Provided it is blocked by increasing demand and growth of innovation

This conclusion was reached by participants in The Day’s discussion of economic growth prospects in 2002-03, organized jointly with the cabinet’s press center. The topic attracted public attention in conjunction with parliamentary hearings of the government’s action plan and subsequent forced revision of certain overstated indices of national macroeconomic development. The discussion involved, among others, Ihor SHUMYLO , state secretary of the Ministry of the Economy and European Integration; Anatoly MAKSIUTA , state secretary of the Ministry of Finance; Valery HEYETS , director of the Institute of economic Prognostication of the Ukrainian National Academy of Sciences, and Oleksandr P ASKHAVER , president of the Center for Economic Development.

V. H.: Latter-day macroeconomic indices are reason enough to state that the Ukrainian economy is entering a depression phase according to certain parameters. Enterprise revenues are declining as are their bank deposits. In other words, these enterprises’ assets are dwindling. True, they are said to be hiding their cash flow from taxes. Is there a way out of this situation and to support domestic enterprises? I don’t think so. Yet this problem addresses not only the government, but also the monetary authorities (i.e., the National Bank of Ukraine — Ed. ). After all is said and done, it is a big economic and political problem. An economy entering a depression phase requires some kind of stimulation and support by a rather high money supply. Today, we have every reason to assume that the situation calls for a more liberal policy in regulating the money supply. Thus, the problem of preventing depression must be addressed not so much to the cabinet as to the broader circle of people formulating economic policy and capable of supporting the cabinet’s efforts.

In addition, it is time we all realized that our economy is becoming increasingly market-oriented. There are constant ups and downs in the process, and the market fluctuations we are witnessing are also part of this objective economic process. At the same time, this country is undergoing painful structural transformations. How is one to determine the time frame? Naturally, a month or two won’t be long enough, nothing will have actually happened in the economy over this period.

A. M.: I wouldn’t describe the process going on as a depression. I think that our economy is experiencing certain growth problems. I agree that we all must get accustomed to living under the conditions of a real market economy. It is faced with tasks that were not characteristic of the previous years. We must pay special attention to the new conditions and tasks, find precisely the kind of tools capable of securing a positive course of events, and prevent negative trends affecting the economy and public welfare. However, watching the budget process, I wouldn’t talk about any threat.

We are collecting considerably more taxes than last year, even though a bit less than expected. There are both economic reasons and factors connected with tax management. This, in turn, prompts one to assume that in the course of reform proposed by the cabinet in its action plan it is necessary to simultaneously improve that management, because it is not enough to just lower tax rates and expand the tax basis, although this is a positive shift, of course. It is necessary to enhance the taxpayer’s accountability.

Otherwise we’ll have lower budget revenues and at the same time reduced internal demand. The key factor to improve the economic situation is stimulating market demand for the products of other enterprises that are increasing their output but can’t find markets within Ukraine. I think the cabinet should look for ways to sell the commodities produced by our industries. Domestic demand can be stimulated by a reasonable combination of fiscal and monetary policies. In fact, the cabinet proposals to considerably lower the individual income tax should be considered from this standpoint. The cabinet and Verkhovna Rada are working on the tax code, which also envisages measures aimed at increasing market demand. Simultaneously, we must remember organizational measures, studying markets outside Ukraine where we could supply products we previously lacked and now have more than we can consume.

I. S.: I would like to remind you of some figures we all know. 5.9% GDP growth in 2001; 9.1% in 2002. Few other countries show such an increment and over such a period. Hence, the natural desire to preserve and increase the rate appears at variance with the results of the first couple of months, causing people to discuss the possibility of depression, although in other countries with 3.5% GDP in five months, they wouldn’t likely use the word. Our concern is also explained by the fact that the current GDP amounts to only 51.7% that of 1991 (after all these years of growth). In other words, our current standard is extremely low. At the same time, the actual GDP curve largely reflects our habitual seasonal fluctuations, although May, for various reasons, including the number of holidays, turned out obviously in the red, after the positive indices of previous months. However, considering the real state budget revenues, the nominal value shows an increment of 22-23%, and the real value is 18%. A number of other indices should also be regarded as positive. Thus, we have a 17.5% increment in terms of the real incomes of the population, which best describes progress, showing that people are adding to their bank deposits, meaning that there will be more money available as loans in the economy and also give a fresh impetus to the retail trade (18.2%). Considering these rather high indices, our economy could even be described as warmed up. We held a seminar, involving research institutes and the national bank. We tried to work out forecasts for this and the following year. We noted a certain discrepancy in economic indices, including consumption and production. I wouldn’t want to oversimplify things and say that higher economic growth indices are impossible in the real economy, compared to last year’s. However, I will cite some facts showing that we have a good foundation. The number of barter deals has declined substantially, while increasing the number of monetary payments for electricity and gas. Regrettably, the banking sphere does not adequately respond to the positive changes in our economy. Although the loans provided by commercial banks have increased by 11%, the level of money supply by 7%, and the money mass by almost 12%, the banking system shows no real interest in significant long-term credit. This is explained by a number of risk factors having to do with the guarantees of owner- creditor rights.

V. H.: We had the same situation last year, yet bank loans increased by 26.5% and individual bank deposits by 19%. This year, individual bank deposits have grown by 23%, meaning an increase in bankroll, but loans have declined two and a half times

I. S.: I agree that there are signs of certain problems, offering a picture that requires quite decisive and fundamental changes. However, I’d like to point out that we approach these changes, having a growth reserve enough for the next couple of months, maybe longer. And there is, of course, the export factor. We are more in the black than last year, and we have a better current balance. But we also have controversial trends. While reducing exports to Russia and the overall trade turnover with that country, this negative phenomenon is made up for by trade exchange with other countries, which means a lot of things, including competitive growth (even in the absence of inflation), as has been mentioned by Mr. Heyets. We closely follow the hryvnia-dollar exchange rate dynamics, which is especially important in the foreign trade domain. A new process took place this year, the hryvnia- euro and euro-dollar rate fluctuations. A large number of our foreign economic agreements and estimates are in terms of US dollars, yet Ukraine’s principal economic partners are Russia and Europe, not the United States. The hryvnia-euro devaluation rate has registered some 12% of late, meaning that the new euro rate has caused no damage; perhaps on the contrary, it may allow us to improve our competitiveness. True, this will not solve all of the problems, far from it. I’m convinced that we may be able to solve a number of issues in the immediate future and that, if neglected, these issues could threaten an increase in 2002-04. Because a growth rate of 3-4% cannot satisfy us, considering Ukraine’s miserable per capita GDP compared to 1991.

O. P.: I think that, when assessing the risks of depression, we cannot refer to our economy as a market one. First, the degree and quality of the influence (legitimate and otherwise) of the state do not conform to the standards established by the world’s market economies. In our economy, the extra-economic factors in ordinary transactions performed by any businessman are even more important than the economic ones. Another component is monopolization, which is incompatible with the notion of a market economy. In fact, illegitimate, unlawful monopolization plays a more important role than the lawful monopolies. The third factor is that business transactions in Ukraine are not institutionally secured as they should be in a market economy. We have no obligations to carry out agreements and nonpayment is just one piece of outward and eloquent evidence. There is such a thing as economic enforcement, but more often than not this sanction proves ineffective. In a word, I, as a businessman, cannot work in Ukraine the way I can, say, in Poland, let alone Germany. And so our economy cannot be called a market one. Thus, if we want to prevent depression, we cannot act the way we would in Germany. In that country we would consider the available macro- and microeconomic instruments and agree on which we would apply and when. In Ukraine, such instruments are important, of course, but they are not decisive in overcoming the depression.

V. H.: We had the same instruments and the same tax policy last year (this year the latter is even a little better), but the results were different.

O. P.: Comparing what we had last year and what we have now, we have to consider the authenticity of the statistics and the ratio of what’s happening on the right side of the law and in the shadows. I for one am under the impression that the natural indices are increasing slower than the cost parameters, especially where we are shown quick growth. As for the lawful growth factor, we should remember that what we have is the real physical scope along with getting out from under the shadow. For example, there was considerable agricultural and industrial output growth, while in transport – I mean the principal carriers in those sectors – there was practically no increment. And so I think that the factor of getting out of the shadow plays a very important role. Slowing down that growth means, I think, the reverse. Depressive factors push business people into the shadow. The shadow economy could thus undermine lawful indices, and this is something we ought to bear in mind. For example, increasing the ratio of budget capital investment in our under-the-table market economy would make no actual changes in the growth indices. In contrast, lowering the unpredictability of the authorities (not necessarily those at the top, but collectively) could produce a tremendous effect.

V. H.: Before the elections last year, when the regime was truly unpredictable (a phenomenon registered in all countries under the circumstances), we had an upsurge. Now the situation is entirely different. We are two years from the presidential elections and it’s perfectly understandable, yet we discuss the unpredictability of the regime. I can’t agree with this.

O. P.: I have in mind the political system, it is operating in a capital suppression mode.

V. H.: Why didn’t it suppress capital like that before? There was investment growth according to all the classical canons, and it was ahead of economic growth 2-3 times.

O. P.: True, I’ve just mentioned the depressive factor when reviving the economy, adapting it to some standard factors, is over and certain signals from those in power are necessary. Yet there are no signals.

One other thing is that we have a weak economy – I call it an inadequate economy – it is very difficult to come out with some ideas about how to correct one situation or another. For example, the economy needs a banal, standard signal of lessening the tax burden. Yet this isn’t a technical but social problem, because there is a certain conflict of interests. And so there is no signal. Why? Take the cabinet action plan. I think it’s rather systemic. Another thing is that it has a striking number of clauses. By the way, I was nonplused to learn the number of cabinet action plans. If you divide a state budget program by this number, the result would be ridiculous. Merely writing down that we want to ease the tax burden would mean doing nothing. It is necessary to determine market demand and rely on an influential force in society while neutralizing some other force. Before sending signals or making decisions like forming domestic automobile construction, the government must have some kind of social analysis, otherwise this will be a road leading nowhere.

V. H.: I would also like to discuss the status of our economy. What is it, market or not-quite- market? That’s not even putting the question academically. By and large, there is only one problem we must finally resolve, a very meaningful one. Until recently we had a mechanism making it possible to transfer to the state budget debts accumulated by enterprises run up by incompetent management. This ruptured the mechanism of competition causing capital exchange and the restructuring of production. That mechanism made it possible to use the resources of growth even while piling up debts and we were moving forward, although it was a dead end. We tried to destroy that mechanism but did not do the job. And so we are faced with a very big problem. Will the government once again burden the state budget with everything piled up because of mismanagement and reluctance to restructure, rejuvenate, access free markets, and enhance competitiveness? If it doesn’t, I think we’ll have a classical market system. The executive says that the classical resources of further economic growth have been practically exhausted. Where do we go under the circumstances? In some cases, restructuring the economy is based on foreign investment, and it has certain consequences like those we see in Poland. That country couldn’t have chosen a different path, one of innovating development, because it has never had the kind of scientific and technological basis Ukraine has. Now that our cabinet sets itself the task of using an innovation model, it surely realizes that it is a serious signal addressing society as well as business, opening quite alluring prospects. We often hear in response that there are no resources. Really? Take an example. Various estimates say there are between one and five million Ukrainians working abroad, each earning an average of $500-600 a month, of which $300-400 is actually saved, totaling some $3,500 a year. All told, it is 3-4 billion dollars that could be brought to Ukraine, many times more than we could expect from international financial institutions, a very substantial addition, free of all the humiliating political conditions. So the government is working on a mechanism to secure this money’s input and encourage investing them at home. In other words, Ukraine does have an innovation resource, a sizable one, except the big question is how we’ll manage to use it.

A. M.: If we want to find an innovation development resource in the budget, I agree that this is a complicated way to go about it. The finance ministry’s stand in principle is that we must switch to a program-target-oriented method of forming and implementing the state budget. However, it will be some five years before all those counting on budget appropriations will realize that this money is allocated not for sustaining this or that institution but to achieve certain results. We see a solution to this problem in allowing the economy and banking system to accumulate such money and extend credit to the economy, and in keeping the budgetary and fiscal efforts from impeding the innovation model.