“I want to emphasize that it is still realistic and possible to synthesize different approaches and models.”

Serhiy PYROZHKOV:

“I share the idea that there can be no ready-made models for a specific country. And each political force should form a model of its own suitable in the specific conditions and able of being put into practice. If one group is to make a model and another to implement it, this will create a gap with no result at the end. What we have seen in this country for ten years confirms that somebody has been drawing up the models, somebody else has been trying to put them into practice, but essentially nothing was done in the end. Besides, there are universal worldwide models and specific models based on the practice of individual countries. I hear every now and then about the Chinese, Swedish, and other models. I don’t think this is right, for a model can only have the right to be adapted or concretized when it has already been fully implemented somewhere.

“Consider one more idea connected with globalization. I think one of the main results of globalization for our countries is the smuggling and hiding of capital abroad. Experts estimate that about $100 billion, taken from the CIS countries, have been deposited in foreign bank accounts, mostly in offshore zones. In other words, under conditions when our weak economic system should be protected, globalization has brought problems which nobody can control or avoid.

“Another point is why there is no unity between the economic entities and the national interest. Enterprises and small business pursue their purely economic interests in the shape of profit, while our national interests exist in a somewhat blurred form, which does not reflect the interests of large economic facilities.

“The next point concerns the population. Why is our population still unprepared for the creative progress mentioned and is unable to set up any models or strategies? First, our population is varied. I think, judging by the employment level, there are three big macrogroups. The first of them, 22%, embraces people employed in the primary sector, i.e., doing manual labor. Most of them live in the countryside. The second macrogroup comprises those working in industry and living primarily in small cities and towns. This is a source of the increasing marginalization and crime rate among the people. Since they are bound to one enterprise, they will remain jobless should that entity close. What is developing today is a new, working class type of emigration, mostly to the Russian Federation. About 300,000 people annually migrate to Russia in search of jobs.

“The third group is the so- called modernized population, in which I include the elite, highly- educated people, and politicians, who account for about 20% of the whole social structure. But this so- called basis of the middle classes is also unable, unfortunately, to earn a living by working on its own. Thus it fills the ranks of the force prone to protest force known as ‘the socially explosive group of the population.’

“It is necessary to make the population’s social structure more homogeneous primarily by changing the forms of employment. this will also be a key to increasing the level of our economic development.

“Reforms can be proclaimed, but the main thing is to carry them out, not just proclaim them. There is no unity of purpose in this country at the level of various branches of government. I think this is one of the most important problems we must solve if the economy is to be further developed.”

Oleksandr SOROKIN:

“The dependence of the Ukrainian economy on the foreign market situation exceeds all rational limits. Even if we manufacture steel or something else, there still are many factors we do not control. So when we decide on the currency-related behavior of a bank, we take into account the positions of the exporter and the importer. It is common knowledge, unfortunately, that we have suffered a trade deficit even in the best years. To be honest, the situation is changing somewhat. For example, paradoxical as it might seem, we have a trade surplus with Europe, in particular, with Germany. But all these surpluses are offset by an unfavorable trade balance with Russia. However, the GDP export/import share in its pure form, isolated from other structural parameters, never points to a country’s place within the international division of labor.

“Today, the criterion of the efficiency of economic systems has shifted to structural characteristics, such as the share of information technologies, products intellectual labor, post-industrial production facilities, etc. Besides, integration of the economies of highly-developed countries presupposes organized structuring, that is, the formation of economic alliances with due account of national interests and reciprocal obligations. In such conditions, even as high as 70% dependence of the nation’s economy on the foreign market situation would not present a threat to the economic security of a country. Hence, what the future model of the Ukrainian economy should do is not to reduce the share of exports or imports in the GDP but to fill the export/import operations with the products of information technologies and intellectual labor. In that case the increase of this indicator will testify to the economy’s progressive nature, not its inferiority.”