“Either to carry out liberal reforms dishonestly or to honestly wash our hands and give the reforms to the criminal community”

The head of the newly-established Ministry of Incomes and Taxes of Ukraine is going to tell us one of these days about what his ministry’s officials will be dealing with. There will hardly be any serious surprises, but, nevertheless, the corridors of power regard this step as “reform of the reforms” aimed at squeezing unruly entrepreneurs out of the gray zone and forcing all Ukrainians to honestly pay taxes. Well, it is a good idea, but have the right methods been chosen to put it into practice? And, in general, can we call it a reform when some functions are being transferred from one minister to another political figure? This must be our warped interpretation of the so much needed economic reforms which, as previous experience shows, usually remain an illusion on paper. This country’s leadership also admitted the other day that the current approaches to liberal reforms were hopeless. The head of state, Viktor Yanukovych, accused the Mykola Azarov government of wrecking the reforms and asked him to change the style of work. “How on earth can one fulfill [plans] by 35 or 25 percent? It is sabotage. This means people have just lost the sense of responsibility,” he said during a Cabinet meeting on economic reforms. “I would request Mr. Azarov to change a little the style of the government’s work and draw conclusions systematically, without waiting for the end of the year,” the president added in the end. Yanukovych also said that he was pinning great hopes on the newly-appointed ministers who came “on the crest of a new wave.” Will the reforms of the new-wave ministers be crowned with success? What will pose the most formidable obstacle to the economic development of this country this year? This, as well as monopolization of economic processes in this country and consequences of the land reform delay, is the subject of an interview with Oleksandr PASKHAVER, president of the Center of Economic Development.

Do you believe in zero inflation? And will deflation have a positive or a negative effect on this country this year?

“One can call into question the methods of assessment and absolute figures, but an abrupt price drop is inevitable. But, to tell the truth, there is nothing to boast about. Let us recall 2002, a year of deflation, when the economic growth ground to a halt, there was a budget deficit, and, as a result, the budget was sequestered – for the first time in the history of Ukraine. Deflation and these consequences are interrelated. Deflation is an alarming development in any economy, especially in the developing countries that have a non-optimal structure of the national economy. This illustrates a sluggish economy and can be compared to the condition of an individual with the body temperature of 35.5oC.”

What are we sick with?

“We are sick with what the entire Europe is. Stagnation has set in, and the demand for Ukrainian goods on foreign markets has dwindled. But we are sick in our own way: the illness has assumed the deformed and painful shape we saw in 2008. The real cause for worry today is an unfavorable economic situation at least in the first half of 2013. The industrial slump is accompanied with an essential budget deficit, the growing foreign debt, and reduction of the gold and hard-currency reserves. And, what is more, investors still do not trust us, even to the extent they did in 2008. The growing foreign debt and the dwindling trust are certain to result in more expensive international loans. The government has a narrow range of possibilities.”

With this in view, what actions do you think the government may take?

“The government is launching a budget deficit reduction program. Yet it is easy to foresee that, although there will be a mechanical increase of tax pressure on business, all the other plans will run counter to the commercial interests of governmental officials and their entourage for whom power is the most profitable business. It is possible to cut the budget deficit by slashing all expenditures in order to raise incomes by way of legalizing the gray economy or activating business.

“There are two ways to cut budgetary expenditures. The first is to reduce the state’s intervention in the economy. Although this is methodically difficult, the main obstacle is different – reduced intervention restricts enrichment by corruption. All attempts of this kind have so far been unsuccessful. The other way is to reduce expenditures by way of dismissing a part of employees and cutting current assets to the minimum. It is a widespread but mindless way of economizing, which results in a poorer quality of the state. The fallacy of this approach is obvious on the example of medicine.

“Let us turn now to combating the gray economy. It can be reduced by easing the corruption burden on entrepreneurs. For all the state-related expenditures (legal and illegal) of business are summarized in one overall tax. Accordingly, the more illegal extortions there are, the more the entrepreneur economizes on the payment of legal taxes. All the state’s previous attempts to overcome the gray economy without curbing corruption look scornful with respect to business. In all these years, business development has also been slowed down due to an increased legal tax burden without corruption being suppressed.

“Business activity can grow as a result of systemic liberal reforms – first of all, deregulation and market-related adaptation of the national economy’s social sectors. Yet there is an insuperable conflict of interests between the government as commercial business and systemic liberal reforms. Besides, the government entrusts these reforms to bureaucracy. I do not think the people in power are so stupid as not to understand that a pike must not be allowed to improve things in the pond.

“What characterizes the government’s ‘liberalism’ best is the constant and consistent formal, and especially informal, monopolization of the most profitable varieties of business. Monopolization, as antagonist to competition, suppresses business, reduces quality, and slows down, if not kills altogether, the updating. This leaves no place for the activation of business and the growth of its incomes.”

What will the now emerging monopolization of the economy lead to?

“In the course of time, the government will change and de-commercialize, ushering in the era of de-monopolization. It is a social conflict-prone process even in a legal economy. Suffice it to recall de-monopolization of the Morgan and Rockefeller empires. It is far more difficult to break informal monopolistic ties. Therefore, the current monopolization will be reechoing for a long time in the shape of undeveloped markets and the poor population.”

Is Ukraine mature enough to face this course of events?

“It is not prepared either politically or socially.”

To what extent effective is the establishment of the Ministry of Incomes when there is the Ministry of Finance? Is there any logic in this innovation?

“It is an absolutely unviable formation. Combining the functions of income policy formation and tax collection is an administrative aberration and a conflict of interests, which should not arise inside the same agency. If a taxman has been instructed to form a policy, he will map out a policy that fits him. It is the same as allowing traffic policemen to approve traffic rules or authorizing the military to declare war. In my view, the Ministry of Incomes will not survive long.”

What effect will the continuation of a tough currency exchange policy, which the president recently called for, have on the economy?

“The National Bank should pursue a flexible and situational policy. For this purpose, national regulators all over the world are independent and are responsible to the people for economic stability.”

Word has it again that Ukraine is on the way to joining the Customs Union. What can cause these expectations to come true?

“If Ukraine finds itself totally barred from international loans, it may do some movement towards the Customs Union. And we will then be just bought for loans. Should this occur, we will have something similar to the Kharkiv Accords: we will give you money and you should make political concessions for an indefinite period of time. We must do a bit of thinking to avoid the trap into which Bohdan Khmelnytsky got – he thought he was signing a treaty on military alliance with the Muscovite tsar, but the result was different.”

Taking into account this country’s economic situation in early 2013, is it worth expecting banks to soften the crediting policy?

“Credit means trust. All that we have discussed before shows that one of the gravest defects in our economy and society is an extremely low level of trust of all in all. It is not quite clear to me how crediting activity will unfold in these conditions. I do not agree that crediting will be developing in 2013 in the conditions of economic stagnation, the growing pressure on entrepreneurship and, hence, reduced ability to borrow. In all probability, it will be, as before, stagnating and folding up. How can credits go cheaper in a country, where nothing is stable? Can’t you see that there are fewer and fewer foreign investments in this country?”

In particular, some say that one of the factors that cause this is an incomplete land reform and an opaque land market.

“This is right. On the one hand, land market is one of the most important factors for economic growth. But, on the other, it is clear that land reform will look like the ‘wild’ industrial privatization in the 1990s. Undoubtedly, the privatization of land will play its role and finally free Ukraine from a Soviet-style economy. Agriculture will begin to develop at rather a fast pace, albeit perhaps in the forms that are socially unacceptable in our society. What will land relations be like? The answer is simple: like society and the government.”

Do you think it is good that the introduction of land market was slowed down?

“What good is there here? A bad and unfair land reform is still better than its absence. The absence of it causes millions of people to be in a suspended condition: they are unable to earn money when they sell land. Is this really a property if I cannot sell it? There is no such an alternative as legal market or its absence. A real alternative to a legal market of land is a gray market and criminalization of land relations.”

If the land market goes the way of “wild” industrial privatization and monopolization of the economy, will this not “kill” most of the small-scale land owners who will earn just a few hundred dollars for their plots? And how will they survive after this money goes down the drain?

“Whoever does not want to sell their land will not do so – they will lease it out. Of course, there will also be a forced change of owners, as was the case in the 1990s. But, on the whole, if land reform were carried out now, this would give us a highly-concentrated farming sector. I am sure most of the current owners would sell their land. The agro-industrial complex would raise its output several times over.

“Failure to settle the land problem has brought about an illegal turnover of land and a situation when a considerable number of plots formally belong to nobody. The industrial privatization at first followed a ‘gray’ scenario, too. First factory managers set up a host of tiny firms, as part of the state-run enterprise structure, to privatize profits. Then they informally established, on behalf of the workers, entities which in reality transferred ownership to some people, usually managers, outside of the processes of privatization. All this went very quickly. This was one of the factors that promptly launched an economically inevitable, but socially unsuccessful, privatization. This must be the destiny of all liberal reforms in a corruption-eroded society. In other words, we are facing the same dilemma: either to carry out liberal reform dishonestly or to honestly wash our hands and give these reforms to the criminal community.”

Den/The Day has declared 2013 as Monomakh Year. Do you support this initiative and do you think that Ukrainian society is mature enough to have a leader like this?

“Serious social transformations follow two ways. One is that people extol a hero who thinks he is equally respected by the entire populace, and he changes the historical tradition. Otherwise, one should go the way of evolutionary development. It is not up to us to choose, but we should remember that such heroes and their deeds mean big bloodshed and sufferings for the country. Evolutionary changes do not inspire so much, but they proceed more easily. Just one example: the male population of France became shorter after the Napoleonic wars because tall men had been killed in the war. This was by no means the highest payment for France’s revolutionary grandeur. And I am not sure that Ukrainians are prepared to sacrifice themselves for new heroes.”

We know that you are a regular Den reader and, accordingly, paid attention to the fact that, after declaring 2013 as Monomakh Year, Den announced Yehor Anchyshkin, founder of the Viewdle IT project, Man of the Year 2012. How did you react to this decision of our editorial board?

“You chose only one criterion for a Man of the Year contender – innovations. Undoubtedly, the future belongs to innovations. From this angle, Den chose not only an individual, but also a certain variety of occupations. I am sure Anchyshkin tried to reach numerous compromises in very many things – otherwise, he would not have achieved success. There should be people like this in the country, for they know how do good business in these difficult (I would even say adverse) conditions. It is your choice, and, as a reader, I respect it.

“What struck me personally was the story of a priest who has adopted several hundred children. In my view, this is a more rare ability to do good than successful innovational business is. But it is a matter of taste.”