NEW RHETORIC OF GOVERNMENT POLICY But there is no money to implement decisions anyway

Of late, officials close to the President have been saying that Ukraine has come very close to the final stage of the transition period, that the basis of a market economy has been created, and that the effected changes are irrevocable. At the same time the process of establishing the Concept of New Economic Strategy is ongoing. For the first time this Concept was presented early April during the scientific-practical conference called The Ukrainian Economy, 1998-2000. According to Presidential Adviser Anatoly Halchynsky the change in economic policy was brought about by objective circumstances requiring the implementation of new priorities for the country’s development. “In the future the focus shall be shifted toward more effective coordination of credit, financial, industrial, science, and technology policies, which would provide incentives for technological innovations and investment in industry” and, finally, assure the formation of highly competitive, science-intensive domestic industry.

Certainly, all these objectives are of critical importance for Ukraine and accepted by almost all opponents of official policy. The problem is caused by other factors. How are we to achieve these goals? The Presidential team proposes the following. First, a list of strategic priorities is to be made. They do not recommend betting on sectors with short pay-back periods (i.e., light and food industries) and the agro-industrial complex. The sectors, which should be considered priorities for investment are space rockets, aircraft building, shipbuilding, information, biotechnology, etc. After approval, the priorities will be called programs, for which Verkhovna Rada will establish a special mode of investment. On the other hand, the government promises to assure the success of the programs with an appropriate microeconomic policy. Thus, since the development of certain sectors (enterprises) was considered useful for all subjects of economic activity, it is logical that a favorable monetary and credit policy will also determine the government’s actions. Luckily the government does not propose to print money or to freeze the foreign exchange rate (as done earlier). On the contrary, it has decided to keep inflation low. However, it would be desirable to tie the hryvnia exchange rate to inflation (in other words, slow devaluation). Concerning financial support for the programs, it is obvious that the NBU will be requested to increase the money supply “according to a plan” irrespective of the actual indices of industrial development. Up to now economists have not reached agreement: some of them think that only active public administration will bring the economy out of stagnation, while skeptics claim that any discussions about targeted industrial policy are simply pointless due to the lack of any reserves for state financing. Even before the disputes on this new government economic policy, objections were heard in the narrow circle concerning the feasibility of the stated plans. Usually, in a country overcoming a crisis, growth begins in the food industry, raw materials, and processing sectors. This is obvious, since comparatively small investment (with short pay-back periods) are required in these sectors. Then the capital (including that in the form of tax receipts), accumulated in this sector would be invested in reanimating the sectors with longer pay-back and requiring larger investments, such as heavy engineering and aircraft building. Certainly, one might say that industrial revival will go in parallel: enterprises with short pay-back would develop on the basis of self-financing, and the rest through support of state investments. This is true but not for us. In our case the potentially profitable sectors can hardly make ends meet, while others have simply been unprofitable for many years. All this shows that the economic policy of the government has in principle failed to create a viable product. However, it seems that the government, stuck in elaborating new strategies, does not notice these problems and cannot see that the existing rules of the game in general do not encourage productive activity in Ukraine. Instead, the government dreams of economic heaven for selected enterprises in selected sectors.

Let us assume that President Kuchma manages to receive legislative approval for a “special mode of financing” for his “priorities”. Where is he going to get the money? Obviously, he has no financial levers for such a policy. What remains - tax concessions, budgetary allocations, and pressure on the banking system. The inefficiency of public administration has been growing throughout the years of Ukrainian independence, and the cost of the state apparatus has risen from 19% to 60% of GDP. At the same time the great weight of government expenditures brings about not only the squandering and plundering of the nation’s wealth but real protests by economic subjects against this ill-considered policy. The shadow economy is the direct result of over-regulation. According to the NBU, increases in the money supply in 1997 entailed almost a 50% increase in enterprise bank deposits and 42% growth in income; at the same time the increase of funds in enterprises’ bank accounts was only 14%. This means that economic subjects are protesting the state’s overly intrusive attention to their assets and take them out of the control of financial bodies.

What, then, does the government propose in this case? Do they intend to reduce the fiscal pressure on the economy? Does their strategy explain how to do it? It appears that the financial system has already improved, and now they have to intensify the collection of *taxes and broaden the tax base. To make a long story short, the new official strategy resembles a very banal story of self-justification. They suggest that we forget all the mistakes they made and just agree that all set but undone tasks of the “transition period” are solved. Obviously, this is the real reason why this new strategy and rhetoric has been developed.